Supreme Court New South Wales

• Medium Neutral Citation: In the matter of Optimisation Australia Pty Ltd (No 2) [2014] NSWSC 1394
• Hearing dates: Friday, 10 October 2014
• Decision date: 10 October 2014
• Jurisdiction: Equity Division - Corporations List
• Before: Brereton J

Decision

Order that company advance surplus funds on loan account to directors. Order that defendant be restrained from paying company expenses without notice to plaintiff

• Catchwords: CORPORATIONS - members rights and remedies - oppression - exclusion of director/member from management - retention of the whole of the company profits without declaring a dividend is oppressive - whether interlocutory relief should be granted
• Legislation Cited: (Cth) Corporations Act 2001, s 232, 233
• Cases Cited: Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; [2006] HCA 46; Business World Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499; Re Courtesy Real Estate Pty Ltd (2013) 96 ACSR 593; [2013] NSWSC 1666; Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688; Re G Jeffery (Mens Store) Pty Ltd (1984) 9 ACLR 193; Reid v Bagot Well Pastoral Co Pty Ltd; Shannon v Reid (1993) 12 ACSR 197; Re City Meat Co Pty Limited (1983) 8 ACLR 673; Thomas v HW Thomas Ltd [1984] 1 NZLR 686
• Category: Interlocutory applications
• Parties: Brian Raymond Kearney (plaintiff); Optimisation Australia Pty Limited (first defendant); Gary Williams (second defendant); Susan Williams (third defendant); Sharmark Pty Ltd (fourth defendant)
• Representation: Counsel: B Kearney (in person) (plaintiff); D Gasic (solicitor) (defendants); Solicitors: Australian Business Lawyers & Advisers (defendants)
• File Number(s): 2013/153589

Judgment - ex tempore

1 HIS HONOUR: Before the court are two notices of motion filed by the plaintiff Brian Raymond Kearney on 3 October 2014 which raise what are, in effect, four discrete issues. In an outline of written submission handed to the Court this morning, Mr Kearney seeks to raise some additional issues that go beyond the scope of those notices of motion. Given that those submissions, which were provided to the solicitor for the defendants at the beginning of the hearing today, go beyond the scope of the motions, and permit no realistic opportunity to provide an informed response to them, it would not be appropriate for the Court to deal with the additional matters today. If they are to be pursued, it will be necessary that they be invoked by a motion that properly raises them. But insofar as they seek, in effect, production of further documents for inspection, consideration might be given to whether that cannot be dealt with in the discovery process, in respect of which directions have already been made.

2 The first issue raised by the notices of motion is an application by the plaintiff for leave to further amend the statement of claim in the proceedings. The plaintiff's affidavit in support of the motion annexes a draft amended statement of claim. Some aspects of the proposed amendments appear straight forward, and it would seem that in respect of those aspects amendment should be uncontroversial. However, on even a cursory reading, the draft contains a number of manifest defects. The first is that it purports to join a fifth defendant, but does not appear to seek any relief whatsoever against that fifth defendant. The second is that it claims damages for wrongful dismissal, but contains no pleading of material facts to support such a claim. There are probably other problems.

3 The solicitor for the defendants has informed the Court that a revised draft amended statement of claim has since been provided. I have not taken the trouble to examine it at this stage, because it will not affect the course that I propose to take, but it apparently adds allegations of fraud of a general and unparticularised kind.

4 The plaintiff, who is currently unrepresented, now seeks an opportunity to have his proposed amended pleading professionally settled, and it seems to me that it is ultimately in the interests of everyone that that be done; but it needs to be clearly understood that if the pleading is defective, including if it is not sufficiently particularised in respect of allegations of fraud, leave to amend will not be granted. I therefore propose to adjourn that part of the notice of motion to a date to be fixed to enable it to be professionally settled in the meantime.

5 The second issue is an application for access to documents produced pursuant to the order I made on 22 September 2014 that the defendants produce to the court certain specified documents. It is, I would have thought, standard and well understood practice that documents produced on subpoena or pursuant to an order for production may be accessed only pursuant to an order of the Court granting access to them. This practice is applied on a daily basis in the Registrar's subpoena list, and likewise whenever subpoenas are returnable before a judge of the Court. Typically it is asked whether there is an objection to access and then the Court makes an order for access, but access is not permitted unless and until an order for access has been made.

