Re QB Foods Pty Ltd

[2021] NSWSC 1227

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of QB Foods Pty Limited [2021] NSWSC 1227

Hearing dates:

24 – 27 August 2021, 14 September 2021

Date of orders:

28 September 2021

Decision date:

28 September 2021

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Order to be made for Defendants to buy out Plaintiffs’ shares in company. Parties to bring in short minutes of order to give effect to this judgment.

Catchwords:

Oppression — Members’ rights and remedies — Whether conduct is oppressive to, unfairly prejudicial to, or unfairly discriminatory — Where first defendant increased salary without consent — Where first defendant took funds from company and then returned them — Where defendants resolved to issue shares in company in manner that would cause substantial dilution in plaintiffs’ shareholding — Where other heads of oppression not made out.

Oppression — Members’ rights and remedies — Exercise of discretion as to remedy — Whether compulsory buyout orders as to Plaintiffs’ or Defendants’ shares appropriate in the circumstances — Whether to order company be wound up in oppression — Where relationship between the parties has broken down — Where both parties have contributed to present dispute.

Legislation Cited:

- Corporations Act 2001 (Cth), ss 232, 233, 461

Cases Cited:

- Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd (2008) 66 ACSR 325; [2008] VSCA 86

- Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd (2018) 125 ACSR 227; [2018] QCA 048

- Boyd v Feeney [2017] NSWSC 1595

- Byrne v A J Byrne Pty Ltd [2012] NSWSC 667

- Camden v McKenzie [2008] 1 Qd R 39; [2007] QCA 136

- Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; (2009) 257 ALR 610; (2009) 73 ACSR 1; [2009] HCA 25

- Craig v Silverbrook [2013] NSWSC 1687

- Dynasty Pty Ltd v Coombs (1995) 59 FCR 122; (1995) 138 ALR 64

- Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672; [2001] NSWCA 97

- HNA Irish Nominees Ltd v Kinghorn (No 2) (2012) 290 ALR 372

- John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451

- Jones v Dunkel (1959) 101 CLR 298

- Mair v Rhodes and Beckett [2018] VSC 132

- MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167; [2004] NSWCA 451

- Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692

- Munstermann v Rayward [2017] NSWSC 133

- Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343; [2009] NSWSC 342

- New South Wales v Hunt (2014) 86 NSWLR 226; [2014] NSWCA 47

- O'Neill v Phillips [1999] 1 WLR 1092; [1999] UKHL 24

- Rankine v Rankine (1995) 18 ACSR 725

- Re a Company (No 00477 of 1986) (1986) 2 BCC 99,171

- Re Bicher & Son Pty Ltd (2020) 147 ACSR 108; [2020] NSWSC 711

- Re Bird Precision Bellows Ltd [1984] Ch 419

- Re Bird Precision Bellows Ltd [1986] Ch 658

- Re Catombal Investments Pty Ltd [2012] NSWSC 775

- Re Global Mortgage Equity Corporation Pty Ltd (2013) 97 ACSR 30; [2013] NSWSC 1586

- Re ICB Medical Distributors Pty Ltd [2018] NSWSC 1315

- Re Kit Digital Australia Pty Ltd (in liq) [2014] NSWSC 1547

- Re Pure Nature Sydney Pty Ltd [2018] NSWSC 914

- Re Rectron Electronics Pty Ltd [2013] VSC 384

- Re Scientific Management Associates Pty Ltd (2019) 141 ACSR 115; [2019] NSWSC 1643

- Re Swan Services Pty Ltd (in liq) [2016] NSWSC 1724

- Russell v Lee Holdings Pty Ltd (No 3) [2020] WASC 346

- Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324

- Shanahan v Jatese Pty Ltd [2019] NSWCA 113

- Smith v Gould [2012] VSC 461

- Snell v Glatis (No 2) [2020] NSWCA 166

- Societe d'Avances Commerciales (SA Egyptienne) v Merchants' Marine Insurance Co [1924] 20 Ll L Rep 140

- Solanki v Cufari [2014] VSC 345

- Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152

- Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 288 ALR 310; (2011) 84 ACSR 121; [2011] NSWCA 104

- United Rural Enterprises Pty Ltd v Lopmand Pty Ltd (2003) 47 ACSR 514; [2003] NSWSC 910

- Varma v Varma (2010) 6 ASTLR 152; [2010] NSWSC 786

- Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd (2014) 88 NSWLR 689; (2014) 290 FLR 18; (2014) 101 ACSR 643; [2014] NSWCA 326

- Watson v Foxman (1995) 49 NSWLR 315

- Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459; [1985] HCA 68

Texts Cited:

- S Brenker & I Ramsay, “Legitimate expectations and the oppression remedy” (2020) 36 Aust Jnl of Corp Law 3

Category:

Principal judgment

Parties:

Adriano Locantro (First Plaintiff)
Pino Locantro (Second Plaintiff)
QB Foods Pty Limited (First Defendant)
Amy Stagnitta (Second Defendant)
Gavin Stagnitta (Third Defendant)

Representation:

Counsel:
B May (Plaintiffs)
A Ogborne (Defendants)

Solicitors:
Turner Freeman Lawyers (Plaintiffs/)
Paul Bard Lawyers (Defendants)

File Number(s):

2020/340945

Judgment

Nature of the proceedings

1. The Plaintiffs, Mr Adriano Locantro (to whom I will refer, without any disrespect, as “Adriano”) and Mr Pino Locantro (to whom I will refer, also without any disrespect, as “Pino”) seek relief in respect of the affairs of QB Foods Pty Ltd (“QB Foods”), including relief for oppression under s 232 of the Corporations Act 2001 (Cth). In particular, they seek an order that they purchase the shares in QB Foods held by the Second and Third Defendants (to whom I will refer, without any disrespect as “Gavin” and “Amy”) respectively at fair value based on the shareholdings in QB Foods as at 26 November 2020. That order is presumably intended to require those Defendants to transfer their shares to Adriano and Pino, which they do not wish to do. Alternatively, Adriano and Pino seek an order that Gavin and Amy purchase their shares in QB Foods at fair value based on the shareholdings in QB Foods as at the same date.

2. By way of background, Adriano and Pino are brothers, and have interests in a bakery and café business trading as Locantro Fine Foods (“Locantro”). In their capacity as trustees of the Locantro Family Trust, Adriano and Pino jointly hold 31 DVVR class shares, 30 Equity (“EQ”) class shares and 30 “Management” (“MGT”) class shares in QB Foods. Gavin is the sole director of QB Foods and holds 1 DVVR class share in QB Foods. Amy is Gavin’s wife and holds 30 DVVR class shares, 30 EQ class shares and 30 MGT class shares in QB Foods. In the result, Adriano and Pino together hold fifty per cent of the issued share capital of QB Foods, and Gavin and Amy together also hold fifty per cent of the issued share capital of QB Foods, and Adriano and Pino on the one hand and Amy on the other would share equally in a distribution of a surplus on a winding up. QB Foods manufactures and supplies pre-blended beverage products to food retailers which are used to make smoothies and other similar products.

3. Mr May, who appears for Adriano and Pino, points out that the rights and conditions associated with each class of shares are provided in cl 65.2 of QB Foods’ constitution; the rights attaching to each class of shares are provided for by a schedule to that Constitution; the “EQ” class shares entitle the member to participate in the distribution of surplus assets on a winding up; the “MGT” class shares entitle the member to one vote per share held; and the “DVVR” class shares provide a right to receive such dividends as the directors from time to time declare, as well as being redeemable preference shares that can be redeemed at the discretion of the directors.

Chronology, affidavit evidence and credit

4. I will first set out a chronology of events, which are in narrow compass, drawing partly upon Adriano’s and Pino’s chronology, but also including several other events which Adriano and Pino did not include in their chronology.

5. QB Foods was incorporated on 13 March 2014, and acquired a pre-existing business operated by a company associated with Gavin that had been placed in voluntary liquidation. On or about 1 July 2015, Adriano and Pino as trustees of the Locantro Family Trust were issued new shares in QB Foods for consideration of $100,000, fully paid. As I noted above, the new shares issued to Adriano and Pino constituted 50% of the issued capital of QB Foods, with Gavin and Amy holding the other 50%.

6. By email dated 27 September 2016 (Ex P3, ECB 558), Adriano made a request to Gavin that:

“Just going forward, could you please include me in all financial meetings being planning and lodging with your accountant. It’s no biggie, but I just think it’s important that we are both there.”

7. On or about 2 August 2017, Adriano, Pino, Gavin, Amy and QB Foods executed a document titled “Heads of Agreement of QB Foods Pty Ltd” (“HoA”) (Ex P1, ECB 43ff). The recitals to the HoA provide that it was to take effect from 1 July 2015. Clause 5 of the HoA deals with additional funding of QB Foods and I will address that clause below in dealing with a share issue that is in dispute. Clause 6(c) of the HoA provides that purchases of capital equipment in excess of $10,000 were to be approved by both Gavin and Amy on one hand, and Adriano and Pino on the other, and I will also address that clause in dealing with a disputed purchase below. Clause 7 of the HoA deals with Gavin’s salary and with Adriano’s and Gavin’s role in QB Foods and I will address that clause in dealing with issues in dispute below. Clause 10 of the HoA provides that dividends are payable at the discretion of the director based on QB Foods’ financial position.

8. From 13 July 2018, Gavin’s salary was increased to $66,560 with Adriano’s and Pino’s agreement or acquiescence, departing from the position previously provided by cl 7(a) of the HoA. On 1 December 2019, Gavin sought to have his salary further increased to $150,000 per annum, plus superannuation and car and mobile phone expenses. By email dated 10 December 2019, Adriano and Pino consented to that salary increase on several conditions (Ex P2, ECB 120-121) as follows:

“(1)   Adriano and Pino have full access to MYOB Live of QB Foods.

(2)   Should the business have a bad year, Gavin to take a pay cut to help cash flow. (This would happen in a year where there was an unexpected downturn.)

(3)   Should Adriano wish to work in the business in the future (either part-time or full time) Adriano will receive the same benefits and pay as Gavin Pro-Rated.”

