Re Ross Wood & Sons Pty Ltd (in liq); Wood v Targett
[1997] FCA 232
•10 APRIL 1997
CATCHWORDS
Company Law - whether an order under s 503 of the Corporations Law should be made to remove the respondent as liquidator of certain companies in circumstances where those companies are in the last stages of winding‑up but where there is a possibility that claims against persons with whom the respondent had an association might be pursued by another liquidator with the prospect of some benefit to the applicant and where if claims are not pursued, disruption and expense will only be caused to the applicant.
Corporations Law s 503
Companies Act 1961 (NSW) sch 4 table A
Aboriginal & Torres Strait Island Commission v Jurnkurakurr Aboriginal Resource Centre Aboriginal Corporation (1962) 10 ACSR 121
Re Club Superstores Australia Pty Ltd (1993) 10 ACSR 730
Re Biposo Pty Ltd; Condon v Rodgers (1995) 120 FLR 399
Advance Housing Pty Ltd v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230
Hamilton v National Australia Bank Ltd (1996) 137 ALR 231
Lam Soon Properties Ltd v Molit (No. 55) Pty Ltd (1996) 22 AESR 169
Northborne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434
LAURENCE SCOTT WOOD AND BARRY MAXWELL WOOD v RONALD SCOTT TARGETT
No. NG 36 of 1995
CORAM:Lehane J
PLACE:Sydney
DATE:10 April 1997
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY )
GENERAL DIVISION ) No. NG 36 of 1995
IN THE MATTER OF ROSS WOOD & SONS PTY LIMITED (IN LIQUIDATION)
(A.C.N. 000 542 085)
BETWEEN:LAURENCE SCOTT WOOD AND
BARRY MAXWELL WOOD
Applicants
AND:RONALD SCOTT TARGETT
Respondent
CORAM:Lehane J
PLACE:Sydney
DATE:10 April 1997
MINUTE OF ORDERS
THE COURT ORDERS THAT:
Matter stood over to Friday, 9 May 1997.
The applicants file and serve, no later than 5 days before 9 May 1997, draft short minutes of the orders they propose in relation to the ex parte orders made by the Court on 6 November 1995.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY )
GENERAL DIVISION ) No. NG 36 of 1995
IN THE MATTER OF ROSS WOOD & SONS PTY LIMITED (IN LIQUIDATION)
(A.C.N. 000 542 085)
BETWEEN:LAURENCE SCOTT WOOD AND
BARRY MAXWELL WOOD
Applicants
AND:RONALD SCOTT TARGETT
Respondent
CORAM:Lehane J
PLACE:Sydney
DATE:10 April 1997
REASONS FOR JUDGMENT
LEHANE J: The applicants hold all the issued "H" class shares in Ross Wood & Sons Pty Limited (the Company). They hold those shares as trustees of a trust constituted by a deed dated 22 June 1976 (the Trust), the beneficiaries of which are principally the grandchildren of the applicants' father, Matthew Ross Wood. The Company is in liquidation: a resolution that it be wound up by way of members' voluntary winding up was passed on 10 April 1995. The respondent is the liquidator. He is the liquidator also of a number of other companies (the Subsidiaries) of which the Company is the majority shareholder, either directly or through an interposed holding company (I shall describe the corporate structure in more detail later in these reasons). The Subsidiaries are Ross Wood Productions Pty Limited, Group Films Pty Limited, Dongwe Holdings Pty Limited, Kalehe Holdings Pty Limited and R W P Equipment Pty Limited. A resolution
to wind up each of the Subsidiaries, by way of members' voluntary winding up, was passed at about the same time as its members resolved to wind up the Company.
The respondent says that the winding up of the Company and the Subsidiaries is complete. On 30 June 1995 an amount representing the surplus assets of the Company was distributed to its members. Meetings, purporting to be those required by subs 509(1) of the Corporations Law (the Law), of members of the Company and the Subsidiaries were held on 9 August 1995 and on the same day the respondent lodged the returns required by s 509. There is a question, to which I shall return, whether the meetings were validly held.
