Aqua-Max Pty Ltd v MT Associates Pty Ltd
[2001] VSCA 104
•19 July 2001
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No. 5966 of 1993
8017 of 1994
| AQUA-MAX PTY. LTD. & ORS | |
| Appellants | |
| v. | |
| M.T. ASSOCIATES PTY. LTD. & ORS | Respondents |
---
JUDGES: | BROOKING, CHARLES and CHERNOV, JJ.A. | |
WHERE HELD: | MELBOURNE | |
DATES OF HEARING: | 28-31 May and 4-6 June 2001 | |
DATE OF JUDGMENT: | 19 July 2001 | |
MEDIUM NEUTRAL CITATION: | [2001] VSCA 104 | |
---
COMPANIES – Statutory relief against oppression – Cumulative effect of conduct – Bona fide conduct as oppression.
COMPANIES – Board meeting – Director tricked into attending – Whether meeting good at law – Or in equity – “Surprise” in equity.
CONTRACT – Repudiation by non-performance – Notice of intention to rescind unless contract performed by specified date – Whether acceptance of repudiation possible while notice current.
APPEAL – Judge’s findings after evaluation of oral evidence – Appellate interference.
INTEREST – Recoverable by statute where debt payable at date or time certain – Sufficient if date or time becomes certain.
Corporations Law, s.260.
Supreme Court Act 1986, s.58.
---
| APPEARANCES: | Counsel | Solicitors |
| For the Appellants | Mr A.J. Myers, Q.C. | Eggleston Clifton-Jones |
| For the Respondents | Mr R. Kendall, Q.C. Mr A. Phillips | Wilmoth Field & Warne |
THE COURT:
How the appeals arise
These two appeals concern a judgment and orders given and made by Gillard, J. in a very heavy case. There were two related proceedings. In the first (5966 of 1993), Aqua-Max Pty. Ltd. (“Aqua-Max”) and Sietel Ltd. (“Sietel”) sued M.T. Associates Pty. Ltd. (“MTA”), Malz Nominees Pty. Ltd. (“Malz”) and John Massey Trihey (“Trihey”). They sought injunctions against a threatened application to wind up Aqua-Max. They also alleged, among other things, negligent misrepresentations, misleading and deceptive conduct and breaches of fiduciary duty in connection with a joint venture between Sietel and MTA for the development, manufacture and sale of gas and electric water heaters. Aqua-Max was the vehicle by which that joint venture was to be carried on, with Sietel and MTA holding shares in the ratio 80/20.
In the first proceeding, the defendants made a number of successful counterclaims. The plaintiffs have appealed, but the appeal is now only in respect of the decision given on the counterclaim by Malz against Aqua-Max for bonus payments pursuant to a consultancy agreement entered into for the purposes of the joint venture. That appeal originally raised many other issues.
The second proceeding, 8017 of 1994, was brought by MTA against Aqua-Max and Sietel, alleging oppression by Sietel as majority shareholder in Aqua-Max and seeking relief under s.260 of the Corporations Law. It was commenced in the Federal Court of Australia soon after the commencement of the first proceeding and later cross-vested to the Supreme Court. A third defendant, Cook’s Body Works Pty. Ltd. (“Cook’s”), was added after the hearing, but the appeal does not raise discrete issues concerning it.
The two proceedings were heard together by Gillard, J. for 53 sitting days. By a remarkable feat, on 19 June 1998, only a few weeks after the hearing concluded, his Honour gave very comprehensive reasons for decision. These were in favour of the respondents, the judge determining that two share issues made by Aqua-Max to Sietel, and a related issue made to Cook’s, had been oppressive, unfairly prejudicial and unfairly discriminatory within the meaning of s.260. His Honour pronounced a final judgment in proceeding 5966 of 1993 on 14 July 1998. By orders made on 17 July 1998 in proceeding 8017 of 1994, he set aside the share issues and directed Sietel to purchase the 400 shares in Aqua-Max held by MTA. The defendants in the second proceeding have appealed against those orders.
The orders of 17 July 1998 provided for the appointment of a special referee pursuant to Order 50 of the Supreme Court Rules if, as occurred, the parties could not agree on the price of the shares held by MTA. As a result, on 24 July 1998 Gillard, J. appointed an accountant, Mr C.T. Daly, as special referee to value them. Mr Daly delivered his report on 9 October 1998. The appellants sought an order that the report be adopted pursuant to r.50.04, and MTA sought an order that it be not adopted. Gillard, J. heard this matter over another four days and gave judgment on 20 August 1999, adopting the report in part only. The proceeding was further adjourned for the hearing and determination of matters of valuation outstanding as a result of that decision. Judgment on the question of valuation was given on 14 March 2000. That judgment was later revised in significant respects after additional submissions. Further reasons for decision were given in a ruling on costs on 3 May 2000. Final orders, including orders as to costs, were made on that day.
Five decisions called in question
The appeals call in question decisions of the judge contained in five sets of reasons for decision:
(a)The decision given on 19 June 1998 on whether the application under s.260 should succeed and the decision given the same day concerning one of the counterclaims upheld in the first proceeding;
(b)The decision given on 20 August 1999 to adopt in part the special referee’s report;
(c)The decision of 14 March 2000 determining how much should be paid for MTA’s shares;
(d)The revised decision determining how much should be paid for those shares;
(e)The decision of 3 May 2000, dealing with costs.
These five sets of reasons comprise 500 pages. The principal decision, that of 19 June 1998, occupies 164 pages. There seem to have been about 70 sitting days in relation to all five decisions, leaving aside the time spent on interlocutory questions by the judge. There are 61 volumes of appeal books and some eight volumes of documents said to be of particular importance and extracted from the appeal books. The index to the appeal books itself occupies a volume. We have six volumes of written submissions and several volumes of copies of authorities, not to mention other things handed up in the course of argument. The relative brevity of our own reasons for decision will give no idea of the number of questions of fact that have been debated before us (often by written submissions) or of the degree of detail into which counsel have gone on questions of fact and questions of credibility.
There are applications for leave to appeal as regards the matter of costs. One or more members of the Court have sat on four occasions to monitor the progress of the appeals. The actual hearing of the appeals to date has occupied seven sitting days, even with the aid of extensive written submissions before, during and after the hearing, and in addition we found it necessary to reconvene once after the conclusion of argument. The costs of the proceedings taken to date must be enormous.
The issues broadly stated
The issues which arise on these appeals are said by the parties to be, in broad terms, whether the judge erred in:
(a)holding that the making of the two share issues by Aqua-Max to Sietel amounted to oppressive conduct or conduct unfairly prejudicial to or unfairly discriminatory against MTA as a shareholder of Aqua-Max for the purposes of s.260 of the Corporations Law;
(b)declining to adopt parts of the special referee’s report, rather than adopting the whole report;
(c)attributing the valuation he did to the Aqua-Max shares which Sietel was ordered to purchase from MTA;
(d)adjusting that valuation on compensatory grounds favouring MTA and failing to adjust it on compensatory grounds favouring Sietel;
(e)allowing the claim by Malz against Aqua-Max for bonus payments in proceeding 5966 of 1993 and awarding interest in relation to that claim; and
(f)awarding solicitor-client costs against the appellants in respect of part of both proceedings.
The respondents have given a notice of contention in relation to the decision of 19 June 1998 on the s.260 application and the decisions of 20 August 1999, 14 March 2000 and 3 May 2000. The notice of appeal in the second proceeding, 8017 of 1994, contained 324 grounds, and on 20 and again on 27 October 2000 Callaway, J.A. made animadversions upon this. On 23 March 2001 his Honour gave leave to amend that notice of appeal and as a result the number of grounds was reduced, but only to 92. The notice as amended ran to 30 pages. Some of the grounds each fill a page.