9. By his email dated 18 December 2019 (Ex P2, ECB 122), Gavin did not wholly accept the conditions that Adriano and Pino had sought to impose on that salary increase, and responded as follows:

“#1

Access to QB MYOB live. I have discussed with you at length, not only recently but also many times before. This should really be information Privy in our work environment which is in Belfield not [Locantro’s premises at] Leichhardt.

From the early days of our partnership, I have been asking that both yourself & Pino come on a monthly or weekly basis and review and discuss all the financials of the company. But you have not wanted to do this.

You can have access to a live read only file which I will arrange this week. The company information is Privy to you and Pino only. It is not information to share with others without my consent, accountants, bookkeepers, associates & friends.

#2

If the business cannot afford to pay its employees in the future, as the company director I will make the appropriate decisions with the information we have at the time.

#3

We have a contract in place for this, I don’t see the relevance in your point, but yes pro-rated, same as me and the same as the contract which is an equivalent rate per hour.

Ref in our contract, 7.B-3.”

10. From 24 December 2019, or early January 2020, Adriano was allowed full access to QB Foods’ “MYOB Live” financial software, satisfying one of the conditions that he and Pino had imposed on their consent to the increase in Gavin’s salary.

11. By an email dated 12 February 2020 (Ex D2, ECB 1363), Gavin wrote to Adriano proposing that QB Foods start paying Adriano a wage as an employee of QB Foods, referring to the terms of the HoA and observing that:

“The most important thing for me is to discuss how we can get you to commit to working at least one day per week? Preferably more if we want to take this business to the next level.

Maybe before we have this meeting it might be an idea for you to have this discussion with Pino and see how you can step away (completely) at least one day a week from Locantro?

If we do this, we can be clear on our direction with your work and your commitment and hopefully maximise your efforts to grow QB.

I think if we don’t do this, it will be another year of more of the same as what has been happening over the past 2-4 months, allot [sic] talk but really no solid commitment to working in the business on your behalf. (Just being honest).

Let me know if we are on the same page here?”

12. On 28 February 2020, there was a discussion between Adriano and Gavin about the possibility that Gavin would buy him out or that he would buy Gavin and Amy out, and the latter was rejected by Gavin (Adriano 29.3.21 [61]).

13. On 3 March 2020, Gavin emailed Adriano (Ex D2, ECB 1363) noting that he was “not interested” in Adriano running the business from his office at Locantro and requesting that Adriano write a job description so it was clear how Adriano would be working in the business one day a week; complained about Adriano seeking to micro-manage the business and Gavin and the staff and checking up on Gavin through the staff, and followed up on the email dated 12 February 2020 to which I referred above.

14. By email also dated 3 March 2020 (Ex D1), Adriano wrote to Gavin as follows:

“On Friday we had a pretty lengthy discussion on ownership and the future of this company and you made it quite clear that you no longer wanted to be partners with us.

You made us an offer to give us (Locantro Trust) our money back ($250,000) + some money for our time – I took this as $50,000 = (Total of $300,000) to leave. …

Then I made a counter-offer of $600,000 for the business + a guaranteed $200,000 in stock/entitlements (meaning you would walk away with a minimum of $800,000).

Prior to discussing anything about emails, … my job role (which is outlined in our agreement as Business Strategy, New business development, Marketing, Social Media, Finance).

I need to know your stand on our offer?

As mentioned on Friday there are only 4 possible outcomes for the future for us and they are:

(1)   We sort out our problems and attempt to do this together (this is still my preferred option.

(2)   We buy you out.

(3)   You (Amy) buy us out.

(4)   We sell the whole business.”

15. By a text message sent to Gavin on 4 March 2020 (Ex P3, ECB 408-409), Adriano advised that:

“Hi Gav, I have tried to call you 2 times today and have called you for 5 days straight, yet you continue to ignore my calls.

Part of your duty as a Managing Director of our company is to make yourself available to the owners and shareholders. Something you are currently not doing.

Today, against our agreement and with no just cause you disabled my read only access to MYOB and disabled me of my QB emails. As a 50% shareholder of this business I take these actions of misconduct very seriously.

I ask that we meet up tomorrow (what ever time suits you day or night) to resolve whatever problems and issues you may have and try to resolve them professionally.”

16. On 4 March 2020, Adriano’s access to QB Foods’ “MYOB Live” financial software was removed. By an email dated 5 March 2020 (Ex P2, ECB 123), Gavin indicated his difficulties with Adriano’s working practices and the reasons for removing his access from MYOB Live as follows:

“My issue around this discussion is your lack of involvement and contribution to working in the business as agreed in our contract (Min 1 day per week). This really has not happened in any capacity, frequently as we agreed.

Your idea and my idea of you working in the business are very different. I don’t believe you have added any valuable contribution in a very long time. By adding value I mean working in the business to grow (NBD), Strategy and your list below as you have described in our agreement.

Like I have said to you so many times in writing and in person, you showing up at the factory randomly from time to time without actually having a role is not productive and achieves nothing for our business in terms of growth. (It also takes me away from my work.) …

Yesterday, I removed your access from MYOB Live because as MD [Managing Director], I am responsible to act in the best interests of the company.

I made it very clear that, these files are NOT    to be discussed with anyone without my consent, which you did and I know this is not the first time you have.

I do not want our business being discussed among others without me or without my consent. …

If you need company financials (or other info) I will always provide this to you at any time. There is clearly no benefit to the business by you having a live MYOB file.

My [p]referred option is to stay as a partnership as is yours BUT, it cannot happen while you are not adding value to the business. This was our agreement from the start. …”

17. The parties further corresponded concerning their working relationship in mid-March 2020. By an email sent to Adriano and Pino on 16 March 2020 (Ex D2, ECB 1147), Gavin noted the then difficulties between the parties, noted his view that Adriano had not contributed one day per week over the last couple of years, although they are recognising they had spent many hours on the phone which were “not productive working hours”; expressed his concern as to the conditions imposed on his pay rise in 2019 and noted the risk of future issues as to his remuneration, and expressed the view that the condition imposed by Adriano and Pino as to full “MYOB Live” access had “nothing to do” with the amount of his remuneration; and addressed two possibilities for the future relationship between the parties as follows:

“At this point getting out of the business is no longer an option for me, so I see two options for us moving forward that work.

Option 1: Ongoing, Adriano works in the business one day a week as per our contract. Adriano is paid $30,014.40 plus Super P/A which is 20% of Gavin’s wage as agreed. This would be a normal working day same as it is for Gavin from 8am – 6pm, a day of your choice. No other distractions with your other businesses and fully committed to the role in QB [Foods] on this day and during this time only.

We will set you up as an employee in the system and you will be paid each fortnight like myself & the other employees.

We will need to put together and (I need to agree on) your job description to ensure we have a clear role defined for you which will contribute to the growth and needs of business.

You can have a desk here in [Head Office] and you can have access to QB [Foods] files which include MYOB full access in a readable format for this one day of the week, if you want it.

NB: You will not have access to MYOB files outside of these work hours on personal devices.

During this day you need to work on the business and contribute value to the growth of the company. It will not be a day for me to be reporting to you as a shareholder.

We will have weekly/monthly meetings to raise concerns and discuss our progress and planning in the company. The reporting to Shareholder discussions can take place in these meetings.”

18. It seems to me that this proposition was consistent with the HoA, so far as it contemplated that Adriano would work in the business one day a week and would, during this period, be remunerated for doing so; and, importantly, it would have permitted Adriano full access to QB Foods’ MYOB files in a readable format, on the basis that he would access the information on QB Foods’ premises while working in QB Foods’ business. There seems to me to be nothing unreasonable about that approach, although it fell short of the “MYOB Live” access that Adriano and Pino had required as a condition of approving Gavin’s earlier salary increase.

19. That email then identified an alternative proposal, as follows:

“Option 2: Adriano steps back from working in the business, in turn you will sacrifice a wage, and take on the role of shareholder as you are. In this case you will receive weekly/monthly Sales and financial reports, and of course, as we do now, I am happy to chat with you to discuss the day to day running of the business and your thoughts when required.

I would meet with you at least once a month to report back and ensure we have our business in check. These monthly meetings become the opportunity to raise concerns and discuss our progress and planning in the company.

As Director of the company I will meet all my obligations to the shareholders, legally and ethically as best I can.

Finally to elaborate further on your discussion around my reporting into you on a regular basis about the day to day running of the business. I am not comfortable with this and regardless of which option we choose for your involvement, I need to implement management style which works best for the company. This goes back to a partnership where clear roles are defined and you are not looking to do my role as GM.”

That alternative proposal did not provide “MYOB Live” access, as required by the conditions previously imposed by Adriano and Pino on Gavin’s salary increase. It was not inconsistent with Adriano’s and Pino’s rights under the HoA, and contemplated a high level of reporting to them as major shareholders in respect of QB Foods’ sales and financial reports.

20. On 20 April 2020, early in the COVID-19 pandemic, Gavin withdrew $120,000 from QB Foods’ account. He subsequently repaid that amount as I note below. On 2 June 2020, Gavin removed Adriano’s access to a QB Foods email address.

21. By a letter dated 11 June 2020, marked “without prejudice” but tendered without objection (Ex P2, ECB 125), Gavin advised Adriano, Pino and Amy that:

“As sole director of the Company, I have always and will continue to comply with legislative provisions in relation to you as shareholders and will provide you with all such information as the company is required by law to provide to shareholders.

Unless required by law, shareholders will not have access to the MYOB files or any other company information.

All Company information provided to shareholders will be provided on a strictly confidential basis and is not to be used for the use or benefit of any other entity.”

22. He referred to the recent economic downturn, presumably associated with COVID-19, and indicated that he anticipated that QB Foods would not have surplus funds to pay dividends in the foreseeable future; noted that it had no borrowing capacity because it had been unable to report any repeat earnings; noted that he had personally guaranteed loans in respect of the four company vehicles which were in excess of $150,000; referred to a proposal that QB Foods relocate to larger premises and purchase equipment to expand its operation, and proposed that each shareholder invest a further $200,000 in that financial year to begin that process. He also foreshadowed a further increase in his salary, and I address the claim in respect of that matter below.

23. On 26 June 2020, Gavin repaid the amount of $120,000 to QB Food’s account that was withdrawn on 20 April 2020. Also on 26 June 2020, Gavin authorised the purchase of a forklift for QB Foods worth $24,530. I address the claim in respect of that matter below.

