Vadori v AAV Plumbing
[2010] NSWSC 274
•13 April 2010
Reported Decision:
77 ACSR 616
New South Wales
Supreme Court
CITATION: Vadori v AAV Plumbing [2010] NSWSC 274 HEARING DATE(S): 2, 3 and 4 February 2010
JUDGMENT DATE :
13 April 2010JURISDICTION: Equity Division JUDGMENT OF: Ward J DECISION: 1. Declare that the affairs of the first defendant have been conducted in a manner that is oppressive to, unfairly prejudicial to, or unfairly discriminatory against the plaintiff within the meaning of section 232 of the Corporations Act (Cth) 2001.
2. Order the fourth and fifth defendants to purchase the share of the plaintiff in AAV Plumbing Pty Limited for the sum of $190,800.CATCHWORDS: CORPORATIONS – alleged breach of s 232 Corporations Act – diversion of corporate opportunities – breakdown of business relationship and cessation of trading of company – main business diverted to new company owned by majority of shareholders and directors – oppressive conduct found – majority shareholders ordered to purchase minority shareholder’s share in company – principles concerning valuation of shares in oppression suits – consideration of value attributable for goodwill – share valued largely by reference to value of company’s claim against directors for breach of statutory and fiduciary duties in diversion of corporate opportunities LEGISLATION CITED: Corporations Act 2001 (Cth) CATEGORY: Principal judgment CASES CITED: Addstead Pty Ltd v Liddan Pty Ltd [(1997) 25 ACSR 175
Backoffice Investments v Campbell [2007] NSWSC 161; (2007) 61 ACSR 144 (2007) 25 ACLC 302
Birtchnell v. Equity Trustees, Executors and Agency Co. Ltd. [1929] HCA 24; (1929) 42 CLR 384,
Boardman v Phipps [1966] UKHL 2; (1967) 2 AC 46; [1966] 3 All ER 721
Campbell and Another v BackOffice Investments Pty Limited [2009] HCA 25; (2009) 238 CLR 304; (2009) 257 ALR 610; (2009) 73 ACSR 1
Campbell v BackOffice Investments Pty Ltd [2008] NSWCA 95
Campbell v Backoffice Investments Pty Ltd [2009] HCA 36; (2009) 259 ALR 402; (2009) 83 ALJR 110
Canadian Aero Service Ltd v O'Malley [1974] SCR 592, 40 DLR (3d) 371
Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; (2008) 65 ACSR 661; 245 ALR 780
Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178
Colour Control Centre Pty Ltd v Ty [(1996) 39 AILR 4,316
Doyle v Australian Securities and Investments Commission (ASIC) [2005] HCA 78; (2005) 227 CLR 18; (2005) 223 ALR 218; (2005) 56 ACSR 159
Dwyer v Lippiatt; Dwyer v Backpackers R Us, at 355; Drinkwater v Caddyrack Pty Ltd [1997] NSWSC 431
Ehsman v Nutectime Int’l Pty Ltd [2006] NSWSC 887; (2006) 58 ACSR 705
ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1995) 15 ACSR 536
Fexuto Pty Limited v Bosnjak Holdings [2001] NSWCA 97; (2001) 37 ACSR 672; (2001) 19 ACLC 856
Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732; 23 ACLC 1100
Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal) Limited [1964] 2 QB 480; [1964] 1 All ER 630; [1964] 2 WLR 618
Furs v Tomkies (1936) 54 CLR 583
Gemstone Corp of Australia Ltd v Grasso (1994) 13 ACSR 695; 12 ACLC 653
Goozee v Graphic World Group Holdings Pty Ltd [2002] NSWSC 640; (2002) 42 ACSR 534
Green & Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41
Industrial Development Consultant Ltd v Cooley [1972] 1 WLR 443
Keech v Sandford (1726) 2 White & Tud LC 706; [1558-1774] All ER Rep 230; (1726) Cas temp King 61; (1726) 2 Eq Cas Abr 741; (1726) 25 ER 223
Lord Corporation Pty Ltd v Green [(1991) 22 NSWLR 532-4
Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859
Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452
Mopeke Pty Ltd v Airport Fine Foods Pty Ltd (2007) 61 ACSR 395; 25 ACLC 254; [2007] NSWSC 153
Mordecai v Mordecai [(1988) 12 NSWLR 58
Natural Extracts Pty Ltd v Stotter [(1997) 24 ACSR 110
Pacifica Shipping Co Ltd v Andersen [1986] 2 NZ LR 328
Peso Silver Mines Ltd (NPL) v Cropper (1966) 58 DLR (2d) 1
Ragless v IPA Holdings Pty Ltd (in liq) [2008] SASC 90; (2008) 65 ACSR 700; 254 LSJS 225
Rankine v Rankine (1995) 124 FLR 340
Re a Company (No 002612 of 1984); Dwyer v Lippiatt; Dwyer v Backpackers R Us.Com Pty Ltd (2004) 50 ACSR 333; [2004] QSC 281
Re a Company (No 002612) (1986) 2 BCC 99,453
Re Baumler (UK) Ltd [2005] 1 BCLC 92; [2004] All ER (D) 139; [2005] BCC 181 (Ch D)
Re Bright Pine Mills Pty Limited [1969] VR 1002
Re Hollen Australia Pty Ltd; Holt v Burnside [2009] VSC 95
Re Scottish Co-operative Wholesale Society Limited v Meyer [1959] AC 324; [1958] 3 All ER 66
Regal (Hastings) v Gulliver [1967] 2 AC 134; [1942] 1 All ER 378
Roberts v Walter Developments Pty Limited (1997) 15 ACLC 882
Sanford v Sanford Courier Service Pty Ltd (1986) 10 ACLR 549; (1987) 5 ACLC 394
Scottish Co-operative Wholesale Society v Meyer; Webb v Stanfield [1991] 1 Qd R 593; (1990) 2 ACSR 283; 8 ACLC 715
Shelton v NRMA [2004] FCA 1393; (2004) 51 ACSR 278
Short v Crawley (No 30) [2007] NSWSC 1322
Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313
Thomas v HW Thomas Ltd [1984] 1 NZLR 686, at 694; (1984) 2 ACLC 610; (1984) 2 NZCLC 99,14
Victoria, Spincode Pty Ltd v Look Software Pty Ltd [(2001) 4 VR 501
Wayde v NSW Rugby League Ltd [1985] HCA 68; (1985) 180 CLR 459; (1985) 61 ALR 225, at 234
Webb v Stanfield [1991] 1 Qd R 594TEXTS CITED: Equity and Commercial Relationships, ed. PD Finn, Law Book Company, 1987
Ford's Principles of Corporations Law (13th Edition), eds RP Austin, IM RamsayPARTIES: Lisa Vadori (Plaintiff)
AAV Plumbing (First Defendant)
Andrew Peter Antunovich (Second Defendant)
Paul Antunovich (Third Defendant)
Kathryn Anne Antunovich (Fourth Defendant)
Lisa Antunovich (Fifth Defendant)
Peter Vadori (Sixth Defendant)FILE NUMBER(S): SC 254946 of 2007 COUNSEL: M Lawson (Plaintiff)
No appearance (First Defendant)
M W Young (Second to Fifth Defendants)
In Person (Sixth Defendant)SOLICITORS: Thomas Mitchell Solicitors (Plaintiff)
No appearance (First Defendant)
Antunes Solicitors (Second to Fifth Defendants)
In Person (Sixth Defendant)
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
WARD J
TUESDAY 13 APRIL 2010
2007/254946 LISA VADORI V AAV PLUMBING PTY LIMITED & ORS
JUDGMENT
1 These proceedings arise from the breakdown in the working relationship between Mr Andrew Antunovich, his brother Mr Paul Antunovich, and Mr Peter Vadori (all plumbers by trade), who are the three directors of the first defendant, AAV Plumbing Pty Limited, and the manner in which in late 2006 that company ceased to carry on its plumbing business.
2 Mrs Lisa Vadori, a one third shareholder of AAV and the wife of one of the three directors (Mr Peter Vadori), alleges that the affairs of AAV from around late November 2006 (in relation to the cessation of the plumbing business of the company) have been conducted in a manner contrary to the interests of the members of the company and oppressive to, unfairly prejudicial to or discriminatory against, her interests, in breach of s 232 of the Corporations Act 2001 (Cth).
3 Mrs Vadori is seeking an order under s 233 of the Act that the majority shareholders (the fourth and fifth defendants, Mrs Kathryn Antunovich and Mrs Lisa Antunovich, being the wives of the other two directors) purchase her shareholding for a sum to be set by the court. In the alternative, she seeks an order that the company be wound up under s 233 of the Act.
4 Mrs Vadori also seeks, as an alternative to her oppression suit, leave to commence proceedings against the directors of the company for damages for breach of statutory and fiduciary duties by reason of the same conduct which it is alleged was oppressive.
5 For convenience, I will refer to each of the directors and their wives (other than Lisa Vadori) by their first name (however, to avoid confusion between the two Lisa’s, I will refer to the plaintiff as Mrs Vadori). I note that, of the six defendants, AAV did not appear and was not represented at the hearing; Peter appeared in person and was not represented at the hearing. Where I refer collectively to the defendants in these reasons, I am referring to the second to fifth defendants only (those being the shareholders and directors of AAV other than Mrs Vadori and her husband).
6 Broadly speaking, the steps that were taken to divide up the business and assets of AAV in late 2006 are not in dispute (though there is a dispute as to whether there was any agreement at all between the directors in relation to the taking of some of those steps, such as what was to happen with the company’s stock in trade). Where there is a more substantive dispute is as to whether any agreement reached between Andrew, Paul and Peter in late 2006 (as to which the basis on which the assets and work in progress of the company were to be divided up between them or the new corporate entities with which the Antunovichs, on the one hand, and the Vadori’s, on the other, were by then associated) was one entered into by Peter as agent for his wife or was one in respect of which she is estopped from making the complaints now made as to what has occurred.
7 In particular, the defendants plead (in paragraph 29(c) of their Defence dated 1 May 2008) that, from the time that Mrs Vadori became a shareholder (in June 2005), Peter acted as her agent and that he, with the full knowledge and consent of Mrs Vadori, participated in the direction of the affairs of AAV (including the decision to dissolve the business of the company and to allocate equipment and assets as between the three directors). It is pleaded that, prior to March 2007, Peter (whether on behalf of himself or as agent for Mrs Vadori) did not raise any objection to the resolutions made at a meeting on 21 November 2006 (that AAV would cease to trade and that its assets would be allocated as between the three directors) or the course of action undertaken pursuant to that agreement, until such time as the directors had reasonably undertaken action pursuant to those resolutions and to their detriment relying on those resolutions, as a result of which (ie as a result of Peter’s failure to raise an objection to the arrangements at an earlier time) the defendants contend that Mrs Vadori is estopped from seeking the remedies that she now seeks.
