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  •   Notable Unreported Decision

Posgate v Hanson

 

[2018] QSC 51

SUPREME COURT OF QUEENSLAND

CITATION:

Posgate & Anor v Hanson & Anor [2018] QSC 51

PARTIES:

DARRYL WILLIAM POSGATE

(First Applicant)

and

BROKEN COMPASS PTY LTD ACN 131 839 239

(Second Applicant)

v.

MATTHEW GUY HANSON

(First Respondent)

and

MATAMA PTY LTD ACN 105 777 820

(Second Respondent)

FILE NO/S:

S188/17

DIVISION:

Trial

PROCEEDING:

Application

ORIGINATING COURT:

Supreme Court at Cairns

DELIVERED ON:

12 March 2018

DELIVERED AT:

Cairns

HEARING DATE:

9 August 2017, 10 November 2017

JUDGE:

Henry J

ORDERS:

  1. The application is listed for the making of final orders at 10.00 am on 16 March 2018.
  2. Prior to that time the respondents will inform the applicants in writing whether, for the purposes of the Court’s final orders, it is correct that the respondents’ most recent offer remains current.
  3. The parties will be heard as to costs at the above time in the event they have not otherwise agreed as to costs in the meantime.

CATCHWORDS:

CORPORATIONS – WINDING UP – APPLICATIONS FOR WINDING UP BY COURT – ORDERS – GENERALLY – whether a winding up order on the just and equitable ground should be refused on discretionary grounds – where this includes a share buy-out offer – whether the applicants are acting unreasonably in not pursuing an alternative remedy.

Allways Resources Holdings Pty Ltd & Anor v Samgris Resources Pty Ltd & Anor [2017] QSC 74, considered

Hillam v Ample Source International Ltd (No 2) (2002) 202 FCR 336, cited.

Maine v Chelia [2005] NSWSC 860, cited.

Bernhardt v Beau Rivage Pty Ltd (1989) 15 ACLR 160, cited.

Exton & Ors v Exton Pty Ltd (2018) 118 ACSR 411, cited.

Allways Resources Holdings Pty Ltd & Anor v Samgris Resources Pty Ltd & Anor [2017] QSC 74, cited.

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, considered.

Re a Company (No 00709 of 1992) O’Neill & Anor v Phillips & Ors [1999] 2 All ER 961, considered.

Corporations Act 2001 (Commonwealth)

COUNSEL:

VG Brennan for the applicants

AI O’Brien for the respondents

SOLICITORS:

Preston Law for the applicants

Morrow Petersen for the respondents

  1. The applicants seek orders winding up two companies, Inspection Apps Pty Ltd (“Inspection Apps”) and Workflow Technologies Pty Ltd (“Workflow”) (collectively “the subject companies”).
  2. The first applicant, Mr Posgate, and the first respondent, Mr Hanson, either hold or control the corporate holding of 50 per cent each of the shares in each company.[1] 
  3. The subject companies were in the past operated co-operatively by Mr Posgate and Mr Hanson but, since Mr Posgate suddenly left Cairns to pursue a lucrative employment opportunity in Western Australia, there has been a breakdown in trust and confidence between them.
  4. At issue is whether the resulting circumstances are sufficiently dire to justify a winding up order and, if they are, whether Mr Posgate is acting unreasonably in seeking such an order rather than accepting an offer by Mr Hanson to buy him out after an independent valuation process.

The progress of the application

  1. The hearing of the application progressed over two days, three months apart.  On the first day Mr Posgate and Mr Hanson, each deponents in the application, were cross-examined. The cross-examination of Mr Hanson extended into day two.  Both were unimpressive witnesses, with each being unwilling to be candid about how unreasonably each had behaved at different stages of their estrangement. 
  2. An important feature of the matter is that by day two Mr Hanson had made a reasonable offer to implement a fair and orderly buy out process.  Prior to that point the case’s momentum was more finely balanced.

Background

  1. The subject companies were incorporated as vehicles through which Mr Posgate and Mr Hanson developed a digital application.  Workflow Technologies holds the relevant patent.  Inspection Apps conducts a business involving the production and supply of cloud base inspection management and report generation.  Mr Posgate and Mr Hanson also developed a business known as Mypoolinspections through another company, Freemans Townsville Pty Ltd (“Mypoolinspections”).  That business involved pool fence inspections booked on-line. 
  2. As between them Mr Posgate worked most of the time for Mypoolinspections while Mr Hanson worked most of the time for Inspection Apps.  Mr Posgate testified he had only worked 10 to 20 per cent of the time for Inspection Apps.[2]  Mr Hanson disagreed, estimating that percentage was no more than five per cent.  Mr Posgate was paid $55,000 per annum plus superannuation by Mypoolinspections but was apparently not paid by Inspection Apps.  Mr Hanson was paid about $26,000 per annum by Inspection Apps and a like amount by Mypoolinspections.  Mr Posgate is recorded as once acknowledging to Mr Hanson that they were “both giving away our time cheap in the effort to build both businesses up”.[3] 
  3. It appears then that they were taking modest salaries, as two people building their own business, doing most of the work themselves, sometimes do, mutually sacrificing short term financial benefit to build the business.  Where one such person ceases working for the business to earn more elsewhere, as occurred here, it is to be expected that, as occurred here, the other person will not want to continue sacrificing their entitlement to a salary commensurate with work performed.
  4. In early January 2016 Mr Posgate gave Mr Hanson notice of his intention to cease working for Inspection Apps and Mypoolinspections, from 26 February 2016.  He disingenuously asserted in this proceeding that his departure was prompted by frustration at them not having reached a partnership agreement and his relationship with Mr Hanson breaking down.[4]  It is obvious the main reason was his acceptance, from as early as 28 November 2015,[5] of a lucrative offer to work in a tug boat business in Western Australia.  Indeed, he was once recorded admitting to Mr Hanson that the thing which made him decide to leave was the lure of an “awesome pay packet” with the prospect of soon earning $250,000 a year.[6]
  5. In a transparent attempt to appear virtuous and downplay the impact of his abandonment of the businesses Mr Posgate asserted unrealistically in cross-examination that he could still have done some work for Inpection Apps on-line over in Western Australia.  Mr Posgate had to have known his departure would have potentially dire consequences for the future viability of at least one of the two businesses in which he and Mr Hanson had been the main workers. 
  6. It will be recalled Mr Posgate had worked most of the time for Mypoolinspections.  The parties could not agree on the future management or ending of the Mypoolinspections business.  Proceedings filed by Mr Posgate in June 2016 ultimately resulted in consent orders which, inter alia, appointed a Receiver to the company Mypoolinspections. 

