SUPREME COURT OF QUEENSLAND

Transcription

1 SUPREME COURT OF QUEENSLAND CITATION: Manthey Redmond (Aust) Pty Ltd (in liq) & Ors v Manthey & Ors [2017] QSC 145 PARTIES: MANTHEY REDMOND (AUST) PTY LTD (ACN ) (IN LIQ) FILE NO/S: DIVISION: PROCEEDING: (first plaintiff) AND MANTHEY REDMOND CORPORATION (ACN ) (second plaintiff) v STEPHEN CHARLES MANTHEY (first defendant) AND MANTHEY HOLDINGS PTY LTD (ACN ) (second defendant) AND GEOFFREY REDMOND (first defendant added by counterclaim) AND TIMOTHY JOHN ERIC REDMOND (second defendant added by counterclaim) AND REDMOND FAMILY HOLDINGS PTY LTD (ACN ) (third defendant added by counterclaim) BS7703/15 Trial Division Trial DELIVERED ON: 6 July 2017 DELIVERED AT: Brisbane HEARING DATE: 8 February 2017

2 2 JUDGE: ORDER: CATCHWORDS: COUNSEL: Jackson J The order of the court is that: 1. Adjourn the further consideration of the trial of the counterclaim to a date to be fixed. CORPORATIONS MEMBERSHIP, RIGHTS AND REMEDIES MEMBERS REMEDIES AND INTERNAL DISPUTES GENERALLY where the first defendant, first defendant by counter claim and second defendant by counterclaim were directors of the first plaintiff where the second defendant and the third defendant by counterclaim held shares in the first plaintiff where the first plaintiff by its board of directors constituted by the first and second defendants by counterclaim resolved to issue 1200 ordinary shares to the third defendant by counterclaim where the first plaintiff was placed in voluntary administration where the plaintiffs by counterclaim allege that the first and second defendants by counterclaim breached their duties under ss 181(1) and 182(1) of the Corporations Act 2001 (Cth) in causing the issue of 1200 shares in the first plaintiff to the third defendant by counterclaim and that the third defendant by counterclaim was knowingly concerned in the contraventions where the plaintiffs by counterclaim allege that the first and second defendants by counterclaim s conduct in causing the issue of 1200 shares in the first plaintiff to the third defendant by counterclaim was oppressive where the plaintiffs by counter claim sought declarations under ss 1317E and 233 of the Corporations Act 2001 (Cth), declaratory relief and an injunction under s 1324 of the Corporations Act 2001 (Cth) directed towards the first, second and third defendants by counterclaim whether the relief should be granted Corporations Act 2001 (Cth), s 233, s 1317E, s 1324 Civil Proceedings Act 2011 (Qld), s 10(2) Ainsworth v Criminal Justice Commission (1992) 175 CLR 564, applied Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, discussed Commonwealth v BIS Cleanaway Ltd [2008] NSWCA 170, discussed Elders Trustee and Executor Co Ltd v Commonwealth Homes and Investment Co Ltd (1941) 65 CLR 603, discussed Maddocks v DJE Constructions Pty Ltd (1982) 148 CLR 104, applied Webb v Stanfield [1991] 1 Qd R 593, followed Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, applied C Johnstone for the plaintiffs by counterclaim C Jennings for the first, second and third defendants by

3 3 SOLICITORS: counterclaim TVP Law for the plaintiffs by counterclaim LAS Lawyers for the defendants by counterclaim [1] Jackson J: In this proceeding there are both claim and counterclaim. However, the trial was only on the counterclaim. That was because the first plaintiff is being wound up in a creditors voluntary winding up and is insolvent. Since that event, neither the liquidators nor the second plaintiff have progressed the claim. In the face of an adjournment of the claim the defendants and plaintiffs by counterclaim applied for and obtained an order that the counterclaim be tried separately and before the claim. [2] By way of background, the plaintiffs claim is for: (a) (b) (c) a declaration that the first plaintiff is the owner of the invention known as the Linear Convergent Engine including the right to apply for a patent in respect of the Linear Convergent Engine invention as described in Provisional Patent Application Number and Provisional Patent Application Number ; a declaration that the first plaintiff is the owner of the invention known as the OX2 Engine and is entitled to be the proprietor of any patents granted in respect of that invention; and orders that the second defendant deliver up to the second plaintiff all plans, drawings and specifications produced by it pursuant to the agreement dated 6 November 2009 and all prototype engines and engine parts produced by it pursuant to that agreement. [3] In support of their claim, the plaintiffs allege that the first defendant is the inventor of the OX2 Engine and the Linear Convergent Engine (also referred to as the Eco- Engine and the Multi-fire Engine). They allege that the first defendant assigned title to the Linear Convergent Engine invention to the first plaintiff, including the right to apply for a patent in respect of that invention and that the first defendant assigned title to the OX2 invention by a deed executed in November 2012 to a company which in turn assigned that invention to the first plaintiff. [4] As well, the plaintiffs allege that by a written agreement between the second plaintiff and the second defendant dated 6 November 2009 the second defendant agreed to build and test prototypes of the Linear Convergent Engine and that it was an implied term of that agreement that all plans drawings and specifications and all prototype engines produced by the second defendant pursuant to the agreement would be the property of the second plaintiff. [5] Against that background, the defendants as plaintiffs by counterclaim in the further amended counterclaim make the following allegations. [6] The first defendant is the sole shareholder and director of the second defendant and entered into agreements with the defendants by counterclaim in relation to the commercialisation of the first defendant s idea of a more efficient form of combustion engine.

