Fernlake Pty Ltd, Re [1994] QSC 135 [1995] 1 Qd R 597

IN THE SUPREME COURT OF QUEENSLAND A.P.N. 210 of 1994 Brisbane Before the Hon Mr Justice W C Lee [Re: Fernlake Pty Ltd] IN THE MATTER of the CORPORATIONS LAW AND IN THE MATTER of FERNLAKE PTY LTD (A.C.N. 056 552 884) JUDGMENT - W C LEE J. Delivered:27/05/94 CATCHWORDS: COMPANIES - winding up - special resolution of members in support - position of equitable owner of shares viz. a viz. the company - whether "member" - whether entitled to notice of meetings - whether entitled to vote at meetings - whether entitled to direct registered owner how to vote - effect on resolution - whether regular - whether court will act on resolution in circumstances where both registered shareholders involved in breach of trust PRACTICE - companies - winding up - substitution of applicant - whether original application a nullity - whether substitution can still be ordered - relevant considerations Counsel: S. R. Eleftheriou for the Applicants P. F. Dalkie for the Respondent Solicitors: Whitman & Co. for the Applicants Puryer & Co. for the Respondent Hearing date: 23 & 24 May, 1994 -- 1 of 22 -- IN THE SUPREME COURT OF QUEENSLAND A.P.N. 210 of 1994 IN THE MATTER of the CORPORATIONS LAW AND IN THE MATTER of FERNLAKE PTY LTD (A.C.N. 056 552 884) JUDGMENT - W C LEE J. Delivered:27/05/94 This is an opposed application to wind up the applicant/company, Fernlake Pty Ltd. The principal point to be decided in the application is whether the respondent, who is the equitable owner of half of the shares in the company but who is not registered as a shareholder in respect of those shares, was entitled to receive notice of and vote at or influence the vote at a meeting of shareholders of the company held on 31 March 1994 during which a special resolution, purportedly pursuant to s. 253 of the Corporations Law ("the Law"), was passed that the company be wound up. Other subsidiary matters have also arisen. There are six issued shares in the company. Unfortunately, much of the background to this application is to be found in a long history of bitter disharmony between the persons entitled to those shares. One side consists of the registered owners of all six of the issued shares, Julie Louise Heffernan ("Julie") and her daughter Jacqueline Anne Patchett- Heffernan ("Jacqueline"). Julie is the registered owner of -- 2 of 22 -- 2 five of the shares and Jacqueline is the registered owner of the one remaining share. Both are also directors. The other side consists of the respondent, Joseph McCulloch. I was informed that the company has adopted the articles of association contained in Table A of Schedule 1 of the Law. On 23 June 1993, by deed between the respondent, Julie, Jacqueline and the company, Julie sold two of her five shares to the respondent and Jacqueline sold her one share to him. The total consideration was $15,000 which was paid by the respondent on 25 June 1993. As I have alluded to, no transfers in favour of the respondent were ever lodged with the company and consequently his name does not appear on the register of members. Although the precise cause of the respondent's failure to become the registered owner of those shares is the subject of dispute, it appears that the reasons for that failure are largely attributable to him. In any event, for the purposes of this application, that contest need not be resolved. On 1 July 1993, the respondent commenced working in the company. At that time the company was apparently already in overdraft with the Commonwealth Bank which, on 2 July 1993, agreed to extend the overdraft up to the sum of $30,000 subject to personal guarantees by the respondent on the one hand, and by Julie and a Lorraine Gaye Lysaght ("Lorraine") as directors on the other. Lorraine was the wife of the respondent but was never formally appointed a director. On 29 October 1993, an equitable mortgage was granted by the company to the Bank over -- 3 of 22 -- 3 its undertaking to secure the overdraft facility. This was executed under the common seal of the company in the presence of and under the signatures of Julie and Lorraine. Thereafter, various disputes occurred between the two sides. Detailed reference to these need not be made. However, on 21 March 1994, discussions occurred between Julie and the respondent during which the respondent informed Julie that unless she agreed to what he had said at a prior meeting, she was to find a new partner or wind up the company. Julie agreed that the respondent told her to wind up the company at that time. On 22 March 1994, a notice to quit the premises leased by the company was issued by the landlord. The application for winding up was presented by the company on 31 March 1994, the date of the special resolution. It is expressed in general terms and simply seeks orders that the company be wound up, that a liquidator be appointed to conduct the winding up, and "such further or other order as may be just". The application is supported by a statutory affidavit sworn by Julie and also filed on 31 March 1994. That affidavit attests to the fact that the company is indebted to various people, including Julie, in the total sum of $133,278 and is unable to pay its debts. It exhibits what purports to be a minute of the special resolution of 31 March 1994, moved by Julie and seconded by Jacqueline. That document reads in part: "IT WAS UNANIMOUSLY RESOLVED by a majority in