Failure to resolve Mr Hanson’s remuneration

  1. Mr Hanson must have been seriously aggrieved by Mr Posgate’s abandonment of the businesses and it is obvious that prompted a degree of unreasonableness in his behaviour in his ensuing dealings with Mr Posgate in respect of Inspection Apps.  That unreasonableness was most obvious in his unwillingness to meet Mr Posgate’s early reasonable requests for financial information to allow a properly informed consideration by him of Mr Hanson’s requests for higher remuneration.  That said, Mr Posgate seems to have been slow to apprehend or act on the need for an independent assessment of a fair remuneration of Mr Hanson.
  2. On 22 April 2016 Mr Hanson’s solicitors wrote to Mr Posgate’s solicitors indicating that until a reasonable remuneration package was agreed Mr Hanson intended that he would receive an interim salary for his work with Inspection Apps of $150,000 per annum, backdated to 27 February 2016.[7] 
  3. There followed failed attempts to call a directors’ meeting for 23 and 30 May 2016.  Mr Hanson again sought to raise the issue of his remuneration in calling a directors’ meeting for 2 September 2016.[8]
  4. That directors’ meeting proceeded on Skype with Mr Hanson announcing that he wanted to be paid a $254,532 salary per annum plus compulsory superannuation and certain bonuses.[9]  He claimed in evidence that this was what he wanted to be paid solely for his work for Inspection Apps.[10]  The ten-fold leap in prospective salary for working for Inspection Apps from about $26,000 to about $254,000 was extraordinary, even allowing for Mr Hanson’s explanation that he wanted to be paid a fair market salary, and it was likely to occasion financial hardship to Inspection Apps.[11]   He was obviously conscious of that, for in cross-examination he downplayed the magnitude of the proposed figure saying, “I accept that that was at the very high end of a market salary, but it was certainly subject to negotiation”.[12]  He rejected the suggestion he had intended the proposed salary would remunerate him for his combined work for Inspection Apps and Mypoolinspections [13] although that inference provides a more sensible explanation for the surprising dimension of the increase.
  5. Mr Posgate sought time to consider that proposal and on 9 September 2016 requested further information, as follows:

“As you would be aware, as Directors of the company we owe the company a fiduciary duty to act in its best interests.  Accordingly, in order to properly consider whether increasing your salary to this sum is in the company’s best interests we would both need to be satisfied that:

  1. The salary reflects the market value of the role that you are performing – can you please provide me with more detail in this regard including whatever information you can about persons performing a similar role, in similar sized companies in the Cairns area.
  2. How the company’s financial position could justify the increase of your salary on a ten fold basis.

Once you provide me with this information I will happily consider and we can look to reconvene a Directors Meeting to further discuss.”[14]

  1. Mr Hanson responded with an email on 9 September 2016 attaching a screenshot from the website payscale.com, writing:

“1. Attached is a screenshot of the payscale.com site which provides the market value. There are 146 examples, averaged to arrive at this figure. The figures exclude “City” based salaries, which are higher.

Incidentally, the MD role in payscale does not include the skills of IT development or Project Management which obviously contribute.

As you well know, there is no reporting of wages of Managing Directors in Cairns, so that information is not available.

2. The percentage increase is irrelevant.  The company has revenue streams, and cash assets to support the proposed salary.  You have access to the bank records. …”[15]

  1. Notably that response provided no specific information about the company’s finances.
  2. On 19 September 2016 Mr Hanson wrote to Mr Posgate demanding he confirm his agreement to increasing Mr Hanson’s remuneration to a so called “market salary” and “the proposed remuneration package”.[16]  Mr Posgate responded on the same date, noting inter alia that Mr Posgate’s remuneration proposal was not supported by any material provided to date.  It concluded:

“I am more than willing to consider the restructure of your remuneration package, but any proposal regarding the same will need to have regard to the company’s financial position and market value of the remuneration you propose.  To this end I invite you to submit a revised proposal that includes:

  1. A justification of the remuneration proposed with reference to the company’s financial position and profit and loss position;
  2. evidence of the market value of the role that you are performing.”[17]
  1. On 9 November 2016 Mr Hanson emailed Mr Posgate Inspection Apps’ MYOB profit and loss statement to 30 June 2016, explaining its profit result was not accurate and that he could not produce the year to date profit and loss statement.[18]  Such qualifications were hardly likely to reassure Mr Posgate that he was being given full and accurate information about the company’s financial position. 
  2. Then on 22 November 2016 Mr Hanson requested Mr Posgate confirm a remuneration offer,[19] apparently not having grasped the legitimacy of Mr Posgate’s interest in being properly informed about the company’s financial position in order to give properly informed consideration to the remuneration issue.  Mr Posgate’s response of 23 November 2016 noted, inter alia:

“…[T]he information that you provided me with to date is of no utility in determining what is an appropriate package. …

The extracts that you have sent to me from various websites are of no benefit in this regard.  Given that you are employed by the company and you wear “two hats” being that of an employee and that of a director, it really falls to you to advance the proposal that you say is in the best interests of the company to appoint you on.  You will also need to make clear as to what your level of commitment is as part of your remuneration noting that you are still dividing your time between IA and the MPI business. …”[20]