4 4 [7] On 17 March 2008 the first plaintiff was incorporated with the first defendant and the first and second defendants by counterclaim as directors and a share capital of 900 ordinary shares, issued as to 630 shares to a company associated with the first defendant and as to 270 shares to a company associated with the first and second defendants by counterclaim. [8] On or about 15 April 2008, the 630 shares were transferred to the second defendant and the shareholders entered into a written agreement described as the 2008 Shareholder Agreement. Under that agreement the second defendant was to hold 70 percent and the company associated with the first and second defendants by counterclaim was to hold 30 percent of the shares in the first plaintiff. [9] On 28 August 2008, by deed executed by the shareholders the second defendant agreed to sell 90 of the 630 shares to the company associated with the first and defendants by counterclaim for the sum of $2,350,000. Nevertheless, cl 3 of that deed provided that the voting rights of the shareholders in the first plaintiff would be 80 percent to the second defendant and 20 percent to the company associated with the first and second defendants by counterclaim. [10] On 17 August 2011, the second defendant and the third defendant by counterclaim entered into a further shareholders agreement, described as the Final Shareholders Agreement. By this time, the third defendant by counterclaim had become the holder of the 720 shares associated with the first and second plaintiffs by counterclaim by transfer of those shares. [11] On 27 February 2015, the second defendant wrote to the third defendant by counterclaim purporting to terminate the Final Shareholder Agreement. [12] On 20 April 2015, the third defendant by counterclaim gave notice that it accepted termination of the Final Shareholders Agreement. [13] Accordingly, it is contended that if the first plaintiff had a beneficial interest in any technology pursuant to the Final Shareholders Agreement that technology ceased to be held by the first plaintiff and reverted to either the second defendant or the first defendant. [14] On 21 April 2015, the first defendant by counterclaim gave notice of a meeting of the board of directors of the first plaintiff to be held on 28 April [15] On 28 April 2015, the first plaintiff by its board of directors constituted by the first and second defendants by counterclaim resolved to issue 1200 ordinary shares to the third defendant by counterclaim for an immediate cash injection of $50,000 and resolved that the first plaintiff enter into a facility agreement with the third defendant by counterclaim to obtain an advance of a further $100,000 at commercial rates of interest to be secured by a charge over the first plaintiff s assets for additional working capital, so that the first plaintiff had access to cash if such funds are needed. [16] The constitution of the first plaintiff provided: (a) by cl 4B that the directors may allot or otherwise dispose of the shares or issue of grant options in respect of shares and such persons on such terms and at

5 5 such times and with such preferred deferred or other special rights whether with regards to dividend voting, return of capital or otherwise as the directors think fit; and (b) by cl 5 that before issuing the shares of a particular class the directors must offer the shares to the existing holders of shares of that class so that as far as practicable the number of shares offered to each holder must be purported to the number of shares of that class they already hold. [17] On 29 April 2015, the first plaintiff sent a letter to the first defendant stating that the first plaintiff offered to the second defendant up to 1,800 shares in the first plaintiff at $41.66 each for a total cost of $75,000 on the same terms as those offered to the third defendant by counterclaim. [18] On 7 May 2015, the first plaintiff issued 1,200 shares to the third defendant by counterclaim. [19] Accordingly, it is alleged that the issue of the 1,200 shares was: (a) (b) made in breach of cl 5 of the constitution and was invalid; and not fair to the first plaintiff or its shareholders because it increased the third defendant by counterclaim s shareholding from 40 percent to 74 percent and diluted the second defendant s shareholding by a corresponding amount. [20] On 8 August 2016, the first plaintiff was placed into voluntary administration. 1 [21] On 9 September 2016, at a second meeting of creditors called by the administrator, 2 the creditors of the first plaintiff resolved to wind it up. 3 The effect was that the company was taken to have passed a special resolution under s 491 of the Corporations Act 2001 (Cth) ( CA ) that the company be wound up voluntarily without a declaration under s 494, so it entered a creditors voluntary winding up in circumstances where it was insolvent. Causes of action [22] The plaintiffs by counterclaim allege that the true purpose of the first and second defendants by counterclaim in causing the issue of the 1,200 shares and the effect of issuing the shares was to dilute the second defendant s controlling interest in the first plaintiff. [23] The plaintiffs by counterclaim further allege that the conduct of the first and second defendants by counterclaim in resolving to allot and issue the 1200 shares was a contravention of s 181(1) and s 182(1) of the CA and that the third defendant by counterclaim was knowingly concerned in the contraventions. [24] They further allege that the directors conduct and the issue of the 1,200 shares to the third defendant by counterclaim and the conduct of this proceeding by the first 1 Corporations Act 2001 (Qld), s 436A(1). 2 Corporations Act 2001 (Qld), s 439A. 3 Corporations Act 2001 (Qld), s 439C(c).

