REASONS FOR JUDGMENT

INTRODUCTION

1                                             The defendant (the Company) is registered under the Corporations Act 2001 (Cth) (the Act).  The plaintiff (Ms Solinska) and Mr Mark James Hoddinott are its directors.  They are equal shareholders.  Whilst the Australian Securities and Investments Commission (ASIC) shows Ms Solinska and Mr Hoddinott as joint shareholders, Ms Solinska contends that in reality they each hold 50% of the share capital of the Company.  Nothing turns on this distinction for present purposes. 

2                                             Ms Solinska has commenced this proceeding under s 461(1)(k) of the Act seeking the winding up of the Company on just and equitable grounds. 

BACKGROUND

3                                             Regrettably, the Company’s history has not been successful.  It was incorporated on 1 June 2004.  At that stage, Ms Solinska was its sole director and shareholder and in the second half of that year discussions ensued between Ms Solinska and Mr Hoddinott.  Agreement was then reached between them such that in early 2005, pursuant to that agreement, Mr Hoddinott was registered as a shareholder of the Company.  Its name was changed from Fortuna Entertainment Pty Ltd to Fortuna Corporation Pty Ltd.  It was not until 28 August 2008 that Mr Hoddinott was registered with ASIC as a director of the Company and in the following year conflict arose between the directors in respect of money that had been invested by Mr Hoddinott in the Company.

4                                             Early this year, Mr Carl Huxtable was approached for the purpose of discussions with a view to the Company’s winding up and this proceeding to wind up the Company was brought in April 2010.  Mr Hoddinott did not formally appear but the Court received the benefit of his views.  He initially opposed the winding up of the Company principally on the basis of protecting the funds that he advanced to the Company.  Mr Hoddinott later appeared to accept the need for a winding up but had some concerns as to the identity of the liquidator and whether Mr Huxtable would be impartial.  Notwithstanding assurances given to him as to Mr Huxtable’s obligations as an officer of the Court, in all the circumstances, I will order that Mr Evan Robert Verge, a completely independent liquidator be appointed as he is prepared to consent to appointment.  That is the course which appears least likely to generate further ongoing disputation. 

STATUTORY CONSIDERATIONS

5                                             Section 462(2) of the Act provides as follows:

462      Standing to apply for winding up

…

(2)        Subject to this section, any one or more of the following may apply for an order to wind up a company:

(a)        the company; or

(b)        a creditor (including a contingent or prospective creditor) of the company; or

(c)        a contributory; or

(d)        the liquidator of the company; or

(e)        ASIC pursuant to section 464; or

(f)        ASIC (in the circumstances set out in subsection (2A)); or

(h)        APRA.

6                                             A contributory, as defined under s 9 of the Act, is described in this way:

(a)        in relation to a company (other than a no liability company):

(i)         a person liable as a member or past member to contribute to the property of the company if it is wound up; and

(ii)        for a company with share capital—a holder of fully paid shares in the company; and

(iii)       before the final determination of the persons who are contributories because of subparagraphs (i) and (ii)—a person alleged to be such a contributory; …

7                                             Ms Solinska is shown as a joint holder of six fully paid ordinary shares on the records of ASIC.  Each of the directors have approached their involvement on the basis that they are participating as a 50% shareholder in the Company and that it is, in effect, a genuine partnership. 

WINDING UP ON JUST AND EQUITABLE GROUNDS

8                                             Resort to principles of equity in this commercial context was discussed in Ebrahimi v Westbourne Galleries Ltd [1973] AC  360 and more recently in the High Court in Friend v Brooker (2009) 239 CLR 129 (at[90]); Kennon v Spry (2008) 238 CLR 366 (at [95]); Vigolo v Bostin (2005) 221 CLR 191 (at [71]).

9                                             In Ebrahimi, Lord Wilberforce discussed the factors which might enable a court to subject the exercise of legal rights of shareholders to equitable considerations of a personal character.  The fact that the company is a small one was not sufficient taken alone.  The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements:

(i) an association formed or continued on the basis of a personal relationship, involving mutual confidence...; (ii) an agreement, or understanding, that all, or some (for there may be "sleeping" members), of the shareholders shall participate in the conduct of the business (iii) restriction upon the transfer of the members' interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.

10                                          In Re Wondoflex Textiles Pty Ltd [1951] VLR 458 (at 465), Smith J said that the partnership analogy will ordinarily be applicable where:

the members of the company are a relatively small number of persons who have become associated as members in pursuance of an agreement or arrangement involving the creation of a personal relationship between them, and where, in addition, there are restrictions upon the transfer of shares...

In Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 (at [177]) the High Court said:

There may be an issue about whether deadlock in the affairs of a company would fall within s 232 of the Corporations Act. It is not necessary to explore these questions further in the present matter. It may be noticed, however, that the facts in the present matter revealed a clear case in which it was just and equitable that the company be wound up. The company as constituted after the share sale had evident similarities to a partnership and the two shareholders were at loggerheads.

APPLICATION OF THE LAW TO THE PRESENT CIRCUMSTANCE

11                                          This was effectively a two person partnership in the form of a company, the main object of which was to create a website known as ‘Alfa X’.  The proposal was somewhat speculative and depended on funding in order to be launched.  Ms Solinska does not have the financial resources to provide that funding or to keep the Company going and Mr Hoddinott does not intend to inject more money into the business and does not wish to run the Company by himself.  Mr Hoddinott has made demand on Ms Solinska to pay him one half of the money he has advanced to the Company.  Assuming the advance was to the Company, the proper debtor is the Company.  Nevertheless, Mr Hoddinott has commenced legal action against Ms Solinska to recover part of the fund advanced. 

12                                          It is clear also that the Company was tantamount to a quasi partnership having started and continued on the basis of a relationship involving mutual confidence.  Both of the directors regard themselves as essentially being partners in the business and there was an expectation that each would participate in the conduct of the business.  Pursuant to the agreement reached between the directors, on the death of either director, the shareholders’ shares would automatically pass to the other and there was a commitment to do everything possible to protect and enhance the interests of the other.  It is clear that there has been a complete breakdown of the relationship between the directors.  The reality is that without further capital injection, which neither is director is prepared or able to supply, the Company cannot continue.  There is a management deadlock.  This is an entirely appropriate case for the exercise of the Court’s discretion to wind the Company up on just and equitable grounds.

APPOINTMENT OF LIQUIDATOR

13                                          I have indicated in the Introduction that I propose essentially for pragmatic reasons to appoint Mr Verge as a liquidator in the Company.  In saying that, I do not wish to suggest for a moment that Mr Huxtable is not independent, indeed to the contrary.  It is clear that he does have the requisite degree of independence and would be an entirely suitable appointee.  Nevertheless, in the interests of avoiding any further disputation and attendant delay and additional costs, as Mr Verge has consented to his appointment as liquidator, I will take that course.  The orders which will be made are as follows:

1.                  Fortuna Corporation Pty Ltd ACN 109 340 230 be wound up by the Court on the grounds that it is just and equitable that it be wound up.

2.                  Evan Robert Verge of Melsom Robson, Chartered Accountants be appointed as the Official Liquidator of Fortuna Corporation Pty Ltd ACN 109 340 230.

3.                  The costs of this application be paid out of the assets of Fortuna Corporation Pty Ltd ACN 109 340 230.

Associate: 

Dated:         5 October 2010