24. By a long letter dated 30 June 2020, Adriano’s and Pino’s solicitors set out an account of QB Foods’ history; demanded copies of specified documents; sought to require that Gavin reduce his salary to $38,900 plus superannuation in accordance with the HoA, notwithstanding that that amount was less than the salary to which Adriano and Gavin had previously agreed; demanded the entry into a new shareholder agreement by Amy and Gavin; and indicated that, if that did not occur, Adriano and Pino would bring proceedings seeking relief under ss 461(1)(e)-(f) of the Corporations Act, which allow the Court to make an order for the winding up of a company.

25. Gavin and Amy’s solicitors replied by letter dated 2 July 2020 (Ex P2, ECB 135) declining to provide undertakings sought by Adriano and Pino but recorded Gavin’s undertaking to continue to manage QB Foods in the ordinary course of its business, including maintaining a complete record of its income and expenses from the conduct of its business; contended that Adriano had breached the requirement that he work with Gavin in the business for a minimum of one day per week and that Amy was entitled to buy the balance of the shares in QB Foods and had made an offer to do so and reopened the period for acceptance of that offer. Further correspondence followed between the solicitors.

26. On 30 July 2020, Adriano told Mr Ersan, QB Foods’ factory manager, that he and Gavin were having “a bit of a dispute” and that:

“Gavin is trying to rip me off. My intention is to take over the business from Gavin. When I take over, if you stay with me, I will give you a small share in the business, a promotion and a pay rise.”

Pino then joined the conversation and told Mr Ersan that “[Y]our job is safe with us” and Adriano requested him not to tell Gavin about the conversation.

27. That conversation led Mr Ersan to become concerned as to the security of his employment and he then resigned, although he was subsequently persuaded to remain with QB Foods on a casual basis. His letter of resignation dated 6 August 2020 addressed to Gavin provides a contemporaneous account of his conversation with Adriano and Pino as follows:

“Last Thursday I visited Adrian’s business in Leichhardt and he told me everything that is going. He told me that he was taking over your business from you very soon and not to worry that my job was safe. He offered me a promotion and a pay rise and said to me he would give me profit in the business when he takes over. He said he would look after me. Pino was there to and he agreed with Adrian.

I don’t believe that my job is safe anymore and I am scared that I will not be able to pay for my family in the future in this job if something happens to you.

I do not want to work for Adrian as I don’t really know or trust him what he is offering, and I do not want to be struck in arguments as stuck without a job may be.”

That letter then indicated his intention to resign and that he was “very upset”.

28. On or after 26 August 2020, Gavin caused QB Foods to stop supplying its products to Locantro’s Leichhardt store, where Adriano would not provide a confirmation requested by QB Foods as to the use of those products. By email dated 28 August 2020 sent to a staff member of QB Foods and copied to its accounts section, Adriano said that:

“I have been contacted by several customers this week (customers which I have an existing relationship with through Locantro) which would like to come to the shop and have a taste test of our products. … This is a problem as I currently have no stock. … Also I have a two meter sign in the shop and have no stock. … I desperately need stock.

Gavin is obviously trying to get Personal by not sending stock, but as a director of our company he should be acting in the best interest of all share holders and send the stock to a fully paying customer (which is Locantro). Please let me know if you would like up front payment as this will not be a problem.”

That email then set out an order for stock and had further exposed the dispute between QB Foods’ shareholders to its staff (Ex P2, ECB 156).

29. By email dated 1 September 2020 (Ex P1, ECB 158), Gavin responded, reasonably enough, expressing concern as to Adriano’s contact with QB Foods’ staff in the email dated 28 August and requesting that Adriano contact him directly and stated that:

“Your request for stock has been rejected because as you have stated in your email, your intentions are to use the stock for taste testing and sampling for Locantro new customers at the Locantro store.

This is not acceptable.

If there are new customers who are wanting to sample, they should be referred to me directly as would a normal new customer contact.

Again, you have no authority to represent QB products and I instruct you to stop immediately.”

30. That email also addressed issues as to delivery, given the previous dealing between Adriano and Mr Ersan, and observed that:

“Please confirm by responding to this email that you agree NOT to use stock for any purpose other than it is intended use which is retail purpose only, ie: to serve to your customers in store.

Once you have confirmed I can look at alternative arrangements to supply stock we can possibly supply by courier at your own expense.

I take this opportunity to ask you and Pino again to meet with me and the shareholders (with or without lawyers) to discuss your intentions moving forward with hope of resolving your differences amicably.”

31. Adrian responded by email dated 1 September 2020, which did not provide the requested undertaking and requested continued supply; suggested that the problems could not be resolved by reason of Gavin’s inability to compromise and come to a fair and reasonable resolution; and insisted that all discussions take place through lawyers.

32. On 6 November 2020, Gavin sent a letter to Adriano and Pino concerning a proposed “Share Purchase Plan” and, when Adriano and Pino did not take up their portion of that issue, by resolution dated 27 November 2020 (Ex P1, ECB 82-83), resolved to issue further shares in QB Foods to Amy and Gavin. I address the claim in respect of that matter below. These proceedings were commenced on 1 December 2020 and, on that date, the Court granted an interlocutory injunction preventing QB Foods from issuing any shares or taking any step to effect “registration” of the shares purportedly issued to Amy and Gavin on 27 November 2020 or entering into a transaction that altered or diluted Adriano’s shareholding in QB Foods. On 2 December 2020, that injunction was continued until further order. The “Share Purchase Plan” was subsequently cancelled on 1 February 2021.

33. I now turn to the affidavit evidence and cross-examination. In addressing that evidence, I 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; Varma v Varma (2010) 6 ASTLR 152; [2010] NSWSC 786 at [424]–[425]; Re Kit Digital Australia Pty Ltd (in liq) [2014] NSWSC 1547 at [7]; John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451 at [94]-[96]; Boyd v Feeney [2017] NSWSC 1595 at [25]. I have also been conscious of the importance of the credit of witnesses where there is, in respect of some issues, inconsistencies in the oral evidence, and I bear in mind 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, his or her motives and the overall probabilities: Armagas Ltd v Mundogas SA [1985] 1 Ll R 1 at 57; Craig v Silverbrook [2013] NSWSC 1687 at [142]. I have also had regard to Atkin LJ’s observation in Societe d’Avances Commerciales (Societe Anonyme Egyptienne) v Merchants’ Marine Insurance Co (The “Palitana”) (1924) 20 LI L Rep 140 at 152 that “an ounce of intrinsic merit or demerit in the evidence, that is to say, the value of the comparison of evidence with known facts, is worth pounds of demeanour”; substantially the same view was taken by Keane JA in Camden v McKenzie [2008] 1 Qd R 39; [2007] QCA 136 at [34], by Leeming JA (with whom Barrett JA and Tobias AJA agreed) in State of New South Wales v Hunt (2014) 86 NSWLR 226; [2014] NSWCA 47 at [56]: see also Craig v Silverbrook above at [141] and Re Swan Services Pty Limited (in liq) [2016] NSWSC 1724 at [6] on which I have drawn for this summary of the case law.

34. Adriano and Pino rely on Adriano’s first affidavit dated 1 December 2020. Adriano there set out the matters which are in dispute and referred to correspondence relating to the “Share Purchase Plan” in evidence which was largely admitted as a submission.

35. Adriano and Pino also rely on Adriano’s second affidavit dated 29 March 2021 which referred to the nature of QB Foods’ business. Adriano there claimed (Adrian 29.3.21 [15]) that he had leveraged his client relationships and used other contacts “to assist to deliver a client base to QB Foods of about 800 clients”. It emerged in cross-examination that he had contributed to obtaining some clients for the Company, but not to the 800 client which it has developed over time through the activities of all its employees. Adriano also gave evidence that Locantro “was also responsible for the formulation of approximately 20% of the products that QB Foods might produce and supply”. It emerged in his cross-examination that that evidence was highly misleading. It was likely not correct even by reference to the number of product lines sold by QB Foods, and was plainly not correct as to the volume of sales, as to which Locantro contributed less than one percent of the volume of products sold.

36. Adriano there referred to his having met Gavin when they were in high school, to his and Pino’s investment in QB Foods in 2015, and to the HoA to which I have referred above. He claimed (Adriano 29.3.21 [28]) to have commenced working for QB Foods between three and five days every week, without payment, between July 2015 and July 2017. That evidence is unverifiable, since Adriano was working for Locantro at that time and did not produce any systematic record of work done for QB Foods, although the evidence indicates at least that frequently received and sent brief emails and text messages from and to QB Foods’ clients and potential clients and also conducted product demonstrations for potential clients in that period. Adriano there also set out the nature of the work he claimed to have done and claimed to have built relationships with new clients of QB Foods using Locantro’s connections, which is plausible in the circumstances.

37. Adriano’s evidence (Adriano 29.3.21 [38]) was that he had requested access to QB Foods’ MYOB data from July 2015 to December 2019 and that Gavin had responded that Adriano should ask him for the relevant information. He claimed not to have had that access until December 2019, although it emerged in his subsequent affidavit evidence and in cross-examination that he had in fact had access to at least some parts of the MYOB data, and particularly sales information, since at least July 2017. It is unlikely that he had simply forgotten that matter, when verifying his second affidavit, and the omission of reference to it, combined with the misleading evidence to which I referred above, left me with the strong impression that Adriano was prepared to tailor his evidence so as to seek to advance his and Pino’s case. Adriano also there addressed a number of the specific issues on which he and Pino rely in the oppression claim, which I address below.

38. By a third affidavit dated 18 June 2021, Adriano led evidence that was partly in reply to other evidence led in the proceedings. He also led evidence which plainly exceeded the proper scope of reply evidence, much of which was admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW) as submission or as his understanding and not proof of the fact. He took issue with significant aspects of Gavin’s first affidavit. He acknowledged (Adriano 18.6.21 [80]) that he had received access to MYOB from 2017 on, but is evidence was that he could then only see sales data and not purchases or bank feeds, and he only received full access in January 2020 for a few months. He also there referred to conversations with Ms Radovic in relation to certain transactions in the MYOB file (Adriano 18.6.21 [90]); however, the Plaintiffs did not plead that there was anything improper in any aspect of those transactions. He also referred to text messages with customers and emails with customers during the period 2016 to 2020, and to an occasion on which he had an involvement with the hiring of a sales representative for QB Foods, and claimed that was a regular occurrence between 2015 to 2019 in evidence admitted with a limiting order under s 136 of the Evidence Act as submission and as evidence of his understanding and not proof of the fact.