number of the members having the right to attend and vote at the meeting, being a majority that together holds not less and 95% in nominal value of the shares giving -- 4 of 22 -- 4 that right, THAT the following resolution be passed as a special resolution notwithstanding that less than 21 days notice of the meeting was given:- '1. THAT the Company be wound up by the Court and that JULIE LOUISE HEFFERNAN be authorised to sign the Statutory Affidavit to the Court on behalf of the Company and to do all such things as are necessary as are duly required for the making of an Order winding- up the Company.'" That document also discloses that an ordinary resolution of directors was then moved by Julie and seconded by Jacqueline, pursuant to which Julie was authorised to act as the company's agent to present the application for winding up by the Court, to sign all necessary affidavits and documents, and to make an application for the appointment of a provisional liquidator. The Registrar duly appointed a provisional liquidator on 5 April 1994 after previous objection by the solicitors for the respondent to the appointment as provisional liquidator of the person specifically nominated by the solicitors for the company. As a result, an alternative provisional liquidator was appointed. The respondent's solicitor made no other objection to the winding up application at that time. The provisional liquidator has collected certain of the assets, books and documents of the company, and has sold some of those assets. After the appointment of the provisional liquidator on 5 April 1994, the Commonwealth Bank on 6 April 1994, called up the guarantee and made demands on the respondent and Julie. The respondent then paid out in full the debt of $26,724.26 owing to the Bank. It was not in dispute that by virtue of that -- 5 of 22 -- 5 payment, the respondent became the chargee of the mortgage executed on 29 October 1993. On 6 April 1994, the respondent appointed a receiver and manager of the company pursuant to rights claimed under the mortgage. The Registrar's certificate was issued on 10 May 1994 and the matter came on for hearing before me after the respondent objected to the winding up order on various bases outlined in his "notice of grounds of opposition" filed 4 May 1994. Those grounds are that: 1. the resolution to wind up the company was irregular, invalid and a sham, and passed contrary to the rights of the respondent as equitable shareholder of three shares in the company; 2. the application to wind up was made without any or any proper authority and is void; 3. the resolution to wind up the company and the application are shams and are void; 4. the company does not have standing to apply for a winding up due to the invalidity of the special resolution. A joint affidavit of Julie and Jacqueline was also filed on 31 March 1994. That affidavit asserts, inter alia, that they are the directors of the company, that the company has a registered paid up capital of two ordinary shares with each of them holding one share and that they are the only shareholders of the company given the right to attend and vote at meetings of the company. Counsel for the respondent contended in supported his submission that the resolution to wind up and the -- 6 of 22 -- 6 winding up application itself were shams, that each of these statements was deliberately false. Although I do not think that anything turn on this issue, I will consider some of these assertions briefly. In the first place, it was admitted before me that as at the date of swearing of the affidavit there were six fully paid shares in the company, held by Julie and Jacqueline in the proportions that I have stated and that the respondent was the equitable owner of three of those shares. I shall consider the question of the voting rights attaching to those shares in greater detail later in these reasons. Secondly, even though Lorraine did certain acts as a director, for example, executing documents under the company seal, she was never formally appointed as a director of the company. It was submitted on behalf of counsel for the respondent that Lorraine was, at the time of the meeting of 31 March 1994, in fact a director by virtue of the extended definition of that term in s. 60(1)(a) of the Law. That provision includes within the definition of director a person occupying or acting in that position, whether or not validly appointed to occupy or duly authorised to so act. As an aside, it was argued that she should have had notice of and the opportunity to participate in the directors' meeting held after the shareholders' meeting on 31 March 1994. It was not in dispute that she was not a shareholder of the company. Table A, Article 64 provides that the share qualification for directors may be fixed by the company in general meeting and, -- 7 of 22 -- 7 unless and until so fixed, is one share. Lorraine did not hold such a share and no evidence as to whether or not the company in general meeting had resolved to alter the effect of this article was placed before me. On the other hand, counsel for the applicant argued that s. 60(1)(a) was intended only to affect the position of the company with outsiders who might deal with persons, like Lorraine, purporting to act as a director of the company. Although I am not persuaded that the respondent's arguments on this point are correct, I do not consider that they have any