In the matter of Auzhair Supplies Pty Ltd (a deregistered company) and Auzhair 1 Pty Ltd - Greenaway v Auzhair 1 Pty Ltd [2010] NSWSC 1339 (19 November 2010)

Last Updated: 23 November 2010

NEW SOUTH WALES SUPREME COURT

CITATION:
In the matter of Auzhair Supplies Pty Ltd (a deregistered company) and Auzhair 1 Pty Ltd - Greenaway v Auzhair 1 Pty Ltd [2010] NSWSC 1339


JURISDICTION:
Equity

FILE NUMBER(S):
10/017300

HEARING DATE(S):
10 November 2010

JUDGMENT DATE:
19 November 2010

PARTIES:
Warren Thomas Greenaway (First Plaintiff)
Elizabeth Gay Greenaway (Second Plaintiff)
Auzhair 1 Pty Ltd (First Defendant)
Anna Gerace (Second Defendant)
Domenico Gerace (Third Defendant)
Fiona Gerace (Fourth Defendant)
Ilario Gerace (Fifth Defendant)
Jeanine Gerace (Sixth Defendant)
Roy Gerace (Seventh Defendant)

JUDGMENT OF:
Ward J

LOWER COURT JURISDICTION:
Not Applicable

LOWER COURT FILE NUMBER(S):
Not Applicable

LOWER COURT JUDICIAL OFFICER:
Not Applicable



COUNSEL:
J T Johnson (Plaintiffs)
D Ash (Defendants)

SOLICITORS:
Carroll & O'Dea (Plaintiffs)
Sachs Gerace Lawyers (Defendants)


CATCHWORDS:
CORPORATIONS
application for reinstatement of company by plaintiffs aggrieved by de-registration due to outstanding liabilities owed under loan agreement with the company
application for appointment of liquidator to wind up company on its reinstatement
separate application for rectification of register of first defendant to reinstate plaintiffs on register as shareholders
plaintiffs removed from register without notification (and where no compliance with Corporations Act requirement)
whether plaintiffs thereby unfairly prejudiced or oppressed
HELD
reinstatement of debtor company ordered
company to be wound up upon reinstatement
liquidator appointed
rectification of share register of first defendant ordered
compulsory purchase re plaintiffs’ shares
EVIDENCE
where onus of establishing consent or lack of consent to share cancellation lies on application for rectification of register

LEGISLATION CITED:
Corporations Act 2001 (Cth)


CASES CITED:
Actwane Pty Ltd (Receiver and Manager Appointed) (In Liquidation) and William James Moss v Hotel Redfern Pty Ltd, Actwane Holdings Pty Ltd and Stephen Michael Larkin [2002] NSWSC 265
Brandi v Mingot (1976) 12 ALR 551
Cadbury Schweppes Pty Ltd v Darrell Lea Chocolate Shops Pty Ltd (No 4) (2006) 229 ALR 136; [2006] FCA 446
Commonwealth of Australia v McLean (unreported, NSWCA, 31 December 1996)
Grant & ors v John Grant & Sons Pty Ltd & ors [1950] HCA 54; (1950) 82 CLR 1
Gregory Paul Montfroy v Roads Corporation (trading as VicRoads) [2005] VSC 320
HML v R [2008] HCA 16; (2008) 235 CLR 334; (2008) 245 ALR 204
Ho v Powell [2001] NSWCA 168; (2001) 51 NSWLR 572
Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd (No 2) [2008] FCA 810; [2008] ATPR 42-240
J P Morgan Portfolio Lemery Ltd v Deloitte Touche Tohmattsu (2008) 167 FFCR 212
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Katsilis v Broken Hill Pty Co Ltd (1977) 18 ALR 181; (1977) 52 ALJR 189
Lake v Crawford [2010] NSWSC 232
Lampropoulos v Kolnik [2010] WASC 193
Lundie & Anor v Rowena Nominees Pty Ltd (Receiver & Manager Appointed) (In Liq) [2006] WASCA 106
McLaughlin v Daily Telegraph Newspaper Co Ltd (No 2) [1904] HCA 51; (1904) 1 CLR 243
Payne v Wizaard Industries Pty Ltd (1997) 24 ACSR 277
Rafeletos v Great Wall Resources Pty Ltd [2009] FCA 1395
Re Peter Conyers Holdings Pty Ltd (in liq) (1996) 14 ACLC 1835
Szozda v Szozda [2010] NSWSC 804
Watson v Foxman (1995) 49 NSWLR 315
WorkCover Authority (NSW) v Picton Truck and Trailer Repairs Pty Ltd [2004] NSWCA 371; (2004) 51 ACSR 102

TEXTS CITED:
Austin & Black, Annotations to the Corporations Act, LexisNexis, Looseleaf Service
Heydon D., Cross on Evidence, 7th Australian ed, Butterworths, 2004

DECISION:
Re Auzhair Supplies Pty Ltd
Plaintiffs' claim for reinstatement of deregistered company and for appointment of liquidator to wind up company on reinstatement upheld.
Re Auzhair 1 Pty Ltd
Plaintiffs' claim to rectify register of first defendant to restore their names as shareholders upheld. Breach of s 232 Corporations Act. Compulsory Purchase order to be made.
Orders for valuation of shares and costs orders to be made after Counsels' submissions.



JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST


WARD J

FRIDAY 19 NOVEMBER 2010

10/017300 IN THE MATTER OF AUZHAIR SUPPLIES PTY LTD (A DEREGISTERED COMPANY) AND AUZHAIR 1 PTY LTD - GREENAWAY V AUZHAIR 1 PTY LTD & ORS

JUDGMENT

1 HER HONOUR: In this matter Mr and Mrs Greenaway seek orders in relation to financial transactions entered into by them in 2002/04 with entities then owned and operated by various members of the Gerace family with whom Mr and Mrs Greenaway had been friends for some years.

2 In summary, over the period 2002-2004 Mr & Mrs Greenaway provided funds totalling some $600,000 which were to be used in the business of one or other of two companies - Auzhair Supplies Pty Ltd (since deregistered) and Auzhair 1 Pty Ltd. They were shareholders, on incorporation, of Auzhair 1. In these proceedings they seek an order reinstating the registration of the first (now deregistered) company (Auzhair Supplies) of which they claim to be a creditor and for the winding up of that company in insolvency. They also seek an order for the rectification of the register of members of the other company (Auzhair 1) to record their holding of one ordinary fully paid share each in the issued capital of Auzhair 1 which they say was cancelled without notification to them (and seek consequential orders in relation to that company).

3 As to those matters, it seems now broadly to be accepted by the defendants that the application for voluntary deregistration of Auzhair Supplies in 2005 was wrongly made (though what consequence flows from that is not accepted). As to the process by which the Auzhair 1 shares were forfeited, the defendants ask, rhetorically, what other document would have been filed consistent with what they submit was an agreement in 2004 for the reversion from equity in Auzhair 1 to a debt owing by Auzhair Supplies (and they resist the relief sought in respect of Auzhair 1).

Background

4 It is not disputed that Mr and Mrs Greenaway had a friendship over some years with various of the defendants (Roy Gerace, Larry (Ilario) Gerace and Mick (Domenico) Gerace. (The wives of each of those men are the remaining individual defendants.) At the relevant time, the three male Gerace defendants were the directors and shareholders of Auzhair Supplies (ACN 085 159 280), whose ABN was ABN 330 851 59280.

5 Mr Greenaway gave evidence, by affidavit affirmed on 18 January 2010, that in about 2002 Larry Gerace approached Mr Greenaway’s wife with a proposal that the Greenaways lend funds to a company run by the Geraces (by which they can only have been referring to Auzhair Supplies, as Auzhair 1 was not then incorporated). Mrs Greenaway apparently agreed to do so (and, indeed, the making of a loan of $200,000 to Auzhair Supplies by Mrs Greenaway is not disputed by the defendants). Mr Greenaway, who had operated a business with his wife for some years up until their retirement in 2003, says that he and his wife paid a total of $200,000 in June or July 2002 to Auzhair Supplies.

6 In evidence was a copy of a loan agreement dated 1 July 2002, signed both by Mrs Greenaway (whose signature was apparently witnessed by Larry Gerace) and by Roy Gerace on behalf of Auzhair Supplies (whose signature was also witnessed by Larry Gerace).

7 That loan agreement recited that Mrs Greenaway had agreed, at the request of Auzhair Supplies, to lend $200,000 to the company. That amount was to be repaid three years from the date of execution of the agreement, i.e. it was repayable on 1 July 2005. Interest was payable in arrears at the interest rate of 10%per annum in instalments payable every six months from the date of the agreement (a total of six instalments of $10,000) each with the final instalment payable on the repayment date. (In evidence there was a similar unsigned version of the loan agreement, in which the borrowing company was identified as Auzhair Pty Ltd (but with the same ACN as that of Auzhair Supplies) dated 15 June 2002. There is no explanation as to the reason for the earlier version but nothing seems to turn on this. Presumably it was an earlier draft of the loan agreement, perhaps corrected when the mistake as to the company name was appreciated.) It is not clear, on the face of the 2002 loan agreement, who prepared that document. Mr Greenaway denied that he had done so and there seems no basis to suggest that he or his wife did.

