Supreme Court New South Wales Medium Neutral Citation: In the matter of Catombal Investments Pty Ltd [2012] NSWSC 775 Hearing dates: 25 June 2012 Decision date: 26 June 2012 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: First Defendant be wound up - Second Defendant to pay Plaintiffs' costs Catchwords: CORPORATIONS - Winding up - Just and equitable ground - quasi-partnership where purposes can no longer be achieved and shareholders wish to realise assets COSTS - where one shareholder resiles from agreement to wind up company and unsuccessfully opposes proceedings Legislation Cited: (Cth) Corporations Act 2001, s 461(1)(k) Cases Cited: Re Straw Products Pty Ltd [1942] VLR 222 Re Bleriot Manufacturing Aircraft Company Ltd (1916) 32 TLR 253 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 Re Nestor Pty Ltd (1981) 6 ACLR 114 Category: Principal judgment Parties: Brian John Scott Munro (First Plaintiff) Graham David Scott Munro (Second Plaintiff) Catombal Investments Pty Ltd (First Defendant) Royce Gordon Scott Munro (Second Defendant) Representation: J G Harrowell (First and Second Plaintiffs) S A Wells (Second Defendant) Hunt & Hunt (Plaintiffs) Commins Hendricks (Defendants) File Number(s): 2012/ 122218 Judgment (ex tempore) 1HIS HONOUR: By originating process filed on 18 April 2012, the plaintiffs Brian John Scott Munro and Graham David Scott Munro seek an order for the winding up of the first defendant company Catombal Investments Pty Ltd in which they and their brother the second defendant Royce Gordon Scott Munro are the three equal shareholders. They invoke the just and equitable ground. For convenience and to avoid confusion, and without intending any disrespect, I refer to the Munro Brothers by their first names. Facts 2The Munro family has farmed Catombal near Cumnock in central western New South Wales since 1877. Through various entities they currently own and farm 4407 hectares on which they conduct a sheep, cattle and cropping enterprise. The company is the land owning entity and owns nine properties said to be worth in excess of $10 million, subject to mortgages securing liabilities of about $4.25 million. 3Since 1974 the farm business has been managed by the three brothers, assisted by Brian's sons Hamish and Andrew, both of whom have until recently worked full-time in the business. 4Brian is now 71 and has worked in the business for 54 years; he wishes to retire and pass on his interest to Hamish and Andrew. Although he lived on one of the properties for 35 years, he and his wife now live in Wellington. Hamish worked in the business for twelve years, until recently. He lives with his family on one of the properties. He wishes to continue farming, but has recently resigned from the business due to the failure of succession planning. Andrew worked on the farm for seven years, and also wishes to continue farming. He has also recently resigned from full-time employment in the business, due to the failure of succession planning, though he continues to work for it two days per week. He also lives with his family on one of the properties. Brian now wishes to assist Hamish and Andrew by realising his equity, to allow them to acquire some of the land to run their own separate enterprises. 5Royce is 68 years old, has worked on the properties for 48 years and wishes to continue to do so. He lives on one of the properties. 6Graham is 65, and retired for medical reasons in 2005. He has for many years wished to realise his equity and be released from the company. He lives in Wellington and has three daughters, none of whom have any involvement in the business. 7For over twenty years, the three brothers have discussed and debated arrangements for succession and the future management of the business, without reaching a resolution. In aid of that end they have sought external advice, at considerable cost. On 30 June 2011, a deed was executed providing for Brian to retire and his equity to be utilised for Hamish and Andrew to acquire part of the property for their separate ventures. However, this was subject to Royce reaching a separate agreement with Graham, which did not eventuate. 8In November 2011, Graham's solicitor foreshadowed an application for winding up of the company, if no agreement was reached to pay out Graham. This led to a mediation on 16 December 2011, at which the three brothers and other family members were present. Agreement on the amount payable to Graham still could not be reached, and the parties agreed, as recorded in a note made on the mediation agreement, inter alia, that the company be wound up and that their solicitors agree on a liquidator. Subsequently, the solicitors agreed on the appointment of Christopher Chamberlain of Chamberlains SBR as liquidator, on the basis that a Dubbo-based manager of that firm, Graham Brown, would have the conduct of the liquidation. 9At the end of December 2011, Royce sought to defer the proposed liquidation, and his brothers agreed to this, on terms, in early January 2012. Those terms were not satisfied by Royce, and, on 22 February 2012, the plaintiffs' solicitors foreshadowed that a winding up application would be filed and costs claimed against Royce. A further warning to the same effect was conveyed on 29 February 2012, and again on 6 March 2012. On 26 March, a letter to Royce's solicitors indicated that the institution of proceedings was imminent, and on 28 March a further warning was conveyed of the Plaintiffs' intention to seek costs against Royce. 