Vincent Wood v Ellisor Pty Ltd and Anthony Austin Slater [1997] ACTSC 60 (4 September 1997)

SUPREME COURT OF THE ACT

VINCENT WOOD v. ELLISOR PTY LTD and ANTHONY AUSTIN SLATER
No. SC1005
of 1996
Number of pages - 7
Company Law - Costs

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

MILES CJ

CATCHWORDS

Company Law - application to wind up or order majority shareholder to transfer shares to minority shareholder on ground of oppressive conduct - Corporations Law, ss.260 and 461 - principles applicable - application partly motivated for enforced repayment of loan - grounds unlikely to be made out - order applicant to pay one half respondent's costs.

Costs - substantive claims subject of settlement or abandonment shortly before trial - cross applications for costs - whether applications to be decided in light of what orders would have been made if case had been fought - no, because costs always discretionary - but consideration of strength of relative cases inevitable.

Costs - company law - application to appoint provisional liquidator when company trading profitably and assets not in jeopardy - costs to be paid by applicant.

Corporations Law, sub-ss. 260(2)(c) and (2)(k); sub-ss.461(f), (g) and (k),

Supreme Court Act 1933, s. 23

Quirk v. Bawden [1992] ACTSC 118; (1992) 111 FLR 115; 112 ACTR 1

Mincom Pty Ltd. v. Murphy [1983] 1 Qd.R. 297 at 307

Re East West Promotions Pty Limited (1986) 4 ACLC 84

HEARING

CANBERRA, 18-20 March 1997 (hearing), 4 September 1997 (decision)

4:9:1997

Counsel for the applicant: Mr. U. Boettcher

Solicitors for the applicant: Meyer, Boettcher & Clapham

Counsel for the respondents: Mr. T.M. Johnstone

Solicitors for the respondents: O'Connor Harris

ORDER

THE COURT ORDERS THAT:

1. The applicant pay the second respondent's costs up to and including the amendment of the application on 16 December 1996, such costs to include costs reserved on 6 December 1996.

2. The applicant pay one half of the second respondent's costs thereafter.

3. The first respondent pay its own costs.

DECISION

MILES CJ

Nature of case: applications for costs after settlement by consent

These are competing claims for costs by parties who were at relevant times the shareholders and the directors of Ellisor Pty Ltd (the company).

The proceedings commenced on 6 December 1996 by the filing of an application to wind up the company under sub-ss.461(f) and (k) of the Corporations Law on the grounds that the affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to a member of the company and that it is just and equitable that the company be wound up. On the same day a separate application was filed seeking the appointment of a provisional liquidator.

The applicant was Mr. Vincent Wood. At the time of commencing the proceedings he held 40 per cent of the shares and was a director of the company. The respondent, Mr. Anthony Austin Slater, was the other director who held the remaining 60 per cent of the shares.

The application was amended on 16 December 1996 to include alternative and additional claims for orders under s.260 of the Corporations Law. One of the additional or alternative orders sought was an order that Mr. Slater purchase the shares of Mr. Wood at a price to be determined. Another was that the company [re]pay Mr. Wood a director's loan of $13,706.

The grounds relied on for the orders sought were amended to read as follows:

"(a) that the affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial, to or unfairly discriminatory against Vincent Wood, or in a manner that is contrary to the interests of the members as a whole; or

(b) that an act or omission, or a proposed act or omission, by or on behalf of the company, or a resolution, or a proposed resolution, of a class of members, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against Vincent Wood or was or would be contrary to the interests of the members as a whole;

(c) it is just and equitable that the company be wound up."

The three grounds specified are grounds on which a company may be wound up under sub-ss. 461(f), (g) and (k) respectively of the Corporations Law. The first and second of those grounds are also the grounds on which an order may be made under s.260. The orders that may be made under s.260 include (2)(c), an order that the company be wound up and (2)(k), an order requiring a person to do a specified act or thing.

The amended application for relief under ss.260 and 461 was listed for hearing on 18 March 1997. However, shortly before that date Mr. Wood sold his shares to someone else and thus he could no longer seek an order that Mr. Slater purchase his shares from him. Mr. Wood also lost the standing to claim the remaining relief sought, including the order to wind up the company. By the date set aside for the hearing all relief sought (including repayment of the director's loan) was the subject of agreement or abandonment, save the appropriate order as to costs.

