Smith v French
[2000] VSC 381
•25 September 2000
| SUPREME COURT OF VICTORIA | |
| COMMERCIAL AND EQUITY DIVISION | Not Restricted |
No. 2237 of 1996
| MICHAEL ROSS SMITH & ORS (According to the schedule attached) | Plaintiffs |
| v | |
| WALTER MURDOCH FRENCH & ORS (According to the schedule attached) | Defendants |
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JUDGE: | McDonald J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 21, 22, 23, 26, 27, 28, 29, 30 July 1999 2, 3, 4, 5, 6, 9, 10, 11, 12, 16, 17, 18, 19, 20, 23, 24, 25, 26, 30, 31 August 1999 1, 2, 3, 6, 7, 8, 9, 10, 13, 14, 15, 17, 20, 21, 22, 23, 24, 28, 29, 30 November 1999 1, 2, 3, 6, 7, 8, 9, 10 December 1999 | |
DATE OF JUDGMENT: | 25 September 2000 | |
CASE MAY BE CITED AS: | Smith & Ors v French & Ors | |
MEDIUM NEUTRAL CITATION: | [2000] VSC 381 | |
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Corporations – Whether agreement for Joint Venture – Whether oppression of minority shareholder – Whether winding up order appropriate – Duties of directors – debts between companies – Whether manager was an executive officer of company – Corporations Law ss. 9, 82A, 232, 246AA, 461; Companies Code ss. 229; Corporations Law ss. 232, 1317HD
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APPEARANCES: | Counsel | Solicitors |
For the Plaintiffs | Mr D. Meagher QC with Mr C. Gunst QC (to 6/8/99) Mr C. Gunst QC with Mr P. Lacava (from 6/8/99) | Middletons Moore & Bevans |
| For the Defendants | Mr P. Bick QC Mr J. Davis | Norton Gledhill |
Smith and Ors v French and Ors
Schedule of Parties
| Michael Ross Smith | First Plaintiff |
| Mark Anthony McCallum | Second Plaintiff |
| Quarry Quip Engineering Pty Ltd | Third Plaintiff |
| Skye Quarries Pty Ltd | Fourth Plaintiff |
| Walter Murdoch French | Firstnamed Defendant |
| Nancy French | Secondnamed Defendant |
| Ian Dalton Hosking | Thirdnamed Defendant |
| Ballarto Pastoral Pty Ltd | Fourthnamed Defendant |
| Skye Quarries Sales Pty Ltd | Fifthnamed Defendant |
| Skye Poultry Pty Ltd | Sixthnamed Defendant |
| Quarry View Pty Ltd | Seventhnamed Defendant |
HIS HONOUR:
The first plaintiff, Smith, is the secretary and a director of the third plaintiff, Quarry Quip Engineering Pty Ltd (“Quarry Quip”). He is the registered and beneficial owner of four of the issued shares in that company. Smith is also a director and the secretary of the fourth plaintiff, Skye Quarries Pty Ltd (“Skye Quarries”). He is the registered owner of one of the three issued shares in that company.
The second plaintiff, McCallum, is a director of Quarry Quip. He also is the registered beneficial owner of four of the issued shares in that company. McCallum is also a director of Skye Quarries. He is the registered owner of one share in that company. The third share issued by Skye Quarries is registered in the name of the second defendant, Nancy French. She is the wife of the first defendant, Walter French. The first defendant, French, is a director of Quarry Quip and is registered as the beneficial owner of the remaining four shares that have been issued by that company. Since 31 December 1979 French has been and is a director of the fourth defendant, Ballarto Pastoral Pty Ltd (“Ballarto”). He is the registered and beneficial owner of 30 of the 31 shares issued by that company. The other share issued by Ballarto is held by the third defendant, Hosking, who is and has been since 13 March 1995 a director and the secretary of that company. Hosking is by occupation a chartered accountant. On and since 19 June 1997 Ballarto has been the registered proprietor of the business name “Skye Mineral Sands”.
The fifth defendant, Skye Quarries Sales Pty Ltd, was incorporated on 20 June 1995. On that day French and Hosking were appointed directors of the company. The two issued shares in the company were registered in the name of Springfield (Mt Eliza) Pty Ltd and Hosking. On the pleadings it is admitted by the defendants that French was the beneficial owner of all or a substantial part of the issued shares in Skye Quarries Sales and that he was a person in control of the company and at whose direction the company was accustomed to act.
On 1 June 1994 Skye Poultry Pty Ltd was incorporated. It is admitted by the defendants on the pleadings that French, at all material times, was the beneficial owner of all or a substantial part of the issued shares in that company and that he was a person in control of the company and at whose direction it was accustomed to act.
On 11 November 1993 the seventh defendant, Quarry View Pty Ltd, was incorporated. At all material times French was the beneficial owner of all or a substantial part of the issued shares in that company and he was in control of the company and the person at whose direction the company was accustomed to act. On 22 November 1993 Hosking was appointed a director and secretary of that company. At all material times he held a share in the company but it is denied on the pleadings that he is the beneficial owner of the same.
In these proceedings it is alleged by the plaintiffs and admitted by the defendants that French was the person in control of Ballarto and it was at his directions that that company was accustomed to act.
Since about the 1970s land on the Mornington Peninsula at Skye, being Crown allotment 31A and being the whole of the land described in the certificate of title, volume 9580, folio 194 (“Lot 31A”) has been owned by Ballarto. The land to the north of Lot 31A, namely, Crown allotment 33A (“Lot 33A”) was until the 1980s owned by members of the family of the defendant, French. At about this time Lot 33A was sold to and became owned by George and Lucy Florencig. To the north of the land, Lot 33A, and adjoining it was further land being Crown allotment 33C (“Lot 33C”). At or about the time that George and Lucy Florencig became owners of Lot 33A they also purchased Lot 33C from the estate of the deceased mother of the defendant, French.
In September 1993 Lot 33C was purchased by one Worcester from George and Lucy Florencig for a total consideration of some $442,000. Although the land was initially purchased at sale by Worcester he subsequently nominated Quarry View as the purchaser and it completed the purchase of this property.
In May 1994 Quarry View purchased from the mortgagee of George and Lucy Florencig, the Westpac Banking Corporation, Lot 33A and a further property comprising a poultry farm situated nearby to the north of Lot 33C and being identified as Lot 2, Ballarto Road, Skye.
On 6 February 1973 the Minister for Mines for Victoria granted to Southern Sand & Gravel Pty Ltd (“Southern Sand”) a licence to quarry sand on Lot 31A. By a document dated 5 February 1973 Ballarto, which was then the owner of Lot 31A, granted a licence to Southern Sand to quarry for sand on Lot 31A. The licence obliged Southern Sand to pay Ballarto a royalty and to indemnify Ballarto against any costs in connection with the quarry operations and, at the termination of the licence, to deliver up the quarry in good condition and order, free from any danger of subsidence or landslide or other dangers to life or property. On 15 August 1978 Southern Sand assigned its interest in the licence granted to it by Ballarto to William Edgar Sims and William Eric Sims (“the Sims”). Ballarto consented to this assignment.
During the period from 1974 to 1981 Southern Sand and then the Sims mined and extracted sand from Lot 31A. A washing plant was used in this enterprise and in consequence large quantities of slimes or sludge came to be settled, deposited and stored in dams on the property.
In 1981 the Sims ceased to work and operate the quarry at Lot 31A. There were then existing slime dams on this property. On 29 March 1982 the State Mining Engineer wrote to the Sims requiring that all above ground sludge dams be drained and that the sludge be dried and disposed of. This work was not attended to. This led to the Extractive Industry Licence issued in respect of this land being revoked on 15 November 1983.