8 Mr Greenaway deposes to receipt of interest totalling $20,000 payable under the 2002 loan for the period from July 2002 to July 2003, in instalments of $10,000 on 1 July 2003 and 3 January 2004, respectively. (It would seem, therefore, that there was some default in the payment of interest instalments at the outset, since on the loan agreement an instalment would have fallen due on 1 January 2003, though again nothing seems to turn on this.)

9 In paragraph 14 of Mr Greenaway’s affidavit he deposes to having attended a dinner with Roy, Larry and Mick Gerace in June 2003 at a restaurant in Ryde during which Mr Greenaway says it was proposed that

Elizabeth and I invest funds into a company established by the Geraces for the distribution of imported hair products. The name of the company was Auzhair 1 Pty Ltd. The amount discussed was a further $400,000. It was also proposed that the $200,000 loaned to Auzhair Supplies Pty Ltd in or about July 2002 would be rolled into the Auzhair 1 Pty Ltd investment. The proposal was that Elizabeth and I would own 25% of Auzhair 1 Pty Ltd and be entitled to 25% of the profits. Elizabeth and I agreed to the proposal. (my emphasis)

10 That arrangement was not documented in writing and there is some confusion, at least on Mr Greenaway’s part, as to what was understood or conveyed to him at the time by the concept of “rolling” the $200,000 loan into the Auzhair 1 “investment”. Whether the name “Auzhair 1” was mentioned at the time (and whether Mr Greenaway understood it was to be a separate company) is unclear. Mr Greenaway’s evidence in the witness box was that he could not recall when he became aware of the name “Auzhair 1”.

11 The manner in which paragraph 14 of the affidavit is worded (which unfortunately was not in direct speech and so suffers from the fact that it seems to be a summary or conclusion as to what was said or the effect of what was said) suggests that the proposal being put to the Greenaways in June 2003 was a proposal by which there was to be an “investment” by them of funds in a new company (i.e. Auzhair 1); that this was notionally to include the existing $200,000 loan; and that Mr and Mrs Greenaway would own 25% of the new company. (If, however, that was the arrangement, then that is not what appears to have actually happened, at least in that there seems no doubt that the additional moneys were paid to Auzhair Supplies not Auzhair 1.)

12 An application was made in June 2003 for the registration of Auzhair 1. That application recorded the shareholders of the company as being each of the second to seventh defendants and Mr and Mrs Greenaway. The documentation disclosed that each of the shareholders held one ordinary fully paid share, the amount paid up on that share being $1.00.

13 The ASIC search in evidence disclosed that Auzhair 1 was incorporated on 17 June 2003. Larry and Roy Gerace were appointed the directors of Auzhair 1.

14 A Shareholders’ Agreement (undated but seemingly executed at some stage on or after 26 June 2003 having regard to the footer appearing at the base of the first page of the agreement - “shareholdersagreementv1.1 26Jun03”) was entered into between the second to seventh defendants and Mr and Mrs Greenaway. It contained a standard form entire agreement clause (clause 10.8) and recorded that the company’s principal business activity was to be acting as a distributor of hair products, including cream based hair dyes and bleaches. There was to be a single director (initially Roy Gerace) and a single alternate director (Larry Gerace).

15 In three separate payments made around June 2003, Mr and Mrs Greenaway paid further sums (totalling $400,000) to Auzhair Supplies. There was no loan agreement entered into at that time in relation to the additional moneys nor did the Shareholders’ Agreement in relation to Auzhair 1 make any reference to this.

16 Mr Ash (Counsel for the defendants) says that the reasonable inference from this evidence is that Mr and Mrs Greenaway gave up their rights as lender (to Auzhair Supplies) to call for repayment from Auzhair Supplies of the $200,000 loan and that both that amount and the additional $400,000 were to be treated as a payment in order that they receive 25% of the new company or investment vehicle (Auzhair 1) i.e. as the price paid to acquire those shares. Certainly the arrangement or proposal that Mr Greenaway says he and his wife accepted seemed to involve the existing loan of $200,000 being treated, with the additional funds to be provided, as an investment in the new (hair product distribution) company. Some of Mr Greenaway’s evidence in the witness box would support this (which I address later).

17 However, what is not clear is what the parties agreed as to the manner in which the existing loan was to be “rolled” into the proposed investment into the new company or, indeed, how that investment was to be effected (whether by capital contribution or by a loan to the company).

18 There is no suggestion by Mr and Mrs Greenaway (and it was emphatically disavowed by Mr Greenaway in the witness box) that any sum over and above the total amount of $600,000 was paid to either of the Auzhair company entities or to the defendants.

19 The question is how the parties agreed to treat the total “investment” by Mr and Mrs Greenaway of $600,000 into the business of one or other company (i.e. whether that be a loan arrangement initially with Auzhair Supplies but in some way from 2003 adopted by Auzhair 1, or whether, as from June or July 2003, that sum was in effect treated as a capital contribution by Mr and Mrs Greenaway to the new company and no longer repayable as a loan, or whether there was some other arrangement).

20 The absence of any further loan agreement at that stage (of the kind entered into in 2002) and the issue of shares in Auzhair 1 to the Greenaways would tend towards an inference that the arrangement between the Greenaways and the Geraces at that point (ie as at June 2003) was for the Greenaways to receive a return on their $600,000 “investment” by means of a profit share from the Auzhair 1 business and not by interest repayments as such. However, if so, this is not recorded in the Shareholders’ Agreement.

21 The subscription price for the shares, as disclosed on the documentation lodged with ASIC, was $1.00 each. It does not seem to me that the evidence supports a conclusion that the purchase or subscription price paid for the shares by Mr and Mrs Greenaway was $600,000 (whether by way of forgiveness of the $200,000 loan and the payment of additional funds, or otherwise). It is possible that the $600,000 was agreed to be treated as a loan to the new company, Auzhair 1, (which would be consistent with Mr Greenaway’s understanding of the purpose for the funds being provided) but there is no documentation to indicate in what circumstances any such loan was to be repaid to Mr and Mrs Greenaway and the moneys were paid to Auzhair Supplies. It is also relevant to note (as already mentioned) that there was nothing recorded in the Shareholders’ Agreement in relation to any capital contribution by the respective shareholders (which might be thought to be a surprising omission if this is what the payment was intended to be, particularly as the Shareholders’ Agreement was prepared in a formal document and presumably, given its form and language, by someone familiar with or privy to legal or commercial documentation of this kind). In that regard I note that the typeface and layout of the Shareholders’ Agreement differs from that of the 2002 loan agreement.

22 The statement by Mr Greenaway that he and his wife were to “invest funds” into the company in the additional sum of $400,000 would equally be consistent with that sum being a capital contribution or a loan. The “roll over” of the $200,000 into the Auzhair 1 “investment” is similarly open to interpretation either way.

23 Apart from the relatively few contemporaneous documents which were in evidence, there was very little by way of company or other documentation to reveal what the arrangements were between the parties. None of the defendants chose to adduce any oral evidence as to what had transpired in 2003/2004. I discuss later what inferences (if any) can be drawn from the absence of direct evidence from the defendants.

24 There is no dispute, however, that on the incorporation of Auzhair 1 Mr and Mrs Greenaway each held a share in the company (and the company records show that this remained the case until 2006).

25 Mr Greenaway says that in or about June 2004 he and his wife “indicated that we were not happy with the return we had received from our shareholding in Auzhair 1 Pty Ltd” (para 20 of his affidavit).

26 There is no evidence of any dividends having been declared and paid to the shareholders of Auzhair 1 over the relevant period (other than a reference in his oral evidence by Mr Greenaway to an amount of approximately $2,000), so it is not surprising that, if Mr Greenaway had been expecting dividend funds of a greater amount over this period (or, indeed, dividends equating to what would have been a 10% interest payment on the funds he and his wife provided), he would have been unhappy with the result of the 2003 arrangement.

27 Under the 2002 loan agreement (and whatever the manner in which that may have been “rolled over” into the new “investment”), a further instalment of $10,000 would have fallen due in July 2004. (A payment of $10,000 seems to have been made around that time.) Therefore, the complaint in June 2004 in relation to the “return” from the Auzhair 1 shareholding cannot seemingly have related to a complaint about non-payment of interest on any subsisting loan arrangement at that stage (since the next interest payment was not due until July 2004), unless this was a complaint about the apparent failure to make the first interest instalment. It could, however, be consistent with there remaining a loan (whether to Auzhair Supplies or to Auzhair 1) on foot at that stage but with the Greenaways also expecting a dividend return on their shares in the new company (or, perhaps, that they were prepared to waive any claim for interest provided or for so long as dividends were received at least in the equivalent amount).

