Re Serviced Apartments Melbourne Group & Melbourne Serviced Apartments Pty Ltd
[2020] VSC 752
•13 November 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2020 02351
IN THE MATTER OF SERVICED APARTMENTS MELBOURNE GROUP PTY LTD (ACN 611 491 984)
BETWEEN
| MICHAEL ATWELL | Plaintiff |
| and | |
| MELBOURNE SERVICED APARTMENTS PTY LTD (ACN 614 091 342) | First Defendant |
| SERVICED APARTMENTS MELBOURNE GROUP PTY LTD (ACN 611 491 984) | Second Defendant |
S ECI 2020 03093
IN THE MATTER OF MELBOURNE SERVICED APARTMENTS PTY LTD (ACN 614 091 342)
BETWEEN:
| LUKE MELLOR | Plaintiff |
| and | |
| MELBOURNE SERVICED APARTMENTS PTY LTD (ACN 614 091 342) | First Defendant |
| SERVICED APARTMENTS MELBOURNE GROUP PTY LTD (ACN 611 491 984) | Second Defendant |
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JUDGE: | DELANY J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 30 October 2020 |
DATE OF JUDGMENT: | 13 November 2020 |
CASE MAY BE CITED AS: | Re Serviced Apartments Melbourne Group & Melbourne Serviced Apartments Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2020] VSC 752 |
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PRACTICE AND PROCEDURE – Derivative leave application by director to bring proceeding against other director and external parties – Serious question to be tried - Leave not in best interests of Companies – Application refused – Corporations Act 2001 (Cth) ss 236, 237.
COMPANY LAW – Winding up application – Just and equitable ground – Unresolvable deadlock between the directors – Liquidator appointed to wind up company – Galanoipoulos v Ali Moustafa & Ors [2010] VSC 380 applied – Corporations Act 2001 (Cth) ss 461(1)(k), 467(4).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Ms C M Jones | HWL Ebsworth Lawyers |
| For the Defendants | Mr T L Bevan | EC Legal |
HIS HONOUR:
The applications
There are two applications in two separate proceedings requiring determination by the Court. The dispute is between two individuals, Michael Atwell and Luke Mellor in relation to two companies of which both are the only directors, Melbourne Serviced Apartments Pty Ltd (‘MSA’) and Serviced Apartments Melbourne Group Pty Ltd (‘SAM’).
The first proceeding, S ECI 2020 02351 (‘Derivative Leave Application’) initiated by Mr Atwell on 27 May 2020, seeks derivative leave pursuant to s 237 of the Corporations Act 2001 (Cth) (‘the Act’) to bring a proceeding in the name of MSA and SAM against:
(a)Mr Mellor, the other director of the two companies,
(b)Melbourne Corporate Accommodation (‘MCA’), a purchaser of part of the business of the two companies, and
(c)Mario Salvo, a person who was engaged in the purchase transaction on behalf of MCA and who had previously negotiated with both Mr Atwell and Mr Mellor in relation to a proposed joint venture with the two companies.
The second proceeding, S ECI 2020 03093 (‘Winding Up Application’) was commenced by Mr Mellor on 27 July 2020. Mr Mellor seeks the winding up of MSA and SAM on the just and equitable ground pursuant to s 461(1)(k) of the Act. On 27 July 2020, the plaintiff in the Winding Up Application filed a Consent of Liquidator with the Court, on behalf of Bruno Secatore of Cor Cordis.
Prior to the hearing the parties provided a combined statement of issues in relation to both proceedings. This was of considerable assistance. It identified those issues that are agreed between the parties and those issues requiring determination.
The parties also filed a short agreed chronology.
Each party provided written submissions and a form of order for which that party contends.[1]
[1]Mr Atwell relies upon submissions dated 14 August 2020. Mr Mellor relies upon submissions dated 21 August 2020 and further submissions dated 27 October 2020.