6 When Mr Kearney, having established that the documents had been produced to the Exhibits Office, attended the Exhibits Office to inspect them, he was advised - conformably with the practice - that he could not inspect the documents without an order for access. When he submitted to the defendant's solicitor a draft consent order providing for that access, he was told that consent had been indicated to the Court when the order for production was made. Subsequently, he was told that he needed to complete a "request for access to the court file" document, a copy of which the defendant's solicitor provided to him. This is an irrelevant document for access to documents produced on subpoena or pursuant to an order. It is the form that is filled out when someone wants to inspect the Court file in the Registry, not to obtain access to documents produced on subpoena. It is somewhat difficult to see why this course was taken, and somewhat difficult to understand why the proposed consent order could not simply have been agreed to when it was submitted. In any event, I granted access to the documents produced this morning, and I will make a formal order in that respect, including photocopy access, at the conclusion of this judgment.

7 The third issue is the plaintiff's application for an order that the first defendant pay a dividend of $300,000 to the directors of the company, to be distributed pro rata to their existing shareholdings.

8 As background, it is necessary to say a little more about the nature of the proceedings and the issues in it. The case is in substance an oppression suit in respect of the first defendant company Optimisation Australia Pty Ltd. The directors of the company are the plaintiff, the second defendant Mr Williams, and the third defendant Ms Williams. The shareholders are now the plaintiff as to 35 shares and, it would seem, the fourth defendant Sharmark Pty Ltd as trustee for Mr Williams as to 33 shares and as trustee for Ms Williams as to 32 shares. Originally, however, the plaintiff held 51 per cent and Mr Williams or his trust 49 per cent of the shares.

9 The plaintiff's primary complaint, although much that is surplusage and/or of very tangential relevance has been advanced on both sides, is that he has been excluded from management and employment by the company since 30 April 2013. A subsidiary complaint, which he now seeks to raise by the proposed amended statement of claim, is that his shareholding was reduced from 51 per cent to 35 per cent. He remains a director, but self evidently is in the minority of directors.

10 The order that he presently seeks would, on a final basis, be in the nature of an order regulating the affairs of the company under (Cth) Corporations Act 2001, s 233. In Re Courtesy Real Estate Pty Ltd (2013) 96 ACSR 593; [2013] NSWSC 1666, Black J held that in oppression proceedings interlocutory relief could be granted - in that case, the reinstatement of a director - on the usual basis upon which interlocutory injunctions are granted, although in that case ultimately his Honour declined to make an order for reinstatement on an interlocutory basis. Essentially, as his Honour explained in that case, on an application for an interlocutory injunction, the question is whether the plaintiff has established a sufficiently seriously arguable case for a final injunction to justify the grant of interlocutory relief having regard to the balance of convenience. The plaintiff bears the onus for making out a case of interlocutory relief. A serious question to be tried must be established before one reaches the question of the balance of convenience. The two limbs of the question are interrelated, in that the strength of the plaintiff's case on the claim for final relief may be relevant to what is required to establish that the balance of convenience supports interlocutory relief, and the preponderance of the balance of convenience may be relevant to the strength of the case required to make out a sufficiently serious question to be tried [Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; [2006] HCA 46, [65]-[72]].

11 Where interlocutory relief is of a mandatory nature, the Court takes into account the potential consequences of granting mandatory relief which may later have to be undone, and that may be a telling factor on the balance of convenience [see Re Courtesy Real Estate, [14]]. But it is no longer the case that a mandatory injunction is a "rara avis" or requires a particularly "high degree of assurance" [Business World Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499, 503-4 (Gummow J), in which his Honour granted interlocutory relief being satisfied that to do so would not in any practical sense decide the case on a final basis "because the consequences can be undone if final relief is refused"].

12 Although a failure to pay dividends, or a failure to determine dividends to the maximum level that the profits of the company fairly allow, does not in itself constitute unfairness or oppression [Re G Jeffery (Mens Store) Pty Ltd (1984) 9 ACLR 193; Thomas v HW Thomas Ltd [1984] 1 NZLR 686], a failure to declare dividends may amount to oppression or unfairness in the sense required to attract relief under Corporations Act, s 232 in certain circumstances, particularly when it amounts to excluding one shareholder or group of shareholders from benefitting in the profits of the company [Re City Meat Co Pty Limited (1983) 8 ACLR 673; Reid v Bagot Well Pastoral Co Pty Ltd; Shannon v Reid (1993) 12 ACSR 197, 208-9].