It is in those circumstances that the applicants, by their application filed on 6 November 1995, seek, as their primary relief, an order under s 503 of the Law that the respondent be removed as liquidator of the Company and of each of the Subsidiaries and that Mr Max Christopher Donnelly, an official liquidator, be appointed in his place.
Detailed Background
The Company was incorporated in 1966. The subscribers to its memorandum of association were Matthew Ross Wood and Mary Iris Wood. Its shares were, initially, divided into three classes, denominated "A", "B" and "C". The "A" shares (which were issued to the subscribers, Mr and Mrs Wood) conferred the right to vote at meetings of the Company but carried no right to participate in profits; on a winding up their holders were to be entitled only to repayment of the capital paid up on them, and for that purpose
they were to rank equally with the holders of the other classes of shares. The "B" and "C" shares conferred "the right only to such dividends as the Directors may in their absolute discretion from time to time determine and recommend to a meeting of the Company" (articles of association, article 2(d)); they carried no right to vote except at separate class meetings. Article 2(h) provided that:
Notwithstanding any provision of these Articles or of any rule of law a dividend in favour of one class of shares may be declared or paid without at the same time requiring a declaration or payment of a like or any dividend in favour of the other classes or any other class of shares and dividends at differing rates may be declared or paid on or to the respective classes of shares.
Two other provisions of the articles, or incorporated in them, should be noted. The Company was incorporated under the Companies Act 1961 (NSW) and accordingly the provisions of table A in the fourth schedule to that Act applied except as excluded or modified. A provision of table A not excluded or modified was article 99:
The directors may from time to time pay to the members such interim dividends as appear to the directors to be justified by the profits of the company.
Secondly, article 81 of the articles of association may be relevant to the circumstances in which, and the way in which, dividends were in fact declared. It provided:
Notwithstanding any rule of law or equity to the contrary, a director of the company shall not be disqualified by his office from contracting with the company either as vendor, purchaser or otherwise, nor shall any such contract or any contract transactions or arrangements entered into by or on
behalf of the company in which any director shall be in any way interested be avoided or be rendered voidable nor shall any director so contracting or being or (sic) interested be liable to account to the company for any profit realised by any such contract transaction or arrangement by reason of such director holding that office or by reason of the fiduciary relationship thereby established and any such director notwithstanding his interestedness and/or such fiduciary relationship may as a director vote in respect of any such contract, transaction or arrangement and may take part in the actual affixing of the Company's seal to and/or sign any deed, document or instrument giving effect to or evidencing or in any way relating to any such contract, transaction or arrangement, but disclosure of such interestedness shall be made and recorded as contemplated by Section 123 of the Companies Act, 1961. Failure to make and/or to record such disclosures as aforesaid shall not operate to avoid or render voidable any such contract, transactions or arrangements.
By a special resolution passed on 25 July 1966 the articles of association were amended so as to add four further classes of shares, denominated "D", "E", "F" and "G". Those shares had exactly the same rights as the "B" and "C" shares. Then, on 23 June 1976, a special resolution was passed to amend the articles by adding a new "H" class of shares. The rights of a holder of "H" were, once again, identical in all respects with those of the holders of all other shares but the "A" shares.
In fact, the "H" shares were created so that they might be allotted to the trustee of the Trust which, it will be recalled, was constituted on 22 June 1976. The trustee of the Trust, from its constitution, was Mr Alexander Albert Merdith; 2,900 "H" class shares were issued to him, as trustee, fully paid.
Following the allotment to Mr Merdith, the holders of the various classes of shares were as follows:
Mr Matthew Ross Wood held two "A" shares and his wife, Mrs Mary Wood, held one "A" share; Mrs Wood also held 3,000 "B" shares; Terence Ross Wood held 4,000 "C" shares; Barry Maxwell Wood held 4,000 "D" shares; Laurence Scott Wood held 4,000 "E" shares; Ross Gregory Wood held 4,000 "F" shares; Matthew Ross Wood held 1,000 "G" shares; and Mr Merdith held 2,900 "H" shares. The holders of the "C", "D", "E" and "F" shares were the sons of Mr Matthew Ross Wood and Mrs Mary Wood. The "A" and "H" shares were fully paid; the other shares were partly paid.