6 6 plaintiff at the behest of the first and second defendants by counterclaim constituted oppression for the purposes of s 233 of the CA. Relief sought [25] The plaintiffs by counterclaim pressed at the trial for the following relief: 1 2. A declaration of the issue of 1,200 shares in [the first plaintiff] to [the third defendant by counterclaim] on about 7 May 2015 was void or invalid. 2A. Declarations that in resolving to issue, thereafter causing [the first plaintiff] to issue the 1,200 shares issued in [the first plaintiff] to [the third defendant by counterclaim] on about 7 May 2015 each of [the first defendant by counterclaim] and [the second defendant by counterclaim]: (a) pursuant to s 1317E of the Corporations Act 2001 (Cth) acted in contravention of s 181(1) and/or s 182(1) of the Corporations Act 2001 (Cth) and/or; (b) pursuant to s 233 of the Corporations Act 2001 (Cth) acted: (i) contrary to the interests of (the first plaintiff) as a whole; and/or (ii) oppressively to or unfairly prejudicially to [the third defendant by counterclaim] [sic]; 2B. Pursuant to s 233 of the Corporations Act 2001 (Cth), a declaration [the third defendant by counterclaim] was not entitled to have the 1,200 shares issued in (the first plaintiff) to [the third defendant by counterclaim] on about 7 May 2015; 7. An order pursuant to s 1324 of the Corporations Act 2001 (Cth) that [the third defendant by counterclaim]: (a) be restrained from dealing with the 1,200 shares issued in [the first plaintiff] to [the third defendant by counterclaim) on about 7 May 2015; (b) be restrained from exercising any voting rights in (the first plaintiff) contingent upon the 1,200 shares issued in (the first plaintiff) to (the third defendant by counterclaim] on about 7 May 2015; and (c) Surrender the 1,200 shares issued 8. An order that the [first and second defendants by counterclaim]: (a) pay the [first plaintiff s] costs of the proceeding [26] The plaintiffs by counterclaim did not pursue the other relief sought in the further amended counterclaim. The parties to the counterclaim

7 7 [27] At the trial, only the plaintiffs by counterclaim and the first, second and third defendants by counterclaim were represented. In particular, the further amended counterclaim was not made or pursued against the first plaintiff. On the face of the further amended counterclaim, the first plaintiff was not a defendant by counterclaim. But even if the further amended counterclaim could otherwise have been treated as having been pleaded against it, by s 500(2) of the CA a proceeding in court against the first plaintiff cannot be proceeded with except with the leave of the court. The plaintiffs by counterclaim sought no such leave and accepted that no order could be made against the first plaintiff on the hearing of the counterclaim. [28] As will appear, that state of affairs creates significant problems in terms of the relief sought by the plaintiffs by counterclaim. However, they elected to proceed with the hearing of the counterclaim in the face of any difficulty of that kind. [29] So far as the defendants by counterclaim were concerned, their defence as presented was limited to whether there was any breach of duty or invalidity attaching to the resolution of the directors of the first plaintiff made by the first and second defendants by counterclaim and the issue of the 1,200 shares in the first plaintiff to the third defendant by counterclaim and whether they should be ordered to pay the first plaintiff s costs. Was the issue of the 1200 shares void? [30] For the purpose of analysis, let it be assumed that the first and second defendants by counterclaim constituting the board of the first plaintiff acted for the dominant purpose of increasing the third defendant by counterclaim s shareholding in the first plaintiff and diluting the value of the second defendant s shareholding. It is trite that an issue of shares made by the board of directors of a company for a dominant purpose of that kind is improperly made and voidable. 4 [31] However, the plaintiffs by counterclaim allege that the 1,200 shares were issued to the third defendant by counterclaim. Although the share issue was invalidly made and voidable, the third defendant by counterclaim thereby became a member of the first plaintiff in respect of the 1,200 shares. 5 Where shares are allotted and issued in consideration of the payment of a sum of money for an improper purpose, the transaction is voidable, not void. 6 It follows, that the claim in par 2 of the relief sought for a declaration that the issue of 1,200 shares was void cannot succeed. [32] The relief that may be granted by a court is, in effect, a rescission of the transaction to allot and issue the shares. As part of the relief, the register of members of the company will be ordered to be rectified by removal of the name of the relevant members in respect of the relevant shares. The share certificates, if there are any, will be ordered to be delivered up and cancelled. And the consideration which was paid by the relevant members will be ordered to be repaid to them by the company. However, the plaintiffs by counterclaim seek none of that relief. [33] For a start, they did not make the company a party to the counterclaim or if they did they cannot proceed in their counterclaim against it. But even if that problem were overcome, by granting leave to proceed against the company, there is another 4 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, and Maddocks v DJE Constructions Pty Ltd (1982) 148 CLR 104, Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, and 315.

