FEDERAL COURT OF AUSTRALIA

Harris (Trustee for the Nedyah Investment Trust) v Evans, in the matter of Canford Property Group Pty Ltd [2018] FCA 1856

ORDERS

UPON THE USUAL UNDERTAKING AS TO DAMAGES PROVIDED BY GREGORY JOHN HARRIS AS TRUSTEE FOR THE NEDYAH INVESTMENT TRUST ON 22 NOVEMBER 2018, THE COURT ORDERS THAT:

1.    Anne-Marie Jane Barley of AMB Insolvency Services Pty Ltd be appointed as official liquidator of Canford Property Group Pty Ltd ACN 168 875 205 provisionally pursuant to s 472(2) of the Corporations Act 2001 (Cth).

2.    Costs be reserved.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

COLLIER J:

Introduction

1    By originating process filed 5 November 2018, the plaintiff seeks orders winding up Canford Property Group Pty Ltd (the Company) pursuant either to s 461(1)(k), on just and equitable grounds, or s 233, on grounds of oppression, of the Corporations Act 2001 (Cth) (the Act). The applicant has further filed an interlocutory process seeking the appointment of a provisional liquidator under s 472(2) of the Act, pending the hearing of the appliction to wind up the Company. It is this interlocutory application which was the subject of urgent hearing this evening, and in respect of which I now give judgment.

Background

2    The plaintiff, Mr Harris, and the first defendant, Mr Evans, met in or around 2010 when they were both employed at a large international real estate company. In approximately 2013, Mr Harris and Mr Evans decided to set up the Company for the purpose of conducting their own real estate business.

3    The Company was incorporated on 1 April 2014, at which time Mr Harris and the first defendant were the only directors of the Company. At first, the business was operated remotely and from approximately 20 January 2016, the business was operated from a premises leased by the Company at 68 Thomas Drive, Surfers Paradise, Queensland.

4    Upon incorporation of the Company, 100 ordinary shared were issued and were held by Mr Evans as follows:

    50 ordinary shares in his capacity as trustee of the Evans Family Trust (the beneficiary of which was the Evans family); and

    50 ordinary shares in his capacity as trustee of the Sirrah Investment Trust (the beneficiary of which was the Harris family).

5    Four days after the incorporation of the Company, Mr Harris ceased to be a director of the Company as he did not hold a real estate licence, which was a requirement in Queensland to carry out the work of a real estate agent.

6    On 24 March 2016, Mr Harris was re-appointed as a director of the Company, at which time he held the relevance licence. On the same day there was an allotment of shares in the Company as follows :

    50 ordinary shares to Mr Harris in capacity as trustee of the Sirrah Investment Trust (the beneficiary of which was the Harris family) and

    75 ordinary shares to Ms Tracy Lisa Evans in her capacity as trustee of the Evans Family Trust (the beneficiary of which was the Evans family).

7    I understand that Mr Evans resigned as trustee of the Evans Family Trust on 24 March 2016, on which date Ms Evans was appointed. (I understand that Mr Evans is married to Ms Evans.

8    On 25 January 2017 50 ordinary shares were transferred from Mr Harris as trustee of Sirrah Investment Trust, to Mr Evans as trustee of Nedyah Investment Trust (the beneficiary of which was the Harris family).

9    On 30 June 2017 there was a further allotment of shares in the Company as follows :

    60 D class shares to Ms Tracy Evans in her capacity as trustee of the Evans Family Trust (the beneficiary of which was the Evans family), and

    40 E class shares to Mr Evans as trustee of Nedyah Investment Trust (the beneficiary of which was the Harris family).

10    On 7 September 2018 Mr Evans was removed as trustee of Nedyah Investment Trust, and replaced by Mr Harris as trustee.

11    It is generally accepted by the parties that Mr Harris’ primary role was marketing the services of the business operated by the Company. Mr and Mrs Evans were primarily responsible for the day-to-day control of the Company, as well as its books and records.

12    In summary, at 1 November 2018, the shareholdings of the Company were as follows:

    75 ordinary shares held by Ms Evans as trustee for the Evans Family Trust;

    50 ordinary shares held by Mr Harris as trustee for the Nedyah Investment Trust;

    60 D class shares held by the Ms Evans as trustee for the Evans Family Trust; and

    40 E Class shares held by Mr Harris as trustee for the Nedyah Investment Trust.

13    Both Mr Harris and Mr Evans maintained director loan accounts in accordance with Division 7A of the Income Tax Assessment Act 1936 (Cth).

