Trevan v Trevan

[2010] NSWSC 330

CITATION:	Trevan v Trevan & Ors [2010] NSWSC 330
HEARING DATE(S):	23 and 24 March 2010
JUDGMENT DATE :	27 April 2010
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Palmer J
DECISION:	Liquidator’s decision reversed.
CATCHWORDS:	CORPORATIONS – LIQUIDATION – PROOF OF DEBT – whether liquidator’s decision to admit proof of debt should be reversed – whether valid and binding agreement between company and shareholder for buy-back of shares.
LEGISLATION CITED:	Corporations Act 2001 (Cth) – s 1321(1) Corporations Law 1996 (Cth) – Pt 2.4, Div 4B, s 206B
CATEGORY:	Principal judgment
PARTIES:	Robert Warren Trevan (Plaintiff) Jack Harrison Trevan (First Defendant) Ian James Purchase (Second Defendant) R.H. Trevan Pty Ltd (In liq) (Third Defendant) Trevan Car Sales (In liq) (Fourth Defendant) Trevan Auto Service Pty Ltd (In liq) (Fifth Defendant)
FILE NUMBER(S):	SC 2007/256054
COUNSEL:	L. Tyndall (Plaintiff) D.J.A. Mackay (First Defendant) J. Baird (Second Defendant – Submitting appearance)
SOLICITORS:	Maxwell & Co (Plaintiff) McCartney Young (First Defendant) Shaw Reynolds Bowen & Gerathy (Second Defendant – Submitting appearance filed in Court on 23 March 2010)

2007/256054 Trevan v Trevan & Ors

JUDGMENT

27 April, 2010

Introduction

1 The applicant, Mr Jack Trevan, seeks an order under s 1321(1)(d) Corporations Act 2001 (Cth) reversing the decision of the second defendant, the liquidator of Trevan Car Sales Pty Ltd, made on 20 November 2008 to admit a Proof of Debt lodged by Jack’s brother, Mr Robert Trevan.

2 For the sake of convenience and without intending disrespect, I will refer to the brothers by their first names. I note that the liquidator has filed a submitting appearance, save as to any costs order which might be sought against him.

3 In the Proof of Debt lodged by Robert, Robert claimed that Trevan Car Sales, a company of which he and Jack were the sole directors at all relevant times, was indebted to him in an amount of $250,160 together with interest. The claim was said to arise from a contract made in March or June 1996 between Trevan Car Sales and Robert for the buy-back of 590 shares held by Robert in the company at a price of $424 per share.

4 There is no written agreement for the buy-back. There are no contemporaneous records directly evidencing the alleged buy-back agreement. Jack says that no buy-back agreement was ever made.

5 There was a problem in the way in which the case was presented. As emerged only when submissions were about to commence, the holder of the shares which are the subject of the alleged buy-back agreement was not Robert but Lismore Car Wreckers Pty Ltd, which is the trustee of Robert’s Family Trust. The liquidator’s decision to admit Robert’s claim to proof is, therefore, wrong on its face and cannot stand.

6 When I pointed out this problem, Robert’s counsel sought leave to file an Amended Interlocutory Process adding Lismore Car Wreckers as a Respondent. The liquidator indicated that he would consent to Robert’s Proof of Debt being amended to show Lismore Car Wreckers as the creditor and said that he would admit Lismore Car Wreckers’ claim for the same reasons as he had admitted Robert’s claim.

7 In the interests of determining the real issues between the parties as quickly and cheaply as possible, I granted leave to file an Amended Interlocutory Process and proceeded on the basis that Lismore Car Wreckers would submit a Proof of Debt which the liquidator would admit. I will therefore examine the merits of the assertion that there was a buy-back agreement giving rise to a debt owing by Trevan Car Sales to Lismore Car Wreckers.

8 Again, for the sake of convenience, I will refer to the shares in Trevan Car Sales held by Lismore Car Wreckers as trustee for Robert’s family trust as “Robert’s shares” and to the shares held by Jack’s family trustee company as “Jack’s shares”.