Mr Matthew Ross Wood died in 1980. Subsequently, by transactions the precise dates and details of which are not in evidence, the members of his family other than Mr Ross Gregory Wood ceased to hold shares in the Company. At the same time Mr Graham Frederick Lind became a shareholder. Following the transactions, Mr R G Wood and Mr Lind each held two "A" shares, 1,500 "B" shares, 2,000 "F" shares and 500 "G" shares; Moona Productions Pty Ltd, a company controlled by Mr R G Wood, and Lindfilms Pty Ltd, a company controlled by Mr Lind, each held 2,000 "C" shares, 2,000 "D" shares and 2,000 "E" shares. Mr Merdith continued, as trustee, to hold 2,900 "H" shares. The shareholdings in the Company and the corporate structure of the group of companies can be diagrammatically represented as follows:
Ross Wood Productions Pty Ltd Group Structure
+--------------+ +--------------+ +----------------+
¦ Ross Gregory ¦ ¦ Matthew Wood ¦ ¦Graham Frederick+---+
¦ Wood Family ¦ ¦ Grandchildren¦ ¦ Lind Family ¦ ¦
+---¦ ¦ ¦ Trust ¦ ¦ ¦ ¦
¦ +--------------+ +--------------+ +----------------+ ¦
¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
¦ +--+----+-----+ +--------+---------------------+---+-----+ ¦
¦ ¦100%+-----+------+--------+-+ +-------+---+100% ¦
¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
¦ +--------------+¦ ¦ ¦ ¦ ¦ +----------------+ ¦
¦ ¦ Moona ¦¦ ¦ ¦ ¦ ¦ ¦ Lindfilms ¦ ¦
¦ ¦ Productions ¦¦ ¦ ¦ ¦ ¦ ¦ P/L +-+¦
¦ ¦ P/L ¦¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦¦
¦ +--------------+¦ ¦ +-+-------+ ¦ +----------------+ ¦¦
¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦¦
¦ ¦ ¦ +------+------+----------+-------+---+-------+----+ ¦ ¦¦
¦ ¦ +----------+------+----------+---+ ¦ ¦ ¦ ¦ ¦ ¦¦
¦ ¦ ¦50% ¦50% ¦18%¦26%¦12%¦18% ¦ ¦ ¦ ¦¦
¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦¦
¦ ¦ +--------------+ +----------------+ ¦ ¦ ¦ ¦¦
¦ ¦ ¦ Wood-Lind ¦ ¦ Ross Wood ¦ ¦ ¦ ¦ ¦¦
¦ ¦ ¦ Holdings P/L ¦ ¦ & Sons P/L +---+ ¦ ¦ ¦¦
¦ ¦ ¦ ¦ ¦ ¦26% ¦ ¦ ¦¦
¦ ¦ +--------------+ +----------------+ ¦ ¦ ¦¦
¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦¦
¦ ¦ ¦ ¦ ¦ +--------+ ¦ ¦ ¦¦
¦ ¦ ¦ +--------------+------------+ ¦ ¦ ¦ ¦¦
¦ ¦ +-----------+ +---+ ¦ ¦ ¦ ¦ ¦¦
¦ ¦ ¦19% ¦61% ¦21%¦59%¦9%¦9% ¦¦
¦ ¦ +--------------+ +----------------+ ¦¦
¦ +----------------------¦ Ross Wood +----+ ¦ Group Films ¦ ¦¦
¦ 7%¦ Productions ¦9% ¦ ¦ P/L ¦ ¦¦
+----------------------------¦ P/L +--+ ¦ ¦ ¦ ¦¦
3%+--------------+1%¦ ¦ +----------------+ ¦¦
¦ ¦ +-----------------------+¦
¦ +--------------------------+
¦
+------------------------+--------------------------+
¦100% ¦100% ¦100%
+--------------+ +--------------+ +----------------+
¦ Dongwe ¦ ¦ Kalehe ¦ ¦ R.W.P. ¦
¦ Holdings P/L ¦ ¦ Holdings P/L ¦ ¦ Equipment P/L ¦
¦ ¦ ¦ ¦ ¦ ¦
+--------------+ +--------------+ +----------------+
Since 31 January 1986 Mr R G Wood and Mr Lind have been the directors, and Mr Lind has been the secretary, of the Company.
