Reuther v Wallace

Case [2021] SASC 107

SUPREME COURT OF SOUTH AUSTRALIA

(Appeal to a Single Judge)

REUTHER & ANOR v WALLACE

[2021] SASC 107

Judgment of the Honourable Justice Parker  

13 September 2021

APPEAL AND NEW TRIAL - APPEAL - GENERAL PRINCIPLES - RIGHT OF APPEAL - WHEN APPEAL LIES

CORPORATIONS - MEMBERSHIP, RIGHTS AND REMEDIES - MEMBERS' REMEDIES AND INTERNAL DISPUTES - OPPRESSIVE OR UNFAIR CONDUCT - WHAT CONSTITUTES - CONDUCT OF OR RELATING TO DIRECTORS

CORPORATIONS - MANAGEMENT AND ADMINISTRATION - FINANCIAL INFORMATION AND AUDIT - FINANCIAL REPORTS - RELIEF FROM REQUIREMENTS AS TO ACCOUNTS AND RECORDS OR FINANCIAL REPORTS

This is an appeal against the refusal of a Master to set aside notices issued under s 293 of the Corporations Act 2001 (Cth) (the Act) on the basis that the conduct of the respondent was not oppressive conduct within the meaning of s 232 of the Act.

The Master held that s 293 of the Act confers a statutory right upon a shareholder to require a company to produce audited accounts upon being served with a notice and that the Act draws no distinction between a shareholder who holds shares on trust and a shareholder who holds a beneficial interest in their own right. The Master held that if a trustee had no right to require an audit, no other person would be capable of exercising that right as the beneficiaries of the trust are not shareholders and could not seek relief under s 293.

The Master also held that the exercise of the statutory right conferred by s 293 did not amount to the conduct of a company’s affairs for the purposes of s 232(a). Further, the issue of such a notice does not amount to an actual or proposed act or omission by or on behalf of a company in terms of s 232(b).

The Master further held s 293 does not require a shareholder who issues a notice to have any purpose in doing so. Therefore, the contention that there was no proper purpose for the issuing of the notices was not relevant.

The appellant advanced 5 different grounds of appeal, distilled by the parties to 3 issues.

Held, per Parker J, granting leave to appeal but dismissing the appeal:

1.The obligation placed upon the company under s 293 that requires it to prepare, or take steps to have prepared on its behalf, financial statements falls within the ordinary meaning of the words used in s 232(b).

2.The issue of the s 293 notices is not “contrary to the interests of the members of the company as a whole” within the meaning of s 232(d) nor “oppressive to, unfairly prejudicial to or unfairly discriminatory” pursuant to s 232(e).

3. The occasion for the exercise of discretion to grant relief under s 233 does not arise.

Australian Securities Commission Act 1989 (Cth) s 30(b); Corporations Act 2001 (Cth) ss 53, 232, 233, 249D, 292, 293; Corporations Law (Cth) ss 53, 260(1); Fair Work Act 2009 (Cth), referred to.

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AGLC
Reuther v Wallace [2021] SASC 107
Case
[2021] SASC 107
Decision Date

CaseChat Overview and Summary

In the case of Reuther v Wallace, Linda Olga Reuther, the appellant, appealed against the decision of a Master of the Federal Court, who dismissed her application to set aside notices issued by Mr Wallace, the second respondent, under s 293 of the Corporations Act 2001 (Cth). The appellant and the second respondent were formerly in a personal relationship and also directors, shareholders, and employees of a company, the first respondent. The appellant and the second respondent had reached a settlement agreement, where the appellant agreed to purchase the second respondent's shares in the company, and the second respondent would resign as a director. The valuation process agreed upon at the mediation had not been resolved, and the second respondent issued notices under s 293 of the Act, requiring the company to prepare audited financial reports for the years ending 30 June 2019 and 30 June 2020. The appellant applied to have the notices set aside, which the Master refused.

The legal issues in this case were whether the issue of the notices under s 293 by the second respondent occurred in "the conduct of a company's affairs" within the meaning of s 232(a) of the Act, whether the issue of the notices was "contrary to the interests of the members of a whole" in terms of s 232(d) or "oppressive to, unfairly prejudicial to or unfairly discriminatory" pursuant to s 232(e), and whether the Master erred in finding that the second respondent's purpose in issuing the notices was irrelevant.

The court held that the obligation placed upon the company under s 293 that requires it to prepare, or take steps to have prepared on its behalf, financial statements falls within the ordinary meaning of the words used in s 232(b). The court also found that the issue of the s 293 notices was not "contrary to the interests of the members of the company as a whole" within the meaning of s 232(d) nor "oppressive to, unfairly prejudicial to or unfairly discriminatory" pursuant to s 232(e). The occasion for the exercise of discretion to grant relief under s 233 did not arise.