  1. The latter point, that Mr Hanson was also spending time working for Mypoolinspections is obviously relevant to the quantum of his remuneration for his work for Inspection Apps.  In cross-examination Mr Hanson acknowledged he was dividing his working time equally between both businesses but claimed he was in effect working such long hours that he worked about 40 hours each for each business per week.[21]  No working time records or other corroborative evidence appears to have been produced to support that assertion but it is also unlikely there would be organised  records of that  kind in a business of this scale. 
  2. On 23 November 2016 Mr Hanson emailed Mr Posgate, providing no specific information other than the bland assertion Mr Hanson worked a minimum of 40 hours per week for Inspection Apps.[22]  Mr Hanson asserted it fell not to him but to Mr Posgate to advance a remuneration offer.  He alleged it was clear Mr Posgate would not make an offer and asked Mr Posgate to confirm he would agree to Inspection Apps engaging a remuneration consultant.  
  3. Mr Posgate responded by email of 24 November 2016 saying he would do his own research and come back with a proposal.  He sought confirmation that Mr Hanson’s employment with Inspection Apps would be his sole undertaking and that his duties were as before except that they were taking up his time on a full-time basis.[23]  Mr Hanson chose not to provide a response on advice, because his lawyers believed the request was intended to set him up in respect of the Mypoolinspections matter.[24]  Such a suspicion is understandable.  Much was made in the submissions of Mr Posgate’s counsel in the present application of Mr Hanson’s non-compliance with early requests for financial information to allow Mr Posgate to make a properly informed decision.  However, those submissions rang a little hollow given that by his email of 24 November 2016 Mr Posgate was not seeking financial information and only wanted confirmation Mr Hanson was working full-time for Inspection Apps.
  4. By email of 2 December 2016 Mr Hanson sought to convene a directors’ meeting on 23 December 2016 to consider his motions, inter alia, appointing him Managing Director.[25] Another notice of general meeting[26] by Mr Hanson for the same date, advanced alternative resolutions, apparently dependent upon whether he would be appointed Managing Director.  Some alternative resolutions included reference to a salary of $151,554 plus superannuation and various incentives and a proposal to appoint a person to determine the salary with the determination being binding upon the company. Mr Posgate conceded in cross-examination that such a proposal was reasonable.[27]
  5. On 22 December 2016 Mr Posgate’s solicitors wrote to Mr Hanson’s solicitors complaining the information sought by Mr Posgate on 24 November 2016 had not been provided and in the absence of such information Mr Posgate would vote against the proposed resolution.[28]  Mr Posgate also emailed Mr Hanson directly indicating he could be taken to vote against the resolutions.[29]  The meeting scheduled for the following day did not occur.
  6. On about 17 January 2017 Mr Hanson received a written “Work Evaluation and Remuneration Advice for the Role of General Manager, Inspection Apps” dated 17 January 2017 from Argent Group Pty Ltd.[30] That advice responded to Mr Hanson’s request of the Argent Group to conduct a work value and remuneration study for the position of General Manager at Inspection Apps.  The work value at which the advice assessed that position was described as “common for business heads of small businesses who have to possess all the skills of leading and managing a business – without having many employees to delegate the responsibilities to.”[31]  The advice concluded:

“Market data would indicate the role of GM is worth a base salary in the range of $160k to $180k; with a salary package in the order of $190k to $215k.  As company profitability might not be sufficient to afford such a remuneration level currently, the Argent Group suggests that Inspection Apps pay as much as possible up to the minimum of the applicable range; and also provide for a bonus of up to a further 20 per cent of [base salary and employment cost] should further company growth enable the payment of this additional amount – which would still be broadly comparable with the fair market range mentioned above.

Matthew, we appreciate that like many small business owners, you have been paying yourself a lot less than the market pay range mentioned above.  However, these rates are predicated on what it would cost to employ a suitably qualified person into the role from outside the company, to effectively lead, manage and grow the business.”[32]

  1. Mr Hanson sought to call yet another directors’ meeting on 20 January 2017.  In doing so he did not disclose the Argent Group’s advice of 17 January 2017, indeed it was not disclosed until shortly before the resumption of day 2 of the hearing of the present application.  He testified he considered it would pointless to provide the advice back in that era.[33]  The more specific likely explanation is he perceived the salary range in the advice would be regarded as too high in the circumstances. The notice included six resolutions relating to Mr Hanson’s remuneration and another relating to the managing director’s powers.[34]  Again Mr Posgate resisted the convening of the meeting indicating he was voting no to the resolutions and again seeking a response to his earlier request of 24 November 2016.[35]
  2. It is noteworthy that throughout the above described era Mr Posgate did not in his communications credibly attempt to negotiate a solution to the impasse.

The nosedive into litigation

  1. On 20 February 2017, the parties agreed to consent orders appointing a receiver to Mypoolinspections.[36]  It is difficult to avoid the impression the developments in respect of that litigation had somehow infected the balance of the “negotiation versus litigation” thinking of the parties or those advising them in respect of the Inspection Apps dispute.  However, that balance soon tipped, quite unproductively, towards litigation. 
  2. The next day Mr Hanson’s solicitors wrote variously to Mr Posgate’s solicitors and “The Directors” of Inspection Apps proposing that the parties enter into buy-out negotiations of Inspection Apps and Mypoolinspections, the latter entity already being controlled by Receivers.  The correspondence adopted a tone rather at odds with the context of an attempt to pursue negotiation, calling for Inspection Apps to “concede and agree” to matters regarding Mr Hanson’s work role and the appointment of a remuneration consultant within 14 days or proceedings would be instituted by Mr Hanson against the company in the District Court. 
  3. In the correspondence Mr Hanson’s solicitors noted that without the parties’ agreement “no resolution of directors (or shareholders) can be passed authorising the engagement of solicitors to act for the Company in defending any such proceedings”.[37]
  4. Failing the company taking responsibility for defending such a proceeding s 237 Corporations Act 2001 (Commonwealth) allows an officer or member of the company to apply for leave to intervene for the purpose of taking responsibility for the defence on behalf of the company.  Conscious of that Mr Hanson’s solicitors, presumably not content to “rattle the sabre” merely by their threat of legal proceedings, also added the warning that in the event there was such an application for leave they would:

"(i)oppose the application;

  1. in the alternative, seek directions for the appropriate remuneration to be the subject of a report by a suitably qualified expert, or other directions calculated to simplify and expedite the determination of the dispute;
  2. further to (ii) oppose, and if necessary seek an order preventing, the appointment of your firm as the solicitors to act in defence of the proceeding, on the basis that it would be more appropriate for the Company to appoint an independent firm for that purpose;
  3. further to (ii) oppose any order that your clients’ costs of intervening in the proceeding be paid by the Company, or alternatively, impose stringent conditions in respect of any such order – including provision for an order for costs against your clients to be made in the event the defence of the proceeding is unsuccessful.”[38]
  1. This warning was an unfortunate example of the undesirability of litigious posturing in correspondence between lawyers.  It would not enhance the prospect of negotiation and served no positive purpose.  It was mere hot air which would not alter Mr Posgate’s probably good legal prospects of successfully intervening under s 237.  Further, the reference at (iii) to the Company appointing an independent solicitor seemingly over-reached on the potential conflict issue - a successful intervener under s 237, who would here be Mr Posgate, is the person who would then act in the company’s interests and would appoint and instruct solicitors, whoever those solicitors may be.  
  2. It is no surprise that Mr Posgate’s solicitors returned fire by letters on 10 March 2017,[39] citing the prolonged failure to resolve the remuneration dispute and Mr Hanson’s foreshadowed District Court proceeding and opposition to Mr Hanson intervening in it to represent the company, as demonstrating a deadlock between the only two directors and shareholders.  The letters confirmed a preparedness to engage in buy out negotiations but indicated that if the District Court proceeding was initiated or Mr Hanson’s remuneration was not resolved within a reasonable time a winding up application would be brought.
  3. The nosedive towards litigation continued.  Receiving no response by 30 March 2017, Mr Posgate’s solicitors invited the respondents to resolve the companies be voluntarily wound up.[40]  On 7 April 2017 Mr Hanson’s solicitor filed the threatened District Court proceeding, seeking an array of remuneration related declarations and payments.[41]  Mr Posgate’s solicitor filed the present application for winding-up on 13 April 2017. 

Financial issues

  1. On 19 April 2017 Mr Hanson provided draft financial statements for Inspection Apps, requesting Mr Posgate sign and return them by 21 April 2017.  According to those statements, Inspection Apps’ net operating profit was about $120,000 for the 2014/15 financial year and about $114,000 for the 2015/16 financial year.  Operating expenses in the draft financial statements detailed increases in wages from $11,000 in 2013/14, to $50,576 in 2014/15, and to $114,000 in 2015/16.  The operating expenses also included payments to unidentified associated parties of about $28,000 in 2014/15, and about $64,000 in 2015/16.  They also disclosed an increase in debtors in 2015/16 from $35,000 to $132,000. 
  2. Mr Posgate emailed Mr Hanson identifying these “financial anomalies” on 19 April 2017 inviting him to explain them.  Mr Hanson responded by email explaining that “$38k of the $64k is a provision for that wages liability”. 
  3. On 26 June 2017 Mr Hanson transferred $10,603.96 from Inspection Apps’ bank account to Mypoolinspections, justifying the transfer by an invoice from Mypoolinspections to Inspection Apps, for Inspection Apps’ 50 per cent share of expenses including rent and IT support and backups.  Mr Hanson did not speak to Mr Posgate about this payment or request his agreement to it.  He concedes it did not arise out of a contractual obligation.[42]
  4. Some concern was expressed in Mr Posgate’s initial affidavit in this matter about a lack of recent tax returns and accompanying financial statements however Mr Hanson deposed to the preparation of tax returns and financial statements to the financial year ending 30 June 2016.  A problem remains in that tax returns for recent financial years have not been lodged, essentially because the directors cannot agree on the identity of the company accountant and the accuracy of the financial records.
  5. Some concern was also raised about a transfer of $100,000 at one stage  from Inspection Apps bank account to Mr Hanson’s although that was in an earlier era when Mr Posgate had frozen accounts and Mr Hanson needed access to operating expenses.[43]
  6. The materials show, and it is not in dispute, that the business of Inspection Apps continues to operate successfully[44] and is trading profitably.[45]  In addition to Mr Hanson it has a part-time book-keeper and an employee who works four days a week for about $40,000 per annum.

Alternative remedies

  1. On 29 May 2017 Mr Hanson made an offer to purchase the subject companies’ shares by appointing an expert to value the shares.[46]  The offer included a variety of conditions including that an expert to be appointed to make a final and binding valuation determination which was to take account of Mr Hanson’s District Court claim.
  2. Mr Posgate’s solicitors responded on 6 June 2017,[47] identifying “unacceptable” problems with the offer including the uncertainty of the proposed proforma financial statements, the notion that the expert would take account of the District Court proceeding and that the offer did not dispose of the District Court proceeding, the binding nature of the termination, the absence of any disposition of Mr Posgate’s costs in the present application and the need for the parties to still negotiate in good faith to reach agreement on the terms of a formal contract.
  3. A revised offer was made on 21 June 2017, though the revision went to the appointment of accountants rather than the issues mentioned above.[48] 
  4. The latter point was noted in correspondence by Mr Posgate’s solicitors of 27 June 2017[49] in which they made an open offer to sell the shares of Mr Posgate and Broken Compass Pty Ltd for $275,000 or to buy the shares of Mr Hanson and Matama Pty Ltd for that amount.  That offer was explained on the basis the subject companies hold about $320,000 at the bank and have goodwill, physical assets and intellectual property worth about $230,000, giving rise to a combined total of $550,000, half of which is the offered amount.  The offer ignored the alleged liability for remuneration characterising the claim for it as unmeritorious.  Such a position is at odds with the concession of their client Mr Posgate in cross-examination that Mr Hanson deserved to be paid more than $26, 000 per annum.[50]
  5. The offer lapsed, although the need for a statutory so-called whitewash procedure likely to be required under it was further discussed in emails between the parties.  On 31 July 2017 Mr Hanson’s solicitors effectively repeated that component of the offer of 27 June 2017 which involved a buy-out of Mr Hanson’s interests for $275,000 but included arrangements to allow the statutory whitewash procedure to occur.[51]  The same letter candidly acknowledged however that Mr Posgate was the more natural seller and Mr Hanson the more natural buyer of the shares – a proposition Mr Posgate agreed with in cross-examination.[52]  The ensuing rejection of the offer cited explanatory concerns about company expenditure and accounting and further costs incurred.[53]
  6. The first day of the hearing proceeded on 9 August 2017.  Subsequent to it, on 19 September 2017, Mr Posgate’s solicitors made a further offer in the alternative.[54]  That offer lapsed but Mr Hanson’s solicitor made a further offer on 7 November 2017.[55]  The hearing resumed on 10 November 2017.  The substance of the most recent offer is discussed further below.  As will be seen, this case ultimately turns upon whether Mr Posgate has acted unreasonably in not accepting Mr Hanson’s offer.