8 In the alternative, it is pleaded in paragraph 29(d) of the Defence that AAV was conducted in the form of a quasi-partnership whereby the directors were quasi-partners and had conducted the business of the company on that basis, including acting as agent for their respective spouses (the shareholders). It is alleged that (as directors and quasi-partners) Andrew, Paul and Peter came to an agreement to cease trading and to allocate the assets of the company between them; that the defendants relied on that agreement and reasonably acted to their detriment in so doing and that, as Peter was acting as agent for Mrs Vadori, Mrs Vadori is now estopped from bringing these proceedings on the stated basis that each quasi-partner is entitled to rely on the agreements arrived at between them and reasonably to act on them.
9 As can be seen, each of the pleaded estoppels is predicated on a finding that Peter was acting as agent for his wife in the conduct of the company’s business and, more relevantly, in the decision to cause it to cease trading and to divide up its assets (not an estoppel arising from any silence or conduct on the part of Mrs Vadori in her own right).
10 Mrs Vadori’s complaint of oppressive conduct and breach of duty by the directors, as pleaded in paragraph 23 of the Statement of Claim by reference to the preceding paragraphs (relevantly including 11-22), relates to the manner in which, on the parting of the ways between the three directors, the business and assets of the company were, in effect, split up between the three directors without reference to Mrs Vadori as one of the three shareholders of the company.
11 Relevantly (in light of the submissions which have been made for the defendants as to the ambit of the oppression pleading), Mrs Vadori’s allegation of oppression includes the alleged breach of statutory and fiduciary duties by the directors pleaded in paragraph 18 of the Statement of Claim (as seemingly recognised by the defendants insofar as their Counsel, Mr Young, submitted, when contending that the grant of leave to commence proceedings in the name of the company would not be in its best interests, that it would be difficult to find any cause of action to sustain a derivative suit which would not also amount to oppression).
12 It is alleged that, as from 1 December 2006, the plumbing business of AAV “was essentially transferred” to a new company in which the defendants were directors or shareholders respectively (A & P Plumbing Pty Limited) (para 11), as was the work in progress of AAV (comprised by works which were the subject of then contracts to be completed by AAV, being Montgomery Homes contracts in the value of $148,934.30 and Contour Building and Construction contracts to the value of $98,015, as particularised) (para 12); and a significant proportion of AAV’s assets and intellectual property (para 16), and that this took place with no compensation or payment of moneys to AAV (paras 11, 14, 17). As seems to have been a matter of fundamental dispute between the parties, the alleged transfer of business also took place with no accounting for any goodwill in the business of AAV. The difference between the parties as to whether there was any, and if so the value of any, goodwill in the business of AAV as at 1 December 2006, largely explains the difference between the amount which Counsel for Mrs Vadori, Mr Lawson, contends is the appropriate price to be paid for her share in the company (if a compulsory purchase order is granted), that being in the order of $250,000, and the nominal amount which is all that Mr Young submits should be ordered if (which the defendants deny) any oppressive conduct is established to have occurred.
13 Paragraph 15 pleads that all plumbing works associated with the contracts and quotations detailed in paragraph 13 (ie, the existing contracts said to have been ‘transferred’ to A & P Plumbing) were obtained ‘through’ the defendants by reason of their position as members and/or directors of AAV.
14 The assets and intellectual property said to have been transferred to A & P Plumbing (for no consideration) are particularised in paragraph 16 as being: AAV’s leasehold interest in its business premises; all but one of its employees; its stock and plumbing supplies; and its office equipment and furniture. There is a dispute as to a number of these allegations (including as to whether employees can be regarded as transferable assets) but, in particular, I note that in relation to the stock it is said by the defendants that there was a three way split of the stock in trade agreed, as between Andrew, Paul and Peter, but that Peter has since failed or refused to collect his one-third share of stock, which nevertheless remains available to be collected. (Mrs Vadori disputes that there was any such agreement (or, if there was, that it binds her) and asserted in the witness box that the stock said to be available for collection is not the same stock as that held by AAV in 2006. However, it is not apparent that any steps have been taken to verify whether the stock in question is the same stock and I do not see that I am in a position to make any finding in that respect.)
15 Paragraph 18 pleads that on or about 1 December 2006, the defendants (including the sixth defendant, Peter) commenced using motor vehicles and equipment owned by AAV for business ventures other than that associated with AAV.
16 Paragraph 22 pleads a breach of ss 180, 182, 182 and 183 of the Corporations Act and/or of the directors’ fiduciary duties, by reference to the use by Andrew and Paul of their positions as directors to obtain a profit for A & P Plumbing to which AAV is said to be entitled (referring, as I understand it, both to the existing work taken over from AAV and to the future work opportunities arising from the relationship between AAV’s existing clients and AAV’s respective directors, particularly Andrew).
17 Complaint is also made (paras 19 – 21) as to the payment, out of funds from AAV’s bank account, on 20 December 2006 of moneys to the defendants either without the consent of the members and directors (in the case of two payments of just over $4,000 to Andrew and Paul, said by them to be holiday pay) or as dividends without payment (at that time) of a corresponding dividend payment to Mrs Vadori (in the case of the two dividend payments of $3,340 to each of Kathryn and Lisa).
18 During the course of cross-examination of Paul, questions were raised as to the payment of AAV funds to meet other expenses, such as mortgage repayments for real estate not owned by the company but by the partnership and the making of superannuation contributions on behalf of Andrew and Paul (see, for example, at T 94/96). There was also some cross-examination of Paul as to the payment of duty chargeable in respect of a contract for sale of the neighbouring land to the AAV business premises, ultimately acquired by the partnership, from which Mr Lawson suggested that money may have been paid by the company which was not to its benefit (but for the benefit of the partnership between Andrew, Paul and Peter).
19 Objection was taken to this line of questioning on the basis that these were not matters pleaded in the Statement of Claim. The oppressive conduct there pleaded (as summarised above) relates solely to the conduct of the defendants from around late November 2006 in respect of what might be described as the practical winding up of AAV’s plumbing business (AAV itself not having been wound up at any stage).
20 Whether or not conduct of this kind might properly form part of claims made for breach of directors’ duties, if leave to commence derivative proceedings were to be granted, these were not matters pleaded in relation to the derivative suit for which leave was sought in these proceedings nor were they pleaded as conduct in breach of s 232 of the Corporations Act.
21 Mr Lawson nevertheless submitted that if there were to be a compulsory purchase order (and an adjustment to the price per share as valued by the different valuers who gave evidence in these proceedings) it might be necessary to take into account any sum of money that the company had paid out to a third party’s benefit and which might need to be returned to the company.
22 Suffice it to note, at this stage, that when the company’s accountant (Mr Jarrod Bramble of Cutcher & Neale) was taken in the witness box to various accounting entries, Mr Bramble said that there was a loan account in place when the business was transferred from the partnership to the company and that this loan account had been left in place as between AAV and the partnership. (He said that this was where the ‘ad hoc’ lease arrangement in relation to AAVs business premises was in place). Mr Bramble expected that there would be internal accounting entries to record payments made out of company funds for the benefit of the partnership or the directors (T 112) and took me through the general ledger report to confirm that the mortgage repayments for the property owned by the three individual directors in partnership had been accounted for in the partnership accounts as a loan from the company to the partners (by reference to p 464 of the court bundle). Presumably, therefore, any repayment of moneys of this kind would be dealt with in a winding up of the company, if not before.
23 I have proceeded on the basis of the claims as pleaded and therefore have not taken into account, in determining the claims now brought against the defendants, the making of any payments out of company funds towards partnership or personal expenses at an earlier time. In any event, the evidence from Mr Bramble suggests that the criticism made of the defendants in this regard is unwarranted.
24 There is no dispute but that A & P Plumbing in fact took on the task of completing the existing work, which AAV had on its books as at 1 December 2006. Both Andrew and Paul accepted in the witness box that no payment was made by A & P Plumbing to AAV in relation to that work (Paul - T 78.2, T 84.33-42; Andrew T 158) and that there was no attempt to pay to AAV any amount by way of the profit margin that A & P Plumbing had received (or that AAV might have expected to receive) from that work (Paul - T 78.7; T 84.33-42; Andrew – T 158).
25 It is not disputed that AAV’s bank account (which was in credit as at November 2006) is currently overdrawn; that the company continues to incur accounting and other fees at a time when it is not trading; and that it has no function other than as a trustee of the existing superannuation and investment funds held for the benefit of the three directors of AAV.
26 AAV’s only assets at present (it seemingly being accepted that no goodwill now reposes in the company, whatever may have been the case as at late 2006) appear to be the remaining one-third of the company’s stock as at December 2006 (which is said by the defendants still to be held by A & P Plumbing awaiting collection by Peter on behalf of his wife and/or their new company, Vadori Plumbing); any debts represented by the loan balances shown in the company’s accounts; and (significantly in my view) the benefit of any chose in action the company may have by way of a claim against one or more of its directors for breach of duty in relation to the matters of which Mrs Vadori complains.
27 Expert evidence was adduced by both sides in the proceedings (from Mr Gregory Lawrence, who was called by Mrs Vadori, and from Mr Robin Humphreys, who was called by the defendants). With the consent of the parties, at the outset of the hearing I directed that the experts confer in order to see if they were able to reach agreement as to the issues relating to the valuation of the business and of Mrs Vadori’s share in the company as at the relevant time. They did so and a handwritten joint report dated 3 February 2010 was tendered (Ex 4). The experts have agreed that (based on the factors stated at the commencement of the report) the value of the business of AAV as at 1 December 2006 was $750,000, of which the value of goodwill (assessed on the basis that the business was a going concern and with no threat of employees/directors leaving the company) represented $500,000.
28 In particular, the experts agreed that on the said valuation of the business of the company, the value of each shareholder’s interest in the company would be $250,000 (without taking into account any minority interest discount that would be applicable were the share to be offered outside the current shareholders’ group) but that if a minority interest discount were to be applicable it would be in the range of 15% - 40%, depending on (unidentified) circumstances.