The main appeal split in two
Both sides were busily getting up the appeals in the expectation that the Court would hear argument on all the numerous questions at the same time, and no less than three weeks were allocated to the hearing of the appeals on that basis. At a hastily arranged mention of the appeals on 10 May, at a time when our knowledge of the case was very limited, we raised with counsel the question whether the case did not lend itself into a division into two parts (loosely called for convenience “liability” and “quantum”) and suggested that it was unwise to embark upon the contemplated full hearing when success of the appeals on “liability” would decapitate the respondents’ case. It seemed to us that the argument on “quantum” might take even longer than the argument on “liability”. Both sides readily agreed that we should in the first instance hear argument only on the question whether an order should have been made in the proceeding invoking s.260 and the question whether the impugned judgment in favour of the respondents on the counterclaim should have been given, on the basis that we would if necessary later deal with “quantum”. It is of course appreciated by counsel that views expressed in our reasons for decision on “liability” will not disqualify us from later dealing with “quantum”.
The two share issues
Much more must now be said about the circumstances out of which this litigation arose. But before we turn to the facts in detail we should direct attention to certain important issues resolved by the judge for the purposes of the application under s.260. We have said that his Honour set aside two issues of shares in Aqua-Max made to Sietel. The capital of Aqua-Max was small; plainly it would need far greater funds than its exiguous capital could provide. Sietel had considerable assets: MTA did not. It was agreed between them – we now speak very generally – that Sietel should lend Aqua-Max $1m. by instalments and that if additional funds were needed Sietel and MTA would contribute them in proportion to their shareholdings in Aqua-Max (80/20). They agreed that, if either of them contributed a greater proportion of loan funds because the other failed to contribute its due proportion, their shareholdings in Aqua-Max should be adjusted in accordance with a formula. Sietel in fact lent Aqua-Max far more than the initial $1m. and the additional amount which it lent was many times larger than the total amount lent by MTA. One of the major disputes concerns the issue – the litigants call it “the formula issue” – by Aqua-Max to Sietel on 6 April 1993 of 1,062 shares, supposedly pursuant to the formula. His Honour set it aside. Another major dispute concerns the issue by Aqua-Max, on 3 November 1993, of 521,556 shares to Sietel and 196 shares to Cook’s. The parties call this “the pro rata issue”. His Honour set that aside also. The result of the April and November share issues was to reduce MTA’s shareholding in Aqua-Max from 20 per cent to 0.076 per cent.
We turn now to the facts in detail. What follows will be in part a statement of the facts (either indisputable or common ground), in part a summary of the evidence and in part a summary of the judge’s findings. All three are incomplete. We shall of course endeavour to keep these three things distinct.
The facts in detail
On 24 April 1987 Trihey approached Richard Rees, managing director of Sietel, with a proposal to develop a storage water heating unit using a stainless steel tank. Sietel had previously owned a business manufacturing domestic heating appliances, and importing a hot water unit, under the Pyrox name. After long negotiations, on 21 November 1988 Sietel on the one hand and MTA, Malz and Trihey on the other entered into a joint venture agreement (“the JVA”) to develop and manufacture gas and electric water heaters. Sietel took 1,600 shares in Aqua-Max, the joint venture company incorporated for the purpose, and MTA took 400.
Trihey and Richard Rees were appointed the two directors of Aqua-Max on 21 November 1988. Its articles of association provided that there were to be no less than two and no more than ten directors and that the quorum at a directors’ meeting was the chairman representing the majority shareholder and one other director. The quorum at a general meeting was the majority shareholder plus one other member. The chairman representing the majority shareholder had a casting vote at meetings of shareholders and of directors.
On the same day, 21 November 1988, Malz and Trihey entered into a consultancy agreement with Aqua-Max. Also on the same day, MTA, Trihey, Bernard Croxford (“Croxford”), Millard Patton (“Patton”) and Maurice Fiddler (“Fiddler”) on the one hand and Aqua-Max on the other entered into a second consultancy agreement. These agreements provided that Aqua-Max was to pay the parties through MTA and Malz for services rendered on the project.
The JVA provided that the issued share capital of Aqua-Max should consist of 2,000 fully paid shares, held as to 80 per cent by Sietel and as to 20 per cent by MTA. It also provided that MTA and Malz would furnish research and development expertise and management services to Aqua-Max in accordance with the respective consultancy agreements. Sietel undertook to procure premises on suitable terms for the initial production of prototype products and for initial limited production.
Additional loan contributions to be proportionate to shareholding
By clause 7 of the JVA, Sietel agreed to provide Aqua-Max with loan funds of up to $1,000,000, secured by a first ranking mortgage debenture at commercial rates. The parties agreed that the loan funds would be provided in three stages, subject to achievement of specified minimum performance and financial criteria. If either of the first two stages (stage A and stage B) required funding beyond $50,000, Sietel and MTA would contribute the funds required in amounts proportionate to their shareholdings. Stage A was the production of sufficient prototypes to obtain necessary regulatory approvals, and the obtaining of those approvals. Stage B was limited production of the prototype in accordance with specific financial criteria. Additional loan funds above $1,000,000 were to be sought by way of loan or other external sources of finance, failing which the parties would again contribute in proportion to their shareholdings. The important clause 7(5) of the JVA provided for the adjustment of the shareholdings of the parties, in accordance with a formula set out in a schedule, if either party “contributes a greater proportion of loan funds than it is required to contribute because the other of them fails to contribute its due proportion”. The terms of that formula will be dealt with in due course.
By the JVA, if the directors of Aqua-Max determined that it was reasonably practicable for it to fund payment, Aqua-Max was to pay MTA royalties based on 3 per cent of sales and Sietel a management fee based on 12 per cent of sales (to be adjusted proportionately if the proportions of issued shares changed). The JVA also provided for the share capital in MTA to be held as to 77.5 per cent by Trihey or his nominee (in the event, Malz), 5 per cent each by Croxford, Fiddler and Patton, and 7.5 per cent by nominees of Sietel (in the event, Sietel itself).
On 22 November 1988 Trihey began work on the project as a consultant for MTA. Croxford started working on the project for MTA on 21 December 1988. Patton began work on 10 July 1989 as an employee of Aqua-Max, having worked on the project as an employee of Cook’s since March 1989. Cook’s was a wholly-owned subsidiary of Sietel. On 17 September 1989 Fiddler joined the project on behalf of Malz as consultant to MTA. Sietel made factory space available to Aqua-Max by way of lease.
Additional loan funds provided
Soon after the JVA was entered into it became apparent that further funds would be required. MTA contributed 20 per cent of the additional funds required each month to pay its own accounts until 12 September 1990. By December 1990 Sietel had lent $576,113 to Aqua-Max (calculated as including accrued compound interest but excluding lease commitments to Sietel). MTA had lent $84,729 (calculated on the same basis). By June 1991, Stages A and B had not been reached. Sietel had lent $916,274, while MTA had lent $91,340.
Final approval of the gas heater unit was obtained from the Australian Gas Association in November 1991. The first production of 50 units for field tests started in that month. On 18 November 1991, shortly after the first production of 50 units for field tests had begun, Aqua-Max stopped paying MTA and Malz invoices in full.
Disputes and difficulties
In December 1991 Aqua-Max failed to pay in full the MTA invoice for November 1991. On 31 December 1991 Richard Rees told Trihey that an adjustment to MTA’s shareholding was required if Sietel was to continue to contribute loan funds, since MTA had not contributed its required proportion of loan funds since September 1990.
