Avakiwi Pty Ltd, Re; ex parte Clark [2004] QSC 1

SUPREME COURT OF QUEENSLAND CITATION: Re Avakiwi Pty Ltd; ex parte Clark [2004] QSC 001 PARTIES: PETER JOHN CLARK (applicant) v AVAKIWI PTY LTD ACN 101 426 902 (first respondent) RODGER FANTHAM BAYLY (second respondent) FILE NO: BS 11252 of 2003 DIVISION: Trial PROCEEDING: Originating Application ORIGINATING COURT: Supreme Court DELIVERED ON: 16 January 2004 DELIVERED AT: Brisbane HEARING DATE: 14 January 2004 JUDGE: Douglas J ORDER: Adjourn the application to the Civil List for hearing CATCHWORDS: CORPORATIONS – WINDING UP – WINDING UP BY COURT – GROUNDS FOR WINDING UP – WINDING UP ON THE JUST AND EQUITABLE GROUND – DEADLOCK – IMPOSSIBILITY OF EFFECTIVELY CARRYING ON BUSINESS – WHETHER WINDING UP APPROPRIATE REMEDY AT INTERLOCUTORY STAGE COUNSEL: M J Byrne QC, with him P J Hanlon, for the applicant M R Bland for the respondent Rodger Fantham Bayly SOLICITORS: Adamsons Solicitors for the applicant McCullough Robertson Lawyers for the respondent Rodger Fantham Bayly [1] By a partnership agreement (“the agreement”) that commenced on 25 July 2002 Rodger Bayly (“Mr Bayly”) and Robert Bayly entered into partnership with Dylroy -- 1 of 8 -- 2 Pty Ltd (“Dylroy”), a company controlled by the applicant, Peter Clark. Another party to the agreement was the company Avakiwi Pty Ltd (‘Avakiwi’). [2] Avakiwi’s role under the agreement was to act as nominee for the partnership for administrative convenience and to hold the partnership assets as a custodian or nominee only. It was required to deal with partnership assets as directed by the partners and was authorised to make supplies to and acquisitions from third parties for all purposes connected with the partnership business as the nominee of and on behalf of the partnership and to issue tax invoices on its behalf; see cl. 4 of the agreement. [3] Avakiwi became the registered proprietor of land at Mount Tamborine on 15 October 2002. The land had been used to grow avocados and kiwifruit and the parties intended that it should continue to be operated as such, relying on the expertise of at least Mr Bayly and, it seems, of his brother Robert in that field. It was also envisaged that the land may be developed and/or sold in the future but there is a dispute between the parties as to when that possibility might occur. Mr Bayly swears that his understanding of his discussions with Mr Clark about the purpose of the partnership was that subdivision for residential purposes would not be considered for at least five years which was why he and his brother agreed to commit capital in excess of $30,000 in the first year to make improvements to the horticultural operation and embarked on a plan to undertake substantial pruning and thinning of the avocado trees on the property to create improved production in two to three years time; see paras 14 and 15 of his affidavit filed 13 January 2004. Those discussions appear to be reflected in the definition of ‘sunset date’ in the -- 2 of 8 -- 3 agreement as the fifth anniversary of the commencement date; see also the terms of cl. 3.3. He also points to the terms of the partnership agreement in cll. 12 and 14. [4] Clause 12 deals with termination and deems a terminating event to have occurred if a partner gives at least six months’ notice to the other partners of the wish to terminate the agreement provided that a notice under that clause may not be given before the second anniversary of the commencement date. Clause 12.1(g) provides also, however, that a terminating event will be deemed to have occurred if a partner or a principal is in breach of the terms of the agreement and fails to remedy that breach within the required time period after being served with a valid rectification notice. Clause 13 deals with the service of rectification notices which must specify the particulars of the default and require that the defaulting party rectify it within 30 days of receipt of the notice or any longer time specified in it. Clause 14 then sets up a regime pursuant to which, if one party wishes to sell its interest, it may do so by giving a notice to the continuing partner, providing it, effectively, with an option to purchase the outgoing partner’s interest. If the continuing partner does not exercise that option then the outgoing partner may sell its interest to a third party. [5] A notice said to be served in accordance with cl. 13 of the agreement has been delivered by Dylroy. It asserts that Mr Bayly is in default in a number of respects by not acting in the best interests of the partnership by occupying a house on the