28 The defendants contend, however, that the loan had been “rolled into” an equity relationship by way of share ownership in Auzhair 1 as from June 2003, such that no debt relationship then remained with Auzhair Supplies. Mr Ash submits that the fact there was no mention of any unhappiness with loans to the “now deregistered” company (i.e. Auzhair Supplies) supports the inference that at that stage there was only an equity relationship and no debt relationship (although, as I have noted, the repayments under that agreement seem to have been met other than the first six month instalment back in January 2003).

29 Whatever the status of the arrangements between the parties at that point, what is unclear is what next happened, i.e. after the Greenaways expressed unhappiness with the return from their shareholding.

30 The one thing that did then happen was that, on 1 July 2004, the parties signed a new loan agreement. In outline the agreement is in similar format and typeface to the 2002 loan agreement. There is again no evidence as to who prepared that loan agreement. However, Mr Greenaway was adamant that he had not done so and did not know who had. It seems reasonable (in the absence of any evidence from the defendants to suggest otherwise) to accept Mr Greenaway’s evidence in this regard and to infer that the loan agreement was prepared by or on behalf of one or more of the Auzhair parties.

31 Given the similarity of typeface, format and content between the two loan agreements it also seems reasonable to infer that that loan agreement was prepared as a “cut and paste” based on the 2002 agreement, which might explain the fact that it is drafted in prospective terms (ie “on the date of signing this deed Mr and Mrs Greenaway will provide the advance to Auzhair Supplies Pty Ltd on the terms and subject to the conditions set out in this agreement. The advance will be provided to Auzhair Supplies Pty Ltd by way of bank cheque/cheque drawn by Mr and Mrs Greenaway and payable to Auzhair Supplies Pty Ltd”), even though it is accepted by all parties that the funds referred to in the agreement had already been provided by the Greenaways.

32 The 2004 loan agreement recited an agreement by Mr and Mrs Greenaway to lend moneys at the request of a company having the same ABN as Auzhair Supplies (although where the name “Auzhair Supplies” appears throughout the agreement there is a vertical line and no space between the ‘r’ and ‘S’).

33 I interpose to note that it was not suggested that there had been an error in the documentation of the 2004 loan agreement in relation to the identity of the borrower (i.e. that it should be rectified to identify the borrower as Auzhair 1) although, in response to the allegation that the July 2004 loan agreement, represented the balance of moneys outstanding to them by Auzhair Supplies at the date of the loan agreement being entered into, the defendants somewhat curiously pleaded as follows:

As to paragraphs 18 and 19 of the claim, the defendants admit that on 1 July 2004 the plaintiffs entered into written loan agreement in respect of an advance of $600,000 repayable on 1 July 2007 and say further:

(a) that it is not clear on the face of the particularised document whether the named borrowing party ... is Auzhair 1 or Auzhair Supplies Pty Ltd;

(b) that if this Honourable Court finds as an objective fact that the borrowing party is the first defendant, the first defendant (Auzhair 1) admits that the advance has not been repaid save and except as pleaded below;

(c) that save and except as pleaded above, the defendants do not admit the paragraph.

34 In relation to that pleading, it is hard to accept that, whether or not the defendants are in a position to speak for the now deregistered company (and even then the former directors of that company ought surely to be in a position to say what they knew of the arrangements entered into by that company), the first defendant (Auzhair 1) and its directors were not in a position to say whether or not Auzhair 1 was the borrower of the loan recorded in the 2004 loan agreement. Hence, the statement or comment in para 3 of the Defence seems to me to be disingenuous at best.

35 Repayment of the moneys the subject of this agreement was said to be due on 1 July 2007, with an interest rate specified of 10% per annum. Interest was to be payable in arrears in instalments every six or twelve months from the date of the agreement. (It was conceded that the clause contained a typographical error insofar as it provided for six instalments of $30,000 or 12 instalments of $60,000, with the final instalment payable on the repayment date.)

36 Tendered as Exhibit 1 by the defendants in the proceedings before me is the answer given by Mr Greenaway to an interrogatory ordered by the court by consent on 9 March 2010, the relevant parts of which are as follows:

“Interrogatory

Please look at annexure H to the first plaintiff, Mr Greenaway’s affidavit made on 18 January 2010 [the 2004 loan agreement], in particular clause 2 (“provision of funds”. Please advise:

(a) in what manner any funds the subject of the loan agreement were provided; and

(b) when (each) provision was made?

Answer:

(a) the funds were a rollover of an existing admitted indebtedness by Auzhair Supplies Pty Ltd to Mr and Mrs Greenway in the amount of $600,000. Acknowledgement signed in relation to the receipt of cheques for a total amount of $600,000 invested with Auzhair Supplies Pty Ltd.

(b) the provisions were made as follows: [and a table of cheque details was appended]

37 On the evidence before me, I would infer that the 2004 loan agreement documentation was intended to record an agreement that (whatever the nature of the arrangements that had been entered into in 2003 when the additional $400,000 funding was provided by the Greenaways) the sum of $600,000 was then acknowledged to be the subject of a loan to Auzhair Supplies, and that company promised to repay that loan on the terms of the agreement. In substance, that does not now seem to be disputed by the defendants.

38 The defendants, however, say that the only available inference from this is that the plaintiffs, unhappy with their $600,000 equity exposure to Auzhair 1 (acquired at the time they “rolled over” their initial investment into that company), wished by mid 2004 to exchange that exposure for a $600,000 debt exposure to Auzhair Supplies (now deregistered). Mr Ash submits that if that is correct then the only extant legal relationship after 2004 between the relevant parties was a relationship of debt between Mr and Mrs Greenaway as lenders and the now deregistered company (Auzhair Supplies) as borrower.

39 The defendants, in those circumstances, do not now resist the grant of relief to reregister the company (which they accept would on that evidence “appear” to be a debtor to Mr and Mrs Greenaway) although they maintain that there is no basis for it necessarily to be wound up in insolvency at that stage (despite having admitted the allegation in para 38 of the Statement of Claim that Auzhair Supplies is insolvent). (I consider this in due course.)

40 Around the time of entry into the 2004 loan agreement, further payments were made to Mr and Mrs Greenaway. In particular, on 30 June 2004 an amount of $30,000 was paid. The defendants deny that this was a payment made in relation to a loan but there is no explanation proffered for a payment in that amount at that time.

41 Further payments of $30,000 on 2 July 2004, $30,000 on 30 June 2005, $25,000 on 5 July 2005, and $60,300 on 14 July 2006 were made to the Greenaways. Smaller amounts from 2007 onwards were paid to Mr and Mrs Greenaway by a variety of persons/entities (but not by Auzhair Supplies) (all presumably relating to the payment of interest on the loan recorded in the 2004 agreement). There is no evidence to suggest that any of these payments represented dividends out of company profits.

42 On 22 February 2005, Roy Gerace, as director of Auzhair Supplies, signed an application for voluntary deregistration of Auzhair Supplies. Voluntary deregistration of a company is possible where, amongst other things, there is a declaration that the company has no outstanding liabilities. However, on the face of the 2004 loan agreement (and on the defendants’ own case theory), that could not then have been the case.

43 Paragraph 24 of the Statement of Claim pleads that as at 22 February 2005 Auzhair Supplies had outstanding liabilities, namely the debt to the plaintiffs. That is not admitted by the defendants. However, Mr Ash accepts that if the company had an extant debt at that time (and he accepts that the evidence “tends” that way), then the company should not have been the subject of a voluntary deregistration application.

44 On 6 June 2005, Auzhair Supplies was dissolved pursuant to s 601AA of the Corporations Act 2001 (Cth).

45 On 10 February 2006, Roy Gerace signed an ASIC form in relation to the cancellation of shares held by Mr and Mrs Greenaway in Auzhair 1. That application described the shares as having been forfeited pursuant to s 258D of the Corporations Act. Section 258D of the Corporations Act provides:

A company may, by resolution passed at a general meeting, cancel shares that have been forfeited under the terms on which the shares are on issue.

46 There was no documentary evidence in relation to any general meeting of the kind required to effect the forfeiture of those shares, nor is there any evidence to suggest that the terms on which Mr and Mrs Greenaway’s shares were issued permitted their forfeiture. Mr Ash, quite fairly, conceded that there were no internal company documents consistent with what happened and that the company records were a ‘shambles’.

47 Counsel for the plaintiffs, Mr Johnson, submits that there is no evidence as to any basis upon which the shares issued to the plaintiffs could properly have been forfeited: the ordinary shares being described in the company records as fully paid shares and there being no apparent conditions attaching to their issue articulated in the Shareholders’ Agreement.

