The Food Improvers Pty Ltd v BGR Corporation Pty Ltd (No 3)
[2007] FCA 97
•12 FEBRUARY 2007 (CORRIGENDUM 19 FEBRUARY 2007)
FEDERAL COURT OF AUSTRALIA
The Food Improvers Pty Limited v BGR Corporation Pty Ltd (No 3)
[2007] FCA 97CORRIGENDUM
THE FOOD IMPROVERS PTY LTD (ACN 003 474 280) AND ANOR v BGR CORPORATION PTY LTD (ACN 059 820 807) AND ORS
NSD 1140 OF 2005RARES J
12 FEBRUARY 2007 (CORRIGENDUM 19 FEBRUARY 2007)
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NSD 1140 OF 2005
BETWEEN:
THE FOOD IMPROVERS PTY LTD (ACN 003 474 280)
First PlaintiffJOHN STEPHEN BAX
Second PlaintiffAND:
BGR CORPORATION PTY LTD (ACN 059 820 807)
First DefendantTHE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD (ACN 002 688 897)
Second DefendantCORDATO PARTNERS (SERVICES) PTY LTD
(ACN 075 518 964)
Third DefendantMAIN CAMP HOLDINGS PTY LIMITED (ACN 061 573 804)
Fourth DefendantMAIN CAMP CORPORATION PTY LTD (ACN 054 989 516)
Fifth DefendantSNP NATURAL PRODUCTS PTY LTD (ACN 094 464 490)
Sixth DefendantADVANCED TECHNOLOGY RESEARCH PTY LTD
(ACN 088 655 163)
Seventh DefendantBUSINESS & RESEARCH MANAGEMENT LIMITED
(ACN 070 946 664)
Eighth Defendant
JUDGE:
RARES J
DATE OF ORDER:
12 FEBRUARY 2007
WHERE MADE:
SYDNEY
CORRIGENDUM
On page 2 paragraph 3(b) insert ‘plus GST’ after ‘$20,000’.
On page 2 paragraph 3(b) delete ‘$16,000’ and replace with ‘$15,000 plus GST’.
On page 2 paragraph 3(c) insert ‘plus GST’ after ‘$20,000’.
On page 3 paragraph 4(b) delete ‘$16,000’ and replace with ‘$15,000’.
On page 91 paragraph 273 delete ‘$16,000’ and replace with ‘$15,000’.
I certify that the preceding five (5) numbered paragraphs are a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Rares. Associate:
Dated: 19 February 2007
FEDERAL COURT OF AUSTRALIA
The Food Improvers Pty Limited v BGR Corporation Pty Ltd (No 3)
[2007] FCA 97CORPORATIONS – membership, rights and remedies – members’ remedies and internal disputes – oppressive or unfair conduct – what constitutes – conduct of, or relating to directions – where closely held corporation – whether majority shareholder engaged in oppressive conduct within the meaning of s 232 of the Corporations Act 2001 (Cth) – whether winding up just and equitable under s 461(1)(k) of the Corporations Act 2001 (Cth) – removal of minority shareholder from position of director – exclusion from decision-making and cessation of payment for work performed in executive capacity – destruction of quasi-partnership relationship – company paying for legal fees for majority in defence of minority claim
PRACTICE – jurisdiction – inherent jurisdiction – officers and processes of court – restraining solicitors from acting – right of audience – solicitor a material witness – beneficial pecuniary interest in outcome of litigation – where motion to enjoin solicitor from acting filed and solicitor continued to act
LEGAL PRACTITIONERS – solicitors – proceedings on behalf of client – solicitor a material witness – evidence and conduct likely to be scrutinised – beneficial pecuniary interest in outcome of litigation – where motion to enjoin solicitor from acting filed and solicitor continued to act
Held – corporation’s affairs found to be conducted in a manner oppressive to minority shareholder; just and equitable to wind up corporation
Corporations Act 2001 (Cth) ss 232, 233, 461(1)(k)
Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 applied
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 applied
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 applied
In re A Company [1999] 1 WLR 1092 considered
Kallinicos v Hunt (2005) 64 NSWLR 561 considered
Re DG Brims & Sons Pty Ltd (1995) 16 ACSR 559 cited
Scottish Meyer Cooperative Wholesale Society Ltd v Meyer [1959] AC 324 cited
Tay Bok Choon v Tahansan Sdn Bhd [1987] 1 WLR 413 appliedWayde v New South Wales Rugby League Ltd (1985) 180 CLR 459 cited
THE FOOD IMPROVERS PTY LTD (ACN 003 474 280) AND ANOR v BGR CORPORATION PTY LTD (ACN 059 820 807) AND ORS
NSD 1140 OF 2005
RARES J
12 FEBRUARY 2007
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NSD 1140 OF 2005
BETWEEN:
THE FOOD IMPROVERS PTY LTD (ACN 003 474 280)
First PlaintiffJOHN STEPHEN BAX
Second PlaintiffAND:
BGR CORPORATION PTY LTD (ACN 059 820 807)
First DefendantTHE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD (ACN 002 688 897)
Second DefendantCORDATO PARTNERS (SERVICES) PTY LTD
(ACN 075 518 964)
Third DefendantMAIN CAMP HOLDINGS PTY LIMITED (ACN 061 573 804)
Fourth DefendantMAIN CAMP CORPORATION PTY LTD (ACN 054 989 516)
Fifth DefendantSNP NATURAL PRODUCTS PTY LTD (ACN 094 464 490)
Sixth DefendantADVANCED TECHNOLOGY RESEARCH PTY LTD
(ACN 088 655 163)
Seventh DefendantBUSINESS & RESEARCH MANAGEMENT LIMITED
(ACN 070 946 664)
Eighth Defendant
JUDGE:
RARES J
DATE OF ORDER:
12 FEBRUARY 2007
WHERE MADE:
SYDNEY
THE COURT:
1.Declares that the affairs of the first defendant have, since 29 May 2005, been conducted by the second and third defendants contrary to the interests of its members as a whole and in a way which is oppressive to the first plaintiff.
2.Declares that each of the three resolutions of the first defendant made in its general meeting on 1 July 2005, namely to remove the second plaintiff as a director, to ratify the termination of the first plaintiff’s consultancy agreement and to ratify the termination of the employment of Mr Gobert, was oppressive to, unfairly prejudicial to and unfairly discriminatory against the first plaintiff.
3.Declares that, by causing the first defendant to pay:
(a)their legal and other costs associated with these proceedings;
(b)the second defendant a consultancy fee of $20,000 in lieu of $16,000 per month between July 2005 and 28 February 2006;
(c)the second defendant a consultancy fee of $20,000 per month since 1 March 2006;
(d)an interim dividend on 22 February 2006 without first paying, or providing to pay, the first plaintiff $500,000 plus GST in respect of its entitlement to consultancy fees and interest;
the second and third defendants have conducted the affairs of the first defendant in a way which is contrary to the interests of its members as a whole and in a way which is oppressive to, unfairly prejudicial to, and unfairly discriminatory against the first plaintiff.
4.Orders that the second defendant repay to the first defendant with interest from the date of the second defendant’s receipt:
(a)all amounts paid to the second defendant as consultancy fees after 28 February 2006; and
(b)any amount received by the second defendant as consultancy fees, during the period 20 July 2005 to 28 February 2006, in excess of a rate of $16,000 per month plus GST.
5.Orders that up to and including 6pm on 14 February 2007 each of first, fourth, fifth, sixth, seventh and eighth defendants by itself, its servants and agents be restrained from:
(a)entering into any transactions making any payments, creating any liabilities or making any decisions, including in relation to the eighth defendant’s litigation with the Australian Taxation Office (known as the ‘BARM litigation’) otherwise than in the ordinary course of business;
(b)paying any legal fees to the third defendant, Cordato Partners or Mr Anthony Cordato;
(c)paying any further consultancy fees to the second defendant or any other entity connected to Mr Frederick Gulson.