39. Mr Ogborne, who appears for Gavin and Amy, submits that Adriano’s evidence, when tested against contemporaneous or objective evidence, is untrue or greatly exaggerated. He refers to Adriano’s claim that he had not had access to QB Foods’ MYOB data file until December 2019, when he had had at least partial access to “MYOB Live” since July 2017 and had logged onto that system on many occasions between September 2018 and March 2020 (T47, Ex D2, 1215-1342). Mr Ogborne submits, and I accept, that it is highly unlikely that Adriano had simply forgotten the many occasions on which he had accessed that system in that period. Mr Ogborne also points to Adriano’s shifting evidence, as between his affidavit evidence and in cross-examination, as to whether he had access to information in the MYOB system relating to purchases since July 2017.

40. Mr Ogborne also points to Adriano’s evidence in chief that Gavin would only provide him with financial information if he directly asked for it (Adriano 29.3.21 [37]), which I accept was contradicted by the documentary evidence that, at least between May 2016 and June 2019, Gavin sent weekly sales reports to Adriano, as Adriano accepted in cross-examination (Ex D2, 1109-1146, T86). I am not persuaded by Adriano’s evidence that, on each of the many occasions that Gavin had sent him sales reports by email, Adriano had specifically asked for it (T89); it seems to me implausible that such a process would have continued over the long period in which that information was provided. Mr Ogborne also points to Adriano’s overstatement, in his affidavit evidence, of the number of clients which he had delivered to QB Foods (Adriano 29.3.21 [15]), which I noted above. Mr Ogborne also referred to the falsification, by evidence given by Mr Ersan which I accept below, of Adriano’s evidence that he had a desk with a computer in QB Foods’ office (Adriano 29.3.21 [29]); that evidence addressed an important matter, where Gavin’s dissatisfaction with Adriano appears to have reflected the latter’s unwillingness to undertake the day’s work contemplated by the HoA from QB Foods’ offices. Mr Ogborne also refers to Adriano’s overstatement of the extent to which Locantro had contributed to the ingredients used in an “Indulgent” product. While I recognise the possibility of error in that respect, it seems to me that this evidence reflects a wider pattern of overstatement in Adriano’s evidence in chief and in cross-examination, which I noted above.

41. I would not go quite so far as Mr Ogborne’s submission that Adriano’s evidence should not be accepted unless it deals with matters that are common ground or corroborated by other contemporaneous documents that he did not prepare or are against his interest; however, I approach his evidence with caution, and on the basis that it at least involves a significant degree of inaccuracy and overstatement. Mr May responds that the events in issue are the subject of documentary evidence; while that is largely the case, the conversations which lead to them and Adriano’s contribution to the business are an important part of their context, and partly depend on his affidavit and oral evidence. The parties’ recognition of that matter is, of course, implicit in the extent of that evidence and of his cross examination.

42. Adriano and Pino also rely on Pino’s affidavit dated 29 March 2021. Pino referred to the purchase of shares in QB Foods and his evidence was that he had left Adriano to deal with Gavin and Amy in respect of matters involving the shareholding and the HoA. He led evidence as to QB Foods not supplying Locantro from August 2020 and to correspondence concerning that matter in October 2020 and I address that matter below.

43. Gavin and Amy rely on Gavin’s affidavit dated 21 May 2021 which responds to Adriano’s three affidavits dated 1 December 2020, 20 January 2021 and 29 March 2021 and Pino’s affidavit dated 29 March 2021. Gavin there sets out the origins of QB Foods’ business, which had originated with an earlier business which he set up to manufacture pet foods and he refers to his development, from early 2011, of frozen refreshments which would be supplied in a PET plastic tray. Gavin refers to setting up the specialised plant and equipment to manufacture a “smoothie” product from 2012 and to the supply of the product to Nestle in 2014. It appears that the company which then manufactured the product was placed in creditor’s voluntary liquidation after Nestle discontinued the sale of the product and, in September 2014, QB Foods acquired and used the formulas for the manufacture of frozen pre-blended products, using the same plastic tray as had been used in the earlier business and commenced selling pre-blended smoothies to cafes from September 2014.

31. Gavin’s evidence (Gavin 21.5.21 [19]) is that he has been the sole director and secretary for QB Foods and the general manager of its business since incorporation and he refers to the areas of its business for which he is responsible. He also refers to the manner in which QB Foods has developed its customer base (Gavin [27]ff) and to the persons who are now involved in dealing with customers. He also refers to a pet food manufacturing business which was operated by QB Foods, and has had only one remaining customer since June 2016, and ceased in mid-2020. Gavin takes issue (Gavin 21.5.21 [38]ff) with a number of aspects of Adriano’s description of QB Foods’ staff and customers, although it is not necessary to address the detail of these matters in order to determine these proceedings. Gavin also takes issue with Adriano’s evidence as to whether Adriano secured particular clients as QB Foods’ clients, and I pointed above to the misleading character of Adriano’s evidence as to the number of customers that he had introduced to the business. Gavin also takes issue with Adriano’s evidence as to the extent of Locantro’s product range (Gavin 21.5.21 [60]ff) and I again noted that Adriano’s evidence in that respect was misleading in dealing with that evidence above. Gavin also addresses issues as to the reliability of the plant and equipment of QB Foods, given its age (Gavin 21.5.21 [63]ff) and that is a matter of some significance to the valuation evidence led by Adriano and Pino.

32. Gavin also addresses (Gavin 21.5.21 [68]ff) his relationship with Adriano and refers to the fact that Locantro sold smoothies in its café from late 2014 and through to mid-2015. He refers to discussions with Adriano in mid-2015 as to the basis on which Adriano and Pino would invest in the business and gives evidence of a conversation in which he indicated, and Adriano accepted, that Gavin “must continue to have all the management rights and be able to make all the decisions about running the business”. He also refers to his having advised Adriano that he was interested in Locantro’s network, customer contributions and the value Adriano could add to the business as much as the money to be invested and referred to a discussion concerning Amy’s right to buy back the shares if Adriano stopped working for QB Foods, a matter which is later addressed in the HoA. Gavin also refers (Gavin 21.5.21 [85]) to the execution of the HoA; to Adriano’s later involvement with the business; to Gavin’s perception, in late 2015 and early 2016, that Adriano was not meeting his obligation to work with him one day each week, where he was not attending QB Foods office; and to Adriano’s view that he could continue to work from Locantro’s Leichhardt premises rather than from QB Foods’ office.

33. Gavin’s evidence (Gavin 21.5.21 [97]) addresses the provision of live access to QB Foods’ MYOB data file for certain information, including sales, purchases and accounts information, from mid-July 2017 and takes issue with Adriano’s evidence as to the extent of the work he had undertaken for QB Foods and the manner in which that work was undertaken. Gavin also addresses the specific issues on which Adriano and Pino rely for their oppression claims, and I will address that evidence below. Gavin’s also gives evidence (Gavin 21.5.21 [140]) of a discussion on 28 February 2020 with Adriano concerning Adriano’s continued involvement in the business, and his evidence is that he told Adriano that “you can’t be involved any longer in the business unless you are committed to working in the business as we agreed in 2015” and foreshadowed exercising the right for Amy to buy Adriano’s and Pino’s shares under the HoA, if Adriano did not work in the business going forward. He largely agrees with Adriano’s account of the discussion of price at that meeting, and says that he told Adriano that he was not interested in selling out where he and Mr Ersan had built the business and Adriano had never worked in it. I recognise that there is a proximity in timing between that conversation and the withdrawal of Adriano’s access to MYOB and it is at least possible that there was a connection between the two.

34. By a second affidavit dated 28 May 2021, Gavin gave further evidence in respect of the motor vehicles used by QB Foods, and his evidence was that a Ford Ranger utility was mainly used by him and he estimated that it was used 95% for business purposes, apart from his commuting to and from the factory. He also gave further evidence concerning QB Foods’ balance sheet as at 30 June 2020 and to stock-on-hand and the manner in which stocktakes were undertaken.

35. Mr Ogborne submits, and I accept, that Gavin was largely a more reliable witness than Adriano, at least where specific events were concerned, and was generally prepared to concede matters against his interests. It seems to me, however, that Gavin was likely aware of the potential impact of later steps that he and Amy took, particularly in relation to the “Share Purchase Plan” on the control of QB Foods. I address that question below.

36. Gavin and Amy also rely on Amy’s affidavit dated 21 May 2021. Amy’s evidence was that she had not been involved in conversations between Gavin and Adriano concerning QB Foods or involved in management or making management decisions in relation to QB Foods. There is nothing inappropriate in that, where she is a shareholder and not a director or employee or QB Foods. Amy was briefly cross-examined and there is no issue as to her credit.

37. Gavin and Amy also relied on the affidavit dated 29 April 2021 of Mr Ersan, who was previously employed as the factory manager at QB Foods and now performs that role as a casual employee, since he resigned his employment on 6 August 2020. Mr Ersan was a plainly credible witness, who was independent of the parties in dispute, although a letter of resignation (to which I referred above) indicated that he had a favourable view of Gavin as a “great boss and great friend” and a less favourable view of Adriano. I accept Mr Ersan’s evidence and it undermines Adriano’s credit since it falsifies his evidence as to as basic a matter as to whether Adriano ever had a desk in QB Foods’ office.

38. Mr Ersan refers to the occasion when he went to deliver a smoothie order to Locantro and I have set out the conversation that then occurred in the chronology above. Mr Ersan’s evidence was that he then became very worried about his job security, which was important to him where he was married with children and had a mortgage and was providing financial help to his brother’s family, and to his decision to resign his position with QB Foods after that conversation. He referred to his letter of resignation dated 6 August 2020 addressed to Gavin to which I have also referred on the chronology above. Mr Ersan also referred to a subsequent conversation with Gavin in which he agreed to stay with QB Foods as a casual employee on the basis the position could be reviewed when the dispute with Adriano and Pino was resolved. Mr Ersan also gave evidence of the age of the machinery used in the business; that it had begun to break down “a lot”; referred to the delays in production when machinery failed; and gave evidence of the acquisition of a second forklift which had increased freezer capacity by about 40% and reduced labour hours rotating stock in the freezer. I address the issue as to the acquisition of that forklift below. He also denied Adriano’s evidence that Adriano had ever had a desk in QB Foods’ office with a computer, to which I referred above.