13 Bearing in mind that all I am considering at this stage is whether there is a seriously arguable case for final relief, and by no means determining whether that case would ultimately succeed at final hearing, it seems to me that, in circumstances of what is on any view a closely held company that originated as a quasi partnership of which the plaintiff was a founding member but from which he is now practically excluded from management and has been dismissed as an employee, there is a sufficiently seriously arguable case of oppression under s 232 to require consideration of the balance of convenience.

14 Similarly, as it seems to me, this is a case in which it is sufficiently seriously arguable that the retention in the company of the whole of the profits without declaring a dividend is oppressive of the plaintiff. I reach this conclusion having regard to the past history of payment of dividends; the apparent availability of funds to fund a dividend, there being approximately $600,000 cash available; the profitability of the company over the last financial year, with net profit of approximately $651,000 for the year; the circumstance that in the recent past there was a proposal to distribute some of the presently available cash partly by way of payment to the second defendant for work said to have been performed by him for the company while he remained a director but after he had resigned as an employee, and also as to a further $150,000 as a lump sum upfront payment in advance to the company solicitors in connection with these proceedings; and, finally, because, having been dismissed from employment without the distribution of a dividend, the plaintiff is unable to access or benefit from his equity that is tied up in the company now under the control of the defendants. I stress that this is very far from saying that ultimately the Court will conclude that there has been any such oppression. But on the material presently available, there is a sufficiently seriously arguable case to justify consideration of the balance of convenience.

15 As to the balance of convenience there are really two issues. The first, urged by Mr Gasic for the defendants, emphasised the risk referred to by Gummow J in the passage to which I have referred, that such an amount sought practically have the effect of determining aspects of the proceedings. The second is the capacity of the company to pay a dividend in the order of that sort. Those two considerations are, however, interlinked.

16 As to the first, a declaration of a dividend is a rather irrevocable step. It would be, from a financial accounting and taxation point of view, difficult, if not impossible, for a company, having once declared a dividend, in effect to undeclare it. For that reason alone, it seems to me that proceeding by way of declaration of dividend would be inappropriate. But that is not conclusive of the application, because there are other less final ways of achieving practically the same result. There is a long history of the company making loans to its directors on directors' loan account and then, following year's end, making distributions of dividend to eradicate the loan account. If a distribution were effected by way of loan on directors' loan account there would be no such difficulty of finality as there would be if it were effected by way of declaration of dividends.

17 Accordingly, if I conclude that it is otherwise appropriate to make the order sought, I would propose to give effect to it by requiring the company to make loans on directors' loan account rather than to declare a dividend. Amongst other things, that would mean that future liabilities to any of the directors or shareholders could be set-off against those loan accounts, and there would be no permanent impact on the financial position of the company.

18 As to the capacity of the company to fund such a provision, as I have said, the company has slightly in excess of $600,000 cash in its bank account. Over the last financial year it made a profit of in excess of $650,000. In recent months the company has lost a significant customer and Mr Williams estimates that the impact of the loss of that customer will be to reduce the company's profits in the next financial year by $250,000. That implies a forecast profit for the current financial year of $400,000, or approximately $33,000 per month. That is reasonably consistent with the result for July 2014, which Mr Williams says reflects the loss of the major customer to which I have referred with net profit was $24,000 for that month.

19 However, Mr Williams says that there are a number of liabilities for which provision must be made out of the $600,000 available funds. The first is a Business Activity Statement payment of $90,000, and I agree that provision should be made for that. The second is current employee expenses of $60,000 and I also agree that provision should be made also for that.

20 The third is the company's legal costs associated with these proceedings, said to be $150,000. As to that, not all is likely to be immediately payable; it is a sum which will accrue over time. In addition, for reasons explained by Young J in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 and in other cases referred to therein, expenditure of assets of the company on the defence of what is really a shareholders dispute may itself be, though not necessarily is, oppressive. Notwithstanding those reservations, I propose for the present exercise to set aside $150,000.

21 Next, it is said that the company has current monthly costs of $70,000 per month. However, that overlooks the fact that it has monthly income that exceeds its monthly costs and has a monthly profit of between $25,000 and $33,000. There is no reason to make provision for $70,000 as suggested.