8 8 problem which a claim for rescission and rectification of the register of members would face. Utility of declaratory relief [34] By s 10(2) of the Civil Proceedings Act 2011 (Qld): The court may hear an application for a declaratory order only and may make a declaratory order without granting any relief as a result of making the order. [35] Section 10(2) is the modern manifestation of the reforms begun in the 19 th century 7 to make clear the power of the court to grant purely declaratory relief. Nevertheless, discretionary principles inform the exercise of the power, including that a court will decline to grant a declaration which lacks utility or has insufficient practical purpose. 8 [36] Where no substantive relief will follow from the grant of a declaration, and the declaration will be inutile to resolve or quell any other controversy between the parties, the court may not grant the declaratory relief sought, as a matter of discretion. The difficulty in the present case is to identify what real interest 9 the plaintiff has in the relief sought. [37] Perhaps the leading statement of principle on this point is contained in the plurality reasons in Ainsworth v Criminal Justice Commission, 10 as follows: It is now accepted that superior courts have inherent power to grant declaratory relief. It is a discretionary power which it is neither possible nor desirable to fetter by laying down rules as to the manner of its exercise. However, it is confined by the considerations which mark out the boundaries of judicial power. Hence, declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions. The person seeking relief must have a real interest and relief will not be granted if the question is purely hypothetical, if relief is claimed in relation to circumstances that [have] not occurred and might never happen or if the court s declaration will produce no foreseeable consequences for the parties. 11 [38] Another useful discussion appears in Commonwealth v BIS Cleanaway Ltd 12 where Hodgson J said: 7 In particular for present purposes the Chancery Procedure Act of 1852 (UK), s 50 and the provisions which adopted it, such as the Equity Act 1867 (Qld), s 73, which was relocated to the Supreme Court Act 1995 (Qld), s See Dharmananda and Papamatheos, Perspectives on Declaratory Relief, Sydney, The Federation Press, 2011, pp 48-49, 69-70, 142, 145, 149, 159; Zamir and Woolf, The Declaratory Judgment, 4 ed, London, Sweet & Maxwell, 2011, pp [4-99]-[4-109]; and Young, Declaratory Orders, 2 ed, Sydney, Butterworths, 1975, pp 60-61, [703]-[704]. 9 Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421, (1992) 175 CLR (1992) 175 CLR 564, [2008] NSWCA 170, [8]-[10].

9 9 There would in my opinion be no practical consequences of the making of declarations of the kind sought, except such consequences as they may have in relation to a breach, claim or expense of the kind I have mentioned. And even if the claimant were to allege any such breach, claim or expense, this would almost certainly raise specific questions as to the interpretation of the licence, as to what, if there had been a novation, or where the precise terms that the effect of the novation (for example in relation to activities which had been undertaken prior to the novation) and what (if there had been termination of the licence or some other event effecting its operation as from any particular time) was the effect of that termination, or that affectation, as to any application the licence had into the future from that time. Issues such as these will be issues that would best be dealt with together with the terminations of issues raised in connection with the orders actually sought in these proceedings, rather than separately from them in a piecemeal way. The determination of the issues such as these, separately from determination of issues relating to the declarations sought, will be very likely to raise serious problems of a kind that can be raised when separate determinations of interrelated questions are sought. It is for those reasons particularly, in addition to the theoretical and very general and unspecific nature of the declarations, that I consider that it could not be an appropriate exercise of discretion in this case to grant the declarations sought. [39] Questions of these kinds arise about some of the paragraphs of the relief sought by the plaintiffs by counterclaim. Effect of the winding up [40] From the moment that the company went into winding up, the rights and status of the members of the company were altered. Speaking generally, there are significant changes in the powers and entitlements of the members of a company being wound up in a creditors voluntary winding up that is insolvent. 13 The right to bring a proceeding against the company to rectify the register of members persists, but is subject to obtaining leave against the company under s 500(2) of the CA. A member may also apply for leave to bring a derivative action under Pt 2F.1A of the CA, but leave will only be granted in exceptional circumstances. Generally, [t]he members are not able to pass resolutions affecting the company after the beginning of the winding up. 14 [41] Some of the case law is complex, and the remaining status or authority of one of the leading cases 15 is now doubtful, 16 and it must be kept in mind that the winding up in 13 Compare Gronow, McPherson s Law of Company Liquidation, Thomson Law Book Co, [7.740]. 14 Compare Gronow, McPherson s Law of Company Liquidation, Thomson Law Book Co, [7.740]; Commissioner of Taxation v Linter textiles Australia Ltd (in liq) (2005) 220 CLR 592, 620 [85], 648 [174] and 659 [214]. 15 Houldsworth v City of Glasgow Bank (1880) 5 App Cas Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160.