14    It is not in dispute that, on the current shareholding arrangements, Ms Evans controls the voting majority shareholding in the Company.

Relevant evidence

Affidavit of Gregory John Harris of 5 November 2018

15    Mr Harris deposes that initially he and the first defendant were paid monthly salaries of $10,000. In April 2018, Mr Harris’ monthly salary was reduced to $7,000 without his knowledge. Mr Harris states that the first defendant subsequently told him words to the effect that “we all have to pull our belts in”. Notwithstanding this statement by Mr Evans, Mr Harris claims that Mr Evans received a significant salary increase to approximately $20,000 per month.

16    In late June, Mr and Ms Evans travelled overseas. Mr Harris deposes that, on 2 July 2008, he telephoned the Company’s accountant Mr Joshua Dimon and asked for access to the Company’s accounting system, Xero, and that he was provided with such access. Mr Harris logged into Xero and reviewed the Company’s accounts from 2014 to 2018, and identified what he terms “questionable transactions” totalling $2,612,481.55. Mr Harris states that these were listed as “expenses” and not as director’s loans. The categories of transactions identified by Mr Harris were as follows:

    shopping at retailers including David Jones, Harrods, Cartier, Rebel Sport, Louis Vuitton, Target and Apple;

    spa treatments;

    dining at restaurants;

    medical and physiotherapy expenses;

    dry cleaning;

    domestic cleaning;

    florists;

    reimbursements to the first and second defendants’ personal bank accounts;

    various renovations and landscaping of the first and second defendants’ home;

    expenses relating to overseas and domestic travel which were not for Company related trips, including: flights, travel insurance, taxis and Ubers, car rentals, accommodation, and food.

17    I note that, at the hearing, Mr Trewavas for Mr Harris conceded that the amount of questionable transactions Mr Harris was claiming for the purposes of the current interlocutory application totalled $718,701.37 on the basis that there had been some double counting.

18    Mr Harris contacted Mr Dimon on 4 July 2018 to discuss these transactions.

19    At some time in July, Mr Harris was informed by the Mr Evans that the Company owed the Australian Taxation Office approximately $340,000 and that it would struggle to pay the debt as “the money was gone”.

20    On 28 July 2018, Mr Harris states that he met with Mr Evans and Mr Dimon to discuss the questionable transactions. The first defendant stated that he would “fix it”.

21    On 28 August 2018, the first defendant cancelled all Company credit cards, including those in the name of Mr Harris. Mr Harris had received a text message from Mr Evans, in which Mr Evans informed him that he was going to cancel the Company credit cards because Mr Evans believed that someone had gained access to his credit card.

22    From 28 August 2018 date, Mr Harris’ access to the Company server, including the Xero system, was suspended.

23    On 31 August 2018, Mr Harris received a letter from the lawyers for the Company, advising him that:

    a general meeting was held on 31 August 2018, at which a resolution to remove him as a director with immediate effect was passed; and

    he was no longer authorised to attend the premises of the Company, represent the Company, use Company information, property, intellectual property, bank accounts, or contact existing clients of the company.

24    Mr Harris’ electronic access to the Company, including email and text messages, was revoked on 31 August 2018.

25    Mr Harris deposes that he did not receive notice of the general meeting of 31 August 2018. Further, Mr Harris was not paid his salary for the month of August.

26    On 3 September 2018, Mr Harris attended a Westpac branch to obtain a statement for the Company account for August 2018. The statement showed that from 20 to 28 August 2018, a total of $82,400 had been withdrawn online from the Company bank account. Mr Harris states that only he and the first and second defendant had access to the account. The balance at that date was reduced to $126.56.

Affidavit of Mr Roland James Evans of 22 November 2018

27    Mr Evans replied to the affidavit of Mr Harris in an affidavit of his own dated 22 November 2018.

28    Mr Evans materially deposes as follows:

    The increase in share capital on 24 March 2016 was related to the fact that Mr Evans considered that the shareholding at that time was not reflective of respective workloads. A further reason for the increase in share capital was that the Company was undertaking work for Balmain/ Goldman Sachs, and this was conditional upon Mr Harris continuing to have a majority shareholding.

    It was agreed between Mr Evans and Mr Harris that 25 additional ordinary shares would be issues to the second defendant as trustee for the Evans Family Trust, so that the shareholding became a 60:40 split.

    Mr Evans increased his salary to $20,000 in July 2017 to attempt to balance the disparity between the respective workloads and salaries of himself and Mr Harris.