10A meeting of the directors was convened on 5 April 2012. At that meeting, it remained impossible to achieve a common position. A number of resolutions were then moved and supported by the plaintiffs in relation to each of the companies comprising the Munro family group: first, that the agreement made at the mediation on 16 December 2011 to wind up Catombal Investments, Munro Pastoral and The Munro Family Company be implemented without further delay; secondly, that Munro Pastoral retire as trustee of the Munro Unit Trust and that The Munro Family Company retire as trustee of the Munro Family Trust, and in their place that Christopher Chamberlain be appointed as trustee of each of those trusts; thirdly, that any two directors be authorised to execute on behalf of each company a deed of retirement of trustee and appointment of new trustee and other necessary documents; and, finally, that in the absence of unanimous approval of the first resolution in respect of each of the companies, then an application be filed in the Court seeking orders that each of those companies be wound up by the Court and that Mr Chamberlain be appointed as liquidator. 11The first three resolutions were passed by majority, with Royce voting against them. The fourth resolution was passed by majority, with Royce abstaining. As I have said, the winding up application was filed on 18 April 2012. 12Service of the application on the first defendant company is purportedly proved by an affidavit of Mary Constance Morrisroe of 22 May 2012. She deposes that, "I caused to be served at the registered office of Catombal Investments Pty Ltd a letter enclosing the following documents", referring to the originating process, supporting affidavit and liquidator's consent. She then explains: The letter and documents referred to in paragraph 2 (a) to (c) were sealed in a box, addressed to the defendant at the registered office at Yates Baker McLean of 27 Sale Street, Orange, NSW, 2800 and I organised the collection of the box by a courier to be delivered to the registered office. 13She annexes a copy of the courier booking form. 14That affidavit signally fails to prove good service of the summons and supporting documents on the company. Service is not proved by a person saying that she caused service to be effected by handing the documents to a courier. That would not even be sufficient proof where postal service was permitted, in which case it would be necessary for the deponent to prove that he or she had placed the relevant letter, in an envelope addressed to the person to be served, in a post box with the appropriate stamp affixed to it. However, no point has been taken about service on the company. 15More significantly, there are three persons interested in the company - the three shareholders - and there is no doubt that all three shareholders are on notice of the application, two of them being the plaintiffs and the third being the second defendant, who is represented. Those three are also the three directors, all of whom are on notice of the application. There can be no doubt in that context that there has been appropriate notice of the present proceedings to all persons with a relevant interest in the company. 16Service of the proceedings on the second defendant on 23 April 2012 is proved by the affidavit of Ronald George Keith Matthews sworn 26 April 2012. 17Notice of the winding up application in form 519 was lodged with the Australian Securities and Investment Commission on 19 April 2012, as proved by the affidavit of Lorraine Jamhour sworn 22 May 2012. Publication of an advertisement of the application in The Australian on 14 May 2012 is proved by the affidavit of Lorraine Jamhour, also sworn 22 May 2012. 18Royce Munro filed a notice of appearance on 26 May 2012, which set out no grounds of opposition. He filed a notice of change of solicitor on 25 June 2012, and when the matter came before the Court yesterday, on 25 June, sought a further adjournment. For reasons then given, that application was declined. Just and equitable ground for winding up 19The Court may order that a company be wound up if it is of the opinion that it is just and equitable to do so [(Cth) Corporations Act 2001, s 461(1)(k)]. Although the concept "just and equitable" is a broad one incapable of exhaustive definition, conventionally the decided cases are recognised as falling into a number of classes, including in particular: (1) failure of the substratum of the company; (2) deadlock or disagreement in the management of the company's affairs; (3) fraud in the formation of the company; (4) misconduct by the directors of the company; (5) constitutional and administrative vacuum in the management of the company; and, (6) lack of confidence, fairness and public interest and commercial morality. 20However, the Court is not restricted in exercising its discretion to particular factual categories [Re Straw Products Pty Ltd [1942] VLR 222, 223]. And, the question whether it is just and equitable is a question of fact, in respect of which each case must depend on its own circumstances [Re Bleriot Manufacturing Aircraft Company Ltd (1916) 32 TLR 253, 255]. The words "just and equitable" are general words, which must remain general, and the applicant is entitled to rely on any circumstances of justice and equity that affect him or her in his or her relations with the company or shareholdings [Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 ("Ebrahimi"), 374], at least so long as those circumstances have a direct and immediate relationship to, or bearing upon, the management or administration of the affairs of the subject company, or the conduct of its business [Re Nestor Pty Ltd (1981) 6 ACLR 114, 119 (Powell J)]. 21This case does not fall neatly within any of the conventional categories. It was rightly submitted by Mr Wells, for Royce, that there is not a deadlock in management: the plaintiffs, if they wish, could exercise control of the company and make decisions by majority. Nor is there a total failure of the substratum, as the company could continue to hold the properties that it currently holds for use by the farm businesses: it is not impossible for the company to achieve in that way the objects for which it was formed. 