On 13 March 1984 Ballarto applied for an Extractive Industry Licence in respect of Lot 31A and 33A. On 13 May 1985 an Extractive Industry Licence was issued to Ballarto giving it authority to quarry sand and gravel on Lots 31A and 33A. At this time the land, Lot 31A, was owned by Ballarto. Lot 33A was owned by members of the family of French. It later became the property of George and Lucy Florencig. The licence granted was initially for a period of eight years. By lease dated 21 December 1989 George and Lucy Florencig granted a lease of Lot 33A to Ballarto for a period of five years commencing 2 January 1990. The lease further provided for an option of a further five year period. By the terms of the lease it provided to Ballarto the right to enter the land, search for, and mine sand, gravel and stone and to dispose of it. The lease also provided that Ballarto may make roads, carriageways and watercourses upon and over and through the subject land as Ballarto may deem necessary for working and opening up the land for the purpose of quarrying. Further, the lease provided for the payment of a royalty by Ballarto to George and Lucy Florencig in respect of each cubic metre of material extracted from the land. By the terms of the lease it provided that it should expire on 31 December 1990 in the event of Ballarto not obtaining, by that date, an approved “working plan” for the land, granted by the Department of Industry Technology and Resources. In the events that occurred, this lease lapsed on 31 December 1990 due to the failure of the grant of an approval of a “working plan”. Accordingly, as at April 1989 Ballarto owned Lot 31A and held a licence to mine the land on that allotment. However, even though Ballarto held a licence to mine Lot 33A it did not hold a lease from the owners, George and Lucy Florencig with respect to that land. It was not until 2 January 1990 that it had rights as a lessee to enter the land for the purposes of carrying out mining operations on that land (Lot 33A). The lease relevant to the land lapsed in December 1990. It was not until May 1994 that Quarry View became the owner of the land. It was not until 1994 that Quarry View also became the owner of Lot 33C.
It is appropriate at this point to list in chronological order the dates on which the various companies, the parties to these proceedings, were incorporated. They were:
· Quarry Quip Engineering - 7 April 1989
· Skye Quarries - 19 November 1993
· Quarry View – 19 November 1993
· Skye Poultry – 1 June 1994
· Skye Quarries Sales – 26 June 1995
In these proceedings the plaintiffs, by their final amended statement of claim, allege that in or about April 1989 Smith, McCallum and French agreed to engage in a joint venture whereby Ballarto, and later Quarry View, would permit Smith, McCallum and French (“the joint venturers”) or a company controlled by them access to Lot 31A, Lot 33A and Lot 33C, the quarry, for the purpose of extracting sand from the same for sale to the public; that Smith and McCallum would establish the business of steel fabrication to be owned and operated through a company controlled by the joint venturers and to apply that business, inter alia, to the manufacture and supply of steel plant for use in the quarry; that Smith, McCallum and French, through a company controlled and managed by them, would manage the quarry operations and to that end remove slime to enable Ballarto to gain approval for the extraction of sand and thereafter a company controlled by them would remove sand and sell the same to the public and that French would provide securities for a bank overdraft and provide financial advice to facilitate the operations of the joint venture. It is further alleged by the plaintiffs that it was agreed at this time by Smith, McCallum and French, that income derived from the extraction of sand and other products from the quarry business, would be applied to the payment of costs and expenses associated with the establishment and operation of the quarry business, in payment of the costs of steel fabrication and other work manufactured and supplied for use in the quarry and that after payment of all taxes associated therewith, 50% of the balance would be paid to Ballarto in lieu of the payment of a royalty and 50% paid to a company owned and controlled by the joint venturers. It is alleged by the plaintiffs that from April 1989 to November 1992 pursuant to and for the purpose of the joint venture and by the directions of Smith, McCallum and French, Quarry Quip was incorporated, it established a bank account secured by securities provided by French, that it established the business of steel fabrication and other engineering work and constructed and provided steel plant for use in the extraction of sand from that referred to as the quarry. It is further alleged that Quarry Quip commenced the removal of slime from the quarry and also commenced that referred to as the quarry business.
The defendants deny that Smith, McCallum and French ever agreed to enter into or did enter into a joint venture as alleged. In denying that there was any joint venture agreement entered into as alleged by the plaintiffs it is specifically denied that there was any agreement as to royalties to be paid for the extraction of sand which the defendants contend would be fundamental to any such alleged joint venture agreement. In further denying that there was a joint venture agreement entered into between Smith, McCallum and French, it is further contended that for there to be such an agreement many matters would need to have been agreed upon which matters were not the subject of agreement between such parties. Specifically, it is denied that there was any agreement entered into between Smith, McCallum and French pertaining to the starting date and duration of the joint venture, what contribution or contributions the parties thereto would make to the joint venture, what obligations the parties to the joint venture would be obliged to discharge in relation to the same, what was to occur if the income from the joint venture and/or the steel fabrication business was insufficient to meet the costs and expenses of them respectively, who would carry out any necessary reclamation work at the quarry after mining and who would bear the costs and expenses thereof and what payment would be made to Ballarto for the provision of the use of land, building and facilities and other infrastructure on Lot 31A. Further, it is alleged by the defendants that there was no agreement, as would be necessary if there was a joint venture, as to what provision would be made for the use of its land and infrastructure on Lots 33A and 33C and what was to occur if the right to mine sand on such lots was not obtained or lost. Other like matters were relied on by the defendants in support of the contention that there was never at any time any properly constituted or agreed joint venture agreement or arrangement between Smith, McCallum and French giving them or a company controlled and managed by them the management of quarry operations. It was further contended by the defendants that any alleged agreement was void for uncertainty.
The plaintiffs alleged that during the period between April 1989 and November 1992 pursuant to and for the purpose of the joint venture Quarry Quip was incorporated, that it established a business of steel fabrication and other engineering work, that it constructed and provided steel plant for use in the extraction of sand from the quarry, that it commenced to remove slimes from the quarry and commenced, that referred to as, the quarry business. The defendants by their defence deny that Quarry Quip carried out any quarry business during the period from April 1989 to November 1992. They alleged that during this period of time the quarry business was that of Ballarto and not that of Quarry Quip. The defendants contend, however, that during this period Quarry Quip removed slimes and constructed parts of a crusher plant and parts of a sandwashing plant on Lot 31A. It is contended on behalf of the defendants that this work which was carried out by Quarry Quip was carried out by it pursuant to a separate agreement between it and Ballarto and/or French and not pursuant to any joint venture agreement as alleged. The defendants allege that pursuant to this separate agreement it was agreed that Quarry Quip would be paid a fair and reasonable sum in respect of the work carried out by it and that French, under the business name of M & K Quarry Plant, had been invoiced for the work and the same had been paid. It is denied by the defendants that Quarry Quip ever commenced to operate the quarry business as alleged or otherwise. The defendants contend that at all times between April 1989 and November 1992 that the quarry business was Ballarto's business and Quarry Quip had no interest in it.
The plaintiffs further allege that on or about 19 November 1993 the joint venturers, Smith, McCallum and French, caused Skye Quarries to be incorporated, which was done pursuant to and for the purpose of the joint venture and that shares in that company were issued by it to preserve the parties’ equal interest in the joint venture. Shares in that company were issued to Smith, McCallum and the second defendant, Nancy French. It is alleged by the plaintiffs that that latter share was issued to Nancy French at the request of French and for the benefit of himself directly or indirectly. The plaintiffs allege that at this time Quarry Quip transferred to Skye Quarries the quarry business or alternatively Quarry Quip ceased conducting the quarry business and Skye Quarries, pursuant to and for the purpose of the joint venture, commenced to operate the quarry business with the financial support of Quarry Quip.
By the pleadings issue is joined with those allegations, it being alleged that all the issued shares in the share capital of Skye Quarries were held on trust for French and that it operated the quarry business on behalf of Ballarto and that if Quarry Quip provided any facilities or services to Skye Quarries such services and facilities were provided pursuant to an agreement or arrangement between Skye Quarries and Quarry Quip pursuant to which it was agreed that Skye Quarries would pay Quarry Quip a fair and reasonable sum for the provision of such facilities and services.