10 10 the present case is a creditors voluntary winding up. Still, in my view, it remains true to say that it is only in a rare case that a court will avoid a transaction under which a person became a member of a company in exchange for a valuable consideration, where avoidance and rescission of the transaction would lead to a return of an amount which has become property of the company that otherwise constitutes available assets for the purpose of the liquidation by virtue of the winding up. [42] There is one such case of which I am aware, namely Elders Trustee and Executor Co Ltd v Commonwealth Homes and Investment Co Ltd. 17 In that case the High Court ordered that the plaintiffs were entitled to an order that the register of members of the defendant company be rectified by removing the plaintiff as holder of the relevant shares and the company was ordered to repay the amount paid by the shareholder in respect of the shares. But a stay of execution of the order for repayment was granted to enable the plaintiffs to prove in the winding up of the defendant for the amount payable under the order. The effect of those orders was to convert the shareholder into a creditor of the company in the winding up. [43] However, in my view, Elders Trustee should be considered an unusual case. It has not been subsequently considered in any detail. The point of significance is that the effect of the orders made in that case was to convert a member and contributory in the winding up into a creditor ranking among the unsecured creditors. The significance of that change of status is that, subject to a number of qualifications, under s 555 of the CA all debts and claims proved in the winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionally. [44] An assumption that underlies the winding up of a company that is insolvent is that the property of the company will be insufficient in most cases to pay all of those who have debts or claims against the company, that is to say the creditors. In such a case, the contributories will receive nothing. [45] Further to s 555, s 563AA of the CA provides that a selling shareholder s claim under a buyback agreement is postponed until all debts owed to people otherwise than as members of the company have been satisfied. And s 563A provides that a subordinated claim (that includes any claim that arises from buying, holding, selling or otherwise dealing in shares in the company) is to be postponed until all other debts payable by claims against the company are satisfied. [46] In the case of a company being wound up by a creditors voluntary winding up, s 493A of the CA provides, in part, as follows: (8) An alteration in the status of members of a company that is made after the passing of the resolution is void except if: (a) (b) both: (i) the liquidator gives a written consent to the alteration; and (ii) that consent is unconditional; or all of the following subparagraphs apply: 17 (1941) 65 CLR 603,

11 11 (i) the liquidator gives a written consent to the alteration; (ii) that consent is subject to one or more specified conditions; (iii) those conditions have been satisfied or; (c) the court makes an order under subsection 12 authorising the alteration. (9) The liquidator may only give consent under paragraphs 8(a) or (b) if he or she is satisfied that the alteration is in the best interests of the company s creditors as a whole. [47] Austin and Black s Annotations to the Corporations Act expresses the view about s 468A which is in similar terms that: A change in the rights subsisting between a company and its shareholders such as rectification of the register to remove a shareholders name or to fall within this subsection 18 [48] It can be seen, therefore, why it will be a rare set of circumstances where an order will be made that has the effect of rescinding a transaction under which the company issued shares in exchange for valuable consideration, after the company goes into winding up in a creditors voluntary winding up. Declaration that issue of the 1200 shares was invalid or voidable [49] If an order cannot be made in the present case avoiding and rescinding the issue of the 1200 shares, the question which arises is what purpose a declaration in the form of par 2 of the relief sought that the issue of the 1,200 shares was invalid or is voidable could serve? Unless the transaction could be avoided by rescission, as previously described, a declaration of invalidity or that the issue of the 1200 shares is voidable may have no utility. It will not bind the company. If the company continues to be wound up and is insolvent, the rights of the members, inter se, to any distribution, will be irrelevant unless there is a surplus at the end. The entitlements of the members to any surplus under the company s constitution and the CA will be administered by the liquidator. The rights of the members, inter se, will not be relevant otherwise unless the company is brought out of liquidation. The result is that there may be no consequence of use that would flow from the making of the declaration sought, even if it could be made otherwise. [50] In my view, for these reasons, the declaration sought in par 2 should not be made. Declaration of contravention of sections 181(1) or 182(1) [51] Paragraph 2A of the relief sought is in part a claim for a declaration pursuant to s 1317E of the CA as to contraventions by the defendants by counterclaim of s 181(1) and s 182(1) of the CA. By s 1317E(1), if a court is satisfied that a person has contravened a civil penalty provision it must make a declaration of contravention. The civil penalty provisions are identified in a table that follows that subsection. They include s 181(1) and s 182(1). 18 Austin & Black, The Annotated Corporations Act, [5.468A].

12 12 [52] However, s 1317J of the CA provides, in part: (1) ASIC may apply for a declaration of contravention, a pecuniary penalty order or a compensation order. (2) The corporation, or the responsible entity for the registered scheme, may apply for a compensation order. (3) The corporation, or the responsible entity for the registered scheme, may intervene in an application for a declaration of contravention or a pecuniary penalty order in relation to the corporation or scheme. The corporation or responsible entity is entitled to be heard on all matters other than whether the declaration or order should be made. (3A). (4) No person may apply for a declaration of contravention, a pecuniary penalty order or a compensation order unless permitted by this section. [53] Accordingly, the plaintiffs by counterclaim are not authorised or entitled to apply for a declaration of contravention under s 1317E of the CA. That declaration sought in par 2A of the relief should not be made. Declaration of oppression [54] Another declaration sought by par 2A is a declaration pursuant to s 233 of the CA that the first and second defendants by counterclaim acted contrary to the interests of the first plaintiff as a whole or oppressively to or unfairly prejudicially to the third defendant by counterclaim. The last reference may be taken to be a mistake. It seems obvious that the plaintiffs by counterclaim intended to seek a declaration that the directors acted oppressively to or unfair prejudicially to the second defendant. I will return to this question. [55] Paragraph 2B of the relief sought is for a declaration pursuant to s 233 of the CA that the third defendant by counterclaim was not entitled to have the 1,200 shares issued to it. The possible distinction between par 2B and par 2 of the relief sought is that relief is sought pursuant to s 233 under par 2B. However, that does not answer any of the potential objections to rescission of the transaction discussed previously. Further, the declaration is framed in a way that appears to be directed to what the entitlements were before the 1,200 shares were issued to the third defendant by counterclaim. No submission was advanced by the plaintiffs by counterclaim to explain the utility of a declaration in those terms. There is no dispute raised on the pleadings that the 1,200 shares were issued to the third defendant by counterclaim. The further amended counterclaim alleges it. [56] In my view nothing is added by the way in which the declaration sought in par 2B of the relief is framed. That declaration should not be made. Injunctions [57] Paragraph 7 of the relief sought is for an injunction to restrain the third defendant by counterclaim either from dealing with the 1,200 shares or from exercising any voting rights in respect of those shares. That relief is sought by way of final injunction pursuant to s 1324 of the CA.