There is a substantial volume of affidavit material and exhibits. The evidence comprises three affidavits made by each of Mr Atwell and Mr Mellor.[2] In addition, Mr Mellor relies upon an affidavit made by his solicitor, Simon Andrew Crawford and the exhibits to that affidavit.[3] No witness was cross-examined on the hearing of the applications.
[2]Mr Mellor’s three affidavits are dated 27 July 2020 (‘First Mellor Affidavit’), 21 August 2020 (‘Second Mellor Affidavit’) and 20 October 2020 (‘Third Mellor Affidavit’) and refer to exhibits LM-1 to LM-19 (cited below with reference to the corresponding affidavit). Atwell’s three affidavits are dated 25 May 2020 (‘First Atwell Affidavit’), 10 August 2020 (‘Second Atwell Affidavit’) and 27 September 2020 (‘Third Atwell Affidavit’). The First Atwell Affidavit refers to exhibits MA-1 to MA-10. The Third Atwell Affidavit refers to exhibit MA-1.
[3]Affidavit of Simon Crawford dated 25 June 2020 (‘Crawford Affidavit’) and exhibits SAC-1 to SAC-8.
MSA, SAM and their activities
The two companies of which Michael Atwell and Luke Mellor are directors, MSA and SAM, were incorporated in 2016,[4] for the purpose of leasing apartments on a long term basis, furnishing them, and then subletting them on a short term basis for profit.[5]
[4]SAM was incorporated on 23 March 2016: First Mellor Affidavit, [10], exhibit LM-1, 4-5; MSA was incorporated on 5 August 2016: First Mellor Affidavit, [8], exhibit LM-1, 1-2.
[5]First Mellor Affidavit, [12]–[13].
The shareholders in the two companies are Maureen Fraser, the mother of Mr Atwell, as to 50% and Mr Mellor as to 50%.
Neither company is currently trading. SAM was the operating company which managed the day to day operations of the business;[6] MSA was the company that held the assets of the business being leasehold interests in residential apartments,[7] (together, ‘the Business’). The majority of the leases were held in the name of MSA but some leases were held in the name of Mr Mellor, on behalf of MSA.[8]
[6]First Mellor Affidavit, [13].
[7]Ibid.
[8]Counsel for Mellor accepted this was the case. Transcript, 30 October 2020 (‘Transcript’), 41.
At the time the two companies were incorporated, Mr Atwell was a bankrupt. That explains why 50% of the issued shares in the two companies are held in the name of his mother, Ms Fraser. Ms Fraser was initially appointed one of the two directors of the companies, it seems, in name only. She resigned following Mr Atwell’s discharge from bankruptcy in 2017 and he was appointed director in her place.[9]
[9]First Mellor Affidavit, [9]-[11].
Between about mid-2017 and mid-2019 when, according to the evidence of Mr Mellor the companies ceased to trade, the Business held a total of about 117 apartment leases in the City of Melbourne and Southbank. Fifty-three of those apartment leases were in the Platinum building at 45 Clarke Street, Southbank (‘Platinum Apartment Leases’). There were about 45 leases spread across the Empire building at 262 Flinders Street, Melbourne, the Lighthouse building at 450 Elizabeth Street, Melbourne, the Opus building at 57-61 City Road, Southbank, the Eporo Towers at 285 La Trobe Street, Melbourne, and the EQ building at 127 – 141 A’Beckett Street, Melbourne.[10]
[10]First Mellor Affidavit, [15]; First Atwell Affidavit, [5]; Second Atwell Affidavit, [6].