Final orders:
1. The obligation placed upon the company under s 293 that requires it to prepare, or take steps to have prepared on its behalf, financial statements falls within the ordinary meaning of the words used in s 232(b).
2. The issue of the s 293 notices is not "contrary to the interests of the members of the company as a whole" within the meaning of s 232(d) nor "oppressive to, unfairly prejudicial to or unfairly discriminatory" pursuant to s 232(e).
3. The occasion for the exercise of discretion to grant relief under s 233 does not arise.

Orders

Orders of the court

Held, per Parker J, granting leave to appeal but dismissing the appeal:

1. The obligation placed upon the company under s 293 that requires it to prepare, or take steps to have prepared on its behalf, financial statements falls within the ordinary meaning of the words used in s 232(b).

2. The issue of the s 293 notices is not “contrary to the interests of the members of the company as a whole” within the meaning of s 232(d) nor “oppressive to, unfairly prejudicial to or unfairly discriminatory” pursuant to s 232(e).

3. The occasion for the exercise of discretion to grant relief under s 233 does not arise.

Background

Background to the litigation

The company was the first respondent to the application determined by the Master and has been identified as the second appellant in this appeal. Because the company was not a moving party on the application before the Master, the parties accept that it should not have been named as an appellant and lacks standing to seek relief on the appeal.Background The appellant, Linda Olga Reuther, and Mr Wallace were formerly in a personal relationship and also directors, shareholders and employees of the company. In reasons delivered on 16 October 2018 Auxiliary Judge Roder noted that the personal and business relationships between Mr Wallace and Ms Reuther had irretrievably broken down. On 21 October 2017, Mr Wallace and Ms Reuther had reached a settlement agreement at a mediation. Their agreement was recorded in writing and signed by both parties. They agreed that Ms Reuther would purchase the shares held by Mr Wallace in the company at a price fixed by Mr Hugh McPharlin of Nexia Edwards Marshall, a chartered accountant with particular expertise in business valuation who is often engaged to give expert opinion or advice in family law disputes. A process was agreed upon that would enable Mr McPharlin to value the shares. It was also agreed that Mr Wallace would resign as a director. That occurred on 21 October 2017. The matter came before Auxiliary Judge Roder in 2018 following an application by Mr Wallace for an appointment of a receiver and manager of the company who was to conduct a forensic audit of the company accounts and provide a report to the shareholders. Auxiliary Judge Roder noted that difficulties had arisen between the parties in implementing the agreement of 21 October 2017. However, his Honour was not satisfied that the appointment of a receiver was necessary. The parties had reached an agreement which they needed to carry out. The Court could supervise that process. His Honour then adjourned the matter for further directions. The valuation process agreed at the mediation in 2017 had still not been resolved when the matter came before the Master on 28 August 2020. As previously noted, Mr Wallace had by then served upon Ms Reuther notices under s 293 of the Act in respect of the years ending 30 June 2019 and 30 June 2020. Ms Reuther applied to have the notices set aside under s 233(1)(j) of the Act. That application was the subject of the decision by the Master. Her Honour’s decision is the matter now under appeal. Mr Wallace has raised concerns about use of company funds by Ms Reuther based upon expenditure at various times and in widely differing amounts over the period from 2012 to 10 April 2017.[1] The specifically impugned payments with the greatest value were made in 2012 and 2014. The total amount identified by Mr Wallace is some $692,000. All of those payments predate the settlement agreement and also predate the period covered by the audited financial statements sought by Mr Wallace. In addition to the specifically impugned payments, Mr Wallace has also alleged that Ms Reuther received large overtime payments from the company without the supporting documentation required under the Fair Work Act2009 (Cth). No information has been provided to the Court about the quantum or timing of those payments.[1] One payment of $556 in 2010 has also been called into question.