The background

9 Jack, as the applicant for an order reversing the liquidator’s decision to admit Robert’s Proof of Debt, bears the onus of showing that the liquidator was wrong, i.e. Jack must show that there was no binding buy-back agreement. However, rather than requiring Jack to prove a negative in his case in chief, I thought it expedient to require Robert, who asserts the existence of the agreement, to go first with his evidence proving its existence. The order of evidence does not, of course, reverse the onus of proof in this case.

10 Robert relies upon an oral agreement made between himself and Jack in March or June 1996 whereby Trevan Car Sales would buy-back such of Robert’s shares in Trevan Car Sales as would leave the remaining shares in the company equally divided between the brothers’ interests. For such an agreement to give rise to a debt provable in the liquidation of Trevan Car Sales, the company itself had to be a party to the buy-back contract as purchaser, with Lismore Car Wreckers as vendor. If such a buy-back contract was made, it was unquestionably a selective buy-back subject to the provisions of Pt 2.4 Div 4B of the Corporations Law 1996 (Cth) (“the Law”), which was applicable in 1996 when the alleged agreement was made.

11 Section 206B of the Law provided that a company “may buy back its own shares (other than redeemable preference shares) if it follows the procedures laid down in this Division”. It is not disputed that none of the procedures for a selective buy-back was followed, or even set in train, at any time after the alleged buy-back agreement for Robert’s shares in Trevan Car Sales.

12 The absence of compliance with the procedural requirements for a buy-back contained in the Law is of special significance because the parties had the benefit of skilled and experienced lawyers and accountants in working out and implementing in March 1996 a share buy-back scheme for a related company, R.H. Trevan Pty Ltd. In that scheme, the shareholding of the family trust of Richard Trevan, the elder brother of Robert and Jack, was bought back for a sum in excess of $1 million. All concerned in the present dispute were acutely aware that if any buy-back agreement for the shares in Trevan Car Sales were to be implemented, the procedures of Pt 2.4 Div 4B would have to be observed.

The accountant’s evidence

13 Mr Lovell was the accountant for the Trevan group of companies at all relevant times. He had acted as accountant of the group for many years and he was intimately involved in the buy-back scheme for the shares in R.H. Trevan. It is clear that Robert and Jack relied heavily on his advice as to structuring of the group of companies and they also relied upon him to implement whatever changes to the structure they had agreed.

14 Mr Lovell provided a statutory declaration in support of Robert’s Proof of Debt in which he asserted that a buy-back agreement in respect of Robert’s shares in Trevan Car Sales had been made. Evidently, the liquidator has relied upon this statutory declaration in admitting Robert’s Proof of Debt.

15 In his statutory declaration, Mr Lovell explained that in 1996 Mr Richard Trevan wished to retire from the business and to have his shares in R.H. Trevan and Trevan Car Sales bought out. A plan was worked out whereby the companies would borrow funds in order to buy-back the shares held by Richard’s family trust. The buy-back scheme was carried out in accordance with the procedures required by the Law. Extraordinary general meetings of both companies were held on 19 January 1996 which adopted new articles of association and approved a buy-back scheme in accordance with an information statement which had been prepared.

16 A short time later, Robert and Jack agreed that the only “outsider” shareholder in R.H. Trevan, i.e. the estate of Isobel Trevan, should also be bought out for the same price as had been paid for the shares held by Richard’s family trust.

17 The buy-back of the shares held by the estate of Isobel Trevan in R.H. Trevan was carried out in accordance with the procedures required by the Law. A resolution was passed at an extraordinary general meeting of members of R.H. Trevan held on 28 March 1996. The meeting, attended by Robert and Jack, resolved to approve a buy-back scheme in accordance with an information statement dated 28 March 1996, signed by both brothers. The scheme provided for a buy-back not only of all the shares held by the estate of Isobel Trevan but also of 450 shares in R.H. Trevan held by Jack’s family trust company. The price per share was $136. The scheme was expressly conditional upon Jack’s family trust company causing the purchase price for its shares, namely $60,520, to be lent back to R.H. Trevan unsecured “and upon such terms as to repayment as the Directors shall resolve from time to time”.