From late 2017 there were negotiations with Mr Salvo and his companies about the possibility of a joint venture in relation to the Platinum Apartment Leases. A paper titled ‘Joint Venture – discussion points’ dated 22 February 2018 set out discussion points for the proposed joint venture.[11] At that time it was proposed that Mr Salvo or his company would bring in up to 53 or more apartments in the Platinum building, and that Mr Mellor and Mr Atwell would manage the everyday operations and be responsible for the profitability of the joint venture.[12] In an email dated 19 July 2018, Mr Maitland, the representative of Mr Salvo, summarised the deal that the parties had agreed in a meeting that afternoon.[13] That email recognised that the Business was ‘making circa $20K per apartment at the moment’ and that it agreed to guarantee a minimum $10,000 on each apartment that Mr Salvo would put into the ‘pool’ for two years. Mr Maitland’s email also recorded that if the proposed joint venture business was underperforming after two years, then the Salvo Property Group would have the option to purchase the Business at a value calculated as the then current EBITDA of the Business multiplied by three and adjusted for any additional liabilities or assets of the Business acquired since the date of this deal.[14]
[11]First Atwell Affidavit, [6], exhibit MA-4.
[12]First Atwell Affidavit, exhibit MA-4, 38.
[13]First Atwell Affidavit, exhibit MA-5, 42.
[14]Ibid, 42.
There are factual disputes between the parties as to the profitability or otherwise of particular leases. However the provision of short-term accommodation utilising leased apartments in the Platinum building appears to have been more profitable than the provision of short-term accommodation in other buildings.[15]
[15]Second Atwell Affidavit, [6].
Disagreements between the parties
It is common ground that from approximately mid-2018, Mr Atwell and Mr Mellor were in disagreement about the operation of the Business. On 7 August 2018 Mr Atwell incorporated a new company, Serviced Apartments Australia Pty Ltd (‘SAA’).[16] That company adopted the same model of offering short term rental accommodation as the SAM/MSA business model, leasing at least some of the premises previously used in the Business. This behaviour is part of the many disputes between Mr Atwell and Mr Mellor.[17]
[16]First Mellor Affidavit, [25], exhibit LM-1, 6-7.
[17]First Mellor Affidavit, [25]; Third Atwell Affidavit, [8].
By mid-October 2018 the relationship between Mr Mellor and Mr Atwell had broken down.[18] The Business is agreed by the parties to have been in management deadlock since that time.
[18]First Mellor Affidavit, [26]-[27]; Third Atwell Affidavit, [8].
On 16 October 2018 the shared accountant for the parties, Mr Vasta, reported to both of them following an informal mediation which was not successful in resolving all their differences.[19] Mr Vasta set out in his email the matters discussed with the parties and his recommendations, which he asked the parties to confirm.[20] The first matter Mr Vasta reported on was that Mr Mellor would approach the Salvo Property Group the following day and explain that there may be an offer to sell the Platinum Apartment Leases at the ‘right price’. This price was calculated as $10,000 per apartment with a multiplier of three for goodwill, plus the value of the bonds for the properties. This equalled $1.65 million plus the value of the bonds.[21] Mr Vasta also recorded that there would be no discussion with Mr Salvo about the current partnership issues and that no deal would be done without the agreement of both Mr Mellor and Mr Atwell. In addition, from that day neither of the parties would use business cards or bank accounts of the Business for any private or semi-business expenses.[22]
[19]First Atwell Affidavit, [7]; Second Mellor Affidavit, [7].
[20]First Atwell Affidavit, exhibit MA-6.
[21]First Atwell Affidavit, exhibit MA-6.
[22]First Atwell Affidavit, exhibit MA-6, 47.
Shortly after 16 October 2018, Mr Mellor approached Mr Salvo. He did so on a very different basis to what had been agreed as set out in Mr Vasta’s email of 16 October 2018. Mr Mellor contacted Mr Salvo as an anxious vendor of the Platinum Apartment Leases, offering to sell that part of the Business to Mr Salvo at a ‘fire sale’ price.[23] He did not offer to sell for $1.65 million plus the value of the bonds.
[23]First Atwell Affidavit, exhibit MA-7, 51.
