In the matter of Munja Bakehouse Pty Ltd

I should first identify the parties to the proceedings, before turning to the nature of the relief sought in them, which was narrowed following opening submissions. The Plaintiffs in the proceedings are Mr Stephen Dionatos (to whom I will refer as “SD”), DSPEM Pty Ltd as trustee of the Dionatos Trust (“DSPEM”) and Mr Peter Dionatos (“PD”). PD is the sole director and shareholder of DSPEM. SD is a director of the First Defendant, Munja Bakehouse Pty Ltd (“Munja”), owns 50% of the shares in Munja and is also a director of the Second Defendant, Smith Street Marrickville Pty Ltd (“Smith Street”) and owns 25% of the shares in Smith Street. PD is SD’s son, is a director of Smith Street, owns 25% of the shares in Smith Street and is the sole director and shareholder of DSPEM.

The First and Second Defendants, Munja and Smith Street, appropriately took no active role in the proceedings which involved a dispute between their shareholders. The Third Defendant, Jamlyd Pty Ltd (“JPL”), is a company associated with the Fourth and Fifth Defendants, Harry Alexander (to whom I will refer as “HA”) and his wife, Sophia Alexander (to whom I will refer as “SA”), and is joined in its personal capacity and as trustee of the Alexander Family Trust. HA is also a director of Munja and a director of and shareholder of Smith Street and is a director of JPL and SA is the third director of Munja, a director and shareholder of Smith Street and also a director of JPL. It is common ground that Munja operates a wholesale bakery which manufactures and distributes gluten free bakery goods; Smith Street is the owner of a property located in Marrickville in New South Wales (“Smith Street property”) from which Munja operates the business, and Smith Street owns the Smith Street property as trustee for the 30Smith Unit Trust (“Trust”); DSPEM and JPL, are the two unitholders, in equal shares, of the Trust; and JPL owns 50% of the shares in Munja.

By Originating Process filed on 16 November 2022, in proceedings commenced in the Supreme Court of Victoria and then transferred to this Court, the Plaintiffs initially sought a range of relief in respect of the affairs of Munja and Smith Street. That relief was sought, relevantly, under ss 232-233, 247A and 1324 of the Corporations Act 2001 (Cth) (“Act”) and included seeking a buy-out order and a winding up order in respect of those companies. The Plaintiffs filed a Statement of Claim, and Amended Statement of Claim, pleading the factual basis of that claim, but that pleading is no longer relied on where their case has narrowed in the course of the hearing. By Interlocutory Process filed on 31 July 2023, HA, SA and JPL also sought an order that Munja and Smith Street be wound up and that a liquidator be appointed as receiver of the Trust and have consequential powers, which would commonly be made where a liquidator is appointed to the trustee of a trust company. Alternatively, they also sought a buy-out order in substantially the same terms as sought by the Plaintiffs. The latter relief was put on the basis that, where the Court was prepared to make a winding up order under s 461(1)(k) of the Act on the just and equitable ground, it also had power under s 467(1) of the Act to make a buy-out order. I address that question below.

An unusual feature of the proceedings emerged in the openings, namely that the Plaintiffs and the Defendants both sought, essentially, the same relief, namely that HA and SA, or JPL, purchase the shares in Munja and Smith Street as their first preference, and a winding up order as their second preference.

The opening submissions and the fact that the parties sought the same relief in the same priority suggest that the real difference between them involved the question of valuation. After opening submissions, Counsel raised the possibility that that question could be addressed as a separate issue by the Court. I am doubtful that that approach would have been available, because it would likely have involved the Court giving an advisory opinion, if that question was determined in isolation from factual findings in any dispute which gave rise to the exercise of the Court's power to wind up the companies or order a buy-out, whether under the oppression provisions or, as the Defendants sought, under ss 461(1)(k) and 467(1) of the Act. In the event, that approach was not pressed.

After discussions between the parties to bring about a resolution of the matter, or narrow the issues, were unsuccessful, the Plaintiffs sought and obtained leave to amend their Originating Process, so as not to press the relief that was sought in respect of oppression or for the inspection of documents. They now maintain the claim for a winding up of Munja and Smith Street under s 461(1)(k) of the Act, on the basis that it is just an equitable to make that order, rather than on the basis of oppression. HA, SA and JPL subsequently amended their Interlocutory Process, by leave, to seek an order that they purchase the shares in Munja and Smith Street and the units in the Trust. That order was sought on the basis of a narrower oppression claim under s 233 of the Act, which relied on SD’s failure to authorise a lease over the Smith Street property between Munja and Smith Street, which I address below.

I first set out a brief chronology of events, which are in narrow compass, drawing upon SD’s chronology and the affidavit evidence (which I address below) and cross-examination. I have largely omitted reference to events that are no longer relevant to the narrower cases put by the parties.

From the early 2000’s until about 2013 or 2014, SD operated Munja Muffins, a muffin supplier based in Sydney (SD 13.7.23 [10]), and HA and SD met in about 2005 when SD supplied muffins to a café operated by HA (HA 15.9.23 [15]). In about 2013, SD was engaged by HA and SA to supply their cakes to other cafés on a trial basis (SD 13.7.23 [10(g)]) and, around a month later, HA proposed to continue this arrangement on a 50/50 split with SD (SD 13.7.23 [10(g)-(h)]). In December 2013 or early 2014, a meeting took place between SD, HA and SA where the formation of a business between them was discussed (SD 13.7.23 [10(j)]; HA 15.9.23, [31]–[34]); Munja was subsequently incorporated on 26 February 2014; and, in late April 2014 or May 2014, commenced trading at Willoughby in leased premises (SD 13.7.23 [10(o)-(p)]; HA 15.9.23 [41]).

In early February 2015, Munja secured a lease for premises in Marrickville (HA 15.9.23 [48]) and, in October 2016, the business moved to another factory located at Marrickville under a lease (HA 15.9.2023 [70]). By around late 2017, a “Munja Bakehouse” software application went live which allowed products to be ordered and paid for through that application (SD 13.7.23 [10(u)], 17]).

