FEDERAL COURT OF AUSTRALIA

Choon v Chen [2019] FCA 1643

ORDERS

THE COURT ORDERS THAT:

1.    The winding up of A Legend Star (Aust) Pty Ltd (ACN 166 156 645) (Company) be stayed until further order.

2.    The management and control of the Company shall be resumed by its directors until further order.

3.    The defendants do forthwith, and in any event by 4.00 pm on 11 October 2019 and thereafter provide the plaintiffs and their solicitor and any expert engaged by them to undertake an assessment of the value of the Company with reasonable and prompt access to the books and records of the Company.

4.    The defendants do pay the plaintiffs costs of the interlocutory application for a stay of the winding up of the Company in any event.

5.    Subject to his agreement as to the terms of appointment, the proceedings be referred to Mr Steven Standing to conduct a mediation in accordance with Part 28 of the Federal Court Rules 2011 (Cth) and otherwise as directed by the mediator.

6.    Subject to any further order, the fees of the mediator and any disbursements incurred in the conduct of the mediation are to be paid by the plaintiffs as to one half and the defendants as to one half.

7.    The mediation shall take place on or before 1 November 2019.

8.    The parties shall request the mediator to provide to the Court a report on the outcome of the mediation.

9.    Unless otherwise directed by the mediator, each of the plaintiffs and the defendants shall attend the mediation in person together with legal practitioners who act on their behalf in the conduct of these proceedings.

10.    There shall be a further case management hearing at 9.15 am on 8 November 2019 at which time the Court will consider making orders to facilitate an urgent final hearing of the application.

11.    There be liberty to apply at short notice.

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

REASONS FOR JUDGMENT

COLVIN J:

1    A Legend Star (Aust) Pty Ltd (ALSA) is the Australian master franchisee for the bubble tea brand Presotea. It operates a chain of stores in Perth and one store in Sydney. ALSA has appointed franchisees to operate the stores. There are four shareholders of ALSA, the two plaintiffs who, together, hold 48% of the shares, and the two defendants who hold 52% of the shares. It is common ground that there has been an irretrievable breakdown of trust as between the plaintiffs and the defendants as to the conduct of the affairs of ALSA. They each point the finger at the other as being responsible for the breakdown.

2    The current term of the master franchise agreement will expire on 20 October 2019. It is a matter that has been known to the shareholders of ALSA for some time.

3    On 23 August 2019 solicitors acting for ALSA wrote to all shareholders advising that an extraordinary general meeting (EGM) of the company would be held on 24 September 2019 at the offices of Tang Law. Tang Law are the solicitors for the defendants in these proceedings. The notice of the EGM proposed two members' resolutions:

1       Winding up of Company

To consider, and if thought fit, to pass, with or without amendment the following resolutions, as special resolutions:

(a)    That the Company be wound up voluntarily in accordance with section 491(1) of the Corporations Act 2001 (Cth).

(b)    Subject to resolution l([a]) being approved and with effect from the close of that meeting, for the purposes of winding up the Company and distributing the property of the Company (net of liabilities), pursuant to section 495(1) of the Corporations Act 2001 (Cth), Malcolm Field of SV Partners be appointed as liquidator of the Company.

2       No Restrictions for Members to Deal with Good Young Co. Ltd (Taiwan)

To consider, and if thought fit, to pass, with or without amendment the following resolution, as an ordinary resolution:

The member acknowledges the declaration of potential conflict of interests by the Directors and further resolve that the members, effective from the date of this resolution, consents to and permit the Directors, all members and former members of the Company, whether individually or otherwise, approaching and entering into dealings with Good Young Co. Ltd (Taiwan) ('Master Franchisor') without any restriction in relation to any business or matters.

4    The notice was accompanied by a statement of reasons for the proposed resolutions that included the following, under the heading 'No Restrictions and Permission to Deal with Master Franchisor':

Directors of the Company, [the defendants], disclosed their intention to request for the 'Presotea' master franchise for Australia be granted to them or their nominee and have declared their potential conflict of interests.