The Company and the group prospered. Although the evidence as to the management and operations of the Company and the group is slight, it is common ground that the active controllers of the business have since January 1986 been Mr R G Wood and Mr Lind; to the extent that the business has prospered since that time, the prosperity has largely been the result of their efforts. Substantial dividends have been declared and paid since 1986; they have amounted, in total, to about $800,000. Most if not all of the dividends have been declared by the directors, rather than by a general meeting on the recommendation of the directors. In several cases dividends have been declared payable to nominated shareholders (Mr R G Wood and Mr Lind or Moona Productions Pty Ltd and Lindfilms Pty Ltd) rather than by reference to specified classes of shares. No dividends have ever (either since 31 January 1986 or previously) been declared payable to Mr Merdith as holder of the "H" shares.
On 1 April 1987 Mr R G Wood and Mr Lind wrote to Mr Merdith following what the letter describes as Mr Merdith's indicated desire to resign as trustee of the Trust. The letter proceeded:
In this regard, and in connection with the Trust's holding of 2900 "H" Class Shares in the capital of the Company and being the only "H" Class Shares being issued in the capital of the Company, we advise that no dividend has ever been declared or paid by the Company to the Trust as holder of the issued "H" Class Shares and that the Trust has never received nor has it been entitled to receive any payment from Ross Wood & Sons
Pty. Limited since its incorporation. We would further add that the directors of the Company do not foresee any further circumstances which may give rise to the determination of a dividend payment to the "H" Class shareholder or of any other payment to the Trust.
Enclosed with the letter was a form of resignation which Mr Merdith was asked to sign and return. Mr Merdith (presumably shortly after the date of the letter) signed a form of resignation identical with the document enclosed with the letter. It is dated "April, 1987". It is not a deed. Its operative part says simply:
I, ALEXANDER ALBERT MERDITH ... do hereby exercise the powers conferred on mee by Clause 8.1 of the said Deed and do hereby resign as of this date.
No successor trustee was appointed. Clause 8.1 of the deed provides simply that trustees may be appointed or removed and may retire in accordance with the law in force in New South Wales; clearly enough, the "resignation" was ineffective. It could, in any event, hardly be otherwise as Mr Merdith continued to hold the "H" shares, plainly still as trustee of the Trust. No further steps, however, were taken in relation to the Trust until on 24 August 1995 (i.e. after lodgement of the respondent's final return as liquidator of the Company) the respondent's solicitors wrote to Mr Merdith stating that they acted "for Mr Ross Gregory Wood and for his accountant, Mr Ron Targett". Mr Merdith was then told that Mr Wood and Mr Targett had been advised that a registered deed was necessary to effect his resignation, "following the appointment of a replacement trustee". Enclosed with the letter was a form of deed the relevant effect of which would have been that Mr Merdith appointed Mr R G Wood as new trustee and, having done so, resigned as trustee.
The letter was, in my view, somewhat disingenuous: it made no reference to the liquidation of the Company, or anything that had happened as a result; in fact a sum of $129,425 had been distributed by the respondent as the share of surplus assets attributable to the "H" shares. That sum may already have been held by the respondent's solicitors in a separate account; at all events, shortly afterwards it was so held. But Mr Merdith was not told of the changed circumstance that, instead of merely holding shares on which dividends were never likely to be paid, he now held a substantial fund distributable to his beneficiaries.