18 The information statement dated 28 March 1996 signed by the brothers explained the advantages of the buy-back scheme as including “the vesting of all shares in the working directors or entities associated with them in equal shares”. The buy-back of 445 shares in R.H. Trevan from Jack’s family trust left the brothers’ shareholding in R.H. Trevan, through their family trusts, equal.

19 Robert says that the buy-back agreement for Jack’s shares in R.H. Trevan was part of an overall agreement that the brothers’ shareholding interests in both R.H. Trevan and Trevan Car Sales would be equalised by buy-backs at the same price per share as had been agreed for the buy-backs of the shares held by Richard’s family trust.

20 The essence of the evidence in support of Robert’s case is contained in the following paragraphs from Mr Lovell’s Statutory Declaration:

“6. At the time of the buy back [of Richard Trevan’s shares] it was also agreed by the remaining directors and shareholders, Jack and Bob Trevan, that they would adjust their shareholdings so that they each held 50% in the two companies. As a result of that agreement and using the share value paid to Dick Trevan 445 of the shares held by the Jack Trevan Family Trust in R.H. Trevan Pty Ltd were repurchased at a price of $60,520.00. The amount was repaid to Jack Trevan over the years following the agreement in March 1996 at the rate of $630.00 weekly. Of this amount $59,630.00 was paid by way of a fully franked dividend from R.H. Trevan Pty Ltd declared in 1996 and paid by the weekly instalments of $630.00.

7. It was also agreed but not acted upon that the operating company, Trevan Car Sales Pty Ltd would also buy back 590 of the shares held by Bob Trevan Family Trust in the Company for an agreed value of $250,160.00 which was the value per share agreed with Dick Trevan as referred to in paragraph 5 above.

8. That transaction was not finalised for a number of reasons:

At the time of Dick Trevan’s retirement it was necessary for another Dealer Principal to be appointed and it was a requirement of the Ford Motor Company that such a dealer principal held a majority shareholding in the operating company. Bob Trevan was appointed Dealer Principal and he held a majority of the shares in Trevan Car Sales Pty Ltd.

The Company did not have the cash available to make the payment and would have to have borrowed the funds which would have been very imprudent having in mind the already heavy borrowings which had been made to finance the other share buy backs.

The taxation consequences of the share buy back are that the amount received by the shareholder over and above the par value of $2.00 is a dividend and as all the franking credits had been used up in relation to the transaction with Dick Trevan, the dividend that would have been paid to the Bob Trevan Family Trust would have been fully taxable. In these circumstances the Bob Trevan Family Trust would be paying tax mostly at the rate of 48.5 cents in the dollar on the dividend of $248,980.00 but would not receive any cash as consideration for the share buy back and thus would have been severely prejudiced.

9. It was agreed that the deal would be finalised at a later date when the cash position of the companies permitted that to occur.

10. At the time of the share buy back the business affairs of the group were also reorganised and a new company, Trevan Auto Services Pty Ltd, was incorporated to take over the workshop and the sale of spare parts. These aspects of the business had been conducted in Ballina by Coastline Ford and by RH Trevan Pty Ltd in Lismore. The structure of the operation was that RH Trevan Pty Ltd owned the real estate assets in both Lismore and Ballina. Trevan Car Sales Pty Ltd was the active Ford dealer for new and used cars in both Ballina and Lismore and Trevan Auto Services Pty Ltd conducted the service and spare parts businesses in both locations.

11. The structure was such that the major assets were held by RH Trevan Pty Ltd and that Company borrowed the funds from the National Australia Bank which were in part used to buy back the shares of Dick Trevan and the Dick Trevan Family Trust and the Estate of the Late Isobel Trevan and were in part on lent to Trevan Car Sales Pty Ltd to buy back the shares of both Dick Trevan and his family trust.

12. There were Minutes of the meetings of Directors reflecting the actual share buy backs as referred to above but there was no formal notation of the arrangement regarding the agreement to buy back Bob Trevan’s shares. A draft Minute for that buy back was prepared by Bruce Gordon, the Company’s then Solicitor but it was not executed because the transaction did not proceed. That draft indicates that it was intended to approve the buy back on 30 June 1997.