primary relevance to the immediate application. Although most of this history relates to the application based on the special resolution of 31 March 1994, at the hearing of the application counsel for the applicant sought to rely on two other grounds in support of it. Firstly, as counsel for each side openly conceded during the course of the hearing, the incontrovertible evidence is that the company is otherwise hopelessly insolvent. On the material before me, there appears to be a good reason why on that ground alone the company should be wound up. Secondly, it was submitted that the history of the relations between the respondent, Julie and Jacqueline gave rise to a prima facie case for winding up on the just and equitable ground referred to in s. 461 of the Law. Of course, both of these alternatives assume that the application for winding up has otherwise been validly instituted. I shall first deal with the application insofar as it -- 8 of 22 -- 8 relies on the special resolution of 31 March 1994. The respondent's essential complaint in relation to this aspect of the application is that he, as the beneficial owner of three of the shares in the company, had a right to notice of the meeting at which the special resolution was passed. He had no such notice. He also claims a corresponding right to determine the manner in which the voting rights in respect of those shares were cast. In support of his contention on this point, his counsel sought to derive some assistance from the decision of Russell J. in Musselwhite v. G H Musselwhite and Son Limited [1962] 1 Ch. 964. However, in my opinion, a close reading of that case does little to advance his argument. The principal question for the consideration of the Court in Musselwhite was whether the plaintiffs, who at the relevant time remained on the company's share register, were entitled to notice under the company's articles of the company's annual general meeting. Prior to the meeting, the plaintiffs had entered into an agreement to sell their shares to a third party. The purchase agreement provided for payment of the purchase price by instalments, the relevant executed transfers and share certificates being deposited with the company's solicitors until payment had been made in full. At the date of the hearing part of the purchase price was still outstanding. In the course of deciding that whilst they remained on the share register, the plaintiffs remained "members" of the company and were accordingly entitled under the company's articles to receive notice of any meeting, Russell J. commented -- 9 of 22 -- 9 on the effect of an assignment, by way of agreement to sell, of the beneficial interest in the shares and in particular the effect which such an assignment may have had on the assignor's right to attend and vote at meetings. His Lordship, in a passage which was clearly obiter but which I accept as an accurate statement of the law, concluded that where, pursuant to an agreement to sell, the entire purchase price having been paid, that payment, in the absence of any other relevant contractual provision, conveyed to the purchaser the full beneficial title to the shares, including the right to determine how, if at all, voting rights in respect of those shares were to be exercised. In a sense the vendor in such a case, as the registered owner of the shares, is the trustee of those rights for the purchaser. The purchaser, as the beneficial owner of the shares, has the right to direct the vendor as to how those votes are to be cast. That right results from the contract between the parties, and from the trust which arises by virtue of that contract: see also the reference by Russell J. at 982 to the judgment Swinfen Eady M.R., concurred in by Duke and Scrutton L.JJ. in Siemens Bros & Co. Ltd v. Burns [1918] 2 Ch. 324 at 336. The Master of the Rolls there said that "in the absence of any such agreement the voting rights would be with the legal owners of the shares, and it would require a contract to control the exercise of those rights". A trust has a similar effect. However, it does not follow that because the respondent -- 10 of 22 -- 10 was entitled to dictate the manner in which the voting rights attaching to those shares were exercised, he was entitled to notice by the company of any relevant meeting. It is one thing to say that as between the vendor and purchaser the mutual rights and obligations which they have created by their agreement affect the manner in which each is to act in respect of the subject property. It is quite another matter to suggest that those bilateral rights and obligations can somehow affect the company, even though a party to the original agreement to sell the shares. It was not submitted that the company was bound by the trust which arose out of the sale agreement, and in the absence of such an assertion I fail to see why the company should be required to consider the interests of the respondent. This accords with the limited nature of the company's participation in the sale agreement. Quite to the contrary, the authorities suggest that as between the trustee/vendor on the one hand who remains the registered owner of the shares, and the company and the other shareholders on the other, it is he and not the beneficial owner of the shares whose position must be considered. Indeed it would be very curious if the position were otherwise. The memorandum and articles of