6.Grants liberty to any party to apply on 1 hour’s notice in respect of the operation of order 5.
7.Orders the second and third defendants to pay the plaintiffs’ costs of the proceedings.
8.Orders that the first, fourth, fifth, sixth, seventh and eighth defendants pay the difference between the amount of costs recovered by the plaintiffs from the second and third defendants, if any, and the amount at which those costs are taxed.
9.Orders that the parties file and serve any written submissions, on or before 4pm on 13 February 2007, addressing the questions of:
(a)whether it is preferable to have a liquidator rather than a receiver appointed to the first defendant or any other defendant;
(b)the appropriate proportion of the legal fees paid for the defendants’ conduct of the proceedings which ought be borne by the second and third defendants;
(c)orders to set aside and rearrange the interim distribution or dividend paid by the first defendant on 22 February 2006 so as to give effect to these reasons including orders to the effect that the first defendant pay to the first plaintiff $500,000 in satisfaction of its entitlement to both consultancy fees and interest prior to the distribution by way of dividend of the balance of the proceeds from the sale of Main Camp Station and the first defendent’s other assets to its shareholders in accordance with option B.
10.Stand the proceedings over to 9.30am on 14 February 2007 for hearing on the making of further orders.
11.Directs that these orders not be taken out until final orders are made disposing of the questions the subject of the submissions to be made on 14 February 2007.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NSD 1140 OF 2005
BETWEEN:
THE FOOD IMPROVERS PTY LTD (ACN 003 474 280)
First PlaintiffJOHN STEPHEN BAX
Second PlaintiffAND:
BGR CORPORATION PTY LTD (ACN 059 820 807)
First DefendantTHE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD (ACN 002 688 897)
Second DefendantCORDATO PARTNERS (SERVICES) PTY LTD
(ACN 075 518 964)
Third DefendantMAIN CAMP HOLDINGS PTY LIMITED (ACN 061 573 804)
Fourth DefendantMAIN CAMP CORPORATION PTY LTD (ACN 054 989 516)
Fifth DefendantSNP NATURAL PRODUCTS PTY LTD (ACN 094 464 490)
Sixth DefendantADVANCED TECHNOLOGY RESEARCH PTY LTD
(ACN 088 655 163)
Seventh DefendantBUSINESS & RESEARCH MANAGEMENT LIMITED
(ACN 070 946 664)
Eighth Defendant
JUDGE:
RARES J
DATE:
12 FEBRUARY 2007
PLACE:
SYDNEY
REASONS FOR JUDGMENT
OUTLINE OF ISSUES
In mid 1999 three businessmen, John Bax, Fred Gulson and John Reece, through their shareholdings in and directorships of BGR Corporation Pty Ltd, gained control of the Main Star One group of companies. That group was involved in the production, distribution and sale of tea tree oil and its products. Initially Mr Gulson’s company, The Triad Health Products Group of Companies Pty Ltd, held 70.4% of the shares in BGR, Mr Bax’s company, The Food Improvers Pty Ltd held 22.2% and Mr Reece’s company, Karcor Holdings Pty Ltd, held 7.4%. Sometime shortly after the beginning of July 1999, Mr Gulson caused Triad to transfer 7.4% of the shares in BGR to Cordato Partners (Services) Pty Limited, a company controlled by his law school friend and a solicitor, Mr Tony Cordato.
Mr Bax, Mr Gulson and Mr Reece carried out the functions of the senior management of the businesses, which were known as Main Camp, after the takeover. They did so in accordance with a business plan which Mr Bax prepared. Mr Cordato provided the business with legal services, but did not play a role as a director or executive. In July 1999 each of Triad, Food Improvers and Karcor entered into consultancy agreements, which Mr Cordato had drafted, with a Main Camp company. In July 2000 replacement consultancy agreements were made with BGR. All the consultancy agreements provided for the payment to each consultant company of $20,833.33 per month for, inter alia, the provision of services by its respective principal.
In March 2001 the consultancy fees ceased to be paid. There is a substantial issue as to the terms on which that occurred. Mr Bax and Mr Reece say that invoicing of the fees was suspended but that in the future invoices could be rendered and payments would be made for services provided if and when the Main Camp group could afford to pay. Mr Gulson and Mr Cordato say that there was no arrangement deferring rendering, or for the payment of, consultancy fees if they had not been invoiced contemporaneously with the provision of the services. Later, after a dispute in 2002, Mr Reece relinquished his shareholding. The holdings of the remaining three shareholders from then on were Triad 68%, Food Improvers 24% and Cordato 8% of the shares in BGR.
After Mr Reece’s departure, Jim Gobert, an expert in the use of and applications of tea tree oil products, took up the role of marketing manager of the group as an employee, but not as a shareholder or partner.
Eventually in about mid 2003, the payment of consultancy fees recommenced, but at much reduced rates, though there were increases later. Mr Bax’s and Mr Gulson’s companies received consultancy fees thereafter.
In early 2005 Mr Bax, Mr Gulson and Mr Gobert were planning an overseas trip to market tea tree oil. Mr Gobert was also to have discussions with European regulators about standards that were then being contemplated that would affect the sale of tea tree products within the European Commission. They arrived in Europe in the latter part of May 2005. Mr Gulson began to exhibit quite erratic behaviour as a result of a psychiatric condition which he had and which worsened during this time.
On 29 May 2005, in circumstances which I will describe in more detail below, Mr Gulson, without any prior discussion with Mr Bax, summarily dismissed Mr Gobert in London for no good reason on the eve of important meetings with an Israeli customer. Mr Bax then said that he could no longer work with Mr Gulson and refused to do so. Mr Gulson attended the meetings with the Israeli customer that had been scheduled the next day. All three men made their way home, Messrs Bax and Gobert travelling together and Mr Gulson separately. Mr Gulson returned and immediately went to the Main Camp plantation in Northern New South Wales. His erratic behaviour became more and more pronounced and caused alarm to the plantation manager, Mr Williams, and staff.
On 8 June 2005 Mr Gulson met in Sydney with Mr Cordato and Mr Bax. Mr Gulson was adamant that Mr Gobert would not be reinstated, although Mr Bax had already re-employed him. Mr Bax said that he would not work with Mr Gulson. Mr Cordato was at that time trying to hold what was obviously a highly fractious position together as best he could so that the parties could co-operate to effect the sale of the Main Camp undertaking and an orderly dissolution of the business relationship. However, on 10 June 2005 Mr Gulson caused an extraordinary general meeting of BGR to be called for 1 July 2005. The business of that meeting was to remove Mr Bax as a director, ratify Mr Gulson’s summary dismissal of Mr Gobert, and his termination of Food Improvers’ consultancy agreement. Because Mr Gulson’s shareholding was sufficient, the July meeting proceeded to do so with Mr Cordato’s support. In the meantime, Mr Gulson had been admitted to the Northside Clinic psychiatric hospital for treatment for his condition which had by then become quite unstable. Thereafter, Mr Gulson and Mr Cordato substantively exercised control over the direction of BGR to the exclusion of Mr Bax. In mid July 2005 Food Improvers and Mr Bax commenced these proceedings.
In mid September the 2005 the parties met and agreed to appoint an agent for sale of the Main Camp business. After the meeting Mr Bax prepared two suggested methods of distribution one of which involved a recognition that Food Improvers was owed $500,000 for consultancy fees and that after payment of this amount, the balance of the net proceeds of sale of the Main Camp plantation and business would be distributed to the shareholders by BGR as a fully franked dividend. After that distribution the shareholders would repay their loan accounts, which were substantial, and BGR would then make a further fully franked dividend. This became known as ‘option B’. Correspondence ensued in which Mr Cordato, acting as the solicitor for all of the defendants, confirmed that the distribution would be made in accordance with option B.