    The Company had three bank accounts with Westpac Banking Corporation.

    He and Mr Harris both maintained company loan accounts in accordance with Division 7A of the Income Tax Assessment Act 1936 (Cth) documented by Mr Dimon.

    There were a number of credit cards (including an American Express Card) related to the Company with Mr Evans as the primary cardholder and Mr Harris as the secondary cardholder. There were a number of secondary cardholders linked to the American Express card including Ms Evans, Mr and Ms Evans’ children, and a number of employees of the Company.

    Any personal expenditure incurred by him on the credit cards is either paid to the accounts from his personal account at the end of the month, or paid off via a loan from the Company to him. A similar arrangement existed in respect of Mr Harris, although in respect of Mr Harris his personal expenditure is paid off via a loan from the Company to him and accounted for by way of his company loan account.

    Given the use of Company credit cards for business and personal purposes by multiple cardholders, careful attention was given to ensuring that all transactions were properly accounted for and applied to the respective company loan account where applicable.

    In or about July 2018 he informed Mr Harris that the Company had a significant tax debt to the Australian Taxation Office which the Company would struggle to pay. Mr Harris’ loan account as at the end of June 2017 was $220,653.31 and Mr Evans’ was approximately $186,380.24. Mr Harris’ loan account had continued to increase during the 2017/2018 financial year. Interim payment arrangements were entered into by the Company with the Australian Taxation Office in November 2018 for payment of the Company’s tax debt.

    On or about 27 August 2018 a number of unauthorised transactions had occurred in respect of one of the Company’s bank accounts and a credit card. The sum of $1,000.00 had been withdrawn, and a skiing holiday package in New Zealand had been paid for on Mr Harris’ credit card. On being informed by Westpac that there had been other unauthorised attempts to access the Company’s bank accounts Mr Evans cancelled the credit card and changed banking access details. He told Mr Harris of this.

    To ensure that no unauthorised amounts could be further drawn from the relevant bank accounts Mr Evans directed Ms Evans to transfer sums of $6,500.00 and $49,900.00 to a different Company bank account.

    Mr Evans believed that Mr Harris had been making questionable withdrawals. When Mr Evans questioned Mr Harris, Mr Harris stated that he needed money for a holiday to New Zealand.

    On 31 August 2018 a general meeting of members of the Company was held, at which the members passed resolutions that Mr Harris be removed as a director of the Company with Mr Evans remaining the sold director, and the change of office holders be recorded in the Company Register and notified to the Australian Securities and Investments Commission. The resolutions were put to the members due to Mr Harris’ failure to perform his agreed duties and his conduct in withdrawing funds from the accounts of the Company for his personal use unrelated to the operation of the business of the Company. Mr Harris was given notice of the resolutions that day, and the Company’s lawyers also contacted him concerning Mr Harris’ relationship with the Company.

    In relation to alleged questionable transactions on Mr Evans’ part claimed by Mr Harris – in summary, all personal expenditure incurred by Mr Evans or his family on various Company credit cards has been paid off either directly or via a loan from the Company and accounted for by the company loan account. In the circumstances there were no “illegitimate” or “questionable” transactions. Mr Harris’ claims arise because he had never involved himself in the management of the Company, and therefore was not aware that expenses were incurred in the ordinary course of business. Mr Evans explained this to Mr Harris during the meeting of 27 August 2018.

    On 21 November 2018 Mr Evans offered to purchase all the shares held by Mr Harris as Trustee for the Nedyah Trust in the Company at fair value agreed by himself and Mr Harris, or otherwise as determined by an independent accountant. Mr Evans also proposed that all loans by the Company to Mr Harris be repaid by Mr Harris at the same time.

    Mr Evans understands that the Company is solvent.

    If a provisional liquidator were appointed, neither Mr Evans nor the five full time employees of the Company would continue to work for the Company, and the business of the Company would be destroyed. It would also cause irreparable harm to Mr Evans as a real estate agent as well as the goodwill of the business.

Affidavit of Mr Joshua Dimon of 22 November 2018

29    Mr Dimon deposes to having reviewed the spreadsheet provided by Mr Harris outlining the “questionable transactions”. In Mr Dimon’s view, of the transactions totalling $2,612,481.55, transactions totalling $1,893,780.18 were clearly not questionable, being:

    $593,099.23 in payments to the Australian Taxation Office for the tax obligations of the Company; and

    $1,300,680.95 in transfers from one of the Company’s accounts to another, such that these amount to double counting.