partnership’s property rent free and allowing a cottage to be occupied by others without charging them rent, charging a management fee not agreed to and using the house and cottage as a base for other interests that conflict with the partnership interests. -- 3 of 8 -- 4 [6] That notice appears to have been forwarded to Mr Bayly on or about 5 September 2003 and required rectification by 5 October 2003. Perhaps the most significant grievance for which rectification was sought was, however, a request that Mr Bayly agree to the sale of the land owned by Avakiwi at Mount Tambourine. It is hard to see how, on the evidence, Mr Bayly’s refusal to consent to the sale of land without being given the opportunity of purchasing it pursuant to cl. 14 of the agreement would constitute default under the agreement. Mr Bayly also contends that the parties had agreed that he be paid a management fee and that he occupy the house on the land. He has ceased allowing others to occupy the cottage. He also denies conduct in respect of his other interests at Mount Tambourine inconsistent with his obligations as a partner of Dylroy. [7] There does not seem to have been any further action in reliance on the rectification notice under cl. 13 of the agreement. Instead Mr Clark has brought this application to wind up Avakiwi relying, among other things, on the just and equitable ground in s. 461(1)(k) of the Corporations Act 2001. Avakiwi’s shares are held equally by Mr Clark and Mr Bayly who are also its only directors. Mr Clark argues through his counsel that there has arisen such a deadlock between the shareholders and directors of Avakiwi that its management is impossible with the consequence that it should be wound up. He also contends that there has been misconduct by Mr Bayly as a director and shareholder of Avakiwi in his management of the avocado and kiwi fruit orchard and a preferring of his own interests to those of the company contrary to ss 461(1)(e), 461(1)(f) and 461(1)(k) of the Corporations Act 2001. [8] Mr Bayly’s evidence challenges the factual basis of the allegations of misconduct made against him, factual disputes that I am unable to resolve summarily. His -- 4 of 8 -- 5 counsel, Mr Bland, also argues that it is not just and equitable to wind up Avakiwi because of the effect of cl. 12.1 of the agreement, preventing dissolution of the partnership within two years of its commencement, except for unremedied breach. His submission is that Mr Clark, in bringing the application, lacks the clean hands necessary to obtain equitable relief; see Re Westbourne Galleries Ltd; Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, 387 where Lord Cross said that a petitioner who relied on the just and equitable ground must come to court with clean hands, and “if the breakdown in confidence between him and the other parties to the dispute appears to have been due to his misconduct he cannot insist on the company being wound up if they wish it to continue”. [9] Mr Byrne QC, for Mr Clark, has drawn my attention to a passage in Malos v Malos (2003) 44 ACSR 511, 516 [26] where Barrett J adopted an observation of Santow J that a lack of clean hands could not be an absolute bar to the grant of a winding up order. Santow J went on to say, however, in the passage extracted by Barrett J, that lack of clean hands “must be an important factor in the exercise of the court’s discretion along with other factors, such as whether the partnership is truly deadlocked”. [10] In the circumstances I have outlined it seems to me that Mr Bayly can rely on the provisions of cl. 12.1 as justifying the inference that the partnership was intended to continue at least for the period of two years envisaged by that clause, except for unremedied breach, and, as a consequence, that Avakiwi should not dispose of the partnership’s principal asset during that period without the approval of the partners and without the use of cl. 14’s provision for requiring an outgoing partner to give a continuing partner the option to purchase the outgoing partner’s equity interest. It -- 5 of 8 -- 6 would be difficult, in my view, to treat Mr Bayly’s reliance on those parts of the agreement as constituting a breach of the terms on which he agreed the affairs of the company should be conducted, or of using the agreement in a manner which equity would regard as contrary to good faith; see O’Neill v Phillips [1999] 1 WLR 1092, 1098-1099. Mr Bland also argues that there are other remedies available for the applicant including orders for the purchase of shares or the use of the procedure under cl. 14 of the agreement