Re Relae Pty Ltd
[2022] VSC 835
•24 November 2022
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2022 02803
IN THE MATTER of RELAE PTY LTD (ACN 603 747 119)
BETWEEN:
| EVAN HAYES | Plaintiff |
| v | |
| ASHOK MENON & ANOR (according to the attached Schedule) | Defendants |
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JUDGE: | Efthim AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 26 and 27 October 2022 |
DATE OF JUDGMENT: | 24 November 2022 |
CASE MAY BE CITED AS: | Re Relae Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2022] VSC 835 |
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CORPORATIONS – Corporations Act 2001 (Cth) – Part 5.4A – Section 461(1)(k) – Winding up on just and equitable ground – Deadlock – Substratum of the company is gone – Irretrievable breakdown of relationship – Lack of confidence in the conduct and management of the affairs of the company – Oppressive – Whether applicant for relief has clean hands – Part 5.4B – s 467(4) – Whether other remedy available.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Grady | Macpherson Kelley |
| For the Defendants | Mr A Bartzis | Atherton Palany Lawyers |
HIS HONOUR:
The plaintiff, Evan Hayes, and the first defendant, Ashok Menon, are directors of, and each hold 50% of the issued shares in, the second defendant, Relae Pty Ltd (‘the Company’). The plaintiff applies to wind up the Company on the ground that is just and equitable to do so. The application is opposed by the first defendant.
Background
In April 2014 the plaintiff met the first defendant while they were working together on a procurement project. The plaintiff was employed by Blackmores as Director of Procurement. Blackmores engaged the first defendant and Amit Vats via a consultancy firm as consultants for a six-month procurement project that was managed by the plaintiff.
After formal conclusion of the procurement project, the plaintiff, first defendant and Mr Vats had a meeting where they discussed the development of a business focused on procurement and product development for a range of other businesses.
On 19 January 2015 the plaintiff, first defendant and Mr Vats incorporated the Company. At that time, the plaintiff, first defendant and Mr Vats were equal shareholders, and the first defendant’s wife, Archana Menon (‘Archana’), was appointed as the sole director of the Company.
Previously, the plaintiff had proposed winding up the Company. The first defendant and Mr Vats initially agreed but the first defendant subsequently asked whether he could keep the Company instead. Mr Vats and the plaintiff agreed and, as a result, all of the shares held by the plaintiff, first defendant and Mr Vats were transferred to Archana in May 2017.
In March 2018 the plaintiff resigned from his position with Blackmores and accepted a role as managing director of ‘Factors Group Australia’. A condition of his employment was that he be permitted to continue work on personal ventures provided there was no apparent conflict.
In 2018 the business was re-established. In April 2018 discussions were held by the plaintiff and the first defendant and it was agreed that the first defendant would take the position of managing director of the Company and be responsible for:
-day-to-day management of the business;
-hiring and supervising staff of the business;
-operating the Company’s financial accounts, including the Company’s bank account held with the Commonwealth Bank of Australia;
-developing a procurement consulting practice;
-delivering projects to clients of the business;
-invoicing clients for work performed; and
-new business developments generating leads with potential clients and closing new project deals.
The plaintiff would also conduct development activities for the Company as a consultant, which included the following duties:
-creating a product development practice;
-introducing the plaintiff’s network to the first defendant to sell in and generate a client base for the business;
-developing and presenting proposals to key clients of the business; and
-referring procurement consulting clients and introducing projects for the business.
In relation to the remuneration to be paid to the plaintiff and first defendant, the plaintiff deposes that they would be remunerated equally according to the respective numbers of hours they each worked in the business per month. The first defendant disagrees with the plaintiff’s view regarding remuneration.
The first defendant deposes that:
(b)Given the overwhelming responsibility of my role, especially as compared to Evan, my annual salary was fixed at $300,000, including superannuation. I was also entitled to additionally claim work expenses such as mobile phone, travel expenses and the like.
(c)I would be paid as and when payments from clients would come through to the Company to a maximum of $300,000 in a year.
(d)Evan would get paid a day rate of $1245.33 excluding super gross per day, plus any associated expenses such as travel to be charged at cost, to be paid only for the days he was in Melbourne, and for meetings related to his duties as specified in paragraph 19(b) of the Hayes Affidavit.
The plaintiff deposes that:
In or about October 2018, Ashok and I had a telephone call wherein we discussed that we wanted our salaries to be an amount comparable to Ashok’s salary at Pact Group. Ashok’s salary at Pact Group was $234,000 per year, which I understood to have been based upon full-time hours of 220 working days per year and eight working hours per working day.
