Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Nutectime International Pty Limited v Timentel Pty Limited [2011] NSWCA 257 Hearing dates: 16 June 2011 Decision date: 05 September 2011 Before: Giles JA , Handley AJA , Tobias AJA Decision: 1. Appeal allowed with costs. 2. Orders 1 and 2 made in the Equity Division on 30 October 2009 set aside. 3. Order 3 which directed that Timentel Pty Ltd be wound up, and Order 4 that appointed James Alexander Shaw as liquidator set aside unless within 14 days a consent order is filed signed by or on behalf of the appellants, and the second and third respondents, to confirm those orders. 4. Order 6 dismissing the defendants' cross-claim set aside, and in lieu thereof judgment for the cross claimants David Neilan Brady and David Brian Paix for nominal damages. 5. The plaintiff to pay the costs of the defendants David Neilan Brady and David Brian Paix of the proceedings in the Equity Division including the cross-claim. 6. The respondents Patricia Mary Ehsman and Michael Ehsman to have a certificate under the Suitors Fund Act for the costs of the appeal. [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] Catchwords: CORPORATIONS - oppression - private company - breakdown in relationship - funds urgently required - majority make secured advance - minority fully informed - refused to contribute - no oppression CORPORATIONS - oppression - private company - breakdown in relationship - majority selling assets to new company owned by them at fair valuation - minority fully informed - declined to make higher offer or obtain further valuation - no oppression CORPORATIONS - oppression - private company - breakdown in relationship - majority undertaking informal winding up - formal winding up no benefit to minority - no oppression DIRECTORS - duty to act in good faith for benefit of company - company in difficulties - majority making secured advance to preserve assets - breach of duty not established MORTGAGES - advances made before security granted - advances pursuant to agreement to grant security - made under security when granted - no preference VALUATION - retrospective - events after valuation date - known contingencies at valuation date - evidence of later events admissible Legislation Cited: Corporations Act 2001, ss 232 and 233 Suitors Fund Act Cases Cited: Brown Shipley & Co v Kough (1884) 29 Ch D 848 Bwllfa & Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Ltd [1903] AC 426 Ex parte Fisher (1872) LR 7 Ch App 636 In re Colombian Fire-Proofing Co Ltd [1910] 1 Ch 758 In re F&E Stanton Ltd [1929] 1 Ch 180 In re Jackson & Bassford Ltd [1906] 2 Ch 467 McCathie v FCT [1944] HCA 9, 69 CLR 1 Morris v Morris [1895] AC 625 Nocton v Ashburton [1914] AC 932 Re Hyams (1970) 19 FLR 232 Richard Brady Franks Ltd v Price [1937] HCA 42, 58 CLR 112 Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584 Willis v The Commonwealth [1946] HCA 22, 73 CLR 105 Category: Principal judgment Parties: 1st Appellant - Nutectime International Pty Ltd 2nd Appellant - David Neilan Brady 3rd Appellant - David Bruce Paix 1st Respondent - Timentel Pty Ltd 2nd Respondent - Patricia Mary Ehsman 3rd Respondent - Michael Ehsman Representation: Counsel: F Corsaro SC with B Bradley - Appellant S B Docker - 1-3 Respondents Solicitors: Appellant - Mason Lawyers Respondent - McDonald Johnson Lawyers File Number(s): 2005/261666 Decision under appeal Citation: [2009] NSWSC 1096 Date of Decision: 2011-09-05 00:00:00 Before: Gzell J File Number(s): 5189 of 2005 Judgment 1THE COURT : This is an appeal from orders of Gzell J [2009] NSWSC 1096 in oppression proceedings brought by Mrs Ehsman, a minority shareholder, against Timentel Pty Ltd (the company), the other shareholders (the defendants) and their company Nutectime International Pty Ltd under ss 232 and 233 of the Corporations Act 2001 (the Act). The former section relevantly provided: "The Court may make an order under section 233 if: (a) the conduct of a company's affairs; or (b) an actual or proposed act or omission by or on behalf of a company; or (c) a resolution, or a proposed resolution, of members or a class of members of a company; is either: (d) contrary to the interests of the members as a whole; or (e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity." 2On 16 October 2009 Gzell J published his reasons for judgment and on 30 October made his formal orders (red 57). Order 1 directed Nutectime to retransfer, for no consideration, the assets it acquired from the company under two agreements of 2 September 2005 (the sale agreements). Order 2 directed the company to restore its shareholders' loan accounts to the state they were in prior to 6 May 2005, and Order 3 directed that it be wound up. Order 6 dismissed the defendants' cross claim. 3The Judge found that the execution by the company of a loan facility and charge in favour of the defendants on 9 May 2005 gave them a preference over the existing loan of Mr and Mrs Ehsman [54]-[55]. The transactions were therefore oppressive, unfairly prejudicial to, and unfairly discriminatory against Mrs Ehsman. 4The Judge also found that completion of the sale agreements on 2 September 2005 and the application of the purchase price to pay off the defendants' secured loan were oppressive to, unfairly prejudicial to, and unfairly discriminatory against Mrs Ehsman [70], [77], [81]. 5The company was left without assets and with no capacity to pay anything to Mr and Mrs Ehsman in reduction of their loan account. All its assets had been transferred to Nutectime which was owned and controlled by the defendants. 6Although the Judge's reasons would have supported an order setting aside the loan facility and the charge, that order was not made. This could have been corrected under the slip rule. 7The company and the defendants brought a cross claim against Mr and Mrs Ehsman based on a contract evidenced by minutes of a directors' meeting. It alleged in substance that the shareholders had agreed that Mr Brady, one of the defendants, would arrange for the company's debts to be paid by DNB Global Corporation (DNB), that the other shareholders would then pay their share, and DNB would be reimbursed. 8The Judge held that the parties had not intended to enter into legal relationships and the cross claim was dismissed. 9Nutectime, Mr Brady and Mr Paix, another shareholder and director, appealed. The third defendant Mr Frasca submitted to the orders of the Court save as to costs. 10Mrs Ehsman invented a wrist watch in the form of a bracelet with a split face and hands which could appear in either or both halves of the split face. She applied for patents in Australia and the United States. Early in 1998 she met Mr Brady and they agreed to work together to develop the invention. In October Timentel was incorporated with Mrs Ehsman owning 50% of the shares and Mr Brady the other 50%. The other defendants, Messrs Paix and Frasca, became interested in the project and were allotted 5% of the shares reducing the other holdings to 45%. Mr and Mrs Ehsman, and Mr Brady became directors. Mr Brady became the Chairman. 11Swiss consultants were engaged to develop prototypes. In November 1998 Mrs Ehsman granted the company an exclusive royalty free licence to work her invention. 12The Swiss consultants developed significant improvements (the new invention) and the company applied in France for a second patent. The board meeting on 16 March 1999 noted that the company's capital was almost exhausted. The minutes record (1/436) that Mr and Mrs Ehsman were having difficulty paying their share of the expenses. The other directors agreed to consider increasing their contributions and the board arranged to meet on 28 March "to finalise and resolve strategy". 13The minutes of the 16 March meeting continued: "Frank Frasca then expressed concern as to Funds in Bank not being sufficient to pay ongoing bills ... Patti Ehsman said that David N Brady had always paid the amounts upfront so that we kept in good standing. He would then work out what they owed and they paid it to him. Patti proposed, subject to agreement from David, that the method continue as he was completely trustworthy ... David N Brady was asked if he would agree to continue this method. He did so. Frank Frasca stated all shareholders must guarantee payment of their respective payment amounts as and when bills occurred and that this would be a guarantee as shareholders of the company and as individuals and asked for agreement on this from all present - agreement was given. Chairman asked if Patti Ehsman was formally moving this and she said yes. The chairman then wrote down and read out words as above, whereupon she so moved it. Seconded by Michael Ehsman. Vote 4 - nil David N Brady abstained - Motion passed." 14The minutes were signed by Mr and Mrs Ehsman as directors, by Mr Brady as chairman and by Mr Frasca and Mr and Mrs Paix as shareholders. 15The next meeting was held, as arranged, on 28 March. The minutes record the presence of Mr and Mrs Ehsman, Mr Brady, and Mr and Mrs Paix and Mr Frasca. They record (1/439): (1) IT WAS RESOLVED that until further notice all funding requirements be paid by each shareholder Group, not pro rata to % shareholding, but at 25% for each Shareholder Group, as a means of assisting Michael and Patricia Ehsman through their tight financial situation ... (4) IT WAS RESOLVED that all parties would pay equal amounts of AUD$36,000 by 29 March 1999 to facilitate payment of items tendered ... on basis of resolutions 1 and 2 abovementioned." 16The minutes were signed by Mr Brady as chairman. 