Cassegrain and 1 Or v CTK Engineering Pty Ltd and 1 Or [2005] NSWSC 495 (26 May 2005)

Last Updated: 26 May 2005

NEW SOUTH WALES SUPREME COURT

CITATION: Cassegrain & 1 Or v CTK Engineering Pty Ltd & 1 Or [2005] NSWSC 495



CURRENT JURISDICTION:

FILE NUMBER(S): 4277/04

HEARING DATE{S): 14-16/02/05

JUDGMENT DATE: 26/05/2005

PARTIES:
Thomas Jean Roger Cassegrain & 1 Or
v
CTK Engineering Pty Ltd & 1 Or

JUDGMENT OF: White J

LOWER COURT JURISDICTION: Not Applicable

LOWER COURT FILE NUMBER(S): Not Applicable

LOWER COURT JUDICIAL OFFICER: Not Applicable

COUNSEL:
Plaintiffs: R Beech-Jones
Defendants: CRC Newlinds SC & F Donohoe

SOLICITORS:
Plaintiffs: Turks Legal
Defendants: Priest McCarron


CATCHWORDS:
CORPORATIONS - Winding up - Oppression - Just and equitable ground - Plaintiffs are class B shareholders with no voting rights - Defendant company and director - Director manages company - Company entered into transactions benefiting defendant director - Proceeds of sale of land lent to related parties of director - Undisclosed loans to related parties - Related party transactions concealed from shareholders - Concealment of new and hazardous business venture controlled by defendant- Accounts not audited - New constitution removing requirements for annual general meetings and auditing of accounts - Director caused company to oppose winding up order despite legal advice that it was inevitable - Whether company affairs conducted in a manner oppressive or prejudicial to, or contrary to the interests of class B shareholders - Winding up by consent - S 233(1)(a), s461(1)(k) of Corporations Act - Held that winding up would have been ordered and the plaintiffs had been successful in the proceedings - Held that plaintiffs are entitled to costs.
PRACTICE AND PROCEDURE - Costs - Whether director should indemnify company for costs incurred in defending proceedings - Whether company funds had been improperly expended - Discretionary power as to costs - S233(1)(j) of Corporations Act - S 76 Supreme Court Act - Held that defendant director acted unreasonably in causing company to defend winding-up application - Held that defendant company liable for costs up to appointment of provisional liquidator - Director defendant liable for costs up to and including this hearing - Director defendant to indemnify company for its liability to the plaintiffs and for costs and expenses incurred in defending proceedings up to appointment of provisional liquidator.

ACTS CITED:
Corporations Act 2001 (Cth)
Family Provision Act 1982 (NSW)
Supreme Court Act 1970 (NSW)

DECISION:
1. The first defendant pay the plaintiffs' costs of the proceedings, including reserved costs, up to and including 12 November 2004; 2. The second defendant pay the plaintiffs' costs of the proceedings, including reserved costs; 3. The second defendant indemnify the first defendant against the costs payable by the first defendant to the plaintiffs, and in respect of costs and expenses incurred by the first defendant in defending the proceedings; 4. The exhibits may be returned after 28 days.


JUDGMENT:


IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION


WHITE J

Thursday, 26 May 2005


4277/04 THOMAS JEAN ROGER CASSEGRAIN & Anor v CTK ENGINEERING PTY LTD & 1 Or

JUDGMENT

1 HIS HONOUR: Each of the plaintiffs in these proceedings holds 551 B class shares in the first defendant (“CTK”). The second defendant, Mr Claude Cassegrain holds one A class and 146 B class shares in CTK. He is a director of CTK. For a time, he was CTK’s sole director. At all times up to the appointment of a provisional liquidator, he was the person with the principal role of managing the company.

2 By their Originating Process filed on 2 August, 2004 the plaintiffs sought an order that CTK be wound up pursuant to s 233(1)(a), or ss 461(1)(e), (f), (g) or (k) of the Corporations Act (2001). That is, the plaintiffs sought an order that CTK be wound up on either or both grounds that: (a) its affairs were being conducted in a manner which was oppressive to, or unfairly prejudicial to, or unfairly discriminatory against, the plaintiffs as members, or contrary to the interests of the members as a whole; or (b) that it was just and equitable that the company be wound up.

3 They also sought orders that the second defendant pay their costs and CTK’s costs. Although not expressly claimed in the Originating Process, they have also sought an order pursuant to s 233(1)(j) of the Corporations Act that the second defendant indemnify CTK in respect of the legal costs and expenses it incurred in the defence of the proceedings up to the time of the appointment of a provisional liquidator.

4 On 31 August 2004, the plaintiffs applied for the appointment of a provisional liquidator. That application, together with other interlocutory applications, was heard by Windeyer J on 5 and 8 November 2004. On 12 November 2004, his Honour ordered that John Frederick Lord be appointed liquidator of CTK provisionally, and that the costs of the application be costs in the proceedings.

5 When the provisional liquidator was appointed, CTK was carrying on a business of harvesting tea-tree oil and mulch. The provisional liquidator decided that the company should no longer continue that business. On 16 December 2004, the second defendant advised the provisional liquidator that he would consent to the liquidation of the company. That advice was given immediately after Mr Lord had confirmed to the second defendant that he had concluded that the business should no longer be continued.

6 The second defendant did not consent to the relief which the plaintiffs had sought against him personally. He consented to an order that the company be wound up on just and equitable grounds, but did not consent to a declaration that the affairs of the first defendant had been conducted oppressively, nor that the company was liable to be wound up on the ground of oppression, nor that any relief was available against him on the ground of oppression. As the parties agreed to the making of a winding-up order it was unnecessary to make any of the declarations which were sought. The remaining issues were how the costs of the proceedings should be borne and whether the second defendant should compensate the first defendant for the costs which he caused it to incur in defending the proceedings.

7 The second defendant submitted that where there was a concession that the plaintiffs were entitled to the principal relief claimed because of events which had happened after the proceedings were commenced, but not that he had been guilty of any wrongdoing, the principles to be applied in determining all issues about costs were those described by Hill J in Australian Securities Commission v Aust-Home Investments Ltd [1993] FCA 585; (1993) 44 FCR 194 at 201 and by McHugh J in Re Minister for Immigration and Ethnic Affairs; ex parte Li Qin [1997] HCA 6; (1997) 186 CLR 622 at 624-625.

8 In Australian Securities Commission v Aust-Home Investments Ltd, the applicant had obtained interlocutory relief, but circumstances had changed such that it did not need to press for final relief. Hill J stated a number of propositions which have received subsequent support. They were:

“(1) Where neither party desires to proceed with litigation the court should be ready to facilitate the conclusion of the proceedings by making a cost order: ...

(2) It will rarely, if ever, be appropriate, where there has been no trial on the merits, for a court determining how the costs of the proceeding should be borne to endeavour to determine for itself the case on the merits or, as it might be put, to determine the outcome of a hypothetical trial: ... This will particularly be the case where a trial on the merits would involve complex factual matters where credit could be an issue.