At that meeting, Ashok and I subsequently agreed that we would be paid according to the respective number of hours we spent performing the Ashok Duties and My Duties respectively, at an hourly rate based upon a $300,000 annual, full-time salary. On the basis of the full-time hours referred to in paragraph 21 above, that hourly rate was calculated to be $170.45 per hour…
The plaintiff carried out duties for the Company remotely and, according to the plaintiff, autonomously through his consulting group, Fit Milestones Pty Ltd (‘Fit Milestones’). His salary for performing his duties would be paid by way of fees payable to Fit Milestones for work conducted on behalf of the Company.
The Company, according to the plaintiff, ceased trading in January 2020, whereas the first defendant deposes that it ceased trading after October 2020.
The plaintiff deposes that there has been an escalated conflict between the plaintiff and the first defendant since at least 1 April 2019 in relation to:
-the first defendant withholding company information from the plaintiff;
-the first defendant crediting amounts to a shareholder loan owing to the first defendant for expenses that the plaintiff believes were not incurred by the first defendant as a director, employee or agent of the Company;
-the first defendant causing the Company to make repayments of the shareholder loan to the first defendant without the plaintiff’s consent;
-the first defendant causing the Company to pay a salary and superannuation to Archana without the plaintiff’s consent and without employing Archana;
-the first defendant causing the Company to pay to him a salary and superannuation in excess of the salary agreement without the plaintiff’s consent; and
-the first defendant refusing to consent to the Company paying the plaintiff for his time spent performing his duties for the Company in accordance with the salary agreement.
The Applicable Law
Section 461(1)(k) of the Corporations Act 2001 (Cth) (‘the Act’) provides:
(1) The Court may order the winding up of a company if:
...
(k)the Court is of opinion that it is just and equitable that the company be wound up.
The Court has power to wind up a company under this provision if it is just and equitable to do so. In Re Catombal Investments Pty Ltd,[1] Brereton J observed that:
…the court is not restricted in exercising its discretion to particular factual categories [Re Straw Products Pty Ltd [1942] VLR 222, 223]. And, the question whether it is just and equitable is a question of fact, in respect of which each case must depend on its own circumstances [Re Bleriot Manufacturing Aircraft Company Ltd (1916) 32 TLR 253, 255]. The words "just and equitable" are general words, which must remain general, and the applicant is entitled to rely on any circumstances of justice and equity that affect him or her in his or her relations with the company or shareholdings [Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (“Ebrahimi”), 374], at least so long as those circumstances have a direct and immediate relationship to, or bearing upon, the management or administration of the affairs of the subject company, or the conduct of its business [Re Nestor Pty Ltd (1981) 6 ACLR 114, 119 (Powell J)].[2]
[1][2012] NSWSC 775.
[2]Ibid [20].
In Re Docklands Chiropractic Clinic Pty Ltd,[3] Hetyey AsJ said that the categories of circumstances which trigger the just and equitable jurisdiction are not closed or rigid. His Honour listed the following matters relevant to the question of whether a just and equitable winding up order should be made:
[3][2020] VSC 364 (‘Re Docklands’).
(a) a failure of the main object of the company’s formation;
(b) a deadlock in the management of the company;
(c) a breakdown in the relationship between the shareholders;
(d)a lack of confidence in the conduct and management of the affairs of the company;
(e)where there has been fraud, misconduct or oppression in relation to the affairs of the company;
(f)serious concerns about the company’s compliance with its statutory obligations, including the filing of tax returns; and
(g)a risk to the public interest that warrants protection.[4]
[4]Ibid [22].
The Issues
There are three main issues before the Court:
-whether there are grounds that the Company should be wound up;
-whether the plaintiff is disentitled to bring this application; and
-the effect of open offers made by the first defendant to the plaintiff to purchase the plaintiff’s shares.
The Evidence
The plaintiff and the first defendant were cross-examined. Counsel for the plaintiff submits that after making some observations of the witnesses there were not any glaring credibility issues with either of the witnesses and that both attempted to give honest accounts.
I am of the view that that is correct regarding the plaintiff. The first defendant appeared to give an honest account on many issues that were raised but not all.