In February 1992 Trihey and Richard Rees signed the Aqua-Max accounts for the year to 30 September 1991. The figures in them had been in dispute between Sietel and MTA. The judge found that Trihey signed the accounts under duress. On 11 February 1992 Richard Rees wrote to Trihey requiring an adjustment to the shareholding in Aqua-Max and referring to the formula mentioned in clause 7 of the JVA. On 14 February 1992 Trihey’s solicitor, Ian Bult (“Bult”), of Abbott Tout Russell Kennedy, had a telephone conversation with Richard Rees, in which Bult told Rees he had advised Trihey he had a different view on the interpretation of clause 7. On 17 February 1992 Aqua-Max stopped paying MTA’s monthly invoices.
In March 1992 production of the first 50 units was completed and production of the next 200 commenced. That production was completed by June 1992, and thereafter the project went into full production at the rate of 8-10 per day.
In a letter dated 13 March 1992 Bult informed Richard Rees that the non-payment of the consultancy fees to MTA, Malz and Trihey personally by Aqua-Max had left them in a very serious financial position.
On 24 March 1992 the brother of Richard Rees, Geoffrey Rees, a solicitor, of Brian Ward and Partners, acting on behalf of Sietel, wrote to Bult stating that Sietel would “pursue a claim for loss and damage resulting from breaches of representations made by” Trihey. This was the first mention of any complaint about the conduct of Trihey in relation to the project. On 25 March 1992 Trihey told Richard Rees he would not be attending further Aqua-Max directors’ meetings. The following day, Trihey, Croxford, Fiddler and Patton did not go to the factory. Trihey, Croxford and Fiddler, who were the then representatives of MTA, temporarily stopped work on the project by way of protest over the dispute between the parties, including the non-payment of consultancy fees to MTA. But they returned to work soon after this. From 26 March 1992 until about October 1992 Bult ceased to act for Trihey, who had told him he would try to speak to Richard Rees directly in an effort to resolve their differences.
Issue of options suggested
On 27 March 1992 there was a meeting of shareholders of MTA, attended by Trihey, Patton, Croxford, Fiddler and (on behalf of Sietel) Richard Rees. The judge accepted Trihey’s account of that meeting and rejected the evidence of the other four participants to the effect that the parties agreed that Aqua-Max would issue $2,000,000 worth of options to Sietel and MTA in the 80/20 ratio because Sietel’s loans would reach $3,000,000. Richard Rees instructed Sietel’s solicitor, Geoffrey Rees, to prepare a formal agreement following the meeting. By the end of March 1992, Sietel’s loan to Aqua-Max (again calculated with compound interest and excluding lease commitments) had reached $1,807,447, while MTA’s loan was $100,687. Manufacture of the Aqua-Max 200 commenced and final approval was given by the Australian Gas Association in June 1992. On 27 August 1992 Richard Rees gave Trihey the draft agreements prepared by Geoffrey Rees, which Trihey refused to sign. They allowed the options to be exercised by 1 February 1993.
Deficiency in shareholders’ funds
In August and September 1992 Aqua-Max received its first income from the project, in cheques totalling $494,547. Trihey and Richard Rees endorsed them to Sietel as part repayment of its loans. The net effect was to reduce Sietel’s total loan account from $2,921,463 at the end of July 1992 to $2,819,582 at the end of September 1992 (a reduction of $101,881). On 10 September 1992 Sietel on behalf of Aqua-Max paid MTA $12,000. The Aqua-Max accounts for the year to 30 September 1992 (signed in March 1993) revealed an operating loss of $387,822 and a deficiency in shareholders’ funds of $385,822.
In December 1992 Richard Rees reduced his annual salary from $72,000 to $18,000 as a result of the financial difficulties of the Sietel group in connection with the Aqua-Max project. Richard Rees unsuccessfully sought additional funding from Sietel’s existing bankers, Westpac Banking Corporation, but successfully sought extra funding from the National Australia Bank in December 1992 to enable Sietel to continue to fund the Aqua-Max project. On 15 December 1992 Sietel was suspended from the Australian Stock Exchange for failure to report group financial results for the six months ending 30 September 1992.
On 14 January 1993 Croxford tendered his resignation to MTA and Richard Rees suggested to Trihey that he, Croxford and Fiddler become employees of Sietel rather than contractors of MTA. The judge found that Trihey refused to agree on his own account but reluctantly agreed that Croxford and Fiddler should become Sietel employees. On 1 February 1993 Croxford and Fiddler began working as employees of Sietel pursuant to their service agreements, which were dated 15 October 1993. By each agreement Sietel agreed to pay each man $35,000 “in consideration of the grant by the Employee of the restrictions and restraints included within this Agreement”. It was admitted by Richard Rees in evidence that this amount did not represent a payment for a restraint of trade covenant given by the employee as appeared on the face of these agreements. Instead it represented consultancy fees due to them from their employment with MTA, which payment had not been made by MTA, which itself had not been paid by Sietel in full since November 1991.
The auditor’s role and the proposed $480,000 pro rata issue
On 12 February 1993 the then Aqua-Max auditor, Yves Tawil, raised with Richard Rees the problem that Aqua-Max had a deficiency in shareholders’ funds and was trading while technically insolvent. On the same day Trihey and Richard Rees met. Rees claimed that this was a directors’ meeting of Aqua-Max and that he and Trihey agreed to proceed with a pro rata share issue of 480,000 shares in accordance with Tawil’s recommendation. But the judge rejected that evidence. On 12 February 1993 Richard Rees also provided Trihey with a copy of the draft September 1992 accounts. Within these was a statement that an issue of 480,000 ordinary shares at $1.00 each had already taken place. In February 1993 Trihey’s accountant, Michael Priester, examined the draft Aqua-Max accounts. On 26 February 1993, Trihey refused to sign the draft accounts; there were amounts in dispute in them.
On 1 March 1993 Trihey’s solicitor, Bult, informed Richard Rees that he had advised Trihey in October or November 1992 not to sign the option agreement. On 9 March 1993 Trihey and Richard Rees met. The judge rejected the evidence of Rees that Trihey agreed that the pro rata share issue could proceed. The two men met with their solicitors on 11 March 1993 and agreement was not reached.
On 10 March 1993 Bult had another conversation with Richard Rees, who said he did not intend to respond to a letter from Bult dated 19 February 1992 which set out Trihey’s objections to the September 1992 accounts and to the interpretation of the JVA put forward by the Rees brothers. On 11 March 1993 Bult attended a meeting at the offices of Aqua-Max with Trihey, at which Richard Rees, Geoffrey Rees and Tawil were also present. Richard Rees stated at this meeting that the consultancy arrears owing to MTA and Malz would have to wait but that the persons concerned would receive priority as employees of Sietel if they agreed to become its employees. At this meeting Bult also referred to Note 9 to the draft accounts of March 1993, which stated that there had been an issue of 480,000 shares at $1.00 each to existing Aqua-Max shareholders. Richard Rees said to Bult that this had not occurred yet and that he would not want it to happen on an 80/20 basis “unless there was some documentation”. Bult said to Richard Rees that Trihey might not be prepared to sign the documentation on Rees’s terms and Rees said that if MTA adopted this attitude he would issue the additional shares anyway. Bult told Rees that he could not do this, as Trihey was one of two shareholders and directors of Aqua-Max. At the 11 March 1993 meeting Bult said that Sietel should fund Aqua-Max to allow the arrears of the consultancy fees to be paid to Trihey and his associates because of the desperate financial position they were in. He also told those present that Trihey was about to lose his house.