17Mr Brady would arrange for DNB Global Corporation, in which he had a minority interest, to pay the company's accounts as they became due for payment. DNB would invoice the company which would obtain the funds from its shareholders to reimburse DNB. 18The practice continued until the meeting on 20 February 2001 (2/454). A decision was then taken to extend the second patent to the European Block of 18 countries. The minutes record that this would be very expensive, but was critically necessary. The resolution to proceed was passed unanimously and the minutes further record: "5. David Paix stated he had confirmation from Michael and Patti Ehsman that their finances had improved, and, as he could no longer afford to support them by continuing to pay at 25% shareholding, whilst only holding 5% shares, he moved that from this moment onwards each Shareholder Group pay their own funding requirement contributions specific to the shareholding that Shareholder Group has in the Company. In the case of He and Dawn Paix @ 5%, for Frank Frasca @ 5%, for Patti and Michael Ehsman @ 45% and David N Brady @ 45%, although noting that David N Brady had already paid much more than he was required to ... Vote: All in favour - unanimous". 19The next meeting of relevance took place on 9 June 2002 (2/490). Messrs Paix and Franca were appointed directors over the opposition of the Ehsmans, and Mrs Ehsman was replaced as secretary by Mr Paix. At the meeting on 30 June (2/495) the shareholdings of Mr and Mrs Paix and Mr Franca were increased to 15% and the shareholdings of the Ehsmans and Mr Brady were reduced to 35%. 20Mrs Ehsman was not present at the meeting on 1 August (2/523) and Mr Ehsman, who was, walked out during the meeting. 21The accounts of the company for the year ending 30 June 2002 were signed by its accountants and the defendants on 18 February 2003 (2/567). These showed shareholders' loan accounts of $1,604,911, including the Ehsmans' loan account of $312,349. 22On 11 February 2003 the defendants served notices of demand on the company for their loan account debts. At the meeting on 12 March (2/584) the parties agreed to try to work together for a trial period of three months, and the defendants agreed to suspend their demands if Mr Ehsman resigned as a director. He later did so. 23Development of the new invention proved difficult and expensive. The minutes of the meeting on 4 August 2004 (2/612), at which Mrs Ehsman was present, record: "3. Moneys verbally approved for shock resistance and guarantee from all parties. Final clarification of funds by Patricia Ehsman tomorrow. 4. David Brady (Chairman) to ring Switzerland tonight and agree in principle to proceed with overhaul of watch. Final clarification and confirmation to be given within 24 hours. If confirmed to DNB to proceed, DNB to send funds immediately and get work started" 24These resolutions were approved unanimously. The minutes record that the secretary later spoke to Mr Ehsman who confirmed that he had his share of the moneys and was ready to proceed. This information was passed on to the chairman. 25The minutes of the next meeting held on 24 August (2/616) record a statement by Mrs Ehsman that "she had the funds", and a statement, presumably by Mr Brady, that DNB had commissioned further development work on the watch and sent CHF 100,000 to the Swiss consultants. The minutes include: "7. There was total agreement to proceed on the revised costings noting that these costs may not be the final costs." 26The Judge found [32] that Mr and Mrs Ehsman made no further contributions after 24 August 2004. 27On 8 October a letter was sent to Mrs Ehsman by the defendants which referred to her approval for further development and willingness to contribute to the cost. They complained that payment had not been forthcoming (2/625). On 20 October notice was given (2/630) of a meeting on 9 November to discuss the sale of the company's assets "having regard to the difficulty being experienced ... in raising much-needed further working capital ... to the project." 28Mrs Ehsman did not attend the meeting which resolved (2/692) that the Ehsmans be informed that they could retain their own valuer to value the second patent. The meeting also noted that further working capital was required to protect the patent and develop the watch. 29Mrs Ehsman and her solicitor attended the meeting on 29 November. The minutes record the following resolutions passed over Mrs Ehsman's opposition (2/713): "14. FF, ... proposed a resolution: That having regard to the inability of the Ehsmans to agree with the other shareholders on the further development of its IP in its patented hinged electronic watch and the Ehsmans' refusal to contribute further necessary working capital an impasse had been reached which could best be resolved by the company selling its assets, paying creditors and distributing the remaining funds amongst the shareholders ... 15. FF ... proposed a 2 nd resolution: Chairman is authorised to investigate sale of Timentel assets by internal and external sale process and report back to the next Board meeting ...". 30The meeting on 7 December 2004 was also attended by Mrs Ehsman and her solicitor. The minutes record (2/730) that Mr Brady tabled an "Overview of moneys owed by Ehsmans in period from April to December 2003 (sic) detailing Ehsmans arrears for full period ...". Resolution 8 opposed by Mrs Ehsman was: "8. The Chairman stated bills needed to be paid including legals, Patent issues, ASIC & Williamson Chaseling and proposed that the 35% shareholders put in 10K each and the 15% shareholders put in a proportionate amounts ..." The motion, which was opposed by Mrs Ehsman, was carried. The minutes continued: "The chairman asked, in light of the motion being carried, would PE contribute her share, but she said no. The Chairman said we need to pay our bills, why won't you contribute. Mr Doyle [Mrs Ehsman's solicitor] then said that PE had voted against the motion. [He] then suggested the Chairman could put funds into the company as a loan, to pay the bills ...". 31On 21 December Mr Doyle e-mailed the company's solicitor (2/747): "A better option is for DNB Global to lend the money to Timentel on either a secured or unsecured basis." 32Mrs Ehsman did not attend the meeting on 12 January 2005 when the other directors resolved (2/771) to obtain an independent valuation with a view to the sale of the company's assets, with the first offer to shareholders. 33On 28 January the directors, other than Mrs Ehsman, approved the company's accounts for the year ended 30 June 2003 (2/778). These disclosed shareholder loans of $1,704,660, of which $330,494 was owed to the Ehsmans. On 21 February the defendants wrote to the Ehsmans drawing attention to their outstanding contributions of $75,000, asking them to honour their agreement and immediately pay what they owed (2/804). 34On 28 February, in the absence of Mrs Ehsman, the directors resolved to obtain a valuation of the company's assets from a firm in Switzerland (2/821). 35On 21 February (2/804) the other directors wrote to the Ehsmans again, asserting that they were in breach of the agreement to share in funding the company, and asking them to pay their overdue share of the expenses in the order of $75,000. There was no response. 36On 10 March the company sent an invoice (2/823) to the Ehsmans for $73,987.43 for their contributions to company costs from 6 August 2004 to 27 February 2005. There was no response. 37Mr Brady prepared a contribution reconciliation summary (2/837-9) which showed that the Ehsmans owed $81,853. On 13 April the company's solicitors sent a copy to the Ehsmans' solicitors with copies of the board minutes of 16 and 28 March 1999, and 20 February 2001. 38On 20 April Mr Brady sent a memorandum by facsimile to the other directors, including Mrs Ehsman (2/854-8). Amounts of CHF 60,890 plus VAT together with patent annuity fees were due for payment by 11 May if the company was to validate the second patent in the European Block. An invoice for this amount from the company's patent attorneys in Switzerland was attached (2/859). 39Mr Brady wrote (2/854): "... we need shareholder commitment to pay their shares of the necessary validation fee by 22 April 2005, with all respective shares of the necessary funds put in place to transfer no later than 06 May 2005. This is essential to securing and enhancing the value of the Company's IP Asset. ... an alternative may be for the Company to borrow the amount required on a short term loan to secure validation of the European Block Patent while the Company finds a buyer for its IP Assets as foreshadowed and proposed in recent Board meetings. If the shareholders are unable and unwilling to fund payment of the required validation fee I would recommend we seek a short term loan ...". 40Mr Brady proposed a loan which would be secured by a registered first charge in favour of the lender over the company's IP assets. The directors, other than Mrs Ehsman, who did not vote, signed copies of a circular resolution to seek a loan from an outside source. 