But once the sale had been completed, without notice to Mr Bax, the distribution was ultimately made simply on the basis of shareholding entitlements without any payment recognizing Mr Bax’s claim for consultancy fees. Earlier, when the Main Camp sale was about to be settled, Mr Cordato’s solicitors’ firm, Cordato Partners, issued 16 accounts totalling about $135,000 in respect of matters in which his firm had acted since 1999. Those accounts were paid very promptly from the sale proceeds.
The proceedings have been conducted with considerable feeling on all sides. At issue are the claims that Mr Bax and Food Improvers make, namely that:
·BGR was in effect a quasi partnership consisting of initially himself, Mr Gulson and Mr Reece, and later himself and Mr Gulson. Mr Cordato was more of a silent investor. In this quasi partnership, Mr Bax was the managing director or chief executive, Mr Gulson was the corporate counsel and company secretary and Mr Reece, originally, was to be involved in running the Main Camp farm and marketing its products. Mr Gobert succeeded to Mr Reece’s functions but not his equity.
·Mr Gulson used his controlling shareholding in BGR and the ultimate alliance of Mr Cordato, to engage in oppressive conduct within the meaning of s 232 of the Corporations Act 2001 (Cth). That conduct began with the summary dismissal in London of Mr Gobert in the middle of the overseas trip and then Mr Gulson’s use of his majority shareholding to exclude Mr Bax from any role in BGR contrary to the quasi-partnership. Mr Gulson used his voting power to impose his will at the meeting of 1 July 2005, with Mr Cordato’s support.
·Mr Gulson and Mr Cordato used and are using the resources of BGR to pay Cordato Partners for all of their companies’ litigation costs against Mr Bax. They have excluded him from important decisions as to the terms of sale and the making of the distribution following the sale of Main Camp business, having previously represented to him that option B would be the method of distribution of the sale.
·Mr Gulson continues to cause BGR to pay Triad a consultancy fee of $20,833 each month.
·Mr Cordato and his firm ought not to act as solicitor for all of the defendants because it is oppressive or he has a conflict of interest and lack of independence.
·The parties actually entered into a contract to cause the distribution of the proceeds of Main Camp sale to be made in accordance with the methodology in option B.
Although there is a large number of evidentiary conflicts, the real substance of the dispute falls within a much narrower compass. At the heart of the case are the questions of:
·how the parties agreed that they would conduct the Main Camp business in 1999;
·what arrangement was made for cessation of payments of consultancy fees in March 2001;
·the circumstances and consequences of the resumption of payment of the consultancy fees;
·the justification for the respective parties’ positions in May and June 2005;
·the question as to whether the conduct of BGR by Mr Gulson alone or with Mr Cordato gave rise to a right to relief on the just and equitable ground or amounted to oppression of Food Improvers;
·whether there was a contract for the distribution of the proceeds of sale of the Main Camp business in accordance with option B.
MID 1999 – BASIS OF RELATIONSHIP OF THE PARTIES
When negotiations for the acquisition of the Main Star One group were reaching their conclusion, Mr Bax was chief executive officer of the Ink Group. He had been a fellow of CPA Australia (an association of chartered accountants) since the early 1980s. Prior that he held senior managerial roles, including chief financial officer of a publicly listed trust.
The principal companies in the group were:
·Main Camp Holdings Pty Limited, which owned land known as Main Camp on which a tea tree oil farming business was operated. That involved the growing of tea trees, distillation of tea tree oil, selling the tea tree oil and the supply of tea tree mulch. Some other agricultural activities were also conducted on the property including the running of cattle, growing of soy beans, barley and timber.
·Main Camp Corporation Pty Limited purchased tea-tree oil from Main Camp Holdings. It sold Main Camp branded tea tree oil to domestic and international customers.
·SNP Natural Products Pty Limited purchased non-branded tea tree oil from Main Camp Holdings and third parties together with Australian native herbs and spices. It on sold its own branded tea tree oil products and Australian native herbs and spices. SNP also conducted all head office operations with the BGR Group and its sales and marketing.
·Advanced Technology Research Pty Limited, was a non operating entity which held claims against the failed Australian Rural Group Limited (in liq).
·Business and Research Management Limited, known as BARM, was an also non operating entity which an outstanding objection against the Australian Taxation Office for a tax refund of about $9.2 million.
In late June 1999 Mr Bax, Mr Gulson and Mr Reece met at Mr Reece’s Gladesville offices on a Saturday morning. Mr Bax presented a paper entitled ‘Strategic and Short Term Business Plan for the Control and Operation of the Main Star One Group’ in anticipation of BGR’s imminent completion of the take over. The plan referred to the Main Star One Group’s complex corporate structure and unique processes of operations. One objective was to seek the co-operation of Mr Glen Stotter, who was a principal in the management of the Main Star One Group. Mr Bax emphasized that the staff of the Main Star One Group had quickly to form the view that BGR was professional in its manner and was acting in the staff’s and the investors’ best interests. There had been extensive litigation concerning the Main Star One Group in the 1990s (see the judgments of Hill J in Natural Extracts Pty Limited v Stotter (1997) 24 ACSR 110; [1997] FCA 471 and Hely J in Natural Extracts Pty Limited (now called Benchmark Essential Oils Pty Limited (in liq)) v Stotter [1998] FCA 1636).
The plan recorded that the appointment of an appropriate managing director was critical in order to provide a clear and unequivocal statement to staff and external parties. The managing director had to liaise directly with Mr Stotter and be seen by investors in the tax schemes for tea tree oil products as a suitable person to take over his role. Mr Bax proposed that he be the managing director of the Group. He, Mr Gulson and Mr Reece were each to hold the position of director of BGR and each would have specific areas of responsibility. The plan proposed that all executive directors would report to the managing director, but they would all have equal say on a business direction and planning issues. The latter class of decisions would be made at board meetings. A number of strategies for the running of the business was proposed and a short term business plan was outlined.
The plan proposed that each of the three would have particular responsibilities which reflected the skills that he brought separately to the business. Mr Bax was have responsibility for all financial and administrative functions, liaising with Mr Stotter, licensed dealers and investors and dealing with future acquisition proposals. Mr Gulson was to be general counsel, having responsibility for all commercial legal matters pertaining to the operations of the group, settlement of outstanding litigation, company secretarial functions, government relations and managing special assets. He was also designated to have responsibility for insurance (although in the event he did not, but nothing turns on this). Mr Reece was to have responsibility for agricultural, operational and technical matters, relations with consultants acting on the various projects of the group, commercialization of research investments known as ‘Budplan’ products, supervision of the Main Camp plantation and the sales of tea tree oil and related products.
Mr Bax spoke to his plan after the others had read it in Mr Reece’s office. He said that he had met with all the senior executives and directors of the Main Star One Group and they were concerned about its future. He noted his previous experiences as chief executive officer and in senior management of other businesses and proposed that he be appointed as managing director of BGR and all of its subsidiaries. He then explained Mr Gulson’s role based on his legal background as a solicitor, should be as company secretary. Mr Bax envisaged that Mr Gulson would be able to use his connections with various government departments which he had developed when he was with New South Wales Farmers and he could concentrate on running of the BARM litigation with the Australian Tax Office and potential investor groups. That litigation involved a claim by BARM, a subsidiary of the group, for a refund of many millions of dollars. It is yet to be heard by a judge of the Court.
Mr Bax proposed that Mr Reece’s role be to develop the markets for the sale of the products, look after the Main Camp farm, and pursue the commercialization of the research from the Budplan projects.
Both Mr Gulson and Mr Reece agreed with Mr Bax’s proposals. They decided to hold regular weekly management meetings. They all agreed to hold regular board meetings because there were two non listed public companies in the group as well as other finance companies. They agreed that they would appoint a chairman at each meeting to handle the role and that there was no need for a permanent position of chairman to be filled. Mr Gulson observed that was a good idea that a chairman could be appointed at meetings from whomever was present because of the travel commitments each of them would have.