30    Mr Dimon deposed that he is aware that, since the registration of the Company, Mr Harris and Mr Evans have used their Company credit cards for personal transactions and that, where that occurred, the transactions amounts have been either repaid or allocated to the loan accounts to ensure that they will be repaid to the Company.

31    In Mr Dimon’s opinion, and from his knowledge of the business of the Company and the Company’s financial records, all of the transactions in the spreadsheet annexed to Mr Harris’ affidavits are:

    proper expenses of the Company;

    transfers between accounts of the Company;

    expenses of Mr Evans that have already been (or will be) repaid by Mr Evans, or have already been (or will be) allocated to Mr Evans’ loan account, to be repaid to the Company;

    expenses of Mr Harris that have been (or will be) allocated to Mr Harris’ loan account, to be repaid to the Company.

Consideration

32    Mr Harris seeks to appoint a provisional liquidator pursuant to s 472(2) of the Act in order to protect the assets of the Company pending the determination of the application to wind up the Company under s 233 or s 461(1)(k) of the Act. He offers an undertaking as to damages in the usual terms in support of this application, although Counsel for Mr Evans queried whether Mr Harris’ financial position supported that undertaking.

33    Mr Harris has outlined eight primary reasons that he contends should cause concern for the Court, being:

    the removal of Mr Harris as a director from a tightly held company with two founding parties, without notice, only after Mr Harris confronted the Mr Evans about questionable transactions exceeding $2.6 million from the Company accounts;

    the issue of 25 new ordinary shares, without notice to Mr Harris, which diluted Mr Harris’ rights in the Company;

    the questionable transactions relating to the first defendant in excess of $2.6 million;

    the cancellation of Mr Harris’ corporate credit card one day after the first defendant was confronted by Mr Harris in relation to the questionable transactions;

    the suspension of Mr Harris’ access to all Company records, including financial records, soon after the first defendant was confronted about the questionable transactions;

    the removal of more than $100,000 from the Company bank account in the days surrounding the removal of Mr Harris as a director;

    doubt as to the solvency of the Company; and

    the breakdown of trust and confidence between the founding directors such that Mr Harris is banned from entering the Company’s premises.

34    Mr Harris further submits that Mr Evans is preferring his own interests to that of the Company by:

    failing to explain the questionable transactions;

    engaging lawyers on his own behalf and on behalf of the Company;

    being a director of Canford Estate Agents Pty Ltd, which appears to be in competition with the Company; and

    taking steps to remove Mr Harris as a director of the Company.

35    Mr Evans in response submits, in summary, that:

    he has not engaged in questionable transactions;

    he has offered to purchase Mr Harris’ interest in the Company at a fair value, however Mr Harris rejected that offer;

    any appointment of a provisional liquidator would destroy the Company’s business and reputation;

    the appointment of a provisional liquidator is not justified given that there are other measures which would be adequate to preserve the status quo and secure the ends sought by the application;

    Mr Harris’ undertaking as to damages is of little value; and

    Mr and Ms Evans are supporting the Company financially.

36    Section 472(2) of the Act provides for the appointment of official liquidators in the following terms:

The Court may appoint an official liquidator provisionally at any time after the filing of a winding up application and before the making of a winding up order or, if there is an appeal against a winding up order, before a decision in the appeal is made.

37    As I noted earlier, the substantive application to wind up the Company has been brought pursuant to s 461(1)(k) of the Act on the just and equitable ground or, in the alternative, s 233 of the Act on grounds of oppression within the meaning of s 232 of the Act. For the purposes of making an order under s 233 of the Act, s 232 provides:

The Court may make an order under section 233 if:

 (a)    the conduct of a company’s affairs; or

 (b)    an actual or proposed act or omission by or on behalf of a company; or

(c)    a resolution, or a proposed resolution, of members or a class of members of a company;

is either:

 (d)    contrary to the interests of the members as a whole; or

(e)    oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member or members whether in that capacity or in any other capacity.

38    When determining whether to appoint a provisional liquidator, the Court is to have primary regard to two questions, namely:

(1)    whether there are reasonable prospects of the plaintiff obtaining a winding up order; and

(2)    whether, having regard to the whole of the circumstances and in particular the measures already in place, the assets of the company are in jeopardy such that they need to be put under the protection of a provisional liquidator pending trial.

See Grace v Grace [2007] NSWSC 6 at [29]; Australian Securities and Investment Commission v Uglii Pty Ltd [2016] FCA 1099.