On 7 May 2019, Smith Street was incorporated (SD 13.7.23 [14(a)]) and, on 16 July 2019, Smith Street purchased the Smith Street property, funded by a bank loan (SD 13.7.23 [14(b)-(c)]). Between October 2019 and April 2020, renovations were undertaken at the Smith Street property, funded by loans from Munja, SD and JPL to Smith Street (HA 15.9.23 [132], [137]). In July 2020, the business commenced trading from the Smith Street property (SD 13.7.23 [13(c)]) and, on 8 October 2020, Smith Street paid $100,000 each to JPL and SD in repayment of their loans (HA 15.9.23 [133]).

SD’s and HA’s evidence addresses several conversations in 2022 in which HA requested that he be paid a higher salary than SD, although there is a dispute whether that was agreed or not (SD 13.7.23 [16(a)-(c)], [20(c)], [25(d)]; HA 15.9.23 [190]-[194]). In evidence admitted as submission under s 136 of the Evidence Act 1995 (NSW) (“Evidence Act”) rather than as proof of the fact, SD says that, on 6 July 2022, HA commenced taking an additional $2,640 gross per week in addition to a pay rise that all directors received of $2,768 net per week (SD 13.7.23, [25(d)]). HA exhibited minutes of a meeting between HA and SD on 7 July 2023 that record that SD rejected the proposal for HA’s salary increase and made a counter offer that HA receive $200,000 on the sale of the business in 2 years (HA 15.9.23 [202]; Ex D1, 97-98). SD’s evidence, also admitted as submission under s 136 of the Evidence Act rather than as proof of the fact, is that in around August 2022, the directors of Munja ceased receiving weekly “dividends” which they had previously received amounting to approximately $100,000 per annum each (SD 13.7.23 [25(l)]). By email dated 24 August 2022, SD requested HA to repay the additional wages that he claimed had been taken by HA without SD’s consent (SD 13.7.23 [21(b)]). By email dated 28 August 2022, HA responded to that email (SD 13.7.23 [21(c)]) and, on 1 September 2022, SD again emailed HA confirming that he did not agree to HA taking an additional salary (SD 13.7.23 [21(d)]). On 26 September 2022, SD caused $31,680 to be paid to him by Munja, purportedly as additional wages, which he says matched the amount that HA had withdrawn up to that date as part of his salary increase (SD 13.7.23 [25(f)]). HA subsequently caused the additional wages withdrawn by SD to be recorded as a loan from Munja to SD (SD 13.7.23 [25(f)]; Ex P1, 290). The Plaintiffs also lead evidence concerning issues as to approval of tax returns and access to documents from November 2022, while the proceedings have been on foot. It is not necessary to reach findings as to the merits of this dispute, given the narrowed cases put by the parties, beyond noting that these matters plainly contributed to the breakdown in their relationship.

I now address the lay affidavit evidence and cross-examination. Given the narrowing of issues in the case, and the limited scope of cross-examination, it is largely not necessary to reach findings of credit as to the relevant witnesses. In his affidavit dated 13 July 2023, SD referred (SD 13.7.23 [10]) to the circumstances in which Munja was established, and also referred to a discussion, in early 2014, which contemplated an equal salary and equal dividend between the parties. I accept that that was likely discussed and was the parties’ expectation at the time the business was established. Given the narrowing in the parties’ cases, it is not necessary to decide whether the “foundational agreement” to which SD referred was established, although it seems unlikely that such an agreement would have fixed the directors’ roles and remuneration for all time, irrespective of their continued health, capacity or commitment to the business, or their continued performance or non-performance of their roles. I accept that the parties had at least an understanding as to their respective participation in the business and an expectation of trust and confidence is readily found in closely held companies of this kind.

SD there outlined the earlier operation of the business and the introduction of the computerised ordering system on the “Munja Bakehouse” software application, and his evidence is that he is unable to use that application because he is partly illiterate and has difficulties with technology and lacks literacy skills (SD 13.7.23 [1], [18]). SD outlined (SD 13.7.23 [11]), in evidence admitted largely as evidence of his understanding rather than evidence of the fact, the areas of responsibility between him, HA and SA, and claimed that he was responsible for logistics, distribution and sales, and again referred to his understanding that all directors would receive the same salary and that the affairs of Munja would be conducted “on the basis of mutual trust and confidence”, as part of the alleged “foundational agreement”.

SD refers (SD 13.7.23 [12]) to preparation of a shareholders’ agreement, which he says was never executed, and his evidence, again admitted as submission and not proof of the fact, is that the business then continued to operate under the terms of the alleged “foundational agreement”. SD refers (SD 13.7.23 [13]ff) to the subsequent history of the business, to HA’s wish since 2022 to be paid an increased salary, and to HA’s and SA’s assumption of tasks within the business that SD claims he was previously responsible for, as the business has increasingly used online systems including the Munja application, which SD again says he is unable to use. SD also addresses several complaints as to the manner in which HA and SA have treated him in the business, which he no longer presses as an oppression claim, although they are relevant to the parties’ respective loss of trust and confidence in each other. SD also addresses (SD 13.7.23 [25]ff) the matters which he contends involved an “arbitrary salary increase” in respect of HA, which he contends were inconsistent with the “foundational agreement” and addresses (SD 13.7.23 [29]ff) issues as to access to the companies’ books and records and the preparation of their financial statements and tax returns.

SD was relatively briefly cross-examined, including as to the circumstances in which Smith Street acquired the Smith Street property. He was challenged concerning his resistance to the execution of a lease between Munja and Smith Street in respect of the Smith Street property, both in 2020 and in 2023, although the relevant Defendants limited their oppression claim to the position in 2020. His evidence in cross-examination was that there was never a risk that Smith Street would deny Munja the right to occupy the Smith Street property, although I recognise that there were later references to a possible sale of the Smith Street property as the conflict between the parties developed. His evidence in cross-examination, largely directed to the later period rather than events in 2020, was that he resisted the execution of a lease because its proposed terms did not reflect an agreement that the rent payable by Munja would reflect the costs incurred by Smith Street in owning the Smith Street property, and because he had lost trust in HA and SA, and he was suspicious as to the terms of a lease that was prepared on HA’s instructions and without his input. SD also recognised in cross-examination, in my view correctly, that the interests of Smith Street and Munja were not aligned in respect of the entry into a lease, at least so far as its specific terms were concerned. It is plain that SD, at least in the later period, was suspicious of HA and possibly also of SA. SD generally presented as an honest witness, and I accept that he honestly held the views that he expressed in cross-examination. It is not necessary to form a view as to whether his suspicions of HA and SA were or were not justified, although he likely correctly perceived that he was at a disadvantage in dealing with them, by reason of his lesser sophistication in business matters.