Delwyn Rees appointed a director
On 15 March 1993 Delwyn Rees (Richard’s father) was appointed a director of Aqua-Max, on the casting vote of Richard Rees, at a directors’ meeting attended by Rees and Trihey. The trial judge found that, although Trihey was deceived into attending the meeting and “ambushed”, the meeting was valid and the appointment was not made in breach of any fiduciary duty or for an improper purpose. The respondents’ case was that Richard Rees had tricked Trihey into entering a room, and the judge found that Rees had lied in his evidence when he said he had told Trihey that there was to be a director’s meeting there.
On 16 March 1993 Bult wrote to Geoffrey Rees, taking issue with aspects of the draft accounts, noting that Richard Rees had indicated that a share issue was desirable in view of the “deficiency in shareholders equity” as disclosed in those accounts and stating that, if a share issue was to proceed (the need for which he queried), it had to be to existing shareholders in proportion to their existing shareholdings. On 17 March 1993 Bult wrote again to Geoffrey Rees, requesting further information on the accounts of the company. Bult further questioned whether a pro rata share issue was necessary in view of the express statement contained within the draft accounts of March 1993 that Sietel was to continue its financial support of Aqua-Max. On 18 March 1993 Bult wrote yet again to Geoffrey Rees and stated that he was instructed by Trihey that Richard and Delwyn Rees had put considerable pressure on him to participate in a directors’ meeting. Bult stated that Trihey had raised bona fide concerns about specific issues relating to the accounts and that Trihey was under a duty as a director to ensure the accounts were correct before he signed them.
On 24 March 1993 the auditor, Tawil, sent Geoffrey Rees a draft letter of subordination of Sietel’s loan to Aqua-Max. This draft was sent to Geoffrey Rees for the purpose of his settling it on behalf of Sietel and he stated that he did in fact settle it before forwarding it on to Sietel. The draft letter of subordination sent to Geoffrey Rees by Tawil and the letter eventually settled by Geoffrey Rees were not referred to in any of the affidavits of Richard Rees, Geoffrey Rees or Tawil. Furthermore these letters were not discovered before the trial. They emerged only after a call was made by counsel for the respondents for the production of Geoffrey Rees’ legal file.
The auditor’s letter about the deficiency
On 25 March 1993 Tawil wrote to Richard Rees, noting the deficiency in shareholders’ funds of $385,822 and indicating that Aqua-Max needed to address its “technical insolvency” in one of three ways: issuing shares to cover the deficiency and envisaged further losses; arranging for subordination of the Sietel loan; or obtaining a letter from Sietel undertaking to support its operations for the next year. The judge found that this letter was written at the suggestion of Richard Rees, based on a draft prepared by Geoffrey Rees. Richard Rees swore that on 24 March 1993 he contacted Tawil at least twice to discuss the pro rata issue of shares. Tawil gave evidence that the letter of 25 March was the idea of Richard Rees, although the three options mentioned in it were his. The judge rejected much of Tawil’s evidence about the pro rata share issue. Tawil swore that his preference for a share issue was based essentially on an ASC Directive, which had (he said) expressed concern about directors’ trading in a company which showed a deficiency of shareholders’ funds. Although both Tawil and counsel for the appellants were invited by his Honour to produce this directive, it was not produced.
On 26 March 1993 the directors of Aqua-Max, other than Trihey (who refused to be present), held a meeting attended by Geoffrey Rees and Tawil. The directors resolved to issue shares in accordance with the formula in the JVA. They signed the accounts for Aqua-Max for the year ending 30 September 1992. These differed from the draft accounts for that year. The “Statement by Directors” in the draft said that the company would be able to pay its debts as and when they fell due “given the continuing financial support of the holding company, Sietel Limited”, whereas the statement signed by the directors on 26 March 1993 contained no such words.
Resolution for formula and pro rata issues
On 6 April 1993 the directors of Aqua-Max (again in Trihey’s absence, but after he had received notice that a directors’ meeting was to take place) resolved to issue 1,062 shares to Sietel, supposedly in accordance with the formula in the JVA. The meeting also resolved to make a pro rata issue of 598,938 shares based on the new shareholding proportions, acceptance to be notified with payment by 14 May 1993. The resolution noted that payment for the pro rata issue could be made from existing loan accounts. Copies of the Aqua-Max minutes were not forwarded to Trihey and generally were never circulated to directors.
On 8 April 1993 Malz and MTA sent letters of demand to Aqua-Max for fees ($137,702.61 and $18,688.77 respectively) under their consultancy agreements. These were statutory demands under the Corporations Law.
Pro rata issue deferred
On 20 April 1993 the directors of Aqua-Max resolved that the pro rata share issue be deferred. No reason was recorded in the minutes.
On the morning of 28 April 1993 Malz and MTA served on Aqua-Max notice of rescission of their consultancy agreements. At about this time Trihey stopped working at the Aqua-Max premises. On 29 April 1993 Aqua-Max brought proceeding 5966 of 1993 in the Supreme Court to prevent a winding-up application.
On 27 May 1993 Sietel transferred one share in Aqua-Max to Cook’s; Trihey was not told of this. Next day Trihey’s solicitors, Abbott Tout Russell Kennedy, sent a facsimile addressed to Richard Rees and Aqua-Max about the annual general meeting proposed for 2 June 1993. This reiterated Trihey’s objection to the pro rata share issue or the authorisation of the directors of Aqua-Max in relation to the issue of shares. On 1 June 1993 Trihey’s solicitors again sent a facsimile to Brian Ward & Partners, alleging that the meeting of directors of 15 March 1993 was invalid and in any event oppressive and prejudicial, as was the proposed issue of further shares. The letter also said that Trihey would not attend the meeting on 2 June and thus there would not be a quorum. On 2 June 1993 the annual general meeting of shareholders of Aqua-Max, attended by Sietel and Cook’s but not by MTA, ratified the “formula” issue of 1,062 shares and resolved that the directors might issue further shares to cover the deficiency in shareholders’ funds and anticipated losses over the next year.
On 17 August 1993, Sietel’s directors resolved to pass a credit in favour of Aqua-Max, the amount being subsequently determined at $600,000.
Pro rata issue is made: the “round robin”
On 28 September 1993 the directors of Aqua-Max declared that Trihey was deemed to have vacated office by not attending directors’ meetings for six months. They appointed James Lillie to replace him. The directors resolved to recommend to shareholders a pro rata issue of 600,152 shares, being 521,556 to Sietel, 196 to Cook’s and 78,400 to MTA. A general meeting, held on 15 October 1993, no representative from MTA attending, resolved that the directors might offer 600,152 shares of $1 each on a pro rata basis, being 521,556 to Sietel, 196 to Cook’s and 78,400 to MTA. There is no reference in the minutes to permitting subscribers to use loan accounts to pay for the shares. On 27 October 1993 the directors of Aqua-Max decided to issue shares as the general meeting had authorised. Richard Rees wrote to shareholders informing them of the decision. The letter to MTA stated that its entitlement was 78,400 shares and that the offer could be accepted with payment up to 4.00 p.m. on 10 November 1993, otherwise it was deemed to be declined. Again there was no reference in the minutes to permitting subscribers to use their loan accounts, and there was no reference to this in the letter to MTA. On 1 November 1993, MTA’s solicitors wrote to Aqua-Max’s solicitors seeking an undertaking not to proceed with the share issue and describing it as “unauthorised conduct”.
On 3 November 1993 Sietel and Cook’s took up the share issue and paid cheques to Aqua-Max in the amounts of $521,556 and $196 respectively. At a meeting of Aqua-Max directors on 4 November 1993 Richard Rees reported that $521,752 had been banked in the Aqua-Max account on 3 November 1993 and that the company was in a position to repay part of its loan from Sietel. It was then resolved that a payment of $520,000 be made to Sietel. On 5 November 1993, Aqua-Max repaid Sietel $520,000, part of its outstanding loan. These events led to the judge’s description of a round robin of cheques.