MR BAX WAS MANAGING DIRECTOR
Mr Gulson and Mr Cordato sought to assert during the hearing that Mr Bax’s use of the title of managing director did not properly reflect his role in the running of the business. I reject their evidence. Each was an unsatisfactory witness on this matter. Although there was no formal appointment of Mr Bax as managing director by any board resolution, once BGR assumed control of the group on 2 July 1999, Mr Bax began to act as managing director with the knowledge of Mr Cordato, Mr Gulson and Mr Reece. The group required a managing director or chief executive to run it. He continued in that role until June 2005. Throughout this time, he was recognised by the staff and external parties who dealt with the BGR group as managing director or chief executive. His name appeared in correspondence with third parties, including the group’s financiers and customers, in the capacity of managing director. His business cards were printed with his capacity so described.
Mr Reece, who had no reason to be favourable to any party in the litigation, confirmed that Mr Bax was recognised as and acted as managing director throughout Mr Reece’s time with BGR. Mr Williams also confirmed this was so up to June 2005.
In evidence, Mr Gulson agreed that when the three partners took over the Main Camp business in July 1999 the 45 to 50 staff needed to know who was the ‘boss’, managing director or chief executive officer, and that all three directors had agreed at that time Mr Bax was to be managing director. In early June 2005 Mr Gulson began calling himself ‘interim managing director’ in correspondence. On 7 June 2005 Mr Gulson drafted a letter for Mr Cordato to review before Mr Gulson sent it to Mr Bax’s solicitors. Mr Gulson referred to having letters on file from ‘the former managing director’. I find that this description not only reflected how Mr Gulson saw Mr Bax but also the reality that Mr Bax was the managing director of BGR and its group.
Mr Cordato gave evidence about a meeting with Mr Bax and Mr Gulson on 8 June 2005 when they discussed Mr Williams’ fax of that day addressed to Mr Bax as CEO. There, Mr Williams had complained of Mr Gulson’s irrational behaviour the previous day and its impact on the staff and business of Main Camp. Mr Cordato said that whole fax concerned him. He told both Mr Bax and Mr Gulson that this could not continue and ‘… somebody’s got to sort him [Mr Williams] out and calm him down’. Mr Cordato said that Mr Bax had responsibility for sorting out the way in which Mr Gulson was behaving towards Mr Williams because Mr Bax brought Mr Williams’ fax into the meeting and ‘.... he was the CEO’. The evidence continued:
‘(MR LEVER:) ‘But did you not speak to Fred Gulson to try and sort Fred Gulson out to stop him behaving in the way that Dennis Williams was complaining about?---That was one reason I asked for the meeting of 8 June 2005, to sort out the inter alia for this issue.
HIS HONOUR: Mr Cordato, why would a chief financial officer have responsibility for sorting things out with the staff who were running the plantation business - - -?---He sent - - -
- - - and not the chief executive officer?---Well, Mr Williams thought of him as a chief executive officer, which is what CEO would imply to me.’ (emphasis added)I find Mr Cordato’s evidence on this issue to be implausible. Mr Cordato sought to downplay Mr Bax’s role by describing it as that of chief financial officer when he knew that was a false description. As his evidence showed, he had no basis for that description which he volunteered despite his knowledge that Mr Bax was regarded by the plantation manager, represented on business cards and to the staff as managing director or chief executive officer. Indeed Mr Cordato said Mr Bax had been acting as such for two or three years. I do not believe the limitation he put in that evidence. I find that Mr Cordato knew that Mr Bax was the managing director and chief executive officer from about the time BGR took over the Main Camp business.
The reason for Mr Cordato’s expectation that Mr Bax should ‘sort out’ Mr Williams was that the former was the managing director in Mr Cordato’s mind, and had always been so. And, as he said, he did nothing himself to ‘sort out’ Mr Gulson although he recognised that Mr Gulson then appeared agitated and to have periods of irrationality. I find that Mr Cordato was conscious Mr Gulson was behaving in the way which Mr Williams described and Mr Cordato endeavoured, at the meeting on 8 June 2005, to have Mr Bax’s authority with the staff restored so that Mr Gulson’s disruptive behaviour would not threaten their investment in the business.
In closing address the defendants conceded that the parties conducted their affairs in the way that had been contemplated in the meeting in Mr Reece’s office in June 1999 and that a quasi partnership existed between Mr Bax, Mr Gulson and Mr Reece from that point forward. The defendants also then conceded that Mr Bax, as a matter of fact, acted as managing director or chief executive officer of the group, notwithstanding that there was no formal appointment to that office. Each of the three had his agreed role. The respective corporate vehicle of each was paid an equal consultancy fee equally through and each regarded his performance of a significant management role as important to his place in the overall business.
I am satisfied that Mr Bax acted as managing director of BGR and the group with the knowing consent of Mr Gulson and Mr Reece and the knowledge of Mr Cordato until the events of June 2005. Each of Mr Bax, Mr Gulson and Mr Reece performed in substance the roles assigned to them in Mr Bax’s plan.
Having seen and heard each of them, I am confident that they each sought to co-operate with one another in the running of the business and, until the circumstances involving Mr Reece’s ceasing to be a part of the partnership, treated each other as partners. Subsequently until 29 May 2005 Mr Bax and Mr Gulson treated each other as partners. And they made all significant decisions jointly and worked co-operatively in the operation of the business notwithstanding the disparity between the respective sizes of their companies’ shareholdings in BGR, or the presence of Mr Cordato’s company as another minor shareholder.
CONSULTANCY AGREEMENTS
Food Improvers and Mr Bax entered into a consultancy agreement with Main Star One Holdings Pty Limited on 2 July 1999. That agreement provided that the consultant (Food Improvers) was entitled to a consultancy fee of $20,833.33 payable monthly in advance from 5 July 1999 unless otherwise agreed (cl 4.1). A similar consultancy agreement was entered into by Main Star One Holdings with Karcor and Mr Reece. I infer that a similar position applied to Triad and Mr Gulson even though the actual consultancy agreement was not in evidence.
New consultancy agreements replaced these from 1 July 2000. They were between BGR and each of the principals and their respective service companies. The BGR consultancy agreements contained a provision for the payment of consultancy fees which was relevantly identical to that in cl 4.1 in the earlier agreements. The consultancy fee payable under cl 4.1 was exclusive of GST (which commenced to be payable from 1 July 2000). The consultant was required to charge GST and show it separately on an invoice issued to BGR at the end of each month so that the amount payable would include GST (cl 10.11). There was an initial term of one year, but the agreements were to continue afterwards unless terminated by three months’ notice in writing or in accordance with a right of BGR to terminate the consultancy immediately provided in cl 9.
BGR’s CASH FLOW DIFFICULTIES
From July 1999 until approximately late 2003 the BGR group incurred significant legal costs in a number of pieces of litigation. It also required a high level of working capital to operate the 4,500 hectare Main Camp plantation which had 55 million tea-trees planted and a staff of approximately 25. The market for tea-tree oil was at that time over supplied and the price for tea-tree oil decreased from $45 per kilo in 1999 to about $24 per kilo in 2003.
In about October 2000 four new tractors were required to be leased each which would cost approximately $440,000. Leasing finance initially, was not approved. The group’s cash position tightened and in about December 2000 Mr Bax called a meeting with Mr Gulson and Mr Reece at his office in Phillip Street, Sydney in which Mr Bax told the others that his examination of the current and future levels of expenditure against projected incomes revealed cash flow problems. He told them of the need to fund the test cases, and the difficulties that running a table grape farm at Jabiru, in the Northern Territory, meant that business could not be operated at a profit because of obligations under a prospectus and the disputes with Australian Rural Group. Moreover, he pointed out the deteriorating market price of tea-tree oil and suggested that in the next few months BGR would need a cash injection of several hundred thousand dollars. He suggested that it would be up to the three of them to provide financial support because the business was basically managing projects which was not something a financier would find attractive.
MARCH 2001 MEETING: SUSPENSION OF CONSULTANCY FEES – LOANS TO BGR
Over the next three months to March 2001 a number of other meetings concerning cash flow issues took place. Then, critically, in March 2001 Mr Bax called Messrs Gulson and Reece to another meeting in their offices in Phillip Street Sydney.