On 28 May 2019, Mr Mellor entered into two sale and transfer agreements with MCA, a company associated with Mr Salvo for the assignment of the Platinum Apartment Leases (‘Sale and Transfer Agreements’).[24] One agreement concerned leases held in the name of MSA, the other concerned leases of the MSA business held in the name of Mr Mellor personally.
[24]First Mellor Affidavit, [60], exhibit LM-1, 42–61.
The price in the two agreements, signed only by Mr Mellor, was $14,000 per apartment inclusive of bond and furniture, and $9000 per apartment inclusive of bond and furniture, where Mr Salvo was the agent managing the apartment.[25] There was no multiple of three as had been referred to in previous communications. The gross price agreed, $600,000 plus or minus adjustments, did not remotely approach the asking price of $1.65 million plus bonds, mentioned in the 16 October 2018 email from Mr Vasta.[26]
[25]First Mellor Affidavit, exhibit LM-1, 43.
[26]First Mellor Affidavit, [62].
On 31 May 2019 Mr Mellor emailed Mr Atwell notifying him about the sale of the Platinum Apartment Leases to Mr Salvo, including details as to how the price for each apartment was calculated.[27] The evidence does not establish whether copies of the Sale and Transfer Agreements were provided at that time. What is clear is that on 19 June 2019, SBA Law, at that time the solicitors for Mr Atwell, threatened to issue proceedings to restrain the sales.[28] However, Mr Atwell took no action and did nothing concerning the sale until approximately 12 months later, after the Sale and Transfer Agreements had been completed.
[27]First Mellor Affidavit, [67], exhibit LM-1, 62-64.
[28]Crawford Affidavit, exhibit SAC-1, 7.
Mr Mellor gave detailed evidence about why he says it was necessary for him to enter into the Sale and Transfer Agreements in May 2019. It is his evidence that the amount paid, $438,500 after adjustments, would have been higher were it not for the fact that ten of the 53 leases were unable to be transferred to the purchaser.[29] He gave detailed evidence about the application of the proceeds of the sale, including to discharge debts owing to external creditors of the Business and to pay outstanding loans both to him (in part) and his mother (in full).[30]
[29]First Mellor Affidavit, [62].
[30]First Mellor Affidavit, [68]; Third Mellor Affidavit, [16] – [32].
Mr Mellor says that it was necessary for him to enter into the agreements in May 2019 having regard to his duties as a director of the two companies.[31]
[31]First Mellor Affidavit, exhibit LM-1, 63.
The evidence discloses that of the sum of $438,500 received by the Business from the sale of 43 apartments in the Platinum building, approximately half went to pay or partly pay loans owing to Mr Mellor and his mother.[32] That is in circumstances where Mr Atwell and his mother were also owed and continue to be owed approximately $240,000.[33]
[32]Ibid, [68].
[33]Second Atwell affidavit, [17].
Mr Atwell received nothing from the sale. He claims that the sale of the Platinum Apartment Leases was at an undervalue and without his authority or consent.[34]
[34]First Atwell affidavit, [17].
It is common ground that Mr Mellor did not have Mr Atwell’s authority to enter into the Sale and Transfer Agreements. Mr Mellor was the sole signatory to the agreements.[35] It is not unreasonable to infer that Mr Salvo and MCA knew that the ‘fire sale’ was not being conducted with the authority of the board of MSA and SAM. Clause 6.2 of both of the Sale and Transfer Agreements contains an express warranty by Mr Mellor that he is a director of MSA and SAM and that he has the capacity to enter into the agreements. The clause reflects an awareness on the part of the purchaser of, at least, a potential lack of authority on the part of Mr Mellor to bind the two companies.[36]
[35]First Mellor Affidavit, exhibit LM-1, 50, 60.
[36]First Mellor Affidavit, exhibit LM-1, 47, 57-58.
