Supreme Court New South Wales Medium Neutral Citation: In the matter of HCAFE Chatswood Pty Ltd [2017] NSWSC 1828 Hearing dates: 5 December 2017 Decision date: 05 December 2017 Jurisdiction: Equity - Corporations List Before: Black J Decision: The Court appoints a provisional liquidator to HCafe Chatswood Pty Ltd. Catchwords: CORPORATIONS — Winding up — Liquidators — Appointment of provisional liquidator – where substantial shareholders of closely held company excluded from management – where any assets of company require preservation. Legislation Cited: - Corporations Act 2001 (Cth), ss 232–233, 461, 472(2) Cases Cited: - Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) [2013] FCA 234 (2013) 93 ACSR 189 - Australian Securities Commission v Solomon (1996) 19 ACSR 73 - Earth Loop Pty Ltd v AIAN Investments Pty Ltd [2008] NSWSC 1042 - Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535; (2003) 47 ACSR 197 - Re New Cap Reinsurance Corporation Holdings Ltd [1999] NSWSC 536; (1999) 32 ACSR 234 - Re Therma Truck Pty Ltd [2016] NSWSC 266 - Riviana (Aust) Pty Ltd v Laospac Trading Pty Ltd (1986) 10 ACLR 865 Category: Procedural and other rulings Parties: Jianlin Weng (First Plaintiff) Youhua Li (Second Plaintiff) Fei Sun (First Defendant) Kee Mew Family Pty Ltd (Second Defendant) HCafe Chatswood Pty Ltd (Third Defendant) Representation: Counsel: B F Katekar/K Petch (Plaintiffs/Applicants) A Katsoulas (Defendants/Respondents) Solicitors: Juris Cor Legal (Plaintiffs/Applicants) Kekatos Lawyers (Defendants/Respondents) File Number(s): 2016/385934 Judgment – ex tempore (revised 7 december 2017) 1. By Interlocutory Process dated 4 December 2017 the Plaintiffs, Ms Weng and Ms Li, seek an order for the appointment of a provisional liquidator to the Third Respondent, HCafe Chatswood Pty Ltd ("Company"). Although a further order was sought by way of restraint, I do not understand that to be pressed, if the application for a provisional liquidator is successful such that the Company's assets (if any remain) are placed under independent control. Background 1. By way of background, by Originating Process filed on 23 December 2016, the Plaintiffs sought orders in respect of a claim for oppression under ss 232 and 233 of the Corporations Act 2001 (Cth), including orders for the transfer of shares in the Company by the Defendants to the Plaintiffs or, alternatively, an order for the winding up of the company under ss 233 or 461 of the Corporations Act, including on the just and equitable ground. 2. At the same time as the Originating Process was filed, Slattery J made an order, directed to a then suggestion of a sale of the Company that: "The whole of the net proceeds of any sale of the business of the [Company], less any applicable taxes, charges and costs of sale including legal costs, are to be paid immediately upon receipt into a jointly controlled bank account in the names of [the respective parties' solicitors] and may not be withdrawn without the written authority of both solicitors or a further order of the Court." 1. That order was amended on 24 July 2017, to substitute the name of the First Defendant's current solicitor for the solicitors previously acting for her, in respect of the solicitors who would control the joint bank account, but otherwise left in place. 2. The Plaintiffs have read several affidavits to establish the basis of the oppression and winding up applications, including affidavits of Mr Wang dated 21 December 2016, Ms Weng dated 22 December 2016, Mr Yu dated 26 May 2017 and Ms Li affirmed 1 June 2017. Those affidavits indicate what appear to be two substantive bases for the oppression claim and the claim for a winding up on a just and equitable ground. The first basis of those claims is that shares in the Company had initially been issued on a basis that, the Plaintiffs contend, was inconsistent with the agreement between the relevant shareholders, and was also disproportionate in its treatment of the Plaintiffs on the one hand and the First Defendant, Ms Sun, on the other, where the shares issued to Ms Sun were issued at a substantially lower issue price than the shares issued to the Plaintiffs. Ms Sun contends, in response, that she had not agreed to an arrangement that shares would be issued to her at the same issue price as to the Plaintiffs, or that she would contribute the amount which had originally been proposed to capitalise the Company to an amount of $600,000, and she considered that there was a proper basis to issue the shares to her for a lesser amount so that the Company was capitalised in a lesser amount. Whether that is the case, or not, is a matter for a final hearing. 