Counsel for both Mr. Wood and Mr. Slater urged me to consider their applications for costs in the light of what the situation was likely to have been if Mr. Wood had not sold his shares and the dispute had proceeded as a contested case. Faced with this united front on the part of counsel, I had no option but to receive the evidence, oral and documentary, and the written submissions. However, it is necessary for me to state at the outset that it is not incumbent upon the Court, faced with a case that has been settled, or discontinued, on terms, save as to costs, to embark upon a determination of the issues as if the case were still being fought on its merits. Moreover, it seems to me that no matter how firmly entrenched the practice that costs go to the litigious victor, the legislature has been at pains, again and again, to lay down the simple mandate that costs are discretionary. Section 23 of the Supreme Court Act 1933 is but one example of such mandate and intent, and the Court should have regard to it.

However, some enquiry into the relative strength of the cases presented for the respective parties is inevitable. If, for example, the strength of the case for one party were over-whelming and the other party persisted in an obstinate refusal to concede defeat until the eve of the hearing, it is likely that costs, or most of the costs would follow the event. If it were shown that there were merits more or less equal on both sides and that the negotiated agreement was a compromise, it might be appropriate for each side to bear its own costs. Analogous considerations are relevant when the Court is asked, after a fought out contest on the merits, to take into account, on the question of costs, a prior payment into court or pre-trial offers of settlement made without prejudice save as to costs: see Quirk v. Bawden [1992] ACTSC 118; (1992) 111 FLR 115; 112 ACTR 1.

It is necessary then to say something about the nature and merit of the claims of the parties in the context of a case in which there are no pleadings from which the issues can be identified.

Application for appointment of provisional liquidator

The application for nomination of a provisional liquidator under O.75B of the Supreme Court Rules should be considered separately from the rest of the case. Whatever the justification for applying for an order winding-up the company on the grounds put forward, no good reason was advanced for appointing a provisional liquidator as an initial step towards the ultimate relief to be granted at the suit of Mr. Wood.

For standing to make an application under s.461 of the Corporations Law, Mr. Wood relied upon his position as a contributory (holder of fully paid shares in the company) and not as a creditor. There is no general right on the part of a contributor to apply for the winding up of a solvent company which is still trading. I assume in Mr. Wood's favour that he was not aware of this at the time of commencing proceedings. However, he admitted in cross-examination that he had commenced proceedings because he thought that that would encourage the company to repay a director's loan advanced by the company to him. On 11 December 1996 his solicitors threatened to make the failure to repay the loan the basis of an additional ground of insolvency for the purpose of winding up. However, he conceded in his affidavit of 13 March 1997 that the loan did not become repayable until that later date. The assets of the company were not in jeopardy. These facts and the concession by Mr. Wood are sufficient to justify an order that Mr. Wood should pay the respondent's costs of the application dated 6 December 1996 seeking the appointment of a provisional liquidator.

Application for a winding-up order

Mr. Johnstone for Mr. Slater, submitted that the application that the company be wound up (made by separate written application dated 6 December 1996, but assigned the same cause number in the registry) was, like the application for a provisional liquidator, made for the ulterior motive of repayment of a loan by him to the company ("the director's loan") and should therefore never have been made. Indeed, Mr. Johnstone submitted that it was an abuse of process.

Numerous authorities were referred to in order to support the submission that a winding up order should not be sought when there is a bona fide dispute as to liability.

In Mincom Pty Ltd. v. Murphy [1983] 1 Qd.R. 297 at 307, Williams J. said:

"..... the request for a winding up order is made as a last resort and only if the petitioner is not able otherwise to obtain the real relief which he seeks. It must always be a question of degree whether or not one can conclude that a petition has not been presented with the genuine object of obtaining a winding up order but merely as a lever to exert pressure in order to obtain something to which the petitioner may not otherwise be entitled (say, for example, an inflated price for his shares)."

For reasons that will be apparent later, my conclusion is that Mr. Slater has not discharged the onus cast upon him of showing that the application to wind up the company was not made bona fide. It follows that I do not think that it was likely that the application to wind up the company would have been dismissed as an abuse of process. I think that the appropriate order for costs in that regard is to be considered along with the appropriate order for costs in relation to the claim after it was amended on 16 December 1996.

Whether or not a winding up order would have been made on the merits needs to be considered in the light of the alternative claims for an order compelling Mr. Slater to buy Mr. Wood's shares.