48 Mr Greenaway deposes in his affidavit that he was not notified of any meeting of shareholders to bring about a forfeiture of his or his wife’s shares. There is no evidence (other than what might be inferred from the evidence he gave in the witness box that in mid 2004 it was proposed there be a ‘reversion’ to 10% interest) that he (or his wife) consented to any such forfeiture.

49 There is also no explanation for the fact that the forfeiture of shares occurred in February 2006 (some 18 months after the arrangements pursuant to which the defendants now submit the equity relationship between the parties was exchanged for, or reverted to, a debt relationship).

50 Mr Johnson submits that the absence of any material put before the court or evidence given by the defendants relating to the circumstances under which the shares were forfeited must in the circumstances give rise to an inference that no appropriate actions were taken and that there was no compliance with the requirements of the constitution of Auzhair 1 (a copy of which was not in evidence but which it is said should be assumed contained the “replaceable” provisions provided for under the Act, in circumstances where the plaintiffs had sought unsuccessfully to have a copy of the Constitution produced) or the requirements of, the Shareholders’ Agreement or the Corporations Act.

51 (In passing, I note that, although in the defendants’ submissions it was suggested that the plaintiffs were estopped from asserting that they had continued to have legal rights qua members, that assertion was not pressed and, in any event, had not been pleaded.)

52 The loan recorded in the 2004 loan agreement fell due for repayment on 1 July 2007. On 8 March 2007 (by reference to the facsimile transmission imprint) it seems that a handwritten note addressed to “Warren and Gay” was sent to the Greenaways from “La Bionda” (the hairdressing salon operated by one or more of the Gerace family):

“We apoligize [sic] we do not have your moneys on the due date.

We reasure [sic] you that when we have a date of payment we will notify you immediately. Thank you for your patience.”

53 Mr Johnson points out that there is no suggestion in this note that Auzhair Supplies had by that time already been deregistered for almost two years or that Auzhair 1 or anyone else was in fact the debtor. On its face the document appears to acknowledge a debt due by someone connected with the Gerace family or its businesses to the Greenaways.

54 In evidence there was also a copy of a handwritten note signed by “Warren and Gay” on 21 June 2007, providing banking details to “Roy and Larry” requesting the deposit of “loan money” into their branch.

55 No repayment of the principal sum or outstanding interest was made on 1 July 2007.

56 By letter dated 18 September 2007, lawyers then acting for Mr and Mrs Greenaway wrote to Larry and Roy Gerace (addressed to them at Auzhair 1) referring to a loan of $600,000 due to be repaid on 1 July 2007 and seeking urgent advice as to what proposals had to repay the sum.

57 The response by Sachs Gerace on 9 October 2007 was that it was not “entirely clear” to the writer on what basis payment of the loan from his clients (Larry and Roy Gerace and Auzhair 1) was sought, though stating “Be that as it may, I understand that my clients are making arrangements to ensure that the money advanced by your clients is reimbursed to them and that, in the meantime, they are being paid interest.”

58 The response to that, by letter dated 11 October 2007 from the Greenaways’ then lawyers was, amongst other things, that the directors and owners of Auzhair 1 had guaranteed the repayment of the $600,000. It is not clear to me on what basis it was asserted that there was such a guarantee and that suggestion has not been subsequently pressed.

59 On 1 October 2009, two letters were written from Carroll & O’Dea, now acting for Mr and Mrs Greenaway: one to Roy Gerace in relation to the deregistration of Auzhair Supplies (to which there was no response) and the second to Auzhair 1 in relation to the cancellation of the Greenaways’ shares.

60 In response to the second letter, (by letter dated 7 October 2009) Sachs Gerace, acting on behalf of Auzhair 1, wrote to Carroll & O’Dea and recounted what was referred to as the “relevant history” concerning the matter. This letter was tendered by Mr Johnson not for the truth of its contents but as a document received by the plaintiffs. In cross-examination, various of the paragraphs of the letter were put to Mr Greenaway and he variously accepted and disagreed with what was asserted in that letter. To the extent that it might be inferred that it records the instructions given to Sachs Gerace from Auzhair 1 by one or more of its directors at the time it was sent it is instructive to set out in full the assertions made in the letter (with Mr Greenaway’s responses) as to the relevant history:

1. On 15 June 2002, Elizabeth Greenaway entered into a loan agreement with Auzhair Pty Ltd to advance $200,000 for a period of three years at an interest rate of 10% per annum. [Mr Greenaway accepted there was an advance of $200,000 in 2002 although on the documents it would arguably appear to have been pursuant to the loan agreement dated July 2002. In any event there is no real dispute that this amount was the subject of a loan to Auzhair Supplies and that it was not repaid in accordance with its terms (ultimately being superseded or “rolled into” the 2003/04 arrangements.]

2. Shortly prior to June 2003, Elizabeth Greenaway and Warren Greenaway approached my clients to inquire whether they were able to invest an additional $400,000 in Auzhair’s business and, if so, whether they could take an interest in the business [Mr Greenaway denies, and I accept his denial, that he and his wife were the ones who made the approach to the Geraces. Mr Greenaway says (and none of the defendants gave evidence to contradict this) that it was the three male defendants who, at a dinner in June 2003 had requested the “investment” of additional funds. “They’re saying that we asked if we could invest another $400,000 in Auzhair’s business. ... We didn't ask them, they asked us if we've got any more money can you invest it in a company and you can get more on your money by doing that than what you would getting 10% of the $600,000. So we agreed because we needed the money”. T.16.31-38.]

3 Auzhair 1 Pty Ltd was therefore created and Elizabeth Greenaway and Warren Greenaway were issued with one share each. They made a capital contribution to Auzhair 1 Pty Ltd of $600,000. $200,000 of that money was converted from the previous loan made by Elizabeth Greenaway to Auzhair Supplies and $400,000 was new funds. [Mr Greenaway did not agree with the statement that he and his wife would get “one share each” T.16.49. He says that they were never told how many issues he would get (but he accepted, at least initially, that that paragraph was otherwise correct T.17.14)]

4. In about June 2003 the Greenaways complained to my clients that they were not satisfied with the rate of return on their shares. [Mr Greenaway accepted this - both para 20 in his affidavit and in the witness box] They therefore requested that their investment in Auzhair 1 Pty Ltd be converted to a loan on the same terms as Elizabeth Greenaway's previous loan and that they be “taken out” of the company. [It is difficult for me to accept that any request in such terms was made. Mr Greenaway’s evidence goes no higher than that he and his wife wanted their money and the suggestion was put to them, which they accepted, that they “revert” to 10% interest on the moneys] It was then agreed that the Greenaway shares in Auzhair 1 Pty Ltd would be cancelled and a fresh loan agreement would be drawn up between the Greenaways and Auzhair Supplies Pty Ltd in respect of the loan of $600,000 for a period of three years at an interest rate of 10% per annum. A loan agreement dated 1 July 2004 was then prepared and signed. [As to the question of any agreement for cancellation of shares, this is by no means clear and I consider it below. Nor is it clear that Mr Greenaway appreciated that there was any relevant distinction between Auzhair Supplies and Auzhair 1 in that regard.]

5. Auzhair Supplies Pty Ltd subsequently went into liquidation [in fact it was dissolved on the application of Roy Gerace which application contains what, on the Sachs Gerace letter, must be seen to have been a false declaration as to the company’s liabilities] and therefore could not and cannot repay the loan. [seemingly a recognition of Auzhair Supplies’ inability at the time to repay the loan]

61 The 7 October 2009 letter from Sachs Gerace concluded that it would be unfair and inequitable for the Greenaways to have received interest payments stemming from the “second loan agreement” (presumably the 2004 agreement) and at the same time to claim a right to have their shares in Auzhair 1 reinstated. Apart from the fact that that ignores the question as to whether the shareholding was an additional part of the initial arrangement (which the defendants chose not to clarify), it might be thought that it does not lie in the mouth of at least some of the defendants to speak of fairness or equity, having taken steps to deregister a company without notice to the Greenaways which they now seem to acknowledge owed a considerable debt to the Greenaways at the time.

Mr Greenaway’s evidence

62 In essence, the defendants (as is their right) have put the plaintiffs to proof of those of the matters asserted in the pleadings which are not expressly admitted by the defendants. (The costs consequences of so doing where there are matters within the defendants’ own knowledge, are matters which may need to be addressed in due course.)

63 Relevantly, there was no affidavit evidence from any of the individual defendants or anyone on behalf of the company going to the events which took place in 2002-2004, or thereafter. There was also a paucity of company documentation of any kind. I was taken to the affidavits sworn in relation to the discovery ordered in these proceedings, in which the defendants deposed to the lack of documents including company records.

64 This means that on most of the factual issues in dispute I was left with limited documentary evidence and Mr Greenaway’s recollection of events (tested as that was in cross-examination).