Relevant legal principles

  1. Section 461(1)(k) of the Corporations Act 2001 (Commonwealth) (“the Act”) empowers the Court to order the winding-up of a company if “the Court is of opinion that it is just and equitable that the company be wound up”.
  2. Section 467(4) of the Act provides:

467 Court’s powers on hearing application

(4) [Just and equitable application] Where the application is made by members as contributories on the ground that it is just and equitable that the company should be wound up or that directors have acted in a manner that appears to be unfair or unjust to other members, the court, if it is of the opinion that:

  1. the applicants are entitled to relief either by winding up the company or by some other means; and
  2. in the absence of any other remedy it would be just and equitable that the company should be wound up;

must make a winding-up order unless it is also of the opinion that some other remedy is available to the applicants and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.” 

  1. The remedy of winding-up an otherwise solvent company, as here, has been described as an extreme remedy, although it is no longer inevitably viewed as a remedy of last resort.[56]  It may have advantages over an alternative remedy and in that assessment it ought be borne in mind that a liquidator is suitably equipped to realise company assets and sell shares.[57]  
  2. The authorities show a winding up may be an appropriate remedy in circumstances where there is animosity between the principal shareholders.[58]  So it is that in cases involving equal shareholders in solvent companies where appointed directors are deadlocked on critical issues, courts have been prepared to order a winding up on the just and equitable ground.[59] 
  3. It is well established that the categories of winding up on the just and equitable ground are not closed.[60]  One such category is in the case of a company run as a quasi-partnership where the controlling members’ relationship has broken down.[61]  In this context, it has been observed that the term “quasi-partnership” may be misleading and that it is preferable to refer to such a category of case as involving “a majority controlled business requiring mutual cooperation and a level of trust”.[62]  In any event the present matter falls into such a category.
  4. It is a category well explained in the often cited judgment of Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd & Ors[63] in which his Lordship observed:

“The foundation of it all lies in the words “just and reasonable” and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. …  The “just and equitable” provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it.  It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.

It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise.  Certainly the fact that a company is a small one, or a private company, is not enough.  There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. … The superimposition of equitable considerations require something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.”

Discussion

  1. There is an obvious tension in the superimposition of equitable considerations in the present case.  The fact that Mr Posgate cannot at will “take his stake and go elsewhere” favours his position.  As against that Mr Hanson’s counsel emphasises the commercial arrangement between the players was premised on the shareholders participating in the business.  This was said to imply an implicit obligation on Mr Posgate in departing that arrangement to co-operate in attempting to arrive at new arrangements affording Mr Hanson the chance to continue with the business.  That is, it was submitted, Mr Posgate has no just or equitable entitlement to a “no fault divorce” or “to walk out of the company and burn it to the ground on the way out”.  
  2. The reference to there being no right to a no fault divorce in this context drew upon the observations of Lord Hoffmann in Re a Company (No 00709 of 1992) O’Neill & Anor v Phillips & Ors.[64]  There, in reasons subheaded “No-fault divorce?”,  his Lordship rejected the submission that “in a ‘quasi-partnership’ company one partner ought to be entitled at will to require the other partner or partners to buy his shares at a fair value”, needing only to declare that trust and confidence has broken down.  His Honour observed:

“I do not think that there is any support in the authorities for such a stark right of unilateral withdrawal.  There are cases, such as Re a Company…, ex p Kremer [1989] VCLC 365, in which it has been said that if a breakdown in relations has caused the majority to remove a shareholder from participation in the management, it is usually a waste of time to try to investigate who caused the breakdown.  Such breakdowns often occur (as in this case) without either side having done anything seriously wrong or unfair.  It is not fair to the excluded member, who will usually have lost his employment, to keep his assets locked in the company.  But that does not mean that a member who has not been dismissed or excluded can demand that his shares be purchased simply because he feels that he has lost trust and confidence in the others.”[65]

  1. Concerned with the exclusion of a minority shareholder without an offer to buy his shares or make some other fair arrangement his Lordship observed of those circumstances:

“…[T]he unfairness does not lie in the exclusion alone but in exclusion without a reasonable offer.  If the respondent to a petition has plainly made a reasonable offer, then the exclusion as such will not be unfairly prejudicial and he will be entitled to have the petition struck out.  It is therefore very important that participants in such companies should be able to know what counts as a reasonable offer. 