As a result of the narrowing of the parties’ cases, HA, SA and JPL rightly read only parts of their affidavit evidence. In HA’s first affidavit dated 15 September 2023, he referred (HA 15.9.23 [14]-[15]) to his and SA’s history in the operation of restaurants and cafés over many years and to his initial meeting with SD in 2005, when SD was a supplier of muffins to a café that HA and SA owned and operated. HA outlined (HA 15.9.23 [28]ff) the initial discussions concerning the establishment of the business between HA, SA and SD and outlined how Munja’s business was conducted when it was first established and the then distribution of work between HA, SA and SD. HA also referred (HA 15.9.23 [127]ff) to the purchase of the Smith Street property and the operation of Munja’s business in 2019 and through the COVID-19 pandemic; to the circumstances in which SD declined to sign the draft lease between Munja and Smith Street in respect of the Smith Street property; to a contested directors’ meeting on 27 and 28 June 2022 at which issues as to remuneration were discussed; to subsequent exchanges concerning a possible sale of Munja’s business and to directors’ meetings of Munja since January 2023. By a second affidavit dated 24 November 2023, HA provided further information as to the nature of Munja’s business, the preparation of its financial statements and the employees of the business and responded to aspects of SD’s affidavit dated 20 October 2023, taking issue with substantial aspects of that affidavit.

HA was cross-examined although aspects of that cross-examination. HA initially did not accept that there was any conflict between his duties as a director of Munja and his duties as a director of Smith Street when considering the terms of the proposed lease, on the basis that he would act in the “best interests of both”, and he accepted that he had not considered that position as at April 2023 and had not turned his mind to the conflict (T56-57). There is no reason to doubt that HA would have genuinely sought to have acted in the interests of both Munja and Smith Street at that time, as he perceived them. As I will note below, it seems to me that the interests of Smith Street as lessor and Munja as lessee were potentially in conflict, at least in respect of specific issues such as the amount of the rent payable, the length of the proposed lease and the number and length or options for renewal, and such a conflict is not generally resolved by a director’s belief that he or she will act with subjective honesty in addressing the matters where the conflict exists. These matters remain relevant to the oppression claim put by HA, SA and JPL in respect of SD’s failure to approve a draft lease in 2020, although their oppression claim concerning discussions concerning a lease in different terms in 2023 is no longer pressed.

By her affidavit dated 15 September 2023, SA also addressed (SA 15.9.23 [11]ff) the initial discussions with HA and SD about establishing Munja’s business and the work done in establishing the business. SA also refers (SA 15.9.23 [66]ff) to the purchase of the Smith Street property in 2020, the bank’s request for an executed lease between Munja and Smith Street and SD’s refusal to sign that lease at the time. By her second affidavit dated 27 November 2023, SA referred to her work in creating recipes for the business and in the day-to-day operation of the business. SA was not cross-examined.

As I noted above, all parties now seek an order that Munja and Smith Street be wound up. It is therefore common ground that that order should be made unless HA, SA and JPL obtain an order that they buy out (and, implicitly, SD, PD and DSPEM sell) the shares in the companies and the units in the Trust.

The "just and equitable" ground for winding up a company in s 461(1)(k) of the Act is not limited by particular categories, as I noted in Re CNPR Limited [2018] NSWSC 989 at [8] and Re Spitfire Q Pty Ltd [2021] NSWSC 866 at [12]. Where a company was established on a basis of relationships of mutual confidence, a winding up order may be made on the just and equitable ground under s 461(1)(k) of the Act where irreconcilable differences emerge between its members: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672; [2001] NSWCA 97 (“Fexuto”) at [89]; Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343; [2009] NSWSC 342 (“Nassar”) at [97]–[98]. The circumstances in which the Court may make a winding up order under s 461(1)(k) of the Act also include circumstances where the substratum of the company has failed: Re Catombal Investments Pty Ltd [2012] NSWSC 775 at [19]ff.

Mr Parish, who appears for the Plaintiffs, draws attention to my observations in Re Amazon Pest Control Pty Ltd [2012] NSWSC 1568 (“Amazon Pest Control”) at [17] that:

In Read-Zorn v Origin Distillers Group Pty Ltd [2023] FCA 280 at [19]-[23], Jackman J summarised the applicable principles as follows:

In Haycraft v AF1 Services Pty Ltd [2023] FCA 774 at [73]ff, Stewart J observed that:

Section 467(4) of the Act applies where a winding up order is sought on the just and equitable ground and requires the Court to have regard to the availability of some other remedy and whether a plaintiff would be acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy. There is no absolute rule that the Court will not wind up a solvent company, although winding up is a last resort: Re Pure Nature Sydney Pty Ltd [2018] NSWSC 914 at [76]. In Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd (2018) 125 ACSR 227; [2018] QCA 048, McMurdo JA noted (at [46]) that:

I also bear in mind the Court of Appeal’s observations in Snell v Glatis (No 2) [2020] NSWCA 166 (“Snell”) as to the comparative merits of a buy-out order and a winding up, in the context of an asset-holding company. Leeming JA (with whom Bell P and Meagher JA agreed) there held that an order made by the trial judge for the defendant to buy out a plaintiffs’ minority shareholdings in a group of companies should not have been made, notwithstanding her Honour’s careful and comprehensive review of the authorities supporting that approach, where there was insufficient evidence that the defendant could comply with that order within the specified timeframe, the company was not running a business but collecting rents on leased property, and winding up was a realistic means of securing to the plaintiffs their share of the value of the group and preventing ongoing oppression. The first two of these factors do not arise here, where the Defendants themselves seek a buy-out order and the business is a trading business which likely has greater value as a going concern. Bell P (as the Chief Justice then was) also there observed (at [6]) that:

That decision has since been considered in Russell v Lee Holdings Pty Ltd (No 3) [2020] WASC 346, where the parties had exchanged buy-out offers and asserted their capacities to meet any orders made to that effect. Although that was not a case involving an actively trading business, Martin J there treated the Court of Appeal’s decision in Snell as a counterweight to the authorities describing winding up as a remedy of last resort. In Re Crow Inn Pty Ltd (No 2) [2020] NSWSC 1749, Rees J referred to Leeming JA’s observation in Snell that the circumstances in which a shareholder must realise assets in order to meet a buy-out order lend themselves to the appointment of a liquidator for the purposes of ensuring that occurs independently of the parties. Although each party had there sought buy-out orders, Rees J instead ordered that the companies be wound up.