Mr Merdith did not comply with the request of the respondent's solicitors. Instead, he executed a deed by which he appointed the applicants trustees of the Trust and then resigned. After some correspondence between the solicitors for the parties, the final distribution in the winding‑up of the Company, attributable to the Trust, was paid to the applicants as trustees. Following further correspondence, these proceedings were commenced.
Basis of applicants' claim
The applicants say that the respondent, because of a long standing association with the Company and its present directors, lacks independence. The respondent is the brother‑in‑law of Mr R G Wood. He holds shares in Moona Productions Pty Limited as trustee of a trust known as the R G Wood Family Trust. He was appointed auditor of the Company and of each of the Subsidiaries on 1 June 1990 and continued in that office until he assumed the role of liquidator. He prepared drafts of several of the resolutions by
which dividends were declared. He is referred to as Mr R G Wood's accountant in correspondence from solicitors acting for both Mr Wood and the respondent.
That claimed lack of independence is said to be significant because, the applicants submit, the liquidator of the Company and the Subsidiaries should have investigated the conduct of the directors in relation to at least two matters. One is their practice of consistently declaring dividends on the shares in which they were interested while declaring no dividends on the other shares, i.e. those held by the Trust, the second relates to the acquisition, use and ultimate disposal of two properties on the Gold Coast in Queensland. In those circumstances, it is said, the respondent's close relationship with the group and its management disqualified him as an appropriate person, as liquidator, to undertake the necessary investigation. Additionally, the applicants submit, the respondent's conduct of the winding‑up was in fact unsatisfactory in that he did not, on his own evidence, consider at all the propriety of the declaration and payment of dividends and considered (the applicants say) only superficially and inadequately the transactions relating to the Gold Coast properties.
The two properties were acquired in 1988. The funds required to purchase and furnish them emanated from Ross Wood Productions Pty Limited; that company lent them to Group Films Pty Limited which in turn lent to the two companies which acquired the properties, Dongwe Holdings Pty Limited and Kalehe Holdings Pty Limited. No interest was charged on the loans. Although the properties were purchased as investments, they were never let on commercial basis. They were from time to time occupied by, among
others, Mr R G Wood and Mr Lind; neither paid rent. When ultimately the properties were sold (at a loss) some of the fittings and furnishings were transferred to Mr R G Wood without consideration. These matters, the applicants argued, called for investigation by a liquidator with a view to possible proceedings against the directors - Mr R G Wood and Mr Lind - of the companies involved in the transactions.
No other alleged discrepancies, or matters said to require investigation, were pressed in argument. Particularly, there is no issue as to the correctness of the respondent's calculation of the share, attributable to the "H" shares, of the final distribution paid in the winding‑up of the Company.
The applicants submitted that the Court should be the more ready to grant the relief sought because no identifiable prejudice would be caused to the respondent or to other persons interested in the Company and the Subsidiaries. Their winding‑up was complete, in the sense that all property remaining after satisfaction of claims against them had been distributed, so that there was no question of the liquidation or distributions being held up or of additional expense being incurred, payable in priority to the claims of members in the liquidation of the Company and the Subsidiaries. In practical terms, if a new liquidator were to investigate matters or take proceedings, someone would need to provide the necessary funds; and in the present circumstances, the funds must come from the applicants or those associated with them.
The respondent's reply
The respondent's submissions may be summarised as follows:
lThere is no reason to suppose that in declaring the dividends the directors did not act properly within the bounds of the discretion which the articles gave them. There was no obligation under the articles to declare a dividend payable to holders of "H" shares; no dividends had ever been declared on the "H", even before Mr R G Wood and Mr Lind took control. As to the Gold Coast properties, the Court would act only if satisfied there was a prima facie case in support of a claim against the directors of the Subsidiaries concerned. The respondent's evidence was that he had considered the matter: there was nothing particularly unusual in making intra‑group loans free of interest; there was no apparent basis to attack the initial decision to invest in the properties; the respondent, as liquidator, had information about the rental which might be obtained for the properties; he had also obtained advice that the fixtures and fittings could not be sold for a substantial sum. In those circumstances, the respondent's view that in the commercial circumstances there was not a claim worth pursuing against the directors was one with which the Court would not interfere.