On 8 November 1993 MTA commenced Federal Court proceedings against Sietel, alleging oppression and seeking the winding up of Aqua-Max. On 10 November 1993 shares were allotted to Sietel and Cook’s. MTA did not accept the share offer. Notwithstanding the undertaking given by Sietel at the meeting of the directors of Aqua-Max on 26 March 1993 (with which compare the undertaking in Note 18 to the March 1993 final accounts) that it would take up any shares not taken up by a minority shareholder, Sietel never took up any of the 78,400 shares offered to MTA. On 11 January 1994 the directors of Aqua-Max adopted the September 1993 accounts. According to a note to these, “the chief entity has agreed to continue providing the budgeted level of support which meets the projected day to day requirements of the company provided the company meet the requirements of the chief entity’s bankers.”
On 3 June 1994 the Federal Court ordered that Aqua-Max be joined as a respondent in the oppression proceeding. That proceeding was cross-vested to the Supreme Court on 15 September 1994 and became proceeding 8017 of 1994.
On 8 June 1995 Trihey became a bankrupt. On 16 May 1997 a meeting of MTA shareholders was requested by Richard Rees on behalf of Sietel, which held a 7.5 per cent interest in MTA, and by other shareholders, namely Patton, Fiddler and Croxford. At this meeting, which was also attended by Delwyn Rees and the solicitor Wayne Jonas (as legal adviser to Sietel), an attempt was made to remove the incumbent directors, Albert Trihey and Zara Trihey, which failed. The litigation was discussed and Richard Rees, on behalf of Sietel, offered $50,000 in settlement. This offer was rejected. Richard Rees then sought to have himself appointed as a director of MTA, but this motion was defeated. Rees told the meeting that he would “restore MT & Associates to the real world and do what it was originally was set up for, rather than fund court cases. … I would reconsider the offer of $50,000.”
The judge’s findings
It is helpful to summarise some of the findings made for the purposes of the second proceeding. In broad terms, his Honour found that, since about 1992, Richard Rees had set out to destroy MTA’s interest in the joint venture in the sense that he had sought to “re-write” the JVA so as to give Sietel a greater proportion of the shares in Aqua-Max, which would reflect the greater financial contributions of Sietel to the venture and redress the relatively poor return it was to receive by way of royalties under the JVA. In order to achieve that end, Rees applied a “financial squeeze” to MTA from early 1992 (in order to pressure Trihey into agreeing to the 90/10 ratio and to dissuade him from questioning Rees’s conduct of the affairs of Aqua-Max) and caused shares to be issued to Sietel for the purpose of effectively destroying MTA’s interest in the joint venture and Aqua-Max and otherwise used his position to advance the interests of Sietel at the expense of MTA. The particular findings included the following:
(a)Richard Rees unilaterally caused Aqua-Max not to pay MTA accounts in full from November 1991, notwithstanding that Sietel had sufficient assets to support the venture. (Although Westpac did not support the venture as at the end of 1991, NBA provided further funds to Sietel in 1992). This led to severe financial pressure on MTA members. On 11 March 1993 Rees again refused Trihey’s request that MTA accounts be paid although told that Trihey was in “dire financial trouble”.
(b)Richard Rees persisted (at least until late March 1992) in claiming that MTA had to provide extra funding beyond the 20 per cent required by the JVA. Rees threatened that otherwise the shareholding ratio would have to be changed to 90/10. He made the demands notwithstanding that he was told that there was no obligation on MTA to provide more than 20 per cent of extra funds. The threats were made, for example, in December 1991, on 11 February 1992 and on 25 March 1992. There was no basis for a 90/10 share adjustment.
(c)As at late March 1992 Richard Rees was seeking to persuade Trihey to agree to a pro rata share issue. (His Honour rejected Rees’s claims that Trihey agreed on 9 March 1993 to the then proposed pro rata issue and that at the MTA shareholders’ meeting on 27 March 1992 Trihey agreed that, when Sietel funding reached $3m, options to take up 2m. shares would be issued pro rata. His Honour found that this proposal was contrary to the JVA. Moreover, the loan account of Sietel exceeded $1.9m. at the end of August 1992 and therefore it would have had no difficulty in converting its loans to shares. But MTA would have been short by $380,000 had it sought to take up its proportion of the pro rata share issue.)
(d)Richard Rees threatened that Sietel would withdraw financial support for the project (which would have brought to an end Trihey’s investment), although he had no intention that Sietel should withdraw support.
(e)Richard Rees inflated the Sietel loan account with Aqua-Max by unilaterally charging Aqua-Max:
(i)“substantial” amounts for
-office and administrative work supplied to Aqua-Max by Sietel
-rental
-insurance and leasing charges.
Although Trihey knew of the charges, he was not consulted about them and later disputed many of them.
(ii)compound interest on the loans. There was no agreement to that effect by MTA. The interest credited to Sietel by September 1992 was $400,000.
(f)Richard Rees caused Aqua-Max to repay the Sietel loan account in preference to the MTA loan account. His Honour found that there was an implied agreement that loans of Sietel and MTA would be repaid when Aqua-Max was in a financial position to do so and that this position was reached only in about October 1993. Rees, however, caused Aqua-Max to reduce the Sietel loan account from August 1992, that is, before it could properly do so, but in any event the loan account of MTA was not reduced. The following steps were taken by Rees:
-He caused in August 1992 two cheques received by Aqua-Max from the sale of units to be endorsed in favour of Sietel in reduction of its loan account, but nothing was paid to MTA.
-The project reached the stage of self-funding after September 1993, at which stage the loan account of Sietel was $4.2m.; it was reduced to $1.5m. by 30 September 1997, whereas the MTA loan account was not but should have been reduced.
-On 31 October 1993 Sietel paid $521,500 for its pro rata shares by means of a “round robin” transaction.
(g)Richard Rees sought to persuade Trihey to sign certain agreements (which would have destroyed MTA’s interest in the venture). It was part of his attempt to destroy MTA’s interest in the venture at a time when all the indications were that the project would be successful.
(h)On 12 February 1993 Richard Rees sought to pressure Trihey into signing false 1992 accounts (prepared under the supervision of Rees), which sought to make the issue of pro rata shares (480,000) a fait accompli.
(i)Richard Rees procured the appointment on 15 March 1993 of a third director to Aqua-Max (in order to be in a position to effect the share issue). He had been told on 11 March 1993 that Trihey opposed the issue of the 480,000 shares and that he (Rees) could not issue them on his own vote.
(j)Richard Rees procured two issues of shares by Aqua-Max to Sietel which amounted to oppressive or unfair behaviour as against MTA. That conduct began in about March 1993.
(i)In early 1993 Richard Rees effectively laid the ground work for the pro rata share issue on the pretext that it was being done to overcome the problem arising from the draft 1992 accounts, which showed that Aqua-Max was trading at a loss and had a shareholders’ funds deficiency.
On 26 March 1993 the Sietel board (at the behest of Rees) resolved, in effect, to protect its proportionate interest in Aqua-Max in accordance with the JVA in view of its disproportionate provision of funds to the venture. Later that day, at the Aqua-Max board meeting which Trihey did not attend, Richard Rees reported that Sietel would not accept a subordination of its loan but would agree to a pro rata share issue provided that Sietel received its formula share entitlement before any pro rata issue. The Aqua-Max board then resolved to issue formula shares.