65 Mr Greenaway accepted that it was fair to say as at around July 2003 (after payment of the additional $400,000) he thought that he (and his wife) had paid $600,000 “for a quarter share in a company” (“That was as I thought, yes” T 10.9 – 10.14). He accepted that there was only ever one payment of $600,000 (T 11.34). He agreed that he believed he was owed $600,000 and interest at 10% (T 12.24).

66 When asked, by reference to para 14 of his affidavit, whether the effect of his evidence was that there was a $200,000 loan that, together with the additional $400,000 became “the investment capital” that the Greenaways put into acquiring 25% of Auzhair 1, his response was “My only concern was that we get 10% interest on our moneys. Larry and Rory put everything else together. They suggested we ... ” (T 13.2). What was not clear to me, from my observation of the witness’ evidence (as I noted at the time) was that he understood what was meant by “investment capital” in that question. My observation of Mr Greenaway in the witness box at this point was that he was focused on the fact that he and his wife had paid $600,000 (and he said he believed that, whatever arrangements were put in place, he was to receive a 10% return on those moneys). In particular, when asked to identify his “shareholding” in Auzhair 1, he said “well it was $600,000” (T 14.9).

67 Insofar as Mr Greenaway accepted that in June 2003 he had reached an agreement in relation to his investment in the company, it seemed to me that there was considerable confusion on his part as to that agreement (in particular, as to what was meant by investment or what he meant by a capital contribution). He seemed to regard the latter as “investing our money in the company” (T 19.17) in circumstances where the company would repay that money in due course – (T 19.31).

68 Mr Greenaway accepted that he had owned shares before (T 20.14) and said that his concept of ownership of shares was that when the company made a profit they paid a dividend to shareholders (T 20.18). He agreed that, having regard to what was said in paras 14 and 15 of his affidavit, he understood himself to be converting his “investment” ”from a loan arrangement to a share ownership arrangement” (T 20.33). He was asked what his understanding was of the effect of the July 2004 document and he said that he saw it as a binding contract between the Geraces and himself (and his wife) (T 21.44) and that they would be paid a percentage of the profit that Auzhair Supplies made (T 22.8).

69 In this regard, it seems Mr Greenaway was confused as to the difference between Auzhair Supplies (of which he was never a shareholder) and Auzhair 1 (of which he was). In any event, his stated understanding as at 2 July 2004 that, as a shareholder of the company, he would enjoy any profit made by it (T 22.23) cannot have derived from anything in the July 2004 agreement (which was in its terms clearly a loan agreement).

70 Nevertheless Mr Greenaway’s understanding, expressed in the witness box, was that there was originally a loan and “then it was changed to an investment in Auzhair 1” (T 22.13). He understood that he and his wife were classed as a shareholders of the company and would enjoy any profits made by it. He was clearly confused as to whether he was a shareholder of Auzhair Supplies or Auzhair 1. He was not sure about the dates but he seems to have thought that the companies were one and the same (and that Auzhair or Auzhair Supplies had simply been wound up or the company name had changed to Auzhair 1) (T 23.16-18).

71 Mr Greenaway said “When we first gave them the second amount of money, which was the $400,000, that was the start of us becoming a shareholder in Auzhair 1 Pty Ltd and the dividend we got out of that was about $2,000” (T 25.8). He accepted that he was unhappy about that and, when he was asked what happened next, he said “They said we’ll revert to 10% interest on your money that you had invested with us” (my emphasis) (T 25.17). Significantly, however, there was nothing to explain how that “reversion” was to be effected.

72 On re-examination, Mr Greenaway was unable to recall whether, when he had sworn paras 14 and 20 of his affidavit, he had not seen any of the attachments to his affidavit and he could not recall when he was told of the existence of Auzhair 1. (T 25.26-29)

73 Mr Johnson submitted that in the circumstances the contemporaneous documents executed by the parties were the best source of evidence. Reference was made in that regard to Watson v Foxman (1995) 49 NSWLR 315 (as well as the failure of the defendants to give any evidence as to the transaction).

74 In Watson v Foxman (at 318), McLelland CJ in Eq (as his Honour then was) recognised the fallibility of human memory, in an oft-quoted passage by, as follows:

... human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consider­ation of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.

75 His Honour went on to say (at 318-319) that:

Each element of the cause of action [there for misleading and deceptive conduct but his Honour expressly noted that the principles so espoused were true also for claims based, inter alia, on contract] must be proved to the reasonable satisfaction of the court, which means that the court "must feel an actual persuasion of its occurrence or existence". Such satisfaction is "not ... attained or established independently of the nature and consequence of the fact or facts to be proved" including the "seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding": Helton v Allen [1940] HCA 20; (1940) 63 CLR 691 at 712.

Considerations of the above kinds can pose serious difficulties of proof for a party relying upon spoken words as the foundation of a cause of action ..., in the absence of some reliable contemporaneous record or other satisfactory corroboration.

76 His Honour’s observations as to the frailty of human memory have been applied in the context of other claims. In Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd (No 2) [2008] FCA 810; [2008] ATPR 42-240 (at [41]) for example, Rares J cited the above passage and noted that his Honour’s observations were just as apposite in a case where the question arises as to what oral terms of the contract were agreed in the course of negotiations.

77 I accept that I should approach the evidence (and particular the oral evidence) of Mr Greenaway with some caution, bearing in mind his age and the confusion he exhibited in the witness box when attempting to answer questions put to him on a variety of matters.

78 I turn then to the claims for relief in relation to the alleged loan arrangement and the forfeiture of the Greenaways’ shareholding in Auzhair 1.

Claim for reinstatement and winding up in insolvency of Auzhair Supplies

79 It is submitted that the plaintiffs are persons aggrieved by the deregistration of Auzhair Supplies (it having been deregistered at a time when there was an outstanding liability owed to them under the 2004 loan agreement) and thus they are entitled to apply to the court to reinstate the company pursuant to s 601AH(2) Corporations Act. Further, it is submitted that they are relevantly creditors within the terms of s 459P of the Act and entitled as creditors to apply, as part of that reinstatement, for a winding up order under s 459A upon insolvency.

80 The court may order that a company’s registration be reinstated if satisfied that it is just to do so (WorkCover Authority (NSW) v Picton Truck and Trailer Repairs Pty Ltd [2004] NSWCA 371; (2004) 51 ACSR 102 and see authorities cited in Austin & Black, Annotations to the Corporations Act, LexisNexis, Looseleaf Service, at [5A. 601AH; p 85,106]).

81 A creditor or contingent creditor is a person aggrieved, for the purpose of the section, as is a person who wishes to pursue litigation against the deregistered company (see Re Peter Conyers Holdings Pty Ltd (in liq) (1996) 14 ACLC 1835; Payne v Wizaard Industries Pty Ltd (1997) 24 ACSR 277; and authorities cited in Austin & Black, at [85,107].

82 The discretion conferred on the court in this regard requires consideration of matters such as the circumstances in which the company was deregistered, the purpose of the reinstatement, the solvency of the company, whether any person is likely to be prejudiced by the reinstatement, and the public interest generally (again, see Austin & Black).

83 The court may appoint the liquidator with effect from the company’s reinstatement (J P Morgan Portfolio Lemery Ltd v Deloitte Touche Tohmattsu (2008) 167 FFCR 212 and see other authorities cited in Austin & Black at [85,161]).

84 In summary, both sides (notwithstanding the stance adopted by the defendants in their pleadings) appear to be in furious agreement that the documentary evidence establishes in all probability the existence of an outstanding loan, as at the date of deregistration of Auzhair Supplies, as between the Greenaways and that company. There is nothing to suggest that any one or more of the directors and shareholders of that company (Roy, Larry and Mick Gerace) could not have come to this court to say why (if it were not so) that was not the case. They chose not to do so.

85 The defendants’ own “case theory” is that a “debt relationship” was created in July 2004 when the 1 July 2004 loan agreement was signed. There is no dispute that the principal sum ($600,000) is outstanding and that there is a not insubstantial amount of interest owing on that principal sum.

86 The declaration signed by Roy Gerace when application was made for the deregistration of the Auzhair Supplies must have been false. Whether that was a knowingly false, or an inadvertently or erroneously false, declaration is immaterial for present purposes. It was false and, as creditors of the company, the Greenaways were deprived by reason of the dissolution of the company of the opportunity to have an independent liquidator determine what had occurred and to enquire into what was done with the funds provided to the company. (Mr Greenaway’s evidence was that he understood the moneys (or some of the moneys) were to be used as a guarantee for the purpose of the importation of hair products from Italy. If this was for the benefit of Auzhair 1, then there may well be questions as to what arrangements there were between the respective companies for the provision of finance or financial support of that kind. There might also be questions as to the conduct of one or more of the directors of the company, all of which cannot be explored while the company is deregistered.)