41A board meeting on 29 April (2/866), which Mrs Ehsman did not attend, confirmed the circular resolution. Item 5 of the minutes stated: "Chairman stated he was instructed by the other four (4) directors of DNB Global that it was no longer prepared to carry debts on behalf of Timentel, particularly as the Ehsman component, up to 18.03.05 stood at above AUD $86,000.00, with no attempt made to pay anything by Ehsmans since before August 2004. A quick calculation was done which revealed a need for an amount of at or near AUD $120,000.00 to cover payments for the Patents, Williamson Chaseling and outstanding amounts not paid by Ehsmans to Williamson Chaseling and Sparke Helmore. FF moved that the Chairman and Secretary seek to borrow this amount on whatever terms were available and offer a First Registered Charge over the Company Assets, as this appeared the only way we could equitably satisfy creditors, plus secure and protect the Patents at this time." 42The resolution was carried. Mr Brady sent Mrs Ehsman a facsimile letter (2/868) which stated "3. The Board voted unanimously to seek loan funds to accommodate the requisite payment of the European Patent Block and offer a First Registered Charge over the Assets of the Company to a willing Funding Party." 43Mr Brady approached two banks which refused to lend without personal guarantees, and a financier who would only lend at an interest rate of 80% to 120% (black 263-5). Mr Paix approached another bank and a building society without success (black 359). 44On 3 May the company's solicitors wrote to the Ehsmans' solicitors (2/869) enclosing a copy of the valuation by Mr Spode of Les Artisans Horlogers of Switzerland who valued the company's assets at CHF 220,000, and the chairman's memoranda of 20, 28 and 29 April. The letter continued: "3.1 ... the Chairman and Secretary have had to start making inquiries with conventional lenders with a view to raising approximately $200,000 additional working capital from which the Company can pay the abovementioned European Block Patent validation fees and various other outstanding fees and charges owed to various service providers. 3.2 So far the approaches to conventional lenders have been unsuccessful and it seems likely that loan funds from private lenders will need to be called upon. Messrs Brady, Paix and Frasca are prepared to lend the company $200,000 but under strict conditions that those funds are secured by way of a Fixed and Floating Charge. 3.3 ... at the Company's next Board meeting on 9 May, the directors will ... consider, and if thought necessary, resolve to proceed with such further loans as may be available from shareholders or other sources ... and to secure the repayment of those loans by way of a first registered Fixed and Floating Charge over the Company's assets. 3.4 We are instructed to advise you that Messrs Brady, Paix and Frasca at least consider these steps are necessary and prudent having regard to the need to secure payment of the European Block Patent fee and the further development of the Company's IP Assets." 45Mrs Ehsman did not attend the meeting on 9 May at 12 noon, but Mr Brady received a faxed letter from her solicitors at 9.35 am (2/881). The solicitors said that their clients would like the opportunity to make their own independent inquiries about the Swiss valuation. The letter continued: "It may be that the Ehsmans are also prepared to lend money jointly on a secured basis, depending on the proposed terms of the loan." 46The minutes of that meeting (2/883) record the following: "5. The Chairman referred to the Company's urgent need for further working capital to cover various expenses and noted that he, Mr Frasca and Mr Paix had agreed in principle to provide a Loan Facility (Loan) of up to $246,000 to the Company to cover various expenses including the following: - DNB ... invoice dated 6 May 2005 ... for AUD $216,746.15 (see copy attached) covering: Due and outstanding contributions by Ehsmans monies not paid to 18 March 2005 AUD $86,507.69; European Block Patent Payments plus three DNB invoices ... DNB:008054-63; DNB:008077-31; and DNB:008091-08 for AUD $130,238.46 - Sparke Helmore's outstanding accounts of AUD $16,000 (made up of 25% Mr Frasca, 25% Mr Paix, 50% Mr Brady); - William and Chaseling's account of AUD $2,992.00 (made up of 25% Mr Frasca, 25% Mr Paix, 50% Mr Brady). - An invoice to come from Les Artisans Horlogers' for valuation for approximately AUD $7,000." 47The meeting resolved (7) that the required loan be made available by the three directors present up to a maximum of AUD $246,000 secured by a charge and that the loan facility and charge be executed. 48Item 9 recorded: "The Chairman tabled the Certificate of final validation for the European Block Patent # 1179192 noting that he, Mr Frasca and Mr Paix had already paid the money required funds (sic) urgently last week to achieve registration of this Patent." 49The DNB "invoice" of 6 May for $216,746.15 (2/880), referred to in par 5 of the minutes, was ambiguous. It was headed "recordation of payment of outstanding moneys." It continued "We take this opportunity to confirm the recordation of due payments." It referred to the "due and outstanding contributions to 18 March 2005 of Ehsman moneys not paid", of $86,507.69, and the amount of $130,238.46 for the European Block patent, and continued "We thank you for payment and remind you that confirmation of Full Status Patent Certificate for Japan is anticipated quite soon at which time further fees will need to be paid." 50It was not clear whether the document was a receipt for payment, or an invoice thanking the company in anticipation of payment. Mr Brady said in an affidavit that it was a request for payment (1/242) and the Judge so found [43], [48]. However other evidence indicated that it was a receipt. 51The loan facility (3/894) recited that the company had requested the lenders (the defendants) to provide financial accommodation, and their agreement to provide the "Facility" "from the Effective Date" defined as 2 May 2005. The "Commencement Date" was defined as 9 May. The "Initial Loan" was defined as "the amount ... in Item 4 of Schedule 1 being the amount ... owed by the borrower to the lenders on the day before the Commencement Date" ie 8 May. This was shown as $216,746.15 made up of $86,507.69 for the outstanding contributions from the Ehsmans and $130,038.46 for European Block Patents. 52"Loan" was defined as accommodation made by the Lenders "after the Commencement Date". The "Loan Amount Outstanding" was defined to include the "Initial Loan" plus the "Loans" i.e. those made after the "Commencement Date". The "Facility Limit" was $246,000. 53The "Lenders" agreed to make the "Facility" available from the Effective Date (cl 3.1(a)). The termination date was 60 days after the "Commencement Date", and the interest rate was 17%. 54The Judge held [49], [50] that there was no evidence that the initial loan of $216,746.15 was paid on 8 May (the day before the "Commencement Date") or at all, or that the company discharged the debt to DNB, or that the defendants' loan accounts increased. He said [50]: "Nor was there any evidence of ... the payment of any money by Mr Brady, Mr Frasca or Mr Paix under the loan facility agreement. That supports the plain meaning of the definition of initial loan as moneys already advanced to Timentel when the loan facility agreement was executed." 55The Judge added [52]: "... An analysis of invoices met by loan funds was attached to submissions on behalf of [the defendants]. There was no mention of the DNB invoice of 6 May 2005. The analysis served to highlight the fact that funds lent preceded the execution of the loan facility agreement as all the identified invoices preceded 9 May 2005." 56The analysis, prepared for the litigation (black 498-9) showed amounts of $86,507.69 for the Ehsmans and $130,238.46 for various DNB invoices covered by items 27.2-27.5 in the analysis. 57The amount of $78,083.70 for validation of the European Block patent was not invoiced until 4 June 2005 (3/996) but the amount of CHF 60,890 was shown in the invoice from the Swiss patent attorneys (2/859) attached to Mr Brady's facsimiles to the other directors, including Mrs Ehsman, of 20 April 2005 (2/854, 858). It is also referred to in the minutes of 29 April and 9 May. 58Mr Brady's facsimile of 20 April stated that the funds to validate the European Block patent had to be in place by 6 May (2/854). That is the date of the ambiguous DNB letter with its "recordation of payment". 59The minutes of 9 May, a Monday, refer in places to a future loan, but record at the end "that [Mr Brady] Mr Frasca and Mr Paix had already paid the required funds urgently last week to achieve registration of this Patent." Mr Paix gave direct evidence, by affidavit, of his contribution of $60,000 to the loan funds (1/274). 