(ii)The Aqua-Max board meeting on 6 April 1993 which Trihey did not attend resolved to issue 1,062 formula shares purportedly in accordance with clause 7(5) of the JVA, but Richard Rees misapplied the formula. This changed the shareholding ratio to 87/13 in favour of Sietel. It was entitled to a lesser number of shares and “the issue of those shares was oppressive and unfairly discriminatory and prejudicial to MTA”. His Honour re-calculated the entitlement of Sietel as 219 shares.
(iii)Richard Rees procured the issue of about 600,000 shares in Aqua-Max to Sietel. (Rees knew that MTA could not afford to take up its proportion of the issue and that therefore, upon Sietel’s taking up both entitlements, the shareholding of MTA in Aqua-Max would be minimal.) The shares were eventually issued in November 1993, but the process commenced early in 1993. The shares were issued for the sole purpose of benefiting Sietel at the expense of MTA and for the purpose of destroying its interest in Aqua-Max. It was in breach of the JVA (and the expectations of the parties to the JVA), and the resolution of the Aqua-Max directors to issue those shares was for an improper purpose and not for the benefit of Aqua-Max. The improper purpose was to benefit Sietel and to destroy MTA’s interest in Aqua-Max. Moreover, Sietel and Cook’s used their voting power as shareholders of Aqua-Max, in resolving on 15 October 1993 to ratify the offer, for an improper purpose and contrary to the JVA and the expectations of the parties to it. “Their” conduct “in achieving what they did through board resolutions and shareholders’ resolutions was oppressive, (etc.)”. His Honour rejected the claim of Richard Rees that the shares were issued to avoid the 1992 accounts being qualified. The auditor had told the directors at the meeting of 26 March 1993 (as recorded in the Foo memorandum) that he would certify the accounts if Sietel supported Aqua-Max for the next 12 months. The draft accounts of February 1993 showed that Sietel was providing and continuing to provide financial support and Sietel in fact continued to do so. Hence there was no need to issue those shares for that purpose. The delay in implementing the pro rata share issue pursuant to the resolution of 6 April 1993 until November 1993 was tactical, that is, because of the presence of litigation and the parties’ discussing settlement. Discussions broke down in August 1993 and Rees gave instructions to implement the pro rata share issue. This also contradicted the case of Sietel that the share issue was necessary because of the auditor’s concern over the 1992 accounts.
(k)Richard Rees procured the transfer of one share in Aqua-Max from Sietel to Cook’s in order to have a quorum at the shareholders’ meetings since MTA refused to attend and Sietel was the only other shareholder. (Unless there was a quorum, Richard Rees could not procure the relevant resolutions for the purpose of issuing the shares.)
(l)Richard Rees procured the Aqua-Max board on 28 September 1993 to resolve that Trihey had vacated the office of director of Aqua-Max and that Lillie be appointed in his place.
(m)Richard Rees dealt with Sietel and Aqua-Max as if he owned them beneficially and could do with them what he liked. He was responsible for the decisions of the board of each company with little regard for minority shareholders. Thus (in addition to the above actions of Rees, which demonstrated his use of his dominance and control over the affairs of Sietel and Aqua-Max in order to achieve his ends), he:
(i)unilaterally procured Sietel to forego a debt of $600,000 owed by Aqua-Max to it in 1993;
(ii) unilaterally procured Sietel to reduce the rent payable by Aqua-Max;
(iii)did what he liked with respect to records, minutes and accounts; for example, the draft accounts for the 1992 year were false;
(iv)caused resolutions that were passed to be ignored, for example, the resolution of 6 April 1993 for the issue of pro rata shares was not implemented until November 1993; the delay in the implementation of that resolution was tactical;
(v)coerced Trihey into signing the 1991 accounts of Aqua-Max; he told him if he did not sign he would not be paid.
The judge’s views on credibility
There was considerable conflict of evidence. This was resolved by his Honour essentially in favour of the respondents. The same may be said of witnesses. The main protagonists were Trihey and Richard Rees. The judge said of Trihey, an inventor, “Whilst I accept that he was guarded in his answers and to some extent prevaricated, I am satisfied that generally he was doing his best to tell the truth as he saw it and I found him an honest witness.” Of Richard Rees the judge formed a most unfavourable view, which he expressed carefully and at considerable length, and which we shall briefly summarise. In his Honour’s opinion, Rees, an accountant and experienced businessman, was a meticulous man with an eye for detail, and Trihey was in some respects no match for him. Rees, the judge thought, had for years chosen to keep accounts, minutes and other records in a deliberately incomplete, vague and disorderly way, to give himself room to manoeuvre subsequently and “to change the facts if the occasion required it”; he treated Sietel and Aqua-Max as if the companies were his own property; he obstructed the conduct of the case by failing to disclose properly documents which were clearly relevant; as a witness he was evasive and argumentative and prevaricated; his evidence had to be viewed with suspicion and scrutinised very carefully; on a considerable number of occasions he told deliberate lies. The judge said, in fine, “I formed a very unfavourable view of the credibility of R. Rees”. For reasons which he again gave at considerable length, and which we do not summarise, the judge formed an unfavourable view of both Delwyn Rees and Geoffrey Rees; each of them had tried to mislead the court. The auditor, Tawil, was another important witness. Again for reasons which he gave, the judge rejected his evidence on a number of important points. A good deal more will be said of this later.
The judge’s conclusions on the two principal issues
Section 260(1) and (2) of the Corporations Law provides –
“ (1) An application to the Court for an order under this section in relation to a company may be made:
(a) by a member who believes:
(i)that affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members, or in a manner that is contrary to the interests of the members as a whole; or
(ii)that an act or omission, or a proposed act or omission, by or on behalf of the company, or a resolution, or a proposed resolution, of a class of members, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or was or would be contrary to the interest of the members as a whole; or
(b)… “
” (2) If the Court is of the opinion:
(a)that affairs of a company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in this section called the ‘oppressed member or members’) or in a manner that is contrary to the interests of the members as a whole; or
(b)that an act or omission, or a proposed act or omission, by or on behalf of a company, or a resolution, or a proposed resolution, of a class of members of a company, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in this section also called the ‘oppressed member or members’) or was or would be contrary to the interests of the members as a whole … “
- the Court may make an order or orders.
During the trial the respondents relied upon both paragraphs of sub-s.(2). The trial judge made a detailed examination of the law relating to s.260, and the cases bearing upon a shareholder’s statutory right to relief against conduct which is oppressive. After noting that s.260(1) and (2) had been in its present form since 1983, his Honour said that the cases established the following propositions applicable to the present matter –
(i)The court must proceed with caution in exercising the jurisdiction under s.260 in order to avoid any unwarranted assumption of responsibility by the court for the management of the company.
(ii)In determining whether the conduct complained of falls within the section, it will be necessary for the court to undertake an exercise balancing the competing considerations of the interested parties. It is a question of fact and degree.
(iii)It is not necessary that the conduct complained of is continuing at the date of the application.
(iv)Whether the conduct falls within s.260 is to be determined objectively, that is, by the standard of reasonable directors possessed of the skills, knowledge and acumen of the actual directors.
(v)The applicant must prove oppression or unfairness.
(vi)But the applicant does not have to prove any actual irregularity, invasion of a legal right or lack of probity or want of good faith, although proof of any will be some evidence of oppression or unfairness.
(vii)The applicant does not have to prove dishonest intent, purpose or motive: it is the effect of the acts and omissions which is relevant.
(viii)However, if the directors are empowered to discriminate against members and to prejudice their interests, a decision to that effect made in good faith and for a purpose within power without more will not fall within s.260.
(ix)The applicant may prove that the conduct complained of although in accordance with the constitution of the corporation nevertheless is unfair because it is contrary to the legitimate expectations of the members of the corporations.