Mr Bax said that the time had come and that the business needed another $500,000 according to his calculations. It was not turning around and the price of tea-tree oil was still going down. He said it was a shareholder issue. Mr Gulson asked what that meant. Mr Bax said that BGR could not sustain consultancy fees for the three of them. He suggested that they repay some fees and that should be done in effect in proportion to their shareholdings. Thus, he suggested that Mr Gulson should repay $315,000, Mr Reece $37,000 and Mr Bax $111,000 inclusive of GST. Mr Reece said that seemed fair to him. Mr Gulson noted it obliged him to contribute a lot. Mr Bax pointed out that he was the largest shareholder.
Mr Gulson observed that he would have to borrow funds and pay interest and that they should be able to charge interest back to the company. Mr Bax said in evidence that Mr Gulson also asserted that the consultancy fees should be brought up to date as soon as possible. Mr Gulson said because they all would be borrowing and have no income from consultancy fees, the company should pay interest. Mr Bax agreed with that. Mr Reece said that he could not borrow money and that he would want his consultancy fees brought up to date as soon as possible. Mr Bax said that there was no need for them to continue to put in more invoices for their consultancy fees because BGR had no money to pay it. Any invoices would involve their companies becoming liable to tax although they would not have been paid. So, he suggested they stop issuing invoices. The others agreed.
Mr Reece had no reason to give evidence favouring one party against the other in these proceedings. His account was that Mr Bax said that they would have to suspend the consultancy fees rather than cancelling them. Mr Bax pointed out that if the fees were cancelled Mr Reece, for one, would only obtain remuneration or reward by way of distribution on the basis of shareholding. That would mean that Mr Gulson would earn nine times more than Mr Reece although Mr Reece was working for the group full time. And Mr Reece said there was mention of the fact that when the group got on top of things they would be reimbursed.
Mr Gulson contradicted Mr Bax’s and Mr Reece’s account of this meeting. He said that Mr Bax had told them that consultancy fees would cease to be paid from then and that they had to lend BGR $500,000 in proportion to their shareholdings. Mr Gulson denied that Mr Bax referred to returning consultancy fees.
In the event, a number of steps was taken in March 2001 and following by BGR’s directors and members to offer the group financial support. First, the BGR creditors ledger shows that each of the three consultants paid back consultancy fees. This was done by credit notes which were dated 1 March 2001 and the payments to BGR on 23 March 2001 of $183,333.30 by Triad, $111,000.00 by Food Improvers and $37,000 by Karcor as recorded in BGR’s creditors ledger. No corresponding entries occurred for Cordato Partners Services. Secondly, Mr Gulson approached Mr Cordato and arranged for him to contribute $37,000. BGR’s general ledger recorded loans being made on 23 March 2001 by Triad of $116,666.70 and on 26 March 2001 by Cordato Partners Services of $37,000.
Thus in late March 2001 Triad paid a total of $300,000 to BGR, Food Improvers paid a total of $111,000 and Karcor and Cordato Partners Services had paid $37,000. These payments in late March 2001 provided a cash injection of $485,000.00 Thus Triad contributed 61.9% of that sum, Food Improvers, 22.9% while Karcor and Cordato Partners Services each contributed 7.6%.
Next, on 7 May 2001, BGR’s general ledger records that Triad made a further loan of $157,500 (70.89%) and Food Improvers lent $55,500 (Ex 2; 4/120.1.3) of a total of $222,250.
Last, on 8 June 2001, BGR’s general ledger shows that Triad lent $40,000 (46.5%) Food Improvers lent $20,000, (23.3%) Karcor lent $8,000 (9.3%) and on 13 June 2001 Cordato Partners Services lent $18,000 (20.9%) totalling a further $86,000.
Of the total of the loans made in May and June 2001 ($308,250), Triad contributed 64.1%, Food Improvers 24.5%, Karcor 5.6% and Cordato Partners Services 5.8%. I am not satisfied that anyone remembered the precise conversations or reasons why the amounts paid in the period between March and June 2001 were paid in the proportions or way in which they are recorded in BGR’s books but nothing turns on this. Thus, in the three months to June 2001, the shareholders had paid $793,250 to BGR. Triad’s share of the total payments by each shareholder represented 62.7% in respect of its 63% of the shares. Food Improvers had paid 23.5% compared to its shareholding of 22.2% and Karcor and Cordato Partners Services had paid 6.8% and 6.9% respectively as against their 7.4% shareholdings. Of that, $331,333.30 was recorded in BGR’s creditor’s ledger as a repayment of consulting fees. Moreover, the three executives had ceased to render, through their companies, any invoices for consultancy fees, representing an ongoing notional contribution of $20,833.33 each per month on top of the amounts of fees repaid.
I infer that each of the shareholders made total payments in the three months to June 2001 in approximate proportion to their shareholdings in order to provide needed cash to BGR. So, Mr Bax said in cross-examination, it was tax effective for the three consultants to return as much as they could by crediting consultancy fees previously earned. This meant that they would not have to pay company tax on the fees returned. On the other hand, it is improbable that Mr Bax, Mr Gulson and Mr Reece were repaying those fees, once for all rather than lending notionally the equivalent sum. The basis asserted by Mr Gulson would have meant that they could never reverse the repayment were BGR’s fortunes to recover. That would have resulted in each of the executives making a gift to BGR not only of the work which they had done up to then but also of what they had been paid for it. I am satisfied that Mr Bax, Mr Gulson and Mr Reece intended and understood that the consultancy fees which were repaid in March 2001 were always intended to be returned to the consultants if the BGR group could afford to do so in future.
Subsequently, on 22 September 2005, Mr Bax, Mr Cordato and Mr Gulson met with BGR’s taxation accountant, Joe Lombardo of KPMG, Accountants at KPMG’s offices to discuss possible distributions of the proceeds of sale of Main Camp. I will return to this meeting below, but Mr Lombardo gave evidence that early in the meeting the following exchange occurred.
‘Mr Bax: ‘I am owed consultancy fees as marked on the first schedule. There are consultancy fees owed to each of us’. He indicated Mr Gulson;
Mr Gulson: ‘Yes that’s right’.
Mr Bax:‘Because I have a lesser share in the company, I need to have my consultancy fees paid.’’
The ‘first schedule’ was Mr Lombardo’s description of option A prepared by Mr Bax; it claimed all amounts which could have been, but had not been, invoiced. The admission by Mr Gulson that substantial consultancy fees were owing is consistent with Mr Bax’s and Mr Reece’s evidence as to what occurred in March 2001 when the payment of the fees was discussed. Option A recorded that over $1,000,000 before interest was owed to each of Triad and Food Improvers as consultancy fees. And Mr Lombardo noted that when the discussion turned to option B, which recorded $500,000 as consultancy fees and interest payable to Food Improvers alone, he said that it seemed as if that sum had been agreed upon. Mr Gulson was nodding in apparent agreement when the $500,000 sum was raised by Mr Bax as due and he, Mr Lombardo, proceeded on that basis.
I have no hesitation in accepting Mr Lombardo’s evidence as accurate and reliable and prefer it wherever it conflicts with Mr Cordato’s or Mr Gulson’s. Mr Lombardo had no reason to favour any party in his recollection. He had cause to remember the discussion. He was trying to dissuade Mr Bax from structuring Food Improvers receipt of the sale proceeds to include any sum for consultancy fees because it would be taxable, unlike a payment of the same sum as dividend (in light of the BGR group’s franking credit position).
I am satisfied that at the meetings which occurred in March 2001, Mr Bax, Mr Gulson and Mr Reece decided that it would be pointless for any of them to cause their service companies to continue to issue monthly tax invoices since the BGR Group did not have sufficient cash with which to pay their consultancy fees. Accordingly, each of them continued to work full time in the management of the group in the expectation that if and when its fortunes turned around through their efforts, they would be entitled to render invoices for the work they had performed in the preceding period, including the period for which they had repaid the fees previously earned.