29 The experts further agreed that if certain assumptions were to be made (namely, assumptions as to the intentions of the directors to leave and to set up business in opposition to the company with some or all of the company’s employees and as to the satisfaction of the company’s regular clients with the work of the current directors), then this would “completely overwhelm the original valuation”. The experts concluded that: “If the results of the assumptions are taken to the worst case scenario, the experts agree that the company would be worth little more than its net asset value of some $250,000. Some residual goodwill may remain depending on the extent to which the circumstances occur [though what that extent might be was not explored]”.
30 Mrs Vadori seeks the making of a compulsory purchase order against the remaining two one-third shareholders (Kathryn and Lisa) in the sum of $250,000. (It is said that a purchase of shares by the company by way of a reduction in share capital would have no utility because the company has no money.) Alternatively, a winding up order is sought by way of remedy for the alleged oppressive conduct but in those circumstances Mrs Vadori would seek to postpone the operation of any winding up order until after the outcome of the derivative suit she seeks leave to bring.
31 As I understand it, the claim for leave to commence a derivative suit is pressed only if Mrs Vadori fails in her oppression suit (or, perhaps, if she fails to obtain the relief she seeks by way of a compulsory purchase order in that suit).
Issues
32 Both sides handed up, in accordance with the pre-trial directions I had made, a statement of the issues they perceived as arising for determination in these proceedings. Broadly, those issues overlap. Some, such as the questions as to whether goodwill reposed in the company (or in one or more of the individual directors) or as to the transfer of work in progress, which were specifically raised as issues by Mr Lawson, seem to me to be subsumed in one or more of the issues as stated more generally by Mr Young (such as issues 1 and 4) or not to be pressed at all (in that I did not understand Mr Young to be asserting that goodwill reposed in the individual directors; simply that, by reason of the winding up of the business affairs of AAV, there was no goodwill left as at December 2006 to appropriate).
33 In essence, the issues as I see them may be summarised as follows:
1. Whether the circumstances in which the directors of AAV caused it to cease carrying on its plumbing business, and the way in which that business and the company’s assets were divided up between the directors in late 2006 without reference to the shareholders, amounted to oppression or conduct otherwise in breach of s 232 of the Corporations Act ?
3. Alternatively, should leave be granted for Mrs Vadori to commence a derivative suit in the name of AAV against its directors for breach of statutory or fiduciary duties in relation to the conduct alleged to have been contrary to the interests of members and oppressive?2. If so, what remedy should be granted pursuant to s 233 of the Act?
34 The determination of the above issues gives rise, among other things, to the question whether the cessation of AAV’s business and the division of its assets was effected pursuant to an agreement or arrangement to which Mrs Vadori was bound (or as to which she is in some way estopped from taking issue) and as to the value of Mrs Vadori’s share in the company (and, in particular, whether there subsisted any goodwill in the company as at 1 December 2006 which should be taken into account in valuing Mrs Vadori’s share for the purposes of a compulsory purchase order).
35 There are also questions as to the appropriateness at this stage of a winding up order in respect of the company (whose only role since late 2006 has been as trustee of a superannuation fund, and of an investment fund wholly owned by it as trustee of the superannuation fund, for the benefit of the three directors).
Summary
36 In summary, for the reasons set out below, I am of the view that the affairs of the company in late 2006 were conducted in a manner contrary to the interests of its members and oppressively to Mrs Vadori, in breach of the directors’ statutory and fiduciaries and in breach of s 232 of the Corporations Act, for which breach the appropriate remedy is an order that the remaining shareholders buy Mrs Vadori’s share in the company.
37 The evidence of the chartered accountant called as an expert for the defendants, Mr Robin Humphreys, is in effect that (in circumstances where there were no restrictive covenants to restrain the directors/employees from leaving the company and the competing with it) the value to be attributed to the company for goodwill as at 1 December 2006 would be nominal. I did not understand this evidence to imply that the goodwill of the business reposed in any one director (as opposed to the company itself). Rather, I understood it to be a function of the fact that, in the absence of effective non-restraint covenants in place with the three directors, the company was always at risk of one or more of those directors choosing to cease their working relationship with the company, to the detriment of the value of the goodwill in its business, and hence that once that (worst case) situation eventuated, by the end of 2006, any goodwill which might have been built up in the company was no longer worth anything. Mr Lawrence, in agreeing to the propositions set out in the joint experts’ report, accepts that this is the appropriate conclusion to be reached in relation to the issue of how any goodwill in the company is to be valued.
38 However, what the experts did not seemingly take into account in valuing the business and assets of the company as at 1 December 2006 was the value of any claim which AAV may have against the directors if the conduct of the directors (in implementing the decisions taken by them in November 2006) was improperly to divert not only the plant and equipment of the company to themselves (thus making it unlikely that the company could as a practical matter complete the work it was contractually bound to do or to take on any other work) but also to divert to A & P Plumbing (for the benefit of the Antunovich family interests) the existing work and customer base of AAV and thus to destroy any residual goodwill there may have been left in AAV.
39 Mrs Vadori accepts that she has had the benefit, through the allocation of equipment and the payment of cash to the new company with which she and her husband are now associated (Vadori Plumbing Pty Limited), of a one-third share of at least some of the assets of the company (and Mr Lawson confirmed that she is not seeking to ‘double dip’, as had been suggested in submissions by Mr Young). For their part, the defendants seem to have accepted that the division of plant and equipment was roughly equal as between the three directors and their respective new entities (though I recognise that Andrew and Paul believe that the scales are weighted slightly in Peter’s favour in that regard).
40 In my view, the amount to be paid for Mrs Vadori’s share should take into account not simply a one-third share of the value of the business, as valued by the experts on a nil goodwill basis, but also an amount to compensate for the loss of a one third share of the profit component for the existing AAV work which was taken on by A & P Plumbing in late 2006; an amount to reflect the value of one-third of the company stock remaining on hand as at late 2006 after the allocation of two-thirds of that stock to Andrew and Paul or their new company (A & P Plumbing); and an amount to reflect the value of a share of the company’s claim against the directors in relation to the breach of directors’ duty.
41 I therefore consider that, in all the circumstances, the fair price for which Mrs Vadori’s shareholding in the company should be acquired is $190,800. That represents, broadly speaking, the value of her one-third share of the business as at 1 December 2006 (ie one-third of $250,000 – approximately $83,000) less the value of the plant and equipment/cash received by Vadori Plumbing (which seems to be around $50,000, comprised of $20,000 in the equity in the car/equipment taken by Peter and $30,000 in cash), ie $33,000, plus the value of one-third of the stock as at 2006 ($16,300) and one-third of the profit attributed to the existing work taken over by A & P Plumbing (over $16,400), plus one-third of the value to be attributed to the business wrongfully appropriated by Andrew and Paul (or the profits obtained by A & P Plumbing from that business), for which they would be liable to account on a claim for breach of their duties as directors.
42 I have assessed that last component as equivalent roughly to one-third of the 2006 net profits of AAV (on the assumption that the business was, in effect, taken over completely by A & P Plumbing, with the benefit of all but one of the employees, the use of the business premises and presumably the office infrastructure or set-up at those premises; and the benefit of the existing customer relationships). As the evidence was that the 2006 financial year returned a profit of $375,000, and I see no reason to assume that the profits would have been any less in the 12 months after A & P Plumbing took over AAV’s business, I would add to the purchase price the sum of $125,000 as the one-third share of that amount.
43 In those circumstances, as I understand it, the alternative claim is not pressed and the question whether leave should be granted for Mrs Vadori to commence a derivative suit does not arise. Had I been of the view that there was no breach of s 232 of the Corporations Act, or none for which a compulsory purchase order remedy would lie which would compensate for the breach of directors’ duties in issue in these proceedings, then I would have found that Mrs Vadori had established an entitlement to an order for leave to commence a derivative suit against Andrew and Paul for breach of their duties as directors arising out of the circumstances in which the business of AAV was improperly diverted from the company to A & P Plumbing and AAV was denuded of the benefit of any residual goodwill in the business. There is no doubt that Andrew and Paul (albeit without appreciating that this was inconsistent with their duties as directors) took, for the benefit of A & P Plumbing, the existing work of AAV and of opportunities for future work, while still directors of AAV and still owing fiduciary and statutory duties to AAV.
44 As to the claim for a winding up order, the evidence was that AAV does not presently serve any function other than as trustee of the AAV Plumbing Superannuation Fund and as trustee of the AAV Plumbing Investment Fund (which is wholly owned by the trustee of the Superannuation Fund, according to the AAV Plumbing Group structure as outlined in Annexure C to Mr Bramble’s affidavit of 24 July 2009), and that the difficulties which have hitherto stood in the way of its winding up might now be able to be resolved in the course of a winding up of the company. The defendants do not, as I understand it, oppose such an order, though neither do they press for such an order to be made.
45 It seems to me that given that the timing (and perhaps process) of the winding up may affect the return to members, the question of the winding up of the company is one which should more appropriately be determined by the members after the purchase of Mrs Vadori’s share in the company, at which time Mrs Vadori will have no further interest in the company and therefore no interest in the outcome of the winding up.
- Commencement of partnership
46 As noted earlier, Andrew and Paul are brothers. They have known each other for many years (Peter and Paul having worked for the same plumbing company as apprentices in the late 1980’s). In December 1988, they entered into a partnership agreement under which they carried on business for some years. A copy of that partnership agreement was in evidence and both Andrew and Paul were taken, in cross-examination, to certain of its terms – namely, those dealing with termination of the partnership and the provisions for the determination of the goodwill of the partnership in that event. Under their initial business arrangements, it was contemplated (although neither Andrew nor Paul appears to have appreciated this) that goodwill might be built up over the course of the partnership and that the value of that goodwill would be taken into account when and if the partnership came to an end. That partnership agreement remains on foot as at today’s date, no steps having ever been taken to determine that agreement and to wind up the partnership between the three men. However, any goodwill in the partnership seems long since to have been assumed, with the consent or acquiescence of the partners, by AAV.
47 Together, as partners, the three men acquired, and still own, two pieces of real estate in Gateshead, Newcastle, being the business premises from which first their partnership business and subsequently the AAV plumbing business had operated (and from which for a period after 2006 the business of A & P Plumbing operated) and, more recently, a commercial property next door to those business premises.
- Incorporation of AAV
48 Some time after the establishment of the partnership, a decision was made by the partners to carry on the business under a company structure. According to Andrew, this was on the advice of accountants (though not, as I understand it, from Cutcher & Neale who were only instructed to act for AAV from mid 2006).