It is alleged further by the plaintiffs that during the period from April 1989 to February 1996 pursuant to and for the purpose of the joint venture and by the direction of Smith, McCallum and French, Quarry Quip bore expenses of manufacturing and supplying steel plant for the quarry and that it bore and paid expenses for the quarry business and provided and paid for the services of persons working in the quarry business. It is alleged by the plaintiffs that Quarry Quip bore such expenses, paid expenses and provided plant and labour for the quarry business on the understanding and in the expectation that out of the receipt of profits from the business it may ultimately be compensated or rewarded. More specifically, or in the alternative, Quarry Quip claims payment of sums totalling $1,020,755.90 on a quantum meruit against “the defendants or one or more of them” for the value of goods and services supplied and rendered. In particularising this claim in Schedule 1 Quarry Quip’s claim is for plant and equipment manufactured and supplied, expenses met and paid for, payments made and wages met and paid for during the period from 5 February 1991 to June 1994.
In addition, Quarry Quip claimed against Ballarto payment of $810,000. The basis of that claim as expanded, was that Ballarto in the course of events had recovered that sum in proceedings brought by it against the Sims and others for the costs of removing and treating slimes wrongfully left untreated and not attended to by the Sims on vacating Lot 31A, that Quarry Quip had performed the work of removing and treating such slimes but that Ballarto had profited from the amount recovered from the Sims and had not paid to or accounted to Quarry Quip for the sum recovered by it in the proceedings. By their defence Ballarto and French denied liability to Quarry Quip with respect to this sum alleging that the work performed by Quarry Quip in the removal of slimes from Lot 31A was work done pursuant to a separate agreement between Quarry Quip and Ballarto and or French pursuant to which it was agreed to pay to Quarry Quip a fair and reasonable sum, which had been paid.
Further, the plaintiff, Skye Quarries, alleged that during the period from January 1994 to February 1996 it permitted French to draw against it moneys to be applied to the purposes of the quarry on the understanding and in the expectation of receipt of profits out of which it may ultimately be compensated or rewarded or in the alternative it permitted French to draw moneys against it in the false belief that they were in furtherance of the quarry business conducted by Skye Quarries when, in fact, the moneys were wholly or in part applied for the personal benefit of the defendants or one or other of them. Skye Quarries claimed repayment of these amounts which, it alleged, totalled $1,846,952.05. The defendants denied liability to the plaintiffs and in particular to Quarry Quip and Skye Quarries in respect of the sums alleged to be owing to Quarry Quip or expenses incurred and the provision of and construction of steel and steel plant for the purpose of the quarry and for the provision of services, the provision of labour and for expenses met as alleged. Further, the defendants denied liability to Skye Quarries in respect of sums allegedly drawn against it and paid for the interests of French and others, other than for the purpose of the quarry, or sums allegedly withdrawn by him from the company for his personal and other use and not for the purposes of or associated with the conduct of the quarry. The defendants further alleged in respect of the sum alleged to have been expended and incurred by Quarry Quip for the purpose of the conduct of the quarry and the provision of steel plant and equipment and other services and matter for the conduct of the quarry, that Quarry Quip was in receipt of moneys from the sale of sand and revenue derived from the quarry business which must be taken into account, maintaining that it had not been taken into account by Quarry Quip by its claim. Further, the defendants contended that any moneys of Skye Quarries which were used for the payment of expenses of the defendant, Skye Poultry, such moneys were paid pursuant to an agreement or arrangement between Skye Quarries and Skye Poultry whereby it was agreed that in consideration of Skye Poultry providing to Skye Quarries chicken manure, Skye Quarries would pay expenses of Skye Poultry relating to the conduct by it of a poultry farm at Lot 2 Ballarto Road.
It was further alleged by the plaintiffs in these proceedings that from December 1994, without the agreement or consent of Smith or McCallum, Quarry Quip or Skye Quarries, French assumed the position of manager of Skye Quarries, that he managed all aspects of the company to the exclusion of Smith and McCallum, that he appropriated to his own interests or interests of companies he controlled the revenue and profits of Skye Quarries, that he caused Skye Quarries Sales to be incorporated, directors to be appointed and shares to be issued and that he directed and/or caused Skye Quarries Sales to commence the operation of the quarry business so that all profits thereof would in future accrue to its benefit to the exclusion of Skye Quarries. Further, it is alleged by the plaintiffs that from June 1997 and thereafter French caused Ballarto to continue to operate the quarry business under the business name, Skye Mineral Sands, so that all profits thereof would accrue to its benefit to the exclusion of Skye Quarries. These allegations are denied by French and the defendants by their defence. The defendants allege that if there was a joint venture it was terminated in December 1994 by Smith walking out of and abandoning the quarry business and his position as manager of Skye Quarries. It is alleged by the defendants, by their defence, that if there existed a joint venture to that point of time it was terminated by Smith and McCallum by Smith’s conduct. It is alleged on behalf of the defendants that at the time any access to the quarry operation that was had by Skye Quarries was by virtue only of a licence granted to it which came to an end on 16 December 1994 or alternatively 30 January 1995 or alternatively 30 June 1995 and Ballarto and/or Quarry View revoked the licence and so the joint venture thereby came to an end.
The plaintiffs, by their pleadings, further allege that as a director of Quarry Quip and by virtue of his position in the management of Skye Quarries, French owed a fiduciary duty to each company to, inter alia, act honestly and in good faith and not to make improper use of his position to gain directly or indirectly an advantage to himself or others or to cause detriment to either Quarry Quip or Skye Quarries. It is alleged further that by virtue of French controlling the management of Skye Quarries in and from December 1994, he became and was an “executive officer” of Skye Quarries within the definition of s. 9 of the Corporations Law and that he was an officer of Skye Quarries within the definition of s. 82A and s. 232 of the Corporations Law. It is alleged that as a director of Quarry Quip and as an “executive officer” of Skye Quarries French owed to each company fiduciary and statutory duties which it is alleged he breached, in particular by wrongfully diverting moneys from Quarry Quip and Skye Quarries and causing the quarry business to be taken from Skye Quarries. The plaintiffs allege that by reason of breaches by French of fiduciary duties and statutory duties owed by him to each of Quarry Quip and Skye Quarries he is indebted to such companies for the profits made by him and others in consequence of such breaches. Again, it is alleged that in consequence of breaches by French of the fiduciary duty and statutory duty owed by him to Quarry Quip and Skye Quarries he is indebted to Quarry Quip and Skye Quarries or one or other of them for the profits made by himself or other defendants or for an amount equal to the loss and damage suffered by “the plaintiffs or one or other of them”.
Further, it is alleged by the plaintiffs that French or one or other of the defendants has profited from breaches by French of the fiduciary or other duties owed by him and in particular by diverting the quarry business to Skye Quarries Sales, by benefiting from the removal of slime from the quarry and by appropriation of steel plant and moneys of Quarry Quip and Skye Quarries for the purposes of French or other defendants.
It is further alleged by the plaintiffs that Ballarto, Skye Quarries Sales, Quarry View and Skye Poultry had the knowledge of its respective controller, French, with respect to his breach of fiduciary and other duties owed by him to Quarry Quip, Skye Quarries, that each assisted French in the breach of his fiduciary and other duties owed by French to each of them and that they benefited from such breaches. Each of these allegations are denied by the defendants.
Further, it is alleged by the plaintiffs that at all material times the defendant, Hosking, in his capacity as a director of Ballarto, Skye Quarries Sales, Skye Poultry and Quarry View knew of the alleged breaches by French of the fiduciary and other duties owed by him to Quarry Quip and Skye Quarries and assisted French in the breach of such duties.
Again, and further, the plaintiffs allege that the second defendant, Nancy French, as the wife of French and as holder of a share in the Skye Quarries knew of the breaches by French of his fiduciary and statutory duties and in particular assisted French in his appropriation of the amount of $400,000 from the bank account of Skye Quarries in November and December 1994 and other moneys for her benefit such as forms part of the claim identified and particularised in Schedule 2 to the statement of claim. Such allegations are denied by her.
The plaintiffs have further claimed and alleged that, “the defendants or one or other of them are liable upon a quantum meruit to Quarry Quip and Skye Quarries for the value of goods supplied and services rendered for the use and benefit of the defendants”. In addition to the claim made by Quarry Quip for $1,020,755.90, as previously referred to, Quarry Quip and Skye Quarries each claim a proportion of the further sum of $810,000 alleged to have been received by Ballarto for the cost of removal of slimes from Lot 31A and Skye Quarries claims $1,846,952.05 being for moneys allegedly wrongly appropriated from it as set out in Schedule 2 to the statement of claim.