The judge placed particular weight on what was called the “expectation principle”. His Honour said that the JVA and the parties’ interests in Aqua-Max created expectations which were superimposed on their rights under the constitution of the company. His Honour said that the failure to give effect to the expectations and understandings in the operation of the company as the joint venture vehicle might be contrary to s.260 even though there was no wrongful act. The second matter on which the judge placed particular emphasis was the fiduciary duty owed by a director to the company. His Honour then examined at considerable length the facts of the case, placing particular emphasis on the formula issue in April 1993 and the pro rata issue in November 1993, the consequence of these allotments being that the 20% shareholding held by MTA in Aqua-Max was reduced to 13.07% by the first allotment and to 0.076% in November 1993.
The judge found that the formula issue was miscalculated and was determined in breach of the JVA. His Honour found that Richard Rees was responsible for the error and that he and Delwyn Rees in resolving to issue the shares acted in breach of their fiduciary duties as directors to perform their duties for the benefit of the company as a whole. His Honour found that the formula issue of shares amounted to conduct which was oppressive and unfairly prejudicial to and unfairly discriminatory against MTA as a member of Aqua-Max.
The judge also found that the pro rata issue benefited Sietel and Cook’s at the expense of MTA in Aqua-Max, was oppressive, unfairly prejudicial to and discriminatory against MTA as a shareholder in Aqua-Max, was not made for the purpose of raising capital in Aqua-Max or for any purpose to benefit the company or its shareholders as a whole; and was made for the dominant purpose of diluting the interest of MTA in Aqua-Max to benefit the financial interests of the Rees companies Sietel and Cook’s. MTA was accordingly entitled to relief.
The parties’ submissions
The appellants did not, either in their notice of appeal or in submissions, take serious issue with the legal propositions upon which the judge had relied. In the notice of appeal, however, the appellants claimed that the judge had erred in holding that the relationship between Sietel and the respondents was governed in whole or in part by the expectations and understandings of the parties not circumscribed by legal or equitable rights and obligations and not supported by the JVA. The appellants contended that the judge had erred in identifying certain expectations and understandings of the parties which were inconsistent with the terms of the JVA. The appellants’ written and oral submissions focused on two principal findings of the trial judge as to specific conduct in which Sietel and its representatives had engaged, first the formula issue and secondly the pro rata issue. The appellants submitted that the judge erred in finding that these two share issues had amounted to conduct which was oppressive, unfairly prejudicial to or unfairly discriminatory against MTA. As to the formula issue the appellants submitted that, on its proper construction and using the figures adopted by the trial judge, the formula in the JVA entitles Sietel to at least the number of shares issued to it pursuant to the formula issue. The submission continued that even if his Honour’s construction of the formula was correct, allowance should nonetheless have been made for accrued but unpaid interest, being compound interest. A third submission as to the formula issue was that in any event, even if there had been error in construing and applying the JVA formula, any such error was incapable of constituting oppression. It was submitted that Richard Rees construed and applied the formula in a way that a reasonable director could readily have done; and that on an objective test the approach adopted was not oppressive or unfair and therefore that the findings of the judge that the formula issue was motivated by self-interest and involved a breach of the fiduciary duties of Richard and Delwyn Rees and was thereby vitiated was not open on the evidence. As to the pro rata issue the appellants submitted that the finding that it was motivated by an improper purpose was not reasonably open. In respect of the judge’s treatment of oppression and unfairness generally the appellants submitted that the judge had given too wide an operation to the concepts of legitimate expectations and understandings of the parties, had identified expectations and understandings which were inconsistent with the terms of the JVA and to the extent that either or both of the findings of oppression and unfairness drew support from other findings as to the credit of witnesses these also were tainted by error and should be set aside.
In this Court, the respondents supported the judge’s conclusions and submitted further that the appellants’ arguments concerning oppression or unfair conduct failed to take into account the requirement that the whole of the conduct of the oppressor should be assessed cumulatively. The respondents submitted that in determining whether there has been oppression the Court does not look separately at individual incidents which of themselves may not amount to oppression or unfair prejudice or unfair discrimination against a particular member, but rather looks to the cumulative effect of the whole of the actions and conduct in the circumstances of the case. It was submitted that s.260 invites attention not to events considered in isolation but rather as part of a consecutive story. The respondent relied on specific findings of conduct made by the trial judge quite apart from the findings concerning the two share issues, which it was submitted had been found by the judge to be conduct which was oppressive against MTA. His Honour, it was argued, had found that Sietel, by its representatives, had embarked upon a pattern of conduct determined to destroy the interest of MTA as a shareholder of Aqua-Max. In particular, the respondents relied on the principle that conduct may be lawful, but still be oppressive or unfairly prejudicial.
Oppression arising through the consequences of one party’s conduct
From the foregoing it may be seen that the dispute between the parties is not so much as to the law but rather as to the judge’s conclusions of fact. It is nonetheless necessary in this judgment for us to consider some of the cases which demonstrate that conduct may still be oppressive or unfairly prejudicial, notwithstanding that the conduct is lawful, or accords with the company’s constitution, having regard to its effect upon the minority shareholder. Some of the cases to which we refer relate to the concept of “just and equitable” as a ground for winding up, but there is high authority for applying the same reasoning to the concept of oppression in s.260; see O’Neill v. Phillips[1]. InRe Wondoflex Textiles Pty. Ltd.[2] was a case where the company was held to resemble a partnership. Smith, J. said –
“It is also true, I think, that, generally speaking, a petition for winding-up, based upon the partnership analogy, cannot succeed if what is complained of is merely a valid exercise of powers conferred in terms by the articles; … to hold otherwise would enable a member to be relieved from the consequences of a bargain knowingly entered into by him; … but this, I think, is subject to an important qualification. Acts which, in law, are a valid exercise of powers conferred by the articles may nevertheless be entirely outside what can fairly be regarded as having been in the contemplation of the parties when they became members of the company; and in such cases the fact that what has been done is not in excess of power will not necessarily be an answer to a claim for winding-up. Indeed, it may be said that one purpose of [the just and equitable provision] is to enable the court to relieve a party from his bargain in such cases.”
This passage was quoted by Lord Wilberforce in Ebrahimi v. Westbourne Galleries Ltd.[3], in a passage which described the whole judgment of Smith, J. in Wondoflex as being of value. In Re M. Dalley & Co. Pty. Ltd.[4] Lush, J. said -
“In my opinion want of probity is only one of the ways in which oppression can manifest itself, … One person may ‘subject another to continual injustice’ by insisting, however honestly, on a proposition that is wrong or by using his strength to maintain, however honestly, a position unjustified in law. … Section 186 [the predecessor in the Companies Act 1961 of s.260] is, upon the authorities, a wide remedial section not to be narrowed in the manner contended for by an interpretation of the first judicial observations made upon it. It is to be observed that it speaks of oppression in terms of its impact on the oppressed, not in terms of the intention of the oppressor, except to the extent that the word itself has some moral or emotional content.”
[1][1999] 2 All E.R. 961 per Lord Hoffman (with whom Lord Jauncey of Tullichettle, Lord Clyde, Lord Hutton and Lord Hobhouse of Woodborough agreed) at 967.
[2][1951] V.L.R. 458, at 467.
[3][1973] A.C. 360 at 378.
[4][1968] 1 A.C.L.R. 489, at 492. (Reversed on other grounds: (1968) 120 C.L.R. 603.)