In the first place, the offer must be to purchase the shares at a fair value. …

Secondly, the value, if not agreed, should be determined by a competent expert. …

Thirdly, the offer should be to have the value determined by the expert.  I do not think that the offer should provide for the full machinery of arbitration or the halfway house of an expert who gives reasons.  The objective should be economy and expedition, even if this carries the possibility of a rough edge for one side or the other (and both parties in this respect take the same risk) compared with a more elaborate procedure. …

Fourthly, the offer should, as in this case, provide for equality of arms between the parties.  Both should have the same right of access to information about the company which bears upon the value of the shares and both should have the right to make submissions to the expert …

Fifthly, there is the question of costs. …  If there is a breakdown in relations between the parties, the majority shareholder should be given a reasonable opportunity to make an offer … before he becomes obliged to pay costs. …  The mere fact that the petitioner has presented his petition before the offer does not mean that the respondent must offer to pay the costs if he was not given a reasonable time.”[66]

  1. There is an element of circularity in the relevance of consideration of the offer of a share buy-out to s 467(4).  It might be thought such an offer, if reasonable, bears upon whether it is just and equitable to order the winding up of a company.  However, the availability of such a remedy is in effect ignored in the initial reasoning contemplated by s 467(4)(a) and (b), viz s 467(4)(b)’s words, “in the absence of any other remedy”.  In effect the availability of the other remedy becomes relevant once the prima facie requirements of s 467(4)(a) and (b) are met.  That is because s 467(4) goes on to provide, if the requirements of s 467(4)(a) and (b) are met, that the court:

“…must make a winding-up order unless it is also of the opinion that some other remedy is available to the applicants and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy”. (emphasis added)

  1. The prima facie requirements of 467(4)(a) and (b) have been met in this case.  The real issue is whether some other remedy is available to the applicants and they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.
  2. As to those prima facie requirements, the passage of time has clearly demonstrated Mr Posgate’s entitlement to relief by winding up.  True it is the business is apparently solvent and apparently continues to trade profitably, although perhaps not as profitably as may appear when eventual allowance is made for its obligation to fairly remunerate Mr Hanson since Mr Posgate’s departure.  However, the subject companies clearly cannot continue to operate indefinitely given the extent of the unresolved estrangement between Mr Hanson and Mr Posgate. 
  3. Mr Hanson and Mr Posgate cannot co-operate sufficiently to hold regular directors’ meetings.  Mr Hanson is suing the company and they obviously will not reach agreement about how the company should approach that litigation.   Trust has broken down to the point where one of them is unwilling to agree to the accuracy of financial statements and tax returns prepared on the direction of the other.  The elementary corporate obligation to file tax returns is not being met.  The directors are in effect failing to meet their responsibilities as directors.  This cannot continue.  With the passage of time the combined weight of these ongoing problems has made it plain that absent some other remedy it would be just and equitable that the companies should be wound up.
  4. The pivotal question to be determined then is whether some other remedy is available to the applicants and, if it is, whether they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.
  5. Mr Posgate places reliance upon the tentative view expressed by Bond J in Allways Resources Holdings Pty Ltd & Anor v Samgris Resources Pty Ltd & Anor[67] that once, as here, an applicant has established the basis for winding up on the just and equitable ground, there is a shift in onus to a respondent to persuade the Court that some other remedy is available to the applicants and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.  It is unnecessary to form a concluded view about that because if the respondents have such an onus I am satisfied it has been met.
  6. The remedy available to the applicants and for that matter the respondents is obvious.  It is that Mr Hanson and his interests should buy out the shares of Mr Posgate and his interests for an independently valued amount, which valuation should be informed by an independent assessment of the companies’ true financial position, including any monies owed to the companies by Mr Hanson and any money owing to Mr Hanson from the company by way of proper remuneration of him since Mr Posgate’s departure. 
  7. There have been a number of offers to pursue a remedy of this kind.  Ultimately submissions focused upon the respondents offer of 7 November 2017.  The submissions of each side focused upon this offer with a view to each arguing about the reasonableness or unreasonableness of the applicant in not pursuing such a proffered remedy.
  8. The remedy offered by Mr Hanson’s solicitors on 7 November 2017 (“the most recent offer”) was for Matama Pty Ltd to purchase all of Broken Compass Pty Ltd’s shares in Inspection Apps and Workflow[68] at a price to be determined by an independent accountant experienced in the valuation of shares in private companies.  The terms of the offer are necessarily detailed but relevantly include the following elements:
  1. The offer nominates a reputable local accountant to be the independent accountant along with a number of alternative reputable such accountants.
  2. The shares are to be valued without discount by reason of there being no majority holding and on the basis their value is 50 per cent of the respective net asset value of the companies, including any goodwill as an asset.
  3. The valuation is to occur by reference to proforma draft financial statements prepared by one of a number of alternatively nominated reputable local firms of accountants.
  4. In connection with the disputed remuneration, the offer proposes a settlement by the passing of a resolution that Mr Hanson’s remuneration from 24 February 2018 should be $130,000 per annum plus superannuation.  Importantly, as an alternative to that proposal, the terms offer that the independent accountant determine Mr Hanson’s entitlement to additional remuneration.
  5. The independent accountant is empowered to make adjustments in determining the actual net asset value in order to take account of any payments or transactions of the companies from February 2016 prejudicial to Mr Posgate’s interests and any amounts due to Mr Hanson by way of the remuneration mentioned above.
  6. Each side can nominate a firm of accountants or solicitors to make written representations to the independent accountant.
  7. The terms make provision for full access and inspection of the companies’ records both by the independent accountant and Mr Posgate’s representatives.
  8. Before making his determination the independent accountant is to invite each side to make written representations.
  9. The independent accountant will make a reasoned determination accompanied by brief written reasons which determination will be final and binding upon the parties, save that it may be reviewed by the Court on the grounds that it was made by reason of a material error of law or fact or not in accordance with the terms of the offer.
  10. The costs of the independent account are to borne in equal shares by the parties, unless the independent accountant determines otherwise and, if so, in such proportions as the independent accountant determines.
  11. The terms make provision for the parties to negotiate the terms of the formal contract necessary for the sale and purchase of the shares, with any difference between them as to those terms being referable to the senior partner for the time being of a reputable local law firm whose decision on the issue will be final and whose costs will be borne in equal shares by the parties, unless that senior partner determines otherwise and, if so, in such proportions as he or she thinks fit.
  12. The terms make provision for an extension of the completion date in the event the price for the shares exceeds $100,000, so as to allow a dividend to be declared for the purpose of completing the sale.
  13. As to the costs of the present application, the terms offer in the alternative that the applicants pay 80 per cent of the respondents’ costs on the standard basis or that the parties request the Court to determine the order as to costs.
  14. The offer was stipulated as remaining open for acceptance to the close of business on the second day of the hearing, subject to it being extended by notice in writing by the respondents.
  1. In advancing submissions relating to this offer, Mr Hanson’s counsel implicitly contemplated that this Court ought determine the argument on the premise that the offer will be current pending the Court’s determination.  However, this point was not explicitly addressed and, while my reasons now proceed on that implication, it will be necessary for it to be confirmed before any orders made on that premise are perfected.
  2. Mr Hanson’s counsel submits the most recent offer has the characteristics of what was described as a reasonable offer by Lord Hoffmann in Re a Company O’Neill & Anor v Phillips & Ors discussed above.  Indeed he acknowledges its drafting deliberately incorporated such features.
  3. Mr Posgate’s counsel submitted the applicants were not acting unreasonably in seeking to have the company wound up instead of accepting the most recent offer.  He listed six reasons in support of that argument.  Each of those reasons appears below by way of an italic subheading, followed in each instance by my discussion of it.