The plaintiffs in the proceedings have specifically claimed:
A.All necessary enquiries and accounts and consequential orders for the payment to the plaintiffs of such sums as are found due on the taking of such accounts in respect of:
§ the moneys appropriated by French for the purposes of the quarry business from Quarry Quip and Skye Quarries;
§ the moneys appropriated by French for the purposes other than quarry business from Quarry Quip and Skye Quarries;
§ the profits made by the defendants or any of them arising out of the diversion of the quarry business to Skye Quarries Sales and or Ballarto and the use of the defendants steel plant and associated engineering work
B.An order that the defendants pay to Quarry Quip, alternatively Skye Quarries, an amount equal to the profits made or to be made by French or any of the defendants in consequence of the breaches of fiduciary duties or contravention of the Civil Penalty provisions of the Corporations Law.
C.An order that there be paid to Quarry Quip an amount equal to the loss and damage it has suffered.
D.An order that there be paid to Skye Quarries an amount equal to the loss and damage it has suffered.
E.Alternatively to C. and D. an order upon a quantum meruit in favour of Quarry Quip and/or Skye Quarries to be paid by the defendants or one or other of them.
EE.An injunction both interlocutory and permanently (pending the taking of accounts and the payment of all sums found due upon the taking of accounts) restraining the defendants from dealing with, disposing of, transferring, or further diverting assets including the quarry business and the profits therefrom).
F.Alternatively, a declaration that Skye Quarries Sales and/or Ballarto holds the sand mining business and the profits made in its conduct for the plaintiffs or one or other of them and is thereby accountable to them for the same.
G.Damages.
H.Interest.
Such claims as made and prosecuted by the plaintiffs, which were in effect claims made by Quarry Quip and Skye Quarries, were resisted by the defendants and each of them.
By their defence the defendants specifically contended that the removal of slime from the quarry by Quarry Quip was conducted by Quarry Quip pursuant to a separate agreement or arrangement with Ballarto or French pursuant to which Ballarto and or French agreed to pay to Quarry Quip a fair and reasonable sum in respect thereof which has been paid in full; that the construction and provision of steel plant for use in the extraction of sand from the quarry by Quarry Quip was carried out pursuant to a separate agreement or arrangement between Quarry Quip and Ballarto pursuant to which Ballarto agreed to pay to Quarry Quip a fair and reasonable sum for the construction of such steel plant. The defendants further contended that Quarry Quip never commenced or operated the quarry business as alleged and that the quarry business at all times between April 1989 and November 1992 was Ballarto’s business and Quarry Quip had no interest in it.
Further, by their defence, the defendants contended that all of the issued shares in the share capital of Skye Quarries, that is, to Smith, McCallum and Nancy French were held on trust for French and that Skye Quarries operated the quarry business on behalf of Ballarto.
Again it was specifically contended by the defendants that if Quarry Quip bore the expenses of manufacturing and supplying of steel plant to the quarry it was on the understanding and in the expectation of receipts of profit out of which Quarry Quip may be compensated and that in particular Quarry Quip had received from the quarry business $688,176.53.
Further, and in particular, the defendants allege that if there was a joint venture, as alleged, which is denied by the defendants, that in December 1994 the joint venture was terminated by Smith, or alternatively Smith and McCallum, when Smith walked out and abandoned the quarry business and his position as manager of Skye Quarries. It was further or in the alternative contended by the defendants that if the quarry business was conducted by Skye Quarries and as such had access to the quarry and managed the quarry business this was done pursuant to a licence granted by Ballarto and or Quarry View which on 16 December 1994, or alternatively 30 January 1995 or alternatively 30 June 1995, was revoked by Ballarto and or Quarry View.
It was further contended by the defendants that if there was any joint venture or any agreement or arrangement between Smith, McCallum and French and or between Quarry Quip and or Skye Quarries and any of the defendants in relation to the quarry business the same came to an end by consent of the parties in December 1994 or alternatively in 1995. It was alleged by the defendants that by reason of such termination if the plaintiffs or any of them have any claim against the defendants or any of them such claims were limited to the taking of accounts up to the termination and for orders for the payment of such sums as may be found due from and or to the plaintiffs by French or other defendants for the period up to such termination.
It was further contended on behalf of the defendants that if there was any joint venture, as alleged or otherwise (which was denied) or if Quarry Quip and/or Skye Quarries (if the share capital of Skye Quarries was not beneficially owned by French) had any right to operate the quarry business, then the plaintiffs or some or other of them were indebted to French, Ballarto, Skye Poultry, Quarry View and or Skye Quarries Sales for a fair and reasonable sum (to be calculated at commercial rates or, alternatively, on a quantum meruit) for the provision of sand, soil and other quarry products, the use of the quarry and other facilities of Ballarto and Skye Quarries Sales; the use of plant and equipment of Ballarto and Skye Quarries Sales.
It was further contended by and on behalf of the defendants that if there was a joint venture between Smith, McCallum and French, which was denied, then there was a term of such joint venture that each of Smith, McCallum and French would contribute equally to the quarry business and equipment business but that Smith and McCallum had not contributed equally to the quarry business or joint venture and in consequence thereof French had suffered loss and damage being the difference between the value of the contribution to the joint venture and contribution of Smith and McCallum.
Again, it was alleged and contended on behalf of the defendants that if there was a joint venture between Smith, McCallum and French, which was denied, each of Smith, McCallum and French were entitled to a distribution or dividends out of the profits of such joint venture subject to any adjustment as between them for unequal contribution to the joint venture.
Further, it was contended on behalf of the defendants that if there was a joint venture between Smith, McCallum and French, which was denied, Smith and McCallum owed to French fiduciary duties to act in good faith and honestly in relation to the affairs of the joint venture and to provide full and accurate accounts of all information and matters relevant and material to the joint venture, to avoid conflict of interest with the interests of the joint venture, to avoid profiting personally from the opportunities and information of the joint venture and to account for benefits obtained by or on behalf of or by reason of a joint venture and or affairs. It was specifically alleged that if there existed such joint venture Smith and McCallum had breached their fiduciary duties in that they did not, at all times, act in good faith and honestly in relation to the affairs of the joint venture, that they did not provide full and accurate accounts of all information and matters relevant to the affairs of the joint venture and they were guilty of a conflict of their interest with the interests of the joint venture and profited personally from the opportunities and the information of the joint venture and failed to account for the benefits obtained by or on their behalf by reason of the joint venture. Specifically it was alleged that Smith and McCallum ran the engineering business through Quarry Quip as if they were the sole shareholders, directors and owners of the business, that they conducted that business as they saw fit and that they took for themselves and their wives salaries and other benefits to which they were not entitled. It was alleged that that included Smith and McCallum causing to be procured from Quarry Quip loans to each of them on non-commercial terms and that Smith and McCallum or one or other of them took the business of Quarry Quip and the joint venture for themselves.
By way of counterclaim the defendants alleged that Smith and McCallum, as directors of Quarry Quip, owed duties to Quarry Quip which they breached, causing Quarry Quip to suffer loss and damage and resulting in Smith and McCallum making a profit. French, as a director and shareholder of Quarry Quip, sought to pursue a claim by way of a “derivative action” on behalf of Quarry Quip as against Smith and McCallum for the alleged loss and damage suffered by Quarry Quip resulting in Smith and McCallum making a profit. French as a director and shareholder of Quarry Quip sought to pursue a claim on its behalf against Smith and McCallum for loss and damage allegedly suffered by Quarry Quip in consequence of the breaches by Smith and McCallum of the duties owed by them to Quarry Quip.