In his oral opening submissions, Mr Parish put the basis of the application for a winding up on the just and equitable grounds as that Munja (and implicitly Smith Street) operated as a quasi-partnership and there was a breakdown in the substratum of the relationship such that there is no longer mutual trust and confidence. In his written closing submissions, Mr Parish submitted that:

Mr Parish also points to evidence supporting the characterisation of the arrangement as a quasi-partnership and as requiring mutual cooperation and a level of trust, including that the parties met and agreed to their relationship before the company was incorporated and before they had considered the structure of the company; their conduct in working in the business and taking equal salaries until about July 2022; the fact that they did not execute a shareholders’ agreement, although that may not assist SD where he appears to have declined to do so; and HA’s, SA’s and SD’s respective roles as employees working in the business, although there is now a dispute as to the nature of their roles. He also points to matters indicating the breakdown in the relationship of mutual trust and confidence, including evidence that HA has formed the view that SD is “useless to him” and that HA is doing the bulk of the work in the business (SD 13.7.23 [16(a)]; several instances of personal conflict (SD 13.7.23 [24]); and the fact that both parties now seek winding up on the just and equitable grounds in this case. He submits, and I do not understand it to be contested, that:

I am satisfied that an order to wind up Munja and Smith Street on just and equitable grounds is properly made here given the failure of the relationship between the companies’ directors and shareholders and where that is common ground between the parties, where I am not satisfied that I can instead make a buy-out order for the reasons set out below.

As I noted above, HA, SA and JPL also sought an order that the liquidator appointed to Smith Street be appointed as receiver of the Trust and have consequential powers, which would often be made where a liquidator is appointed to the trustee of a trust company. Section 67 of the Supreme Court Act 1970 (NSW) provides that the Court may, at any stage of the proceedings, appoint a receiver by interlocutory order in any case in which it appears to the Court to be just or convenient to do so, and there are many cases in which the Courts have made such an appointment in favour of a liquidator appointed to a trustee company in respect of trust assets. That appointment can be made on the basis of a former trustee’s right of indemnity and exoneration in respect of trust assets, which is available even where a trustee’s office is vacated by reason of the appointment of a liquidator to the trustee company: Stansfield DIY Wealth Pty Ltd (in liq) (2014) 291 FCR 17; (2014) 103 ACSR 401; [2014] NSWSC 1484; Re Double Bay Property Management Pty Ltd (in liq) [2020] NSWSC 203; Re Glenvine Pty Ltd (in liq) [2020] NSWSC 866. I will make that order, where I will make a winding up order.

SA, HA and JPL seek an order that they buy-out the shares held by the Plaintiffs in Munja and Smith Street, and the units in the Trust, on two alternative bases.

The first is a claim that where the Court could make a winding up order under s 461(1)(k) of the Act on the just and equitable ground, it could make a buy-out order under s 467(1) of the Act. Section 467(1) of the Act relevantly provides that:

Neither ss 467(2) or 467A of the Act are presently relevant. As I noted above, s 467(4) provides that:

Mr Parish acknowledges that cll 28, 30 and 103 of the Trust deed provide a mechanism for the purchase of units in the Trust, but I accept that mechanism is likely to be unworkable here where it requires Smith Street as trustee to set the redemption price and determine valuation methods and policies to apply for a valuation of the Trust’s net asset value and the directors of Smith Street, namely SD and PD on the one hand and HA and SA on the other, have conflicting interests in that regard and are likely to be deadlocked. There is no constitutional mechanism and no shareholders’ agreement that allows one party to buy the other’s shares in Munja on an agreed basis and there is no evidence that HA or SA on the one hand or SD on the other have made any offer to buy out the other’s interest in Munja.

This claim raises a significant question as to the scope of s 467(1) of the Act. Counsel did not address, in any detail, the applicable principles of statutory construction which are well-established. In CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; [1997] HCA 2, the High Court observed (at CLR 408) that:

In Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355; [1998] HCA 28 (“Project Blue Sky”), the majority of the High Court observed (at [69]) that the primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all of the provisions of the statute; that the meaning of a statutory provision must be determined by reference to the language of the statute viewed as a whole; and that “the process of construction must always begin by examining the context of the provision that is being construed”. The majority then summarised (at [78]) the process of statutory construction as follows:

In Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27; [2009] HCA 41 (“Alcan”) at [47], the High Court observed in a majority judgment that:

In Federal Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503; [2012] HCA 55 (“Consolidated Media”) at [39], the High Court quoted the first sentence of the passage cited above from Alcan and again emphasised the primacy of the text in statutory interpretation, observing that:

In Thiess v Collector of Customs (2014) 250 CLR 664; [2014] HCA 12 at [22]-[23], the High Court observed, with reference to Consolidated Media at [39], that:

In Australian Securities and Investments Commission (ASIC) v Taylor [2023] FCAFC 189 at [42], Mortimer CJ and Abraham J succinctly summarised the applicable principles as follows:

I bear these principles in mind and have also had regard to the statutory history of s 467(1) of the Act in dealing with this question. The legislative antecedents of s 467 of the Act can be traced at least to ss 85-86 of the Companies Act 1862 (Imp), which provided:

Section 171(1) of the Companies Act 1929 (UK) then provided that:

That section was reflected in substantially identical language in s 176 of the Companies Act 1931 (Qld), s 197 of the Companies Act 1934 (SA), s 211 of the Companies Act 1936 (NSW), s 170 of the Companies Act 1938 (Vic) and s 188 of the Companies (Co-operative) Act 1943 (WA). The language of s 467(1)-(2) of the Act is substantially equivalent to s 171(1) of the Companies Act 1929 (UK) and subsequent provisions, although it is now split into two subsections.