“It effectively requires an Accountant to decide the District Court claim”

  1. The offer’s relevance to the District Court claim is merely that, like the claim, it relates to the topic of Mr Hanson’s entitlement to additional remuneration.  The fact that the District Court claim happens to relate to the same topic is not to the point.  Courts often decide matters which can be decided by other means.  The notion that an independent accountant can satisfactorily determine Mr Hanson’s entitlement to additional remuneration is unremarkable.[69]  If the offer is accepted and the buyback proceeds Mr Posgate’s side would have no interest in the fate of the District Court proceeding and there would be no utility in Mr Hanson pursuing it.

“It invites further dispute about who the independent accountant should be for the purpose of the completion of the financial accounts”

  1. The offer nominates a reputable local accountant along with alternative local accountants.  No reason is advanced as to why the applicant would not regard those experts as suitable.  It would be unreasonable for the applicants to dispute the proffered choices.

“It envisages a process which will take a minimum of five months to complete”

  1. There is no evidence to suggest that the winding up process would likely take less time.  Moreover, in this case tasks with some similarity to those contemplated under the offer would likely also be performed as part of a winding up.  Bearing in mind the additional responsibilities inherent in a winding up, such as the continued conduct of the business pending winding up, it is likely the process contemplated by the offer would take less and at worst no more time than a winding up.

“There is no indication as to the probable cost”

  1. It is well known to the court that the prices charged by liquidators responsible for winding up companies tend towards the upper end of rates charged by accountants.  It is unlikely the professionals sought to be engaged under the offer would charge at higher rates than tend to be encountered in a winding up.  It is also unlikely their total time spent on the tasks contemplated under the offer would exceed that likely to be consumed in winding up the companies.  True it is the offer does not indicate the probable cost of the exercise but there is no basis to conclude it would be more expensive than a winding up.  As against this the offer leaves the parties in a better position to protect their interests than can occur once a court intervenes by ordering a winding-up.

“It does not deal with the aforementioned financial anomalies regarding Mr Hanson’s recent dealing with Inspection Apps’ money”

  1. The significance of the so called financial anomalies raised by the applicant appeared to dissipate as the hearing progressed but in any event they are precisely the type of issues which the terms of the offer, summarised at [68(e)] above, accommodate.  The independent accountant would be as well positioned under the offer as a liquidator would be to investigate and resolve any financial anomalies for the purposes of a properly informed valuation.

“It is improbable, given the acrimony between them, that Mr Hanson and Mr Posgate will agree on the various bases upon which the valuation is to occur, who should bear the costs of it and of this proceeding, and what the final terms of the buy-out ought be”

  1. The reality is that the offer leaves little to be agreed as between the parties.  They can make submissions to the independent accountant about the valuation process but ultimately it will be for the independent accountant to make his or her own decisions.  The offer does require the parties agree on the content of the final share sale contract but by that point the matters they have had past difficulty agreeing on will have been decided by the independent accountant.  In any event there is even a mechanism for an independent solicitor to decide the terms of the final contract in the event of disagreement. It is unnecessary under the offer for the parties to agree on the costs of this application.  If they do not agree on the costs of this proceeding I can in any event readily determine that issue. 

Conclusion

  1. Doubtless Mr Posgate has his own reasons for having rejected the most recent offer.  It may be that concern about the costs of the present proceeding and frustration at the long time taken in agreeing on a remedy have influenced his decision making.  Be that as it may, the differences between the parties in arriving at the remedy of a buyout eventually dwindled to quite cosmetic points of difference. On an objective consideration of the evidence as it now stands, I am of the opinion the applicants are acting unreasonably in seeking to have the company wound up instead of pursuing a remedy of the kind exemplified by the respondents’ most recent offer.
  2. For these reasons, the application for winding up should be dismissed assuming, as foreshadowed above, that the respondents confirm their most recent offer remains open for acceptance by the applicants.
  3. These conclusions make it unnecessary to consider whether I have the power per s 467(1)(e), to order valuations with a view to in turn ordering a share buyout.[70]
  4. It will also be necessary to hear the parties as to costs unless costs are agreed. 

Orders:

  1. The application is listed for the giving of final orders at 10.00 am on 16 March 2018.
  2. Prior to that time the respondents will inform the applicants in writing whether, for the purposes of the Court’s final orders, it is correct that the respondents’ most recent offer remains current.
  3. The parties will be heard as to costs at the above time and date in the event they have not otherwise agreed as to costs in the meantime.

Footnotes

[1]In respect of Workflow they are each equal shareholders.  In respect of Inspection Apps, the equal shareholders are the second applicant Broken Compass Pty Ltd, controlled by Mr Posgate, and the second respondent Matama Pty Ltd, controlled by Mr Hanson.