Separately, on 1 June 2019, ten leases of the Lighthouse apartments were sold by MSA, the sale having been arranged by Mr Mellor. The proceeds of that sale, $83,000, are held in trust by a firm of solicitors and are, in effect, frozen.[37] There is no complaint by Mr Atwell that the sale of those apartments was at an undervalue.
[37]First Mellor Affidavit, [81]. The funds will not be released without authorisation from both Mr Mellor and Mr Atwell.
Mr Mellor contends that he had no alternative but to sell the assets of the Business, including the apartments in the Platinum building, due to financial problems encountered in the Business in the early part of 2019. He blames Mr Atwell for those problems.
Mr Mellor contends that on 9 April 2019, Mr Atwell improperly transferred $65,000 from the SAM CBA bank account, to a bank account of a company he controlled.[38] Mr Atwell denies any impropriety and says that those funds were used to pay a debt owing to an employee of the Business.[39]
[38]First Mellor Affidavit, [50], exhibit LM-1, 29; Third Atwell Affidavit, [15].
[39]Third Atwell Affidavit, [9]-[10], [15].
It is agreed that on 27 May 2019 Mr Atwell removed the SAM EFTPOS machines and replaced them with SAA EFTPOS machines.[40] Mr Mellor found out what had occurred. He instructed staff that funds were not to go SAA as it was not part of the Business.[41] On 28 May 2019 the solicitors for Mr Mellor sent a letter to Mr Atwell accusing him of breaches of director’s duty and seeking an undertaking that he stop diverting funds.[42]
[40]First Mellor Affidavit, [55]; Third Atwell Affidavit, [16].
[41]First Mellor Affidavit, [57], exhibit LM-1, 40.
[42]Affidavit of Simon Crawford dated 25 June 2020, [4], exhibit SAC-1.
Mr Mellor alleges that Mr Atwell diverted approximately $200,000, money to which SAM and MSA were entitled, to SAA, in June 2019.[43] That allegation is part of a broader allegation by Mr Mellor that Mr Atwell misappropriated $400,000 from the Business between October 2018 and September 2019.[44] Those allegations are denied by Mr Atwell.
[43]First Mellor Affidavit, [76].
[44]Plaintiff in Winding Up Application, Outline of Submissions on behalf of Mr Mellor dated 21 August 2020 (‘First Mellor Submissions’), [18], [25(c)], [64]; First Mellor Affidavit, [28], [47], [50], [76]–[78].
It is agreed that after 28 May 2019, SAA took over a number of leases of apartments in buildings other than the Platinum building, being leases previously held by MSA. SAA and Mr Atwell made no payment to MSA or SAM in relation to those leases, the bonds and furnishings in respect of which had previously been paid for by the Business.
Mr Atwell agrees that he took over some of the leases and that he currently operates seven leases previously held by the Business.[45] Mr Mellor contends that Mr Atwell took over the remaining leases of the Business, 45–50 leases, which are now either operated through SAA or other entities controlled by Mr Atwell, or have been sold by Mr Atwell.[46] Mr Atwell denies these allegations.
[45]Second Atwell Affidavit, [10(b)].
[46]First Mellor Affidavit, [82].
Mr Atwell says that while SAA took over some of the leases, they had been abandoned by the Business and that he has not sold any leases which were previously owned by the Business.[47] Mr Mellor contends that if the value of the leases is as Mr Atwell says $9,000 to $14,000 to which a multiplier is required to be applied, then Mr Atwell has taken property of the Business of very substantial value, used it for his own purposes and failed to account.[48]
[47]Second Atwell Affidavit, [10(b)]; Third Atwell Affidavit, [25].
[48]First Mellor Submissions, [15]–[16]; First Mellor Affidavit, [16], [71]; Transcript, 55, 57-58.