39. Gavin and Amy also relied on the affidavit dated 29 April 2021 of Ms Radovic, who was also a credible witness and whose evidence I also accept. She referred to her work as a bookkeeper, initially for QB Foods and subsequently for both QB Foods and Locantro. She refers to having told Adriano in early June 2020 that Gavin had never requested her not to discuss QB Foods’ accounts with him and to her decision to resign from both Locantro and QB Foods on that day. She also refers to Gavin having previously told her that it was okay to discuss QB accounts with Adriano because he was “not hiding anything”, but that she did not feel comfortable with discussing QB Foods accounts with Adriano while working at Locantro’s office. She refers to Adriano having asked her more specific questions regarding expenses transactions in MYOB in late 2019 and to her suggestion that he talk to Gavin and review the invoices held in QB Foods’ office which have a more detailed explanation than the MYOB records.

40. Ms Radovic refers to her resignation from Locantro in mid-July 2020, to her oral resignation from QB Foods, and to her subsequently agreeing to continue to work for QB Foods. She also set out the matters which led to her resignation as Locantro’s bookkeeper in a letter of resignation addressed to Pino and Adriano at Locantro, where she observed that:

“I may be a bookkeeper for QB Foods Pty Ltd, but it is not in my professional capacity to be discussing the financials of it outside the QB Foods premises. On many occasions I have been asked certain questions regarding the MYOB data by Adriano, some questions I did answer, some not – because we were not at the QB Foods’ office.

I have told Adriano on many occasions that it is not up to me to give answers, but that he and Gavin should have regular meetings, weekly, monthly or whatever and clarify the daily operations of the company.”

54. By her second affidavit dated 21 May 2021, Ms Radovic denied Adriano’s evidence that she had a conversation with Adriano about pay rates, superannuation and other entitlements of QB Foods staff in about February 2020. Her evidence was that Gavin prepared wages and superannuation in MYOB and made the payments and that her only role was to reconcile the payments as they were debited to QB Foods’ bank accounts with the entries in MYOB made by Gavin. I accept Ms Radovic’s evidence in that respect, given the view that I formed of her credit, and that further undermines the reliability of Adriano’s evidence.

55. Gavin and Amy relied on the affidavits dated 20 May 2021 of Mr Darin and Mr Nicols, who consent to be appointed as liquidator of QB Foods, in the event that a winding up order is made. By his affidavit dated 28 May 2020, Mr Chard confirmed that no other winding up application was pending against QB Foods as at the date of this application. The parties also relied on expert accounting evidence which I will address in dealing with the question of relief below.

Adriano’s and Pino’s oppression claim

56. I should first refer to the applicable legal principles, as to which I have drawn upon Counsels’ submissions and my summary of the relevant principles in Re Pure Nature Sydney Pty Ltd [2018] NSWSC 914, Re ICB Medical Distributors Pty Ltd [2018] NSWSC 1315 at [65]ff and Re Bicher & Son Pty Ltd (2020) 147 ACSR 108; [2020] NSWSC 711 at [73]ff. Section 233(1)(d) of the Corporations Act 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.

57. Section 232 of the Corporations Act in turn 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.”

58. 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) 180 CLR 459; [1985] HCA 68. 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.”

59. The principles applicable to a claim for oppression were also 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) 288 ALR 310; (2011) 84 ACSR 121; [2011] NSWCA 104 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 …”

60. 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]

61. Mr May submits and I accept that conduct may be oppressive even when the defendant believes that he or she is acting for proper purposes: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; (2009) 257 ALR 610; [2009] HCA 25 at [176]. Mr May also refers to my observation in Byrne v A J Byrne Pty Ltd [2012] NSWSC 667 at [45] that:

“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" and can be established by wrongful exclusion from participation in a company's management or by conduct in breach of a shareholders or services agreement even if the person undertaking that conduct thinks he or she is acting properly: Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 at [176]; Harding Investments Pty Ltd v PMP Shareholdings Pty Ltd (No 2) [2011] FCA 567; (2011) 282 ALR 229 at [10].”

62. In their pleading, Adriano and Pino placed substantial weight on the concept of “legitimate expectation”, although Mr May placed less weight on that concept in his submissions (to which I return below) and greater weight on whether conduct would appear unfair in the eyes of a commercial bystander. In a helpful academic article (S Brenker & I Ramsay, “Legitimate expectations and the oppression remedy” (2020) 36 Aust Jnl of Corp Law 3), on which I have partly drawn for the discussion that follows, the authors note that:

“A ‘legitimate expectation’ in the oppression context can be defined as ‘an understanding or apprehension of a member which, because of equitable considerations, would make it appear unfair, to a commercial bystander, to permit the strict assertion of legal rights’. The court is not concerned with the subjective aspirations, hopes, assumptions or understandings of the individual member; a legitimate expectation arises from a common understanding, between the parties, on which their relationship is based and must be established objectively. A legitimate expectation is a reference to ‘what the parties, by words or conduct, have actually agreed’, although it is not necessary that such agreement be enforceable in law. An expectation is ‘legitimate’ when it ‘reasonably appeared likely to happen’.

The ‘standard case’ in which denial of a legitimate expectation may constitute oppression is where shareholders have entered into an association upon the understanding that each of them who has ventured their capital will also participate in the management of the company. In such a case, the member has a legitimate expectation of participation in management and it will usually be considered unjust, inequitable or unfair for a majority to use their voting power to exclude the member from participating in management without giving the member the opportunity to remove their capital upon reasonable terms.”

63. This concept draws, in part, on Re a Company (No 00477 of 1986) (1986) 2 BCC 99,171 at 99,174 where Hoffmann J observed, in respect of a broadly corresponding provision in s 459 of the Companies Act 1985 (UK), that:

“The member’s interests as a member who has ventured his capital in the company’s business may include a legitimate expectation that he will continue to be employed as a director and his dismissal from that office and exclusion from the management of the company may therefore be unfairly prejudicial to his interests as a member.”

64. Subsequently, in O’Neill v Phillips [1999] 1 WLR 1092 at 1104; [1999] UKHL 24, Lord Hoffmann observed that the concept of “legitimate expectation” was “a label for the ‘correlative right’ to which a relationship between company members may give rise in a case when, on equitable principles, it would be regarded as unfair for a majority to exercise a power conferred upon them by the articles to the prejudice of another member” and referred to the “standard case in which shareholders have entered into association upon the understanding that each of them who has ventured his capital will also participate in the management of the company”, where

“it will usually be considered unjust, inequitable or unfair for a majority to use their voting power to exclude a member from participation in the management without giving him the opportunity to remove his capital upon reasonable terms. The aggrieved member could be said to have had a ‘legitimate expectation’ that he would be able to participate in the management or withdraw from the company.”

65. Several subsequent Australian cases have referred to the concept of “legitimate expectation”, including Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343; [2009] NSWSC 342 at [109]–[110] and Austin J’s judgment in Tomanovic v Argyle HQ Pty Ltd above at [39(c)] and [42]. In HNA Irish Nominees Ltd v Kinghorn (No 2) (2012) 290 ALR 372 at 490; (2012) 88 ACSR 427; [2012] FCA 228, Emmett JA in turn observed that, where a company is an association of persons for an economic purpose by agreement, its constitution will usually be taken to regulate the company’s affairs and:

“In order to give rise to an equitable constraint based on legitimate expectation, what is required is a personal relationship or personal dealings of some kind between the parties seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former.”

66. However, difficulties with the concept of “legitimate expectation” were noted by the Court of Appeal in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672; [2001] NSWCA 97, where Spigelman CJ observed (at [62]) that the Court may look behind the company’s constitution for any understanding or expectation that management rights would continue but also that that the “introduction of a word such as ‘legitimate’ before a noun referring to an act or condition, is more a mode of expressing a conclusion than an independent criterion” and Fitzgerald JA observed that the term was potentially unhelpful and distracting and the question was whether or not, in all the circumstances, oppression had been established. Those difficulties were also noted by Campbell JA on appeal in Tomanovic v Global Mortgage Equity Corporation Pty Ltd above at [166]ff, to which Counsel referred in submissions, and in Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd (2014) 88 NSWLR 689; (2014) 290 FLR 18; (2014) 101 ACSR 643; [2014] NSWCA 326 where Barrett JA (with whom Bathurst CJ, Beazley P agreed) observed that:

“denial of ‘legitimate expectation’, of itself, does not attract the statutory jurisdiction and that an essential finding is that the impugned conduct was objectively oppressive, unfairly prejudicial or unfairly discriminatory in the way the legislation contemplates.”

67. In Mair v Rhodes and Beckett [2018] VSC 132 at [514], to which Emeritus Professor Ramsay and Ms Brenker refer in the article noted above, Digby J observed that:

“In Australia, the term ‘legitimate expectation’ has been described as unhelpful and as distorting the objective assessment of fairness in the context of oppression proceeding. To the extent that ‘legitimate expectation’ is a component to the test for unfairness, this phrase refers to an understanding or apprehension of a member which, because of equitable considerations, would make it appear unfair, to a commercial bystander, to permit the strict assertion of legal rights.”

68. I also accept that, as Ms Brenker and Emeritus Professor Ramsay recognise, there may be an overlap between the matters treated as relevant to the concept of a “legitimate expectation” and those that are relevant to determining whether conduct is oppressive, unfairly prejudicial or unfairly discriminatory in the relevant circumstances. 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.