In relation to his salary the first defendant gave the following evidence:
MR GRADY: - - - that you’re probably the first start-up founder ever to get a pay rise going from your employment?---Well, Evan had the opportunity to tell me - I - I offered - in fact I offered to Evan to not to take a $300,000. It was his insistence that I would do it. Okay, it was not - it - I offered. I said, okay, start-up, don’t want to spend too much money, need to conserve cash. We need to be able to invest. I did not take - I - I told him I’d take less. He said, ‘No, no, no, you should take 300’. So that - that was - that is the difference.
All right. Except your evidence was just that it was a - according to you, your salary being covered was a non-negotiable. Now you’re saying you offered to not take your salary?---Sorry?
You said earlier in your evidence that your salary being covered was an absolute non-negotiable for you to be involved in this?---Yes.
And now you’re saying that you offered to Mr Hayes not to take your salary?---So in - and when you had initial conversation that was the first conversation, okay, and then he said, yeah, 300,000. I said, okay, fine, as long as my salary is covered I will do it.[5]
[5]Transcript of Proceedings, Re Relae Pty Ltd (Supreme Court of Victoria, Efthim AsJ, 26 October 2022) 112.
In relation to sharing salary with Archana the first defendant gave the following evidence:
MR GRADY: Yes. I put it to you, Mr Menon, that you split your salary with your wife to obtain a taxation benefit for yourself?---No.
You accept that you did obtain a taxation benefit by splitting your salary with your wife, didn’t you?---No. That - - -
You didn’t obtain a taxation benefit? Is that your serious answer?---Oh, she - she pays tax, I pay tax, or she paid tax. Yeah, she paid tax for 12 months so how does - - -
Yes, yes, and you’d of course know it’s a matter of common knowledge that the top tax rate in this country is 47 per cent for income earned over $180,000; that’s right, isn’t it?---No, I don’t know exactly but then, yeah, if you’re saying so.
Yes, I am saying so. So if you earned $300,000 you’re paying 45 per cent or 47 per cent on everything above $180,000, but if you split the 300 evenly with your wife, 150/150, none of you get into the top tax bracket?---M’hmm, that was definitely not the angle.
That was not the angle?---Ah, it - it has no - it is maybe the effect but then I’m definitely not the thing. The conversation with Evan was pretty clear, yeah.
So your wife?---So we split it, yeah.
Your wife didn’t do any actual work for the company at any stage, did she?---She did.
$150,000 worth?---Ah, maybe not, no.
No, maybe not?---No, no, no.[6]
[6]Ibid 114-5.
The plaintiff submits that the first defendant was emotionally involved and invested in the dispute and his emotion in his evidence portrayed a lack of objectivity about the affairs of the Company.
I note that, when cross-examined, the first defendant gave the following evidence:
MR GRADY: …Mr Menon, I might just ask you this given that it’s just happened. In the speech you just gave, you said ‘I gave birth to Relae’?---Yes.
You compared it to a baby and you said ‘I gave birth to Relae’?---Yes, yes.
And that’s not true is it. You and Mr Hayes - - -?---It is.
- - - I need you to listen to my question - - -?---Sorry, let you finish.
- - - and answer my question. You and Mr Hayes formed this company as founders, didn’t you?---I, can I answer?
Yes?---Yeah, okay. So, in 2013, okay, before I met Evan, I formed up the whole concept around it, okay. Then I got Armeet, there’s a third person there ah, and Evan. I got them on board, okay. Then, for whatever reason, things didn’t work out, people did not have time. I took on the company, I said I would go and do something with it. Evan then came back saying ‘Hey, you know what, this has happened – so and so has moved here. Are you interested in that?’. I said ‘Yeah, let’s see, not sure. I’m thinking of doing something but we’ll talk about it’ and then, so what happened is that we said ‘Okay, let’s get the ball rolling and then get it started’. That’s how it happened so it’s, it’s like a thing. Give birth to a baby, yes, the whole concept, how it needs to be done, what needs to be done, that’s definitely me.[7]
[7]Ibid 99-100.
It was clear from the evidence that the first defendant had a sense of entitlement and regarded the Company as his own. In cross-examination, he gave the following evidence:
MR GRADY: All I want to do, Mr Menon, is just give you an example to tell His Honour why you think that’s fair, and let’s just summarise the situation. You’ve done pretty well out of the last few years in terms of your salary payment, Mr Hayes hasn’t gotten much. We’re now at a standstill, you’ve made an offer to make him sell his shares to you while the company is practically worthless, and you’re just debating over who’s entitled to some cash at bank, and then you should get all the potential upside in the future. What I want to know is why when this was the company that you founded together through your own joint efforts and ideas do you think that is a fair situation for Mr Hayes?---When you found a company together, you start off with a certain perspective of what needs to be done, okay. One person starts to go and do it and execute it, the other person also needs to contribute. When we started the company, there were two angles that we were looking to pursue. One was procurement, the other one was product development, okay. The side I took off was procurement. Product development nothing happened, okay, and that is the angle that Evan was supposed to pursue. So, that’s - that’s - that’s where I’m coming from because right now in Relae, the first cab off the rank her is my capability is in procurement and that’s what I’ll look to pursue first.