The Derivative Leave Application
Sections 236(1)(a)(ii) and 237(1) of the Act permit an officer of a company to apply to the Court for leave to bring a proceeding on behalf of the company pursuant to s 237(1). The Court must grant derivative leave if the preconditions set out in s 237(2)(a) – (e) are satisfied. These preconditions are that:
(a)it is probable the company will not itself bring the proceeding or properly take responsibility for the proceeding;
(b)the applicant, here Mr Atwell, is acting in good faith;
(c)it is in the best interests of the company, here MSA and SAM, that the applicant be granted leave;
(d)where the applicant is applying for leave to bring proceedings, there is a serious question to be tried; and
(e)either:
(ii)at least 14 days before making the application the applicant gave written notice to the company of his intention to apply for leave and the reasons; or
(iii)it is appropriate to grant leave, even though there was no 14 day notice period.
Mr Atwell and Mr Mellor are agreed that it is probable that MSA and SAM will not bring proceedings. It follows that the criteria in s 237(2)(a) are satisfied. All other issues raised by s 237(2)(b) – (d) are in contest, as is the further question, if leave is granted, should it be granted on any and if so what terms?
One issue of significance raised by Mr Mellor is the failure on the part of Mr Atwell to provide an indemnity in favour of MSA and SAM to cover both the costs of the proposed proceeding and any adverse costs orders.
The proposed claim alleges that the price at which the Platinum Apartment Leases were sold to MCA was an undervalue; and that the purchase price was paid to a company controlled by Mr Mellor and not to MSA/SAM. A draft statement of claim was prepared by Mr Atwell which alleges breaches by Mr Mellor of the directors duties in ss 181 and 182 of the Act and breaches of his fiduciary duty.[49] It is alleged that as a result of these breaches the sale is voidable.[50] The claims against MCA and Mr Salvo are for knowing involvement in Mr Mellor’s breach of directors duties;[51] knowing receipt/assistance by MCA and Mr Salvo;[52] and unjust enrichment.[53]
[49]Proposed Writ and Statement of Claim dated 13 May 2020 in Derivative Leave Application, [21]–[27]. See First Atwell Affidavit, exhibit MA-3 (‘Proposed Writ and Statement of Claim’).
[50]Ibid, [25].
[51]Pursuant to ss 181(2), 182(2) and s 79(c) of the Act. Refer to Proposed Statement of Claim, [31] – [32].
[52]Proposed Writ and Statement of Claim, [34], [36].
[53]Proposed Writ and Statement of Claim, [17].
The relief sought in the proposed proceeding includes:
(a)a declaration the Sale and Transfer Agreements dated 28 May 2019 are void (on the grounds they were not authorised by MSA and SAM);
(b)a declaration that MCA holds the leases and other businesses on trust for MSA and SAM;
(c)an order that MCA assign the leases to MSA; and
(d)an order that MSA provide an account of profits, together with orders for compensation pursuant to s 1317H of the Act and equitable compensation.
The winding up application on the just and equitable ground
Section 461(1)(k) of 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.
Section 467(4) of the Act provides:
(4)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.
As observed by Sifris J in Galanoipoulos v Ali Moustafa & Ors[54] and cited by Kennedy J in Re Innovateq,[55] where there is a situation of unresolvable deadlock, an appropriate course is to:
[A]ppoint an independent party, such as a liquidator, to take control of the Company, its remaining assets, and bring an objective view, unrestrained, unrestricted and unencumbered by the views of the parties, in order to determine the fate of the company.[56]
[54][2010] VSC 380 (‘Galanoipoulos’).
[55][2018] VSC 214, [96].
[56]Galanoipoulos [2010] VSC 380, [34].
The parties are agreed that the jurisdiction to make a winding up order pursuant to s 461(1)(k) of the Act is enlivened. It is agreed that MSA and SAM were both formed and continued on the basis of the personal relationship between Mr Mellor and Mr Atwell. There was an agreement or understanding that they would jointly participate in the operation and management of the Business. Until the breakdown of their personal relationship, that is what occurred. Their relationship was based on friendship and trust. That relationship has broken down irretrievably. Each has lost confidence in the conduct of the other. It is agreed that there is a deadlock in the management of the Business. The main object of MSA and SAM has failed.