Adriano’s and Pino’s role in QB Foods

69. It will be convenient to deal with several associated issues as to Adriano’s and Pino’s role in QB Foods together, although the parties dealt with them separately. By way of background to these claims, Mr May submits that several circumstances provide the background to the alleged oppressive conduct, as follows:

“(a)   in about July 2015, Adriano and Pino (in their capacities as trustees of the Locantro Family Trust) invested $100,000 of their funds into QB Foods;

(b)   this investment was in consideration for Adriano and Pino being issued 50% of the “DVVR”, “MGT”, and “EQ” classes of shares on issue in QB Foods, with Gavin and Amy collectively holding the other 50% in each class;

(c)   at the time of the investment, an agreement was reached between all four shareholders with respect to how certain affairs of the Company would be conducted from that point forward, including the roles and responsibilities that each of Adriano and Gavin were to play in the Company;

(d)   this agreement between shareholders was later formalised in writing in the Heads of Agreement, with Gavin executing the Heads of Agreement on his own behalf and separately on behalf of the Company;

(e)   following the investment, Adriano was allocated a Company email address, as well as a key to the factory premises, and he began working for QB Foods in accordance with the Heads of Agreement; and

(f)   Adriano continued working for QB Foods between 2015 and 2020, without any salary, until the events that are the subject of the present proceedings.

Some of these matters are uncontentious and arise from the chronology which I set out above, although the proposition that Adriano ever worked for QB Foods in the manner contemplated by the HoA was highly contentious and was not established by the evidence.

70. I have referred to Adriano’s and Pino’s emphasis on the concept of “legitimate expectations” above. They relied, in this respect, on cl 7(b) of the HoA which provides that Adriano’s role in QB Foods is to include working with Gavin on QB Foods’ business for a minimum of one day per week for the life of the HoA; that Adriano will not be remunerated for the first 24 months, being from 1 July 2015 to 30 June 2017 and, from 1 July 2017, will be remunerated based on the hours worked per week at the equivalent of Gavin’s hourly rate; and his role was to include the performance of specified tasks namely Business Strategy, New Business Development, Marketing, Social Media, and Finance. Adriano and Pino plead (SOC [16]) that, by reason of clause 7(b) of the HoA, Adriano had a legitimate expectation of a right to participate in the management of QB Foods with respect to those areas. Gavin and Amy respond (Defence [10]) that, on the proper construction of the HoA, the management of QB Foods was to be carried out solely by Gavin as its (sole) Managing Director and the work to be performed by Adriano while working with Gavin on QB Foods’ business would not involve its management; and that, on the proper construction of the HoA, if Adriano was not actively committed to working on QB Foods’ business at least one day per week, then Amy had the right to buy Adriano’s and Pino’s shares.

71. Mr Ogborne submits and I accept that the position as to any “legitimate expectation” of Adriano to participate in the management of QB Foods is distinguishable from the position addressed in Campbell v Backoffice Investments Pty Ltd above, where the shareholders agreement and service agreement provided for two shareholders to be the joint managing directors of the company. By contrast, here, it is apparent from both the HoA and QB Foods’ constitution that Gavin was to continue to have the day-to-day control of QB Foods’ operations as its sole managing director, although the HoA also contemplated that Adriano would perform at least one day’s work in the business of QB Foods as I have noted above.

72. Mr Ogborne points out, and I accept, that Adriano and Pino purchased their shares in QB Foods at the time that it was already operating the business, which had developed from a business operated by Gavin in an earlier company, and used recipes and manufacturing techniques that he had created; and that Gavin’s evidence, which I accept, is that he and Adriano had discussed his wish to continue to have management control of QB Foods after Adriano and Pino invested in it, at the time of that investment (Gavin 21.5.21 [10]-[16], [79]-[81], [83]). As I have noted above, the HoA itself contemplated that Gavin would remain the sole managing director of QB Foods (cll 6-7) and was consistent with the continued operation of QB Foods’ constitution, which vested the power to manage QB Foods’ business in its managing director, and also contemplated that Gavin would be QB Foods’ full-time general manager and perform the daily tasks required to operate the company. It seems to me that, read as a whole, nothing in the provisions in the HoA that contemplate that Adriano would work “with Gavin on the business” in specified areas undermines the overall structure of the HoA and QB Foods’ constitution which confer management control upon Gavin.

73. I accept that there is evidence that Adriano took active steps, particularly in the early years of his and Pino’s involvement in the Company, to promote its products to customers of Locantro and associates, and Gavin accepted in cross-examination that he had several strategy meetings or discussions with Gavin. However, there is little evidence that he was regularly or systematically involved in management or decision-making and it seems to me that any “legitimate expectation” of such an involvement is narrowed both by the terms of the HoA and QB Foods’ constitution and by his lack of wider involvement in management as a matter of fact. I have not neglected Mr May’s detailed submissions as to wider case law as to the role of an “executive officer” and “management” of a company. However, I am not assisted by those submissions in respect of the narrower question of the structure of QB Foods’ HoA and constitution and the factual question of the nature of Adriano’s work in QB Foods.

Meetings with QB Foods’ accountant

74. The first of the issues relating to Adriano’s claim to exclusion from management of QB Foods is a claim that Gavin failed to permit Adriano and Pino to meet with QB Foods’ accountant. Adriano and Pino plead (SOC [18]) that, since June 2015, Gavin has excluded Adriano and Pino from meetings with QB Foods’ accountant, Mr Hurwitz, and (SOC [19]) that the exclusion of Adriano from meetings with QB Foods’ accountant was a breach of cl 7(b) of the HoA; a denial of Adriano’s “legitimate expectation” of a right to participate in the management of QB Foods; and oppressive to, unfairly prejudicial to, or unfairly discriminatory against Adriano and/or Pino within the meaning of s 232 of the Act. Gavin and Amy respond (Defence [13]) by denying that Adriano requested that he or Pino be included in meetings with Mr Hurwitz, and pleading that Gavin has not had any face-to-face meetings with Mr Hurwitz between 1 July 2015 and the commencement of these proceedings and all contact during that period with Mr Hurwitz has been by email or telephone.

75. I have referred to Adriano’s email dated 27 September 2016 to Gavin in respect of meetings with the accountant above. In his second affidavit, Adriano also referred (Adriano 29.3.21 [44]-[45]) to having asked Gavin whether he met with QB Foods’ accountant every quarter and to Gavin’s response that he did not do that but that he would ensure that Adriano was invited and could come to any meetings with the accountant. It appears that Gavin did not meet with that accountant but conducted dealings with him by email and telephone calls, and Adriano did not participate in that process. Gavin’s evidence (Gavin 21.5.21 [113]) outlines the manner in which he dealt with the accountant for QB Foods and his evidence that Gavin has always managed the accounts for QB Foods, with a capable bookkeeper who helped with data entry and reconciling receipts and payments with bank statements and using the MYOB system, and he deals with QB Foods’ accountant by email or telephone rather than meeting in person with him. He denies that Adriano had ever asked to meet with QB Foods’ accountant, although it is not necessary to address that factual dispute in order to determine the proceedings.

76. In closing submissions, Mr May refers to Adriano’s 27 September 2016 email to Gavin and to Gavin’s evidence in cross-examination that there were no meetings with the QB Food’s accountant (T182-183). Mr May seeks to draw on the principle in Jones v Dunkel (1959) 101 CLR 298 in reliance on the fact that the accountant was not called, but it seems to me that nothing flows from that where Gavin’s evidence that he conducted his dealings with the accountant by telephone and by meetings was not seriously contested, and it was hardly necessary that Gavin and Amy call another witness to establish that matter. Mr May also submits that the form of “meeting” was largely irrelevant, but I do not accept that submission for the reasons noted below.

77. Mr Ogborne responds that cl 7(b) of the HoA does not impose any relevant obligation on Gavin, and specifically does not impose any obligation to involve Adriano in meetings with QB Foods’ accountant or, I interpolate, to conduct such meetings, as distinct from imposing an obligation on Adriano in respect of his work within the business. Mr Ogborne also submits that Adriano had no wider expectation of participating in the day-to-day management of QB Foods, where the HoA and constitution provided for Gavin to manage QB Foods’ day-to-day business as I noted above. It is also notable that, although Adriano and Pino complain as to Adriano’s exclusion from meetings with the accountant (which, on the evidence, did not take place) and now seek to widen that complaint to his lack of involvement in other dealings with the accountant by email and telephone, they bring no substantive complaint that there was any inaccuracy or default in respect of QB Foods’ financial or taxation affairs, and the evidence suggests that QB Foods’ financial position has generally strengthened as its business has improved over the relevant period.

78. I will assume, without deciding, that it is open to Adriano and Pino to put submissions beyond the scope of their pleaded claim as to meetings with the accountant, where there is no apparent prejudice to Gavin and Amy in their doing so. I also recognise that cl 7(b) of the HoA contemplated that Adriano have a working involvement in the business and that the HoA required Adriano’s and Pino’s agreement to certain financial decisions of QB Foods. However, QB Foods’ constitution also conferred management powers on Gavin as its director and the arrangement between the parties plainly contemplated that Gavin would continue to have the day-to-day conduct of QB Foods’ business. It is not necessary to decide whether it would have been unreasonable for Gavin to decline to involve Adriano in physical meetings with the accountant, where Adriano had no express right to attend such meetings under the HoA and that would arguably intrude on the day-to-day management of QB Foods, where there is no evidence that such meetings took place. It seems to me that it was not oppressive for Gavin not to involve Adriano in emails or telephone calls with the accountant, particularly where Adriano was generally working from Locantro’s rather than QB Foods’ premises. It seems to me that neither the HoA nor any reasonable expectation of Adriano and Pino as the holders of half the shares of a company in which Gavin was the sole director and the managing director had any reasonable expectation that they would participate in such telephone calls or email correspondence, and it is not suggested that they did not have access to QB Foods’ annual financial reports and other financial information. Oppression is not established in respect of this matter, alone or together with other matters.

Access to financial information on “MYOB Live”

79. Next, Adriano and Pino raise an issue concerning access to QB Foods financial information maintained on QB Foods’ “MYOB Live” software. They plead (SOC [27]-[29]) that, on or about 24 December 2019, after many previous requests by Adriano, Gavin granted Adriano access to the MYOB database for QB Foods; on or about 4 March 2020, and without warning to Adriano, Gavin removed Adriano’s access to the MYOB database for QB Foods; and Adriano’s access to the MYOB database had not been restored as at 1 December 2020, the date these proceedings were instituted.