Yes. So, what you’re saying, Mr Hayes, is yes, the asset register says the shares are held 50/50, but in your head because you’re more responsible in your mind for the success of this company it’s not 50/50, you should have more of a say and you should get more?---Yes.[8]
[8]Ibid 128-9.
The Grounds for Winding Up
The grounds for winding up the Company are not the major issue in this case. The first defendant’s opposition relates mainly to whether the plaintiff has come to the Court with clean hands and whether there is a more appropriate remedy than winding up the Company.
The plaintiff relies on the following grounds in support of his contention that it is just and equitable that the Company be wound up:
-the substratum of the Company is gone;
-the Company was founded on the basis of a relationship of mutual trust and confidence that has broken down;
-the management of the Company is deadlocked;
-the affairs of the Company have been conducted in an oppressive manner; and
-there is a need for an independent investigation and an orderly winding up of the Company, including in relation to matters of compliance.
The Substratum
When the application was filed the plaintiff alleged that the substratum of the Company was gone because the Company was formed for the purpose of carrying on a joint enterprise between the plaintiff and first defendant which had ceased trading.
There is a factual dispute before the Court as to whether the Company ceased trading in January 2020 or December 2020. The plaintiff conceded that the Court could not be convinced that the first defendant does not genuinely have the intention to have the Company recommence trading, nor that the cessation of the business at one point or another in 2020 was a final and conclusive abandonment of it.
In my view the very foundation on which the Company was formed is irretrievably broken and this is demonstrated by the correspondence passing between the plaintiff and first defendant over some time. The communications between the plaintiff and first defendant have been exchanged through solicitors since September 2021.
Basically, the business as conducted as a joint enterprise between the plaintiff and the first defendant no longer exists. Even if the business is to be recommenced by the first defendant, it could not be conducted in the manner intended at the time of the Company’s formation. The substratum has gone.
Deadlock
The plaintiff submits that there is a deadlock because:
-the Company has ground to standstill and, given the plaintiff and first defendant hold an equal shareholding, no decisions can be made without the agreement of them both;
-the relationship between the plaintiff and first defendant has broken down and they are in conflict with each other;
-the plaintiff and first defendant each assert that they are owed funds from the Company to the exclusion of, or in preference to, each other and there is no mechanism by which it can be resolved; and
-the plaintiff and the first defendant are signatories to the Company’s bank account and both signatures are required to affect a transaction. The bank account is therefore effectively frozen.
On the evidence it is clear that the Company is deadlocked. It is unable to function. The first defendant did not submit otherwise.
Breakdown of Relations
The plaintiff and first defendant accept that the Company is what is commonly known to be a quasi-partnership. The Company:
-is a small proprietary company with only two members, the plaintiff and the first defendant, and they deliberately structured the corporation so that they held equal shares and were each a director;
-was formed on the basis of a relationship of mutual trust and confidence. The plaintiff and first defendant met prior to the incorporation of the Company and formed a personal relationship;
-was a joint enterprise or endeavour between the plaintiff and the first defendant; and
-by clause 7.4 of its constitution has an effective restriction on the transfer of shares in that the constitution permits the directors to refuse to register a transfer of shares in their absolute discretion and without the need to give any reason for doing so.
The plaintiff submits that the evidence establishes to the requisite standard that the relationship between the plaintiff and first defendant has broken down and done so irretrievably. I do not take that position to be contested by the first defendant, nor does he contest that this is a quasi-partnership company.
I accept that the relationship between the plaintiff and first defendant has not reduced to the level of pure hatred but, on the evidence, the plaintiff and the first defendant do not trust each other. The plaintiff deposes that he does not wish to be in business with the first defendant and that the conflict between the plaintiff and the first defendant is irreconcilable and damaging to the Company. On the other hand, the first defendant is more optimistic. He deposes that he is open to discussing the Company’s issues and that there is no personal animosity.