Further, it was alleged on behalf of French or Ballarto that if there was a joint venture between Smith, McCallum and French, in relation to or including the quarry business, then Smith and McCallum were obliged to pay to French or Ballarto a fair and reasonable sum for the provision to the joint venture of sand, soil and other quarry products for the use of the quarry and other facilities of Ballarto and Skye Quarries Sales and for the use of plant and equipment of Ballarto and Skye Quarries Sales. Alternatively, it was alleged that at all material times Quarry View was the owner of Lot 33A and Lot 33C being the major part of the quarry and that if there was a joint venture between Smith, McCallum and French in relation to or including the quarry business, which was denied, that Smith, McCallum and French were obliged to pay to Quarry View a fair and reasonable sum for the provision to the joint venture of sand, soil and other quarry products.
Further, in respect of Quarry Quip it was alleged on behalf of French that its affairs had been conducted by Smith and McCallum in a manner which was oppressive or unfairly prejudicial or unfairly discriminatory against French as a member of Quarry Quip. It was further specifically alleged on behalf of French that it was just and equitable that Quarry Quip be wound up by reason of the company being conducted oppressively, unfairly prejudicial to and unfairly discriminatory against French as a member of Quarry Quip, which was contrary to the interests of the members of Quarry Quip as a whole and that in consequence thereof it should be ordered that Quarry Quip be wound up. Further, French alleged, in the alternative, that it was just and equitable that Quarry Quip be wound up by reason of the alleged facts that Quarry Quip was founded on a relationship of trust and confidence between Smith, McCallum and French which had broken down and by reason of that it was just and equitable that Quarry Quip be wound up. By way of counterclaim French sought orders pursuant to s. 246AA and/or s. 461 of the Corporations Law that Quarry Quip be wound up or alternatively that an order be made that Smith or alternatively Smith and McCallum purchase the share of French in Quarry Quip at such price and on such terms and conditions as the court deemed appropriate. In addition French sought an order regulating the conduct of the affairs of Quarry Quip in such manner as the court considered appropriate.
At the time that the trial of these proceedings no claim was pursued against any defendant for or on behalf of the plaintiffs Smith and McCallum. However, they were defendants to the counterclaim of defendants.
In considering the facts in this case it is necessary to start in the year 1987. In that year, that is 1987, Smith was the manager of an engineering company, Olivetti Engineering, which company constructed washing plants for the operation of quarries. Smith was a boilermaker by trade and had worked with Olivetti since 1969 when he commenced his apprenticeship with the company. In 1987 McCallum was also employed by Olivetti Engineering as a foreman, having commenced his employment with Olivetti Engineering in approximately 1983 as an apprentice boilermaker.
In 1987 Smith first met French, when French approached Olivetti Engineering to have it build for him a sand washing plant for a quarry at Skye. At this time Ballarto was the owner of Lot 31A. It held a licence to quarry on its land, Lot 31A, and on the land owned by the Florencigs, Lot 33A, but at that time it had no right to mine Lot 33A as it held no lease or licence over that land at that time. At the time that French first met Smith, French informed Smith that he was under pressure to have the quarry operating, that he needed expert assistance in the construction of a sand washing plant at the quarry and also sought to build stock piling conveyors which he would sell to other persons. At this time Olivetti Engineering built washing plants for Linotex Australia, Smith told French that Olivetti Engineering would not construct a washing plant for him. Olivetti Engineering, at this time, built conveyors as ordered by French and, further, it assembled for him screening plants which French had imported from overseas. Olivetti also built for French at Lot 31A a large drive-over feed hopper.
In 1989 Smith and McCallum ceased employment with Olivetti Engineering. They decided to establish a steel processing and fabricating business, however, they needed business premises and some machinery to commence the business. They also needed some form of income while they attracted work and established this business. It was in such circumstances that in 1989 Smith approached French knowing that he wanted a washing plant built. Smith asked French for sub-contracting work for them to build the washing plant that French sought to have constructed at Lot 31A. French agreed with Smith and McCallum for them to commence working in a shed at Lot 31A to which power was provided and there existed basic engineering equipment. It was in such circumstances that Smith and McCallum occupied premises on Lot 31A. A few weeks after this had occurred a representative of Linotex Australia approached Smith and informed him that if he could set up a workshop Linotex Australia would place an order with him to build a washing plant of $200,000 and that Linotex Australia would guarantee payments for goods supplied within 10 days of receiving an invoice. Smith thereafter discussed this matter with McCallum and French. French said that he could see great potential in such a business and offered to provide the workshop premises at the quarry at Lot 31A. At this time French also said that Smith and McCallum would need banking facilities in order to purchase raw materials for the business. French offered to help in this regard stating that he had a good relationship with the local ANZ Bank manager. Smith had always wanted his own engineering business. Because of French’s involvement as to financial matters relevant to such a venture and Smith’s personal friendship with McCallum it was agreed between the three that Smith, McCallum and French would be equal shareholders in this new business. Smith approached his accountant, John McGillivray, who caused Quarry Quip to be incorporated. Each of Smith, McCallum and French were issued four shares in the company. It was necessary for Quarry Quip to have an overdraft account facility for the operation of the engineering business. French arranged this with the ANZ Bank at Dandenong. Initially the overdraft limit was for $30,000. Later this was extended to $100,000 by the bank. The overdraft facility provided by the bank to Quarry Quip was initially secured over land owned by French and guarantees by each of Smith, McCallum and French.
Smith approached BJG Steel and established a 30 day account facility for $30,000 for the supply of steel. The business of Quarry Quip commenced its operations from the workshop made available by French which was situated on Lot 31A. Both Smith and McCallum worked from this workshop and they worked long hours establishing the business. From the outset, the bookkeeping and office duties of Quarry Quip were attended to by Smith’s wife, Karen Smith. She attended to this work first from a makeshift office which was an old furniture van made available by French which was parked at the workshop at Lot 31A.
After Quarry Quip was established Linotex placed orders with it for the construction of a washing plant for some $200,000. Smith and McCallum commenced to build the plant at the workshop at Lot 31A. Within 12 months Quarry Quip had established a successful engineering business. French arranged for the provision of motor vehicles for the use of both Smith and McCallum. At a later time Ballarto charged Quarry Quip rent for the use of the workshop premises and also $15,000 for the hire of the motor vehicles. The latter payment was made by Quarry Quip to Roadshow Auto which was a business conducted by French. In 1989 Quarry Quip commenced to provide materials and perform work at the request of French. This work was invoiced by Quarry Quip to “M&K Quarry Plant” which was a business name used at the time by French. Some of this work included the construction and fabrication of steel works which were later incorporated into the washing plant erected by Quarry Quip at Lot 31A. It also included the assembly of quarry equipment which was, at the time, imported by French into Australia.
In 1990 French requested Quarry Quip, through Smith, to engage in the work of removing slimes from the land at Lot 31A. Smith became engaged in this work himself. Employees of Quarry Quip also were engaged in this work. The work of removing slimes from dams situated on Lot 31A was carried out during the years 1990 and 1991. It was the income derived from the engineering business of Quarry Quip that enabled it to employ men to carry out the work of removing slimes from Lot 31A. In order to perform this work French provided an excavator and also a truck for the necessary cartage of slimes. By June 1990 the engineering business of Quarry Quip had expanded to such an extent that it moved from the workshop premises at Lot 31A to factory premises at Commercial Drive in Dandenong. Also during this period Smith and employees of Quarry Quip, at the request of French, carried out work of constructing roads on Lot 31A and Lot 33A. It was during 1990 that Ballarto had a lease from the Florencigs to mine sand on Lot 33A. That lease lapsed on 13 December 1990. Ballarto did not obtain another lease from the Florencigs for some time. The work carried out by Quarry Quip at the request of French was invoiced to M&K Quarry Plant. Karen Smith in keeping the books of account of Quarry Quip kept and maintained debtors’ cards for each debtor of the company. She was not called as a witness on the trial. Cards identified as those kept by Karen Smith were tendered on behalf of the defendants during the trial and relied on by them. From the “M&K” debtors’ cards it is to be observed that the sequence of entries was adjusted as at 24 April 1992. The amount outstanding for work done by Quarry Quip and charged against French in his business name of M&K Quarry Plant was $19,459.70. This amount is claimed by Quarry Quip as part of its claim in Schedule 1. From an examination of the M&K debtors’ cards it is to be observed that during the period between 1989 and September 1990 M&K paid Quarry Quip $113,281.67. One of the payments was a payment made on 28 June 1990 to discharge the outstanding balance then owed in the sum of $58,957.22. On other occasions, as evidenced by these M&K debtors’ cards, the amounts owing to Quarry Quip was fully discharged. It was submitted on behalf of the defendants that when regard is had to the payments made by M&K and entered on these debtors’ cards that during this period there existed a relationship between Quarry Quip and French with respect to this work performed that being a debtor/creditor relationship and not being that Smith, McCallum and French were engaged in a joint venture.