13. However, to the best of my recollection a document was prepared by Bruce Gordon described as a “Shareholder’s Agreement”. That agreement noted that the shareholding in Trevan Car Sales Pty Ltd was in fact 77% Bob Trevan and the Bob Trevan Family Trust and 23% Jack Trevan and the Jack Trevan Family Trust but that it had been agreed that the directors and shareholders would treat the Company as if there was an equal shareholding for the purposes of decision making and other aspects of corporate governance. That document was known as the ‘under the table agreement’ and it protected Jack Trevan’s interests in the Company as otherwise he was a minority shareholder. I believe that the document was signed but a copy cannot be located.

14. When the businesses were ultimately sold in 2005 funds became available and in particular there was a substantial tax free pre CGT capital gain in both Trevan Car Sales Pty Ltd and RH Trevan Pty Ltd. However the arrangement regarding the share buy back of the shares held by the Bob Trevan Family Trust was not completed at that time and all funds were ultimately repaid from Trevan Car Sales Pty Ltd and Trevan Auto Services Pty Ltd to RH Trevan Pty Ltd and are still held by that Company.”

21 The arrangement regarding the share buy-back of the shares held by the Trevan Family Trust was not completed when the businesses were sold because, by that time, Robert and Jack had fallen out and Jack would not agree to a buy-back of Robert’s shares in Trevan Car Sales. Without Jack’s agreement, the buy-back could not proceed in accordance with the requirements of the Corporations Act.

Jack’s evidence

22 Jack says that in late 1995 or early 1996 he agreed with Robert that their shareholding in R.H. Trevan and Trevan Car Sales would be equalised. However, Jack says that it was not agreed that money would actually be paid for any shares to be bought back. He says that the payment of $60,520 for the buy-back of 445 shares held by his family trust in R.H. Trevan was “window dressing” to give the appearance of commercial reality to an artificially low price of $136 per share in R.H. Trevan which he and Robert were endeavouring to negotiate with Richard for the buy-back of Richard’s shares. Jack says that it was Mr Lovell who suggested this stratagem of deceiving Richard. He said further that the purchase price of $60,520 was never actually paid, the transaction being effected by book entries whereby his trust company was credited as having received the purchase price, another family company lent the same amount to R.H. Trevan and the loan was gradually reduced, without his consent, by treating his salary payments as repayments of the loan.

23 Mr Lovell denies that the buy-back of the shares in R.H. Trevan held by Jack’s family trust was anything but a genuine transaction which took place in the terms recorded in the company’s books.

Was there a concluded and binding agreement?

24 I do not need to resolve the issue of credit between Jack and Mr Lovell because Mr Lovell’s evidence and contemporaneous records make it clear that, whatever may have happened with the buy-back of Jack’s shares in R.H. Trevan, no contract between Trevan Car Sales and Lismore Car Wreckers came into existence in June 1996 for the buy-back of Lismore Car Wreckers’ shares in Trevan Car Sales, as claimed in Robert’s Proof of Debt or as may be claimed in a new Proof of Debt to be lodged by Lismore Car Wreckers. Further, no contract between Trevan Car Sales and Lismore Car Wreckers for the buy-back has come into existence at any time after June 1996. The reasons are as follows.

25 As I have noted above, Robert and Jack were relying heavily on their advisers – Mr Stone, the Group’s solicitor and Mr Lovell, the Group’s accountant – to advise them and the companies in the Trevan Group and to implement, validly and effectively, whatever transactions were agreed. Mr Stone and Mr Lovell were acutely aware of the buy-back procedures of the Law in early 1996 and they implemented those procedures for the buy-backs of shares in R.H. Trevan and Trevan Car Sales effected in February and March 1996.

26 Mr Lovell made it clear in his evidence that, in drawing up the balance sheets and financial accounts of Trevan Car Sales for the years after 30 June 1996, he never acknowledged any liability of Trevan Car Sales for payment to Lismore Car Wreckers of any consideration for a buy-back of shares because he did not believe that Trevan Car Sales had any contractual liability for that buy-back. Mr Lovell believed that there would be no such contractual liability unless and until the necessary shareholders’ resolutions had been passed and the procedures required by the buy-back provisions of the Law had been carried out. Until Trevan Car Sales was in a financial position to implement the buy-back, Mr Lovell understood that all that was in place was an understanding between Robert and Jack as to what should happen in the future.