The oppression remedy in turn arose from developments in the United Kingdom where, in 1945, a company law reform committee chaired by Lord Cohen released the Report of the Committee on Company Law Amendment (Cmd 6659, June 1945) (“Cohen Report”). The Cohen Report observed (at paragraph 60), in relation to concerns about minority shareholder oppression, that:

The Cohen Report recommended (Recommendation II, p 95) that:

Subsequently, the Companies Act 1947 (UK) introduced the modern oppression regime, and the contingent buy-out remedy, at s 9:

It seems to me that both the Cohen Committee and the Companies Act 1947 (UK) proceeded on the basis that the then statutory winding up regime, which corresponds to the present regime, did not confer the power which Mr Ogborne, who appears for the Third to Fifth Defendants, contends is available under s 467(1)(c) of the Act. Had it done so, there would have been no need to “impose upon the parties to a dispute whatever settlement the Court considers just and equitable” or to allow a power to make other orders where “a winding-up order would not do justice to the minority”, because the corresponding provision in s 171 of the Companies Act 1929 (UK) would already have authorised a buy-out order or any other order to be made on hearing the winding up application.

Returning to the legislative history, s 210 of the consolidated Companies Act 1948 (UK) corresponded to s 9 of the Companies Act 1947 (UK). The oppression regime and the buy-out remedy was then introduced in Australia by s 186 of the Uniform Companies Act 1961 in similar terms to s 210 of the Companies Act 1948 (Cth). The oppression regime is now set out at ss 232-235 of the Act.

The scope of s 467(1)(c) of the Act was considered in Alati v Wei Sheung (2000) 34 ACSR 489; [2000] NSWSC 601 (“Alati”), where Young J noted (at [8]) that, “‘[a]lthough a comparable section has been in the Companies or Corporations Acts from the middle of the nineteenth century, there has not been any Australian case considering the extent of the court’s power in those 150 years”. His Honour also observed (at [34]) that the provision is expressed in wide terms. It appears that, in Host-Plus Pty Ltd v Australian Hotels Assn [2003] VSC 145 at [60], it was conceded by the defendant that the court had power under s 467(1)(c) of the Act to give relief of the kinds referred to in s 233 of the Act and Hansen J observed (at [68]) that, noting the general acceptance by counsel of the power under s 467(1)(c), it was not necessary to examine that power or its relationship with s 467(4). It appears that Hansen J ultimately did not determine that question and that decision does not advance matters. In Triulcio v Chase Property Investments Pty Ltd [2004] NSWSC 311 at [37], Gzell J observed that the defendants there relied on s 467(1)(c) of the Act to submit that the court could order the purchase of the plaintiff’s shares at a figure to be determined by a referee. His Honour did not decide that issue because he was not satisfied that the plaintiff acted unreasonably in seeking to have the defendants wound up instead of pursuing an order for the compulsory acquisition of his shares and that decision also does not advance matters.

In Premier Aviation Holdings Pty Ltd v Mackay [2022] VSC 416, a submission was made that a buy-out order could be made under s 467(1)(c) of the Act, where the Court had declined to make an order for a winding up on the just and equitable ground. Button J there referred to Alati and observed (at [493]-[494]) that:

On balance, although with a degree of hesitation, I am not persuaded that the ancillary power provided in s 467(1) of the Act is sufficiently wide to authorise a buy-out order here, in substitution for the winding up order that I would otherwise make. First, as I have noted above, a corresponding provision has existed since at least ss 85-86 of the Companies Act 1862 (Imp), and the legislative history that I have set out above, and particularly the events surrounding the introduction of the oppression remedy, do not support the reading of the section for which Mr Ogborne contends. Second, it seems to me that that reading of the section would undermine the coherence of the Act, since it would confer wider powers on the Court than are available in respect of oppression, which would be available without the need for oppression to be established. Third, the case law dealing with the application of s 467(1) of the Act and its predecessors in other contexts typically treats that section as authorising orders that are ancillary to a winding up application, and it seems to me that a buy-out order is not properly characterised as ancillary to a winding up, but is a different remedy that is inconsistent with a winding up. Fourth, the limitation in s 467(4) of the Act does not support the existence of the suggested power, where that subsection operates sensibly without such a power, because other remedies may be available under a provision in a company constitution or a trust deed allowing one shareholder or unit holder to acquire another’s shares or units, or may be available where oppression is established, allowing access to the remedies specified in s 233 of the Act.

Alternatively, HA, SA and JPL seek that buy-out order on the basis of a narrow oppression claim, directed to the failure of SD to execute a lease over the Smith Street property between Munja and Smith Street in a particular form in 2020. Although the evidence also addressed discussions in 2023 as to whether a lease should be executed on different terms, Mr Ogborne indicated in closing submissions that that matter was not relied on to support the oppression claim.

I should briefly address the applicable principles and I have drawn upon my summary of the relevant principles in Re Pure Nature Sydney Pty Ltd [2018] NSWSC 914, Re ICB Medical Distributors Pty Ltd [2018] NSWSC 1315 at [65]ff, Re Bicher & Son Pty Ltd (2020) 147 ACSR 108; [2020] NSWSC 711 at [73]ff, Re QB Foods Pty Ltd [2021] NSWSC 1227 at [56]ff and Re SRD Property Pty Ltd [2023] NSWSC 441 at [68]ff in this respect.

Section 232 of the Act provides that the Court may make an order under s 233 of the Act if:

Where the matters specified in s 232 of the Act are established, the Court may relevantly make an order for the purchase of shares by a member of a company under s 233(1)(d) of the Act and may make an order requiring a person to do a specified act under s 233(1)(j) of the Act. For completeness, the Court can also make a winding up order under s 233(1)(a) of the Act, which neither party seeks. I have addressed both parties’ claim for a winding up on the just and equitable ground under s 461(1)(k) of the Act above.