It was the evidence of Smith that Quarry Quip was not paid for the work that it performed and material supplied by it in constructing the crusher. His evidence was that the first five items as appearing on Schedule 1 for equipment and parts provided were supplied and provided for construction of a crusher. Those five items total $135,652.80. The building of the crusher by Quarry Quip for French was completed in May 1992. On a day in May 1992, when the crusher was being commissioned, French was piloting an aeroplane when it crashed causing a passenger to be killed, a house property to be extensively damaged and also resulting in French suffering severe injuries. After this aircraft accident in May 1992 the quarry at Lot 31A was virtually locked up and Smith and McCallum continued to run the engineering business of Quarry Quip.
In or about November 1992 Smith was approached by French at the factory premises of Quarry Quip. French requested that he and some of the staff at Quarry Quip commence work on the Ballarto land, to reclaim the slime dams and to construct and erect such plant as required for the purpose of sand extraction and washing and stone extraction and crushing. French, on behalf of Ballarto, wanted these works to be undertaken on similar arrangements as before which was that Quarry Quip would perform tasks and provide materials as requested by French and that French or Ballarto would reimburse Quarry Quip or pay for those services to be performed.
In order to distinguish between the income and the expenses of Quarry Quip in the conduct of its engineering business from that of the company in the performance of work for and at the quarry, a separate account was kept by Quarry Quip in the name of Skye Sand Soil & Stone which was a business name registered by Quarry Quip. A ledger was maintained by Karen Smith who recorded expenses under one or other of two headings as divisions of Quarry Quip. The expenses incurred by Quarry Quip in relation to the quarry were recorded under the name of Skye Sand Soil & Stone and such items of expenses are those which make up the balance of items in Schedule 1 to the amended statement of claim.
At the time that French approached Smith, French was keen for work on slimes to be undertaken as he was under some pressure because Ballarto would lose its extractive industries licence if such work was not undertaken. At this time French requested Smith to devote most of his time in performing work at the quarry at Lot 31A. In discussions had between Smith and French at this time about financing the work to be performed by Quarry Quip at the quarry it was said by French and agreed to by Smith that this work would be financed from the sale of product. Smith returned to the quarry site and in 1993 a stage was reached when product was sold.
In November 1992 two separate bank accounts were opened and maintained by Quarry Quip for Skye Sand Soil & Stone. One was a cash management account into which the proceeds of the sale of product was paid. The other was a cheque account against which cheques relating to quarry expenditure were drawn. Moneys were paid from the cash management account into the cheque account from time to time. By May 1993 it was necessary for Quarry Quip to extend its overdraft. Quarry Quip was paying for works being performed at the quarry but at this time it was not receiving a great deal of income from the sale of products. Smith spoke to French about this matter. French expressed concern as to where the assets of Ballarto then stood having regard to his aircraft accident. French also expressed concern as to the position of McCallum and Quarry Quip. French raised with Smith the matter of Ballarto providing to Quarry Quip a mortgage debenture. After discussions between Smith and French, French caused Ballarto to execute a debenture charge in favour of Quarry Quip over the assets of Ballarto to secure the payment of $600,000. This figure was arrived at in discussions had between Smith and French. The figure of $600,000 was arrived at and it represented the approximate gross value of work that had been performed and provided by Quarry Quip to Ballarto at the time. French in his evidence stated that he chose the sum of $600,000 as his best estimate of the amount then owing to Quarry Quip before any income for product sales was brought into account.
The construction of the washing plant on Lot 31A was completed about mid-1993. Many of the parts and structures for the same were built at the engineering business of Quarry Quip and transported to the quarry.
In 1993 Quarry Quip did a considerable amount of work at the quarry. At this time the quarry extended into Lot 33A pursuant to a lease granted to Ballarto by George and Lucy Florencig, the owners of Lot 33A.
In the latter part of 1993 with the sand washing plant, situated on Lot 31A, operating, the sand mining and quarry business was flourishing. At about this time a discussion took place between French and Smith. In his witness statement Smith said that it was “decided with French that a separate company should be incorporated to deal with the quarry business rather than as a division of Quarry Quip”. Smith gave evidence that French, through his solicitor, Nicholas Brand & Co, arranged for the company, Skye Quarries, to be acquired and that he and McCallum were appointed directors. The shareholders of that company were Smith, McCallum and Nancy French. The registered office of the company was that of Smith’s accountant, McGillivray. Smith stated that French indicated to him that due to concerns he had concerning civil liability arising from the aircraft crash he did not wish to be a director or shareholder of the company and he did not wish to hold shares in his name.
It was the evidence of French that at this time he explained to Smith and McCallum that he was concerned as to the prospect of litigation being brought against him arising out of the aircraft accident and for that reason he wished each of them to hold one share in Skye Quarries for him and that each agreed to hold a share in the company on his behalf. French also gave evidence that his wife, Nancy, agreed to hold her share in the company on his behalf.
Smith denied that French had ever maintained this to him. He said he had not heard of it until he read the witness statement of French. It was not put to either McCallum or Smith, on behalf of French, that they had agreed to hold their shares in Skye Quarries in trust for French. The establishment of this company was a development from Quarry Quip when each of Smith, McCallum and French were the shareholders in it. It is to be reasonably expected that in the absence of some specific agreement Smith and McCallum would hold shares issued to them for their own benefit and not in trust for someone else.
This matter assumed considerable importance on the conduct of the trial. My conclusion on this issue largely turned on my assessment of the credibility of witnesses particularly that of French and Smith. I specifically deal with this matter later but for the moment it is sufficient to state that I am not prepared to accept the evidence of French, that Smith and McCallum were to hold their shares in Skye Quarries in trust for him. I am satisfied that each of Smith and McCallum hold their respective shares in Skye Quarries beneficially and not in trust for French. Any interest that French may have held as a shareholder in this company was in respect of the one share held by his wife, Nancy French. In respect of a number of other companies in which French held an interest, although not being registered as the owner of shares, French held signed, but not completed, transfers of shares held by others and also held signed, but incomplete, resignation of persons as directors of those companies. This was not the case in respect of the shares and directorship of Smith and McCallum in Skye Quarries. I do not accept French’s evidence that it was agreed between him, Smith and McCallum that they would hold their shares in Skye Quarries on trust for him. The shares held by Smith and McCallum in Skye Quarries were beneficially held by each of them respectively.
In evidence Smith said that when he and French spoke together French said that the account should continue in the same fashion as Skye Sand Soil & Stone and that the remaining moneys in the account should be transferred to the account of Skye Quarries. He gave evidence that the quarry business was to be conducted in the same manner as it had been with Skye Sand Soil & Stone, with the assistance of Quarry Quip. As to how Quarry Quip was to be reimbursed for the money that it provided for the quarry business, Smith said that French insisted, at all times, that it was through the sale of product and that it would continue in the same manner as Skye Sand Soil & Stone.
Smith further gave evidence that in his discussions with French at this time the discussion was, that after all costs were met, total costs were met, by Quarry Quip Engineering for Ballarto’s costs, any profit that was left over would be shared 50/50, 50% going to Ballarto in the place of royalties and 50% goes to Quarry Quip Engineering. This he said was a discussion had with French prior to Skye Quarries being formed. Smith said that the arrangement “was that Quarry Quip Engineering would invoice Skye Quarries and then those invoices would be met, when they could be, from profit from the sand washing or sand mining venture…” Smith corrected what he had said on that occasion to say that the amount owed to Quarry Quip would be invoiced by Quarry Quip to Skye Quarries and would be paid out of the “income” of the sales of mined products. Smith said, further, that after the costs of mining and the costs of Quarry Quip being paid, the profits of Skye Quarries was then to be divided “50/50 between Ballarto and Quarry Quip Engineering”.