As a matter of fairness to all members, the said Directors (who are also members of the Company) expressed their wishes that all members and former members of the Company, whether individually or otherwise, be permitted to approach and enter into dealings with the Master Franchisor without any restriction in relation to any business or matters.

5    On 11 September 2019, the plaintiffs commenced an application against the defendants seeking access to the books and records of ALSA and a declaration that the affairs of ALSA had been conducted in a manner contrary to the interests of the members as a whole and in a manner prejudicial to them as minority shareholders. They also sought an order that the defendants purchase their shares, alternatively an order that a liquidator be appointed to wind up the company. However, in the course of these proceedings it has been made clear that the plaintiffs' primary case is that the appropriate order in these proceedings is that the defendants be ordered to purchase their shares in ALSA.

6    On 19 September 2019, solicitors for the plaintiffs wrote to Tang Law saying, amongst other things, that the resolution to wind up ALSA would require 75% support of members and that the plaintiffs would attend and vote against the resolution and demanded the withdrawal of the resolutions and the cancellation of the EGM. Tang Law did not respond.

7    The following appears to be common ground as to what occurred concerning the EGM:

(1)    the appointed hour for the commencement of the EGM as stated in the notice was 10.00 am;

(2)    the plaintiffs arrived at Tang Law late - on the evidence there is a dispute as to whether it was three or four minutes after 10.00 am; and

(3)    the plaintiffs spoke to the receptionist at the offices of Tang Law, they were asked to wait, and thereafter they were told that the EGM had been held.

8    The defendants claim that the EGM commenced at 10.00 am at which time they were the only shareholders present, and the resolutions were duly passed, and the meeting concluded at 10.04 am and that it was not until immediately thereafter that the defendants were told that the plaintiffs had just arrived in reception.

9    In those circumstances, counsel for the defendants contends for the unquestionable validity of the EGM and the resolutions said to have been passed.

10    However, that submission fails to recognise that the substantive basis of the claim brought by the plaintiffs, albeit not conceding the validity of the meeting and the manner in which it was conducted, rests upon claims that there has been a fraud on the minority and, significantly, that there has been oppression of the plaintiffs in their capacity as members of ALSA.

11    On 26 September 2019, I heard an interlocutory application by the plaintiffs for orders staying the winding up of ALSA until the application by the plaintiffs had been determined. Counsel foreshadowed that the plaintiffs would seek to amend their substantive application to seek orders that the resolutions purportedly passed at the EGM were invalid and that the winding up of ALSA be terminated or permanently stayed.

12    The interlocutory application relied upon substantive claims outlined as follows:

(1)    the resolution was invalid because it had not, in fact, in the particular circumstances, been supported by 75% per cent of the members;

(2)    the chairman of the EGM had obligations to be exercised bona fide in the interests of the company and in a manner that was impartial. By allowing the EGM to be convened in circumstances where the chairman knew that the defendants intended to attend the meeting, having regard to the particular circumstances and in allowing the resolutions to be put, the chairman had breached those obligations;

(3)    the resolutions were a fraud on the minority of shareholders, being the plaintiffs; and

(4)    the resolutions were oppressive and unfairly prejudicial to the plaintiffs as members of ALSA.

13    The orders were opposed by the defendants and I made orders staying the winding up until 5.00 pm today.

14    The defendants have now filed an affidavit opposing any further stay of the winding up and counsel appears for the defendants in opposition to a continuation of the stay.

15    When interlocutory orders were first sought, counsel for the plaintiffs, quite properly, drew the Court's attention to the possibility of uncertainty as to whether the statutory power to stay a winding up as expressed in s 482 of the Corporations Act 2001 (Cth) extends to a voluntary winding up. Section 513 provides that the provisions of the Act about winding up apply in relation to winding up whether in insolvency, by the Court or voluntarily, except so far as the contrary intention appears. Section 482 is within Part 5.4B which deals with winding up in insolvency or by the Court. It may be that the inclusion of s 482 in Part 5.4B manifests a contrary intention for the purpose of the qualifying words to s 513. However, the application of s 482 to a voluntary winding up is supported by the decision in Milicevic v Capital Scaffolding Pty Ltd (in liq) [2007] FCA 1579.