60The ambiguous letter of 6 May (a Friday) had been received the previous week, but the certificate of final validation of the European Block Patent reached Mr Brady before the meeting on Monday 9 May. This would indicate that the funds had been organised and sent to Switzerland before Friday 6 May. The loan facility defined the "Effective Date" as 2 May, the Monday of that "last week", and the funds were probably advanced that day. This would allow time for transmission to the Swiss patent attorneys, payment to the European Patent Office, receipt of the certificate by the patent attorneys, and its dispatch to Australia in time for the board meeting on 9 May. 61The receipt of the certificate is compelling circumstantial evidence that the amount required to validate the European Block patent was paid by the defendants before 6 May. 62Mrs Ehsman annexed to her affidavit of 9 December 2005 (1/72) a copy of the minutes of a meeting of the directors of DNB held in Manila at 8 a.m. on 18 August 2005 (1/157). Mr Brady was not present. The minutes record the following: "C The Chairman noted that DNB Global Corporation had for a number of years, acted as agent for Timentel Pty Ltd, procuring services and Patents in Australia, USA, France, European Block, with application in progress to full Patent Status in Japan and moved that this agency service be continued subject to Timentel paying DNB Global invoices raised for and in connection with such service provision, in a timely manner ... Resolution carried with all votes affirmative. D The Chairman ... moved that Board confirm, by provision of a copy of this Board Minute to the Timentel Company Attorney, ... that: (i) That amounts totalling AUD $227,252.78 was received in May 2005, directly for and on behalf of Timentel, in payment of a number of DNB Global issued and outstanding invoices to the said Timentel for procurement of a number of important services on Timentel's behalf. (ii) That DNB Global Corporation is not owned and controlled by Director Brady, who is a shareholder in the Company and only 1 of 5 Directors of the Company ... Resolution carried unanimously ... E ... the Chairman moved that it be formally recorded that amounts for all invoices previously issued to Timentel Pty Ltd by DNB Global Corporation, for services rendered under the agency agreement between the two entities, as assigned by Director Brady, are paid, up to and including 10 May 2005 ... Resolution carried unanimously ... ". A copy was sent to Mrs Ehsman's solicitor the same day (3/1100). 63The minutes, tendered in Mrs Ehsman's case, are evidence that $216,746.15 was paid to DNB in May 2005, and that the letter of 6 May was a receipt. 64Mr Brady and Mr Frasca should have given direct evidence of their loans and the payments to DNB. Given the resulting confusion it is not altogether surprising that the Judge made the findings he did. 65With the benefit of much fuller argument, and time for consideration of the record, it has become clear that payment was made and the DNB document of 6 May was a receipt. 66We conclude that $216,746.15 described in the loan facility as the initial loan was paid on or before 6 May, probably on 2 May, the "Effective Date" as defined. The charge covered a debt created in anticipation of its execution within a few days. 67There was further evidence in the minutes of 11 July, when Mrs Ehsman was not present (3/1001-2), that loans had been made under the loan facility totalling $247,304.58 as there particularised, including the initial $216,746.15. 68The analysis of the monies paid under the loan facility [55] above included invoices from the company's solicitors, accountants, and others for a total of $30,559.14 making up the $247,305.29 the defendants claimed they lent under the facility. The Judge made no findings about this but there was evidence that amounts were lent after 9 May. 69The payment of $16,000 to Sparke Helmore was evidenced by the firm's statements as at 30 April, 31 May, and 31 August 2005 (2/878, 879; 3/1143). Payment of the stamp duty on the charge was evidenced by a receipt from Sparke Helmore dated 9 May (2/94) and was referred to in that day's minutes (2/885). There was also a receipt from ASIC for payment of the fee for registration of the charge (3/988). 70There was evidence, in a handwritten notation, that the account from the Swiss valuers dated 10 May 2005 for CHF 6456 had been paid (3/961) and the AUD equivalent was recorded in the DNB invoice of 10 May (3/962) and in the minutes of 11 July (3/1002). The amount due to Micheli & Cie of $2,696.43 (3/960) was paid as indicated in writing on that invoice, confirmed by that firm's letter of 11 December 2006 (3/1252). 71The charge did not cover debts owed to the defendants prior to 2 May 2005, and they received no preference in respect of their past debts. 72This is confirmed (3/916) by the definitions in the charge of Loan Agreement, Secured Money, and Transaction Document. 73The recitals in the loan facility (3/894) and charge (3/916) evidenced an earlier oral agreement between the defendants and the company for a loan of up to $246,000 on the security of a charge over its assets. Since the company did not own any interest in land that agreement was specifically enforceable: Brown Shipley & Co v Kough (1884) 29 Ch D 848, 854 per Chitty J; Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584, 595 per Buckley LJ, and created an equitable charge once the initial loan was made. 74Loans made urgently in contemplation of a security to be granted by the borrower are made under that security when granted, provided there is no undue delay. In Ex parte Fisher (1872) LR 7 Ch App 636, 642 Mellish LJ, delivering the judgment of the Court, said: "We agree that the authorities establish, as a general rule, that where a sum of money is advanced upon the faith of a contract that a bill of sale shall be given, the sum so advanced is to be treated as advanced upon the credit of the bill of sale, and is not to be considered as a past debt." 75This decision and the principle referred to has consistently been followed: Morris v Morris [1895] AC 625, 630-1; In re Jackson & Bassford Ltd [1906] 2 Ch 467, 476-8; In re Colombian Fire-Proofing Co Ltd [1910] 1 Ch 758, 765; affirmed [1910] 2 Ch 120 CA; and In re F&E Stanton Ltd [1929] 1 Ch 180. 76In In re Colombian Fire-Proofing Co Ltd (above) the chairman agreed, on 25 November 1909, to lend 1000 to the company on the security of its property. Loans of 350 were made that day and on 2 December, but the debenture was not executed until 6 December when the balance was lent. Neville J. said at 765: "Here I think the two payments of 350 were made in reliance solely upon the promise to execute the debenture at the next meeting and on account of the 1000 which was to be advanced upon it, for the payments being made in anticipation of the execution of the debenture to meet the exigencies of the company. I think, therefore, that the whole 1000 was advanced at the time of the creation of the security. Time in this connection is not, I think, a matter to be decided by the clock, but in accordance with the substance of the transaction and upon the determination of the question of whether the advance was or was not a present advance. In confirmation of this view I may refer to the judgment of Mellish LJ in Ex parte Fisher ." 77The Court of Appeal agreed "with every word" in this judgment: [1910] 2 Ch 120. 78On 29 April Mr Spode valued the company's assets at CHF 220,000 (2/871). He wrote "the drawing file" was valued, without changes, as was the potential market "as though the project was sold as it is at present". "We had not considered the value of any patents and the tooling that has been ... constructed". 79The "project" would have not had anything like that value if relevant patent protection was not available. It is clear that the author was not fluent in English. 80The company asked for the valuation to be clarified, and Mr Spode replied on 20 May (3/964). He stated that he "is aware of the Patents and all the jurisdictions", and the valuation had referred to the need for improvements. He continued: "We did not note however, the necessity nor the cost of improvements for more creative designs ... to make them more commercially attractive, nor of gaining 'shock resistance' certification ...". He concluded: "These points have no material bearing on the value of the [project] in current state". 81We understand Mr Spode to be saying that the patents did not increase the valuation and the need for further development expenditure did not reduce it. 82The minutes of 9 May, and copies of the loan facility and charge, were sent to the Ehsmans' solicitor the same day (2/887). Mrs Ehsman did not attend the next meeting on 9 June (3/997). On 11 July, the 60 day period under the facility having expired, the defendants demanded repayment of the loan by 25 July (3/999). The minutes of the meeting referred to that demand. Mrs Ehsman did not attend (3/1001). 83Mr Paix and Mrs Ehsman did not attend the meeting on 25 July but both solicitors were present (3/1015). The minutes refer to discussions and the meeting was adjourned to 1 August. On 29 July the company's solicitor sent an e-mail to Mrs Ehsman's solicitor attaching the minutes of 25 July and a detailed offer by the defendants to purchase the Ehsmans' shares. 84The offer stated that if it was not accepted the defendants might offer to purchase the company's assets for $268,000. 85The adjourned meeting on 1 August (3/1028) attended by the company's solicitor included, in the absence of Mrs Ehsman, a teleconference with her solicitor. An offer by the defendants to purchase the company's assets for $268,000 was noted. 86The minutes continued: "(2) To avoid further lost opportunities and continued decline in the value of the Company's assets occasioned by delays in commercialising the hinged electronic watch design, the Board has determined to resolve the apparently irretrievable breakdown in the business relationship between Mr and Mrs Ehsman ... and the other shareholder/directors by disposing of the Company's assets at best obtainable price without further unreasonable delay; and (3) The Board invites Mr and Mrs Ehsman to either produce evidence of the value of the Company's assets or make a written offer to purchase those assets ... (b) That the Board Meeting be further adjourned to noon on Monday 8 August 2005 at which time the Board should be ready to consider and decide on any written offers for the purchase of the Company's assets." 