49 In March 1998, AAV was incorporated for that purpose. AAV was also appointed as corporate trustee for the superannuation trust fund set up for the benefit of the three partners and for the AAV Plumbing Investment Trust which I understand is an investment vehicle wholly owned by the superannuation fund. AAV holds other commercial property in Gateshead and a residential property at Hallidays Point as trustee for the investment trust. I understand that trustees for sale have been appointed for some of the properties held by the partners and/or by AAV, presumably as part of attempts to wind up the overall partnership and superannuation arrangements between Andrew, Paul and Peter. For present purposes, however, the only real property owned by AAV is held by it in its capacity as trustee.
50 The complexity of the partnership/company/superannuation and investment arrangements entered into by or on behalf of the three men can be inferred from the difficulties to which AAV’s accountant (Mr Bramble) has deposed in attempting (even before the decision by Andrew and Paul to cease their working relationship with Peter) to regularise the financial affairs of both the partnership and the company. For the purposes of these proceedings it is unnecessary to consider the taxation or superannuation issues which have delayed the winding up of AAV and which were outlined briefly by Mr Bramble in the witness box. In part, I understand them to relate to whether it is possible to roll out certain assets of the superannuation fund into separate funds without financial disadvantage to the beneficiaries of the fund. Mr Bramble’s evidence was that the issues had proved time consuming to resolve and that the timing of any winding up could, as a consequence perhaps of the outcome one or more of these issues, impact upon the ultimate returns to AAV’s members.
51 Neither Andrew nor Paul demonstrated in the witness box any real understanding of the nature of their partnership arrangements (or the terms of their partnership agreement, neither seeming to have read or understood it before signing it). (Paul said he did not really take much notice of the way the business was, he was a worker, and he just signed a partnership agreement and worked (T 67.11). From Andrew’s evidence he, too, did not pay any real attention to the partnership agreement when he entered into in 1998 (T 150).)
52 Nor does it appear that, at least prior to these proceedings, either Andrew or Paul had any real understanding of the consequences of incorporation or the differences in rights and obligations as between directors and shareholders. Certainly, when cross-examined neither professed to have had such an understanding.
53 Paul’s response, consistent with his attitude to the partnership responsibilities was that he never got involved in the way the business operated; again, that he was simply a worker; and that he did not take much notice of the paperwork. He said, “I knew I was a director, that was as far as I knew” (T 68.07).
54 Andrew, similarly, seems to have paid no real attention to the constituent documents of the company or as to his obligations as a director (T 150). He was aware that the business that had been previously conducted by the partnership was transferred to AAV, the company, on 1 July 2004. He said he was not aware of the significance of the fact that once his share was transferred to his spouse this meant that he was no longer the owner of the business and in fact his spouse was the owner of the business (T 152.28). He also said that he now knows but did not know at the time in November/December 2006 that, if the business were dismantled, then because the business was an asset of the company the net assets after payments of liabilities would have to be distributed amongst the shareholders not the directors (T 153.2). It was fairly clear from his evidence that he did not have any realisation at the time that the company and the business that it operated belonged to the shareholders and not the directors (T 153.30).)
55 Peter, for his part, accepted that as at November 2006 he was aware that the wives owned the shares but also that the running of the business had been in the hands of the directors “They were the directors, yes” (T 40). He accepted that there were not any shareholder meetings of AAV and that all decisions about AAV were made by the three men, both before and after the transfer of their shares to their wives. He also accepted that there was never any meeting after the transfer of the shares to the wives at which they were asked, as shareholders, what they wanted to do with the company (T 53/54).)
56 It seems to me likely that it is the apparent lack of appreciation of, or regard for, the consequences of incorporation which in due course has led to the complaints now before me, rather than any conscious attempt by the defendants to deprive Mrs Vadori of her entitlements as a shareholder (and no such conscious wrongdoing was asserted). The conduct of at least Andrew and Paul (and Peter, insofar as he seems also to have participated in the decision-making without reference to any of the members of the company, including his wife, as to their wishes) seems to have been to treat the company’s business as if it were their own. They appear to have felt at liberty to proceed, without having regard the wishes or interests of the actual members of the company, when determining what was to happen to the company’s business after they had decided they could no longer work with Peter, as evidenced by the refusal to permit Mrs Vadori to attend a critical meeting in November 2006 at which the division of the company’s assets was to be discussed. I consider that this, together with the diversion (while still directors) of the company’s business and assets for their own benefit or the benefit of companies associated with them, amounted to conduct in breach of s 232 of the Act.
57 Following the decision to run their partnership business under a corporate structure, from about 1998, the plumbing business which had formerly been carried on in partnership by Andrew, Paul and Peter was carried on by AAV. There is no suggestion that any compensation was sought or paid for the assumption by AAV of that business. (Nothing turns, however, on the lack of consideration or compensation for the ‘transfer’ to AAV of the partnership assets or any then goodwill in the partnership.)
58 According to Andrew, there was a ‘seamless’ transfer to AAV of the plumbing assets of the partnership, which he described as “being plant, equipment, current and forthcoming contracts and goodwill”, without any compensation to the partnership (paragraph 14 of his affidavit sworn 22 July 2009) – an interesting statement when, in cross examination, Andrew seemed to have no understanding as to what goodwill was and said that he never considered any goodwill at the time of that transfer (T151.2). Similarly, Paul says he did not understand there to be any goodwill subsisting in the building trade and thought this was something that attached to shops such as a grocery shop down the corner (T 66.45).
59 Relevantly, all parties seem to accept that, for some time prior to 2006, the plumbing business formerly carried on in partnership by Andrew, Paul and Peter was carried on by AAV (for example, see Andrew at T 151.50) and it follows that any goodwill which may have been built up in that plumbing business at least over the years from 1998 either reposed, as at 1 December 2006, in AAV (as asserted on Mrs Vadori’s case) or was no longer there to be appropriated, following the break up of the AAV business and most of its assets and workforce (as asserted on the defendants’ case).
- Share transfers to spouses
60 On 1 July 2004, share transfers were executed by each of Andrew, Paul and Peter to transfer their shares in AAV to their respective spouses for consideration of a dollar in each case. The share transfers were registered on 27 June 2005. (The reason for the delay in registration was not made apparent to me.)
61 Although the defendants plead that the shareholding of each of the wives was as agents for their husbands, there is nothing in the documentation before me to record such an arrangement. The most the evidence establishes is that the husbands may have understood that the purpose of transferring their shares to their wives was to take advantage of tax or accounting benefits which might flow from such a structure but they nevertheless continued to operate the business as if the transfers had no other effect. There is nothing in my view to warrant a finding that the shares were held by each of the wives other than in her own right.
62 Having chosen to adopt a corporate structure for their business, whether or not they understood its implications, the defendants seem to me to be stuck with the consequences of that course. As directors, Andrew, Paul and Peter owed clear (and well recognised to be onerous) statutory and fiduciary obligations to the company, including to act in the best interests of the company and its shareholders as a whole.
63 In the witness box, Mrs Vadori agreed that the one share she holds in AAV was transferred to her as part of an arrangement that her husband had with Andrew and Paul that all shares were to be transferred to the respective wives (T 12.10). She accepted that she never involved herself to a significant extent in the management of AAV (T 12.30) and that, in effect, she did nothing with her share other than simply hold it, it being her husband who was intimately involved with the AAV business up until November 2006. Mrs Vadori’s understanding was that AAV was being run by the three men (T 12.36-50).
64 However, the fact that Mrs Vadori (and, for that matter, the Antunovich wives) may have left the business decisions to her husband and his co-directors is not, in my view, to the point. The management of any company is in the hands of its directors, subject to whatever limited control may properly be exerted by members in general meeting. I do not think that an inference can be drawn, simply from the fact that from 2004, when she acquired her share, Mrs Vadori apparently left the business decisions to her husband and (apart from her role as bookkeeper for the company up until at least August 2006) did not take part in the management of the company, that Mr Vadori was acting at the relevant times as her agent. (Nor do I think the evidence establishes a quasi-partnership of the kind pleaded under which it should be inferred that Mr Vadori was acting as agent for his wife.)
65 Rather, it seems to me that Andrew and Paul, and perhaps Peter as well, simply assumed (incorrectly) that the incorporation of AAV had changed nothing for practical purposes about the way they had previously run their plumbing business and, until the events in 2006, none of their wives took issue with the conduct by their husbands of the business (without thereby giving up the right to assert their entitlements as shareholders when matters came to a head between their husbands in late 2006).
- Events of 2006
66 In the 2006 financial year, AAV had an annual turnover of over $1.64 million and had generated profits over $375,000 (p 772 of the court bundle). AAV’s sole customers, as at late 2006, were two building construction companies - Montgomery Homes and Contour Building and Construction Pty Limited.
67 It appears that over the years there was some tension between Paul and Peter, the cause of which (though adverted to in some of the affidavits) seems to me to be irrelevant to any issue in the proceedings. What is relevant is that at some point during 2006 the question whether the three men could continue to work together became a topic for consideration by one or more of them.
68 Each of Peter and Andrew, in about June/July 2006, apparently independently gave consideration as to whether the working relationship between the three could continue. Peter says he asked Paul to make an offer to buy him out around this time; and Paul accepts that Peter had done so on a number of occasions over the years.
69 Meanwhile, in mid 2006, and it would seem before the suggestion of a split was seriously discussed between the three directors, Mr Bramble received instructions from Peter to give advice in relation to the accounting and taxation requirements of the AAV Group (by which Mr Bramble refers to AAV, the unit investment trust, the superannuation fund, the partnership and the respective individuals, both husbands and wives). He considered that various steps needed to be taken to ‘regularise’ the affairs of the entities within the group and, towards the end of July 2006, he prepared a memorandum to the directors outlining those matters. He deposed that at this time no mention had been made to him as to the directors going their own ways.
70 On 22 August 2006, there was a meeting between Andrew, Paul and Peter, which Mr Bramble also attended, at AAV’s business premises. Mr Bramble’s recollection is that this was “to discuss the possible split of AAV”. Peter says that it was “to discuss whether the company and partnership issues could be resolved”, by which I understand him to accept that the possibility of a parting of the ways was at least under consideration by the three directors at that stage.
71 On 31 August 2006, Mrs Vadori resigned as bookkeeper of the company (although she remained at work training the replacement bookkeeper until the end of October 2006). Mrs Vadori says that she resigned at her husband’s request because Paul had taken issue with her working for the company (as Paul accepts he had). The fact that she did so, but continued on with the company to train an incoming bookkeeper for the company, suggests that at that stage she understood that the company would be continuing in business.