association of a company constitute an agreement between the company and the shareholders and between the shareholders inter se. Although a particular shareholder may hold the benefit of that agreement on trust for a third party, the registered owner of the shares is the primary party to that agreement. He is the "member" of the -- 11 of 22 -- 11 company, not the beneficial owner of those shares: see s. 184 of the Law and Maddocks v. D.J.E. Constructions Pty Ltd (1982) 148 C.L.R. 104. Absurd results would follow if an obligation were cast on the company or on the other shareholders to determine the extent to which a particular shareholder is the beneficial owner of his shares or the extent to which he holds those shares on trust for another. Quite rightly, the company and shareholders are entitled to treat the registered shareholder, for all intents and purposes, as the owner of the shares and as the person entitled to exercise the rights in respect of those shares. The obligations which the shareholder chooses to create between himself and a third party cannot possibly affect that position. A simple reference to the company's articles makes this position clear. Table A, Article 6 provides as follows: "6(1) Except as required by law, the company shall not recognise a person holding a share upon any trust. (2) The company is not bound by or compelled in any way to recognise (whether or not it has notice of the interest or rights concerned) any equitable, contingent, future or partial interest in any share or unit of a share or (except as otherwise provided by these regulations or by law) any other right in respect of a share except an absolute right of ownership in the registered holder". Additionally, although Table A, Article 96(1) requires that notice of any general meeting to be given to every member, Article 96(2) provides that "no other person is entitled to receive" any such notice. It is for this basic reason that Russell J. in Musselwhite -- 12 of 22 -- 12 considered that the plaintiffs, as registered shareholders, were entitled to notice of the company's annual general meeting, the absence of such notice creating a defect which invalidated the meeting. They were the members of the company. Whether or not they had any beneficial interest in the shares was irrelevant, as between them and the company, in considering the question of the company's obligations under the articles: see also Baden Pacific Ltd v. Portreeve Pty Ltd (1988) 14 A.C.L.C. 677. The decision in Wise v. Lansdell [1921] 1 Ch. 420 supports this conclusion. In that case the plaintiff, as the registered owner of fully paid shares in a private company, charged them in favour of a mortgagee to whom he handed the share certificates and a blank transfer as security. He subsequently gave other equitable charges to other mortgagees. On the registered owner's bankruptcy his trustee disclaimed all interest in the shares but the bankrupt's name remained on the register. At the annual general meeting the chairman refused to accept the bankrupt's vote. Inter alia, a special resolution for voluntary winding-up was passed. Like Musselwhite, that case was clearly one concerning the position of the registered owner viz. a viz. the company, not one concerning the rights of the equitable owner of the shares either qua the company or qua the registered owner. Astbury J. held that as between himself and the company, the bankrupt, so long as his name remained on the register, was entitled to vote in respect of the subject shares. His Lordship noted of course -- 13 of 22 -- 13 that this entitlement was, as between the bankrupt and the mortgagees, subject to the mortgagees' right to dictate how that vote was cast: see also Morgan v. Gray [1953] 1 Ch. 83. From this discussion, the following propositions can be distilled. 1. As between the vendor, who remains registered as a member of the company, and the company and the other shareholders, it is the vendor who is entitled to notice of meetings both under the Law (s. 247(4)) and under the company's articles of association (Table A, Article 96(1)); 2. As between the vendor, who remains registered as a member of the company, and the company and the other shareholders, it is the vendor who is solely entitled to vote in respect of those shares. The purchaser, not being registered has no primary right to vote and indeed the authorities suggest that any article purporting to confer such a right would be invalid: Shears v. The Phosphate Co- operative Company of Australia Limited (1988) 14 A.C.L.R. 747; 3. As between the vendor, who remains registered as a member of the company, and the purchaser, once the full amount of the purchase price has been paid and subject to any contrary agreement between them, the purchaser is entitled to direct the vendor as to how any voting rights attached to those shares are to be exercised, if at all; 4. It follows from these first three propositions that if a -- 14 of 22 -- 14 vendor fails to adhere to his obligation to vote in accordance with the purchaser's directions, that vote is not invalidly cast as regards the company and the other shareholders, but the vendor would clearly leave himself open to an action for damages either for breach of contract or for breach of the trust created by the equitable assignment of the shares. As I have mentioned, these observations proceed on the basis that any rights and interests