16    It was submitted for the plaintiffs that even if s 482 did not apply, there was power under s 90-15(1) of the Insolvency Practice Schedule (Corporations), being Schedule 2 to the Corporations Act, to stay the winding up. The breadth of that power and its application to a voluntary winding up was noted by Gleeson JA in Re ACN 152 546 453 Pty Ltd (formerly Hemisphere Technologies Pty Ltd) (in liq) [2018] NSWSC 1002 at [15]-[20]. Counsel for the defendants, appearing today, accepts that the Court has power under that provision to grant a stay of the winding up.

17    Even if there had been no power under either of those provisions, the Court has its general power to grant injunctive relief on an interlocutory basis for the purpose of preserving the subject matter of the proceedings, in this case the company as a going concern, and the capacity of the Court to grant the primary relief sought by the plaintiffs in these proceedings, namely, an order requiring the defendants to buy out their shareholding in ALSA. The ability of the Court to grant that relief would be wholly compromised if ALSA was wound up before there could be a hearing.

18    I raised with counsel the question whether any order continuing the stay should be conditioned on an undertaking as to damages. Counsel for the plaintiffs submitted that there was no particular identified risk of damage that had been raised by the defendants and, in those circumstances, as there was no need for an undertaking, the orders should not be so conditioned. Counsel for the defendants made no submission contending for a requirement that there be an undertaking as to damages, and, in those circumstances, I will approach the matter on that basis, noting that before I raised the matter with the parties, the defendants had not contended for any such provision.

19    In opposing the stay, the principal matters relied upon by counsel for the defendants were (a)  a contention that the defendants had made a reasonable offer to purchase the shares of the plaintiffs which had been rejected; and (b) a claim that if the stay persists it may become increasingly challenging to realise the going concern value of the company. It was also submitted for the defendants that where the parties agree that there are irreconcilable differences and the party raising complaint is in a minority, the winding up of the company is appropriate and is not oppressive by reason that it manifests only the minority position of the party who does not have a controlling shareholding in the company.

Offer to buy shares

20    As to the offer to buy the shares, the defendants say that they made a reasonable offer to buy out the plaintiffs in July 2018 which was not accepted and that is a substantial matter that bears upon whether there should be a stay. In effect, implicit in the submission is the contention that the plaintiffs are in the position which they are because they have rejected a reasonable offer to buy out their shareholding. There are a number of difficulties with that proposition.

21    First, the report provided to support the valuation of the company states as its first key assumption the following:

We have relied on information and assertions made to us by [the defendants] to the extent that these assertions, if at all, are subsequently found to be inaccurate, our assessment of the market value may need to be adjusted.

22    In the context of a dispute where part of the relief sought is access to the books and records by the plaintiffs for the purpose of being able to undertake an independent valuation, the valuation and the offer made based upon that valuation cannot be afforded great weight as a matter against a continuation of the stay of the winding up.

23    Second, the offer was made well over a year ago. The valuation itself indicates that ALSA's business has been growing at a considerable rate. In those circumstances, the valuation appears to be well out of date and may well not reflect the current circumstances of the company.

24    Third, the valuation though on its face is provided by a party independent of the defendants and is described as such, there is no material to indicate the circumstances in which it was obtained.

25    Fourth, by reason of the fact that the plaintiffs, on the evidence, have not had any real access to the books and records of ALSA, they are not in a position to respond to the basis upon which the valuation was obtained. Counsel for the defendants did refer to an opportunity given to inspect the books of account at a particular time, but the evidence does not disclose an unqualified opportunity to do so on the part of the plaintiffs.

Going concern value

26    As to the preservation of the going concern value of ALSA, it is very difficult to see how the winding up of ALSA advances that outcome. The resolutions purportedly passed at the EGM would not facilitate the sale of the business of ALSA to a third party. Rather, they purport in terms to authorise the defendants to be able to deal with the master franchisor in respect of any business matters. In other words, they purport to consent to the defendants being able to deal with the master franchisee for that purpose. Therefore, taken together, the resolutions bring the activities of the company to an end and allow the defendants complete freedom to seek to appropriate that business to themselves.