(3) In determining the question of costs it would be appropriate, however, for the court to determine whether the applicant acted reasonably in commencing the proceedings and whether the respondent acted reasonably in defending them

(4) In a particular case it might be appropriate for the court in its discretion to consider the conduct of a respondent prior to the commencement of the proceedings where such conduct may have precipitated the litigation: ...

(5) Where the proceedings terminate after interlocutory relief has been granted, the court may take into account the fact that that interlocutory relief has been granted: ...”

(Citation of authority omitted).

9 In Re Minister for Immigration and Ethnic Affairs; ex parte Li Qin [1997] HCA 6; (1997) 186 CLR 622 McHugh J dealt with the principles to guiding the discretionary power to order costs. His Honour said:

“In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order.

In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action.

...

Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried.

...

If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings.”

(Citation of authority omitted.)

10 As Burchett J pointed out in One.Tel Ltd v Deputy Commissioner of Taxation [2000] FCA 270; (2000) 101 FCR 548 at 553, [6], there is a distinction between cases in which one party after litigation effectively surrenders to the other, and cases where some supervening event or settlement removes the subject of the dispute, so that although it could not be said that one side has simply won the only remaining issue is that of costs.

11 This is not a case where the plaintiffs do not wish to proceed with the action. The primary relief which they sought was that CTK be wound up. They succeeded on that claim, and prima facie are entitled to their costs up to the time the second defendant advised the plaintiffs that he would not oppose the making of a winding-up order.

12 In Jeruth Pty Ltd v Haybale Pty Ltd [2004] VSC 319 the plaintiffs had sought an order for winding up and had succeeded in obtaining the appointment of a provisional liquidator. As a consequence of the appointment of the provisional liquidator, a receiver was appointed and the defendants thereafter consented to an order for winding-up on just and equitable grounds, as the substratum of the company’s affairs had disappeared. Redlich J held that the plaintiff could not be regarded as the winner of the litigation and it could not be said that orders for winding-up would have been obtained had the supervening events not occurred. His Honour thus disposed of the application for costs on the principles enunciated in Australian Securities Commission v Aust-Home Investments Ltd and Re Minister for Immigration and Ethnic Affairs; ex parte Li Qin. There were insufficient undisputed facts to establish who would have succeeded at the hearing, and no basis for saying that the proceedings were unreasonably instituted or unreasonably defended. Hence his Honour ordered that each party bear its own costs.

13 Counsel for the second defendant submitted that the same result should follow in this case for much the same reasons, or, that the costs of the plaintiffs should be paid by CTK up to the time the second defendant indicated that he would consent to a winding-up order being made, and that the second defendant’s costs should also be paid by CTK.

14 If CTK is liable to pay the costs of either or both parties, the burden of the costs order will be borne by the shareholders in proportion to their shareholding. That will fall most heavily on the plaintiffs.

15 The plaintiffs maintained a separate claim for relief under s 233 of the Corporations Act that the second defendant indemnify CTK in respect of the costs incurred by CTK up to the appointment of the provisional liquidator. That claim depended on the plaintiffs establishing that the affairs of CTK had been conducted oppressively. It did not involve the discretionary power as to costs considered in Australian Securities Commission v Aust-Home Investments Ltd or Re Minister for Immigration and Ethnic Affairs; ex parte Li Qin. In oppression actions, courts have from time to time found that a company’s resources ought not to have been expended in the defence of a suit which is essentially between shareholders, and reflected such findings in the remedy granted. (Coombs v Dynasty Pty Ltd [1994] FCA 1193; (1994) 14 ACSR 60 at 94; Re DG Brims & Sons Pty Ltd [1995] QSC 53; (1995) 16 ACSR 559 at 591-592, 539; Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413; (1998) 28 ACSR 688 at 733-734). The second defendant did not consent to any orders being made under s 233. For reasons which I gave during the hearing, I allowed the plaintiffs to cross-examine the second defendant on matters relevant to the claim that he indemnify CTK against the costs incurred in defending the proceedings prior to the appointment of a provisional liquidator, as well as on other matters where counsel for the second defendant accepted that cross-examination was legitimate.

Background to the Application

16 There are two classes of shares in CTK. Only holders of A class shares are entitled to vote at any meeting of the company. There are three issued A class shares. The second defendant holds one of those shares. Another is held by his son. The third is held by his sister, Annemarie Cassegrain. At all material times, the second defendant has been a director of CTK. Until 18 February 2004, Mr Troy Terp was also a director. From 18 February 2004 until 31 October 2004, the second defendant was the sole director of the company. On 31 October 2004 he appointed his son a director.

17 The second defendant holds 146 B class shares. His brothers John, Patrick and Dennis, his sister Annemarie, his sister Catherine Dunn and her husband James Dunn, and the plaintiffs hold the other B class shares. The plaintiffs’ father Jean Francois Cassegrain is the cousin of the second defendant.

18 The disputes between members of the Cassegrain family have been before the Court on a number of occasions: see the judgments of Bryson J in Cassegrain v Cassegrain & Anor [1999] NSWSC 1165, of Austin J in Expressway Spares Pty Ltd v CTK Engineering Pty Ltd [2000] NSWSC 1200, and of Barrett J in Dunn v CTK Engineering Pty Ltd [2002] NSWSC 365. The judgments were tendered without objection and the findings of fact were treated as evidence of those facts.

19 There are other corporate entities with which the Cassegrain family is involved. It appears from the judgment of Bryson J in Cassegrain v Cassegrain & Anor [1999] NSWSC 1165 that Expressway Spares Pty Limited was established by Gerard Cassegrain, the father of the second defendant, and became a large and prosperous company engaged in the business of dealing in spare parts for earth-moving equipment and large vehicles. As at the date of his Honour’s judgment, its value was at least $11,500,000 and probably more. There were then 140 shares on issue. Gerard Cassegrain was married to Françoise Cassegrain. Prior to the death of Françoise Cassegrain, she, Claude and Annemarie were together able to cast a majority of the votes at general meetings of the company and hence had practical control of Expressway Spares. Françoise Cassegrain died on 18 May 1988. Patrick, Catherine, Dennis and Jean-Baptiste Cassegrain brought proceedings under the Family Provision Act for provision out of her estate. Her estate included 30 shares in Expressway Spares which were crucial for determining which of the family factions had the power to control the affairs of Expressway Spares. The second defendant and Annemarie Cassegrain were the executors of Françoise’s estate. She had left her 30 shares in Expressway Shares to her “residuary trust”, which was a discretionary trust as to capital and income distributable ultimately among 19 named children and grandchildren. The second defendant and Annemarie were entitled to exercise the powers in relation to the shares held for the residuary trust. The order for provision which Bryson J made was that the second defendant and Annemarie not use their voting power, except in accordance with the wishes of the majority of the children of the testatrix. The effect of his Honour’s order was that control of Expressway Spares passed from the second defendant and Annemarie Cassegrain to the second defendant’s other siblings. Judgment was delivered on 1 December 1999.