for offering an outgoing partner’s interest to a continuing partner. [11] Mr Byrne QC for the applicant, Mr Clark, argues that the company will shortly be in a position not to pay its debts as and when they fall due to which Mr Bland ripostes that his client is willing to fund the expenses of conducting the partnership business this year, expecting to be reimbursed from the proceeds of sale of its crops, and that its net equity is $973,561. [12] Although it is clear that the shareholders and directors in Avakiwi are at odds, as may also be said about Dylroy and Mr Bayly as partners, I am not in a position to say at this stage that the conduct alleged against Mr Bayly amounts to oppression or such as to justify winding up the company on the just and equitable ground. Mr Bayly swears to a continuing willingness to resolve his dispute with Mr Clark pursuant to the agreement or by mediation and points to his willingness either to purchase Mr Clark’s share in the partnership and his shares in Avakiwi or to allow its land to be publicly auctioned at the reserve price Mr Clark has nominated; see paras 12 and 13 of his affidavit filed 13 January 2004. Mr Clark’s particular concern focuses on Mr Bayly’s failure to agree to sell Avakiwi’s land, coupled with his concern about the bringing of this year’s crop to fruition and the continued -- 6 of 8 -- 7 funding of the partnership’s expenses. As I have said, there is no obligation on Mr Bayly as a partner to agree to the sale of the land and there is no obvious uncontested reason, on the evidence so far, to doubt that he will be able to manage the orchard and fund the operation of the partnership business for the immediately foreseeable future. Mr Bayly also offers a number of undertakings in para. 12 of his affidavit filed 13 January 2004 designed to protect Mr Clark’s and Dylroy’s interests in the partnership assets and Avakiwi. [13] In those circumstances, Mr Bland’s principal argument is that this application is misconceived. His submission is that the land is held by the company in trust for the partnership, a view supported by cl. 4 of the agreement, and that, therefore, no liquidator could dispose of it as if it were beneficially owned by the company. He goes on to submit that the dispute is a partnership dispute of a partnership that cannot be wound up within 30 months of its inception absent proven breach of that agreement after the service of a rectification notice under cl. 13 and that, even if it had been sought, there was no occasion to appoint a receiver to the partnership as its business can continue to be conducted by his client and its assets are not at risk. [14] As I have already indicated Mr Bland also submits that winding up is not the only remedy available under s. 233 and also points to s. 467(4) of the Corporations Act. Its effect is that if another remedy is available to the applicant and the court is of the view that Mr Clark is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy then it should not make the order. Where, pursuant to s. 233, the court can make an order, for example, for the purchase of any shares by any member, then it seems to me that it is by no means a foregone conclusion that the only result of this application must be a winding up order. -- 7 of 8 -- 8 [15] It is not appropriate, however, to dismiss the application. The form of cl. 12 of the agreement may not necessarily preclude an application to wind up the company on the just and equitable ground for the reasons advanced in Malos v Malos. In the circumstances, it is my view that the matter should go to trial so that the disputed factual issues can be litigated properly, including the issue whether there is a remedy short of winding up that would be appropriate to resolve the disputes between these parties. Because of the range of the factual disputes, and the potential differences in relief likely to be sought by the parties, it is my view that it would be useful for the parties to exchange pleadings. I also propose to refer the matter to mediation. [16] Accordingly I adjourn the application to the Civil List for hearing and invite the parties to prepare directions for the future conduct of the proceeding including a direction that it be referred to mediation, preferably, I believe, after the exchange of pleadings. It also seems to be appropriate to require undertakings of the type offered by Mr Bayly in para. 12 of his affidavit filed 13 January 2004 but I will hear the parties about the form of those undertakings and about the directions and orders for costs that should be made. -- 8 of 8 --