[2]T 1-37 L24.

[3]Affidavit of Darryl Posgate ct doc 27 p254.

[4]Affidavit of Darryl Posgate ct doc 5 [21]; T 1-28 L21.

[5]Affidavit of Matthew Hanson ct doc 24 p44.

[6]Affidavit of Darryl Posgate ct doc 27 p254.

[7]Affidavit of Darryl Posgate ct doc 5 DWP 10 p56.

[8]Affidavit of Darryl Posgate ct doc 5 DWP 13 p61.

[9]Affidavit of Darryl Posgate ct doc 5 DWP 14 p63.

[10]T 1-73 L 9.

[11]T 1-75 L 13.

[12]T 1-57 L 23.

[13]T 1-73 L9.

[14]Affidavit of Darryl Posgate ct doc 5 DWP 15 p64.

[15]Affidavit of Darryl Posgate ct doc 5 DWP 17 p69.

[16]Affidavit of Darryl Posgate ct doc 5 DWP 17 p68.

[17]Affidavit of Darryl Posgate ct doc 5 DWP 18 p74.

[18]Affidavit of Darryl Posgate ct doc 5 DWP 23 p127.

[19]Affidavit of Darryl Posgate ct doc 5 DWP 24 p129.

[20]Affidavit of Darryl Posgate ct doc 5 DWP 25 p130.

[21]T 1-60 L27.

[22]Affidavit of Darryl Posgate ct doc 5 DWP 27 p135.

[23]Affidavit of Darryl Posgate ct doc 5 DWP 28 p136.

[24]T 1-83 L 45; T 1-86 L36.

[25]Affidavit of Darryl Posgate ct doc 5 DWP29 p139.

[26]Affidavit of Darryl Posgate ct doc 5 DWP30 pp144-145.

[27] T 1-33 L 32.

[28]Affidavit of Darryl Posgate ct doc 5 DWP30 pp141-143.

[29]Affidavit of Darryl Posgate ct doc 5 DWP 31 p217.

[30]Affidavit of Paul Frost ct doc 36 pp23-25.

[31]Ibid p24.

[32]Ibid p25.

[33]T 2-8 L37.

[34]Affidavit of Darryl Posgate ct doc 5 DWP32 p220.

[35]Affidavit of Darryl Posgate ct doc 5 DWP33 p221, DWP34 p222.

[36]Affidavit of Darryl Posgate ct doc 5 DWP 9 pp53 et seq.

[37]Affidavit of Michael Laycock ct doc 2 MKL1 p3.

[38]Ibid.

[39]Affidavit of Michael Laycock ct doc 2 MKL5 pp22,23.

[40]Affidavit of Michael Laycock ct doc 2 MKL7 p25.

[41]Affidavit of Michael Laycock ct doc 2 MKL9 pp31 et seq. The parties agreed no step would be taken in that proceeding for the time being.

[42] T 1-79 L37, T 1-80 L28.

[43] T 1-81 LL29-45.

[44]Affidavit of Matthew Hanson ct doc 30.

[45]T 1-36 L25.

[46]Affidavit of Glen Morrow ct doc 22 GMM9&10.

[47]Affidavit of Glen Morrow ct doc 22 GMM12.

[48]Affidavit of Glen Morrow ct doc 22 GMM15.

[49]Affidavit of Michael Laycock ct doc 25 MKL1.

[50] T 1-38 L 37.

[51]Affidavit of Glen Morrow ct doc 29 pp5-8.

[52]T 1-37 L36.

[53]Affidavit of Glen Morrow ct doc 29 p10.

[54]Affidavit of Paul Frost ct doc 36 PEF1.

[55]Affidavit of Paul Frost ct doc 36 PEF3.

[56]Allways Resources Holdings Pty Ltd & Anor v Samgris Resources Pty Ltd & Anor Ibid [2017] QSC 74, [16].

[57]Hillam v Ample Source International Ltd (No 2) (2002) 202 FCR 336, [80]-[82].

[58]Maine v Chelia [2005] NSWSC 860; Bernhardt v Beau Rivage Pty Ltd (1989) 15 ACLR 160.

[59]Exton & Ors v Exton Pty Ltd (2018) 118 ACSR 411.

[60]Allways Resources Holdings Pty Ltd & Anor v Samgris Resources Pty Ltd & Anor [2017] QSC 74, [15].

[61]Ebrahimi v Westbourne Galleries Ltd [1973] AC 360.

[62]MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167, [71].

[63][1973] AC 360, 379.

[64][1999] 2 All ER 961.

[65] Ibid 972.

[66]Ibid 975.

[67][2017] QSC 74.

[68]The offer erroneously refers to Workflow Technologies Pty Ltd as Workplace Technologies Pty Ltd but nothing turns on that easily corrected error.

[69] See for example Re a company (No 00836 of 1995) [1996] 2 BCLC 192, 204.

[70] Compare Host-Plus Pty Ltd v Australian Hotels Association [2003] VSC 145 [60] and Guerinoni v Argyle Concrete & Quarry Supplies Pty Ltd WASC 22 April 1999 BC9902042.

Editorial Notes

  • Published Case Name:

    Posgate & Anor v Hanson & Anor

  • Shortened Case Name:

    Posgate v Hanson

  • MNC:

    [2018] QSC 51

  • Court:

    QSC

  • Judge(s):

    Henry J

  • Date:

    12 Mar 2018

  • White Star Case:

    Yes

Litigation History

Event Citation or File Date Notes
Primary Judgment [2018] QSC 51 12 Mar 2018 Application listed for final orders on 16 March 2018 and for hearing submissions as to costs; respondents ordered to inform applicants whether their most recent offer remains current: Henry J.
Primary Judgment [2018] QSC 120 29 May 2018 Application dismissed; respondents pay applicants' costs up to and including 6 June 2017; applicants pay respondents' costs after 6 June 2017: Henry J.

Appeal Status

No Status