The parties do not agree that the financial position of MSA and SAM is such that the appointment of a liquidator is a practical and just outcome. After allowing for payment of external creditors, including the Australian Taxation Office, there is approximately $80,000 in cash available in the two companies.[57] This does not account for debts said to be owing to Mr Atwell and his mother of approximately $240,000.[58]
[57]First Mellor Affidavit, [80]–[83].
[58]Second Atwell Affidavit, [17].
The parties also do not agree whether:
(a)there is utility in liquidation;
(b)Mr Mellor brings the application with ‘clean hands’ and, even if he does not, whether the Court should nonetheless make an order for winding up;
(c)winding up would be just and equitable for all parties; and
(d)the compulsory acquisition of shares would be an alternative available remedy in all the circumstances.
In argument, counsel for Mr Atwell abandoned the compulsory share purchase alternative.[59] It was appropriate that he did so. In view of the complex and interwoven disputes between the parties, it would not be possible to value the shares without first determining those disputes.
[59]Transcript, 85.
Mr Mellor takes issue with the allegation of lack of clean hands. He denies the allegations by Mr Atwell which focus almost exclusively on the Sale and Transfer Agreements. He deposes to various matters concerning Mr Atwell. It is unnecessary to repeat them here, but they include the incident concerning the EFTPOS machines.[60]
[60]See First Mellor Affidavit, [67], exhibit LM-1, 62–64.
The responses by Mr Mellor to the lack of ‘clean hands’ allegation are mainly directed toward conduct engaged in by Mr Atwell. The alleged conduct of Mr Atwell does not go to whether or not Mr Mellor has ‘clean hands’.
Consideration and disposition
It is neither possible, nor appropriate to separate the issues that remain in contest between the parties on the two applications and to treat them in separate silos. If derivative leave were to be granted to Mr Atwell, then, until that claim is heard and determined, it would not be appropriate to wind up MSA and SAM. On the other hand, there are very good reasons, including in the form of potential claims by the two companies against Mr Atwell, why it would be preferable to appoint a liquidator who can pursue such investigations and claims as he considers appropriate.
Turning first to the Derivative Leave Application, there is no doubt that there is a serious question to be tried in relation to the cause of action for which derivative leave is sought. There is a real question about the value at which the Business was sold. It is not possible based on the present material to determine how, or when, the price specified in the Sale and Transfer Agreements was arrived at. There is a gap of more than six months between the initial ‘fire sale’ approach by Mr Mellor to Mr Salvo and the contract date. It is clear that more than $200,000 of the price paid found its way to Mr Mellor and his mother personally, whilst other creditors remained unpaid.
There is a dispute about whether Mr Atwell is acting in good faith in seeking derivative leave. It is agreed that MSA and SAM will not bring proceedings themselves against Mr Mellor, MSA and Mr Salvo. Notwithstanding this, there is a dispute about whether instituting such a proceeding is in the best interests of the companies.
Two key issues were identified by Mr Mellor as standing in the way of the grant of derivative leave. The first issue is a lack of funding. The second issue is conflict on the part of Mr Atwell.
Prior to the hearing on 30 October 2020, Mr Atwell did not offer the usual undertaking to fund the proceeding for which derivative leave was sought. Nor did he offer an indemnity in favour of the companies in respect of any adverse costs orders. In the course of the hearing, Mr Atwell’s counsel proposed that the Court make an order granting derivative leave subject to Mr Atwell providing up $150,000 by a certain date.[61] There was no evidence as to his ability to do so.
[61]Transcript, 77-78.