On the evidence it is clear that the very foundation on which the Company was formed, the relationship of personal trust and confidence between the plaintiff and first defendant, has irreversibly broken down.
There was no challenge by the first defendant to the submission that the Company is in deadlock and unable to function.
Oppression
The plaintiff asserts that the evidence strongly suggests that the Company’s affairs have been carried out in a manner that is oppressive or prejudicial to him.
An example of this oppressive conduct according to the plaintiff is the wide disparity of financial benefits received by the relevant parties during the life of the Company. The first defendant and Archana have received payments by way of salary of approximately $435,000, and the first defendant has also received $34,774 in repayment of his shareholder loan to the Company. On the other hand the plaintiff has received a payment of $15,000 in repayment of his shareholder loan to the Company.
In relation to the payment of expenses the plaintiff was of the view that both the plaintiff and first defendant had to approve payment of the Company’s expenses to each other.[9] This is not the understanding of the first defendant.
[9]Ibid 44-5.
In relation to his salary the plaintiff has deposed that throughout the course of operating the business he would:
-personally perform his duties as a director of the Company;
-perform his duties for the Company through Fit Milestones;
-record his time spent performing his duties on an hourly basis;
-not draw payment for that work until the Company was financially viable; and
-draw from the Company, as reimbursement, for Company expenses incurred and paid for by himself personally.
The plaintiff has not been paid his remuneration. The plaintiff has given evidence that the first defendant instructed the Company accountant not to release funds to the plaintiff.
The first defendant deposes that he has perused the tax invoices of the plaintiff and states that:
-the invoices do not adequately, if at all, describe the activity of work;
-he has grave concerns about the validity and authenticity of the invoices, especially where he was advised that Fit Milestones was registered for GST as late as 6 October 2020;
-some invoices are unable to be consented to, given that there is no correlation between Fit Milestones and director’s fees as alleged in the invoices;
-an invoice that refers to an amount owing between Fit Milestones and ‘Medlab’, which is of no concern to the Company, is not owed by it and is flatly rejected; and
-the first defendant had never seen the invoices prior to 29 June 2021 when they were negotiating the end of the business. The admission of the invoices would dilute the first defendant’s ability to claim his due and just salary as agreed.
The first defendant does not deny that the plaintiff performed work for the Company, but that he has been denied any remuneration in circumstances whereby the first defendant has received a substantial sum in remuneration.
A major complaint made by the first defendant is that invoices for the plaintiff’s remuneration were issued by Fit Milestones. The plaintiff was cross-examined at length with regard to his relationship with Fit Milestones. This, in my view, detracted from the real issue, being whether the plaintiff was entitled to claim his remuneration. He should not be disentitled to his remuneration because he issued invoices in the name of Fit Milestones. The plaintiff, as a director of the Company, was providing such services through a separate corporate vehicle and that does not constitute disentitling conduct on the plaintiff’s part.
The disparity of financial benefits received by the plaintiff and first defendant during the life of the Company is an indicator of oppressive conduct.
Impropriety
The plaintiff submits that the first defendant has acted improperly by splitting his salary with Archana to secure a taxation benefit. This could only have been done to secure a tax benefit but the first defendant denies that was the case.[10] There can be no other explanation than that the first defendant was seeking to obtain a tax benefit for himself and Archana to which they were not entitled.
[10]Ibid 114.
The first defendant attempts to justify his actions by stating that the payments were made with the plaintiff’s knowledge and the plaintiff therefore approved them. I note that the plaintiff signed off on the taxation accounts and annual company accounts for the financial year 2020 which covered payments to Archana. The plaintiff, when cross-examined, gave evidence that he knew about these payments when Archana was a director but he did not know that those payments continued.[11]
[11]Ibid 48–50.
Even though it is alleged that the plaintiff signed a tax return, I accept the plaintiff’s evidence that he did not know about the payments made after Archana was removed as a director. Even if he did, there was impropriety and the impropriety was instigated by the first defendant.
The plaintiff also alleges that the first defendant acted improperly by seeking to trademark the brand name ‘Relae’ in his personal name. That application was filed in June 2020 but was withdrawn in January 2021. The first defendant agreed that he personally applied for the various ‘Relae’ trademarks in his own name. The first defendant, when cross-examined, gave the following evidence:
MR GRADY: So you have personally, in your own name, applied for various Relae trademarks; is that right?---Yes, at that point I did, yes.