20 Another company is Gerard Cassegrain & Co Pty Ltd. The second defendant is a director of Gerard Cassegrain & Co. He has a controlling shareholding in that company.

21 Endwise Pty Ltd is a company of which the second defendant is a director and in which there are 2 issued shares, one of which is held by the second defendant and the other by Gerard Cassegrain & Co Pty Ltd. He thus has a controlling shareholding in Endwise Pty Ltd. It is the owner of the land on which a tea-tree harvesting operation was conducted, to which I shall refer later in these reasons.

22 Oceania Agriculture Pty Ltd (“OAL”) is a company wholly owned by Gerard Cassegrain & Co Pty Ltd. It is controlled by the second defendant. The second defendant was appointed as a director of that company on 26 September 2002.

23 There had been earlier proceedings between another B class shareholder, Mr James Dunn, and CTK, in which Mr Dunn had sought a winding-up of CTK on grounds of oppression. That claim was brought in 2001 and was dismissed on 30 April 2002 by Barrett J. It appears from his Honour’s judgment, and it was common ground before me, that at the time of those proceedings, the only business carried on by CTK was as a landholder. It had acquired land with a view to its development, but those plans were not proceeded with. Barrett J recorded that the directors of CTK (Mr Claude Cassegrain and Mr Terp) and Mr Dunn were agreed that the only sensible future course for the company was for the land to be sold and for the proceeds to be distributed to the shareholders on a winding-up. However it was the directors’ view that it would be advantageous to seek a rezoning of the land before sale. The minutes of the directors’ meeting of 19 September 2001 recorded:

“The directors further note that they have advised the shareholders that they intend to sell the company’s lands as soon as reasonably possible and to pay out the company’s debts. Then, once the other assets (including the moneys owed by ES and the estate and shareholders to CTK) are realised, the company is to be liquidated and its money distributed to the shareholders.”

24 In the directors’ report to the shareholders on the results of the company for the year ended 30 June 2001 they noted that all members were desirous that the company be wound up and its net assets distributed to shareholders. The report continued:

“The directors are committed to achieving that result as expeditiously as possible at the best achievable result for the shareholders.”

25 The report then set out steps that were being taken in relation to the selling of the land.

26 The last of the company’s blocks of land was sold on 25 September 2002. The directors’ report to shareholders for the year ended 30 June 2002 did not repeat the statement as to the directors’ intention to wind-up the company.

27 In his judgment of 30 April 2002 dismissing Mr Dunn’s winding-up application, Barrett J identified one instance in which it had been shown that the second defendant had breached his duty as a director. That involved the second defendant causing CTK to pay a sum of $38,894 which was an amount then owed by it to Gerard Cassegrain & Co Pty Ltd. Gerard Cassegrain & Co Pty Ltd was at that stage in receivership. The second defendant caused CTK to pay the moneys directly to a creditor of Gerard Cassegrain & Co to discharge or reduce a debt owed by that company which the second defendant had guaranteed. Barrett J found that in relation to this particular transaction, the second defendant had acted in breach of his duty as a director but that the single default, not forming part of any pattern of behaviour or continuing course of conduct, was insufficient to establish any of the grounds for winding-up in s 461(1) of the Corporations Act. The second defendant acknowledged that he was indebted to CTK for the amount of $38,894, and has caused the books of the company to reflect that fact.

28 In the course of his reasons, Barrett J emphasised the duty of the directors of CTK, and the particular rights enjoyed by the B class shareholders who were not entitled to participate in the management of the company. His Honour said (at [64]):

“It goes without saying that the B Class shareholders, as part of the general body of shareholders, are entitled to expect that the directors of the company will well and faithfully perform their duties as directors. If anything, the inability of the B Class shareholders, as a group, to influence the composition of the Board in a situation where it is only the A Class shareholders, being those possessing voting rights, who can either be directors or elect directors, sharpens expectations that the directors will be attentive to their duties as they affect the non-voting members.”

29 In similar vein his Honour said (at [67]):

“... it is simply no more possible to say of Mr Cassegrain that he is in a position of intolerable conflict because of his relationships with CTK and GC & Co than it is to make that statement of a professional company director who sits on the boards of several public companies which, by and large, lead separate lives in their own spheres. Such a person must remain attuned to the possibilities that different allegiances will come into collision and, when that happens, he or she must take appropriate evasive action. Mr Cassegrain occupies, in relation to CTK and GC & Co, a position of that kind.”

30 The principal ground for the plaintiff’s claim that CTK be wound up under s 233(1)(a), was that the second defendant caused the company to enter into transactions with parties related to or associated with him, where there was a conflict between his interests and his duty to the company, and that he concealed various of those transactions from the shareholders.

Loan to the Estate of Françoise Cassegrain

31 Some of the matters about which the plaintiffs complain in the current proceedings were already on foot at the time of the proceedings before Barrett J. On 5 November 1999, after the hearing before Bryson J and while his Honour’s judgment was reserved, CTK lent $198,200 to the estate of Françoise Cassegrain, of which, of course, he was an executor. The loan was made at interest of 7.5% per annum. The second defendant deposed that at the time of entering into the loan, it was expected that the loan would be for a short period of time. The loan was partially repaid in August 2002, when land held in the name of CTK was sold. Half of the land was beneficially owned by the estate and the principal was reduced to $98,053.27. The plaintiffs contended that it was not appropriate to use the company’s moneys to fund the executors in the litigation of the estate. However, that was a matter which was known to the B class shareholders at the time. The loan is referred to in a judgment of Justice Palmer given on 7 August, 2001, in the proceedings Dunn v CTK Engineering Ltd. It was described in the financial reports provided to the B class shareholders from the year ended 30 June 2000 to the year ended 30 June 2003.

Statutory Demand on Expressway Spares

32 On or about 22 June 2000, CTK served a statutory demand upon Expressway Spares claiming two alleged debts totalling approximately $260,000 and interest. On 12 December 2000, Austin J set aside the statutory demand. The debts were alleged to arise as a result of financial dealings between CTK, Gerard Cassegrain & Co Pty Ltd, and Expressway Spares at a time when Mr Claude Cassegrain had control of the preparation of the internal accounting records of all of the relevant companies. At the time the demand was served, Mr Claude Cassegrain had lost control of the management of Expressway Spares. Austin J found that there was an ambiguity as to whether the financial records correctly treated Expressway Spares rather than Gerard Cassegrain & Co Pty Ltd as the debtor. It also appeared that the first debt was created no later than June 1985 and that there was a genuine dispute as to whether it was statute barred.

33 Finally by way of background, the report of the directors of CTK to members for the year ended 30 June 2002, signed by the second defendant, stated that:

“The directors discovered during the course of defending the application by James Dunn that the issue of 190 shares to James Dunn in 1995 was in error and that the company did not receive consideration for the shares. The matter is currently in the hands of the company’s solicitors.”