lAs for lack of independence, the respondent submitted that something more than a mere appearance of partiality was required; particularly in the case of a voluntary liquidation, it is entirely usual and proper to select as liquidator someone who is familiar with the company and its affairs. In any event, even if the Court might
have intervened if an order had been sought at a much earlier stage, it would not do so when the winding‑up was complete. The Court should also take into account the fact that (as the respondent said) the applicants had not pursued their claim with appropriate vigour.
lThe Court should not make an order unless the applicants satisfied it that funding for the new liquidator was actually in place: to make an order otherwise would be futile.
Reasoning
There is no doubt that the discretion under s 503 of the Law will commonly be exercised in favour of the removal of a liquidator where it appears that the liquidator, through relationships or connections with the company, its management or particular persons concerned in its affairs is in a position of actual or apparent conflict of interest (except, perhaps, a merely "theoretical" conflict): see, by way of examples only, Aboriginal & Torres Strait Island Commission v Jurnkurakurr Aboriginal Resource Centre Aboriginal Corporation (1962) 10 ACSR 121; Re Club Superstores Australia Pty Ltd (1993) 10 ACSR 730; Re Biposo Pty Ltd; Condon v Rodgers (1995) 120 FLR 399; Advance Housing Pty Ltd v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230. A relevant conflict may arise where the liquidator has a personal interest in the liquidation (Advance Housing) or where the liquidator's connection with, for example, a particular claimant against the company gives rise to an apprehension that the interests of that claimant may be preferred to those of other claimants (Club Superstores). Although in a
voluntary liquidation, particularly no doubt a members' voluntary winding‑up, it may be appropriate to choose as liquidator a person who has already some knowledge of the company (Advance Housing at 234), that consideration is unlikely to have great weight in circumstances where there are divergent interests in the liquidation and the liquidator's familiarity arises from a connection with parties representing some only of those interests. The judgment of Young J in Biposo mentions other factors which may guide the exercise of the Court's discretion: one is the length of time for which the winding‑up has continued and the extent of the disruption and the amount of additional expense likely to be caused by changing liquidators; another is that the Court will be cautious in circumstances where it appears that a "wrongdoer" may be seeking to avoid the consequences of wrongdoing by attacking the liquidator (at 403); thirdly his Honour suggests (also at 403) that where "there will be little money in the winding‑up and the liquidator will have to cut corners that he might not otherwise cut ... the Court must be very careful not to impose too strict a duty which would stop that happening".
If the present application had been made early in the course of the winding‑up, it may well be that it would have had good prospects of success. In fact, the application has been made in the last stages of the winding‑up. However, if an order is made, this is not a case where significant disruption or expense is likely to be caused to anyone but the applicants unless, of course, the liquidator's investigations lead to the formation of a view that there are claims which should be pursued. In these rather unusual circumstances, though the Court would not remove the respondent as liquidator if it were clear that to do so would be futile, the Court should in my view be inclined to do so if satisfied that there
is a real possibility that claims against persons with whom the respondent had an association might be pursued by another liquidator with prospects of some ultimate benefit to the applicants.
The two possible claims suggested relate to the declaration of dividends and the transactions concerning the Gold Coast properties. In considering those claims, I face a difficulty which is not uncommon in cases such as this: I do not have the benefit of substantial evidence in relation to the claims (that applies particularly to the claims concerning the Gold Coast properties), I have not heard substantial argument about the merits of the claims and, particularly, the persons against whom the claims might be made are not parties to this proceeding. Nevertheless, I must, on the material before me, form a view as to whether the claims, or either of them, have sufficient apparent substance to justify the principal relief which the applicants seek (see, in an analogous context, Hamilton v National Australia Bank Ltd (1996) 137 ALR 231 at 253; Lam Soon Properties Ltd v Molit (No. 55) Pty Ltd (1996) 22 ACSR 169 at 185, 186).