There are three reasons why Mr Atwell’s application fails:
(a)First, I do not regard the belated proposal concerning funding to be in any way satisfactory. Mr Atwell has known about the hearing date for some considerable time. It was up to him to put on evidence about his financial position. It is his application. A deliberate decision was made by him not to provide the usual undertaking concerning costs relating to the action for which he sought derivative leave. For that reason alone, it is not appropriate that leave be granted;
(b)Second, there is a clear conflict of interest and duty should derivative leave be granted in favour of Mr Atwell. As well as being in a position of conflict, Mr Atwell would likely be a witness in any such proceeding, given the previous dealings with Mr Salvo and his organisation. For that separate reason it is not appropriate that he be given leave; and
(c)Third, it would not be in the best interests of the companies to grant derivative leave so as to give the conduct of any claim against Mr Mellor, MCA and Mr Salvo to Mr Atwell.
On the material available to me it appears that it is in the best interests of the companies to at least investigate bringing proceedings against those persons. Assuming the companies are wound up, such an investigation could be conducted by a liquidator as an independent third party. Given the limited funds available, approximately $80,000, a liquidator’s powers to conduct examinations and investigations provide a more cost-effective means of investigating the strengths and weaknesses of the proposed cause of action the subject of the Derivative Leave Application, than the bringing of those proceedings by Mr Atwell on behalf of the companies. I consider this to be the case even if the other two obstacles to the grant of leave, lack of suitable funding arrangements and conflict, did not exist. The best interests of the company are served by an independent person having the conduct of both the investigations and any litigation.
It is of course one thing to refuse to grant derivative leave, another to order the winding up of the companies so that a liquidator might conduct such investigations and bring such proceedings as she or he may determine.
The parties are agreed that the jurisdiction to make an order for winding up on the just and equitable ground is enlivened. They are agreed that there is a deadlock in the management of MSA and SAM. It is agreed (and it is obvious) that the relationship between Mr Mellor and Mr Atwell has broken down irretrievably.
The evidence establishes and the parties are agreed that that relationship was based on friendship and trust. That friendship and trust has gone. Not only have the parties lost confidence in each other in the conduct and management of the two companies, both contend that the companies should be making claims against the other.
Looking to the utility of a winding up, and whether it is just and equitable for all parties, it is clear that only a liquidator can investigate, and if appropriate, litigate the various claims that the companies may have against each of the two protagonists and their entities arising in the period from August 2018. There are potential claims of substance against both men. Against Mr Mellor, and potentially MCA and Mr Salvo, a claim for approximately $1 million for sale of the Platinum Apartment Leases at an undervalue. Against Mr Atwell and potentially SAA, a claim for the conversion of leasehold assets of the Business to their own use, potentially a claim for more than $1 million and for an account of profits concerning those leases, and also potential monetary claims against Mr Atwell for up to $400,000.
It is difficult to think of a case more appropriate than the present case for the appointment of a liquidator on the just and equitable ground. If a liquidator were to be appointed to the two companies, the liquidator will have the ability to investigate transactions involving both Mr Atwell and Mr Mellor. That includes the potential claims mentioned above, and the repayment of more than $220,000 owing to Mr Mellor and his mother from the proceeds of the Platinum Apartment Leases.
The liquidator can investigate each of these causes of action. She or he can take such steps as considered appropriate to recover property for the benefit of the companies, as well as their creditors and members. The liquidator can do so secure in the knowledge that there is a limited fund that will be available to assist to fund at least part of the work that will be required.
The identity of the liquidator to be appointed is not in question, should an order be made.
I will order that in proceeding S ECI 2020 03093:
(a)Melbourne Serviced Apartments Pty Ltd (ACN 614 091 342) and Serviced Apartments Melbourne Group Pty Ltd (ACN 611 491 984) be wound up pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth);
(b)Bruno Secatore be appointed as liquidator of the companies;
(c)The plaintiff’s (Luke Mellor’s) costs are costs in the winding up.
In proceeding S ECI 2020 02351 I will order that:
(a)The proceeding be dismissed.
(b)The plaintiff (Michael Atwell) pay the third defendant’s (Luke Mellor’s) costs.
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