22However, the rationale behind many of the grounds referred to in the decided cases, particularly in the context of corporate quasi-partnerships, is that a shareholder who has invested in a company on the basis that it will undertake a certain activity is entitled to recover his or her contribution if the activity becomes impossible. Similarly, a shareholder who has invested in a company on the basis of mutual understandings and arrangements as to how the affairs of the company will be managed is entitled to recover his or her contribution if these understandings and arrangements are falsified - for example, by exclusion of a shareholder who was intended originally to be involved in management from management [Ebrahimi]. On the other hand, it is not enough merely that the majority has lost trust and confidence in the minority, or vice versa. Consideration 23This company is in the nature of a quasi-partnership; a family company formed to hold the rural properties on which, through various entities, the family was to conduct their farming business. Its shareholding reflects the shared and equal role and responsibility of the three brothers. For years all three were working directors and shareholders engaged in the family farming business. However, now Royce is the only family member, and the only shareholder, who wishes to continue the business in its current form. Graham has retired, and Brian wishes to retire, and both wish to realise their equity. Thus, the majority of shareholders wish to be no longer involved in the business under current arrangements. 24Although the substratum may not have failed in the strict sense, the concept of the company holding land for use by the family business in which the three brothers work together is no longer attainable. Although none of the three have been excluded from management, the idea of a tripartite management, and benefit, structure is no longer feasible. Although the plaintiffs could form a majority and exercise control, they no longer wish to be engaged in the company, but instead desire to realize their equity, and to be released from the company. However, in the context of a proprietary company with only three shareholders, they cannot carry a special resolution to that effect. 25The purpose of the company as a vehicle for holding land for the joint use, enjoyment and exploitation by the brothers is at an end. In the context of a proprietary company, the plaintiffs cannot practically realise their equity by selling their shares on the open market, and attempts to achieve a sale internally have failed. In those circumstances, it is not just or equitable that their substantial assets should remain unavailable to them and that they remain locked into a company where the majority no longer wishes to carry on the business under these arrangements, but to go their separate ways. 26That conclusion is fortified by the circumstance that, all other options having failed, the shareholders agreed in December 2011 that the company should be wound up, and that course has been deferred while alternatives were pursued, but nothing has come of them. It is further fortified by the circumstance that the majority resolved that winding up proceedings be instituted, and that Royce merely abstained from that resolution, and that even since the proceedings were instituted, Royce has twice indicated that he consents to the company being wound up, although very belatedly he has resiled from that position. 27Accordingly, in my judgment the ground is established: it is just and equitable the company be wound up. 28Insofar as the court has a discretion, I am unpersuaded that an order should be declined to permit alternative arrangements to be explored. There has been ample opportunity already for such arrangements to be explored; in a sense, 20 years, and at least 6 months since the December mediation, and there is no evidence to suggest that there are any real prospects of its being achieved in the short term, if ever. 29The plaintiffs have tendered the consent of Mr Chamberlain to act as liquidator. The second defendant has tendered a consent of another registered liquidator, Andrew Leslie Smith. Absent reason to do otherwise, the practice of the court is to appoint the plaintiff's nominee. The only objection advanced to Mr Chamberlain is that he is also the trustee of the Munro Unit Trust and the Munro Family Trust, appointed pursuant to the recent resolutions of the directors. It is usually desirable that where related entities are to be the subject of administration, there be a common administrator. For that reason, in liquidations of corporate groups, typically the same liquidator or liquidators are appointed to each company in the group. This facilitates rather than obstructs the administration. I cannot see that this case is any different. Moreover, Mr Chamberlain was agreed by the solicitors for the parties pursuant to the mediated agreement. In those circumstances, the fact that he will also be the trustee of Munro Unit Trust and the Munro Family Trust does not seem to me to be a sufficient, if any, objection to his appointment as liquidator. Orders 30Accordingly, I order that the first defendant be wound up and I appoint Christopher Chamberlain of Chamberlains SBR as liquidator. 31The normal order would be that the plaintiffs' costs be paid out of the assets of the company. However, that would diminish the pool available for distribution among contributories generally. It seems to me that these proceedings were necessitated by Royce resiling from, or failing to implement, the December agreement, and/or then, following the 5 April meeting, not consenting at that point to the winding up, or, even after the proceedings were instituted, withdrawing his apparent consent and opposing the relief sought. The necessity for the proceedings, and the costs incurred, would have been avoided by either a members or creditors voluntary winding up. In those circumstances, I think it follows that the second defendant ought to pay the costs of the proceedings. 32My order is that the second defendant pay the plaintiff's costs. ********** Amendments 03 August 2012 - corrected paragraph numbering Amended paragraphs: 20 - 32 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: 03 August 2012