On the material before me the claim relating to the dividends does not bear the appearance of a strong claim. There is no apparent reason why dividends should not have been declared by the directors, as "interim dividends", rather than by the mechanism of determination and recommendation provided by article 2(d) (and it may be noted that the holder of "H" shares could not receive a dividend, if the mechanism of that article were applied, in the absence of a recommendation of the directors that they should receive
one). It was suggested that article 102 of table A might assist. That article has not been excluded from the article of association and its opening words read:
Subject to the rights of persons, if any, entitled to shares with special rights as to dividend, all dividends shall be declared and paid according to the amounts paid or credited paid on the shares in respect whereof the dividend is paid ...
But that submission is convincingly answered by the opening words of the article and by the words "the shares in respect whereof the dividend is paid". I cannot see how article 102 can be taken to override the scheme provided for by article 2 of the articles of association. Nor, I think, is the mere fact that the directors declared dividends on shares in which they were interested, and never on the remaining shares, likely to assist the applicants greatly: article 81 appears to stand in the way, and the history established by the evidence before me must, I think, stand in the way also. It is difficult, given the way in which article 2 is framed and the history, not to think it likely that the "H" shares were created simply so that those who controlled the company would have a discretion, if they chose to exercise it, to cause some income to be paid to the Trust. In the end, it seems to me, an attack on the way in which dividends were declared must centre on whether the power was exercised for an improper purpose or having regard to extraneous considerations. It may be that a liquidator might discover material relevant to that question; the respondent gave evidence that, given the articles and the history, it had not occurred to him to investigate the propriety of the declaration of the dividends. I cannot see it, however, as a likely prospect.
The potential claim in relation to the Gold Coast properties raises rather different considerations. Presumably the basis of the claim would be that the directors had acted in a way which gave rise to claims against them, by the companies concerned, for compensation on the footing that they had breached fiduciary or statutory duties. The successful prosecution of those claims would, presumably, provide additional funds in the relevant Subsidiaries some of which would be distributed to the Company and in turn would be distributable, pro rata, to the members of the Company. It is difficult to resist the impression that ultimately any benefit to the applicants is unlikely to be very great. However, it cannot be said that the circumstances revealed by the evidence do not disclose the possibility of a claim which may bring benefit to the applicants. A difficulty is that the respondent's evidence was that he has made some investigation of the transactions and has concluded, having regard to the commercial circumstances, that no advantage is to be served by making a claim; and it is well established that commercial decisions by liquidators are to be accorded great weight (Northborne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434 at 440). On this aspect of the case, however, the long standing and close connection between the respondent and the group, and those who controlled it, is clearly relevant: the commercial judgment to which courts habitually give great weight is that of an independent liquidator exercising disinterested judgment.
I do not think the respondent's argument about delay is of much consequence. The proceedings were instituted very promptly when the applicants were appointed trustees in the Trust; their delay in taking the steps necessary to set the matter down for hearing,
though perhaps surprising, should not in my view be treated as a matter disentitling them to relief.
Conclusion
In summary, my conclusion is that a reasonable apprehension of partiality on the part of the respondent is clearly established. Given the stage which the liquidation of the Company and the Subsidiaries has reached, however, it would be inappropriate to grant the relief sought if there were not material before the Court suggesting a possibility that a newly appointed liquidator might make recoveries, particularly from directors, which the respondent has not made, and that the fruits of those recoveries would provide a benefit to the applicants. But because the replacement of the respondent as liquidator is unlikely, unless claims emerge from the process, to result in expense or serious disruption to anyone but the applicants themselves, I do not think it appropriate that the Court should require the applicants to demonstrate a strong possibility that claims available to a new liquidator will produce recoveries of substantial benefit to them. On balance, my view is that the applicants have established sufficient grounds to justify the relief which they seek. I do not think I should require them, as a condition of granting relief, to satisfy the Court that funding for a new liquidator is in fact in place: the liquidator, no doubt, will be able to pursue matters only if he is in fact funded and, if he is not, he can no doubt take the steps necessary to bring matters to a speedy conclusion.