87The company's solicitor wrote to the Ehsmans' solicitor on 2 August enclosing a copy of those minutes (3/1031). On 3 August the Ehsmans' solicitor replied (3/1046-7): "... the problem with the Company, in our view, is that it is over capitalised in that substantial moneys had been allegedly spent on developing the Company. The Company could not be sold presently for a value which would reimburse the shareholders for their loans. In our view no shareholder can be expected to 'walk away' from the investment they had made without having their loan accounts repaid in circumstances where the Company may be able to trade on and make profits. We take it that Messrs Paix, Brady and Frasca are not prepared to lend further money to the Company unless the Ehsmans lend money. We have difficulty in understanding this rationale because any such loans will be repaid in priority to any dividends which would be paid to the shareholders. Has the company explored borrowing funds externally? If so, please let us have details ...". 88On the same day the defendants made a formal offer (3/1049) to purchase the company's assets for $268,000 through a company to be incorporated. 89The Ehsmans' solicitor sent a fax to the company's solicitor on 8 August (3/1052) asserting that Mr Spode's valuation was made on 29 April 2004, did not take account of the contributions made in May to protect the patents, and raising other objections. The Judge found that the valuation was made on 29 April 2005 [41]. 90The meeting on 8 August, which was not attended by Mrs Ehsman, recorded the defendants' answers to the complaints in her solicitor's letter received earlier that day (3/1054). The defendants declared their interest in the proposed sale of the company's assets and resolved that their offer be accepted. 91The minutes and associated documents were sent to the Ehsmans' solicitor on 10 August (3/1059). A copy of the draft assets sale agreement was sent to him on 15 August (3/1072). On 17 August he sent a fax to the company's solicitor (3/1096) objecting to the sale and the Spode valuation. He alleged that the proposed sale was "completely irregular" because a company controlled by the defendants would be selling to themselves. 92On 18 August the company's solicitor wrote to the Ehsmans' solicitor (3/1100) responding to earlier questions and complaints. The letter stated: "3 ... As the writer has previously said to your Mr Doyle, it seems to us the breakdown in the relationship between the Ehsmans and the other shareholders is irretrievable and constitutes a failure of the 'quasi partnership' between them and would justify a winding up of the Company on the 'just and equitable' ground. Relative however to the current value of the Company's assets, the costs of such a winding up would be high and should, in our view, be avoided if possible. This may be achieved by the orderly sale of the Company's assets at a fair price without resort to liquidation which is what the Company is seeking to do. 4 The asset sale currently proposed is being carefully conducted with full transparency and documented to protect the Company's interests. We note further that despite being invited to do so, the Ehsmans appear to have made no attempt to provide either an alternative valuation for the Company's assets or a counteroffer for the purchase of those assets." 93On 26 August the company's solicitor sent the final form of asset sale agreement to the Ehsmans' solicitor (3/1108). On 30 August the Ehsmans' solicitor replied (3/1141) stating that he had seen the Ehsmans and "had obtained instructions on an offer to convey which I will do so as soon as I can." No offer was ever received. 94The defendants' new company Nutectime International Pty Ltd was incorporated on 31 August. Mr Brady was allotted 60 shares, Mr Frasca 20, and Mr Paix 20. They all became directors. 95On 1 September the defendants increased their offer for the company's assets to $277,000 to enable it to pay amounts owed to its solicitors for costs (3/1145). The increased price was $35,000 above Mr Spode's valuation. 96Exchange and completion of the sale agreements occurred on 2 September (3/1174). The Judge found [68] that no moneys were actually paid at settlement but this is not the full story. Mr Frasca attended with a bank cheque for $52,187.55 in his favour as his share of the purchase price. Mr Brady attended with a bank cheque for $208,750.08 in his favour as his and Mr Paix's share of the purchase price. Mr Frasca and Mr Brady left with the same cheques. 97The Judge inferred [68] that the cheques were used in a round robin to discharge part of the debts due to the defendants from the company. The settlement sheet (3/1144) makes it clear that the two cheques for $260,937.63 were intended to repay principal and interest due to the defendants under the loan facility. A further cheque obtained by Mr Brady for $16,062.37 in favour of the company's solicitors was delivered on settlement for payment of debts due to external creditors (1/297, 3/1134-4) leaving a surplus of $416.35 in the solicitors' trust account (3/1188). 98The Ehsmans' solicitor was advised the same day that the sale had been completed (3/1174) and on 7 September that ASIC Form 312 for discharge of a company charge had been handed over on settlement (3/1180). 99On 8 September the company's solicitor wrote to the Ehsmans' solicitor and reported on the settlement (3/1185): "(1) In relation to the disbursement of the purchase monies paid by the Purchaser upon completion of the Company's sale of assets, we note that in order to pass clear title in the relevant assets to the purchaser it was ... necessary to repay the Company's secured borrowings in order to obtain a discharge of the fixed and floating registered [charge] over the relevant assets. (2) At settlement ... we, as the vendor's solicitors, provided to the purchaser's solicitors a 'direction as to payment' of the purchase moneys and separate bank cheques were delivered by the purchaser's solicitors in accordance with that direction to repay the company's secured borrowings and our fees. A small surplus remains in our trust account pending further instructions." 100The Judge found [69] that the effect of the sale was to prefer the position of the defendants to that of the Ehsmans because part of the defendants' loan accounts were "supposedly paid out". 101He continued [70]: "Even if I be wrong in this analysis and Mr Brady, Mr Frasca and Mr Paix lent moneys totalling $216,746.15 to Timentel to enable it to pay out the DNB invoice of 6 May 2005, and even if I be wrong and Nutectime paid the purchase price of $277,000 to Timentel, the transactions remained discriminatory against Mr and Mrs Ehsman. The use of those funds to pay off the secured debts of Mr Brady, Mr Frasca and Mr Paix left Timentel as an empty shell with no capacity to pay out any portion of the shareholder loans of Mr and Mrs Ehsman." 102We concluded [66], [71] above, on a detailed review of the evidence, that the defendants made fresh advances of $247,305.29 and obtained no preference. 103The company sold its assets for $277,000. The discharge of the secured loan did not confer any preference on the defendants and did not discriminate against the Ehsmans. Moreover, contrary to the Judge's finding [70], if the company's assets were not worth more than the purchase price the sale did not discriminate against the Ehsmans. 104The Judge found [57] that the company's failure to repay the secured loan enabled the defendants "to exercise their charge in preference to the discharge of Mr and Mrs Ehsmans' loans and in preference to the discharge of the debts of any other creditors". The defendants did not "exercise their charge" because s 267 of the Act prevented its enforcement for 6 months. They exercised their powers as directors. 105The Judge said [41] that the valuer did not "consider" the value of any patents and the tooling. He said later [79] that he did not have to decide whether the price payable under the asset sale agreement was at market value because Mr and Mrs Ehsman were discriminated against. He added [80] that since the valuation "specifically excluded the patents" it was doubtful that it represented market value. 106He also said [80] that the increase in the price to $277,000 "was to pay out portion of the shareholder loan accounts other than those of Mr and Mrs Ehsman". With respect it was not. The increase was to pay out the remaining external creditors (3/1143). 107As we have already held, [78]-[81] above, Mr Spode did not ignore the company's patents. 108There was no other contemporary evidence of value, but later events may be relevant in determining value at an earlier time: Willis v The Commonwealth [1946] HCA 22, 73 CLR 105, 116. The principle has been applied where the market price of coal rose after the valuation date: Bwllfa & Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Ltd [1903] AC 426. In McCathie v FCT [1944] HCA 9, 69 CLR 1, 16-17 Williams J held that in valuing shares evidence was admissible of later events which clarified the company's prospects at the relevant date. 109In Re Hyams (1970) 19 FLR 232 Gibbs J had to determine whether the bankrupt was insolvent in August 1962 when he made a disposition of property in favour of his wife. One of the issues concerned the value of his shares in a proprietary company. Objection was taken to the admissibility of the company's accounts for the year ended 30 June 1962 which did not become available until December that year, and the results of its liquidation which commenced on 1 April 1963. 