In the meantime they (through their service companies) drew down on their loan accounts with BGR as and when they needed funds to meet their living expenses. This had the consequence that they did not receive income and, thus were not liable to pay tax on the loan receipts. Had their service companies rendered tax invoices each month and accrued the consultancy fees as a debt payable by BGR, the consequences would have been that those companies would have incurred tax liabilities due to the receipt of ‘income’ on an accrual basis and for GST. BGR would have incurred a corresponding liability, also on an accrual basis. That would have reduced its profitability in its financial statements which could be shown to third parties, such as the group’s financiers, and, neither the partners nor BGR would have benefited at all. By suspending the issuing of tax invoices until BGR’s fortunes improved, the partners were supporting the fortunes of their enterprise without incurring pointless tax liabilities in respect of money that they knew would not be received at that time.
Likewise, in the first half of 2001 each partner saw it as important to support the group in the meantime by return of some of their consultancy fees and by providing loans to BGR in proportion to their shareholding. The commercial rationale for coming to this conclusion is, in my view, compelling. There was no sense in Mr Bax or Mr Reece in particular, working full time for the group during the period of cash flow difficulties after forsaking once for all any entitlement to be paid for that work given that they obviously thought that they could turn the group’s fortunes around. They were prepared to take the risk of working without secure remuneration during that period for the potential benefits that they would be paid for their past work when BGR was in a position to do so. Only if, despite this work, BGR failed, had they accepted the risk of not being paid at all for their work.
Mr Gulson’s evidence was that, in effect, his co-partners had agreed to forego all right to receive any further remuneration until the group’s fortunes improved. He asserted that the right to fees had been cancelled not suspended. It has suited his financial position since the events of mid 2005 to contend, but I do not accept that he believed that this occurred. Nor do I believe that Mr Gulson understood what was happening in the meetings in March 2001 in that way. It makes no commercial sense. There would be no rational reason why, if the group recovered its fortunes, the partners would not have wanted to reward themselves for the period in which they worked to bring about that result. Quite the contrary, it would have been unfair as between the partners that Mr Gulson’s equity of almost two-thirds of the shares would have benefited from the large amount of free work provided by his co-partners in a disproportionate amount to their rewards.
Indeed, Mr Reece’s equity of 7.4% would have been improved by exactly the same amount as Mr Cordato’s company’s in circumstances where Mr Reece was working full time for nothing in the interests of BGR and Mr Cordato was not working in that way at all. Moreover, Mr Cordato retained the right to render professional fees. The behaviour of Mr Gulson in approving payment of Cordato Partners’ legal fees in January 2006 reflected a recognition that those who supported the group through its cash flow difficulties would be paid for their work. Mr Cordato rendered professional fees in respect of work in progress and other matters which he had conducted over the whole of the period between July 1999 and January 2006 in sixteen separate accounts issued on 24 and 25 January 2006. He did that when the proceeds from the Main Camp sale were about to be distributed.
Mr Gulson gave evidence that he had agreed much earlier with Mr Cordato that the latter should defer rendering his fees until such time as BGR could afford it. Before a short adjournment in the hearing, Mr Cordato denied that he had made such an agreement. Following that adjournment Mr Cordato revealed, grudgingly, under cross-examination, that Mr Gulson had spoken to him in the toilet and sought to remind him that he had agreed with Mr Bax to a deferral of the rendering of his fees. Mr Gulson gave no evidence to deny that he behaved in this way. It was in Mr Gulson’s interest to establish an agreement by Mr Cordato so as to justify the later payment of Mr Cordato’s fees, the rendering of which had been deferred until the BGR group was in a position to pay them as to distinguish his position from that of the executive directors in respect of their entitlement to uninvoiced consultancy fees. Mr Cordato told Mr Gulson in the toilet that he had never made such an agreement.
Mr Cordato, as an experienced litigation solicitor, was aware of the inappropriateness of this discussion while he was under cross-examination. When first asked about the discussion he said he did not believe it was about the evidence he was giving, then that he could not remember. That was disingenuous of him. Asked ‘what were his [Mr Gulson’s] words’ he responded ‘You were there’, before finally divulging what Mr Gulson suggested to him. I can understand that the incident was embarrassing to him, but Mr Cordato was evasive and far from candid in respect of this incident. Mr Cordato sought to glean from counsel what had been overheard before he was prepared to give his own version of the toilet discussion. To his credit, Mr Cordato told Mr Gulson that his suggested evidence was wrong. But this incident and Mr Cordato’s response to its revelation in the witness box caused me to have considerable reservations about his reliability. The incident also showed that Mr Gulson was prepared to seek to influence Mr Cordato’s evidence to bolster his case.
The defendants argued that at the time of his dismissal Mr Reece never claimed the right to any deferred consultancy fees. Mr Reece explained that he was distressed and did not raise any issue in relation to unpaid consultancy fees at the meeting with Mr Bax and Mr Gulson on 17 May 2002 where his services were terminated. He said that he did not discuss anything at the meeting because he was so shocked. He never raised any claim for unpaid consultancy fees later. He had no funds and knew he would have had to pursue the matter, in effect, through lawyers whom he could not afford. Moreover, while he was still a shareholder he knew that the group did not have funds. He said he assumed that the group would eventually, when it became more affluent, make payments that had been due earlier. He then gave the following evidence:
‘You see, I suggest to you that you didn’t raise it because you never believed those funds to be owing to you? ---- You mean you are saying that I worked all that time for nothing.
I’m not saying that, Mr Reece, I’m suggesting to you that when the parties agreed not to charge consultancy fees, they agreed that they would cease to be paid? --- They were suspended. That was what happened. Otherwise, I … would never get any funds.’ (T 403.32-.45)
Mr Bax said that in the meeting of 17 May 2002 he said to Mr Reece that if he signed over his shares in BGR his loan due to BGR would be forgiven and that the parties would all walk away. Mr Bax asserted that he said to Mr Reece that his also meant that there would be no claims for consultancy fees unpaid to Karcor and that Mr Reece agreed. Mr Gulson denies any mention was made of consultancy fees and he also relied on notes of the meeting taken by Ms Wee. Mr Bax had reservations about the completeness and accuracy of those notes. Suffice to say that the notes conclude enigmatically with Mr Reece being recorded as having ‘enquired about his value of shares’ without any further notation. It is likely that there was discussion about this topic which Ms Wee’s notes do not record. Given that Mr Reece was being removed and that he asked about the value of his shares, I am satisfied that Mr Bax referred to the assignment of the shares, the forgiveness of the loan to Karcor and to the parties all walking away.
However, I am not persuaded that any one specifically referred to consultancy fees which had not been invoiced since March 2001. It is likely, and I find, that Mr Reece thought he could still claim these but that, because of the ‘walk away’ proposal both Mr Bax and Mr Gulson understood that those consultancy fees were not to be claimed by Karcor or Mr Reece. A reasonable person in the position of the parties would have understood that Mr Reece agreed to the ‘walk away’ proposal and thus lost any legal right for Karcor to claim consultancy fees: (Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179 [40]).
Ultimately, Karcor’s 74 shares were bought back by BGR. Its loan account was then about $290,000 in debit. Mr Reece signed the share transfer to BGR in November 2003. Mr Reece said he believed the extinguishment of his loan account was a settlement for transfer of his shares and that consultancy fees were never mentioned, but his belief is irrelevant because of the agreement I have found was made in May 2002. The buy back was effected formally in February 2004 and 74 replacement shares were allocated to the remaining BGR shareholders. Karcor’s loan account balance owed to BGR was extinguished by the remaining shareholders assuming responsibility for it in proportion to their shareholding. After this, Mr Bax, through Food Improvers, held a 24% interest BGR, Mr Gulson, through Triad a 68% interest and Mr Cordato through Cordato Partners Services, an 8% interest.