13 13 [58] Section 1324(1) provides, in part: (1) Where a person has engaged, is engaging in conduct that constituted (a) a contravention of this Act; or (c) aiding, abetting, counselling or procuring a person to contravene this Act; or (e) being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing. [59] The substance of the injunction applied for is to prevent the third defendant by counterclaim from using or taking advantage of any of the rights it holds as a member in respect of the 1,200 shares. An injunction preventing the third defendant by counterclaim from dealing with shares would prevent it, inter alia, from transferring or mortgaging the shares. An injunction preventing the third defendant by counterclaim from exercising any voting rights in respect of the shares would prevent the votes for those shares being exercised at any general meeting of members of the first plaintiff. [60] However, the conduct alleged that was a contravention of the Act, for the purposes of s 1324(1), was the conduct of the first and second defendants by counterclaim that allegedly contravened s 181(1) or s 182(1) of the CA. The conduct of the third defendant by counterclaim that might attract s 1324(1) was the third defendant s conduct that constituted being knowingly concerned in those contraventions. [61] The point that emerges is that the injunctions sought are not to restrain the conduct which constituted a contravention or being knowingly concerned in the contravention. Nor does the injunction seek an order requiring the third defendant by counterclaim to do any act or thing. The injunction sought is prohibitory not mandatory. The difficulty that emerges seems to be that the injunction sought is not one within the terms of s 1324(1) of the CA, as set out above. [62] I note that under s 233(1) the court may make any order that it considers appropriate in relation to the company including an order regulating the conduct of the company s affairs in the future or restraining a person from engaging in specified conduct or from doing a specified act. The question arises, therefore, whether the injunction sought might be granted under s 233(1) of the CA, as opposed to s 1324(1). Section 233 when the company is being wound up [63] There remain two questions as to whether parts of the relief sought may be ordered under s 233 of the CA, namely:

14 14 (a) (b) first, whether the declaration sought by par 2A of the relief that the first and second defendants by counterclaim acted contrary to the interests of the first plaintiff as a whole or oppressively to or unfairly prejudicially should be made; and second, whether the injunction sought by par 7 of the relief should be granted. [64] The statutory remedy against conduct that is oppressive to a member or members was originally introduced 19 to provide relief in the form of a remedy in lieu of an order for winding up. The extension of the remedy under s 233 of the CA to conduct that is contrary to the interests of the members as a whole or unfairly prejudicial to or unfairly discriminatory against a member or members does not bely the original mischief to which the remedy for oppression was directed. Winding up is still the first possible alternative, but the other alternatives are usually engaged where no order to wind up is made. [65] It is not surprising, perhaps, that it has been held that an order will not usually be made under s 233 where a company is being wound up. In Webb v Stanfield, 20 MacPherson JA said: But to admit that the proceedings by the applicant under s. 320 may continue unabated is to ignore the fact that the company is presently in the process of being wound up under an order of this Court that remains unchallenged. An order for compulsory purchase of shares at once confronts the statutory prohibition in s. 368(1) against share transfers after winding up has commenced. Even if there is reason to suppose that the difficulty posed by that prohibition would in an appropriate case be overcome by an order of court made under that subsection, the problem remains for the applicant of bringing himself within the terms of s. 320(1). Paragraph (a) of the subsection speaks of a member who believes (1) that the affairs of the company are being conducted in a manner that is oppressive to him. The affairs of the company, in so far as they exist at all in a winding up, are now being conducted by a liquidator, who is an officer of the court: see r. 73(1). It is impossible to sustain a rational belief that the liquidator now in control of the company is conducting those affairs in a manner that is in any way oppressive to the applicant in this matter. If he were found to be doing so, the appropriate remedy would be to apply to the court for directions to be given that the liquidator discontinue such conduct. Alternatively, if s. 320(1)(a)(ii) is resorted to, it can be seen to require, as a condition precedent for the relief envisaged by the section, that there be an act or omission by or on behalf of the company. The applicant s complaint is of Stanfield s action in allegedly appropriating to himself or his new company the advantages of the company s agency agreement or its business with Capita. The very basis of that assertion is that Stanfield did so on his own behalf and not on behalf of the company Stanfield Webb & Associates Pty Ltd. The applicant s claim for relief 19 The original source was a recommendation of the Cohen Committee (Cmnd 6659, 1945) and the Companies Act 1948 (UK), s [1991] 1 Qd R 593,