Loan to OAL

34 The plaintiff’s case focused on events which occurred after Justice Barrett’s judgment of 30 April 2002. On 16 July 2002, the directors of CTK resolved to lend $150,000 to OAL at interest. The minutes of the directors’ meeting record that the second defendant gave notice in accordance with Article 96 of the company’s Constitution of his interest in OAL. The minutes set out the matters which were considered in agreeing to make the loan. It was resolved that the loan be made on security on a bill of sale to be executed by OAL. A bill of sale over certain tractors, harvesters and other machinery was executed by OAL. It was not registered. The bill of sale required that the loan be repaid by 30 December 2002.

35 The minutes of the meeting of directors of CTK of 16 July, 2002, record that in making the decision to make the loan to OAL, the directors took into account that previous loans had been made to OAL which had always been met in full and that the directors had confidence in the integrity of the OAL directors. The loan was not repaid on 31 December 2002. It was repaid on or about 20 August 2004, after the commencement of the proceedings. Interest on the loan was paid by offsetting amounts due under an agreement between CTK and OAL made in September 2003, referred to below.

36 The second defendant became a director of OAL on 26 September 2002. OAL was the manager of tea-tree farms under a managed investment scheme. The trustee of the scheme (Agricultural and Rural Finance Pty Ltd) leased land from Endwise Holdings Pty Ltd and sub-let it to OAL. OAL granted licences to farmer/investors and managed the farms for a fee. OAL’s directors’ report for the year end of 30 June 2002 stated that the proceeds from oil sales, (presumably those derived by the farmer/investors), were insufficient to pay management fees to the company and that a meeting of the farmers had been held on 18 December 2001 to consider a recommendation that the projects be wound up. The farmers voted against the winding-up of the project. On 29 July 2002, the trustee of the scheme filed a summons in the Supreme Court seeking the Court’s opinion, advice and direction that the projects be wound up.

Loan to Second Defendant’s Wife

37 In September 2002, CTK lent $324,000 to the second defendant’s wife. An unregistered mortgage was taken as security for the loan. Interest was not paid on the loan until 31 August 2004, again after the commencement of the proceedings. The principal of the loan was repaid on 23 September 2004.

Non-Disclosure of Loans in CTK’s Financial Statements

38 These transactions were not specifically disclosed in the financial reports for the company for the year ended 30 June 2003. It was the practice of the directors to provide financial reports, called “special purpose financial reports”, for each annual general meeting. B class shareholders could attend and speak at these meetings, but they could not vote. In the financial statements up to 30 June 2002, the accounts disclosed the amounts owing to CTK by the estate of the late Francoise Cassegrain and by Cassegrain Trading Pty Ltd. They disclosed the balance of the shareholders loans as at 30 June 2002, although the debt owed by the second defendant to the company of $38,894 was not separately disclosed.

39 The 2002 annual general meeting was held on 24 December 2002. A letter delivered on behalf of 88% of the B class shareholders was tabled at the meeting seeking information in relation to the 2002 accounts. The minutes of the meeting record that the A class shareholders resolved that “letter to be dealt with in due course without reference to contents”. The letter was thereafter ignored.

40 The financial statements for the year ended 30 June 2003 contained no express reference to the loan to the estate. Apart from a loan to Cassegrain Trading Pty Ltd, the accounts disclosed simply an entry called “interest bearing loans” of $689,094. In the previous year the corresponding entry had been a loan to the estate of $248,024.

41 The second defendant took the position that he did not want to disclose to the B class shareholders any more than he believed he needed to disclose, because he would be criticised for whatever he did. Initially in his evidence, he readily agreed that he did not want the B class shareholders to know that CTK had made loans to OAL and his wife. Later, he said that he did not give serious consideration to not disclosing those loans. He took the view that the B class shareholders were not entitled to such information, and he did not wish to disclose the loans which the company had made.

42 His duty, and that of his then co-director Mr Terp, was to act in the best interests of the company and the members as a whole. No interest of the company would be adversely affected by disclosure of the related party transactions to the shareholders. The second defendant gave various explanations for his position based upon what he said was the acrimony and rudeness of his siblings, or Mr Dunn, at the December 2002 annual general meeting as justifying the paucity of the information in the 30 June 2003 accounts. I do not accept that evidence. In any event, it provides no proper basis for concealing the information as to the nature of the loans made by the company. The fact that the loans were ultimately repaid is no answer to the plaintiffs’ complaint. The second defendant’s failure to consider properly the interests of the shareholders as a whole when determining what information in relation to the company’s affairs should be disclosed, was a breach of his duty as a director. It resulted in the affairs of the company being conducted in a manner which was oppressive to, and contrary to the interests of, the members as a whole.

Delays in Winding-Up CTK

43 In May 2003, the second defendant proposed that before CTK was wound up the questions of the loans allegedly owed by Expressway Spares to CTK should be resolved, as should the question of the validity of the shares issued to Mr Dunn which the second defendant had called into question in the 2002 report to shareholders. Nothing had been done to try to collect the alleged debt from either Expressway Spares or Gerard Cassegrain & Co Pty Ltd, following the judgment of Austin J in 2000. Another matter which the second defendant asserted was holding up the winding-up of the company was the debt owed by the estate to CTK. It seems that the estate was unable to repay the debt. Of course the debt is owed by the executors, including the second defendant. It had been intended that the advance would be secured over various vintage motorcars owned by the estate. However the security documents were not executed. The vintage cars have been sold and the proceeds of sale apparently disbursed without the debt being repaid.

CTK Starts Tea-Tree Farming

44 In July 2003, the second defendant proposed to Mr Terp that CTK enter into an agreement with OAL to take over the tea-tree farming business and continue that business until CTK was in a position to be wound up.

45 Mr Cassegrain outlined to Mr Terp his projections of the yield from the tea-tree operations and the profits which CTK might derive from them. By 12 August 2003, he and Mr Terp had agreed that CTK should embark on the business of harvesting tea-trees. OAL was then in litigation with the farmer/investors who disputed the validity of the termination of the investment scheme. The proposal from CTK was in substance, (although not described in these terms), a share-farming agreement with OAL.

46 OAL and CTK entered into an agreement, called a machinery lease agreement, on 2 September, 2003. OAL leased its machinery to CTK at an annual rent of $70,200. CTK assumed the obligation to maintain the plant and equipment in good working order and to maintain the property, and also to establish and develop markets for the tea-tree oil and mulch. OAL warranted that it was empowered to subcontract to CTK the rights to enter the property, to harvest the crop and to assign the crop and its proceeds of the sale. Such a warranty did not of course mean it had those rights. If the licence agreements with the farmers/investors had not been validly terminated, the investors would be entitled to the proceeds of the harvest. One of the second defendant’s reasons for having CTK, rather than OAL, conduct the harvest, was that OAL might be vulnerable to claims from investors. However, CTK had notice of the farmers/investors’ claims on OAL. It was potentially subject to the same claims. Further, the sub-lease to OAL stipulated that it should only use the land in accordance with certain agreements, except with the consent of Australian Rural Group Limited. That company held the lease on similar terms. The consent of Endwise and Australian Rural Group Limited was required to the proposed use of the land by CTK.