72 According to Peter, there was no further discussion in relation to a parting of the ways until 30 October 2006, when he had a conversation with Andrew in which Andrew informed him that he and Paul had decided to go out on their own. Andrew agrees that such a discussion took place. Peter not only seems to have understood this to have been presented as a fait accompli but also to have accepted (which does not necessarily follow) that he had no choice but to accept that the company would have to cease to carry on business.
73 Peter’s position as at this stage was that he regarded a one third split of everything (including the employees) as a fair division. At T 61, in re-examination, Peter said:
I walked into the office that day [30 October 2006] and Andrew Antunovich said to me, "I have decided with my brother that we are going to go out on our own." And that was it. And then we started discussing what would happen to the split, and my first reaction was I had to guard my own third of the business which meant one third of the employees, one third of everything, including goodwill and work in progress. … (my emphasis)
74 It was not, of course, Peter’s (or for that matter, Andrew and Paul’s) business to be split up in this way.
75 Mrs Vadori says that the first she became aware that the three men were likely to split up was on 30 October 2006, when Andrew and Paul told her husband that ‘it was finished’ (T 14.03). Mrs Vadori said:
Peter came home on Monday and said that [Andrew] had come in, Andrew had come in and told him that - him and Paul had had a meeting on the weekend, decided that they didn't want to work with Peter any more. And they wanted to go off on their own. And Peter had no option other than like doing the same basically because AAV was finished. (T 34.36))
76 At this stage, it would seem that Mrs Vadori had had no opportunity to obtain any advice as to her own position as shareholder and I do not see her silence or failure to object at this point as indicating any acceptance of the proposition that her husband and his co-directors could determine the fate of the company as they chose.
77 Where the respective accounts of the three men relevantly differ, at this point, seems to be as to how their split was announced to the employees of the company and, in particular, as to what occurred on 1 November 2006 when it was determined between them which of the employees would join Peter and which would join Andrew/Paul. Nothing ultimately seems to me to turn on this, other than that Peter said (and I accept) that he was very upset at the events which had transpired on 1 November 2006. In the witness box, Peter spoke with some emotion as to this being a bad period in his life. His wife similarly appeared upset and concerned for her husband at what had occurred. Peter says he felt extremely ill and had to see a doctor.
78 The only relevance, if at all, of Peter’s reaction to the events at this stage or his state of health at this stage would seem to be as to the justification put forward by Andrew/Paul for the two payments made to them but not to Peter on 20 December 2006 – as I understand it, they say these were payments for holiday leave due to them, Peter having taken his holiday leave in effect when he did not return to work after 1 November 2006. Peter, who does not deny that he did not return to work after that date, says the payments he received for the period from 1 November 2006 were for sick leave. If Peter is correct, then he may have a claim for accrued holiday leave against AAV but even so it does not seem to me that there is a basis on which I should infer that the payment of claimed holiday leave to Andrew/Paul (without the consent of Peter or his wife) amounted to oppression. Hence, I remain of the view that this issue (and the two $4,000 odd payments on 20 December 2006) is of marginal relevance, if at all, to the issues before me.
- 2 November 2006 meeting
79 A meeting took place on 2 November 2006 at AAV’s business premises between Andrew, Paul and Peter, at which meeting Mr Bramble again attended. Mr Bramble gave little detail in his affidavit as to what had transpired at this meeting but said that Peter had said words to the effect “We can no longer work together and the business will have to be split up” and that, as a result of the (unspecified) conduct of the parties at the meeting, he came to the conclusion that the situation between them ‘had reached untenable terms’. (Peter did not refer to this meeting in his affidavit, nor did Andrew.)
80 Paul referred in his affidavit to a meeting around this time, at which he says that the accountant (presumably, Mr Bramble) told them they would need to get new entities organised. Relevantly, Paul also says that Mrs Vadori was present at the meeting with a tape recorder and that Mr Bramble suggested that she wait in the car, on the basis that she was “not part of this and there’s no need to be using a tape recorder anyway”. Mrs Vadori denied having attended a meeting with a tape recorder (though, given the dispute as to what was said at the subsequent 21 November meeting, a tape recorder might well have been a good idea.) The relevance of Paul’s account of this meeting is that it supports Mrs Vadori’s evidence in the witness box (T 14.03; T 19.18; T 34.27) that she had attempted to attend a meeting with her husband and had not been permitted to do so (although she attributed this to Andrew having excluded her, not to any suggestion to that effect by Mr Bramble). It also seems to indicate a view (whether put by, or simply adopted by, Andrew and Paul) that the respective wives had no say in the winding up of the company’s business.
81 At T 34.27, Mrs Vadori said:
- There was a meeting arranged at the premises of the business with the accountant Jarrod Bramble, and I was going with Peter to that meeting to know what was going on and also to support him. Jarrod Bramble turned up at the office, and we went in, and Andrew said that I wasn't to be there. The meeting wasn't going ahead if I was there. So then I had to leave for the meeting to continue and sit in the car and wait till it was over. I wasn't given the chance to sit in or anything. I had to wait in the car. (T 34.17-24)
82 Andrew, for his part, accepted in cross-examination that he had not allowed Mrs Vadori to come to a meeting held prior to the meeting on 21 November 2006 about the break up of the plumbing business. In this regard, therefore, I would accept Mrs Vadori’s recollection of the circumstances in which she was not allowed to attend the meeting as more reliable than that of Paul.
83 Mrs Vadori said that she understood the purpose of the 2 November meeting to be to let Mr Bramble know that Andrew and Paul had decided AAV was not operating any more and to discuss what their options were. It is significant in my view that Mrs Vadori did not simply wish to attend to support her husband. She said that she wanted to know what was going on with the company. As a shareholder in a company whose directors (or a majority of whose directors) had made a decision to cease trading, without reference to the shareholders, that seems to me to be not an unreasonable stance for Mrs Vadori to have taken. It also seems to me that, following the stance taken by Andrew not to permit Mrs Vadori to attend that meeting, no criticism can be made of her failing to press to be allowed to attend the subsequent 21 November 2006 meeting or any other meeting at which the directors were discussing the split of their working arrangements but this does not mean that she held her husband out as authorised to bind her to any particular outcome from those discussions.
- 2-8 November 2006
84 Following the 2 November 2006 meeting, Mr Bramble apparently took on the role of seeking to facilitate a resolution of the way in which there was to be a split up of AAV’s assets and business (and there is no reason to think that he was trying to be anything other than even-handed and neutral in this regard).
85 On about 6 November 2006, Mr Bramble wrote to each of the directors (the letters being addressed to the directors only, not to the directors and their spouses), although from the attachment to those letters it is clear that Mr Bramble contemplated that they would be put before the respective spouses in some form. The letters were in identical terms in all relevant respects.
86 The letters stated that “We have been asked [by the other directors and the addressee of the letter] to assist in the negotiation of the split up of the groups assets and business” and went on to note that “As you and your wife effectively own 1/3rd of all of the assets and the business the negotiation amount and structure is of importance to you.” Mr Bramble identified certain concerns regarding the negotiations, including that Cutcher & Neale “will be perceived not to be independent”; advised that valuations had been obtained of the real property holdings and plant and equipment; and noted that “In the short term we have arranged for different Partners of Cutcher & Neale to assist with your affairs” (my emphasis). In the case of Mr and Mrs Vadori, a Mr David Carpenter was identified as the partner to “assist” with their affairs. For the Antunovichs, Mr Ian Neale was the identified partner to assist them.
87 Mr Bramble’s letter also noted that “Due to the complexities of the negotiation we advise you should consider getting independent advice regarding the final split of the assets and business prior to any legal documentation being executed” and asked that the recipient acknowledge both the letter “and also your instructions whether to continue to represent you notwithstanding the concerns outlined in this letter”. The attachment to this letter, for execution by both husband and wife in each case, contained a pro forma acknowledgement of receipt of the letter and the statement “Furthermore, we would like you to proceed with negotiations as planned for Thursday 16 November 2006”. (My emphasis is noted as italicised in each of the quotes above.)
88 Of significance, it seems to me, is that the letter clearly envisaged that if the negotiations, which the author of the letter was contemplating would take place (and in which a separate partner would “assist” each couple or combined couple’s affairs), produced an outcome it would be one which was to be the subject of legal documentation (in respect of which the author advised that consideration as to the obtaining of independent advice should be given).
89 Although they did not recall so doing, it seems that both Mrs Vadori and her husband duly signed and returned the 6 November letter (Ex 3), as did the defendants.
90 Given that Mr Bramble said that he believed his introduction of Mr Carpenter took place at the meeting itself, it seems unlikely that Mrs Vadori had met him prior to the 21 November meeting and she cannot have met him at that meeting as she was not present.
91 Whatever Mrs Vadori might be thought to have done by confirming instructions for Cutcher & Neale to proceed with negotiations on the basis outlined in that 6 November pro forma letter, in my view she was clearly not authorising anyone from Cutcher & Neale to execute any legal documentation on her behalf, nor does the letter suggest that Mr Carpenter (or Mr Bramble) was authorised to commit her to any other kind of binding agreement. At best, this letter might be taken as authorisation for Mr Carpenter to attend the meeting on Mrs Vadori’s behalf, to convey to the meeting any statements she authorised him to make (and perhaps those statements which, though without instructions, he considered it in her interests to make, such as those he may have made in the debate over goodwill) and to participate in attempting to negotiate an agreement in principle as to any matters arising in discussion at that meeting but to do so subject to her instructions, which it would be necessary for her to confirm, with the result that any “agreement” affecting her would be one which she would have the ability later to approve, or not, as the case may be.
92 Given that I see nothing in this letter which authorises Mr Carpenter to commit Mrs Vadori to any binding agreement and that each director received a similar letter (and presumably each couple signed a similar letter confirming instructions to proceed with the negotiations), I cannot see that Mr Carpenter attended the meeting cloaked with any actual or ostensible authority to do more than what the letter contemplated – namely to “assist” with the couple’s affairs (which, as indicated above, I would take to mean to the ordinary reader that he would listen to what was said, convey his own opinion on relevant issues (such as goodwill), convey Mrs Vadori’s position (if any) on relevant issues, and take back to Mrs Vadori any proposal which might have emerged at the meeting for her instructions and assent, if any, such that any final agreement would later be formally documented and signed, after any independent advice as necessary).