The prospect of success of the claim for an order that the company repay Mr. Wood the proceeds of the loan, however, no longer needs to be considered since both Mr. Slater and the company agreed to that order being made. Furthermore, once that order was made, it reduced very substantially the prospect of a further order to be made after a contested hearing that the company be wound up, for, in the event of a subsequent winding up order being made, the effect was likely to make the repayment of the loan nugatory. Any moneys received from the company by Mr. Wood in repayment of the loan within six months of the winding up order would be called in and made available to creditors generally in accordance with the ordinary rules of the ranking of debts under s.556 of the Corporations Law.

Application for an order that Mr. Slater purchase Mr. Wood's shares

The substantial question then is: What chance did Mr. Wood have of succeeding in his claim that Mr. Slater purchase his shareholding in the company on the terms Mr. Wood offered?

The likely factual scenario was as follows.

The company carried on business in a relatively small way at Belconnen in the supply of automotive window tinting, roof modification and upholstery. It also manufactured waterbeds.

By 31 July 1996, at a time when Mr. Slater had suspicions about Mr. Wood's competence and loyalty, a valuation of the company carried out at Mr. Slater's request put the company's worth at $150,000. On 25 September 1996 Mr. Slater offered to sell his 60 per cent of the shareholding to Mr. Wood on the basis of that valuation. Eventually, on 26 November 1996 Mr. Wood declined the offer, advising that he was intending to set up business on his own account.

In the meantime the relationship between the two men deteriorated. In October, whilst Mr. Slater was on leave, Mr. Wood awarded himself a pay rise of $150 per week, which Mr. Slater reduced to $50 in November. During that month Mr. Wood took several steps which indicated that he was contemplating severing his connection with the company. He took possession of the company's cheque book and obtained documentation from the bank which would enable the signatures to the account to be altered.

Mr. Slater for his part directed Mr. Wood, against the wishes of the latter, on 26 November 1996 to take nine and a half weeks holiday forthwith. In the ensuing weeks Mr. Slater held himself out to be the managing director of the company, although there had been no formal change in that regard and no agreement on the part of Mr. Wood. Mr. Slater also appointed a new "branch manager", changed the locks on the premises and refused Mr. Wood access to the premises when Mr. Wood sought to call in order to operate the company computer. Mr. Slater wrote to customers and suppliers informing them of Mr. Wood's commencement of "annual leave" and the appointment of Mr. Ingram to the Belconnen branch "for the interim". These letters were signed by Mr. Slater on behalf of the company and on behalf of Caltarni Pty Ltd in which Mr. Slater also held an interest. Mr. Slater allowed use of the Belconnen premises for pick up and delivery of panel-beating work for Caltarni Pty Ltd which otherwise carried on business at Mitchell. It is likely that Mr. Slater held genuine fears that Mr. Wood was intending to set up business in competition with the company and that there were reasonable grounds for that belief. However, it is also likely that there was no basis for any belief at that time that Mr. Wood had done anything positive toward that intention nor that he intended that the competing business be set up before he sold his shares in the company.

On 4 December 1996 Mr. Wood's solicitors wrote to Mr. Slater's solicitors advising that the latest of several offers made by Mr. Wood for the sale of his shares was withdrawn and that an application for appointment of a provisional liquidator would be brought in the Supreme Court on 9 December 1996. Through the solicitors various issues were raised including the matter of the director's loan already referred to. There was no real issue about whether the loan was owing, but there was an issue about how much was owing or, rather, how much should be paid after various other matters were taken into consideration.

On 5 December 1996 Mr. Slater, as company secretary (a position that he apparently held, although I do not recall it being the subject of evidence), gave notice of a meeting of the directors to be held the following day. At the meeting each man was accompanied by his solicitor. After some preliminary discussion, Mr. Wood's solicitor proposed that his client chair the meeting. Mr. Slater and his solicitor indicated their agreement. Mr. Wood's solicitor then informed the meeting that his client claimed a casting vote under the Articles of Association of the company. He invited his client to move the appointment of a provisional liquidator. Mr. Wood did so. Mr. Slater's solicitor, Mr. John Harris, protested and he and his client left the room. They were, however, followed by Mr. Wood's solicitor and there were subsequent without prejudice discussions. Before the end of those discussions, Mr. Wood's solicitor handed over hand-written minutes of the directors' meeting. The minutes recorded a motion "that Vincent Wood be elected Chairman", which was "passed unanimously". The minutes also recorded a motion "that a provisional liquidator be appointed to the company" and a "response", namely that Anthony Slater and his solicitor left the meeting.