47 At this time Endwise was under the control of receivers. The second defendant’s memorandum to Mr Terp of 12 August 2003 records that OAL anticipated that it would be dragged into the litigation between ARF (the trustee) and borrowers and preferred not to have its affairs complicated with the ongoing operation of managing the plantation.

48 As previously noted, OAL repaid its loan on 20 August, 2004, that is, after the proceedings were commenced. The second defendant said that the loan was called in at a time when CTK needed the cash. Notwithstanding this, on 30 August 2004, CTK paid to OAL $72,200 as rent in advance under the machinery lease agreement. There was no need to make the rental payments in advance. The second defendant’s explanation for doing so was for ease of administration. I do not accept that evidence. The making of the advance payment was a breach of the second defendant’s duty as a director of CTK, as it favoured OAL by giving it the use of moneys which would otherwise have been available to CTK and on which CTK would have earned interest.

Change to CTK’s Constitution

49 The original articles of association of CTK required that general meetings be held once at least in every calendar year within fifteen months after the holding of the last preceding general meeting. In 2003, the A class shareholders sought legal advice to change CTK’s constitution so as to allow the company to operate with a single director and negate the necessity of holding annual general meetings. At the annual general meeting held on 31 December, 2003, the A class shareholders resolved to replace the constitution with a new constitution. The plaintiffs were aware of the holding of the meeting on 31 December 2003, although they did not receive the formal notices of meeting, which gave notice of the proposed changes.

50 The new constitution removed the requirement for annual general meetings. Thereafter general meetings could either be convened as and when any directors saw fit, or at the request of members in accordance with Part 2G.2 of the Corporations Act.

51 The articles provided that the company by resolution could increase or reduce the number of directors. Where there were two or more directors, two directors were necessary for there to be a quorum, unless the directors determined otherwise. Article 83(1) provided that if there were a vacancy in the office of a director, any remaining directors could act, but if the number of remaining directors was not sufficient to constitute a quorum at a meeting of directors, they could only act for the purpose of increasing the number of directors to a number sufficient to constitute such a quorum, or for convening a general meeting of the company. The articles dealt with how resolutions should be passed if there was only one director.

52 No resolution was passed to reduce the number of directors to one.

53 At the meeting, Mr Dunn asked for a reply to the questions asked at the last annual general meeting. The second defendant advised that he would reply to those questions. This was a hollow assurance, given that a year had passed without answer. Mr Dunn tabled another letter in which he asked questions about the financial statements for the year ended 30 June 2003 which had been provided to a number of the B class shareholders. The documents had not been received by the plaintiffs. The second defendant said that the members would be advised when answers to the letter dated 31 December 2003 would be available. No answers to either letter were provided.

Mr Terp’s Resignation

54 Mr Terp resigned as a director on 18 February 2004. At that stage he was not replaced. The second defendant apparently took the view that he was entitled to act thereafter as the sole director of the company. However, as the members did not reduce the number of directors to one, and as the directors had not stipulated a different quorum than that provided for in the articles, the second defendant’s only authority as a director was either to convene a general meeting or to appoint an additional director. It is understandable however, that he should have thought that the amendments made to the constitution had achieved his objective of enabling the company to operate with only one director.

Complaints Made on Behalf of the Plaintiffs on 13 May, 2004

55 The plaintiffs, who are resident in France, took legal advice. On 13 May 2004, Turks Legal wrote on their behalf to the directors of CTK.

56 One of the matters raised by Turks Legal was that the resolution of the general meeting held on 31 December 2003 to adopt a new constitution had the effect that there was no longer any requirement for financial statements to be approved at annual general meetings, and that this would deprive shareholders of their right to ask questions of directors about the financial statements. The letter went on to say that the financial statements provided by the company for the years ended 30 June 2002 and 30 June 2003 did not conform with the accounting standards as they did not disclose all loans made to related parties, or the terms or conditions of such loans. Turks Legal also noted that the financial statements for the years ended 30 June 2002 and 30 June 2003 were not audited. This was accurate. The company’s accountants, Northcorp Accountants, stated in each of the 2002 and 2003 financial statements that no audit or review had been performed. The same appears to be true of the 2001 accounts.

57 Article 145 provided that at the ordinary meeting in every year the directors should lay before the company a profit and loss account and a balance sheet containing a summary of the property and liabilities of the company made up to a date not more than three months before the meeting and from the date up to which the last preceding account and balance sheet were made up. That obligation was not complied with, although the breach was not the subject of any specific complaint in the hearing before me. More significantly, article 147 required the accounts to be audited. That requirement was removed in the new constitution adopted on 31 December 2003. However, the directors’ failure to have the accounts audited for the financial years up to 30 June, 2003 is a serious matter.

58 The letter from Turks Legal raised a number of questions about the 2002 and 2003 financial statements. They sought responses to the questions raised in Mr Dunn’s letters of 23 December 2002 and 31 December 2003, including full details of the interest bearing loans. The letter outlined the plaintiffs’ belief that the directors were in breach of their duties as directors in various respects. It concluded by warning that if the plaintiffs’ concerns were not addressed to their satisfaction within 21 days, the plaintiffs would commence proceedings to obtain relief against the directors or the company.

59 Messrs Byrnes, responded on 26 May 2004 by saying that further time was required. On 8 June 2004, Turks Legal pressed for a response but was met four weeks later with an apology for the delay in replying. Turks Legal again pressed for a response on 13 July 2004. None was forthcoming. The proceedings were commenced on 2 August 2004.

Events After Proceedings Were Commenced

60 The commencement of proceedings stirred the second defendant to action. On 12 August 2004 he wrote to Mr Dunn threatening to cancel 190 of Mr Dunn’s B class shares. On the same day, he wrote to Expressway Spares, demanding payment of a debt, then claimed to be $3,528,896.40. This debt was said to exist because of an advance made to Expressway Spares during the year ended 30 June 1985 which was said to carry agreed compound interest at the rate of 17% per annum. If this were true, the failure of the directors to take any step to recover the debt is quite extraordinary. The disconformity between the debt claimed on 12 August 2004, and the debt which was the subject of the statutory demand dealt with by Austin J in his judgment of 12 December 2000, is also striking. On the basis of the claimed agreed interest rate, the debt as at 30 June 2000 was in excess of $1,845,000. The statutory demand of 22 June 2000 was for two debts, totalling just over $250,000 which were said to carry interest, (not compounding interest), at 10% per annum.

61 In my view, the belated demand on Expressway Spares was a stalling tactic which the second defendant had long had in mind as a reason for not winding up CTK.

62 Also on 12 August 2004, the second defendant wrote to the B class shareholders purporting to explain the circumstances in which shares were incorrectly issued to Mr Dunn in 1996.