Section 232 of the Act and its predecessors extend to conduct involving “commercial unfairness” or where the conduct complained of involves a visible departure from the standards of fair dealing and a violation of the conditions of fair play, or a decision has been made so as to impose a disadvantage, disability or burden on the plaintiff that, according to ordinary standards of reasonableness and fair dealing, is unfair: Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704; Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459; [1985] HCA 68. The principles applicable to a claim for oppression were summarised by Austin J in Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152 (“Argyle HQ”) at [39], and the Court of Appeal noted the parties did not challenge that summary of the applicable principles in Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 288 ALR 310; 84 ACSR 121; [2011] NSWCA 104 (“Global Mortgage Equity”) at [140]. His Honour observed in Argyle HQ at [39] that:

In Munstermann v Rayward [2017] NSWSC 133 at [22], Stevenson J summarised the applicable principles as follows:

The Court will have regard, in determining whether oppression is established under s 232(d) of the Act to “whether conduct adheres to accepted standards of corporate behaviour or is in accordance with how reasonable directors would act in attending to the affairs of the company”: Australian Institute of Fitness Pty Ltd v Australian Institute of Fitness (Vic/Tas) Pty Ltd (No 3) [2015] NSWSC 1639 at [84]. Notwithstanding the decision in Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 10 ACSR 606, the better view is likely to be that s 232 of the Act applies to companies acting as trustees, at least in circumstances where the interests held within the trust are within the scope of a relationship of quasi-partnership between the companies: Vigliaroni v CPS Investments Holdings Pty Ltd [2009] VSC 428 at [68]; Melrob Investments v Blong Ume Nominees Pty Ltd [2022] SASCA 29 at [113]ff; Re Tzavaras & Sons Pty Ltd [2022] NSWSC 359 at [248]. I have also borne in mind the observation in Global Mortgage Equity that each case has to be considered on its own facts and circumstances, and by reference to the conduct as a whole.

As Mr Parish points out in closing submissions, HA, SA and JPL led little evidence in support of the oppression claim. In his affidavit dated 15 September 2023 (HA 15.9.23 [147]-[149]), HA says that, on 3 September 2020, a firm of solicitors provided Munja with a lease of the Smith Street property for execution, and he annexes a copy of the email from the solicitors and refers to a copy of the lease that is annexed to SD’s affidavit. The email dated 3 September 2020 from the solicitors does not provide any independent support for the commerciality of the terms of the lease, but records that it was prepared in accordance with HA’s instructions, and notes that the lease contained the following terms: (1) a term of six years commencing 1 July 2020 with an option to renew for a period of six years; (2) the rent was $20,000 per month inclusive of GST; (3) the rent was reviewed after one year and then every two years to CPI and after two years then every two years to market; (4) the tenant paid outgoings comprising water rates, council rates and land tax; and (5) the lease provided for guarantors to guarantee the lease and for a bank guarantee or security deposit, although the solicitors noted that they were unclear as to HA’s instructions as to the last of those matters (Ex D1, 59). The draft lease (Ex P1, 109) provided that it had a term of four years and six months commencing 6 January 2020 with an option to renew for a period of five years in cl 15 and that the rent was $140,000 per annum subject to adjustments provided in cl 3 of the lease. There were uncertainties as to the terms of that draft lease, and Mr Ogborne now contends that, notwithstanding the statement on the front page of the lease that it contained one option to renew for a period of five years, cl 16 of the lease in fact provided two options to renew, and the solicitors had referred to the issues as to the status of the guarantee and security which had not been resolved. HA’s evidence (HA 15.9.23 [148]-[149]) is that SD refused to sign the lease, that Munja did not have a long term lease with Smith Street for the Smith Street property, but rather a monthly tenancy, and that Munja has continued to pay $20,000 rent per month.

SA’s evidence (SA 15.9.23 [69]-[70]) was that SD and she agreed that the draft lease should be prepared; HA liaised with the solicitors to prepare it; and SD refused to sign the lease in about July 2020, which added to her stress as to his earlier refusal to sign a shareholders’ agreement. No claim is made in the proceedings as to the failure to sign the shareholders’ agreement.

Mr Parish submits that:

It seems to me that HA’s, SA’s and JPL’s oppression claim on this basis cannot succeed, for several reasons. First, the proposition that it was in Munja’s interest to have the security of a lease over the Smith Street property begs the question of the terms of that lease, since it would not necessarily be in Munja’s interests to enter into a lease that required it to pay excessive rent or did not adequately protect its interests as lessee, or in Smith Street’s interest to enter a lease which allowed it too low a rental or did not adequately protects its interest as lessor. There is no evidence whether the draft lease prepared by HA and SA in 2020 reflected a market rental for the Smith Street property, or whether its term and option structure adequately protected either or both Munja’s and Smith Street’s economic and commercial interests, so that SD could not properly refuse to approve that lease. Second, the view that SD then appeared to take, that that matter could be addressed without a formal lease, by the common shareholders’ commitment to permitting continuing occupancy of the property, was not self-evidently unreasonable before the dispute between the parties developed. After that dispute developed, it seems to me that SD had some reason to treat HA’s and SA’s urging that the companies enter into that lease with a degree of scepticism, where a long-term lease of the Smith Street property could, depending on its terms, potentially be disadvantageous to one or other of the companies, and particularly to Smith Street if a long term lease at below market rental prevented a later sale of the Smith Street property at its market value.

Third, and importantly, SD was right to recognise in cross-examination, although he put in his own language rather than in any legalistic way, that Munja’s and Smith Street’s interests were not (or at least were not necessarily) aligned in respect of the entry into the lease. Their common directors, SD, HA and SA faced a potential conflict of duty in approving a lease, and that conflict had not been waived by any unanimous or fully informed consent of the shareholders, or addressed by obtaining independent advice as to the appropriate market rental and options terms for the lease in the market conditions that prevailed in 2020. While HA’s evidence in cross-examination was that he would act in both companies’ interests, and there is no reason to doubt his subjective intent to do so, a conflict of duty and duty will often undermine a director’s judgment as to what those interests require. It seems to me that it was not oppressive for SD not to approve the entry into the 2020 draft lease where to do so, at least without independent advice as to its terms, would arguably have breached the general law and statutory prohibition on conflicts in respect of Munja, Smith Street or both companies. SA’s, HA’s and JPL’s oppression claim fails for those reasons.