There were other incidents and transactions relied upon by each party between then and the eventual dates of the hearing. I do not think that these add anything to what had already transpired up until the initial application before the Court on 6 December. They go to confirm that there developed what both sides now agree was a "managerial deadlock" which, in the interests of the company, could not be allowed to continue. Mr. Wood's solution to the deadlock was to seek that Mr. Slater take over control by buying him out at a price, initially fixed at $60,000, alternatively, that the company be wound up. Mr. Slater's solution was to offer, and to continue to offer, to purchase Mr. Wood's shareholding at a price fixed independently. However, negotiations were complicated by other factors such as mutual releases and other real or imagined causes of action and the repayment by the company to Mr. Wood of the director's loan. The price which Mr. Wood accepted for his shares when they were sold to a Mr. Dennison was $3,200.

Conclusion

On behalf of each party it was submitted that the other was in breach of his fiduciary duties owed as a director to the company. I do not think that either would have made out such a serious allegation. It is true that each had interests other than those of the company, or to put it another way, the interests of each director and those of the company did not coincide exactly. Mr. Wood brought with him a background of experience in automotive window tinting and roof installation which he intended to take with him in the event of setting up in business on his own account. However, the evidence was unlikely to have established that Mr. Wood built on that prior experience or a established a clientele whilst in the service of the company so that to contemplate setting up on his own account involved breach of a fiduciary duty.

Mr. Slater used the facilities of the company to further the interests of Caltarni Pty Ltd and wrongly held out that the business conducted by the company at Belconnen was a "branch" of the business conducted by Caltarni Pty Ltd at Mitchell. It is almost inevitable that every company director is placed from time to time in situations where the director's own interests conflict with those of the company. To prefer one's own interest is not in every case a breach of fiduciary duty, nor is every breach such as to attract judicial intervention. I do not think that, even if the facts were held to constitute such a breach by Mr. Slater, it would have been serious enough to justify an order winding up the company or an order that Mr. Slater purchase Mr. Wood's shares. Likewise, I do not think that if the facts were held to constitute a breach of fiduciary duty by Mr. Wood that Mr. Slater would necessarily have obtained an order in the terms sought by him.

I do not think that the conduct of Mr. Slater could have been characterised like that in one of the authorities cited, Re East West Promotions Pty Limited (1986) 4 ACLC 84, where the secretive manner of the respondent's conduct, her lack of frankness and continued failure to account for the company's assets or the proceeds she derived therefrom was found to constitute conduct which was oppressive and unfairly prejudicial to the petitioning shareholder sufficient for the exercise of the court's jurisdiction that the majority shareholder was ordered to purchase the applicant's shareholding at a price to be determined by the court.

In this case the moving party was Mr. Wood and he bore the onus of showing that there was conduct on the part of Mr. Slater that was oppressive in the sense contemplated by s.260. I am not convinced that he would have discharged that onus. Moreover, there was still a discretion in the Court as to whether the whole of the circumstances, including Mr. Wood's own conduct, were such as to justify the making of the orders sought, particularly the order that Mr. Slater purchase Mr. Wood's shares at the price offered by Mr. Wood. In this respect the manner in which Mr. Wood took over the conduct of the meeting of 6 December 1996 (whereby the resolution to seek a provisional liquidator was passed) is of considerable significance. It may have been a clever move as far as Mr. Wood's interests were concerned but it was not in the company's interests to promote conflict between the two shareholders in that way. Mr. Slater's response has not been shown to have been unreasonable, nor his insistence in the litigation that he was not guilty of oppressive conduct. Whilst otherwise the counter allegations of Mr. Slater against Mr. Wood have not in general terms been made out to constitute breach of fiduciary duty, Mr. Wood's conduct at the meeting of 6 December made it inevitable that the court be asked to intervene. Although Mr. Wood was somewhat precipitate in commencing proceedings that very day, it was unlikely that, without the impending hearing, the parties would have reached agreement. I think that the appropriate order is that Mr. Wood pay one half of Mr. Slater's costs.

Orders

I make the following orders:

1. The applicant pay the second respondent's costs up to and including the amendment of the application on 16 December 1996, such costs to include costs reserved on 6 December 1996.

2. The applicant pay one half of the second respondent's costs thereafter.

3. The first respondent pay its own costs.