Smith was cross-examined on written instructions that he had given to his solicitors in which he said, inter alia, that the role that Skye Quarries would perform was to remove product, market and sell products; that “Income earned from the selling of products would pay for all related costs”; that “The profits after costs were to be shared 50/50 between Quarry Quip and Ballarto”; and that “These profits were to pay back the amounts owed to Quarry Quip and Ballarto for expenses incurred in getting the property operational”. This last sentence was read to Smith by senior counsel for the defendants and it was put to him, “And that is exactly what the arrangements were for, wasn’t it.” Smith replied, “Skye Quarries took over the operation of the quarry business from Skye Sand Soil & Stone and the quarry business then was Skye Sand Soil & Stone.” He was asked, “Mr Smith, Skye Sand Soil & Stone initially and Skye Quarries Pty Ltd subsequently had the income and expenses of the quarry going through them so that at the end of the day Quarry Quip could be repaid the amount it was owed out of profit?” He replied, “To Quarry Quip, yes.” He was then asked, “That is what the arrangements were all about, not about you and McCallum getting two thirds of the quarry business?” He replied, “The arrangement was that two thirds of the quarry business would be paid to Quarry Quip Engineering, 50% of the profits of the quarry was to be paid into Quarry Quip Engineering with 50% going to Ballarto and therefore Mr French was entitled to another third because of his shareholding in Quarry Quip Engineering. That was the arrangement.” It was put to Smith that he did not tell his solicitor what he had just told the court and what he had told his solicitor was, “The profits would be used to pay Quarry Quip back for what it was owed?” He replied, “Correct and then Skye Quarries was taking over.”
In cross-examination Smith readily agreed that Quarry Quip received cash from Sims Metal and Manson Engineering for the purchase of scrap metal. Smith said that the cash was given to the working directors of the company and when this first commenced the cash payments were shared between French, himself and McCallum and that then it was shared between McCallum and himself. Smith accepted that the money properly belonged to Quarry Quip, stating that the arrangement by which the directors of Quarry Quip took these moneys was known to French from the outset and that he had in the past participated in the receipt of such cash payments and he had otherwise not complained about the practice. I accept this evidence of Smith. During the period from January 1995 to July 1999 Sims Metal had purchased from Quarry Quip scrap metal for the total value of $129,129.70. These purchases were paid for in cash. Manson Engineering Pty Ltd had also purchased scrap metal from Quarry Quip from July 1995. These purchases were also paid in cash. The moneys paid by Manson Engineering Pty Ltd total some $47,849.70. On the evidence before the court I am satisfied that the practice of scrap metal being paid for in cash and received by the working directors was known to French and he participated in it at earlier times. Smith accepted that the moneys properly belonged to Quarry Quip. It must be accounted for by each of Smith, McCallum and French. The fact that these payments of cash were received by the directors of Quarry Quip at various times even as a perquisite of directors of the company does not mean that the sums received by them should not be accounted for. Having regard to the knowledge of French of this practice and his earlier participation in it, in my view this practice does not amount to an act of oppression or unfair prejudice by one or other of the directors against the others.
As to the complaint made by French that McCallum took the sum of $34,599.07 for himself, being half of an amount due from Capital Stone Company Pty Ltd to Quarry Quip, from the evidence of Smith I am satisfied that Quarry Quip had a claim against Capital Stone for an amount of money. In response to that claim Capital Stone contended that half the amount had been paid by it to McCallum. The company offered the remaining half to Smith. This offer was rejected by Smith and by Quarry Quip, by the actions of Smith. Smith maintained that the whole was due to Quarry Quip from Capital Stone. In the result Quarry Quip through the actions of Smith recovered from Capital Stone the total sums due. This demonstrates that in his conduct of the affairs of Quarry Quip Smith successfully pursued to the end the claim of Quarry Quip. It cannot be reasonably contended that the actions of Smith in pursuit of this claim were unfair to or unfairly prejudicial to French.
On behalf of French it was also claimed that there existed grounds for the court ordering that Quarry Quip be wound up as in 1996 Smith and French received from Quarry Quip payments by way of a superannuation contribution in the sum of $50,000 and bonuses in that year in the sum of $25,000. Those payments were not discussed with or agreed with French before being made. The payments were referred to in an affidavit sworn by Smith on 13 July 1996 in proceedings brought by French against, inter alia, Smith, McCallum, Quarry Quip and others. It was put that those payments represented a de facto distribution of profits of Quarry Quip. At the time that the payments were made Quarry Quip had in the relevant year retained profits in a sum exceeding $600,000. There was no payment of a dividend. I do not accept that the payment of Quarry Quip of a contribution to the superannuation of Smith and McCallum or the payment of a bonus was a de facto distribution of profits. The superannuation contribution payments were made in respect of the working directors of Quarry Quip. Similarly, the bonuses were paid. There exists in relation to this matter, in my view, no circumstances where it could be reasonably contended that the payments were oppressive or unfairly prejudicial to French.
I next turn to the contention made on behalf of French that the relationship of Smith, McCallum and French as shareholders and directors of Quarry Quip had irretrievably broken down and that in such circumstances it is just and equitable that it be ordered that Quarry Quip be wound up or alternatively that it be ordered that Smith purchase the shares of French and Quarry Quip.
In Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 379 Lord Wilberforce dealt with the provisions of the Companies Act 1948 which empowered the court to order that a company be wound up if it was of the opinion that it was “just and equitable” to do so. His Lordship said:
“The words [just and equitable] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The ‘just and equitable’ provision does not, as the respondent suggests, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations: considerations that is, of a personal character arising between one individual and another which may make it unjust, or inequitable, to insist on the legal rights, or to exercise them in a particular way.”
The fact the relationship of Smith, McCallum and French, as shareholders and directors, of Quarry Quip has broken down does not of itself provide circumstances where in equity it should be ordered that the company be wound up. In International Hospitality Concepts Pty Ltd v National Marketing Concepts (No.2) (1994) 13 ACSR 368 at 371 Young J said:
“A good analysis of the just and equitable ground for winding up is to be found in the article by McPherson JA when at the bar in ‘winding up on the “just and equitable” ground’ (1964) 27 MLR 282.”
After saying that what was said by McPherson JA remains true today, Young J further said:
“the situations in which orders will be made on the ground that it is just and equitable may be reduced fundamentally to three in all. They are as follows:
(1)where initially it is, or later becomes, impossible to achieve the objects for which the company was formed;
(2)where it has become impossible to carry on the business of the company;
(3)where there has been serious fraud, misconduct or oppression in regard to the affairs of the company.
The reasons for restricting the remedy to these three broad heads is that the basic purpose of forming a limited liability company is that the quasi partners contribute their money to a venture and commit their funds to a venture without power to withdraw unless and until the venture comes to a frustrating event.”