Further Correspondence Between Solicitors

63 On 19 August 2004, Messrs Byrnes belatedly replied to the letter of Turks Legal of 13 May 2004. Turks Legal had described the business activities of CTK as including civil engineering work, and mining and restoration works carried out between 1966 and 1988. They also said that since 1988, the company had not engaged in any business activity, although there had been a proposal to develop land which had not proceeded. Turks Legal said that the purpose for which the plaintiffs, through their father, had come to invest in the company in the mid to late 1980s had not been fulfilled. The company had not paid dividends and consequently there had been no return on the investment.

64 In response to these statements, Messrs Byrnes asserted that the company had been involved in the businesses of saw milling, farming, quarrying, mining, farm management, livestock, sub-dividing of land, plant hire and investments. They said that the company continued to be engaged in business activities. Messrs Byrnes’ letter was sent on the authority of the second defendant who had considered its contents. The letter did not disclose the current business activity of the company, namely, the business of tea-tree harvesting through a contract with OAL, a company controlled by the second defendant. That failure was deliberate.

65 The letter went on to detail various historical matters, including the allegations of the second defendant that there was a debt owed to the company by Expressway Spares and that 190 B class shares had been erroneously issued to Mr Dunn. These points were irrelevant to the plaintiffs’ complaints.

66 The failure to respond to the two letters of 23 December 2002 and 31 December 2003 was explained on the basis that the directors had formed the view that the letters, which were written by Mr James Dunn were written in bad faith and did not merit a reply. It is apparent that the second defendant’s antipathy to Mr Dunn, and perhaps to certain of his brothers and sisters, was such that he did not give any proper consideration to the position of the plaintiffs. He did not consider whether it was in the interests of all of the members of the company that information in relation to the company’s business and assets be disclosed to them. The complaint that the company’s accounts had not been audited as the articles required was not addressed.

67 The letter concluded by inviting the plaintiff’s father, Jean-Francois Cassegrain, to join the board of the company or alternatively, for the plaintiff’s father to nominate an independent nominee to the board.

68 The letter enclosed a memorandum written by the second defendant to the B class shareholders dealing with the 190 shares issued to Mr Dunn. The second defendant concluded by saying that in view of the actions commenced by Jean-Francois on behalf of Thomas and Emille (that is the plaintiffs), he had immediately called up all loans and as soon as they were to hand and the 190 B class share issue was resolved, then he would proceed to wind up the company. He also said that he was mindful to protect the company’s anticipated profit in that year in the order of $150,000 from its current commercial activities. He did not disclose what those activities were.

69 It is apparent that the second defendant was using the claim for a debt owed by Expressway Spares and the claim to set aside an allegedly wrongful allocation of shares to Mr Dunn in 1996, as an excuse for delaying the liquidation of the company whilst, unbeknownst to the B class shareholders, it was engaged in the new venture, with a company he controlled, of harvesting tea-trees.

70 Turks Legal responded on 26 August 2004. They made the undisputed point that the claims which the second defendant raised as the primary basis for not then winding up the company dated back many years. The letter contained a detailed but moderate statement of the grounds upon which the plaintiffs believed that the appropriate course was for the company to be immediately wound up. They requested that Messrs Byrnes obtain the second defendant’s consent to an order to be made on 31 August 2004, the return date of the Originating Process, for the company to be wound up and for Mr Lord to be appointed liquidator. They also asked that if the second defendant were to oppose that order, he advise the basis of his opposition. If the matter were to proceed to a hearing, they sought the second defendant’s undertaking that until further order, the assets of the company not be dissipated or used to pay directors’ fees or applied to meet any costs or expenses relating to any action arising out of the alleged debt from Expressway Spares, or in relation to Mr Dunn’s 190 B class shares. This was to preserve the company’s assets pending a resolution of the proceedings. The letter concluded by noting that if the second defendant was not prepared to consent to the company being wound up or to give the undertakings requested, the plaintiffs would move to appoint a provisional liquidator to the company.

71 The plaintiffs’ application for the winding up of the company and for the appointment of a provisional liquidator was supported by all but 12% of the B class shareholders.

Affidavits Filed by Second Defendant

72 On 3 September 2004, the defendants served an affidavit of the second defendant upon the solicitors for the plaintiffs. That affidavit revealed for the first time that CTK was carrying on the business of tea-tree harvesting. It set out reasons for opposing the application for the appointment of a liquidator.

73 In his affidavit, the second defendant deposed that:

“CTK is currently involved in business. It has six employees. The prime purpose of this business is to create profit from trading whilst the outstanding matters are resolved. In the 2004 financial year CTK has a provisional profit, before taxation of approximately $57,000. In the 2005 financial year it is anticipated that CTK’s profit from its activities will be $135,000. CTK has invested substantially in order to make this anticipated profit which is put at risk by the current proceedings.”

74 The impression conveyed by this paragraph, and one which I am satisfied the second defendant intended to convey, was that CTK had a provisional profit from trading of about $57,000 in the 2004 financial year and that its anticipated profit from trading in 2005 was $135,000.

75 In fact, the provisional profit of $57,000 for the 2004 year was arrived at after a projected loss on the trading operations of $15,285.83 in that year, an expense for directors’ fees of $15,000, and bringing to account interest earned of $45,000 and the recovery of legal costs from Mr Dunn of $42,000. The affidavit was misleading by seeking to portray that the trading operations had shown a provisional profit of $57,000.

76 The second defendant’s affidavit prompted the plaintiffs to serve various notices to produce. In a further affidavit sworn by the second defendant on 15 September 2004, he deposed that depending upon the result of the plaintiffs’ application for the appointment of a provisional liquidator, he intended to instruct his solicitors to request that the hearing of the substantive proceedings be deferred until after the harvest had been completed. He deposed that the claimed urgency of the proceedings was for no other purpose than to deny CTK the ability to properly defend itself. He deposed to believing that the plaintiffs and other B class shareholders were aware that it was not in the interests of the company and of all members generally that a provisional liquidator be appointed.

77 The second defendant gave evidence that on about 16 September 2004, he received counsel’s advice that it was inevitable that the Court would determine that the company should be wound up on the just and equitable ground, and that he accepted that advice. He was also advised that the Court would not appoint a provisional liquidator to the company under the circumstances that then existed. He resolved at that stage that the company should not defend a winding up order, but should defend the
appointment of a provisional liquidator.

78 On 11 October 2004 the second defendant swore a further affidavit which set out in detail the alleged grounds for contending that shares had been incorrectly issued to Mr Dunn. The affidavit sworn on 11 October 2004 does not address any ground that could be relevant to the appointment of a provisional liquidator. Its only conceivable relevance to an application to wind up might be that if the company were to institute proceedings to rectify the share register, it would be cheaper for those proceedings to be conducted by the director rather than by a liquidator. However, no step had been taken to rectify the share register for over two years after the second defendant had discovered his alleged error.

79 On 1 November 2004, the second defendant swore a further affidavit in which he deposed to believing that all shareholders had been given notice of the general meeting of the company held in December 2003. He deposed to his general experience in relation to the fees charged by insolvency practitioners. He deposed to a second director having being appointed to CTK on 31 October 2004. This director was his son Thomas. He then deposed to there being a debt owed to CTK by Expressway Spares arising from loans made in 1982 and rolled over up to 1986. He also deposed to his role in the tea-tree operations and said that it was then undertaking its second harvest.