110Gibbs J said at pp 243-4: "... in determining the value of those shares at the material date it is clearly relevant to consider the result of the company's operations for the year ended 30 June 1962, as shown by the accounts, whether or not they were known at that date. Moreover the results of the liquidation, although they occurred subsequently, are also relevant to this issue. Those results throw light on the value of the shares in the company, for in determining the value of the shares it is necessary to consider the prospects of the company, and the Court will not speculate as to what the fortunes of the company might have been when the facts are actually known: see such cases as McCathie v FCT and Willis v The Commonwealth." 111Events after 2 September 2005 are therefore relevant in determining whether the company's assets were worth more than the price paid by Nutectime. The company's financial statements for the year ended 30 June 2005 (blue 3/1213) signed on 27 March 2006 showed shareholders' loan accounts of $2,145,145.00. This represented loan capital invested by the shareholders in the development of the first and second inventions and the cost of patent protection. 112Mr Brady gave affidavit evidence of the technical situation of the project at the time of the sale (blue 1/287). He said: "5. At the time of the purchase of those rights the watch's development had not reached a stage where it could be commercialised. The watch had not reached a stage where it was shock resistant and water resistant. Those resistances are required before a warranty can be provided for the watch. 6. The biggest problem with the watch was that the prototype would work as a bench model (that is, if nobody was wearing it or moved it) but would stop moving when it was moved or worn. 7. After the purchase by Nutectime of those rights, through instruction of Nutectime's board of directors, I caused DNB ... to instruct engineers in [Switzerland] to attempt significant works to bring the watch technology to commercialisation. In particular, the instructions were to develop the watch technology to be shock resistant and water resistant." 113The defendants, through Nutectime, invested substantial further moneys in the project. The relevant invoices from DNB and other parties cover the period from 9 February 2006 to 10 March 2009 (blue 1/287; 3/1253-1258, 1268-1348). 114On 12 December 2007 Mr Spode gave Mr Brady a pessimistic assessment of the project (3/1259): "You requested we closely look at the improvement tried for improving the old technology of the [watch]. We are sorry to say the trying to achieve shock resistance, longer life and water resistance is not now of success. The engineers who try to perfect this are at failure and must try a different plan and technology but this is very difficult for them achieve. To go on to get this technology better, must bring in collaboration with other experts and try different paths but the expense could be another CHF 600,000.00 to CHF 750,000.00. We advise to you that persist with this mechanics and old technology is risky way. Sorry for such disappoint news" (sic). 115In May 2005 the defendants, having already invested, with the Ehsmans, over $2 million in this project, invested a further $246,000 on a secured loan. After the sale they invested further moneys. A little over two years later they had nothing to show for their further investment. 116The parties were aware in May and September 2005 that the watch was not yet marketable but later events revealed that the technical problems were greater than anyone realised at that time. 117We find that at the date of sale the company's assets were not worth more than the purchase price paid by the defendants. We also find, contrary to the Judge [82], that the sale agreements were not, for valuation reasons, oppressive to, unfairly prejudicial to, and unfairly discriminatory against Mrs Ehsman. 118Both sides applied for leave to adduce further evidence about the administration of the winding up. The evidence related to events since the judgment below and there was no need to establish special grounds. The appellants' evidence was said to be relevant to the value of the company's assets in September 2005 and to any orders the Court might make for restitution. 119In the result neither application was pressed and the appellants' motion should be dismissed with no order as to costs. 120Counsel for the respondents submitted (T 16/6/11 pp5-7) that the defendants "set up a situation" through the short-term secured loan and charge to enable them to acquire the assets for themselves. 121The steps taken by the defendants between May and September 2005 involved a de facto liquidation of the company in which its external creditors were paid in full. The process was explained by the company's solicitor in his letter of 18 August 2005 to the Ehsmans' solicitor above [92]. It had been foreshadowed at the board meeting on 29 November 2004 [29] above. 122The Judge found [96] that the defendants exercised their powers to obtain a private advantage, and acted for their benefit and not for the benefit of the company. The latter was left as an empty shell and the defendants gained the advantage of the discharge of their secured debts. 123In view of his other findings and orders, the Judge held [100] that it was not necessary to make a declaration that Nutectime held its assets in trust for the company and it was not appropriate [102] to order the defendants to pay equitable compensation. 124Mrs Ehsman was kept fully informed at each stage. In April 2005 she could have paid her arrears and contributed her share of the fresh funds needed to secure the European Block Patent but elected not to do so. She knew at the time that there was likely to be an informal liquidation later that year. 125In August 2005 she could have made a counter offer for the assets and either taken over the project, or driven up the price. She could also have offered to make appropriate contributions to the cost of developing the watch. She knew when she decided to do nothing that the defendants would finish up buying the assets at the price they nominated. 126The defendants had a scheme or plan, but it was to cope with the situation created by the refusal of the Ehsmans to contribute their share of development costs. The defendants' evidence on which counsel relied was simply a recognition that something had to be done and the obvious consequences of the sale they proposed. G iven the Ehsmans' refusal to contribute their share of the development costs, and the disclosures made, the sale was not oppressive or unfairly prejudicial to her. 127It is still necessary to consider whether the defendants acted in breach of their fiduciary duty and their duty to exercise their powers bona fide in the interest of the company as a whole. It will also be necessary to consider whether the 60 day term of the loan and the interest rate of 17% fall within s 232 of the Act. 128The defendants, as directors, were interested in the secured loan and the sale agreements. Mrs Ehsman had been notified of the relevant meetings and of the business that would be considered. 129Formal notice of the directors' interests was not necessary because (s 191(2)(b)) all directors were aware of the nature and extent of their interests and their relation to the affairs of the company. Section 194 permitted the defendants to vote on the relevant resolutions, para (e) enabled them to retain their benefits, and para (f) prevented the company avoiding the transactions merely because of their interests. 130Section 193 provides that s 191 has effect in addition to, and not in derogation of, the general law and the company's constitution. The company's constitution was not in evidence and there was no proof of any restriction on the right of interested directors to vote. 131The formal validity of the acts of the directors is not the end of the enquiry. 132A contract entered into as a result of a breach of fiduciary duty is voidable not void: Finn "Fiduciary Obligations" 1977 pp 223, 224. One of the remedies for breach of fiduciary duty is rescission but this is only available if the parties can be restored to their former position. Rescission of the loan facility and charge was not sought and restitution would require repayment of the moneys lent. This was not offered and there was no evidence that it was available. 133Equitable compensation on the principles in Nocton v Ashburton [1914] AC 932 is another available remedy but loss has to be proved. The measure of compensation is prima facie the loss suffered by the company as a result of entry into the loan facility and charge and/or the sale agreements. There is no evidence that loan funds were available from any other source on more favourable terms or a lower interest rate. 134The term of the loan of 60 days was very short and the company had no chance of paying off the secured debt within that period. However in April a short term loan from an external source was being considered [39] above. The Court may have had power under the general provisions of s 233(1) to extend the duration of the loan and vary the provision for compound interest at monthly rests. 135In the result these matters were not material. The defendants did not sell the company's assets as mortgagees, but as directors, which they could do at any time. There was no order for issues of quantum to be decided separately from issues of liability. There was also no evidence that on 2 September 2005 the company's assets were worth more than the sale price. In these circumstances there is no proper basis for an order requiring the defendants to pay equitable compensation. 136It seems that action in breach of directors' duties to exercise their powers bona fide in the interests of the company as a whole invalidates that action and restitution is not a condition of the right to relief although it may be a consequence: cf Richard Brady Franks Ltd v Price [1937] HCA 42, 58 CLR 112. 