which may be created or transferred between the vendor and purchaser cannot, on that basis alone, affect the relations between the registered owner of shares or "member" on the one hand and the company or the other shareholders on the other. Indeed, given the fact that the respondent had no right to attend and vote at meetings of the company, it would be surprising if he was nevertheless entitled to notice of those meetings. His sole right was to direct the vendor as to how the votes in respect of the purchased shares were to be cast at any such meeting. That was a right which arose out of the mutual relations between those parties. It is only upon registration of the share transfers that any rights or obligations as between the purchaser and the company or the purchaser and the other shareholders would be constituted, those rights arising out of the agreement which the articles represent and to which he would then become a party. It follows that the meeting at which the special resolution of 31 March 1994 was passed was not tainted by any -- 15 of 22 -- 15 technical irregularity which may have invalidated it. All the notices required to be given were given and all of the relevant votes were cast by those primarily entitled to cast them. Both "members" were present. There was no lack of a quorum: Table A, Article 42. The resolution was passed strictly in accordance with the Law. In addition as both appointed directors were present at the directors' meeting which followed the shareholders' meeting there existed the necessary quorum for it as well: Table A, Article 73. As I have mentioned, it is difficult to see how, by virtue of the extended definition of "director" in s. 60(1)(a), Lorraine was a director who should have received notice of the meeting of directors. In any event, the evidence as to the circumstances surrounding her purported actions as a director is too sparse to reach any concluded view as to whether or not, at the time of the directors' meeting she was continuing to so act. In the end result I do not think it necessary to consider the alternative argument for the applicant that, if the respondent was entitled to receive notice, that failure to give notice amounted to a mere irregularity which I should, in the exercise of my discretion under to s. 1322 of the Law, excuse: see e.g. Re: Broadway Motors Holdings Pty Ltd (In Liq) (1986) 4 A.C.L.C. 598 and Re: Compaction Systems Pty Ltd (1976) 2 N.S.W.L.R. 477. See also Table A, Article 4. However, this conclusion does not necessarily dispose of the application. Having concluded there were no technical -- 16 of 22 -- 16 irregularity surrounding the passing of the resolution, does it necessarily follow that it should be acted upon by the Court in the exercise of its undoubted discretion whether or not to order the winding up under s. 461? In my opinion it does not. As I have mentioned, that section being in permissive rather than mandatory terms, confers an residual discretion on the Court. The evidence is that both registered shareholders who were entitled to vote and did in fact vote in respect of the resolution had contracted to sell one or more of their shares to the respondent. Both were cognisant of that fact and both appear to have acted in disregard of the respondent's right to determine how the votes in respect of those shares should be cast. The meeting was called without any indication to him. It would be clearly inequitable for this Court to give effect to a resolution passed wholly in breach of the trusts by which each shareholder was bound in circumstances where both shareholders were fully aware of all the relevant circumstances surrounding those breaches. I would decline to do so in this case. In effect, each shareholder was knowingly involved in the other's breach of trust. I should mention that I was not otherwise impressed by the way in which these proceedings were brought, particularly in light of the misleading nature of the contents of the joint affidavit of Julie and Jacqueline filed 31 March 1994 to which reference has been made. The indisputable evidence, however, is that the company is hopelessly insolvent, it being in no one's interest to perpetuate its existence, unless funds are introduced. Common -- 17 of 22 -- 17 sense would dictate that the company should be wound up and apart from the considerations I have discussed above, I would have had no hesitation in doing so on the application as presented. There also remains the question of the "just and equitable" ground relied upon by the applicant and the submission by counsel for the respondent that he has substantial rights under the equitable mortgage assigned from the Bank. He has bitterly opposed a winding up order and it does not at present appear whether he intends to introduce funds into the company. He might also wish to take steps to have his name entered in the register of members. In these circumstances, I do not consider that I should make a winding up order on the application as presently framed. Despite my reservations about the conduct of Julie and Jacqueline in the present case, each nevertheless has an individual right as a contributory to apply to the Court to have the company wound up under s. 461 of the Law on the just and equitable ground. In addition, pursuant to Part 5.7B of the Law, introduced by the Corporate Law Reform Act 1992 on 23 June 1992, and in particular ss. 459A