87 As to the basis of a winding up on insolvency, unless the declaration signed by Roy Gerace in 2005 was incorrect not only (as on the evidence it was) as to the liabilities of the company, but also in relation to its assets, it is difficult to see how Auzhair Supplies (on reinstatement) could be in a position to pay its debts as and when they fall due (having a liability under the loan for somewhere in the order of $600,000, no assets and not carrying on business). (The Sachs Gerace letter in October 2009, and the defendants’ admission as to insolvency, would suggest otherwise.) There is no suggestion that the former directors/shareholders of Auzhair Supplies have any intention (let alone ability) to put in place arrangements (if Auzhair Supplies were to be reinstated) in order to enable it to meet its debt to the Greenaways nor is there any suggestion that there is any basis on which the debt claimed by the Greenaways would not, on the reinstatement of Auzhair Supplies, be owing by it.

88 I am of the view that it is appropriate for the registration of the company to be reinstated and that an order be made for the winding up in insolvency of the company as there is no suggestion that the deregistered company, on reinstatement, will have the ability to pay its debts as and when they fall due.

89 There was no issue raised as to the fitness to act of the liquidator nominated for this purpose and who has signed a consent to act.

Claim for rectification of Auzhair 1 share register

90 As to the claim in respect of Auzhair 1, the relevant dispute is as to whether there was any arrangement or agreement between the Greenaways and the Geraces in mid July 2004 pursuant to which the former agreed to surrender their shares in Auzhair 1. (There is nothing to suggest that the shares were forfeited pursuant to any terms of issue of the shares but the manner in which the shares were cancelled would not in my view be material when considering whether to exercise the discretion to rectify the register if I were satisfied that the Greenaways had in fact authorised the cancellation of their shareholding.)

91 Mr Johnson submits that, once it is established that the Greenaways were shareholders and have ceased to be shareholders, then the burden shifts onto the first defendant (Auzhair 1) to establish that the shares were cancelled with Mr and Mrs Greenaway’s authority and/or that it acted reasonably to remove the names of the Greenaways. Reliance is placed by Mr Johnson on what was said in McLaughlin v Daily Telegraph Newspaper Co Ltd (No 2) [1904] HCA 51; (1904) 1 CLR 243 (at 266) by Griffiths CJ, on an application for rectification of the share register, namely that:

The plaintiff, then, having established that he was, before the transfers to be directly mentioned, registered in defendants' register as the holder of the ... shares in question, the onus is cast on the defendants to show that the change in the register has been made by plaintiff's authority.

92 Mr Ash points to the fact that Griffiths CJ had, earlier in his judgment, said that:

The plaintiff is entitled to say to the company - to adopt the words of Shadwell VC (p 487) – ‘you are bound by law to be my bookkeeper in respect of my stock, and to show me the true account of it, and if I can show that on a given day stock stood in my name, and now show that it does not stand in my name, and I have not authorised the transfer of it, you are responsible to me - that is say, you must make the account stand as it ought to have stood’. (my emphasis)

93 Reference was also made by Mr Ash to what was said by Fullagar J in Grant & ors v John Grant & Sons Pty Ltd & ors [1950] HCA 54; (1950) 82 CLR 1, at 51:

The power to order rectification of the register must clearly, I think, be in all cases discretionary. The person claiming rectification must show that he has some equity which the court will protect. If he is a shareholder, then prima facie he shows such an equity if he establishes that a name is wrongly included in or omitted from the register of his company. Some definite reason must be shown, I would think, for refusing rectification before rectification will be refused. (my emphasis)

94 Mr Ash does not accept that his clients bear the onus but says that, in any event, any such onus has been discharged.

95 McLaughlin v Daily Telegraph Newspaper concerned an application for rectification of a company share register in circumstances where it was alleged that the power of attorney (by which the plaintiff’s agent was said to have authorised the plaintiff’s removal from the register) was itself signed when the plaintiff was of an unsound mind. The judgment has been referred to extensively in relation (among other things) to the validity of a power of attorney given by a person under a legal incapacity at the time of signing (see for example Szozda v Szozda [2010] NSWSC 804, at [36], per Barrett J; Lundie & Anor v Rowena Nominees Pty Ltd (Receiver & Manager Appointed) (In Liq) [2006] WASCA 106, at [30]); as to who bears the onus of proof when establishing the incapacity of a party (see for example Lampropoulos v Kolnik [2010] WASC 193, at [92]); and that it is for the party contending that the power of attorney is void to prove that the donor’s incapacity was known by each of the persons who procured the execution (see for example Lake v Crawford [2010] NSWSC 232). The general statement of principle espoused by Griffith CJ stands for the proposition contended for by Mr Johnson. That said, Grant would suggest that the ultimate onus of establishing wrongful omission or removal from the register lies on the party asserting it.

96 The decisions of Bergin J (as her Honour then was) in Actwane Pty Ltd (Receiver and Manager Appointed) (In Liquidation) and William James Moss v Hotel Redfern Pty Ltd, Actwane Holdings Pty Ltd and Stephen Michael Larkin [2002] NSWSC 265 and Emmett J in Rafeletos v Great Wall Resources Pty Ltd [2009] FCA 1395 seem to me to be relevant on this issue. They suggest that, whilst the onus does ultimately lie with the person claiming rectification, if particular factual issues are asserted by the defendant (by way of the defences raised) then an evidentiary onus may nonetheless fall upon the defence to prove those issues, failing which the plaintiff’s evidence in favour of rectification may be sufficient to support the relief sought.

97 In Actwane, her Honour found that the evidentiary onus in relation to particular factual issues fell upon the party resisting the rectification of the share register to have the plaintiff’s shares reinstated. That party had alleged that the removal of one entity’s name in favour of another from the share register was authorised by way of a verbal agreement. There, it was admitted on the pleadings that it had been originally agreed that the entity later seeking to be put back onto the register was the entity that had been to hold the shares in the first place and the issue was as to what had led to the substitution on the register of another company.

98 Bergin J held that the onus of proof (being on the balance of probabilities) lay on the party asserting the factual circumstances supporting the transfer of ownership and thus the original entity’s removal from the register (noting that it had not been in issue that the power of the court to order rectification of the register was no more and no less than a part of its general jurisdiction to “act in personam” in aid of a legal right which is subject to the same principles which apply generally to equitable remedies, citing Grant, per Fullagar J, at 51).

99 Similarly, in Rafeletos v Great Wall Resources, it had been agreed on the pleadings that a certain state of affairs had existed, which (if left standing) would have entitled the applicant to the rectification relief sought under s 175. The respondents contended that such a state of affairs had changed, which if accepted removed any entitlement to relief. Emmett J accepted that the onus lay on the respondents to prove that such a change in the state of affairs had occurred. However, his Honour did point out that otherwise it was the applicant who ultimately bore the onus to establish an entitlement to relief in relation to other relevant requirements that required proof (at [3]).

100 Here, the defendants have simply put the plaintiffs to proof, rather than asserting in their defence the existence of any consent to the share cancellation. The plaintiffs allege (and have adduced evidence as to) a lack of knowledge on their part of any steps taken by the company of the kind required to effect the forfeiture of their shares in 2006 in accordance with the statutory requirements. Implicitly, therefore, it seems to be asserted that the forfeiture was without their consent. If Mr Greenaway’s evidence on that aspect of the matter is accepted (and I do accept it), then it is for the defendants to establish that there was an agreement for authorisation for the cancellation or forfeiture of the shares. In that regard, the defendants would bear the onus.

101 (For completeness I note that had an issue as to the existence of authorisation for the share cancellation been raised by the defendants on the pleadings such that they bore the onus of establishing such authorisation, then on the evidence before me I would not have been satisfied that they had established that, when the shares were forfeited in 2006, this was with the Greenaways’ consent or pursuant to their authority.) As it is, I accept that (other than by way of submissions) no such defence was raised and therefore the Greenaways bear the onus of establishing their claim for rectification of the register.

102 I accept that Mr Greenaway’s evidence (confused as it was in part – and I say that with no disrespect to Mr Greenaway, who is an elderly gentleman and who appeared to me to be sincerely and honestly attempting to answer the questions put to him) suggests that it was his understanding in mid 2003 that he and his wife were to obtain a shareholding in a company (established or to be established to carry on the business of importation of hair products) as part of an arrangement whereby they advanced a further $400,000 to one or other of the Geraces’ corporate entities (and that this involved a change from loan to shares). Whether that “investment” was to be by way of capital contribution (and if so on what terms) or by way of a loan to or adopted by the new company is not so clear. (Mr Greenaway at one stage thought his shareholding in the company was $600,000.) The thrust of Mr Greenaway’s evidence in the witness box (though he seems to have accepted there was a change from loan to shares) was that his only concern was that he would recover 10% interest on the moneys he provided. If so, I do not know that I can draw much from what he now thinks might have been the effect of what happened at that time.