Evidence

Evidence Before The Court

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Decision

Reasons for decision

Counsel for Mr Wallace referred to another decision of Kenneth Martin J in Trafalgar West Investments Pty Ltd v Superior Lawns Australia Pty Ltd (No 3).[3] It was held in that case that if a shareholder had issued a notice, the obligation to prepare financial reports remained after they ceased to be a shareholder. Counsel relied on that authority to submit that when a shareholder ceases to hold the beneficial interest in shares, but continues to hold them as trustee, the obligation to comply with the notice remains on foot.[3] [2012] WASC 319.The decision of the Master The Master held that s 293 confers a statutory right upon a shareholder to require a company to produce audited accounts upon being served with a notice. The Act draws no distinction between a shareholder who holds shares on trust and a shareholder who holds a beneficial interest in their own right. Her Honour observed if such a distinction were to be drawn, it would effectively shield a company from such a request where shares were held by a trustee. If a trustee had no right to require an audit, no other person would be capable of exercising that right as the beneficiaries of the trust are not shareholders and could not seek relief under s 293. The Master also concluded that no remedy was available under s 233 because the conduct complained of by Ms Reuther did not fall within the ambit of s 232. The exercise of the statutory right conferred by s 293 did not amount to the conduct of a company’s affairs for the purposes of s 232(a). The issue of such a notice also does not amount to an actual or proposed act or omission by or on behalf of a company in terms of s 232(b). The Master also held that the contention that there was no proper purpose for the issuing of the notices was not relevant. That was because s 293 does not require a shareholder who issues a notice to have any purpose in doing so. Section 293 simply confers a right upon shareholders to require a company to provide directors’ reports and financial reports. Once that right is exercised, it creates an obligation on the company. That obligation is not qualified by any requirement that a purpose must be established. The obligation imposed by s 293 is also not qualified by a reference to s 232. There is no requirement that s 293 must be read subject to ss 232 and 233 of the Act.The grounds of appeal Ms Reuther had advanced five grounds of appeal. These may be briefly stated as follows:1.The Judge erred in finding that the conduct of Mr Wallace in serving the two notices under s 293 was not conduct within s 232 of the Act. 2.The Judge erred in finding that the conduct of Mr Wallace was nothing more than the exercise of a statutory right which was not within “the conduct of the company’s affairs”.3.The Judge erred in finding that the purpose for issuing such notices was irrelevant when in the circumstances the issue of the notices would only cause the company to incur significant costs that would not otherwise be incurred and would not assist in informing Mr Wallace of the fair valuation of his shareholding as at 21 October 2017.4.The Judge erred in not finding that the exercise of a statutory right to issue notices under s 293 could nevertheless constitute conduct within the meaning of s 232 of the Act.5.The Judge should have found that in all the circumstances that the conduct of Mr Wallace in issuing the notices was conduct of the company’s affairs that was either contrary to the interests of the members as a whole, or oppressive or unfairly prejudicial to Ms Reuther, both in her capacity as a shareholder and in her capacity as the person entitled to receive the transfer of the shareholding of Mr Wallace.The relevant provisions of the Corporations Act 2001 (Cth)

Ratio Decidendi

Legal Principle Established

While acknowledging that s 233 confers a broad discretionary power, it does not expressly include a power to set aside the notices issued under s 293. Even if the Court were to be satisfied that the threshold requirements of s 232 were satisfied, Mr Wallace submits that in the circumstances of this case the discretion should not be exercised. The notices require the production of audited financial reports and directors’ reports in circumstances where questions have arisen about the conduct of the financial affairs of the company by Ms Reuther. In light of the seriousness of those matters and the general public policy which informs a statutory right conferred by s 293, Mr Wallace submits that the Court should decline to exercise its discretion and refuse to grant any relief.Consideration While Ms Reuther has advanced five grounds of appeal, the parties agree that they essentially distil down to three issues. Those issues are, first, whether the issue of the notices under s 293 by Mr Wallace occurred in “the conduct of a company’s affairs” within the meaning of s 232(a). Secondly, was the issue of the notices “contrary to the interests of the members of a whole” in terms of s 232(d) or “oppressive to, unfairly prejudicial to or unfairly discriminatory” pursuant to s 232(e). Thirdly, did the Master err in finding that Mr Wallace’s purpose in issuing the notices was irrelevant. Whether the issue of the notices occurred in the conduct of the company’s affairs While neither counsel has been able to identify any authority where the potential operation of ss 232 and 233 has been considered in relation to the issue of a notice under s 293, they have referred to the decision of Campbell J in Turnbull v National Roads and Motorists’ Association Ltd.[12] The NRMA had been in dispute with its employees about working conditions. A member gave notice under s 249D of the Act requiring the directors to call a general meeting to consider resolutions to amend the NRMA constitution to enhance employment conditions. In the meantime, the industrial dispute was resolved by way of an enterprise bargaining agreement and neither the employees, nor their union, the directors nor the NRMA desired to proceed with the meeting. The NRMA is a very large membership based organisation and the cost of conducting the proposed meeting would be substantial.[13][12] (2004) 186 FLR 360.[13] The NRMA performs much the same role in NSW as the RAA in this State. The plaintiffs in the action were the directors of the NRMA. They sought orders under ss 232 and 233 of the Act that the meeting not be called or convened and that the relevant resolution not be put at the next ensuing general meeting. Campbell J granted relief in the terms sought by the plaintiffs. Before summarising the reasoning adopted by Campbell J, I note that s 249D of the Act requires the directors of a company to call and arrange a general meeting at the request of members with at least five percent of the votes that may be cast at a general meeting or at least 100 members who are entitled to vote at such a meeting. The obligation placed upon directors to call a general meeting upon the giving of a valid notice under s 249D is very similar to the duty placed upon a company by the giving of a notice under s 293. In the latter case, shareholders with at least five percent of the votes in a small proprietary company may give the company a direction to prepare a financial report and directors’ reports for a financial year and to send them to all the shareholders. Section 293(3)(c) provides that the direction may specify that the financial report is to be audited. Mr Wallace exercised that option.