80. Gavin and Amy respond (Defence [22]) by admitting that, on or about 24 December 2019, Gavin allowed Adriano access to the MYOB database for QB Foods; plead that his doing so fulfilled one of the conditions of the agreement increasing Gavin’s salary to $150,000 per annum, plus super, and paying for the costs of his Ford Ranger and mobile phone as part of his remuneration; and plead that access was granted to Adriano to QB Foods’ MYOB database on the condition that he would maintain the confidentiality of QB Foods’ accounts recorded in that database and use those accounts only for the proper purposes of QB Foods. They admit (Defence [23]) that, on or about 4 March 2020, Gavin removed Adriano’s access to the MYOB database for QB Foods; and contend that Adriano had breached the confidentiality of QB Foods’ accounts recorded in the MYOB database and used the accounts for an improper purpose; and that, between 24 December 2019 and 4 March 2020, Adriano had shown QB Foods’ accounts recorded in the MYOB database to Locantro’s bookkeeper (namely Ms Radovic, who was also QB Foods’ bookkeeper) and asked her questions about those accounts for the purpose of advancing Adriano’s and Pino’s interests in their dispute with Gavin and Amy.

81. Adriano and Pino plead (SOC [30]) that Gavin’s removal of Adriano’s access to the MYOB database for QB Foods was a breach of cl 7(b) of the HoA; a denial of Adriano’s legitimate expectation of a right to participate in the management of QB Foods; and oppressive to, unfairly prejudicial to, or unfairly discriminatory against Adriano and/or Pino within the meaning of s 232 of the Act. Gavin and Amy respond (Defence [24]) by denying that Adriano had any legitimate expectation of a right to participate in the management of QB Foods, whether as a result of cl 7(b) of the HoA or otherwise; pleading that Adriano had not taken any role or interest in the management or decision making of QB Foods’ business; and pleading that the removal of his access to the MYOB database was fair and reasonable.

82. Turning to the evidence as to this matter, as I noted above, Adriano’s evidence (Adriano 29.3.21 [57]) was that he had requested access to QB Foods’ MYOB data from July 2015 to December 2019 and that Gavin had responded that Adriano should ask him for the relevant information and that he was first provided read only access to the MYOB database for QB Foods in late December 2019, implicitly in response to the arrangement reached in respect of Gavin’s salary at that time. It emerged in Adriano’s later affidavit evidence and his cross-examination that he had had access to the MYOB database, in respect of some aspects of it, from at least July 2017. Adriano also referred to a conversation with Ms Radovic, who as I noted above was the bookkeeper for both Locantro and for QB Foods, in which she had informed him that Gavin said that he could talk to her about the MYOB file (Adriano 29.3.21 [59]). That evidence was supported by Ms Radovic’s evidence to similar effect in cross-examination. Gavin’s position in that respect is inconsistent with his seeking to conceal aspects of QB Foods’ financial affairs, an unpleaded allegation that from time to time emerged in cross-examination, but is arguably also inconsistent with the basis on which Gavin later terminated Adriano’s access to the “MYOB Live” system..

152. The joint report (Ex J1) in turn identified a number of areas in which Mr Green and Mr Russell disagreed. I have referred above to aspects of that report which were not admitted into evidence so far as Mr Green there sought to develop a new methodology and a substantially higher valuation of the business, to which Gavin and Amy had no opportunity to respond by lay evidence. Mr Russell there increased his value of the business to between $479,250 and $547,714 and his equity value for the business to between $575,837 and $644,302.

153. In submissions, Mr May criticised Mr Russell’s selection of capitalisation rate and his reference to production capacity constraints of QB Foods’ business, to which I referred above. Mr May also submits, drawing upon Mr Lonergan’s text, that the capacity restrictions in the business “should be treated as a short term inefficiency, and thus not an impediment in the calculation of future maintainable earnings”. In particular, Mr May criticises Mr Russell’s view that, despite the growth experienced by the Company in its sales and profit from trading since it was established, its prospects for growth are now limited by operational constraints and the fact that Mr Russell has taken that into account in his valuation of the business. I am not persuaded that that criticism is justified. The existence of significant operational constraints, arising from the age and capacity of the equipment used in the business, was addressed in Gavin’s evidence and corroborated by Mr Ersan’s affidavit evidence and cross-examination, and Mr Ersan was a knowledgeable and credible witness in respect of the Company’s manufacturing operations. I have not neglected Mr May’s contention, advanced in cross-examination, that such capacity constraints may result from freezing capacity limits rather than equipment limits, although it was not established that was the only limiting factor.

154. As Mr May points out, both Mr Russell and Mr Green recognise the possibility that, by additional capital investment, older equipment could be replaced and repair costs and time impact of breakdowns reduced, potentially leading to greater production efficiency, capacity gains and increased profits; but it does not follow that the business should be valued at a higher figure where that has not occurred and QB Foods cannot presently fund that additional investment, not least because Adriano and Pino have declined to invest additional capital and the share issue which may have made available additional funds for that purpose was restrained by the Court on their application and subsequently abandoned. While I accept that an arm’s length purchaser of the business might well choose to replace that equipment after its purchase, it seems to me highly unlikely that it would set its purchase price for the business at a level that paid the vendor for production capacity which the vendor could not achieve and which would only be achieved if the purchaser then took the commercial risk involved in upgrading the company’s production and refrigeration facilities and invested additional capital in the business in order to do so. At the least, it seems to me that such a purchaser would allow for the additional capital cost of those works and a return on its investment which took into account the risk of that investment in determining the purchase price to be paid for the business.

155. Mr May criticises the view expressed in Mr Russell’s report that QB Foods had “numerous competitors” where the evidence suggests there is limited competition in respect of pre-blended smoothie products. I am not persuaded that this is a basis to depart from the capitalisation rate adopted by Mr Russell, where the evidence does not establish that products supplied in other forms are not competitive with pre-blended products in the relevant café markets. Mr May’s submission turns upon a limiting of the relevant market, to pre-blended products only, and the basis for that limitation was not established; obviously enough, the proposition that there is only one or two producers of a product in a particular manner does not exclude competition if that product can be substituted by products produced in a different manner. Mr May also criticises Mr Russell’s view that the industry in which QB Foods is operating is “experiencing little growth”, but points only to QB Foods’ recent history of growth in that respect. It seems to me that the fact that a new entrant to a market experiences a period of significant growth does not establish that the industry in which it operates is growing generally, and still less that that new entrant will continue to grow at a rapid rate into the indefinite future. Mr May also places significant weight upon the fact that QB Foods’ business has been largely limited to the Sydney metropolitan area and its fringes, but it seems to me that that provides little support for the higher valuation advanced by Mr Green, where the lay evidence provides little or no basis for any view that QB Foods has any present organisational or production capacity to extend its business interstate or nationally.

156. Mr May also submits that Mr Green’s capitalisation rate should be adopted in preference to Mr Russell’s capitalisation rate, by reference to the matters which I have addressed above and because Mr Russell fairly agreed that a reasonable value could alternatively have reached the capitalisation rate of 30% which Mr Green had adopted. While that concession fairly reflected the uncertainty involved in determining capitalisation rates, it provided no basis to suggest that Mr Green’s capitalisation rate was preferable to Mr Russell’s capitalisation rate in that respect.

157. Mr May also addressed an adjustment made by Mr Green for legal expenses incurred by QB Foods in respect of a dispute as to document production in these proceedings, and the relevant invoices for those expenses were produced on notice to produce and were tendered (Ex D6). Mr May submits that a substantial amount of those costs was not for the benefit of QB Foods and related to a contested application for access to MYOB information which was determined by Lindsay J as vacation duty judge in January 2021, and as to which the question of costs was reserved by his Honour. Mr May also submits that QB Foods, as a neutral party in the litigation, had no grounds for resisting the Plaintiffs’ application for access to that information and that application was determined in Adriano’s and Pino’s favour. It seems to me that QB Foods had a proper interest in the question of how access was to be given to its financial information in the proceedings, which, in principle, would support its taking a role in and incurring costs in respect of that application. However, it is not necessary to form a final view as to that matter, where that charge was not a recurrent or ordinary course expense of the business and, in my view, is not properly taken into account in assessing the maintainable earnings or profit or value of QB Foods’ business.

158. Mr May also criticised Mr Russell’s approach to several other expenses of QB Foods’ business. Mr May submits that Mr Green’s figure for accountancy fees should be preferred to Mr Russell’s estimate of accountancy fees and I am not persuaded that Mr Russell’s higher figure for accountancy fees should be adopted. Mr May also submits that Mr Green’s lower estimate of advertising expenses should be preferred to Mr Russell’s higher estimate of advertising expenses; that Mr Green’s depreciation figure should be preferred to Mr Russell’s depreciation figure, although the difference between the two is marginal; and that Mr Green’s lower figure for repairs and maintenance should be preferred to Mr Russell’s higher figure, drawing support from the proposition that old equipment could be replaced with new equipment. I am not persuaded that these adjustments should be made. Each of the figures involves an estimate, and all involve questions of business judgment as to the underlying expenses and accounting judgments in respect of the estimates; it does not seem to me that there is any real basis on which to adjust these expense items, where Mr Russell’s approach reflects the actual position and the other expense figures appear to be within the range of acceptable business and accounting judgments. Adriano and Pino also attacked a provision of $70,000 for make-good expenses on QB Foods’ leased business premises in Mr Russell’s report, as unsupported by evidence. I am not persuaded that I should require an adjustment of that figure, where a provision for such expenses appears to be appropriate, and Adriano and Pino do not offer any alternative basis for a proper calculation of that provision.

159. Mr May also raised several questions as to alterations in expenses as between QB Foods’ management accounts reports as at May 2021 and its financial reports as at 30 June 2021, on which Mr Russell relied, apparently questioning the reliability of the expense levels contained in the financial reports as at 30 June 2021. I am not persuaded those matters give rise to any reason for concern, where adjustments of this kind can properly arise in finalising year-end accounts, and the criticisms would not support a finding of any lack of integrity or reliability in those accounts. Mr May also addressed the issues as to QB Foods’ history of profit growth, capacity constraints, profit margins and particular expenses in oral submissions (T329-332) and also addressed the capitalisation rate and make-good expenses in oral submissions (T333).