In the circumstances of this case Quarry Quip was formed and it commenced to carry out and still carries out its business as an engineering company. The breakdown in the relationship that has occurred between Smith, McCallum and French initially had its roots in the discovery by Smith, that without his knowledge, French had withdrawn by bank transfers sums totalling $400,000 from the account of Skye Quarries. It was following this discovery that Smith withdrew from the affairs of Skye Quarries and returned to and thereafter continued working in the engineering business of Quarry Quip. It was subsequent to that that McCallum withdrew from the day-to-day business of Quarry Quip and concentrated on the affairs of M. Steel. From the evidence of Smith it is to be concluded that after McCallum withdrew from Quarry Quip and after he appointed a manager of the company and notwithstanding that M. Steel was in competition to the company that Quarry Quip has prospered. It has continued to carry on its business as an engineering company. There has been no breakdown in the relationship between Smith, McCallum and French brought about by the manner in which, initially, McCallum and Smith and thereafter Smith has conducted the affairs of Quarry Quip. Young J further said in International Hospitality Concepts Pty Ltd v National Marketing Concepts Inc at 371:
“The third of McPherson JA’s head was dealt with in Loch v John Blackwood Ltd [[1964] AC 783] at 788 where Lord Shaw, giving the judgment of the Privy Council said:
‘It is undoubtedly true that the foundation of applications for winding up, on the “just and equitable” rule, there must lie a justifiable lack of confidence in the conduct and management of the company’s affairs. But this lack of confidence must be grounded on conduct of the directors not in regard to their private lives or affairs, but in regard to the company’s business. Furthermore the lack of confidence must spring not from dissatisfaction at being out voted on the business affairs or on what is called the domestic policy of the company. On the other hand, wherever the lack of confidence is rested on lack of probity in the conduct of the company’s affairs then the former is justifiable by the latter, and it is under statutes just and equitable that the company be wound up.’”
In relying on this ground French relied on the fact that there relationship between the three directors of Quarry Quip had broken down. On the evidence the breakdown in the relationship between the directors of Quarry Quip related to matters outside the conduct of the affairs of Quarry Quip and had as its root cause the actions and conduct of French in relation to the affairs of Skye Quarries. In such circumstances it cannot be concluded that it is “just and equitable that the company be wound up”. For the same reasons I conclude that it would not be appropriate for the court to order that Smith purchase the shares of French in Quarry Quip. These matters can be attended to pursuant to the provisions of the articles of association of Quarry Quip.
By counterclaim French sought by way of a “derivative action” and as an exception to the “proper plaintiff” rule (Foss v Harbottle [1843] 67 ER 189; 2 Hare 461) to bring and prosecute proceedings on behalf of Quarry Quip against each of Smith and McCallum. As against McCallum, French sought to institute such proceedings alleging that in breach of his duty as a director of Quarry Quip McCallum had established an engineering business in competition with Quarry Quip and in doing so he had induced customers of Quarry Quip to become customers of his new business, M. Steel, which customers formed a major part of the customers of such enterprise. As against each of Smith and McCallum, French sought by such means to institute and prosecute proceedings alleging that they had received for their own purposes payments of cash for the sale of scrap metal of Quarry Quip and had thereby appropriated such funds to their own benefit.
However, in his final address, senior counsel for the defendants informed the court that in seeking to bring such proceedings French did not seek to bring himself within an exception to the rule in Foss v Harbottle but rather French sought to take such proceedings pursuant to s. 246AA(2)(d) of the Corporations Law. For an order to be made by the court “regulating the conduct of affairs of the company in the future” it is necessary that the court be of the opinion that French was an “oppressed member” of Quarry Quip.
For the reasons expressed previously I am not satisfied that French is an “oppressed member” of Quarry Quip. Accordingly, the foundation for such orders does not exist in the circumstances of this case and this part of the counterclaim of French must fail.
A further claim, by counterclaim, is brought by Skye Poultry against Skye Quarries for a “fair and reasonable sum” for the provision by Skye Poultry to Skye Quarries of materials or benefit it provided by way of top soil mixed with manure, which was valued by the defendant at $13,616.46, and also by permitting overburden from the quarry to be dumped at the poultry farm. As earlier noted, the defendant has not proved that claim to my satisfaction.
The counterclaim will be dismissed.
Summary of conclusions
Although Smith and McCallum are named in the writ and statement of claim as plaintiffs no claim on the pleadings or otherwise was made or pursued by them. In those circumstances no order is necessary with respect to them as plaintiffs.
As noted earlier, the claims against the defendants Nancy French and Ian Dalton Hosking have not been proved, and should be dismissed.
The plaintiff, Quarry Quip Engineering Pty Ltd, has proved that it is entitled to recover the sum of $604,213.54 against the defendant Walter Murdoch French. That sum represents the total of those items in Schedule 1 of the plaintiff’s statement of claim which have been proved to my satisfaction as being moneys paid by Quarry Quip Engineering Pty Ltd at the request of and for the benefit of French.
As to the sum of $604,213.54 the defendant Ballarto Pastoral Pty Ltd is jointly liable for all but $50,750.00 of that sum. The reduction represents funds which I am satisfied were applied solely to the benefit of French, as referred to in paragraph [130]. Accordingly, Ballarto is liable to Quarry Quip in the sum of $553,463.54.
No claim is made against the defendant, Skye Poultry Pty Ltd, nor against the defendant, Skye Quarries Sales Pty Ltd, for any amounts under Schedule 1.
As to the defendant Quarry View Pty Ltd, Mr Gunst, senior counsel for the plaintiffs, submitted, in his written final address, that it had been conceded by his opponent, Mr Bick, that Quarry View would be liable to the same extent that Ballarto was held to be liable. In his reply Mr Bick did not challenge that assertion, but nor did he expressly address the topic when he dealt with the paragraph of the written final address of the plaintiffs in which that contention was advanced. Quarry View was added as a defendant by an order I made on 11 August 1999, the fifteenth day of the trial. The application to join Quarry View as a defendant was made by Mr Bick, on behalf of the existing defendants, and was initially opposed by counsel for the plaintiffs. Quarry View was the owner of the land on which the mining took place and it was submitted by Mr Bick that it was a necessary party in the event that a quantum meruit claim was pursued by the plaintiffs and insofar as it became necessary to ensure that the value and payments of the sand mining which were attributable to Quarry View would be taken into account (and also for the purpose of a counterclaim which the defendants sought to advance). I am not persuaded that joint or several liability to Quarry Quip for the items of expenditure under Schedule 1 has been proved against Quarry View, and I will not make any order as against that company.
As to the claims brought by the plaintiff Skye Quarries Pty Ltd, I find that the plaintiff has proved that the defendant Walter Murdoch French owes it the total sum of $1,749,149.38. That sum is made up as follows:
(a) Sums due under pages 1-7 of Schedule 2 of the statement of claim: $1,198,522.92;
(b) Sums payable for period covered by pages 8-10 of Schedule 2: $188,684.50;
(c) Additional funds transferred under fictitious invoices: $350,000;
(d) Additional sums paid to Skye Poultry (per Exhibit P41): $11,941.96.
Of the total sum due to Skye Quarries Pty Ltd, the defendant Ballarto Pastoral Pty Ltd is jointly liable with French in the sum of $1,696,542.82. The reduction is constituted by the total of the sums of $7,577.52 (being items personal to French and identified by me in pages 1-7 of Schedule 2) and $45,029.14 (being sums paid solely to the benefit of Skye Poultry Pty Ltd).
The defendant Skye Poultry Pty Ltd is jointly liable with French to Skye Quarries Pty Ltd in the sum of $45,029.14.
The plaintiffs have not established any liability by Skye Quarries Sales Pty Ltd to either of the plaintiffs, and the claims against that defendant will be dismissed.
I have concluded that it is not just and equitable that Quarry Quip be wound up, as was sought by the defendants. Nor am I satisfied that any of the other relief sought by the defendants on their counterclaim should be granted. The defendants’ counterclaim will be dismissed.
As to the sums which I have held are due to Quarry Quip and Skye Quarries counsel for the plaintiffs submitted that by being held out from those sums the plaintiffs were denied the use of the sums and the profits which would have accrued had the plaintiffs held those sums. It was submitted that an award of interest is insufficient to recompense the plaintiffs and that I should award compound interest. Counsel for the plaintiffs conceded that unless equitable damages were being awarded the rate of interest should be that fixed, from time to time, by section 58 of the Supreme Court Act 1986. In my view, that is the appropriate rate of interest to be applied here. Even if the sums awarded were to be regarded as being open to an award of compound interest (which I need not decide) I would retain a discretion as to whether to award compound interest at all. In the circumstances of this case I would not exercise my discretion to award compound interest, in any event. I will invite counsel to agree on the calculation of interest which should be awarded in addition to each judgment sum that I have awarded.
I will reserve my decision on the question of costs, and I will hear counsel as to the timetable for the delivery of written submissions on costs, should costs not be agreed.
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