137In that case the appellant had been in financial difficulties and its prospects were not good. Some of its directors and others made unsecured loans on short call or guaranteed its overdraft. The company then issued debentures to those creditors. The trial Judge found that the directors acted in the interests of the company and the general body of shareholders and not in the interests of the proposed debenture holders. Latham CJ said at p 136: "The company was in a difficult position. It was necessary to take some action to prevent creditors descending upon it with a not improbable result that the company would have been forced into liquidation. It is not for a court to determine whether or not the action of the directors was wise. The question is whether it is shown that they did not honestly act for what they regarded as the benefit of the company." 138Dixon J said at p 143: "... if it were established that the debentures were issued in fraud of the company then, except where it appeared that the debenture holder took bona fide, the debenture would be set aside and accounts and appropriate inquiries would be decreed unless it was affirmatively shown that in the events that had happened no useful result could possibly ensue. Those impeaching the transaction must sustain the burden of proving that the directors acted in their own interests and were not in fact exercising their powers in supposed furtherance of any purpose or advantage of the company. In considering such a question it is important to ascertain what are the purposes for which powers are given and to remember that the fiduciary duty of the directors is to the company and the shareholders. It is not enough that they prefer their own interests or those of some other persons to the interests of strangers to the company, for instance, to those of the creditors." 139The company was in a very difficult position at the end of April 2005. It had no cash. DNB was owed $86,507.69, representing the contributions which the Ehsmans had failed to make towards the cost of technical development and patent protection. A substantial portion of this amount had been outstanding since August 2004. The company had some patent protection for the second invention but without substantial further expenditure within days, it would not have protection in most European countries. 140The company's accounts for the year ended 30 June 2005 recorded shareholders' loan accounts of $2,144,657.00 (3/1215). The watch was not yet marketable and the shareholders could not hope to recover their investment unless the company secured and maintained patent protection in major European markets. 141The defendants and DNB had been carrying the Ehsmans for a considerable time and they were refusing to contribute their share of the moneys required. As at 30 June 2005 they had contributed a little over 16% of the loan capital invested in the project, considerably less than the amount required by their shareholding. 142In these circumstances the defendants were entitled to require security for any further advances they made without appropriate contributions from the Ehsmans. The latter were invited to participate in the secured advance of $246,000 but declined. There was full disclosure, no discrimination, and no oppression. Indeed in December 2004 the Ehsmans' solicitor suggested that DNB should lend the company money on a secured basis [31] above. 143Mrs Ehsman alleged that the defendants had refused to provide relevant information about the company's expenditure and the amounts paid by and payable to DNB. This was their justification for refusing to contribute further funds. The Judge found [75] that source invoices from Switzerland had been produced which Mrs Ehsman had initialled, and the company's solicitors had invited her to inspect others but she had not done so. He concluded [76]: "The alleged refusal to provide Mrs Ehsman with source invoices was not a proper basis to refuse to make any further contributions to Timentel." 144What alternatives were open to the defendants? They were not obliged to make further unsecured loans to the company to support Mrs Ehsman's 35% equity. Doing nothing was not an option as they would have lost any chance of recouping their loan accounts of some $1.8 million. 145The Judge found that the defendants could have applied for the winding up of the company [78] "in which event the interests of Mr and Mrs Ehsman would have been treated equally with the interests of the other shareholders." 146If the Judge was referring to the period before the loan facility and charge then, with respect, he was unrealistic. The Board could still function and there was no deadlock. It only became clear on 29 April, a Friday, that Mrs Ehsman would not contribute to the proposed secured loan. By then it was also clear that external borrowings were not available. Time was short because the funds had to be in place by 6 May: [39] above. 147There was very little time to prepare and present applications to wind up the company and obtain the appointment of a provisional liquidator. Even if this could have been achieved the liquidator would not have had any funds. These would have to come from the defendants who could have required security. 148The provisional liquidator may have hesitated before borrowing funds on the security of the company's property to make a risky investment without indemnities or the advice of the Court. Then of course there was the expense. 149In these circumstances the defendants did not act unreasonably in making a secured loan to the company to enable it to pay its overdue debt to DNB and secure further patent protection in Europe. 150The defendants' position and that of the company at the end of April 2005 were analogous to those of the company and its directors in Richard Brady Franks Ltd v Price [130] above. Unless the company obtained further funds the project would collapse and the shareholders' loans, including the Ehsmans' of $348,340 would have been irretrievably lost. 151The defendants kept the project alive for the benefit of all shareholders and loan creditors by injecting fresh funds which, not unreasonably, were advanced on a secured basis. Mrs Ehsman did not establish that in April-May 2005 the defendants acted otherwise than bona fide in the interests of the company as a whole. 152In our judgment therefore the findings that the loan facility and charge were oppressive or unfairly prejudicial to, or unfairly discriminated against Mrs Ehsman [77] must be set aside. The 60 day term was unreasonably short but in the events that happened did not oppress, prejudice or discriminate against Mrs Ehsman because the defendants did not exercise their powers under the charge. 153We have characterised the sale agreement as a de facto liquidation. It was common ground that the relationship between Mrs Ehsman and the defendants had broken down. Mrs Ehsman was not attending board meetings or paying her share of the funds needed for the development and maintenance of the project. 154When the Judge referred [78] to the fact that the defendants had other choices he may have been referring to the situation after the secured loan but before the sale. 155A liquidator appointed at that stage would have been obliged to realise the company's assets. The Ehsmans and the defendants were the only likely buyers. During the extended period from February to September 2005 Mrs Ehsman did not take any effective steps to have the assets valued or make an offer to buy them. 156A liquidator may have obtained another valuation but there is nothing to indicate that it would have been any higher than Mr Spode's. On past performances the defendants would probably have been the only buyers, and there is no reason for thinking that they would have paid the liquidator any more than they paid on 2 September. 157Unless the loan facility and charge could be set aside, the company's assets would have been exhausted in paying the costs of the winding up and the defendants' secured debt. There would have been no surplus for the unsecured loan creditors including the Ehsmans. 158A formal winding up would have produced no tangible benefits for the Ehsmans. This is supported by Mr Spode's pessimistic assessment in December 2007 [114] above, and the lapse of the European patents after the company went into liquidation (T 15/6/11 p 81, T 16/6/11 p 1). No one was prepared to pay the renewal fees. 159The notice of appeal sought the setting aside of the orders below and dismissal of the proceedings. We have held that the loan facility, the charge, and the asset sale agreements were not oppressive or discriminatory and there were no grounds for setting them aside. 160The winding up of Timentel was inevitable unless the parties were prepared for it be struck off by ASIC. A case for a winding up order under s 232 was not established, and there was no application for a winding up under the general provisions of the Act. 161The winding up order was made nearly 2 years ago and was not stayed. The company had few, if any, realisable assets but the position in the winding up is not before the Court. Although the order should not have been made there appears to be no utility in setting it aside, and the rights of the liquidator and possibly others may have intervened. 