and 459P, various persons, including the company, a creditor, a contributory or a director, can apply to the Court for a winding up order on the ground of the company's insolvency, although a contributory or a director must first obtain leave of the Court: s. 459P(2). Directors were given this right no doubt as an adjunct to their responsibility for the debts of an insolvent company if it continues to trade. Jacqueline is a contributory, a director and a creditor and, -- 18 of 22 -- 18 pursuant to an application made on her behalf late in the hearing of this matter, has now applied for an order that she be substituted as the applicant in her own right in the winding up application. Counsel for the respondent opposed substitution on the basis that the original application, not having been duly authorised, was void with the consequence that then there is no power in the Court to order substitution. In support of this proposition, he cited the case of Re Elgar Heights Pty Ltd (No. 2) (1985) 3 A.C.L.C. 480 in which Ormiston J. held that if the application itself amounted to an abuse of process on the basis that the grounds for it were untenable, then there would be no basis for substituting a new petitioner who likewise could not make out those same grounds. His Honour did not hold that there was no power in the Court to order substitution, but rather that the Court would not make such an order when it would be futile to do so. Clearly, with respect, that decision is correct but the present case is quite different. Rule 61 of the Corporations (Qld) Rules 1993 deals with the power of the Court to order the substitution of an applicant in a winding up proceeding. Rule 61(1) provides that the Court may make such an order whenever the original applicant, inter alia, fails to take all the steps prescribed by the rules preliminary to the hearing. Rule 61(2) then provides that when a person proves that he comes within a class of person mentioned in either s. 459P or s. 462(2), the Court may make the order of substitution. At that stage the new -- 19 of 22 -- 19 applicant must positively prove his entitlement to be substituted. Rule 61(1) on the other hand does not condition itself upon the original applicant having established his entitlement to bring the application in the first place. There could be many circumstances in which an applicant has no standing to bring the application, for example, on the mistaken basis that he is a contributory when in fact he is not. An analogy may be drawn with O. 93 r. 17 of the Rules of the Supreme Court dealing with irregularly commenced proceedings. A person might sue as a plaintiff and yet discover that he has no right to sue. Consequently, the real plaintiff may seek to be substituted. The fact that the original applicant could not have succeeded on the application does not mean that the process, when it was issued, was void. Indeed I consider that this was one of the difficulties that provisions of this nature were designed to overcome. In the present case, I have in any event come to the view that the application by the company was validly issued in the sense that all of the technical requirements of the Law and rules thereunder had been complied with. As such, the application is not a nullity. In one sense, it is not necessary to substitute any other person as applicant, but, in view of the conduct of Julie and Jacqueline in acting on behalf of the company without regard to the interests of the respondent, it seems appropriate that Jacqueline be substituted as applicant in her own right so that she may prosecute the proceedings. Insofar as Jacqueline relies on her position as a -- 20 of 22 -- 20 contributory and director of the company to bring the application on the basis of the company's insolvency, I would grant leave under s. 459P(2) for her to do so. Orders should therefore be made in those terms, with leave to amend the application to specify the two grounds relied upon, i.e. that the company is unable to pay its debts, and the just equitable ground. It should also be mentioned that a further reason exists as to why the application of 31 March 1994 should not be formally dismissed. The parties agreed that should I so order, then the respondent's mortgage would not be void as against the liquidator pursuant to the provisions of s. 588FJ of the Law. I consider that an order of that kind would be likely to defeat the policy of that provision, namely, to prevent a creditor concerned about his debt from seeking security for that debt when he knows or suspects that the company is in financial difficulty. Such a person ought not be allowed any advantage over other unsecured creditors. Although I make no determination on the issue of whether or not the liquidator can rely on the provisions of s. 558FJ even if the original application remains on foot, it is relevant to point out that the liquidator's position under that provision would be rendered hopeless if the application were dismissed. This leaves the question of whether the company should now be wound up, or whether the respondent should have the opportunity to resist the application if he can. There may be a question as to whether further directions are needed under -- 21 of 22 -- 21 rule 61(2), including directions as to the filing of further material. Accordingly, I invite further submissions, having regard to the views expressed above. -- 22 of 22 --