So you didn't cause Relae to apply for a Relae trademark?---I did, I did. It was based on Relae, so there's Relae Pty Ltd.
You would be the owner of these trademarks, wouldn't you, Mr Menon? It would be you that owned them, not Renae?---It is now - I - I hear - I hear your point and I had informed Evan that I had applied for it and I also informed that these trademarks would not work because there's some technicality about a trademark, and also it's not possible to do what was intended to do to follow these trademarks so, yeah.[12]
[12]Ibid 117.
The plaintiff denies that he agreed to the trademark being in the name of the first defendant. The plaintiff submits that the first defendant, by simply saying ‘I have registered the trademark for Relae’, acted in a way clearly designed to mislead the plaintiff into thinking that the first defendant had done so on behalf of the Company and not himself.
In my view it was improper for the first defendant to register the trademark in his own name and not in the name of the Company and was oppressive to the plaintiff.
A series of accusations are made by the plaintiff that the first defendant used company funds to meet his personal expenses by being reimbursed for expenses that were not in furtherance of the business. The plaintiff submits that the only practical way to solve such matters is an independent investigation by a liquidator. This is an issue that I do not have to deal with because the grounds relied upon in support of the Company being wound up have been made out.
The plaintiff deposes that the first defendant withheld information about the Company from him and would not fully and candidly respond to his queries. The plaintiff submits that this is a difficult factual question for the Court to resolve on this application. However, the plaintiff deposes that his access to the Company’s bank account was removed. Again, this is an issue that does not need to be considered as the grounds relied upon in support of the Company being wound up have been made out.
Clean Hands
A factor to take into account as to whether a company should be wound up on just and equitable grounds is whether the petitioner has come to court with clean hands.
In Ebrahimi v Westbourne Galleries Ltd (‘Ebrahimi’),[13]
A petitioner who relies on the “just and equitable” clause must come to court with clean hands, and if the breakdown in confidence between him and the other parties to the dispute appears to have been due to his misconduct he cannot insist on the company being wound up if they wish it to continue.[14]
[13][1973] AC 360.
[14]Ibid 387.
Ebrahimi was considered and applied in Malos v Malos:[15]
It is the uncle who applies for winding-up. Normally, the court would be unwilling to grant relief where the situation of breakdown has been created by the applicant’s misconduct. But I do not think that there is any inflexible rule to that effect. I refer, in that connection, to the following observation of Santow J in Ruut v Head (1996) 20 ACSR 160 (a partnership case to which the principles now relevant applied):
“As a matter of logic, lack of clean hands could not be an absolute bar, else otherwise for example, where both partners are equally at fault, neither could obtain a winding up order. Nonetheless it must be an important factor in the exercise of the court’s discretion along with other factors, such as whether the partnership is truly deadlocked.”[16]
[15][2003] NSWSC 118.
[16]Ibid [26].
The first defendant submits that the deadlock in the management of the Company and also the deterioration in its general management is also (if not primarily) attributable to the plaintiff’s conduct.
The first defendant submits that this can be ascertained in the following instances:
-the plaintiff was often absent from the management of the Company and often left the first defendant to run the business on his own as a result;
-when the plaintiff and first defendant attempted to negotiate a workable exit regarding splitting funds upon exit from the Company, the plaintiff failed to promote a proper environment in which a negotiation could be undertaken;
-a consistent lack of responsiveness by the plaintiff to legitimate business queries put by the first defendant, especially regarding progress updates on projects that the plaintiff was working on;
-the existence of potential conflict of interests of the plaintiff whereby the plaintiff was also a director of other companies with potentially competing interests to those of the Company. This includes Fit Milestones, a company never intended to be dealt with by the Company. The plaintiff was also heavily involved with ‘Factors Group’, which was a client of the Company and, since the deadlock occurred, no further business has been able to materialise from ‘Factors Group’ to the ultimate detriment of the Company; and
-the plaintiff caused unnecessary (but critical) disruption to the business when requiring the Company’s bank to require dual director approval on all transactions, especially in circumstances where the plaintiff also had access to the bank accounts all along but also that it was agreed from the outset that either director could access company accounts severally to maximise efficiency.
I accept that the plaintiff was often absent from the management of the Company. He left the management to the first defendant and had different duties to perform. In my view those absences did not cause the deadlock.
The first defendant complains that the plaintiff did not provide a conducive environment in which discussions could be undertaken to negotiate a workable exit regarding splitting funds. I do not accept that this is solely the fault of the plaintiff. The plaintiff’s offer to exit the Company, made by email on 17 June 2021, cannot be said to be unreasonable.