15 15 under s. 320 by way of order for purchase of his shares is therefore not within the literal terms of s. 320(1). If it is objected that this represents too narrow a reading of the provision, the fact remains that the relief sought has, with the intervention of the winding up, ceased to be such as may in this, and perhaps in any other case, be appropriately awarded. The company is insolvent and its affairs are under the control of an officer of court, who is engaged in a form of administration prescribed with some particularity by statute, in which the interests of creditors are entitled to consideration in priority to those of any member or contributory. If it be the case that Stanfield s conduct has caused loss to the company, then it is open to the liquidator by proceedings under s. 542 of the Code or by action in the name of the company in the ordinary way to recover the loss from Stanfield. If such proceedings are taken and succeed, any judgment that follows or its proceeds will enure for the benefit of the company and so form part of the assets from which the claims of creditors and the costs and expenses of winding up will be met. If the liquidator declines to institute such proceedings, the applicant may apply to the Commission under s. 542(1) for authority to make the application himself; or, upon tendering an appropriate indemnity for costs, apply to the court for leave to use the name of the company in an action against Stanfield It is true that the relief sought here is directed not against, or even on behalf of, the company but against another shareholder; and also that what is sought is an order for purchase of and transfer of a fully paid share or shares, a matter in which it may be said the company prima facie has no interest. It nevertheless remains the case that the value to be ascribed to those shares must necessarily take account of the circumstance that the company is now insolvent and so unable to pay its creditors. If as director Stanfield acted in breach of his fiduciary duty to the company, the proceeds of any restitutionary relief against him must now be applied first in satisfaction of the admitted claims of creditors of the company and in defraying costs of the process of winding up. In these circumstances the claims of the shareholders to a return on their investment in the company are necessarily subordinated and postponed to the time, if it arrives at all, at which a surplus over creditors claims and costs is found to have resulted. [66] Webb was decided under s 320 of the Corporations Law. Section 232 and 233 of the CA are in different, wider, terms. The possible effect of this on the court s power to grant relief under s 233 where the company is in liquidation was recognised by the High Court in Campbell v Backoffice Investments Pty Ltd. 21 The plurality judgment stated: 21 (2009) 238 CLR 304. By the time this matter came to trial, a liquidator had been appointed provisionally and the liquidator had sold the whole of the undertaking of Healthy Water. Both of those steps had been taken with the concurrence of both sides of the litigation. The amount recovered on sale of the undertaking of Healthy Water was applied in satisfaction of the costs and

16 16 expenses of the provisional liquidation and some external creditors. Thus, when this matter came to trial, Healthy Water had no business and had no assets. Both shares in the company were then worthless. These considerations were of critical importance in deciding what order was to be made under Pt 2F.1 of the Corporations Act. Upon appointment of a provisional liquidator, any conduct of Healthy Water s affairshttp:// that was oppressive to, unfairly prejudicial to, or unfairly discriminatory against Backoffice (whether in its capacity as a member or in some other capacity) was brought to an end. Mr Campbell no longer controlled the affairs of the company. At or soon after the appointment of the provisional liquidator, and at least by the time of the liquidator s sale of the company s undertaking, the only affairs of Healthy Water being conducted were those undertaken by the liquidator with a view to realising Healthy Water s assets. Once those assets had been sold and the proceeds disbursed in the manner indicated, the winding-up of the company was inevitable. In those circumstances, no order should have been made on the application under Pt 2F.1 of the Corporations Act except an order for the winding-up of the company. It is not necessary to decide whether that conclusion follows because there was no power to make such an order in those circumstances or because the discretion to make such an order could be exercised only by refusing to do so. Because the current form of the oppression provisions in Pt 2F.1 was introduced 178 with a view to making it clear that the court may make orders even if the act, omission or conduct complained of has yet to occur or has ceased, it may very well be that the fact that there was no continuing oppression when this case came to trial does not entail that the court had no power to make any of the orders for which s 233 provides. But that is a point that need not be decided. Given that there was no continuing oppression, and given that Healthy Water had no business and no assets, and was but an empty shell, no order for compulsory purchase of Backoffice s share should have been made. (footnotes omitted) 22 [67] In my view, similar reasoning militates against relief being granted under s 233 of the CA in the present case. It is true that a liquidator in the case of a voluntary winding up is not an officer of the court as is a liquidator in a winding up by the court, but that does not lead to any different outcome, in my view. [68] Any transfer by the third respondent by counterclaim of the 1200 shares will be void, unless the liquidator consents to the transfer or the court makes an order authorising the transfer, and in either case to be validated the proposed transfer must be in the best interests of the company s creditors as a whole. 23 [69] It is unnecessary to pursue any excursus of the rights of members in a creditors voluntary winding up further in order to decide this case. In my view, the declaratory relief that is sought under s 233 in the present case should not be 22 (2009) 238 CLR 304, [179]-[182]. 23 Corporations Act 2001 (Cth), s 493A.