103 On Mr Greenaway’s recollection of the relevant conversation in 2003 it seems that he understood that 25% of the profits would equate to or be better than a 10% return on his money. If so, then the significance of the shareholding acquired by the Greenaways seems to have been that they could recover the moneys they had been asked to advance for the purposes of the company’s business (or which they had “invested” in the company) out of profit dividends in some fashion but that at a minimum they would recover 10% on their money. In whatever way that was to be arranged, there seems no suggestion that the Greenaways were not expecting in due course to be repaid the amount of the “investment”, by whichever company that investment ended up being placed with (if, indeed, Mr Greenaway realised that there were two companies under consideration, which may be a moot point given his evidence in the witness box).

104 There are two matters which seem to me to be significant in this regard. First, there was nothing in the Shareholder Agreement which dealt with any capital contribution by one or more of the shareholders to the company (which suggests that any funding arrangements put in place between the parties were to be independent of the shareholding arrangements and thus the overall arrangement may more likely to have been understood as a loan coupled with the issue of a share) and (though there may be little weight I can place on this given Mr Greenaway’s confused memory) Mr Greenaway’s evidence was to the effect that he had been told he would be in a better position than if he received interest on his money otherwise than under this arrangement (which, if I understood him correctly, might have suggested an ability to earn dividends equating to more than the interest repayments but that at a minimum he would recover the amount “lent” to the company and an amount which reflected a 10% rate of interest on that investment).

105 However, it is not necessary to determine this factual issue. The status of the parties’ relationship in 2003 is only of relevance insofar as it sheds light on what was agreed or understood in mid 2004 when the Greenaways expressed dissatisfaction with the return on their moneys. The critical issue, for present purposes, seems to be what the arrangement was in July 2004 when, on the defendants’ case theory (though none of the defendants gave evidence directly to support this version of events), the equity relationship was transmogrified into (or reverted to) a debt relationship.

106 I am not satisfied on the balance of probabilities that the evidence establishes that in July 2004 Mr and Mrs Greenaway did agree to surrender their shares in Auzhair 1 (in return for an agreement by Auzhair Supplies that it would repay the $600,000 on the terms of the 2004 loan agreement or in return for a substitution of 10% interest in lieu of dividend payments) and I note that there is nothing in the 2004 loan agreement itself which makes provision for that to happen.

107 The high point of the defendants’ case in that regard turns on the final answer given by Mr Greenaway in cross-examination the witness box - to the effect that he was told there would be a reversion to a 10% interest return after he had expressed dissatisfaction with the rate of return from the company. That answer was largely unexplained. For all I know that could have been an arrangement that gave him a fixed rate of return but that would leave him (and his wife) with the shares in the company, for whatever future benefit that might bring.

108 I consider the evidence to be consistent with the Greenaways having understood that from 2004, instead of interest on the $600,000 being represented by or satisfied out of dividend repayments from the company (as to which there might be uncertainty in relation to timing but which also might exceed the previously stated rate of return), they would have in place a fixed interest regime going forward. However, there is no evidence of any express arrangement as to what was to happen in the meantime with their shares in the company (and there might logically be a reason for them to remain on the register as shareholders at least for some time as some form of security for the interest repayments, perhaps by providing them with the ability as shareholder to monitor the business activities of the company, or perhaps in recognition of the agreement to provide the additional $400,000 in the first place).

109 Of significance, in this regard, is the fact that no steps were taken as at July 2004 by the defendants to cancel Mr and Mrs Greenaway’s shares (though there would be no reason for that not to have occurred at the time had that been the arrangement reached with the Greenaways).

110 Mr Greenaway’s evidence in the witness box, on which Mr Ash places weight (namely that, at the meeting in July 2004 it was said by the Geraces that they “would revert” to the 10% interest arrangement on the money) is insufficiently clear to persuade me that the parties’ common intention or understanding, objectively ascertained, was that the Greenaways would give up their shares in Auzhair 1 then and there in return for a debt to be created or acknowledged in their favour by Auzhair Supplies and prior to repayment of that debt. (The confusion Mr Greenaway exhibited in the witness box as to the respective corporate entities gives me no confidence that the arrangement was as the defendants now seek to characterise it – and, again, they chose to give no direct account of what was said and done in 2004 to shed light on this.)

111 I should add that, for the defendants it is said that there is nothing that the defendants need to explain so as to permit the availability of a Jones v Dunkel inference (and that the legal consequence of the 2004 loan agreement is that the only relief should be the relief sought against be deregistered company).

112 A Jones v Dunkel inference is open to be drawn in relation to an unexplained failure to call evidence only if the evidence adduced is sufficient to give rise to an inference as to a matter which calls for explanation by the party against whom the inference is sought to be raised (Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298). The rule in such a case permits evidence in relation to that matter to be given greater weight, and an inference or inferences to be more readily drawn, when the party who might have called evidence to the contrary has chosen not to do so. In Commonwealth of Australia v McLean (unreported, NSWCA, 31 December 1996), Handley JA and Beazley JA said; “... The rule typically applies to strengthen or weaken an inference otherwise available on the evidence for the benefit of the party not in default.” (my emphasis). A Jones v Dunkel inference, if one does arise, would do no more than permit the court to infer that the uncalled evidence or missing material would not have assisted the defendants’ case; it would not permit the inference that the uncalled evidence was in fact damaging to the defendants’ case.

113 In Ho v Powell [2001] NSWCA 168; (2001) 51 NSWLR 572, Davies AJA said, at [15]:

... it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so: cf 69 ALJ at 732–733, 736, 740. As stated by Lord Mansfield in Blatch v Archer [1774] EngR 2; (1774) 1 Cowp 63 at 65; [1774] EngR 2; 98 ER 969 at 970: “... [A]ll evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted”. See also Azzopardi v The Queen (2000) 75 ALJR 931 at 935 [10]; [2001] HCA 25; 179 ALR 349 at 353 [10].

noting that Jones v Dunkel was a particular application of this principle.

114 What the principle allows is for the more ready acceptance of evidence which might have been contradicted (but which was not). Where an inference is open from facts proved by direct evidence and the question is whether it should be drawn, the circumstance that the party disputing it might have proved the contrary, had it chosen to give evidence, is properly to be taken into account as a circumstance in favour of drawing the inference (per Davies AJA in Ho v Powell, at [16]; HML v R [2008] HCA 16; (2008) 235 CLR 334; (2008) 245 ALR 204, at [302] [303]; Brandi v Mingot (1976) 12 ALR 551, at 559-60; Jones v Dunkel, at 312, 320–321; Katsilis v Broken Hill Pty Co Ltd (1977) 18 ALR 181, at 197; (1977) 52 ALJR 189, at 197).

115 In Jones v Dunkel, Dixon CJ added the following observations (at 305):

the law which this passage attempts to explain does not authorise a court to choose between guesses, where the possibilities are not unlimited, on the ground that one guess seems more likely than another or the others. The facts proved must form a reasonable basis for a definite conclusion affirmatively drawn of the truth of which the tribunal of fact may reasonably be satisfied.

116 What a Jones v Dunkel inference does not permit is a choice between two guesses or conjectures or to supply missing gaps in evidence (Cadbury Schweppes Pty Ltd v Darrell Lea Chocolate Shops Pty Ltd (No 4) [2006] FCA 446; (2006) 229 ALR 136, at [50]; [2006] FCA 446). The Hon Justice Dyson Heydon, writing in Cross on Evidence, 7th Australian ed, Butterworths, 2004, at 41, in a passage endorsed by Heerey J in the Cadbury Schweppes case at [50] said that:

... while the rule in Jones v Dunkel permits an inference that the untendered evidence would not have helped the party who failed to tender it, and entitles the trier of fact to take that into account in deciding whether to accept any particular evidence which relates to a matter on which the absent witness could have spoken, and the more readily to draw any inference fairly to be drawn from the other evidence by reason of the opponent being able to prove the contrary had the party chosen to give or call evidence, the rule does not permit an inference that the untendered evidence would in fact have been damaging to the party not tendering it. The rule cannot be employed to fill gaps in the evidence, or to convert conjecture and suspicion into evidence. (my emphasis))

117 In Gregory Paul Montfroy v Roads Corporation (trading as VicRoads) [2005] VSC 320 by Gillard J said in effect that the court is entitled to be bold when a party fails to give evidence on matters in issue of which it clearly has knowledge, though noting that this does not entitle the court to speculate and that the court “is only entitled to draw an adverse inference if there is some substratum of fact supporting it”.