It is therefore, strictly, not necessary to deal with the valuation evidence, although I will so against the contingency that an appellate Court may take a different view from that which I have taken. In doing so, I recognise that the Court has a discretion in fixing a fair price in oppression cases, which is not constrained by ordinary valuation principles and does not require the price to be the market value of the shares: United Rural Enterprises Pty Ltd v Lopmand Pty Ltd (2003) 47 ACSR 514; [2003] NSWSC 910 at [34]-[38]; Shanahan v Jatese Pty Ltd [2019] NSWCA 113 at [47]. In Re Scientific Management Associates Pty Ltd (2019) 141 ACSR 115; [2019] NSWSC 1643, Rees J observed (at [39]) that the basic requirement in an oppression suit is that “the valuation must be fair on the facts of the particular case”, and will be determined as a “price that is fair in all the circumstances having regard to the value that the shares would have had but for the oppressive conduct”. Her Honour went on to observe (at [39]), by reference to authority, that:

I also recognise that, as I observed in Re Global Mortgage Equity Corporation Pty Ltd (2013) 97 ACSR 30; [2013] NSWSC 1586 at [91]-[92], the Court is not bound to choose between the respective valuations prepared by accounting experts, adopting one or the other without modification, although any adjustments to an expert valuation must be supported by the evidence and must, I would add, not involve the Court exercising specialist accounting or valuation expertise which it (and quite possibly Counsel) do not have.

Dealing first with the value of shares in Munja, the Defendants relied on a detailed expert report dated 24 November 2023 of Mr Giliberti for the valuation of the shares in Munja. Mr Giliberti valued shares in Munja alternatively on an EBITDA (earnings before interest, tax, depreciation and amortisation) and EBIT (earnings before interest and tax) basis and derived somewhat different valuations on the two bases. Mr Sanidas’ report dated 20 October 2023, on which the Plaintiffs relied, provides a helpful definition of EBIT and EBITDA as follows:

It emerged in Mr Giliberti’s cross-examination that his valuation on an EBIT basis was likely distorted by the fact that Munja had made use of accelerated depreciation opportunities made available during the COVID-19 period, which would not ordinarily be available, so that its earnings after depreciation in that period would not be indicative of the earnings that it could ordinarily achieve. Mr Parish submits that the Court should prefer the EBITDA approach because:

Mr Parish also submits and I accept that if an EBIT approach were adopted, it would be necessary to correct the EBIT at least in the FY2023 year and determine a normalised EBIT and then further to correct Mr Giliberti’s EBIT range, because of the effect of accelerated depreciation adopted by Munja in FY2023.

Mr Ogborne responds that EBIT was at least an additional means of assessing the value of the properties, including the materiality and importance of depreciation to the activities of the business (T141). Mr Ogborne also responded to the difficulty which accelerated depreciation raised in respect of an EBIT-based valuation, pointing to the fact that the financial reports and taxation returns of Munja were prepared with the assistance of a third party accountant. I accept that proposition, and there is no suggestion that those accounts or taxation returns were not properly prepared, or that acceleration depreciation was not properly claimed by Munja in FY2023. I also accept that, as Mr Ogborne submitted, depreciation is important to the business’s activities, but it nonetheless seems to me that Munja’s access to accelerated depreciation at least in 2023 would distort its valuation, unless depreciation was adjusted to reflect a normalised position.

It seems to me that an EBITDA valuation has the advantage, in principle, that it removes factors which can be affected by business owners’ decisions as to depreciation methods, financing structures and tax, so as to demonstrate the underlying earnings of the business, excluding the effect of its capital structure, and to that extent provides a better measure of a company’s operating performance. That approach is consistent with Mr Sanidas’ evidence that an EBITDA valuation is ordinarily used in commercial transactions involving the sale and purchase of a business. Here, I would prefer Mr Giliberti’s EBITDA valuation of those shares to his EBIT valuation because it avoids the distortion for depreciation that would otherwise arise.

Mr Giliberti’s report initially contained a transposition error, which affected the capitalisation rates which he adopted, and that error was identified in his cross-examination and then corrected by him. He adopted a conventional analytical structure, commencing with an average cost of capital calculation, and then deriving an EBIT multiple and a corrected EBITDA multiple, with a low of 1.7X and a high of 2.2X for the EBITDA multiple. The low end of his EBITDA multiple range was based on Munja’s performance in FY2023 and the high end of that range based on its performance in FY2018, FY2019 and FY2023, excluding those years in which its performance was potentially affected by COVID-19. Adopting the future maintainable earnings on an EBITDA basis which he calculated in his report, and a capitalisation rate of between 1.7X (low) and 2.2X (high), Mr Giliberti arrived at a market value of Munja’s business of between $654,500 and $1,100,000 which was substantially less than the value derived by Mr Sanidas’ calculation of the value of the business, which I address below. I recognise that that figure is lower than the value which Mr Giliberti would have derived on an EBIT basis, but that valuation was exposed to distortions arising from the inclusion of higher rate of depreciation during the COVID-19 period to which I referred above.

Mr Sanidas’ report valued the total equity in Munja at $1,510,000, on an EBITDA valuation only, with SD’s shares being valued at $755,000, based on a weighted normalised EBITDA of $399,958 with a multiplier of 4.5. Mr Ogborne unfavourably contrasted Mr Sanidas’ focus on industry-wide matters, which he submitted did not coincide with the particular business, with Mr Giliberti’s approach (T141).