93 The need for representatives of parties, when involved in negotiations on their behalf, to be expressly cloaked with actual authority if they are to bind those parties to any concluded agreement which might be reached during the negotiations is something which I would have thought is well recognised amongst those professionally involved in negotiations of this kind. It is something of which I would have expected the partners of Cutcher & Neale attending at that meeting to have been conscious (particularly given the care which Mr Bramble had taken to ensure that he drew to the attention of the directors, at least, to the potential for conflicts of interest to arise and to arrange for ‘separate’ assistance from partners who had not previously, apparently, been involved in the affairs of AAV). It seems to me significant in this regard that Mr Bramble does not depose to any statement having been made at the meeting asserting authority by anyone to bind the (absent) shareholders, nor was there any signed document purporting to record any agreement (in principle or otherwise) prepared at the conclusion of the meeting. Mr Bramble’s evidence, in the witness box, made it clear that he did not understand this meeting as one in which a binding agreement was to be struck – and from this I would infer that he did not see it as necessary to clarify with those attending the meeting that they had authority to bind those persons whose interests were to be affected by what was being discussed but who had not been invited to attend the meeting. Therefore, there is nothing to suggest that there was, or that those participating in the meeting were put on notice of, any authority on the part of Peter to bind Mrs Vadori to decisions taken at that meeting or that Mrs Vadori by her conduct held him out as having any such authority.
94 On 8 November 2006, Vadori Plumbing was incorporated. On 11 November 2006, A & P Plumbing was incorporated. Both steps are consistent with Mr Bramble’s advice at the 2 November meeting that the directors should organise new entities. Again, however, this does not lead me to draw any inference as to Mrs Vadori having agreed to steps to be taken to bring the business of AAV to a close.
- 21 November 2006 meeting
95 The critical meeting for present purposes took place on 21 November 2006 at Cutcher & Neale’s offices. (This was the meeting convened by Mr Bramble and foreshadowed in Mr Bramble’s letters to each of the directors.) Mrs Vadori did not attend that meeting. The defendants assert in their pleadings that Peter (not Mr Carpenter) represented Mrs Vadori at this meeting as her agent. As noted above, there is no evidence that Mrs Vadori appointed her husband to attend the meeting as her representative or that he was held out by her as having authority to bind her to any agreement at that meeting.
96 Peter accepted that what was happening in November 2006 was that he, Andrew and Paul were trying to agree on the best way to finish up the business of AAV and a fair way of distributing the assets three ways (T 45.42-46). He accepted that he had understood that at the meeting on 21 November 2006 that he was looking to obtain his wife’s share of the assets of AAV (T 40.38) and that Mr Carpenter was the accountant supposed to be looking after both his interest and his wife’s interest. Peter agreed that this was an important meeting and, consistent with this also being the understanding of his wife, he said that his wife had wanted to be at the meeting. I do not think that any inference can be drawn from Peter’s failure to insist upon her attendance. It is not suggested that he said anything at the meeting to hold himself out as Mrs Vadori’s agent and Peter’s understanding therefore seems to me to be irrelevant on this issue. Nor do I think that Mrs Vadori is estopped from asserting her rights by reason of any failure by Peter to raise an objection to her exclusion from the discussions.
97 Mrs Vadori accepted that she knew that her husband was attending the meeting. She thought that what was to be discussed at the meeting was the future of the business but says she did not discuss with Mr Vadori before he went to the meeting what might happen nor did he tell her what he would be doing at the meeting (T 18). Mrs Vadori said “It’s not that I didn’t want to [go to the 21 November meeting] I don’t think I would have been welcome there because I wasn’t allowed at the other meeting” (T 19.18) (by which I understand her to be referring to the 2 November meeting). Mrs Vadori’s understanding was that shareholders were not invited to that meeting. She was adamant that she had tried to attend a meeting prior to this meeting concerning the split up of the assets of the business “but I was thrown out by Andrew. So I didn’t have a choice to go to any other meeting” (T 23.03).
98 Mrs Vadori was asked whether she had left it to her husband and Mr Carpenter to work out which of the assets of AAV would go to Vadori Plumbing. Her response was, “Well, I wasn’t there”. When pressed, her response was “Yeah, well, I would have liked to have been there but I wasn’t given the opportunity to be there not by my – not by Peter. Andrew and Paul wouldn’t let me at any meetings” (T 27.29). Mrs Vadori did not recall any conversations with Mr Carpenter authorising him to act on her behalf at that meeting (which is consistent with Mr Bramble’s evidence that he only introduced his partners to the directors for the first time at that meeting).
99 While Mrs Vadori seems to have understood that (in circumstances where she had not been allowed to attend the meeting by Andrew and Paul) her interests were going to be ‘looked after’ by her husband and/or her husband and Mr Carpenter at that meeting (T 27.45), that does not seem to me to be sufficient to give rise to a finding that she authorised either of them to commit her to any particular agreement which might have been reached at that meeting. Rather, it is consistent with an understanding that they would convey back to her any proposals which might be made at the meeting so that she could discuss those with her husband and/or obtain advice before binding herself to any particular agreement.
100 Different accounts are given of the 21 November meeting – though none from Mr Neale or Mr Carpenter. Mr Bramble’s account is set out in his affidavit. His recollection of the meeting is also recorded in a letter dated 3 April 2007 which he sent to each of the directors. (He explained the delay between the meeting and this letter by reference to the fact that there was a lot happening in relation to negotiations in respect of the unit trust and superannuation fund at that time.)
101 At T 101, Mr Bramble said that the meeting was an “initial discussion” to facilitate whether anything could be resolved amicably and that the purpose was for the parties to go and appoint independent people if they chose (T 107.37); that it was his understanding that the meeting was meant as a chance for the directors and shareholders (although the latter were not invited to the meeting so any such chance was not likely to have been a particularly meaningful one for them) to have an initial negotiation to see whether they could come to terms amicably or alternatively to seek independent advice (T 107.46). By way, seemingly, of an example of this he said that if, at the time, the directors were able to agree on the goodwill, then an independent person could have been utilised to finalise that negotiation.
102 Mr Bramble’s understanding is therefore consistent with no formal authority having been sought from or given by Mrs Vadori to commit her to any decision at the meeting. Nor did Mr Bramble, in hindsight, regard whatever was agreed on 21 November 2006 as having given rise to a legally binding agreement, which suggests that nothing was said at the meeting to indicate that the parties were intending immediately to be bound by the arrangements then being discussed. Mr Bramble accepted that no agreement was documented following that 21 November 2006 which might be regarded as falling within the description contained in his 6 November letter (T 110).
103 While the conduct of the three directors after that meeting is consistent with there having been at least an agreement in principle between them as to the various matters itemised by Mr Bramble, with the possible exception of the treatment of stock (although the conduct of Andrew and Paul is consistent with Mr Bramble’s recollection on this aspect of the meeting as well), what could not be said was that there was any semblance of a final agreement at that meeting as between the three directors as to how all the issues in relation to the splitting up of the business were to be resolved, let alone any agreement between the shareholders on those matters.
- Mr Bramble’s recollection of 21 November 2006 meeting
104 In Mr Bramble’s affidavit, he recounts the discussion which took place at the meeting, which he says opened with him stating (what it seems he understood the purpose of the meeting to be) that “We need to negotiate the values of all the plant, equipment, jointly owned assets and the value of the goodwill”.
105 Mr Bramble said that during the meeting valuations were tabled for plant and equipment and it was discussed between the people present as to who would like to take that piece of equipment for that value. In relation to two items, a Hino FD Ranger and a Hino Ranger, the valuation attributed to the vehicles was altered (at Peter’s instigation and with Andrew/Paul’s agreement) from that which had been obtained from Slattery’s Auctions. (To the best of Mr Bramble’s recollection, Peter said that he believed that the first (Hino FD) was worth $40,000 not $45,000 and that Andrew and Paul had agreed to a change in that regard.) Mr Bramble says he suggested that each work car be retained by the person currently using it and he records Andrew as having said that the stock should be split into thirds, with Peter agreeing to both propositions. He suggested a cash drawing split one-third/two-thirds between the two new entities (Vadori Plumbing and A & P Plumbing) to which he says there was also assent.
106 Mr Bramble recalled that there was a brief discussion about how the existing work was to be split (but gave no detail other than to recall that each director’s jobs would go with that director). As to new work, he says that Andrew said that they were speaking to the two main clients (Contour Building and Montgomery Homes) to see if they would split future work between the respective entities (ie Vadori Plumbing and A & P Plumbing). He recalls that there was a discussion as to what was to happen about the employees and the value of the warranty work (estimated at $25,000). He recalls that there was an inconclusive discussion as to the real estate within the group and a discussion about goodwill.
107 As to the goodwill, Mr Bramble said in his affidavit that he did not recall the content of the discussion but did recall that no agreement had been reached on any matter concerning goodwill. His recollection was that during the meeting there was a lot of discussion about plant and equipment valuations and real estate, in which each of the directors were most vocal, but that when it came to goodwill it was Mr Neale and Mr Carpenter who had had most of the discussion.
108 Mr Bramble’s letter of 3 April 2007 is consistent with his recollection of the discussion, though not surprisingly is more detailed in some respects. Although written some four and a half months after the meeting, there seems no reason to regard the letter as other than Mr Bramble’s genuine recollection as at that time (ie some time after the meeting itself and therefore not as fresh in his mind, perhaps, as if he had written the letter immediately) as to what had been decided in the meeting as between the three directors.
Peter’s recollection of the 21 November meeting
109 Though at one stage in his evidence Peter said that the meeting was ‘just a discussion’ (T 38.43), he does seem to have accepted that there was an agreement of some kind at the meeting between the three men at least as to the taking of items of equipment (but not as to stock). Peter said, I thought there was going to be a split of the company, so we were all to take one third” (T 39.50). He accepted that since AAV was not going to trade anymore it was appropriate that its assets should be divided up between the interested parties. He says that he thought that whoever took over the AAV work would take over the warranty work (T 56.35).
110 Peter said:
- Well, the only thing that we really didn't agree on in that meeting was the value of the goodwill, and their accountant said there was no value, there was no goodwill at all. And they had all right to take everything that they did. And with that, the meeting was closed. That was the last thing I think that was discussed at that meeting was the goodwill.
though he accepted that at the meeting the accountant representing or “looking after” the interests of Andrew/Paul and their wives had said there was no goodwill (T 49.50).