I have described as somewhat disingenuous the letter of 24 August 1995 to Mr Merdith from the solicitors acting for Mr R G Wood and for the respondent. It will be recalled
that the letter made no reference to the liquidator of the Company or the distribution to its members. However, I accept the respondent's evidence that he had sent to Mr Merdith a notice of the meeting at which the winding‑up resolution was to be proposed and I do not consider that the respondent personally is to be regarded as responsible for the way it was written: there is no material before me warranting such an attribution of responsibility. Additionally, the respondent provided a detailed affidavit and was cross‑examined. Although his close links with the directors, and particularly with Mr R G Wood, are obvious, I see nothing suggesting any lack of probity on the respondent's part.
In those circumstances, the practice illustrated by Advance Housing and Biposo should be applied here: that is, I should give the respondent some little time in which to consider this judgment and, if he thinks it appropriate, to resign as liquidator. Because this seems to me a matter in which it is highly undesirable that further substantial costs should be incurred, in my view the space of time allowed should be rather greater than what was allowed in the cases to which I have referred, so that if possible, in the light of this judgment, matters may be resolved in a way which will not necessitate the appointment of a new liquidator. I think a month is the appropriate time.
Accordingly, I propose to stand the matter over to a date which I shall fix when I deliver this judgment. If, however, the respondent does not, on or before that date, submit his resignation as liquidator of the Company and each of the Subsidiaries (and in the absence of any agreement between the parties as to some other way in which the matter should be disposed of) I propose then to order that the respondent be removed as liquidator of the
Company and the Subsidiaries and that Max Christopher Donnelly be appointed in his place. A consequential order for the delivery of books and records, as contemplated by paragraph 6 of the application, would also be made: the order would, however, relate only to the Company and the Subsidiaries. I do not think it will be necessary or appropriate to make an order for inspection, such as that contemplated by paragraph 7 of the application.
On 6 November 1995 I ordered, ex parte, that subsection 509(5) of the Law was not to apply in relation to the Company and the Subsidiaries; I also ordered that the date upon which the dissolutions of the Company and the Subsidiaries were to take effect was to be deferred until further order of the Court. Those orders remain in force, and should continue to do so until the matter is next before me. Orders in that form, however, may not, in fact, have been necessary or appropriate: not necessary, because the evidence is that as the notice of the final meeting of the Company and of each Subsidiary was published less than one month before the date on which the meetings were held, the meetings were invalidly held and accordingly subs 509(5) would not have applied to dissolve the Company and the Subsidiaries after three months. As to the appropriateness of the orders, I am not, on reflection, entirely convinced that an order that dissolution be deferred until further order of the Court is an order that dissolution take place on a date specified in the order (subs 509(6)). At all events, if an order is to be made replacing the respondent as liquidator, appropriate consequential orders should be made dealing with the question of dissolution. They may include an order under s 1322 of the Law to cure the invalidity of the meetings, coupled with some further order as to dissolution of the
Company and the Subsidiaries; alternatively, it may be appropriate simply to discharge the ex parte orders, to make no order under s 1322 and, in effect, to allow the new liquidator to repeat the procedure under s 509. The applicants should file and serve, no later than five days before the date to which the matter is stood over, draft short minutes of the orders which they propose for that purpose.
Finally, there is the question of costs. Where an applicant succeeds in obtaining an order for the removal and replacement of the liquidator, the usual practice seems to be that an order for costs is made in the applicant's favour, even where the Court allows the liquidator a period within which to consider its judgment and to resign. The circumstances of this case are in some respects unusual, but no reason occurs to me why the usual practice should not be followed here. I have not, however, heard counsel on the question of costs and if any submissions are to be made on that subject they may be made when the matter is next before me.
I certify that this and the preceding 20 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lehane.
Associate:
Dated: 10 April 1997
Heard: 13 March 1997
Place: Sydney
Decision: 10 April 1997
Appearances: Mr R Parker of counsel instructed by Boskovitz & Associates appeared for the applicant.
Mr G Flick SC and Mr J Trebeck of counsel instructed by Slater & Elias appeared for the respondent.
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