3. The second basis for the Plaintiffs' claims is that the parties' arrangement was originally in the nature of a quasi-partnership, the relationship between the parties has broken down — as is plainly the case — and the Plaintiffs have in practice been excluded from any involvement in the Company's affairs. If there was previously any doubt about that proposition, there may be little doubt about it now, where the Company's business has been sold, and the Plaintiffs who are substantial shareholders in the Company have become aware of that sale only because they observed, as passers-by, that the Company's premises were closed and they and their solicitors subsequently made enquiries which have disclosed the fact of the sale. That, plainly, is not consistent with any significant remaining involvement of the Plaintiffs as significant shareholders in decision-making in respect of the Company's affairs. 4. The Plaintiffs also relied on evidence which indicated the circumstances in which they became aware of the closure of the Company's business, prompting the further inquiries which have now disclosed the fact of its sale. It is not necessary to address that evidence, where it is common ground that the business has in fact been sold. 5. The Defendants in turn rely on the affidavit of Ms Sun sworn 16 August 2017. Mr Katsoulas, who appears for the Defendants or at least Ms Sun, did not need to take me through the detail of the affidavit, since he accepted that Mr Katekar, who appears with Ms Petch for the Plaintiffs, had fairly summarised Ms Sun's position, in substantially the terms to which I referred above. The Defendants also rely on the affidavit of their solicitor, Mr Kekatos, dated 5 December 2017, which refers to the circumstances of the sale of the Company's business. It appears that the Company entered into a contract for sale of the business on 22 September 2017 for a sale price of $70,000. Mr Kekatos did not have the carriage of the sale process, but was aware of the manner in which the settlement funds would be expended from at least 18 October 2017 when he was advised of that matter by the solicitors acting for the Company, or Ms Sun, on the sale process. Those settlement funds were expended by payment of the legal expenses of the solicitors of $1,600, and in respect of an amount said to be due to the lessor of the premises for outstanding rent in the amount of $59,021.79. An amount of $14,000 from the sale proceeds, payable by way of deposit, appears to have been retained by the selling agent as its commission. 6. My attention was drawn to the lease of the premises, which suggests that an assignment of that lease to the purchaser of the business could not take place without the consent of the lessor, and that, before the assignment took place, the Company was required to ensure that all monies payable by it to the lessor under the lease were paid to the date of assignment. I therefore proceed on the basis that, as Mr Katekar accepts, it may practically have been necessary for the Company to pay the rent, in order to bring about a sale of the premises, by securing the lessor's consent to the assignment. 7. Nonetheless, the Court had made orders, initially on 22 December 2016, as varied on 24 July 2017, requiring that the whole of the net proceeds of any sale of the business of the Company, less applicable tax, charges and "costs of sale including legal costs" were to be paid immediately into a joint controlled bank account. Mr Katekar submits that there has, in those circumstances, been a breach of the undertaking. Mr Katsoulas submits that there has not, because "costs of sale including legal costs" includes the amount payable by the Company to the lessor, by way of past rental. While I recognise that it was likely that the Company needed to pay the lessor the amounts payable by way of rent in order to complete the sale of its business, it does not follow that, on the ordinary meaning of the phrase "costs of sale", the rent payable on the premises, whether it had been paid when due or paid to secure an assignment, was a "cost of sale" as distinct from a cost of the Company's previous occupancy of the premises. It is not necessary to determine that question in respect of this application. 8. It seems to me that that question does not need to be determined because several matters are now plain. It is now plain that Ms Sun does not consider it necessary to consult with other shareholders in respect of significant decisions in respect of the Company's affairs, including the sale of the business which took place without consultation with them. It is also now plain that the undertakings previously given to the Court no longer have any effective operation to protect the Plaintiffs' interests. Those undertakings would have preserved the net proceeds of the sale, and there are now no net proceeds of the sale to be preserved. To the extent that the Company has any remaining assets, which is not disclosed by the evidence, the undertakings will not preserve them for the continued benefit of its shareholders including the Plaintiffs. Applicable legal principles and determination 1. I turn now to the principles applicable to the appointment of a provisional liquidator, as to which there is substantial agreement between the parties. I have the benefit, in that respect, of submissions from both Mr Katekar on behalf of the Plaintiff and Mr Katsoulas on behalf of the Defendants. Mr Katsoulas accepts that those principles are accurately summarised in my decision in Re Therma Truck Pty Ltd [2016] NSWSC 266 at [18]ff, and I will draw upon that summary in what follows. Section 472(2) of the Corporations Act permits the Court to appoint a provisional liquidator after the filing of a winding up application and prior to the making of a winding up order. The jurisdictional requirements for such an appointment are here satisfied, so far as the Plaintiffs are shareholders in the Company and have brought an application for the winding up of the Company. 