Andrew/Paul’s recollection of the 21 November meeting
111 Andrew recalled very little about the meeting. He said that there was some discussion about what would happen to the stock in trade (T 155); he did not recall a discussion at that meeting as to any value that should be attached or ascribed to the goodwill of the business (T 156.5); he said he did not recall any discussion about the work in progress or what was to happen to that (T 156.12). (It is difficult not to draw the conclusion that he either has a bad memory for events of this kind (which casts doubt on the recollections set out in his affidavit) or that in the witness box (where his automatic response tended to be that he could not recall matters) he was not seriously attempting to turn his mind back to the events of 2006.
112 Paul agreed that at the meeting of 21 November 2006, there was no discussion of how the goodwill of the business would be accounted for upon the dissolution of the enterprise (T 74.27) and that there was no discussion about what sum would have to be paid to Mrs Vadori to compensate her if A & P Plumbing took over all of the AAV contracts (T 74.37).
113 As to the warranty work, Paul’s recollection of the 21 November meeting was that Peter was the one who put the estimate of $25,000 on the warranty work (for the completed AAV jobs) and that Paul had agreed that he and Andrew would do it for $25,000. There is no evidence as to what that warranty work in fact comprised or any final agreement reached with AAV in that regard.
114 Paul agreed that the meeting on 21 November 2006 had proceeded on the basis that the directors were to divide up between themselves, if it was possible, the stock in trade, so that they could take it away and use it in their new business enterprises (T 89.06-11).
Stock
115 The issue as to stock has loomed large during the hearing. Peter was adamant that there was no stock mentioned at the meeting on 21 November, only a division of the equipment (T 44.14) but then seemed to accept that there had been a discussion as to stock at some stage:
- I can't remember the stock being requested. I was under the understanding it was going to be split a third equally. But I think that was prior to the meeting. I am not sure if it was discussed at that meeting or just prior to it.
116 Mr Bramble’s letter suggested (and his recollection of events was) that there was an agreement that stock would be split three ways. This accords with each of Paul’s and Andrew’s recollections of the meeting as set out in their affidavits. Andrew recalls that it was Peter who said the stock should be split three ways, which would accord with Peter’s earlier stated assertion that everything should be split three ways. It does not seem that there was any separate valuation of the stock to hand at that meeting, nor that any of the directors went through a similar exercise as that carried out in relation to the equipment in order to allocate particular items of stock to each.
117 If it were necessary to determine whether an agreement had been reached for the division of stock at this meeting (and ultimately I do not think it is) I would have placed reliance on Mr Bramble’s recollection of events. He was at the meeting in a professional capacity and seems to have had no reason to favour the interests of either faction. A one-third split of the stock would accord with Peter’s earlier adamant position that everything should be split three ways and Peter does recall that there was a discussion to that effect at some time. In cross-examination he seemed ultimately to accept (at T 59) that there was a conversation on 21 November 2006 that the stock should be divided three ways (and that he, Andrew and Paul had each said something to the effect that they agreed to that and there had been a discussion as to splitting of the work), although my observation was that he did not seem particularly sure about this.
118 It seems to me unlikely that the topic of stock would not have been raised at all and that, if this had been an issue of contention between the three directors, then Mr Bramble would have had a clearer recollection of the discussion of this issue. Therefore the fact that he has no recollection of a dispute in this regard suggest to me that his version of the meeting in this regard (corroborated by his April letter, which was written before these proceedings were commenced) is the more reliable.
252 Part 2f.1A of the Corporations Act allows the court to permit a member or officer to bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (s 236(1)). There is no issue that Mrs Vadori, as a member of the company is entitled to seek leave to bring a derivative suit (s 236).
253 Mrs Vadori relies upon the statutory duties owed by the directors to the company to exercise their powers with a reasonable degree of care (s 180) and in good faith in the best interests of the Company for proper purposes (s 181), and not improperly to use their position to gain an advantage for themselves or detriment to the company (s l82). She also asserts breach of the fiduciary duties considered above.
254 What s 237(2) requires is that there be a serious question to be tried. A party seeking leave to bring a derivative suit does not need to prove any element of the derivative suit in order to satisfy s 237(2).
255 The criteria to be considered upon an application for leave to commence a derivative suit are:
the probability that the company will not itself bring the proceedings, or properly take responsibility for them;
whether the applicant is acting in good faith;
whether there is a serious question to be tried by the court (if the applicant is applying for leave to bring proceedings rather than intervene in any proceedings to which the company is a party); andwhether it is in the best interests of the company that the applicant be granted leave;
either that at least 14 days before making the application to the court, the applicant gave written notice to the company of the intention to apply to the court for leave and of the reasons for applying; or that it is appropriate for the court to grant leave even though notice was not given to the company: s 237(2).
256 Each of these five criteria must be satisfied (Goozee v Graphic World Group Holdings Pty Ltd [2002] NSWSC 640; (2002) 42 ACSR 534, at 541; 20 ACLC 1502). If all five criteria are satisfied, then the court is bound to grant the application (Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732 at 735; 23 ACLC 1100). Turning to the respective criteria, I note briefly as follows.
257 Inaction by the company - The court must be satisfied that it is probable that the company will not itself bring the proceedings, or properly take responsibility for the proceedings. In circumstances where two of the three directors and the two remaining shareholders have denied any wrongdoing or oppressive conduct, it seems likely that AAV will not commence any proceedings against any of the directors in relation to the matters of which Mrs Vadori complains.
258 Applicant's good faith – The court will have regard at least to the following matters: (i) whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success; and (ii) whether the applicant is seeking to bring the derivative action for a collateral purpose which amounts to an abuse of process (Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313, at 320). However, the inquiry concerning the applicant’s good faith is not limited to these two matters (Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; (2008) 65 ACSR 661; 245 ALR 780).
259 In Swansson it was said (at 320–21) that it will be relatively easy for the applicant to demonstrate good faith where the applicant is a current shareholder of the company who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant’s shares would be increased.
260 The two factors identified by the court in Swansson as being relevant to consideration of the good faith requirement in s 237(2) were applied by Barrett J in Goozee v Graphic World Group Holdings Pty Ltd. His Honour held that the applicants were acting for a collateral purpose in that the applicants' purpose in seeking to bring the derivative action was to force the directors to pay dividends or else force the directors to arrange for the applicants' shares to be purchased. The application to bring a derivative action was therefore denied. The evidence before me does not permit a conclusion that these proceedings or the derivative claim sought to be pursued is being pursued for a collateral purpose.
261 Best interests of the company – It is for Mrs Vadori to establish that it is in the best interests of the company that she be granted leave. In determining whether an application is in the best interests of the company, it is said that the fact that the applicant has a personal interest in the outcome of the action or the applicant has personal animus against other members of the company is not significant or decisive because this would be common in the types of disputes which lead to derivative actions (Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859; Ehsman v Nutectime Int’l Pty Ltd [2006] NSWSC 887; (2006) 58 ACSR 705). Clearly, if there were to be a compulsory purchase order then it could not be suggested that it would be in the best interests of the shareholders, other than Mrs Vadori, for such proceedings to be commenced (they having acquiesced to date in the events which have transpired), particularly in light of the likely cost of such proceedings. In light of my finding on the compulsory purchase order, this criterion could not be satisfied.
262 A serious question to be tried - In order to determine whether there is a serious question to be tried, the applicant must provide the court with sufficient material to enable the court to make this determination (Charlton v Baber, above at 46). There is the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction (Swansson).
263 It has been said that whether there is a serious question to be tried can be answered only by reference to an infringement of some legal or equitable right or the commission of some legal or equitable wrong (Goozee v Graphic World Group Holdings Pty Ltd, above, at 542 and Ragless v IPA Holdings Pty Ltd (in liq) [2008] SASC 90, at [40]; (2008) 65 ACSR 700; 254 LSJS 225). I consider that here a serious question has not only been established but the claimed breaches of duty have been made out.
264 Notice of proceedings to company – Section 237(2)(e)(ii) contemplates that a court can grant leave even if the applicant has not given written notice to the company of the intention to apply for leave and of the reasons for applying. It is not clear to me whether written notice was in fact given within the time required of intention to commence these proceedings and seeking the relief in this regard. However, AAV and its remaining shareholders and directors have been on notice of Mrs Vadori’s intention to seek relief of this kind since the commencement of the proceedings. I consider that any failure to notify of an intention to make such an application strictly within the section should not preclude the grant of leave.
265 Therefore, but for the fact of the compulsory purchase order that I propose to make, I would have considered it appropriate to grant leave to bring the derivative proceedings. As it is, the requirement for the bringing of such a claim to be within the best interests of the company is not met and I do not grant any such leave.
Conclusion
266 In essence, the respective parties’ positions and my conclusions in that regard may be summarised as follows.
267 Mrs Vadori says that, without consultation with her (and in fact having excluded her from the initial meeting and not invited her to the subsequent decision meeting), the directors of AAV (having agreed that they could no longer work together as tradesmen) chose to divide up the assets of the company between themselves and proceeded to divert the business from the company to their respective new entities (and in terms of the employees/work/client opportunities, the diversion was largely to the new company with which Andrew and Paul were associated). In so doing, they rendered of no value any goodwill that there may have been in the company and Andrew and Paul took for themselves the substance of the business of the old company (of which they nevertheless remained directors). Mrs Vadori was left as a one-third shareholder in a company in which there was little value, but which was continuing to incur costs by reason of its ongoing existence as a corporate entity and whose only function was as trustee for the directors’ investment vehicle and superannuation trust.
268 Andrew and Paul (who remain as directors of AAV), and their wives, as directors and shareholders, respectively, of their new corporate entity, have not only taken the existing work (with all but one of the company’s employees and making use of the existing business premises) but have had the benefit of ongoing work by reason of the decisions made by the company’s two main clients (a business opportunity clearly deriving from the relationship between those clients and Andrew), that ongoing work having represented at least a potential business opportunity for AAV.
269 The defendants’ position is that, although criticism might perhaps legitimately have been made of the manner in which the three directors decided to split up the business and assets of AAV (without apparent reference to the shareholders’ interests or wishes), the oppressive conduct which has been pleaded relates only to the conduct occurring after that decision had been made (and thus, in colloquial terms, after the damage was done). It is said that by 1 December 2006, when the oppressive conduct is pleaded, there was no goodwill left in the company for the defendants to appropriate (or for the shareholders, for that matter, to benefit from) and that the company was no more than a superannuation fund trustee and not in a position to complete the existing work or to pursue any future business opportunities.