27 Mr Lovell’s understanding and intention was obviously shared by Robert and Jack. The “Shareholders’ Agreement” or “under the table agreement” referred to in paragraph 13 of Mr Lovell’s statutory declaration acknowledged the continuing inequality of shareholding in Trevan Car Sales between the brothers’ interests but provided for equality of treatment nonetheless. No-one says that it provided for any payment to be made to Robert in consideration of his agreement, as majority shareholder, to treat Jack, as minority shareholder, equally.

28 It is clear that by March 1997 a buy-back of Robert’s shares in Trevan Car Sales was only a possibility, realisation of which depended upon what happened to the Group’s business in the future. It is admitted by Mr Lovell in his statutory declaration that in 1996 and 1997, Trevan Car Sales was not financially able to borrow sufficient funds to enable a buy-back of Robert’s shares to proceed. Further, in a letter dated 10 March 1997 to Robert and Jack, Mr Lovell gave extensive advice about various proposals for the restructuring of the businesses in the “Trevan Group”, noting in respect of Trevan Car Sales that “it is intended in the near future to repurchase 590 shares from Bob Trevan Family Trust in order to equalise the shareholding of the remaining shareholders”.

29 As Mr Lovell says, from March 1996 until the present time there has been at most – if one accepts Robert’s evidence – no more than an understanding between Robert and Jack that at some indeterminate time in the future Trevan Car Sales would buy out Robert’s shares at an agreed price. Even though Robert and Jack, at all relevant times, were the sole directors of Trevan Car Sales and controlled its shareholders, their understanding could not, in law, dispense with the requirement of the Corporations Law and, later, the Corporations Act, that the procedures for a buy-back be carried out before the buy-back could be implemented: the protections afforded to external creditors of Trevan Car Sales could not be removed merely by agreement between the directors and shareholders of the company. The understanding of Robert and Jack must, by necessary implication, have included the proviso that Trevan Car Sales would only be contractually bound to any buy-back if the buy-back could lawfully be carried out in accordance with the requirements of the applicable Corporations legislation.

30 When the business of Trevan Car Sales was sold in 2005 and the company was at last in a financial position to undertake a buy-back of Robert’s shares, a shareholders’ resolution was necessary in accordance with the provisions of the Corporations Act but it could not be procured because by that time the brothers had fallen out and did not agree on the terms of a buy-back. If there is any binding contract relating to a buy-back in existence, it is between the brothers themselves and it is to the effect that they, as directors of Trevan Car Sales and controllers of the shareholders of that company, will co-operate in procuring the company to undertake a buy-back lawfully in accordance with the requirements of the Corporations Act. If Jack has breached that agreement, Robert’s remedy is a claim against Jack for damages. Whether Robert has a claim in damages against Jack is not the issue in this case and I do not attempt to decide it.

31 For these reasons, I am satisfied that Trevan Car Sales was never contractually bound to buy back any of Lismore Car Wreckers’ shares and that the liquidator has wrongly admitted Robert’s Proof of Debt for the alleged buy-back consideration. For the same reasons, the liquidator would be wrong to admit a Proof of Debt for the same amount lodged by Lismore Car Wreckers.

Orders

32 I do not know whether Lismore Car Wreckers has yet lodged a Proof of Debt and, if so, whether it has yet been formally accepted by the liquidator. I think that the following orders are therefore appropriate:

i) reverse the decision of the Second Defendant made on 20 November 2008 to admit the Proof of Debt of the Plaintiff in the amount of $250,160 for a share buy-back in Trevan Car Sales Pty Ltd (in liquidation);

ii) direct the Second Defendant to reject any proof of debt lodged by Lismore Car Wreckers Pty Ltd for an amount of $250,160 for a share buy-back in Trevan Car Sales Pty Ltd (in liquidation).

33 I will hear the parties as to costs.

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