In that email the plaintiff stated that there was approximately $130,000 left in the Company’s bank account. He proposed that:
-$10,000-$15,000 be left in the bank for six to 12 months ‘in case anything pops up that I have not heard about’;
-the first defendant resign as director, and either withdraw $75,000 and keep company assets such as computers, or withdraw $80,000 and send the assets back; and
-the plaintiff withdraw the remaining $40,000.
In relation to the conflict of interest alleged by the first defendant, the fact that the plaintiff was a director of Fit Milestones and intended to have his salary paid through that company does not lead to any conflict of interest. It cannot be that the plaintiff would be disentitled to claim payment for work he has done by issuing invoices in the name of Fit Milestones. There is nothing to indicate a conflict of interest.
In relation to the plaintiff’s involvement with ‘Factors Group’, the plaintiff, when cross-examined, gave the following evidence:
MR BARTZIS: So, who was more important to you – Factors or Relae?---That's a good question. Um, when um, when, when it came to it when there was a um, a breakdown in ah, conversations with myself and Ashok, I removed myself from the Collingwood conversation so there wasn't a conflict of interest. If you're asking which one was more important to me from ah, I don't, I don't know – it was mutual benefit for both companies in a fair way um, so it would've been a win-win-win scenario.
I'll put it to you that you were in a conflict of interest?---I disagree. I did, I did quite a lot of due diligence to ensure that I wasn't in a conflict of interest which is also all documents that have been discussed. There was full awareness from all parties – Factors, Collingwood and Relae, about my involvement in the companies.
...
So, let's then put this, you know, in terms of the sour relationship and moving forward. Say for example, the company was to survive today and say for example, Ashok was to continue running this company on his own and you were to bow out. What do you think the likelihood of Ashok marketing to Factors Group is in relation to the Collingwood project?---That's an interesting question. Um, we're a contract manufacturer. We take pitches for contract manufacturing all the time. We do quite a lot of the retail chains within Australia. I, I get pitched stuff all the time. Um, if I felt I was at conflict for that, there are also people within the company that can make a fair assessment of the pitch so it wouldn't have to be me.[17]
[17]Transcript of Proceedings, Re Relae Pty Ltd (Supreme Court of Victoria, Efthim AsJ, 26 October 2022) 77-8.
The fact that the plaintiff was a director of Fit Milestones and involved heavily with ‘Factors Group’ does not mean that the plaintiff did not act with clean hands. On the evidence, there is nothing there that would bar the plaintiff from obtaining a winding up order.
I do not accept the first defendant’s assertion that the plaintiff’s requirement that the Company’s bank require dual director approval on all transactions caused unnecessary disruption to the business.
That requirement was installed after negotiations commenced to start closing out the business and therefore after the breakdown in personal relationships and after the deadlock occurred. I also am of the view that the plaintiff’s conduct was not unreasonable when the two shareholders were having issues over closing out the Company.
I also note that on 24 June 2021 the first defendant wrote to the plaintiff stating that he would pay himself the balance of salary owing of $75,000 for the financial year before 30 June 2021. It appears that the first defendant thought he was entitled to that remuneration to the exclusion of the plaintiff’s claim for remuneration.
A lack of clean hands is not an absolute bar to a winding up order, however and on the evidence there is nothing in the issues raised which would disentitle the plaintiff to a winding up order.
Alternative Remedies – The Offers
Section 467(4) of the Act provides:
Where the application is made by members as contributories on the ground that it is just and equitable that the company should be wound up or that the directors have acted in a manner that appears to be unfair or unjust to other members, the Court, if it is of the opinion that:
(a)the applicants are entitled to relief either by winding up the company or by some other means; and
(b)in the absence of any other remedy it would be just and equitable that the company should be wound up;
must make a winding up order unless it is also of the opinion that some other remedy is available to the applicants and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.
In Exton v Extons Pty Ltd,[18] Sifris J considered the operation of s 467(4) of the Act and said:
The expression ‘some other remedy’ in s 467(4) of the Act has been construed very broadly to include not only legal remedies but alternative courses of action otherwise open to the parties, including commercial remedies such as an offer to purchase the applicant’s shares.[19]
[18](2017) 53 VR 520.
[19]Ibid 543 [84].