2. The principles applicable to such an appointment are summarised in Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535; (2003) 47 ACSR 197 at [105]–[106] and Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) [2013] FCA 234 (2013) 93 ACSR 189. In Re New Cap Reinsurance Corporation Holdings Ltd [1999] NSWSC 536; (1999) 32 ACSR 234 at [23], Barrett J (as his Honour then was) observed that: "All that really has to be shown is that there is a bona fide application constituting sufficient ground for the making of the order". An applicant for the appointment of a provisional liquidator must establish, inter alia, that there is a reasonable prospect that a winding up order will be made on the application: Australian Securities Commission v Solomon (1996) 19 ACSR 73 at 80. 1. I am satisfied that there is a reasonable prospect that a winding up order will be made, at least on the basis that there has been a fundamental breakdown in the relationship of the shareholders, in the context of a closely held company. As I noted above, the existence of that breakdown, and the prospects of a winding up order, seem to me to be reinforced by the circumstances in which a sale of the Company's only asset, being the asset which the parties had co-operated in acquiring, has taken place without consultation with the Plaintiffs. Other matters that are relevant in an application for the appointment of a provisional liquidator are whether assets of the Company may be at risk; the degree of urgency, the need established by the applicant and the balance of convenience; and that the appointment of a provisional liquidator may be appropriate in the public interest where there is a need for an independent examination of the state of a company's accounts by someone other than its directors or where the company's affairs have been carried on casually and without due regard to legal requirements. Mr Katsoulas also emphasises that the appointment of a provisional liquidator pending determination of a winding-up application is a drastic intrusion into a company's affairs and will not be undertaken if other measures would be adequate to preserve the status quo and that, as the corollary of that proposition, an applicant must show good reason for intervention prior to the final hearing of a winding up application: Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) above at [13]–[14]. In some circumstances, undertakings may be seen as appropriate to preserve a company's assets until a final hearing: Re Therma Truck Pty Ltd above at [21]. 2. It seems to me that the Plaintiffs have established a need for the appointment of a provisional liquidator, pending the winding up application. The evidence establishes that, first, a significant amount of money was invested in the Company and may have been lost — although that is not clear from the evidence — over the period in which it has traded, since the Company's business has now been sold for a sale price of $70,000 of which a significant amount has been paid to the lessor by way of outstanding rent. There is no suggestion that Ms Sun, who has been in control of the Company for much of that period, is likely to conduct an independent investigation into how those matters have come about, and the circumstances of the sale do not suggest that she is likely to be forthcoming with the Defendants with an explanation as to how that has occurred, given her lack of transparency or consultation in respect of the implementation of the sale. The Company may or may not have other remaining assets, including other funds that might have been available to pay outstanding rental, rather than paying that rental from the sale proceeds. That is not known in the present circumstances, and I do not assume that such other assets exist. 3. The undertakings that previously existed to preserve some part of the Company's assets cannot now do so because the Company's business has been sold, without any payment made into the proposed controlled monies account, and any remaining assets of the Company can only be preserved by the appointment of a provisional liquidator. I can have no confidence that Ms Sun will consult the Plaintiffs before deploying those assets, if they exist, for other purposes, where she has brought about a sale of the Company's business without such consultation. 