270 The defendants say, moreover, that Mrs Vadori’s interests were being ‘looked after’ at the critical meeting in November 2006 by her husband (and/or, though this is not itself pleaded) by an accountant, Mr Carpenter, and that, through her new company Vadori Plumbing, Mrs Vadori has had the beneft of a one-third division of the plant and equipment of the company – and has been in a position where she could have collected one-third of the stock of the company.
271 Fundamental to the defendants’ assertion that Mrs Vadori is estopped from denying (or now making complaint as to) the arrangements made by the directors in November 2006 (and acted on by them from December 2006), is that Mrs Vadori’s husband was acting as her agent at all relevant times. This is based on no more, it seems to me, than that he was her husband; that for some time she had allowed him to make the decisions in relation to the running of the business; that she knew that he was attending the relevant meetings at which the split up of the business would be discussed; that she understood he would be ‘looking out’ for her interests; and that she accepted the benefit of some of the division of assets that thereafter occurred.
272 Mrs Vadori’s conduct in signing the letter authorising Cutcher & Neale to proceed with the proposed November meeting and for Mr Carpenter to attend in order to assist her and her husband with their affairs, does not seem to me sufficient to amount either to an express appointment of Mr Carpenter as her agent (nor is it pleaded as such) or a holding out that he was her agent (since the other directors and their wives were on notice of the limitations in the letter of 6 November 2006 in that regard). It is not suggested that at the 21 November 2006 meeting there was any clear statement made as to the basis on which the wives’ interests were being ‘looked after’, nor does it appear that at the meeting the directors turned their collective minds to the fact that this was not their business to dispose of, but was in fact the business of their wives.
273 Significant in my view is the fact that Mrs Vadori had made it known that she wanted to attend at least the first meeting at which the future of the company was to be discussed and had been excluded from that meeting by Andrew. I do not think she can be criticised for forming the view that similar requests would be met with the same opposition.
274 Not only was there no evidence of any express agency arrangement, there is no evidence in my view to suggest that Mrs Vadori ratified (by accepting the benefit of the company car and excavator which her husband took or the cash payment made to Vadori Plumbing) any arrangement or agreement at the November 2006 meeting other than in respect to those matters alone. Mrs Vadori was never asked to confirm her agreement to the division up of the company’s other assets or business; she did not communicate any agreement to the proposed allocation of stock (as to which I consider there was an arrangement reached between the directors at the relevant meeting); and she certainly did not agree to the defendants’ assertions as to the position in relation to goodwill. The evidence suggests that neither Mrs Vadori nor Mr Bramble thought that any final agreement had been reached at the 21 November 2006 meeting for the disposal of the whole of the business and undertaking of the company.
275 In circumstances where Andrew and Paul did not turn their minds to the question of what interest or entitlements the respective wives had or may have had in the future direction of the company or the division up of its assets and business, they can hardly be said to have understood that Peter was in attendance at the meeting as his wife’s agent in her capacity as shareholder.
276 As directors of the company, it was not the place of Andrew Paul and Peter to divide up the company between themselves and to divert its existing business and then business opportunities away from the company to their respective new corporate entities. A closer case to that considered in Cook v Deeks would be hard to find.
277 Granted, there was no evidence of any non-compete covenant (nor of any requirement for any particular period of notice to be given if there directors wished to leave the employment of the company, from which I would infer that a reasonable period of notice should have been given), so that there would have been nothing to stop Andrew and Paul deciding to resign as directors and to finish their work for the company within a reasonable notice period. However, this they did not do.
278 Provided that there was no misuse by them of any confidential information (and it is hard to see how there could have been, since the work know-how was something they would have been entitled to use and there is no evidence of any trade secrets to be protected, nor of any extensive client lists which the company might have been in a position to protect as confidential information), I cannot see that the decision to leave AAV and thereafter to compete with it (even though this would have had the detrimental effect on goodwill to which the experts deposed) could have amounted to oppressive conduct.
279 However, what Andrew and Paul did was, in effect, to take for themselves and their new company the benefit of AAV’s resources (both in terms of its manpower and the facilities available to it, including its business premises which it occupied rent-free for a number of months), at least two-thirds (or more, depending on how the stock is viewed) of the company’s plant, equipment and tangible assets; and the benefit of both its existing work and the business opportunities it had based on Andrew’s relationship with the clients, without the consent of at least Mrs Vadori. Consent from her, as a one-third shareholder, was simply not sought (and seems to have been regarded as unnecessary).
280 That conduct seems to me to be in clear breach of their duties as directors (both under statute and by reason of their position as fiduciaries), and was oppressive in breach of s 232 of the Corporations Act. Insofar as it is suggested that any oppression was prior to the date pleaded (and hence irrelevant to the claim as pleaded), I do not agree. Apart from anything else, the oppression pleaded includes the alleged breaches of duty in having made use of their position as directors to take the benefits they did from the ongoing work. Further, it seems to me that the implementation of decisions reached at an earlier point was itself oppressive conduct.
281 The question then is as to what is the appropriate remedy for such oppressive conduct. All parties seem to accept that a compulsory purchase order would be the most appropriate form of relief (leaving the winding up of the company to be effected in an orderly fashion by the Antunovichs). It further seems to be accepted that the appropriate time to value Mrs Vadori’s share is at 1 December 2006 rather than as at the date of the commencement of the proceedings, at which later time the oppressive conduct will necessarily have affected the value of the share.
282 But for the oppressive conduct, the company would have had the opportunity to continue its business. However, as Mr Young submits, that opportunity may have been worth very little as the directors were free to leave the company at any time. Had Andrew and Paul simply resigned as directors in November 2006 and left the employ of the company, there seems little doubt that the business of the company would have been adversely affected. Moreover, Mr Humphreys, whose evidence was I thought eminently logical in this regard, is that there is no goodwill attaching to a company whose directors and employees are not subject to any effective restraints.
283 Thus it is said by Mr Young that if the appropriate order is a compulsory purchase order then the buy-out figure would be nominal (in that he says there would be nothing or only a residual value for goodwill and the one-third profit margin on the existing work (approximately $16,000) would have to be offset by existing employee entitlements which were taken over when the new employees commenced with the new company and after account was taken of the plant and equipment obtained by Vadori Plumbing.
284 However, looked at in practical terms, what Andrew and Paul did was to divert to their new company, and in effect re-badge as the business of A & P Plumbing, the whole of the business operations of AAV, at the same time as they owed statutory and fiduciary duties to AAV to act in the best interests of that company, and not to put themselves in a position of conflict with that company or to take make use of their position to make a profit in effect at the expense of the company. In my opinion, as there has been a clear breach by Andrew and Paul of the duties owed by them as directors of AAV, AAV’s assets as at 1 December 2006 must be taken to include the chose in action comprised by any claim it was in a position to make in relation to that breach of duty.
285 In valuing Mrs Vadori’s share of AAV at that time (whatever the position in relation to the existence or otherwise of goodwill in the company), account should be taken of the value of AAV’s claim against its directors. This seems to me to be akin to the cases in which the appropriate basis for valuation of the oppressed member’s share or shares has been to treat the the company to which the business was transferred as a notional subsidiary or to those in which an account of the profits made by reason of the breach of duty has been the basis of an award.
286 In essence, Mrs Vadori’s one-third share of the AAV business now reposes in A & P Plumbing. I am of the view that where this is a result of the fact that the directors have improperly diverted business from the company in breach of their duties, the value of Mrs Vadori’s share should take into account the amount for which they could or would be likely to be required to account to the company for the said diversion of its business.
287 With that in mind, I consider that the appropriate amount for which Mrs Vadori’s share is to be purchased is $190,800. I have reached that amount on the basis that the value of her one-third share in the business of AAV as at 1 December 2006 was valued by the experts at approximately $83,000, of which she has received around $50,000 comprised of cash and the equity in the car/excavator taken by Peter from the company; that a one-third share of the remaining stock as at 1 December 2006 was in the order of $16,300 (ie one-third of $49,000); that Mrs Vadori should be paid one-third of the profit conceded by Andrew on the existing work taken over from AAV (just over $16,400 which I have rounded up to $16,500); and that the amount for which Andrew and Paul should account to the company for the breach of their duties should be measured by the profits reasonably likely to have been obtained from or referable to that business for the 2007 year.
288 As to the last component of the award, I have worked on the basis that the 2006 financial accounts for AAV showed a profit of $375,000 and that there is no reason to think that the profits of A & P Plumbing would be materially less (given that both AAV’s clients made the decision to follow Andrew and Paul to A & P Plumbing – Montgomery Homes absolutely and Contour Building, until its receivership to a large extent). I have therefore allowed a sum of $125,000 for the value of the chose in action.
289 That, together with the sums of $33,000, $16,300 and $16,500, leads to a purchase price of $190,800.
290 As it does not appear that Peter has obtained in any real sense the ongoing business of AAV, I do not consider it necessary to take into account in this regard any claim which might have been brought by AAV against him for a corresponding breach of his duty as a director, nor would it be appropriate for the Antunovich interests, in effect, to be asked to compensate Mrs Vadori for his breach of duty.
291 As A & P Plumbing has had the ongoing benefit of the employees who transferred to it, and given that I have assessed the share value based on the assumed net profits, I do not consider that any adjustment should be made for the assumption of those liabilities by A & P Plumbing.
292 As it appears that Mrs Vadori has had the opportunity to collect the on-third stock held by A & P Plumbing for some time and has not done so (and the stock may well have depreciated in value over that time) I do not consider it appropriate to order interest on the component of the purchase price referable to the value of that stock. I will hear submissions as to whether there should be any interest component otherwise as part of the purchase price.
293 For completeness, I note that had I not been prepared to make a compulsory purchase order that reflected the value to the company of a claim against Andrew and Paul for breach of directors’ duty, I would have considered it appropriate to grant Mrs Vadori leave to bring derivative proceedings in the name of the company against them.
Orders
294 For the reasons set out above, I propose to make the following orders:
2. Order the fourth and fifth defendants to purchase the share of the plaintiff in AAV Plumbing Pty Limited for the sum of $190,800.
1. Declare that the affairs of the first defendant have been conducted in a manner that is oppressive to, unfairly prejudicial to, or unfairly discriminatory against the plaintiff within the meaning of section 232 of the Corporations Act (Cth) 2001.
295 I will hear from the parties in relation to costs and if there are any further submissions as to the orders (such as the question of interest).
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