17 17 ordered, because the first applicant is being wound up in a creditors voluntary winding up. In reaching that conclusion, I am guided by the circumstance that with one exception the plaintiffs by counterclaim now seek no other relief in relation to the declaration sought that the issue of the 1200 shares was contrary to the interests of the first plaintiff as a whole, or oppressive to or unfairly prejudicial to the second defendant, except for the injunctions (that are not expressly based on s 233(1)). [70] The question is what real interest the plaintiffs by counterclaim still have in obtaining the limited declaration sought against the first and second defendants by counterclaim, if nothing further will follow from the declaration (except for an order for costs) unless there is a surplus to be distributed to the members as contributories in the winding up. [71] As to the injunctions sought, unless it appears that the first applicant is to be brought out of winding up or that some very special circumstances arise where the votes attaching to the 1200 shares might be cast in a meeting of members, there seems to be no real utility in making an order for the injunctions sought under s 233(1). [72] In reaching the conclusion that the relief sought should not be granted on discretionary grounds, there is a possibility that the circumstances may change in the future, so that there would be utility in granting the orders sought in the light of the changed circumstances. The decision in the present case does not have the effect that the same questions could not be further ventilated if the circumstances change. The plaintiffs by counterclaim did not adduce any evidence of facts that would suggest that there will be utility in granting the relief sought because of the likelihood that the company will be brought out of liquidation. First plaintiff s costs of the proceeding [73] The order sought by par 8(a) of the relief is also unusual. It is not an order sought by the first plaintiff, which is not a party to the counterclaim. It is not an order as to the plaintiffs by counterclaim s costs of the counterclaim. [74] The first plaintiff s costs of the proceeding are confined to the issues between it and the first and second defendants on the claim. Those issues have not been decided. There is no issue in the proceeding as between the first plaintiff and the defendants by counterclaim. Nor is there any issue on the counterclaim as between the plaintiffs by counterclaim and the first plaintiff. [75] The power to order relief in relation to the company, under s 233 of the CA includes power to make an order for the company to discontinue specified proceedings. 24 And the general power under s 233(1) for the court to make any order under [s 233] that it considers appropriate is undoubtedly a wide power. 25 [76] But what is the basis for the order in terms of par 8(a) of the relief sought by the plaintiffs by counterclaim? The plaintiffs by counterclaim did not make any express argument in support of the orders sought. [77] The starting point is that the plaintiffs by counterclaim allege in the further amended counterclaim that the conduct of the first and second defendants by counterclaim as 24 Corporations Act 2001 (Cth), s 233(1)((f). 25 Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, 334 [72].

18 18 directors in causing the first plaintiff to bring the claim against the defendants was conduct of the affairs of the first plaintiff that was oppressive to, unfairly prejudicial to, or unfairly discriminatory against the second defendant, because the third defendant by counterclaim accepted the termination of the final shareholder agreement and the 1200 shares were issued. [78] However, no order that the claim be discontinued is sought against the first plaintiff in liquidation under s 233(1) of the CA. The liquidators have not, as yet, decided whether to continue or to abandon the first plaintiff s claim. That is not a decision to be made by the first or second defendant by counterclaim. [79] The plaintiffs by counterclaim do contend that the first plaintiff s claim was made in circumstances where the first and second defendants by counterclaim controlled the board of directors and acting as the board caused the first plaintiff to bring the claim (and thereby to incur the first plaintiff s costs of the claim). [80] The next step in the possible argument seems to be that if the 1,200 shares had not been issued the first plaintiff would not have incurred those costs because the second plaintiff by counterclaim, as holder of the majority of the shares issued in the first plaintiff for the purposes of a resolution at a general meeting of members would have been able to change the composition of the board of directors to prevent or stop the proceeding on the claim. [81] All that may be so, but there are complexities associated with such a contention. [82] First, the plaintiffs by counterclaim did not tender evidence at the hearing of the counterclaim that they would have acted so as to appoint directors who would have acted to avoid the first plaintiff incurring the costs of the claim against the defendants. [83] Second, there is apparently no real question that an entitlement of the first plaintiff to an interest in the technology of either the Linear Convergent Engine or the OX2 Engine are the only assets of substance that might comprise property of the first plaintiff. [84] Once appointed, any director of the first plaintiff would have been required to exercise their powers as a director in the best interests of the first plaintiff and for a proper purpose. 26 Acceptance of the defendants repudiation of any entitlement of the first plaintiff to the technology may not have been consistent with the duties of a director. The first defendant would have been a position of conflict of duty and interest in relation to any question as to whether the first plaintiff s entitlement to the technology was terminated. [85] The plaintiffs by counterclaim allege that the defendants by counterclaim accepted the termination of the final shareholder agreement. But that does not foreclose the answer to the question as to the first plaintiff s entitlement to the technology. The letter accepting the termination (under cl 19(a) of that agreement) asserted that the first plaintiff was the sole beneficial owner of the Technology. Nor is the question answered by acceptance of the allegation that the 1200 shares were improperly issued. 26 Corporations Act 2001 (Cth), s 181.