FEDERAL COURT OF AUSTRALIA

Clarke v Bridges [2004] FCA 394

CORPORATIONS – winding up – just and equitable – two-man company – deadlocked board

Corporations Act 2001 (Cth) s 461(1)(k)

Ebrahimi v Westbourne Galleries Ltd. [1973] AC 360 referred to

Tivoli Freeholds Ltd., Re [1972] VR 445 cited

Yenidje Tobacco Company, Limited., In re [1916] 2 Ch 426 cited

STEPHEN CLARKE v LEITH ANDREW BRIDGES and 2BC PTY LTD

V 316 of 2004

FINKELSTEIN J

23 MARCH 2004

MELBOURNE

THE COURT ORDERS THAT:

1.         2BC Pty Ltd be wound up.

2.         Kenneth John Stout of Boutique Corporate Advisory of Level 2, 111 Collins Street, Melbourne Victoria be appointed Liquidator of the Company.

3.         The Plaintiff’s application be otherwise dismissed.

4.         The costs of the hearing on 23 March 2004 be costs in the winding up.

5.         The Plaintiff pay the First Defendant’s costs incurred on 12 March 2004, such costs to be taxed in default of agreement.

6.         The First Defendant pay one half of the Plaintiff’s costs incurred on 16 March 2004, such costs to be taxed in default of agreement.

7.         The requirement for giving any notice of the winding up of the company required by the Corporations Act 2001 (Cth) or the Corporations Regulations, other than the notice given to the Australian Securities and Investments Commission pursuant to s 470 of the Act, be dispensed with.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     In 2001 Mr Clarke and Mr Bridges decided to open a wine bar in Blackburn, an outer Melbourne suburb.  On the advice of Mr Clarke’s accountant they purchased a shelf company, 2BC Pty Ltd, to own and operate the business.  Each man holds two of the four issued shares.  Together they are the only directors.

2                     Mr Bridges and his wife own the premises upon which the company conducted its business.  Mr Clarke says that the parties agreed that the company would be granted a three year lease of the premises with two further options for three years each.  The lease was oral; formal documents were never executed.  The company spent money refurbishing the property to obtain a permit to operate the premises as a wine bar.  The bar opened for business in February 2002.

3                     In mid 2003 relations between Mr Clarke and Mr Bridges deteriorated.  In September 2003 Mr Bridges and his wife served a notice to quit and in October 2003 the business shut down when the company vacated the premises.  The business was sold two months later for about $72,000 despite the fact that in August 2003 Mr Clarke obtained a valuation that the business was worth $169,000.  It is likely that the company could not obtain this amount because the business was not operating at the time of the sale. 

4                     The proceeds of sale were applied in discharge of the company’s liabilities.  A small surplus of approximately $12,000 is being held by the company’s solicitors.  There is an agreement between Mr Bridges and Mr Clarke, which may be of doubtful validity, that this amount is to be divided between them on the ratio of 4.5 to 5.5 respectively. 

5                     Mr Clarke now seeks to have the company wound up.  Initially he sought different relief.  At first he asked for orders that he be authorised, on behalf of the company, to lodge a caveat over the title to the Blackburn premises and to institute proceedings against Mr Bridges for breach of his director’s duties. 

6                     When the matter came on for interlocutory relief, on 12 March 2004, it soon became apparent that none would be granted.  The application was adjourned to enable Mr Clarke to file additional material to properly present his claim that an action be commenced against Mr Bridges.  During the hearing the appointment of a liquidator to the company was discussed as a possible alternative to that relief. 

7                     The hearing resumed on 16 March 2004.  On that occasion Mr Clarke said that he only wished to pursue the winding up of the company.  That application could not proceed because Mr Bridges indicated that he was taken by surprise and needed time to prepare his opposition.

8                     The application was adjourned until this morning.  This enabled Mr Bridges to identify the grounds upon which he opposes the winding up.  Four grounds are relied on.  The first is that the precise basis for the application is unclear.  This submission is easily dismissed.  Here we have a company that conducts no business, has a modicum of assets, has two directors who are unlikely to agree on anything and only two shareholders who cannot remove the deadlocked board.  These are the factors that form the basis of the winding up application.

9                     The second ground is that the evidence does not require or justify the making of the order.  Mr Bridges says that because (i) the company is not engaged in any activity (ii) all but one of its creditors are paid (there may be an outstanding debt of approximately $950) and (iii) the company’s continued existence as a dormant company creates no particular difficulties, there is sufficient reason not to make a winding up order.

10                  Mr Bridges also opposes the winding up on the basis that it would cause him loss.  The particular loss which Mr Bridges identifies is his share of the approximately $12,000 which is held in the company’s solicitor’s trust account.  If the company is wound up it is likely that the liquidator will claim this amount.

11                  Moreover, Mr Bridges says that because he and Mr Clarke control the company they themselves can agree on how the company’s assets should be distributed.  There is, so the argument goes, no reason for the court to intervene. 

12                  Mr Clarke relies on the “just and equitable” clause in the Corporations Act 2001 (Cth) (s 461(1)(k)) to found his application.  In Ebrahimi v Westbourne Galleries Ltd. [1973] AC 360, 374-375 Lord Wilberforce explained that the words of the English equivalent of this section were “general and [should] not be reduced to the sum of particular instances” that may fall within the scope of the section.  The circumstances in which the court will act need not be discussed in any detail.  It is sufficient, for present purposes, to note that the situations where it has been held to be just and equitable that a company be wound up include (i) where the main object for which the company was formed has gone: Re Tivoli Freeholds Ltd. [1972] VR 445; and (ii) where there is a deadlock at both board and shareholder level: In re Yenidje Tobacco Company, Limited. [1916] 2 Ch 426.  Here there is also the added factor that the company may have a cause of action which it is unable to pursue.

13                  I am of the firm view that it is not just and equitable that the present situation should be allowed to continue.  It is inappropriate that this company be left in limbo. If it is the parties will engage in further litigation; I am certain that they will reach no agreement on the fate of the money in the solicitor’s trust account and will simply take that matter to court.  It is regrettable that the parties have not been able to sort out their differences.  Their intransigence is especially difficult to understand when one remembers that irrespective of the outcome of their dispute, the money they are fighting over is likely to be miniscule compared with the costs of this application let alone the costs of any further litigation.  The only way that I can put an end to this state of affairs is to order a winding up.  This is precisely the order that I will make. 

14                  I must also decide the question of costs.  The costs incurred today should form part of the costs of the winding up.  The costs incurred on the two previous occasions on which this matter came before the Court should be dealt with differently.  The cost of the first day should be borne by Mr Clarke because he failed to obtain any relief and the matter was adjourned so he could substantiate his position.  In relation to the second day, Mr Bridges should pay one half of Mr Clarke’s costs.  I accept without hesitation that counsel had not been requested to prepare the case on the basis that he would be required to contest a winding up application.  On the other hand, I think that sufficient was said on the first day to put Mr Bridges on notice that such an application might be made. 

15                  I will make orders accordingly.

Associate:

Dated:              5 April 2004