22 Finally, it is said that provision should be made in the sum of $100,000 for a finance manager yet to be employed by the company on a salary of $100,000 per annum. As Mr Kearney has submitted, the directors had earlier resolved to increase Ms Williams' salary by $50,000 per annum on account of her additional responsibilities in that respect. Even if the company were to employ a finance manager at $100,000 per year, that is approximately $8,500 per month and the monthly profits to which I have referred would be sufficient to cover that. It is not sensible to suggest that $100,000 would be paid for such a finance manager upfront.

23 For these reasons, the total of $470,000 proposed as current liabilities is somewhat misleading. When one subtracts the $90,000 for the BAS, the $60,000 employee expenses, and provides for $150,000 for costs, that still leaves a sum of cash of about $300,000.

24 However, the defendants submit that regard should also be had not just to current liabilities but to a number of potential liabilities. One of them is Mr Williams' claim for compensation for work done while he has not been an employee. The precise basis upon which he is entitled to remuneration for that work after he had resigned as an employee, is not entirely clear. In any event, if the matter is dealt with as I propose by way of loan account, any amount advanced to him would in effect be an advance against his entitlement on account of unpaid wages and could ultimately be set-off against it. For reasons which will become apparent, it would be necessary to preserve about half of the claim - that is to say, about $65,000 - if provision for it were to be made in full out of the assets currently available.

25 Next, reference is made to the potential liabilities of the company to the plaintiff for damages for wrongful dismissal and for the compensation and costs claimed in the present proceedings. As any potential liability to the plaintiff will be able to be set-off against any amount advanced on loan account to the plaintiff, there is no need provide for those potential liabilities in this contract.

26 Finally, reference is made to the costs of cross claims brought or proposed to be brought by the company against the plaintiff. It seems to me that this may well involve some double counting with the $150,000 legal costs for which I have already made provision. In any event, the company has an ongoing profitability of about $400,000 per annum.

27 All that said, I think some further provision should be made after the first $300,000. A conservative approach is prudent in this respect, but it seems to me that I can be comfortably satisfied that at least $200,000 is available for advance to the directors on directors' loan account. I therefore propose to make an order to the effect that the company advance to the directors, or such of them as request it, until further order, the sum of $200,000 pro rata according to their shareholding entitlements.

28 The fourth and final issue is the plaintiff's application for an order that the defendants notify the plaintiff of any payments they intend to cause the first defendant to make in excess of $5,000 prior to those payments being made, but excluding current staff wages. The intent of this application is to afford the plaintiff, who as I have said remains a director of the first defendant, an opportunity to vet significant expenses before they are paid. If he is dissatisfied he can, at his own risk, approach the Court for an injunction. If he does not do so then, unless the defendants agree not to make a payment, the payment can go ahead at the expiration of the notice period.

29 It seems to me that, as a director who retains the legal responsibilities and obligations of a director, it is entirely reasonable that he should at least be notified of proposed significant payments so as to have an opportunity of disputing them if he wishes to do so, at his own risk as to costs.

30 The proceedings already stand adjourned to 3 November for further directions, and the convenient course is to adjourn the balance of the motion for leave to amend pleadings to that date, unless the parties have another view.

31 Accordingly, the Court orders that:

(1) The plaintiff's application for leave to further amend the statement of claim be adjourned to 3 November 2014 at 9.30am before me.

(2) The parties may have access to the documents produced by the defendants pursuant to the order made on 22 September 2014, including photocopy access.

(3) Until further order, the first defendant advance, and the second and third defendants do all things, execute all documents, and vote for all resolutions necessary or convenient to effect the same, on directors' loan account forthwith upon written request by the director concerned:

(a) to the plaintiff up to $70,000;

(b) to the second defendant up to $66,000; and

(c) to the third defendant up to $64,000.

(4) Upon the plaintiff giving to the Court the usual undertaking as to damages, the defendants be restrained from, by themselves, their servants or agents, permitting or suffering the first defendant to pay any invoice or other expense or liability in excess of $5,000, other than regular salary, wages and emoluments of employees, except upon having given seven days written notice by email to the plaintiff, such notice to specify the proposed payee and the amount of the payment and to include a copy of the relevant invoice or equivalent supporting document.

32 The Court further orders that time for service of the defendant's affidavit evidence be extended until further order.

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Decision last updated: 28 October 2014