162The convenient course would be for a consent order to be made without admissions confirming the order for winding up. 163The assets sale agreements should not have been set aside and that order should be reversed. The Court does not know whether the order that Nutectime transfer the assets back to the company was treated as self executing, or whether there was a formal transfer. The orders sought in the notice of appeal did not include an order for a retransfer. In these circumstances the Court should simply set aside the order. Any party seeking a further order can apply by notice of motion within the 14 day period allowed by UCPR Pt 36 r 16(3A). There may be little point since the patents have lapsed and the project has been abandoned. 164The remaining issues arise under the defendants' cross-claim. The only cross claim pressed on appeal was based on what was described as the 1999 agreement between Mr and Mrs Ehsmans and the defendants. The agreement pleaded was oral, evidenced by the minutes of 16 March 1999. These recorded (1/436-7): "3. Michael Ehsman stated that he and Patti were concerned about raising sufficient funds to pay the continuing amounts needed as their contribution to fund development of the watch ... 4. Frank Frasca ... suggested that Michael & Patti seek advice from their accountants and we will consider what contribution we could all make, if any, to help, noting that any assistance so rendered by the rest would be repaid preferentially from any and all revenue generated by the Company. All agreed to consider this ... [and] we should meet on 28 March at the same time and venue to finalise and resolve strategy ... 5. Patti Ehsman said that David N Brady had always paid the amounts upfront so that we kept in good standing. He would then work out what they owed and they paid it to him. Patti proposed, subject to agreement from David, that this method continue as he was completely trustworthy ... David N Brady was asked if he would agree to continue this method. He did so. Frank Frasca stated all shareholder's must guarantee payment of their respective payment amounts as and when bills occurred and that this would be a guarantee as shareholder's of the company and as individuals and asked for agreement on this from all present - agreement was given. Chairman asked if Patti Ehsman was formerly moving this and she said yes. The Chairman then wrote down and read out words as above, whereupon she so moved it. 165The motion, which was seconded by Mr Ehsman, was passed, Mr Brady abstaining. The minutes were signed by Mr and Mrs Ehsman, the defendants, and Mrs Paix. In the normal course minutes are only signed by the Chairman. 166The cross claim did not rely on the meeting on 28 March. The minutes of that meeting, signed only by Mr Brady as Chairman, (1/439) included the following: "1. IT WAS RESOLVED that until further notice all funding requirements be paid by each Shareholder Group, not pro rata to % Shareholding, but at 25% for each Shareholder Group, as a means of assisting Michael & Patricia Ehsman through their tight financial situation. 2. IT WAS RESOLVED that all moneys paid by the respective parties, previously, and, from this moment onwards would be treated as Shareholder Loans and, must be ranked preferentially in front of any distribution of commissions or dividends." 167When counsel for the appellants sought to rely on the minutes of 28 March counsel for the respondents submitted that this was not open on the pleadings. The objection was overruled because the minutes were in evidence, they had been considered by the Judge, and the argument based on them could not have been answered by further evidence at the trial. 168The cross claim alleged that the Ehsmans failed to pay their pro rata contributions as agreed, and that the cross claimants or one or more of them had suffered loss and damage. 169The Judge found [106] that the parties to "the arrangement" of 16 March did not intend to enter into a binding legal agreement. He continued [109]: "The earlier meeting did not lead to a binding agreement on sharing costs. That was to be determined at the later meeting and at that meeting an arrangement was reached different from the pleaded contract." 170The Judge decided that the agreement of 16 March was one in principle only, to be reviewed on 28 March, and that "the arrangement" at the later meeting was different from that pleaded. 171The earlier meeting resolved that "all shareholders must guarantee payment of their respective amounts". This either implied that these would be in proportion to the shareholdings or left them to be defined at the later meeting. 172The cross-claim pleaded (red 39) a promise by the Ehsmans to make pro rata contributions "by reference to their total shareholding". At that time this was 45%. The minutes of 28 March, tendered by the defendants, established that it was then agreed that the Ehsmans would contribute at the rate of 25%. 173The Judge relied on the minutes of 28 March to reject the defendants' claim at the higher rate and then rejected their claim at the lower rate. This was generally, but only partially, within the cross-claim and the pleaded particulars. The difference may be regarded as a variance where only part of the claim was proved. The cross claim should not have failed on the pleading point. 174In our opinion the cross-claim should not have been dismissed for the reasons given by the Judge. An agreement was made between the shareholders, evidenced by the minutes of 16 and 28 March 1999, as a compact binding on the shareholders inter se. The promises by each shareholder, or group of shareholders, were to every other shareholder or group, severally and there is no reason to conclude that they were not intended to be legally binding. Mr Brady had caused DNB to pay the company's accounts and it was to be reimbrused from funds obtained from shareholders [17] above. This was what was meant by Mr Brady paying the amounts up front, as referred to in the minutes of 16 March 1999. The promises were to provide the funds to reimburse DNB, in appropriate proportions. 175Mr Frasca, a defendant and cross claimant, had a falling out with Mr Brady and stopped making common cause with the other defendants. He was served with the notice of appeal and submitted to the orders of the Court save as to costs. 176The agreement made on 16 and 28 March 1999, as found by this Court, continued until the meeting of 20 February 2001 [18] above, when the shareholders agreed unanimously that contributions should again be proportional to the shareholdings. The meeting of 30 June 2002 increased the holdings of Mr Frasca and Mr and Mrs Paix to 15%, and reduced the Ehsmans' and Mr Brady's to 35% [19] above. 177The Ehsmans paid contributions at the rate of 25% after 28 March 1999, and at the rate of 45% after 20 February 2001, and then at the rate of 35% after 30 June 2002 until some date prior to the meeting on 24 August 2004 [26] above. 178The Ehsmans' unpaid contributions accumulated until the end of April 2005 when they reached $86,507.69 [46] above. This represented moneys paid by DNB on behalf of the company which the Ehsmans had promised to reimburse. The cross-claim claimed this amount and a further $56,279.16 for their 35 per cent share of the balance lent under the facility [68] after deducting the $86,507.69. It was submitted that the Ehsmans had promised to indemnify Mr Brady for DNB's payments up front. 179In our judgment Mr Brady was not entitled to enforce the indemnity. He caused DNB to pay the company's accounts, and had not paid them himself. The Ehsmans had promised Mr Brady, and the other shareholders, that contributions would be paid, but DNB was reimbursed on or shortly after 2 May 2005 from the secured advance made by the defendants. Any loss caused by late payment fell on DNB, not Mr Brady or the other defendants; and the loan was repaid upon the sale of the company's assets. The defendants did not suffer any loss as a result of the Ehsmans' breach of contract. 180It was not pleaded or argued that the agreement of March 1999 applied retrospectively to the excess contributions previously made by Mr Brady. In these circumstances the appellants are only entitled to nominal damages. 181Our findings of contract and breach confirm our earlier findings that the defendants' conduct of the company's affairs was not oppressive, unfairly prejudicial to, and did not unfairly discriminate against Mrs Ehsman. The crisis facing the company and the defendants in April 2005 was created by the failure of the Ehsmans, in breach of their contractual obligations, to pay their share of the company's expenses funded by DNB. The defendants were entitled to resolve this crisis by making their secured advance in May 2005 and embarking on an informal winding up. We therefore make the following orders: 1. Appeal allowed with costs. 2. Orders 1 and 2 made in the Equity Division on 30 October 2009 set aside. 3. Order 3 which directed that Timentel Pty Ltd be wound up, and Order 4 that appointed James Alexander Shaw as liquidator set aside unless within 14 days a consent order is filed signed by or on behalf of the appellants, and the second and third respondents, to confirm those orders. 4. Order 6 dismissing the defendants' cross-claim set aside, and in lieu thereof judgment for the cross claimants David Neilan Brady and David Brian Paix for nominal damages. 5. The plaintiff to pay the costs of the defendants David Neilan Brady and David Brian Paix of the proceedings in the Equity Division including the cross-claim. 6. The respondents Patricia Mary Ehsman and Michael Ehsman to have a certificate under the Suitors Fund Act for the costs of the appeal. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 05 September 2011