160. Mr Ogborne in turn advanced several criticisms as to the approach adopted by Mr Green in his valuation of QB Foods as at 31 May 2021, including his treatment of pet food sales and his treatment of particular items such as the extent of private use of motor vehicles and his treatment of business expenses. Mr Ogborne submits that Mr Russell’s valuation as at 30 June 2021 correctly accounts for the absence of pet food income and for motor vehicle expenses and responds to the several criticism`s made by Mr May of Mr Russell’s approach to future maintainable earnings and to expense items, which I have addressed above.

161. As will be apparent from my comments in respect of Mr Green’s reports above, I do not consider that the basis of Mr Green’s earlier valuations were established, either by proof of the assumptions on which they were based or by sufficient disclosure of reasoning supporting the lower 30% capitalisation rate which he adopted. I prefer Mr Russell’s updated valuation of the business in the joint report so far as it is necessary to reach a determination of its value and the value of the shares in QB Foods. However, the maintainable earnings adopted in Mr Russell’s report should be adjusted to exclude the legal expenses incurred by QB Food in the proceedings, to which I referred above, and reduce the amount allowed for accountancy fees as noted above, while maintaining Mr Russell’s rather than Mr Green’s capitalisation rate. I am also not persuaded that any wider discretionary adjustment to that value is warranted where it has not been shown that the oppressive conduct that I have found had any adverse effect on the value of Adriano’s and Pino’s shares. In particular, the share issue was not completed; the monies taken by Gavin from QB Foods were repaid, without causing any loss to it or its creditors or shareholders, other than possibly a minimal interest cost; and the higher salary paid to Gavin, although not approved by Adriano and Pino, was not shown to be out of market. As an exercise of a judicial discretion, I prefer the mid-point of Mr Russell’s valuation range where there is no reason to prefer the higher or lower end of that range, as adjusted to exclude legal expenses of these proceedings and reduce accounting expenses as noted above.

Gavin and Amy’s winding up application

170. Gavin and Amy pleaded, and Adriano and Pino resisted, a claim for an order that QB Foods be wound up under s 233(1)(a) of the Corporations Act or on the just and equitable ground under s 461(1)(k) of the Corporations Act. I bear in mind that, at least where a company is established on the basis of relationships of mutual confidence, a winding up order may be made on the just and equitable basis under s 461(1)(k) of the Corporations Act where irreconcilable differences emerge between its members: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd above at [89]; Nassar v Innovative Precasters Group Pty Ltd above at [97]–[98]. The Court may also make a winding up order on that basis in circumstances that do not amount to oppression, although a person who is responsible for the breakdown of the relationship is less likely to be afforded relief: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd above at [89]-[90]; Nassar v Innovative Precasters Group Pty Ltd above at [90], [96], [117].

171. There is no absolute rule that the Court will not wind up a solvent company, while accepting that winding up is a last resort: Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd (2008) 66 ACSR 325; [2008] VSCA 86 at [119]; Re Pure Nature Sydney Pty Ltd above at [76]. In Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd (2018) 125 ACSR 227; [2018] QCA 048 at [46]–[47], [62], McMurdo J noted 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.”

In Re ICB Medical Distributors Pty Ltd above at [221], I noted that the Court will be reluctant to grant a winding up order so as to further a plaintiff’s personal or other interests at QB Foods’ expense and in a manner that would be adverse to third parties.

172. I also bear in mind the Court of Appeal’s recent observations as to the comparative merits of a buy-out order and a winding up, in the different context of an asset-holding rather than a trading company, in Snell v Glatis (No 2) [2020] NSWCA 166. Leeming JA (with whom Bell P and Meagher JA agreed) there held that an order made by the trial judge for the defendant to buy out a plaintiffs’ minority shareholdings in a group of companies should not have been made, notwithstanding her Honour’s careful and comprehensive review of the authorities supporting that approach, where there was insufficient evidence that the defendant could comply with that order within the specified timeframe, the company was not running a business but collecting rents on leased property, and winding up was a realistic means of securing to the plaintiffs their share of the value of the group and preventing ongoing oppression. Leeming JA referred to several matters which tended against the making of a buyout order and in favour of a winding up order, namely that the companies were not actively trading; that there was a potential for hardship, given the time that was allowed for compliance with that order, admittedly, where a very large amount would be required to be paid to acquire the relevant shares; and that a buyout order could easily lead to injustice and delay, if the plaintiff could not or did not comply with it, and could advance a defence of hardship to an application to enforce the order, so that the resolution of the remedy for oppression was not advanced. Bell P agreed with those observations and noted (at [6]) that, although there are statements in the authorities that winding up is a last resort in a case where oppression is found, that remedy should be considered in an appropriate case, even if neither party seeks it.

173. That decision has since been considered in Russell v Lee Holdings Pty Ltd (No 3) [2020] WASC 346, where the parties had exchanged buyout offers and asserted their capacities to meet any orders made to that effect. Although that was not a case involving an actively trading business, Martin J there treated the Court of Appeal’s decision in Snell v Glatis above as a counterweight to the authorities describing winding up as a remedy of last resort, which I address below. In Re Crow Inn Pty Ltd (No 2) [2020] NSWSC 1749, Rees J referred to Leeming JA’s observation in Snell v Glatis that the circumstances in which a shareholder must realise assets in order to meet a buy-out order lend themselves to the appointment of a liquidator for the purposes of ensuring that occurs independently of the parties. Although each party had there sought buy-out orders, Rees J instead ordered that the companies be wound up.

174. Mr Ogborne submits that the working relationship between Gavin, as QB Foods’ sole managing director and general manager, and Adriano as a shareholder who was to work in the business with Gavin for a minimum of one day per week, was predicated on mutual cooperation, trust and confidence, and refers to the provisions of the HoA which contemplated that arrangement. Mr Ogborne submits, and I accept, that the evidence makes clear that the relationship between Gavin and Adriano has broken down, and these proceedings amply demonstrate that matter. Mr Ogborne refers to Re Catombal Investments Pty Ltd [2012] NSWSC 775 at [19]-[20], where Brereton J observed that a deadlock or disagreement in the management of a company’s affairs was a common case for a winding up on just and equitable grounds under s 461(1)(k) of the Corporations Act, particularly where a company was formed on the basis of personal relationships involving mutual confidence, and that confidence had broken down.

175. Mr May responds that a winding up order is not in the public interest where the relief sought by Adriano and Pino by way of a buy-out order (or, I should add, the relief sought by Gavin and Amy by way of a converse buy-out order) is available; QB Foods is solvent and employs a number of people; and the obligations between the respective shareholders arise from the HoA rather than in a quasi-partnership, and QB Foods’ business does not rely on or require mutual cooperation. I accept these are relevant factors. Mr May also submits that Gavin is responsible for the breakdown in the personal relationship with Adriano; I do not accept that submission, to the extent that it treats Adriano and Pino as not also contributing to that breakdown, for the reasons that I have noted above. He submits that Adriano and Pino wish that QB Foods should continue to trade.

176. I bear in mind that it was contemplated that Adriano would have a role in the specified areas of QB Foods’ business. It would plainly be unworkable for the parties to be in business arrangements which involve them having to make decisions cooperatively, collaboratively or jointly, although I recognise that is arguably not required here where Gavin is sole director and managing director and can make proper decisions on that basis, subject to the rights afforded to Adriano and Pino under the HoA and the obligations imposed on Gavin as a director under the Corporations Act. I recognise that QB Foods is profitable and apparently conducting a successful ongoing trading business despite the breakdown in the shareholders’ relationship and it would plainly not be in the interests of employees of QB Foods that it cease to conduct that business.

172. Had I not been satisfied that an order that Gavin and Amy buy out Adriano’s and Pino’s shares at fair value would remedy the oppression that I have found, I would have concluded that a winding up order should be made, where the relationship between the parties has broken down. I will not make that order where another remedy will sufficiently address the oppression. I recognise that order does not have the necessary consequence that the business would cease to trade, since a liquidator may permit one or other party to operate the business under licence while a sale process is undertaken, and the parties and third parties can then place competing bids to acquire the business in a sale process undertaken under the liquidators’ control. However, that order would at least have a risk that the business would cease to trade and its going concern value would be lost, where a liquidator may not wish to take the risk of continued trading or customers may not wish to trade with a company in liquidation, and that result is plainly adverse to QB Foods’ ongoing employees, its customers and likely also its shareholders, although they would have brought it upon themselves.

173. I considered whether, as in Re Bicher & Son Pty Ltd above, neither a buy-out order nor a winding up order should be made, leaving the business to continue to trade under Gavin’s management and leaving the parties in their existing commercial relationship. That does not seem to me to be a desirable result given the breakdown in the parties’ relationship as evidenced by the events which I have set out above and the fact of these proceedings. I am reinforced in that view where both Counsel indicated, in closing submissions, that their respective clients preferred a winding up order to the parties being left to continue their existing relationship, if each could not achieve its preferred result of a compulsory acquisition of the other’s shares.

Conclusion

179. For these reasons, I will order that Gavin and Amy buy out Adriano and Pino’s shares at a value determined in accordance with the mid-point of Mr Russell’s valuation range as set out in the joint expert report, as adjusted to excluded legal expenses of these proceedings and reduce accounting expenses as noted above. My preliminary view is that there should be no order as to the costs of the proceedings, where there has been a mixed result, since Adriano and Pino have established oppression in respect of a minority of the matters on which they rely, but not shown that it had brought about any diminution of the value of their interest in the business, have not established the higher value of their interest in the business for which they contended or that they rather than Gavin and Amy should acquire the other parties’ shares in QB Foods; and Gavin and Amy have conversely succeeded in their defence of most but not all of the oppression allegations and in obtaining substantially the relief they sought at the hearing. However, I will afford the parties an opportunity to be heard as to the specific orders to be made to give effect to this relief (including the adjustments that are required in respect of Mr Russell’s valuation) and as to costs.

180. I therefore make the following order:

1. Direct the parties to bring in agreed short minutes of order to give effect to this judgment and as to costs within 14 days or, if there is no agreement, their respective short minutes of order and submissions not exceeding 10 pages (in one and a half spacing and Arial 12 point font) as to the differences between them.

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Decision last updated: 29 September 2021