27    Counsel for the defendants submitted that the plaintiffs have the same opportunity by reason of the resolution. The difficulty with that submission is that it is the defendants who have the management and control of ALSA, and, on the evidence as it presently stands, it is the defendants who have the existing relationship with the master franchisor. The plaintiffs were opposed to the resolution at the EGM and it is apparent from that opposition that they did not seek an opportunity to deal with the master franchisor on the basis provided for in the resolution at the EGM.

28    In other words, the resolution at the EGM is in terms that reflect the desires and intentions of the defendants, not those of the plaintiffs, and is to operate in circumstances where the disadvantages of the plaintiffs in their minority would mean that they would be at a disadvantage in any such dealings even if they wished to pursue them. Of course, the claim they make in these proceedings is to the effect that having regard to what has occurred, the appropriate relief is not that they must participate in some form of competitive bid to the master franchisor, but rather the appropriate order is that the defendants purchase their shares in ALSA.

29    Counsel for the defendants could not explain why it was in the interests of ALSA as a whole, as distinct from his own clients, to wind up the company and authorise the defendants to deal with the master franchisor in their own interests. The winding up of ALSA on that basis would not enable the liquidator to arrange an orderly disposal of the business of ALSA. Rather, it would licence its possible loss to the defendants without any compensation to the company.

30    The defendants allege that the master franchisor has decided not to renew the master franchise agreement with ALSA. However, there is no evidence at all to suggest that the master franchisor proposes to take steps to end its relationship with ALSA on 20 October 2019. There is no evidence at all of the steps that have been taken by the defendants in the exercise of their control of the management of the company to secure a renewal of the master franchise. There is no evidence addressing what will occur in relation to ALSA's own franchisees, and the arrangements that it has made with those franchisees and what is contemplated in relation to them if the parties were to proceed on the basis that there could be direct dealings by the defendants with the master franchisor.

31    The only matter stated as to why the master franchise has not been renewed is that the plaintiffs refused in May 2019 to sign a non-competition agreement proposed by the master franchisor. The defendants have produced the unsigned document. It is not a long document, but its import is significant.

32    The document proposes an agreement between the master franchisor and ALSA. It is not a document that the shareholders are required to sign. However, the terms of the document, if agreed to by ALSA, would require it to cause its shareholders and employees to obey its terms. The document provides, amongst other things, for a broad restraint upon the use of confidential information and a two year non-compete clause after the termination of the master franchise agreement with a liquidated damages provision of US$600,000 in the event of any breach. The non-compete clause would apply to shareholders and employees who had agreed to the same terms as required by the document if entered into by ALSA.

33    There is no material to demonstrate the basis upon which the master franchisor could insist upon such a requirement some six months before the expiry of the term of the master franchise. It is not suggested in the evidence that the agreement, itself, was a document provided for in the existing master franchise agreement. In those circumstances, any such requirement would, at the least, have to be considered in the context of the Franchising Code of Conduct.

34    There is no evidence as to why it was considered appropriate by the directors to contemplate entry into an agreement of that kind, nor is there any evidence as to the dealings between ALSA and the master franchisor that gave rise to the request for such an agreement to be entered into. As I have indicated, the defendants are in control of the management of the affairs of ALSA. They have a duty to act in the best interests of the company at all times, and that duty extends to preserving the business relationship with the master franchisor.

35    Therefore, on the view that I take of the matter on the evidence as it presently stands, the submission by counsel for the defendants misses the mark by some margin. The issue here is not whether ALSA should be wound up, but whether it should be wound up in circumstances where the plaintiffs seek relief requiring the defendants to acquire their shares and the defendants are plainly taking active steps to secure the benefit of the master franchise in their own interests and the liquidator would have to compete with them in seeking any renewal of the master franchise.