The use of an EBITDA methodology in Mr Sanidas’ report was consistent with the approach which I have preferred on my review of Mr Giliberti’s evidence above. However, it seems to me that Mr Sanidas had only a fragile basis for the EBITDA multiple which he adopted in that report. The first basis of that multiple was the EBITDA multiple at which four businesses were advertised for sale on a business website, being a dairy food manufacturing business, a food manufacturer, a food manufacturer and distributor, and a food distribution and food services business. I give little weight to that EBITDA multiple, where the EBITDA multiple at which a business is offered for sale says nothing as to the basis on which any transaction proceeded, quite apart from the lack of evidence that the businesses there advertised for sale were similar in character to the business conducted by Munja. Second, Mr Sanidas relied on comparable sales evidence in respect of food manufacturing and general manufacturing businesses sourced from a third party sales database, in order to derive an EBITDA multiple, but it seems to me that evidence is also of little weight, where it provides no basis for an assessment whether the businesses there referred to were comparable to Munja, or indeed of the reliability or representative character of the information included in that third party database. The information disclosed EBITDA multiples between a low of 3.18 and a high of 6.20, and Mr Sanidas adopted an EBITDA multiple of 4.50 for the valuation of the Munja business, which he described as “around the median that has been sourced from the AIBB comparable sales evidence” (Ex P3, 805). It seems to me that little weight can be given to the median of those multiples adopted in the sales evidence, absent evidence as to the integrity of the information contained in the sales database and any basis to assess that the businesses sold were comparable to Munja’s business. I am therefore not persuaded that the higher multiple adopted by Mr Sanidas should be adopted in preference to the lower multiple as derived by Mr Giliberti, by a much closer financial analysis of the features of Munja’s business. I am not persuaded that I can give any significant weight to Mr Sanidas’ valuation and I would not have accepted the substantially higher figure for the value of Munja adopted in Mr Sanidas’ report.

Mr Parish also submits that:

I now turn to the value of the Smith Street property, from which the value of the shares in Smith Street and units in the Trust is derived. The Defendants relied on a property valuation report dated 7 November 2023 of Mr Konidaris in respect of the Smith Street property, which valued that property at $4,870,000. Mr Konidaris has appropriate qualifications and has experience in valuing industrial property in Marrickville; he reviewed the improvements at the Smith Street property in his report and set out an assessment of the local industrial market; and he identified several comparable properties to which he had regard in that review. The analysis in his report, confirmed in cross-examination, indicated that he placed primary weight on three sales, one in Chapel Street, Marrickville which took place at $5,795 per square metre of improved area, which he considered was inferior overall and supported a higher rate for the Smith Street property; a second sale in Meeks Road, Marrickville which took place at $6,450 per square metre of improved area, which he considered to be inferior overall and to support a slightly higher rate for the Smith Street property after adjustment for improvements, although he qualified that observation in cross-examination to indicate that he considered that property was superior in some respects to the Smith Street property (T89ff); and a third sale in Chapel Street, Marrickville, also at $6,450 per square metre of improved area, which he considered was inferior overall and supported a lower rate for the Smith Street property. Mr Konidaris ultimately adopted a rate of $6,000 per square metre of improved area as appropriate for the Smith Street property, leading to the total value to which I referred above.

Mr Parish cross-examined Mr Konidaris and he presented as a knowledgeable and careful witness who engaged constructively with the questions that were asked. Mr Parish contends that that cross-examination showed that reliance should not be placed on the first Chapel Street sale to reduce the rate adopted in valuing the Smith Street property, and that a rate of $6,450 per square metre of improved area should be adopted, rather than the figure of $6,000 per square metre which Mr Konidaris adopted. Mr Ogborne responds that there is no reason to depart from Mr Konidaris’ valuation of the Smith Street property where he had carefully applied his mind to that valuation, based on his expertise, and he gave reasons for his adoption of the comparable sales he used and the assessment he reached as to the per metre rate (T141).

It seems to me that Mr Konidaris had weighed the relevant matters in reaching the view that he had taken; there is no reason to doubt the figure of $5,795 per square metre as providing a realistic minimum figure from which a valuation is to be derived; there is somewhat greater uncertainty as to the upper figure of $6,450 per square metre, as a result of the qualifications to Mr Konidaris’ assessment of the second property and the fact that the sales evidence is somewhat mixed. It seems to me that Mr Konidaris’ report and his cross-examination likely supports a somewhat higher valuation of the property in an application of this kind, where there is a greater prospect that the figure derived by Mr Konidaris would undervalue rather than overvalue the property. If it had been necessary to do so, I would have adopted a rounded valuation of $5 million for the Smith Street property, slightly higher than the valuation adopted by Mr Konidaris, and it would then have been necessary to adjust for any remaining debt in Smith Street and the Trust in order to determine the value for shares in Smith Street and the units in the Trust.

Mr Giliberti adopted the value of the Smith Street property as assessed by Mr Konidaris, to determine the value of the Trust at $1,245,725. I would have adopted that valuation, adjusted by the adjustment I would have made to Mr Konidaris’ property valuation, to which I referred above. It is not necessary to calculate a precise figure where the basis for a buy-out order has not been established.

I am satisfied that a winding up order should be made in respect of both companies, as was common ground if a buy-out order was not made, and the liquidator of Smith Street should be appointed as receiver of the Trust assets. Both parties submitted consents of liquidator, after the hearing had concluded, and I will adopt the Court’s usual practice of appointing the Plaintiffs’ nominee, Mr Free of Jirsch Sutherland, where there is no reason to take a different approach.

Where the court is otherwise minded to wind up a company on the just and equitable grounds, it will often postpone a winding up order to allow the parties an opportunity to negotiate a buy-out: Ruut v Head (1996) 20 ACSR 160 at 163; Argyle HQ at [53]; Amazon Pest Control at [33]. Here, a mediation between the parties was unsuccessful, and I had invited discussions between the parties in the course of the hearing, also without success. I will nonetheless stay the making of a winding up order and the appointment of a receiver for 14 days from the making of orders, to allow the parties a final opportunity to resolve their differences in a manner which will avoid the liquidation of the companies and the Trust.

I direct the parties to bring in agreed short minutes of order to give effect to this judgment, including as to costs, within 7 days or, if there is no agreement between them, their respect draft minutes of order and submissions not exceeding eight pages in Arial font 12, one and a half spacing, as to the differences between them.