118 The question of what inference, if any, should be drawn from the fact that none of the defendants chose, themselves or in the case of the company through a director or officer, to give evidence of their knowledge of the facts and circumstances surrounding the arrangements made in 2003 and, more importantly, mid 2004 becomes of most relevance when the question of who bears the onus is taken into account. (As outlined earlier, in the absence of a plea by the defendants that there was some consensual arrangement with the plaintiffs I consider that the onus remains on the plaintiffs but that it is relatively easily satisfied since, in effect, it requires the proof of their shareholding, of the removal of their names on the register and of a negative – i.e. that there was no knowledge of, and hence consent to, the share cancellations.)

119 The relevant issue on which evidence from the defendants might have been expected to be called is on the question whether the share forfeitures (or, more loosely described, share cancellations) were authorised.

120 It seems to me that it is not surprising that the evidentiary onus of establishing a positive case that share cancellations had been authorised should lie on the party asserting that there was an agreement to that effect. In circumstances (as here) where such an agreement is not pleaded, and the plaintiff is simply put to proof of the claim for rectification of the register, then the effect of the above cases seems to me to be that it is for the Greenaways to prove (as they have) that they were previously registered as shareholders and that their names have been removed. Insofar as it is necessary that they further establish a negative (namely that the removal of their names was without their knowledge or consent and was not authorised by them), then the evidence from Mr Greenaway that they were not notified of any meeting to be convened for the forfeiture or cancellation of their shares (which, though denied by the defendants, was not the subject of any evidence from the company to suggest otherwise) and the lack of any company records evidencing a resolution duly passed at such a meeting or other form of consent by the Greenaways to such a resolution or to the cancellation of their shares should (in the absence of anything further) be sufficient to put the company to proof of its entitlement to cancel the shares. It chose not to do so (having previously, through its lawyers, asserted that the Greenaways had “requested that their shares be cancelled” – in the letter dated 7 October 2009 which, as noted above, contains a number of other disputed statements).

121 There are no documents recording the Greenaways’ consent to the removal of their names from the register. It was not suggested to Mr Greenaway that he or his wife had themselves requested the cancellation of the shares in question. The highest that the evidence goes on this issue, from the defendants’ perspective, is the evidence from Mr Greenaway in the witness box that it was suggested there be a ‘reversion’ to the 10% interest when he complained about the return on the shares in mid 2004. I am not satisfied that this is sufficient to establish an agreement on the part of the Greenaways for the cancellation of their shares (or even that this would have been Mr Greenaway’s understanding of what was then being proposed, assuming that is what the Geraces then had in mind). “Reversion” to 10% interest or a 10% return (in lieu of an expectation to achieve that or a greater rate of return from the dividends out of the company) does not necessarily involve a relinquishment of the Greenaways’ shareholding. Further, if that had been the intention it might be expected to have been both the subject of express discussion during the conversation (beyond a shorthand reference to “reversion”) and acted upon with some promptness thereafter.

122 Support for the conclusion that the agreement reached in 2004 did not involve a change to the shareholdings may in my view be drawn from the fact that no step was taken to effect any such change until well after the discussion at which it is suggested some such arrangement came into effect (with no explanation for that delay), in circumstances where the recording of the loan arrangement itself had taken place almost immediately.

123 In those circumstances, the fact that no direct evidence was called from the defendants to shed light on what was said at the meeting in 2004 (where the question as to whether the cancellation of the shares was authorised by the plaintiffs was an issue on which the defendants’ lawyers had previously asserted their clients’ position and where the plaintiffs’ claim was based on lack of compliance with the requirements under the Act for forfeiture, which must have encompassed a question as to the consent given for the forfeiture) permits, in my view, an inference that the defendants’ evidence would not have assisted their case. However, I accept that such an inference does not permit me to assume that the evidence would have been damaging to the defendants or to fill gaps in the evidence or convert conjecture (say, as to what was meant by ‘reversion’) or suspicion into evidence. Therefore, I do not place weight on any such inference in reaching the conclusion I have.

124 In summary, the defendants submit that what happened in 2004 effected a reversion of the $600,000 investment (by way of capital contribution or the like) in equity in Auzhair 1 into a debt owed by Auzhair Supplies. There is a singular lack of evidence to support such a conclusion. Mr Ash relies upon the evidence of what happened in July 2004 and the reference by Mr Greenaway in the witness box to “reversion”. He emphasizes that, as admitted by the plaintiffs, the total amount advanced by the Greenaways was $600,000 and places reliance on Mr Greenaway's answer to the interrogatory in relation to this ‘investment’ (the reference to “rollover” displaying, he says, quite an accurate statement of Mr Greenaway’s understanding of the process). Mr Ash relies on the fact that Mr Greenaway, in what he describes as a considered affidavit, made no reference to any equity from 2004 until 2009. On that basis, it is submitted by Mr Ash that the evidence shows that in effect there was an authorisation for transfer of the shares.

125 The question, as posed, by Mr Ash, is whether the evidence permits the inference on the balance of probabilities that the version of events that the defendants have put forward (albeit, I note, only by way of submissions not in their pleading) is what happened and that, as from 2 July 2004 the parties understood the arrangement between themselves to have undergone a reversion from equity to debt.

126 As to the reliance placed on Mr Greenaway’s reference to a proposal for reversion to a 10% interest rate, as noted earlier Mr Greenaway’s evidence in the witness box was rather confused and it is by no means apparent to me that what was understood and agreed by the respective parties in mid 2004 was any more than an understanding that interest on the moneys advanced would be repaid under a fixed interest regime (rather than left to depend on when the directors determined to declare dividends out of profits).

127 There is no evidence that there was any discussion that related directly to the surrender or cancellation of the Greenaways’ shares and, significantly, the only documentation signed after the June 2003 meeting was a loan agreement – nothing was recorded in relation to the cancellation of the Greenaways’ shareholding and nothing was done in that regard until 2006.

128 I am satisfied that the Greenaways have established that their names were removed from the share register without compliance by the company with the requirement for shareholder approval and without sufficient evidence of consent by the Greenaways for that to occur. Insofar as the ultimate onus of establishing an entitlement to relief lies on the Greenaways, I consider that they have satisfied that onus (and I note that there was nothing suggested by way of discretion that should point against the grant of the relief sought). If the defendants sought to contend for a consensual agreement that the shares were to be cancelled, as opposed simply to putting the Greenaways to proof on their claim, then that should have been pleaded and the evidentiary onus of establishing that agreement would (consistent with Rafeletos and Actwane) have been borne by the defendants.

129 Finally, as to the consequential relief sought following on from the finding that Mr and Mrs Greenaway were shareholders and that their shares were forfeited without notification and should be reinstated, Mr Johnson submits that the exclusion of Mr and Mrs Greenaway from the share register, and from their benefits as minority shareholders, is conduct that is oppressive to, unfairly prejudicial to or unfairly discriminatory to the plaintiffs as members of Auzhair 1, in breach of s 232 of the Corporations Act. It was not suggested that such a conclusion should not be made (although the defendants in their pleading have denied that there was such a breach). It follows, in my view, from the circumstances in which the shares were forfeited that the removal of the Greenaways from the register of shareholders and the denial of their status of shareholders constitutes a breach of s 232 of the Act.

130 As to the relief which should be granted, winding up is rightly recognised to be a drastic remedy. It seems to me that it would be appropriate in the circumstances for an alternative remedy by way of a compulsory purchase order and therefore for an expert to be appointed to value the shares and for there to be an order that the majority shareholders acquire Mr and Mrs Greenaway’s shares at the price so valued. I propose so to order.

Orders

131 Accordingly, I make the following orders and declaration:

1. An order pursuant to s 601AH(2) of the Corporations Act 2001 (Cth) that the Australian Securities and Investments Commission reinstate the registration of Auzhair Supplies Pty Ltd ACN 085 159 280.

2. An order that, on its reinstatement, Auzhair Supplies Pty Ltd ACN 085 159 280 be wound up in insolvency.

3. An order that Murray Roderick Godfrey of RMG Partners Business Solutions be appointed official liquidator of Auzhair Supplies Pty Ltd ACN 085 159 280 with effect from the reinstatement of that company in accordance with order 1 above.

4. A declaration that the plaintiffs are each the holder of one ordinary fully paid share in the issued capital of Auzhair 1 Pty Ltd.

5. An order that the register of members of Auzhair 1 Pty Ltd maintained under s 169 of the Corporations Act 2001 (Cth) be rectified to record each of the plaintiffs as the holder of one ordinary fully paid share in the issued capital of Auzhair 1 Pty Ltd.

6. An order that the second to seventh defendants purchase the shares of the plaintiffs in Auzhair 1 Pty Ltd at the amount representing the value of the shares as valued by an expert valuer, such valuer to be appointed by agreement between the parties or as ordered by the court.

132 I will hear Counsel as to the appropriate orders or directions to facilitate an expert valuation of the shares in Auzhair 1 Pty Ltd as contemplated by order 6 above. I will also hear Counsel as to costs.

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LAST UPDATED:
22 November 2010