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1936 Supreme(SC) 5
Privy Council At New South Wales
Sir Sidney Rowlatt, Maugham , Justice Lords Blanesburgh, JJ.
D. Davis & Co. Ltd. -Appellant
Versus
Brunswick (Australia) Ltd. and others -Resopndent
Appeal No. 73 of 1933
Decided On : 30-01-1936
G.G. Slack, Frank Gahan , Stafford Cripps, J.H. Stamp, Gavin T. Simonds
Compulsory winding up on 'just and equitable' grounds in a business context depends on whether there is a reasonable hope of future profitability, determined by expert trade evidence rather than the court's own views or the influence of financial guarantees.
Headnote:(A) Companies Act - Section 84(e) - Compulsory winding up - Just and equitable ground - The power of the Court to wind up a company on the ground that it is just and equitable to do so is not confined to causes analogous to those mentioned in other parts of the section.
(B) Determination of "just and equitable" in business contexts - Where the problem is essentially a business one, the decisive question is whether, at the date of the petition, there is any reasonable hope that the object of trading at a profit, for which the company was formed, could be attained. In such cases, the court should consider the matter similarly to a private partnership.
(C) Role of the Court in assessing business prospects - It is not the function of a Court to determine the probable success or failure of a business based on its own views, but to form the best opinion possible based on evidence provided by persons with practical knowledge of the trade and local conditions.
(D) Influence of financial guarantees - When determining if winding up is just and equitable, a guarantee on preference shares should be disregarded, except to the extent that it may have biased the evidence, as the focus must remain on the inherent viability of the business.
Facts of the case:
A company was formed to distribute audio products, with preference shares issued that were guaranteed as to dividends and return of capital for a period of two years. Due to a severe global trade depression, the company incurred significant losses in its first year of operation. The preference shareholders petitioned for the compulsory winding up of the company, seeking to trigger the guarantee. The controlling shareholders and a creditor opposed the petition, asserting that the company had fair prospects of commercial success if provided with continued financial support to survive the depression.
Findings of Court:
The court found that there was a reasonable hope of the company achieving commercial success provided it received sufficient financial assistance. While both the petitioners and the respondents were motivated by the existence of the guarantee, such motives were considered natural and not improper. The evidence from trade experts indicated that the business remained viable despite the temporary economic downturn.
Issues: Whether it was just and equitable to wind up the company on the basis of its current losses and the petitioners' desire to enforce a guarantee, or whether the reasonable hope of future profitability justified its continued existence.
Ratio Decidendi: The court ruled that the onus is on the petitioner to show that winding up is just and equitable. In a business-centric dispute, the core test is the existence of a reasonable hope of future profit. This must be determined by relying on expert trade evidence rather than judicial speculation. The presence of a guarantee that incentivizes liquidation does not override the interests of shareholders who wish to continue a viable business.
Result: Appeal dismissed.
Legal Category Hierarchy
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company law
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winding up
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compulsory winding up
- just and equitable ground
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compulsory winding up
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share capital
- preference shares
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winding up
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practice and procedure
- evidence
Lord Maugham:-
This is an appeal from an order dated 9th September 1932, of the Full Court of the Supreme Court of New South Wales allowing by a majority (Long Innes and Davidson, JJ. Halse Rogers, J., dissenting) an appeal by the present respondents from an order dated 9th October 1931, of the Chief Judge in Equity of the Supreme Court of New South Wales (Harvey, J.), for the compulsory winding up of the respondents, Brunswick (Australia), Limited, hereinafter called "the Company." The apparently simple question which arises is whether the Company ought or ought not to be wound up compulsorily on the ground that that course is just and equitable within the meaning of S. 84(e), NEW SOUTH WALES COMPANIES ACT , 1899 (No. 565 of 1931), or, more accurately, whether such an order was properly made on the petition to be next mentioned. As will be seen the date of the commencement of the winding up (if any) is of primary importance in this case. The proceedings were begun by a petition presented on 8th July 1931, by the appellants, D. Davis and Company, Limited, as holders of 30,000 £1 preference shares and 10,000 ordinary shares in the Company. The petition was opposed by two American trading companies, Brunswick Balke Collender Company (called below "the Brunswick Company"), and Brunswick Radio Corporation (called below "the Radio Corporation"). The former company is the registered holder of 20,000 ordinary shares of the Company and the latter is a creditor of the Company, and, as will be seen, is or may be entitled in equity to the 20,000 ordinary shares just mentioned. The Chief Judge in Equity, on the evidence before him, was satisfied that the Company had no liquid assets and no capital with which to carry on, and that its prospects appeared to be hopeless. He also inferred from certain cables dated in December 1930, that the main object of the American companies was to tide over the two years period of a certain guarantee, and not the bonafide object of carrying on the business of the Company with a view to profit. He accordingly made an order on 9th October 1931 for the compulsory winding up of the Company.
The respondents appealed from that order and the appeals came on for hearing on 12th November 1931. They were adjourned from time to time until 25th November when on the application of the respondents (the appellants before the Full Court) an order was made for a Commission to take further evidence in New York on a defined issue which may shortly be stated as the question whether the persons who controlled the action of the American Companies in opposing the petition were acting with the object of carrying on the business of the Company to advantage or merely for the purpose of rendering the guarantee above referred to inoperative. It should be explained that the petition itself did not contain any allegation of want of good faith in the respondent companies (a matter on which some reliance was placed by the Chief Judge), and it was, therefore, urged that material witnesses in the United States were not asked to make affidavits or called before the Chief Judge in Equity; and this contention was accepted by the Full Court. Sittings of the Commissioner in the United States were held in February and March 1932, the greater part of the time being taken up with the cross-examination of Mr. Herman Starr, President of the Radio Corporation, who was called on behalf of the present respondents. A considerable number of further documents were put in evidence; and it is clear that the materials before the Full Court placed that Court in a position to form a better opinion on the questions of fact involved in the petition than the imperfect materials on which the Chief Judge in Equity had to form his conclusion. After a long and careful hearing the Full Court delivered considered judgments on 9th September 1932, and in the result the petition to wind up was dismissed. In order to appreciate the issues which are involved it is necessary