36    By the terms of the shareholders' resolutions and the information that accompanied them when proposed, the defendants claim to have caused the company to pass resolutions in terms that, if valid, would permit the defendants to deal with the master franchisor without any restriction. It would allow the defendants to abandon any steps to secure the master franchise for the benefit of ALSA and, thereby, deprive ALSA of its ability to preserve its own relationships with its own franchisees. It would mean that the master franchisor could be presented with the alternative of entering into a new master franchise agreement with the defendants. It would compromise the commercial advantage currently enjoyed by ALSA in any dealings with the master franchisor, namely, its existing network of franchised outlets.

The claim that winding up is appropriate

37    As to the claim that, in any event, winding up is appropriate, where a claim of oppression is made there is a range of orders that the Court can make. They include, in this case, the making of an order that the defendants, as the majority, purchase the shares of the minority: see s 233(1)(d) of the Corporations Act. Relief in those terms is the primary relief sought. It is not the case that winding up is necessarily the appropriate course if the plaintiffs were to succeed.

38    It is not the case that management of the affairs of ALSA are deadlocked. The company has been in the management and control of the defendants. Nor is there evidence to support a submission that the company, as matters presently stand, is inevitably unable to secure a renewal of the franchise agreement with the master franchisor. Finally, as to winding up, the evidence is to the effect that ALSA is solvent, and there would be no prejudice to creditors if the winding up order were to be continued to be stayed.

39    By reason that prompt steps were taken to seek the stay, there have been no steps taken to substantially implement the winding up. In the view I take of the matter, the application is supported by the claim of oppression. The principles to be applied in considering claims of oppression are well known. They were reviewed by Jagot J of this Court in RBC Investor Services Australia Nominees Pty Limited v Brickworks Limited [2017] FCA 756 at [31]-[42]. As her Honour made clear in that case, the touchstone of oppression is that conduct be 'so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair'. It is expressed in those terms to reinforce the role of the Court which is not to step into the shoes of directors and unilaterally decide what it thinks is in the best interests of the company. In matters of this kind it is necessary for the Court to form a view as to whether the conduct is of a kind that would reasonably be adopted in the management of the affairs of the company in the interests of the company as a whole. Here I note that the complaints by the plaintiffs are not confined to complaints in relation to the conduct of the defendants as the directors in control of the management of the company but extend now to the exercise of powers by the defendants as shareholders at the EGM.

Conclusion and costs

40    In the circumstances I have described, I am satisfied that a claim based upon oppression principles has been demonstrated to be arguable. It is relevant in my view, for present purposes, to consider the strength of that claim and I would attribute strength to the claim as advanced by the plaintiffs as the evidence currently stands before me. It may be that, ultimately, the court will be persuaded to a different view. However, as matters presently stand, there appears to be considerable merit in the claims advanced by the plaintiffs.

41    For those reasons, I am satisfied that it is appropriate for the stay sought by the plaintiffs to be continued until further order.

42    The plaintiffs also seek an order by way of disclosure, or in exercise of the statutory power to make such orders, that will facilitate prompt access to the books and records of ALSA for the purposes of being able to make an informed assessment of the value of their shareholding in the company. I am satisfied that it is appropriate for such an order to be made in order to facilitate the prompt and efficient resolution of the claims made in the proceedings. I am satisfied that in the circumstances I have outlined, the plaintiffs' application for such orders is made bona fide and for those purposes.

43    The plaintiffs seek orders for mediation by a private mediator on the basis that appointment of a private mediator will facilitate a mediation being arranged promptly and counsel for the defendants has not made submissions in opposition to that course. The plaintiffs have identified a proposed private mediator and the defendants do not make submissions against that person being appointed to conduct the mediation.

44    In matters of this kind, especially in circumstances where there has already been a focus by the parties upon the possibility of resolution and that resolution to take effect by way of some kind of purchase of a shareholding, experience shows that there are reasons why the matter should be referred to early mediation. There is, in addition in this case, the issues that arise in relation to the master franchise agreement and the looming date as to the end of that term. So for those reasons, I am satisfied that it is appropriate to make orders for a private mediation to be undertaken as soon as reasonably practicable. I will otherwise hear from the parties as to costs before making final orders.

Associate:

Dated:    8 October 2019