4. I have had regard to the submissions made by Mr Katsoulas in opposition to the appointment of a provisional liquidator, including the proposition, which I noted above, that there has been no breach of the undertakings given to the Court. As I have noted above I have considered it preferable not to determine that matter, in the context of this application, and my finding that a provisional liquidator should be appointed does not depend on any conclusion that there has been a breach of such undertakings. Mr Katsoulas also submitted that the Plaintiffs have not established that there is a real risk of assets of the Company being disposed of. I do not accept that submission where at least the Company's business has been disposed of, and there is no reason to think that Ms Sun would consult with the Plaintiffs before now disposing of any remaining assets of the Company. There is a significant lack of transparency in what has occurred, both before the sale took place and in the significant period in which the Plaintiffs, by their solicitors, were seeking clarification of what had occurred by correspondence with Ms Sun's solicitors after the event. Mr Katsoulas also submits that these matters do not give rise to any need for the appointment of an independent insolvency practitioner, in respect of the future conduct of the Company's business, where that business has now been sold. I also do not accept that submission, since it seems to me that there is a need now to protect any remaining assets of the Company, in the circumstances of that sale, and where undertakings will no longer do so. 5. Mr Katsoulas also draws attention to the observations of Barrett J in Earth Loop Pty Ltd v AIAN Investments Pty Ltd [2008] NSWSC 1042, where his Honour referred to an observation of Young J in Riviana (Aust) Pty Ltd v Laospac Trading Pty Ltd (1986) 10 ACLR 865 that: "As I understand the practice of this Court over many years, if there is an application made in the presence of the company and suspicious circumstances are disclosed, which may not amount to putting the assets in jeopardy, and the Plaintiff seeks a provisional liquidator and presumably is willing to fund the provisional liquidator to make investigations then ordinarily the Court will appoint a provisional liquidator to make that investigation, though on an ex parte basis it may not have been so bold." 1. That observation does not seem to me to establish the proposition which Mr Katsoulas seeks to draw from it, that the Court will only appoint a provisional liquidator if the plaintiff first undertakes to fund the relevant investigation. First, his Honour seems to me to have been making an observation that a provisional liquidator would ordinarily be appointed in such circumstances, rather than an observation that a provisional liquidator would only be appointed in such circumstances. Second, his Honour appears to have inferred that, where a plaintiff seeks a provisional liquidator, the plaintiff may well fund the provisional liquidator's further investigation. That inference is open here, so far as the Plaintiffs, who have sought the appointment of a provisional liquidator, and who are likely to obtain some benefit from the provisional liquidator's preserving the Company's assets, so far as they continue to exist, may well also be prepared to fund a provisional liquidator to undertake take further investigations of the Company's affairs over the last several months. 2. I note, for completeness, that a consent of liquidator to appointment has been tendered, and the Plaintiff gives the usual undertaking as to damages. For all these reasons, I am satisfied that a provisional liquidator ought be appointed to the Company. Costs and orders 1. Mr Katekar seeks an order that the First and Second Respondents, Ms Sun and Kee Mew Family Pty Ltd, pay the costs of this application. Mr Katsoulas responds that the First and Second Respondents defended the application in their capacity as director and majority shareholder of the company, and that the costs should be costs in the winding up. It is, of course, by no means certain that there will ultimately be a winding up since the appointment of a provisional liquidator is made where a reasonable case has been shown for a winding up, but does not necessitate that that consequence will follow. 2. It seems to me that the First Respondent and Second Respondent could have consented to the appointment of a provisional liquidator, but have not done so, and put the Plaintiffs to proof of the application, on which the Plaintiffs have ultimately succeeded. The ordinary principle that costs follow the event is therefore applicable. That order should be made only against the First and Second Respondents, and not against the Company, which is the subject of the application and not a proponent in it. 3. I make the following orders: On the Plaintiffs' undertaking as to damages, given by their Counsel: 1. Mr Nicarson Natkunarajah, of Roger & Carson Pty Ltd, be appointed as provisional liquidator of the Third Respondent HCAFE Chatswood Pty Ltd ACN 611 326 026. 2. The First and Second Respondents, Ms Fei Sun and Kee Mew Family Pty Ltd, pay the costs of this application, as agreed or as assessed. 3. These orders be entered forthwith. ********** 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: 08 January 2018