39    It is well established that the appointment of a provisional liquidator is a drastic intrusion into a company’s affairs, and that such an appointment will not be made if any less intrusive measure will satisfactorily address the circumstances of the case: Australian Securities and Investments Commission v Uglii Pty Ltd [2016] FCA 1099 at [75]; Australian Securities and Investments Commission v Tax Returns Australia Dot Com Pty Ltd [2010] FCA 715 at [86]; Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd and Others[2003] NSWSC 535; (2003) 47 ACSR 197 at [105].

40    This evening when I queried the parties as to possible alternatives to the appointment of a provisional liquidator, Counsel for Mr Harris submitted that the reinstatement of Mr Harris as a director under s 233 on grounds of oppression would also be a satisfactory means of dealing with Mr Harris’ concerns. However, I am not persuaded that this measure would be less “invasive” than the appointment of a provisional liquidator. As explained in such cases as Catley v Waipa Corporation Ltd (2004) 2 NZCCLR 50 and Re Courtesy Real Estate (NSW) Pty Ltd (2013) 96 ACSR 593, the Court is reluctant to order reinstatement of a director notwithstanding claims of oppressive conduct, because such an order potentially imposes the damage of having the governance of the company changed against the will of those who voted in favour of a director’s removal.

41    No alternative measures were proposed by Counsel for the defendants other than Mr Evans purchasing Mr Harris’ shares in the Company at fair value. For similar reasons to those identified by Logan J in an Wijk (Trustee), in the matter of Power Infrastructure Services Pty Ltd v Power Infrastructure Services Pty Ltd [2014] FCA 1430 at [20]-[26], I consider it likely that any process of purchase of Mr Harris’ shares by Mr Evans would be attended by the acrimony currently existing between them.

42    Turning now to the question whether there are reasonable prospects of the plaintiff obtaining a winding up order – I consider there are such prospects. The facts before me fall neatly into that category of case where Courts have been prepared to wind up companies on the just and equitable ground because of a breakdown in the mutual trust and confidence of members, and allegations of oppression in the conduct and management of the company’s affairs. A detailed discussion of relevant authorities such as Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 can be seen for example in Lipton, Herzberg and Welsh, Understanding Company Law (19th edition) (Law Book Company, 2018) at [17.365] et seq. In this case – the Company was established as a “quasi-partnership” between Mr Evans and Mr Harris on the basis of their personal relationship involving mutual trust and confidence. The present litigation demonstrates that that mutual trust and confidence has dissipated. The share structure has altered so as to dilute Mr Harris’ shareholding, which has been the subject of recriminations by Mr Harris by way of claims of conduct oppressive to him. Mr Harris has been, in effect, shut out of the Company and the management of its affairs. Although it is possible that the Company is solvent, nonetheless in the circumstances there is a reasonable likelihood that an order for winding up of the Company will be made.

43    In respect of the second question, namely whether the assets of the Company are in jeopardy – it appears that there has been some “stripping out” of cash in the Company’s bank accounts, and further that Mr Evans as sole director and Ms Evans as majority shareholder have sole control over and access to those funds. Mr Evans has given detailed explanations for this, however, I am not persuaded that his explanations are demonstrative of him acting in the best interests of the Company (as distinct from the best interests of himself and his family). I am concerned by Mr Evans’ evidence concerning the possible destruction of the Company’s business and the loss of its employees in the event a provision liquidator is appointed. However, I also consider that, in the circumstances of this case, the preservation of the status quo for the benefit of all shareholders so far as is possible favours the appointment of a provisional liquidator, notwithstanding that it is a drastic step.

44    I note Mr Evans’ contention that Mr Harris’ undertaking as to damages is of little value. However Mr Harris has signed such an undertaking, in the usual terms. This is a serious undertaking, and I am not prepared on the basis of the material before me to find that it is of little value. Accordingly, the concern raised by Logan J in Van Wijk at [27] relating to the consequences of a failure to offer an undertaking as to damages is not relevant.

45    Finally, I note that the provisional liquidator proposed by Mr Harris, Ms Anne-Marie Jane Barley of AMB Insolvency Pty Ltd, has consented to act as provisional liquidator of the Company. This consent was filed on 5 November 2018. Provisional liquidators have powers prescribed by sections 472(3) and 472(4) of the Act. It follows that I am prepared to make the interlocutory orders sought by the plaintiff.

Associate:

Dated:    23 November 2018