The defendants argued that after the sale of one investment (Jabiru Table Grapes) in 2004, the group received cash funds and $695,000 was paid to the shareholders. That payment was made in approximately, but not exactly, the proportions of the shareholdings. They argued that this indicated that when BGR had the capacity it did not use surplus cash to pay consultancy fees. However, no distribution was made as a dividend or as a payment of consultancy fees. Instead, interest free loans were made through the BGR shareholders’ loan accounts to the three shareholders in proportions not exactly matching their shareholding (Mr Bax’s company receiving about 33% of the distribution).
None of the parties was able to give any explanation why the proportions used for those loans were out of alignment with the relevant shareholdings. These loans following the sale of a capital asset do not support the defendants’ contention. At best they are neutral facts. It would be likely that when capital assets were sold, the shareholders would receive a return of the capital in proportion to their shareholding. The need to suspend the payment of monthly consultancy fees was caused because the group’s income generating activities and cash flows did not support those payments.
When the cash flows returned to a sufficient level reduced consultancy fees commenced to be paid. The size of those payments increased as the cash flow situation improved. From July 2003 consultancy fees (exclusive of GST) of $8,000 per month were paid to Mr Bax’s and Mr Gulson’s companies out of cash flows. That was maintained until August 2004 when the amount increased to $10,000 a month and from December 2004 to $15,000 per month. The parties appear to have distinguished between rewarding the two active partners, Mr Bax and Mr Gulson, for their work by using cash out of revenues and rewarding the shareholders by advancing interest free loans of surplus capital.
The defendants argued that if Food Improvers and Karcor were able to invoice later for consultancy fees they would have engaged in a fraud on the minority by failing to record the liability in BGR’s accounts and the accrued entitlement in their own accounts. They made, but withdrew an assertion that it was also a fraud on the revenue. Mr Bax said Food Improvers accounted on a cash basis. That meant that it did not have to bring to account any fees not actually paid to it. And cl 4.1 of the consultancy agreement contemplated that the time for payment of the fee could be ‘otherwise agreed between the parties’, while cl 10.11 envisaged that a tax invoice would be issued to BGR monthly. Cordato Partners Services was not the victim of a fraud on the minority by any failure to accrue unpaid consultancy fees.
I am of opinion that the parties agreed in March 2001 that BGR’s liability for payment of the consultancy fees which would otherwise become due under cl 4.1 would be made subject to a condition that BGR be able to pay before the consultant were entitled to issue tax invoices. Thus, if BGR were never in a position to pay, it had no liability to do so. Similar arrangements are familiar to lawyers who agrees to a ‘no win, no pay’ contingency fee with clients. Here, Mr Bax, Mr Gulson and Mr Reece agreed to risk their fees, and to make substantial loans, with Mr Cordato, in the hope that BGR would recover. There was no fraud on the minority in not accruing any liability in BGR’s accounts for consultancy fees which had not been invoiced. Indeed, Mr Cordato never sought to correct the same accounts over the years before January 2006 to reflect his firm’s unbilled work in progress.
There was no consideration given by BGR for a release from its liability under the consultancy agreements to pay the monthly fees. For Food Improvers to give up the right to receive over $20,000 per month required, as a matter of contractual analysis, some form of consideration. The defendants never identified what the consideration was for each of the partners still to provide services at the level and rate that he had been given before this supposed agreement yet to abandon any right to be paid. Their argument leads to a commercially absurd result and reflects convenient self interest. It is inconsistent with their conduct in and after the meeting with Mr Lombardo and the rendering by Mr Cordato, with Mr Gulson’s agreement, in January 2006 of unbilled fees for over six years work when the proceeds of Main Camp were about to be received.
I am satisfied that in March 2001 Mr Bax, Mr Gulson and Mr Reece did agree to defer the rendering of invoices for consultancy fees until the group could pay and they did not intend to or effectively give up their rights to invoice BGR at a later time for the work that had already been or was to be performed during the period when the group could not pay them at all or in full. I find that the partners agreed to pay interest on the funds borrowed by them which they on lent to BGR. I am satisfied that Mr Gulson’s account was not reliable because it is inconsistent with the contemporaneous accounting records of BGR and the evidence of Mr Bax. (Ex 1). The payments made by Triad, Food Improvers and Karcor in March 2001 included substantial sums refunding consultancy fees which I also accept Mr Bax’s and Mr Reece’s evidence as to the meeting of March 2001. It follows that Food Improvers is entitled to invoice and claim those fees at the rate of $20,833.33 plus GST for the period in which they were not paid in full.
THE MAY 2005 BUSINESS TRIP
From early 2000, Mr Bax had increased his involvement in the sales and marketing efforts. After Mr Reece left, Mr Gobert took over his position as the group sales manager. Mr Gobert was an acknowledged world expert in tea-tree oil and its products. Mr Bax accompanied, and provided support for, Mr Gobert on his overseas visits to customers in the European Union and the United States of America. In contrast, Mr Bax had not travelled overseas with Mr Gulson since 2000.
In April 2005 Mr Gulson advised Mr Gobert that he was proposing to draw up a draft long term supply contract between the Main Camp group and an Israeli customer Biomor, for discussion at the proposed meetings with Biomor representatives and Main Camp’s Israeli distributor, Schlomo Steinberg of Petrus Chemicals in London.
On 17 May 2005 Mr Gobert met with Mr Bax and Mr Gulson at BGR’s offices in Sydney to discuss the draft Biomor contract. During the meeting Mr Gulson broke the news that he was leaving for overseas the next day to go to Singapore and that he would arrive in Newcastle, England, on 23 May. Mr Gulson referred to a two page document which he had prepared saying that it was the ‘contract’ for the Biomor meeting in London. Mr Gobert queried whether, after four weeks, the two pages were all that Mr Gulson had prepared. Mr Gulson said that Mr Cordato had let them down on the matter and that he had to prepare the document himself. Mr Bax and Mr Gobert proposed several amendments to the draft and they prepared the next version of the heads of agreement and covering email to Biomor which was attached to Mr Bax’s email to Mr Gulson of 17 May 2005. Mr Gulson asked for the email addresses of the Biomor executives and of Mr Steinberg so that he could have his wife send them the revised draft in advance of the London meeting.
The negotiations in September 2005 and all the correspondence up to the time of the distribution on 22 February 2006 demonstrated that all the shareholders were content to have a payment of $500,000 made in respect of Food Improvers’ entitlement to consultancy fees and thereafter a distribution made in accordance with the balance of option B. Having regard to the oppression which I have found in respect of the way Food Improvers has been treated, I am of opinion that it would be appropriate to make an order requiring BGR, Triad and Cordato Partners Services to cause the payment of a tax invoice for $500,000 plus GST, when issued by Food Improvers, in respect of the compromise of its entitlement to consultancy fees payable by BGR. Although the plaintiffs have also claimed that Food Improvers, should receive three months consultancy fees in lieu of notice for the wrongful termination of the consultancy agreement, I am of opinion that Mr Bax’s and Food Improvers’ conduct in September 2005 and thereafter in offering to accept payment of $500,000 plus GST for those fees under option B makes it appropriate that only that sum be ordered to be paid. The $500,000 was a compromise figure. Had it been paid, each party would have considered that to have finalised all of Food Improvers’ entitlements to fees under the consultancy agreement.
The dividend paid on 22 February 2006 should be set aside and BGR should be required to give effect to a distribution in accordance with the mechanism in option B. That is, the $500,000 consultancy fee plus GST should be paid to Food Improvers by BGR and then a dividend paid to its shareholders which would be used to repay their loan accounts. The amounts so received by BGR would then fund a second dividend to its shareholders. It may be possible for the parties to agree some payments between them of net amounts instead of this, in light of the fact that the earlier payments have been made. Food Improvers will also be entitled to have the dividends paid to it by BGR treated as fully franked.