80 CTK paid all of the costs of the defence of the proceedings up to the appointment of the provisional liquidator, both of itself and of the second defendant. The amount paid, including a reasonable apportionment of fees paid to the company’s accountants was about $124,000. A substantial part of those fees was paid to prepare evidence after 16 September 2004, when the second defendant said he had received legal advice which he accepted, that it was inevitable that the company would be wound up on just and equitable grounds. It is apparent from the reasons of Windeyer J that at the hearing of the application for the appointment of a provisional liquidator, the second defendant did not accept that a final winding-up order should be made in due course, but submit that the order should be deferred until after the harvest. All that was conceded was that there was a serious question to be tried in the substantive action.

Advice that a Winding-Up Order Would not be Contested

81 On 15 December 2004, the provisional liquidator advised the second defendant that he had concluded that the company should cease trading. As noted in paragraph 3, on 16 December 2004, the second defendant advised the provisional liquidator that he consented to the liquidation of the company “as it is now not possible to trade out of the current situation, which has been brought about by the appointment of yourselves as provisional liquidator”. On the same day his solicitors advised the plaintiffs’ solicitors that the second defendant consented to a final winding-up order but would oppose an order for costs being made against him.

Costs Order Pursuant to s 76 of the Supreme Court Act

82 The plaintiffs invoked two distinct sources of power in relation to the costs orders which they seek. One is s 76 of the Supreme Court Act 1970 by which costs are in the discretion of the court which has full power to determine by whom and to what extent costs are to be paid. The regulation of that power by Pt 52A r 4 is immaterial for present purposes. The principles in Re Minister for Immigration and Ethnic Affairs; ex parte Li Qin, Australian Securities Commission v Aust-Home Investments Limited, and One.Tel v Deputy Commissioner of Taxation referred to earlier in these reasons inform how the discretionary power under s 76 should be exercised in matters where there has been a compromise of the claims for substantive relief, but no agreement as to costs. In this case that approach is qualified by of the cross-examination of the second defendant which I allowed by reason of the additional relief sought pursuant to s 233(1)(j) of the Corporations Act. Section 233 is the other power which the plaintiffs invoke, insofar as they seek an order that the second defendant indemnify the first defendant in respect of the costs which it incurred in defending the proceedings up to the appointment of a provisional liquidator. In submissions, counsel for the plaintiffs also sought an order that the second defendant indemnify the first defendant in respect of any costs which the first defendant is liable to pay to the plaintiffs. Again, that claim for relief is based on s 233 of the Corporations Act.

83 This case differs from Jeruth v Haybale Pty Ltd [2004] VSC 319, in that here it is quite clear that even if a provisional liquidator had not been appointed, the company would have been wound up. The second defendant said that he accepted advice that the company would be wound up on the just and equitable ground. At the hearing before Windeyer J the second defendant was only prepared to concede that there was a serious question to be tried that a winding-up order should be made. But it is perfectly clear that if the matter been fully contested, such an order would have been made.

84 I consider that the second defendant acted unreasonably in causing the company to defend the litigation. There were very clear grounds for winding up the company not only on the just and equitable ground, but also on the ground that the company’s affairs had been conducted in a way which was contrary to the interests of the members as a whole and oppressive or unfairly prejudicial to the B class shareholders. There was a clear case that the affairs of the company were being conducted in a way which, considered objectively by a commercial bystander, was unfair (Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704).

85 The principal matters of unfairness were the deliberate concealment by the directors from the B class shareholders of how the proceeds of sale of the company’s land had been invested by being lent to persons or companies associated with the second defendant, and the deliberate concealment of the company’s having embarked on a new and hazardous business venture with a company which the second defendant controlled. That is to say, in September 2002, the company lent $324,000 to the second defendant’s wife. On 16 July 2002, it lent $150,000 to OAL. These loans were in addition to the earlier loan to the executors of the estate of Mrs Françoise Cassegrain. Although the new loans were ultimately repaid with interest, that did not occur until after the proceedings were commenced. The loans were not disclosed to the shareholders. Further, very shortly after OAL repaid its loan, the second defendant caused the company to make advance payments of rent under the machinery lease agreement with OAL for which there was no proper justification. The tea-tree farming venture with OAL was especially hazardous as the only assurance which the company obtained that it was entitled to the crop of oil and mulch and the proceeds of sale of that crop, was a warranty from OAL. The agreement exposed the company to the risk of claims by the trustee of the managed investment scheme or by investors. The venture was concealed from the B class shareholders until the proceedings were commenced. The second defendant deliberately chose not to reveal it in correspondence from his solicitors to the plaintiffs’ solicitors in which they described the businesses of the second defendant.

86 The second defendant also took steps to minimise, so far as possible, the amount of information to be provided to the B class shareholders. He caused amendments to be made to the company’s constitution to remove the need for the holding of annual general meetings. He failed to reply to correspondence about the company’s accounts. He failed to comply with the requirements of the company’s constitution that the accounts be audited.

87 It is apparent from the reasons of Barrett J that the directors had agreed with another B class shareholder, Mr Dunn, that when the company’s land was sold the company should be wound up and its assets distributed to shareholders. The second defendant did not advise shareholders that the directors had resolved against that course because they considered that the company ought to pursue the new business venture of tea-tree oil farming in conjunction with OAL. Rather, he resisted the company’s being wound up on the grounds that there were outstanding debts owed to the company from his late mother’s estate and from Expressway Spares and on the ground that the directors had disputed Mr Dunn’s entitlement to the shares of which he was the registered holder. These were not sufficient reasons for not finalising the company’s affairs. There had been no attempt to recover the alleged debt owing by Expressway Spares. The claim that there was such a debt was made in order to stall the move from the B class shareholders to wind up the company.

88 I consider that it is practically certain that had the winding-up order not been consented to, I would have found that the order was justified not only on the grounds that a winding-up was just and equitable, but also on the grounds that the affairs of the company had been conducted in a way which was oppressive to and unfairly prejudicial to the B class shareholders including the plaintiffs.

89 The plaintiffs are entitled to their costs from both defendants. The first defendant did not oppose a winding-up order, or otherwise participate in the proceedings after Windeyer J appointed a provisional liquidator. The first defendant should be ordered to pay the plaintiffs’ costs up to the appointment of the provisional liquidator. Essentially the litigation was a fight between shareholders. The second defendant should also pay the plaintiffs’ costs of the proceedings, such costs not to be limited to those incurred before the appointment of the provisional liquidator. As the plaintiffs will also be entitled to orders under s 233 of the Corporations Act, the second defendant should pay the plaintiffs’ costs of the proceedings without limitation as to time, that is, including the costs of the hearing before me. The questions whether the second defendant should indemnify the first defendant in respect of its liability to pay the plaintiff’s costs, and whether he should indemnify it in respect of the costs which it incurred up to the appointment of a provisional liquidator in defending the plaintiffs’ claim, are appropriately addressed by reference to s 233 of the Corporations Act.