In Re Docklands, Hetyey AsJ delayed granting a winding up order. His Honour said:
Section 467(4) makes clear that even if the court is satisfied of circumstances which justify a winding up on the just and equitable ground, it must consider whether some ‘other remedy’ is available in the circumstances. The ‘other remedy’ referred to in s 467(4) is not restricted to a legal remedy but ‘is to be understood in the wider sense of a course of action otherwise open to the party’.
Here, that ‘other remedy’ is the acquisition of the plaintiff’s shares in the Company by Ms Price on behalf of the Price parties. This would be a far less drastic form of relief than to appoint a liquidator at this time. Whilst the parties cannot presently agree on a fair price for the plaintiff’s shares, as already observed throughout these reasons, the Court has the power to intervene and to fashion a buyout order after first determining the competing claims made by the parties and ensuring that any diverted assets are restored to the Company. Because of the availability of this alternative and less drastic remedy, s 467(4) would likely operate to restrain the making of a winding up order, even if I was of the opinion that a winding up was otherwise appropriate.[20]
[20]Re Docklands, [65]–[66].
The first defendant refers to the email of 17 June 2021 where the plaintiff put a proposal for the plaintiff and first defendant to resolve their differences. The plaintiff there indicated that he had a preference to receiving $50,000 at that time. On 27 September 2022 the first defendant offered to purchase the plaintiff’s shares for $50,000. That offer was made in an open letter and referred directly to that proposal of 17 June 2021.
The offer of September 2022 was refused and, at the trial, a further open offer was made by the first defendant. The offer to purchase the plaintiff’s shares was increased to $73,000.
The first defendant complains that no open response was received from the plaintiff. The first defendant submits that the open offers are a genuine attempt to buy the shares of the plaintiff and serve as some other remedy open to the plaintiff and first defendant in the context of s 467(4) of the Act. The first defendant says the offers are a way forward and should be taken into account by the Court, and their existence weighs against any winding up in the circumstances.
The plaintiff and the first defendant are 50% shareholders in the Company and are also the directors. The offer made does not allow the plaintiff to exit the Company with 50% of the cash at bank ($148,000) nor with a proportionate share of the assets, those being the computers, intellectual property and goodwill. This does not appear to be an offer of sale at fair value.
The first defendant wants to continue trading the Company even though it has been dormant for some time. There would be nothing standing in the way of the first defendant commencing a new company under the name ‘Relae No 2 Pty Ltd’ and conducting that business.
The plaintiff submits that there were three options available to him when the plaintiff filed this proceeding. The first was that Fit Milestones could sue the Company for the payment of the plaintiff’s invoices pursuant to the verbal salary agreement between the plaintiff and first defendant. The plaintiff chose against that course of action because it would have taken a long time in litigation and the Company had very limited assets to defend it. If the plaintiff did so, then there would be nothing left in the Company as all the available assets would be exhausted.
The second option was to commence an oppression claim. That was not appropriate because the Company was not and is not a going concern. The plaintiff could have brought an oppression proceeding to get a buyout order. Again, at that time, the Company was not a going concern and had little assets and no prospect of trading in the future, so there would have been no point in seeking a buyout order. An oppression case, according to the plaintiff, and I agree, would have been costly, have occupied more time to hear and likely have been futile.
The third option, according to the plaintiff, was winding up, and the plaintiff submits it is clearly the appropriate, just and equitable remedy in order to bring the matter to an end.
Courts are reluctant to wind up solvent companies and the winding up of a solvent and flourishing company should be the last resort.[21] Here, after considering the plaintiff’s offer and the first defendant’s offers, the remedies available and the evidence leading to the deadlock, it is my view that the Company should be wound up pursuant to the just and equitable grounds. There is no other appropriate order that can be made.
[21]See Re Docklands.
Conclusion
The primary issue for the Court in this matter is not whether the grounds for an order to wind up the Company under s 461(1)(k) of the Act have been established. The primary issue for the Court is a factual one, and it is a question of whether the plaintiff has come to the Court with clean hands. In determining who is at fault for the Company’s predicament, the plaintiff cannot be said to be any more blameworthy than the first defendant. The alternative remedy suggested in the form of the first defendant’s offer to the plaintiff is inappropriate.
The Company will be wound up pursuant to s 461(1)(k) of the Act.
SCHEDULE OF PARTIES
| S ECI 2022 02803 | |
| BETWEEN: | |
| EVAN HAYES | Plaintiff |
| - v - | |
| ASHOK MENON | First Defendant |
| RELAE PTY LTD (ACN 603 747 119) | Second Defendant |
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