I am of opinion that an order should be made that a substantial proportion of the legal fees paid for the defendants’ conduct of the proceedings should be borne by the second and third defendants. I propose to hear the parties as to the appropriate form of that relief. I will give the defendants an opportunity to make submissions as to whether the proportions should be 95% or a lesser sum. I should indicate that my preliminary view is that in the order of 90% of the fees payable up to the 31 July 2005 might properly be borne by BGR and that thereafter the substantial part of the proceedings appears to have been conducted for the benefit and defence of the positions of Triad and Cordato Partners Services. Although they contend that the defence of the claim to consultancy fees was for the benefit of BGR, I am of opinion that the dominant purpose of that defence was to benefit Triad and Cordato Partners Services at the expense of Food Improvers. In addition I have found that Mr Gulson did not believe that the entitlement to claim consultancy fees had ever been cancelled. In those circumstances the persistence in the defence was oppressive of Food Improvers.
In relation to the consultancy fees paid to Triad after July 2005, I find that Mr Gulson did perform some substantial work in the management of BGR. Mr Gulson’s decision to sell on the terms on which Main Camp plantation was sold has not been challenged, so that it is accepted that his work achieved a considerable benefit for all the shareholders, albeit, by excluding Mr Bax from the decision making process. I can see no justification for Triad’s consultancy fees at the rate of $20,000 per month having been established on the evidence after 28 February 2006. In my opinion it is oppressive of Food Improvers for Triad to continue to be paid at that rate. Given that Mr Gulson was performing work up to then I am inclined to the view that Triad should be remunerated at the rate agreed between him and Mr Bax before Mr Bax’s exclusion, that is $16,000 per month plus GST. Accordingly, an order should be made that Triad should repay the amounts exceeding what I have set out above as an appropriate sum.
PURCHASE OR BUYBACK OF FOOD IMPROVERS’ SHARES IN BGR
Although an order under s 233 of the Act was sought that Triad and/or Cordato Parter Services purchase Food Improver’s shares in BGR, or that BGR purchase Food Improver’s shares, this claim was not pressed in final submissions and I have not addressed it. The plaintiffs indicated, through unchallenged expert evidence, that valuers could value those shares. Since the evidence is that there is no substantive business being carried on by BGR or its subsidiaries, I am of opinion that no purpose would be served in making such an order and that the interests of the parties will be better served by an order winding up BGR. The process of valuation would be expensive and at the end of the process there would be no guarantee that, after a further hearing, the orders would be given a practical operation. Any order for purchase, or buying back, of shares would require the purchaser to pay Food Improvers some time in the future. The final resolution of this dispute should not be postponed.
SHOULD A RECEIVER BE APPOINTED?
Mr Max Prentice and Mr Murray Smith, both experienced insolvency practitioners and liquidators, gave evidence concurrently as to the likely work and associated costs involved in a court ordered liquidation of the BGR group of six companies which are defendants in the proceedings. They noted that none of those companies is now particularly active. Mr Prentice pointed out that a number of the debtors outstanding at the time he had prepared his report of September 2006 had subsequently been collected and so the work involved in a liquidation was somewhat reduced. Each gave varying estimates of the costs which a court ordered liquidation would involve. It is not necessary for me to resolve that factor. At the end of the day there was broad agreement on those costs other than those associated with the liquidation of BARM. That was because of the complication of the ongoing and unresolved litigation with the Australian Tax Office in which a refund of over $9 million is sought. Both experts agreed that a liquidator would need to become quite involved in that litigation because of the potential for personal liability were it unsuccessful. To the extent that they differ, I prefer Mr Smith’s methodology because it addressed the detailed tasks which a liquidator would need to undertake. Mr Prentice, on the other hand, formed a broad brush estimate based on his experience. I do not mean to criticise Mr Prentice for that approach but simply to prefer Mr Smith’s clearer and more closely justified method of arriving at his result. Both experts gave their evidence with complete professional detachment and undertook the task of assisting the court as one would expect from two such experienced professionals.
The plaintiffs have not given any detailed explanation as to why a receiver of BGR would be appropriate or preferable to a court appointed liquidator. On the evidence BGR has no ongoing business apart from realising its assets. The impact of appointment of a receiver or a liquidator would not appear to make any substantial difference to that exercise. A court appointed liquidator would enable BGR’s affairs to be wound up, including the use of the liquidator’s controlling shareholding in each of the other subsidiaries which are parties to appoint the liquidator or a nominee as a director and remove Mr Gulson and Mr Cordato or any other persons as directors. Again, a liquidator would be in a position to make an assessment, once he or she were appointed to the board of BARM, as to how that company’s litigation with the Australian Tax Office should be conducted. It will be necessary to have cooperation from Mr Gulson and Mr Bax in the running of that litigation, but given the potential benefit each stands to gain from a successful outcome, I am confident that each will be willing to cooperate with an independent third party in its pursuit. There was no evidence as to the cost of the receiver being any less than that of a court appointed liquidator or of any other benefit of a receiver. Indeed, Mr Prentice said that a court appointed receiver of a solvent company sometimes increases costs and does not necessarily resolve the issue.
I will hear the parties on whether it is preferable to have a liquidator rather than a receiver appointed. I cannot see on the material now before me any benefit in having a receiver as opposed to a liquidator. A liquidator will bring finality to the affairs of the parties, which in my opinion, is necessary. A receiver may leave other matters unresolved in circumstances where I do not see the parties as being able themselves to resolve them. While each of a receiver or a liquidator can make an application to the court for directions, my preliminary opinion is that an order for the winding up of BGR should be made and the liquidator will then have a discretion as to the appropriate method of bringing to an end the affairs of the other companies in the group by virtue of the liquidator’s control of them BGR’s shareholdings. In the meantime, it is necessary to order that each of BGR and the fourth, fifth, sixth, seventh and eighth defendants be restrained from entering into any transactions or making any decisions, including in relation to the BARM litigation otherwise than in the ordinary course of business, so that a liquidator can consider what ought to be done about the composition of the boards and the continuing affairs of each of those companies.
COSTS
In my opinion the Triad and Cordato Partners Services should pay the plaintiffs’ costs of the proceedings. If they are unable to do so, then the other defendants, should pay any difference in the amount the plaintiffs are able to recover from Triad and Cordato Partners Services and the amount at which the costs are taxed.
The plaintiffs have sought a special order in respect of the costs of Mr Lawson who came to Sydney to be cross-examined. The costs associated with Mr Lawson’s evidence will be the plaintiffs’ costs in the proceedings and be recoverable on a taxation. I see no need for any special order.
In their final submissions the plaintiffs asked for an order vacating an order made by Hely J on 22 July 2005 when refusing interlocutory relief. He ordered that they pay the then defendants’ costs of the amended interlocutory application up to but not including 22 July 2005. The defendants have not addressed that claim but, having regard to the false impression which Mr Gulson’s affidavit of 20 July 2005 created as to his mental condition, I would be inclined, subject to hearing submissions from the defendants, to vacate Hely J’s order as to costs.
The plaintiffs will have to bring in short minutes of order to give effect to matters in these reasons on which I have indicated I will hear them further. To the extent that either party wishes to make submissions about matters which I have said I will hear the parties on, those submissions should be filed and served on or before 4.00 pm on 13 February 2007. I will order the proceedings to stand over for making of further orders on 14 February 2007.
I certify that the preceding two hundred and eighty one (281) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares. Associate:
Dated: 12 February 2007
Counsel for the Plaintiffs: Mr F Lever SC with Mr R Alkadamani Solicitor for the Plaintiffs: Haywards Solicitors Counsel for the Defendants: Mr S Reuben with Mr D Jarrett Solicitor for the Defendants:
Counsel for Mr Cordato:
Cordato Partners
Mr I Harrison SC (written submissions only)
Solicitor for Cordato Partners Services Pty Ltd:
Cordato Partners Lawyers (written submissions only)
Date of Hearing:
Date of Final Submissions:
9 October 2006–20 October 2006 and 27 November 2006 -1 December 2006
19 December 2006
Date of Judgment: 12 February 2007
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