90 In Re DG Brims & Sons Pty Ltd [1995] QSC 53; (1995) 16 ACSR 559 Byrne J, in the Supreme Court of Queensland, dealt with the expenditure of company funds to defend an oppression suit on behalf of the majority shareholders. His Honour said (at 591-592):

“Many thousands of dollars of company funds have been spent on lawyers, accountants and valuers in defending these proceedings on behalf of the majority shareholders. This is unfair and infringes the basal principle that “the powers, and the funds, of a company may be used only for the purposes of the company”. No doubt a small part of the expenditure was justifiable; for example, in discovery, and in resisting such orders as that the company purchase the shares or pay a dividend for 1991. Expenditure to protect its discrete interests or for other proper purposes of the company may be made from company resources. The essential dispute here, however, is between the shareholders; and company funds should not have been used to defend the majority shareholders.”

91 It was submitted for the second defendant that this was wrong. I do not agree. It is well-based on the authorities which his Honour cited and was approved by Young J (as his Honour then was) in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413; (1998) 28 ACSR 688 at 733. It is also right as a matter of principle. In Fexuto v Bosnjak Holdings Young J observed that some of the English cases had held that the only proper complainant where the company’s moneys have been improperly expended is the company itself. His Honour observed however, (at 733), that under Australian law, the court is not so inhibited. His Honour said that an appropriate remedy in the oppression action was to require the majority shareholders to compensate the company for the unauthorised expenditure.

92 It was submitted for the second defendant that relief as to costs could not be available under s 233, unless the defence of the proceedings was itself found to be oppressive conduct, as distinct from the conduct of the company’s affairs which gave rise to the proceedings. It was submitted that this follows from the requirement that an order under s 233 must be one adapted to relieving against the oppressive conduct. (Fexuto v Bosnjak [1998] NSWSC 413; (1998) 28 ACSR 688 at 742; United Rural Enterprises Pty Ltd v Lopmand Pty Ltd [2003] NSWSC 910; (2003) 47 ACSR 514 at 518). I agree with this submission.

93 It was also submitted for the second defendant that it was not unreasonable for him to spend the company’s money in defending the proceedings. He genuinely believed that it was not in the company’s interests that the company then be wound up. He believed that the tea-tree oil venture on which the company had embarked was likely to be profitable and that the pursuit of that venture would inevitably be harmed by a winding-up order. That was a business decision whose commercial wisdom the courts should not second-guess.

94 There is some merit in these submissions, but they do not justify the steps which the second defendant took in defending the proceedings. His conduct must be judged against his evidence that he had been advised on 16 September 2004 that “it was inevitable that a court would determine that the company should be wound up on a just and equitable ground”, and that he accepted that advice. Such advice should have been sought before the proceedings commenced. His evidence was that from that time he was resolved that the company should not defend a winding-up order but should defend the appointment of a provisional liquidator, and that he had advice that the court would not appoint a provisional liquidator in the circumstances which then existed.

95 I accept that the second defendant could properly have expended the company’s funds in making, and adducing evidence in support of, a submission that whilst a winding-up order should be made, a provisional liquidator ought not to be appointed and the winding-up should be deferred until after the tea-trees had been harvested. However, that was not the course which the defendant took. He submitted to Windeyer J that before a winding-up could take place the existence of a debt which was claimed to be owing to CTK by Expressway Spares should be determined, as should Mr Dunn’s entitlement to the whole of the 290 B class shares registered in his name. These were the same matters upon which the second defendant had resisted the winding-up of the company since 2002.

96 Until the provisional liquidator decided that the company should cease trading, the second defendant vigorously defended the winding-up application on multifarious grounds, some at least of which were specious. Thus his affidavit of 11 October 2004 which contained allegations in relation to the shares issued to Mr Dunn could have had no relevance to any proper defence by the company of the winding-up application.

97 I am of the view that the plaintiffs have demonstrated that in expending moneys in defence of the proceedings the second defendant has conducted the affairs of the first defendant in a way which is oppressive and unfairly prejudicial to the B class shareholders including the plaintiffs. I consider the appropriate remedy is to order the second defendant to indemnify the first defendant against its liability to pay the plaintiffs’ costs of the proceedings and for the costs and expenses the first defendant incurred in defending the proceedings up to the appointment of a provisional liquidator.

98 In Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd Young J held that the appropriate remedy under s 233 to redress the improper expenditure of the company’s money in defence of the proceedings was for the amount of that unauthorised expenditure to be assessed by the Master or by a referee (at 734).

99 Before Windeyer J, part of the opposition to the plaintiffs’ claim was based on the second defendant’s contention that the company should be permitted to complete the harvest without being subjected to the control of a provisional liquidator, although only a small part of the second defendant’s affidavits addressed that issue. I have considered excluding from the indemnity which the second defendant will be ordered to give, the amount of costs incurred by the company in preparing that issue, and its liability to compensate the plaintiffs in respect of their costs of that issue. However, I have decided that such a qualification would not be appropriate. It is not possible to say what costs, if any, would have been incurred if the second defendant had acted appropriately on the basis of the advice he received. It is possible that if he had indicated that he would consent to a winding-up order after the harvest was completed and given appropriate undertakings to ensure that the company’s assets were not deployed outside the ordinary course of business, the issues could have been resolved by consent, or at least the costs substantially reduced. The fact that he may have been entitled to spend the company’s funds in defending the litigation had he acted differently, does not meant that he is entitled to have used the company’s funds in defending the litigation in the way he chose to do. Accordingly, there is no occasion to refer an inquiry as to the level of unauthorised expenditure to a Master or referee.

100 On the first day of the hearing before me the provisional liquidator was represented by counsel. The provisional liquidator was not a party to the suit. There was no objection by either of the parties to his being represented by counsel, subject to the question of costs. When leave was granted for counsel to appear for the provisional liquidator it was made clear that it was at his own risk as to costs, as the Court would not normally grant leave for counsel to appear for a person who was to be present only as a witness. The provisional liquidator must bear his own costs of his legal representation on the first day of the hearing. My prima facie view is that such costs, as distinct from his own costs of attending, are not a cost or expense of the liquidation for which he is entitled to be reimbursed from the assets of the company. Neither party sought a direction in respect of that matter and it is unnecessary to say anything further about it. If necessary, it can be addressed when the liquidator passes his accounts.

101 For these reasons I make the following orders:

(1) The first defendant pay the plaintiffs’ costs of the proceedings, including reserved costs, up to and including 12 November 2004.

(2) The second defendant pay the plaintiffs’ costs of the proceedings, including reserved costs.

(3) The second defendant indemnify the first defendant against the costs payable by the first defendant to the plaintiffs, and in respect of costs and expenses incurred by the first defendant in defending the proceedings.

(4) The exhibits may be returned after 28 days.


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LAST UPDATED: 26/05/2005