Section 260 of the Corporations Law resulted from a series of amendments made to its precursors, which included s.186 of the 1961 legislation and s.320 of the Companies Code 1981. In 1983, s.320 had been broadened to include conduct which is “unfairly prejudicial to or unfairly discriminatory against a member or members” rather than merely oppressive, and to include discrimination against a member other than as a member. In Wayde v. New South Wales Rugby League Ltd.[5] Brennan, J. said that s.320 –
[5](1982) 180 C.L.R. 459, at 470-471, 472.
“… broadens the grounds of intervention. Clearly the legislature intends to provide a greater measure of curial protection to members of a company, especially if they be in a minority, than the protection afforded under earlier Companies Acts.”
and later –
“The operation of s.320 may be attracted to a decision made by directors which is made in good faith for a purpose within the directors’ power but which reasonable directors would think to be unfair. The test of unfairness is objective … the test assumes (whether it be the fact or not) that reasonable directors weigh the furthering of the corporate object against the disadvantage, disability or burden which their decision would impose, and address their minds to the question whether a proposed decision is unfair.”
In Thomas v. H.W. Thomas Ltd.[6] Richardson, J. said of the New Zealand equivalent of s.260 that –
“I do not read the sub-section as referring to three distinct alternatives which are to be considered separately in watertight compartments. The three expressions overlap, each in a sense helps to explain the other, and read together they reflect the underlying concern of the sub-section that the conduct of the company which is unjustly detrimental to any member of the company whatever form it takes and whether it adversely affects all members alike or discriminates against some only is a legitimate foundation for a complaint under s.209. The statutory concern is directed to instances or courses of conduct amounting to an unjust detriment to the interests of a member or members of the company. It follows that it is not necessary for a complainant to point to any actual irregularity or to an invasion of his legal rights or to a lack of probity or want of good faith towards him on the part of those in control of the company.”
There are numerous cases which look to the effect (including the cumulative effect of all the various pieces of unfairness) independently of the question whether the alleged oppressor’s actions are legal or comply with the articles of association; see In re H.R. Harmer Ltd.[7]; Re Norvabron Pty. Ltd.[8]; Morgan v. 45 Flers Avenue Pty. Ltd[9].; Residues Treatment and Trading Co. Ltd. v. Southern Resources Ltd. (No. 2)[10]; McWilliam & Anor v. L.J.R. McWilliam Estates Pty. Ltd. & Ors[11]; Reid v. Bagot Well Pastoral Co. Pty. Ltd.[12]; Fexuto v. Bosnjak Holdings Pty. Ltd.[13]; Re Quest Exploration Pty. Ltd.[14]; Popovic v. Tanasijevic[15]. See also Jennifer Hill, “Protecting Minority Shareholders and Reasonable Expectations”[16]; G.P. Stapledon, “Use of the Oppression Provision in Listed Companies in Australia and the United Kingdom”[17]; Robson’s Annotated Corporations Law[18]; Ford’s Principles of Corporations Law[19].
[6][1984] 1 N.Z.L.R. 686 at 693.
[7][1959] 1 W.L.R. 62 per Jenkins, L.J. at 84.
[8][1987] 5 A.C.L.C. 184 per Derrington, J. at 212.
[9](1987) 5 A.C.L.C. 222 per Young, J. at 233.
[10](1989) 7 A.C.L.C. 1,130 at 1,153 per Perry, J.
[11](1990) 8 A.C.L.C. 1097 per Young, J. at 1101.
[12](1993) 61 S.A.S.R. 165 per Debelle, J. at 181.
[13](1998) 28 A.C.S.R. 688 per Young, J. at 703.
[14](1993) 6 A.C.S.R. 659 per McKenzie, J. at 669-670.
[15](2000) 34 A.C.S.R. 1 per Olsson, J. at 71.
[16](1992) 10 Company & Securities Law Journal 86, 94.
[17](1993) 67 A.L.J. 575, 579.
[18](5th ed., 2000), at 285-286.
[19]Vol 1, 11326.
From what has already been said, it can be seen that the appellants’ arguments, which were very well and succinctly made, focused first on the issue of the credibility of witnesses, secondly on the formula share issue, and thirdly on the pro rata share issue, notwithstanding that the judge’s conclusions as to oppression and unfairness had been founded on a whole course of conduct and events stretching from November 1993 back to November 1991, when Aqua-Max stopped paying MTA and Malz invoices in full. It is to these three principal issues that we now turn.
Credit
The judge’s conclusions as to the credit of witnesses were of particular importance in the resolution of this case. It has been said many times that where, as in the present case, the judge has had the advantage of seeing and hearing witnesses on contested questions of fact, the appellants’ task is a difficult one: Abalos v. Australian Postal Commission[20]; Devries v. Australian National Railways Commission[21]; Mobilio v. Balliotis[22]. A clear statement of why this must be so was given by Lord Sumner in S.S. Hontestroom v. S.S. Sagaporack[23] in the following terms –
“not to have seen the witnesses puts appellate judges in a permanent position of disadvantage as against the trial judge, and, unless it can be shown that he has failed to use or has palpably misused his advantage, the higher Court ought not to take the responsibility of reversing conclusions so arrived at, merely on the result of their own comparisons and criticisms of the witnesses and of their own view of the probabilities of the case. The course of the trial and the whole substance of the judgment must be looked at, and the matter does not depend on the question whether a witness has been cross-examined to credit or has been pronounced by the judge in terms to be unworthy of it. If his estimate of the man forms any substantial part of his reasons for his judgment the trial judge’s conclusions of fact should, as I understand the decisions, be let alone.”
In Abalos this passage was quoted by McHugh, J. in the passage previously referred to in his leading judgment with which Mason, C.J., Deane, Dawson and Gaudron, JJ. all agreed. His Honour went on to point out that –
“Consequently where a trial judge has made a finding of fact contrary to the evidence of a witness but has made no reference to that evidence, an appellate court cannot act on that evidence to reverse the finding unless it is satisfied ‘that any advantage enjoyed by the trial judge by reason of having seen and heard the witnesses, could not be sufficient to explain or justify the trial judge’s conclusion’”: Watt or Thomas v. Thomas[24].
[20](1990) 171 C.L.R. 167, at 178-179.
[21](1993) 177 C.L.R. 472, at 479.
[22][1998] 3 V.R. 833, at 836.
[23][1927] A.C. 37 at 47.
[24][1947] A.C. 484 at 488.
In Walsh v. Law Society of New South Wales[25] the issue was put in the following way by McHugh, Kirby and Callinan, JJ. in a passage in which their Honours again referred to Abalos and Devries –
“the appellate court will be bound generally to defer to any conclusions on the question of credibility formed by the Court or tribunal from whom the appeal is brought where the latter has seen and heard the witnesses. In particular circumstances, it will be open to an appellate court to reach conclusions contrary to those of the Court or tribunal below, notwithstanding a credibility finding. Sometimes it will be authorised to reject those findings where they are ‘glaringly improbable’ or ‘contrary to compelling inferences’ of the case. But the caution required of all appellate courts in such matters has long been recognised and frequently upheld in decisions of this Court.”
See also Bedek v. Brown[26]; FEO v. Pioneer Concrete (Vic.) Pty. Ltd.[27]; Rosenberg v. Percival[28]. Cf. State Rail Authority of N.S.W. v. Earthline Constructions Pty. Ltd.[29].
[25](1999) 73 A.L.J.R. 1138 at 1148.
[26][2000] F.C.A. 880 at [13] to [14].
[27][1999] 3 V.R. 417, at 424.
[28](2000) 75 A.L.J.R. 734.
[29][1999] 73 A.L.J.R. 306, at 322, per Kirby, J.
The appellants submitted that in so far as the findings of oppression and unfairness drawn by the judge against it drew support from other findings as to the credibility of witnesses, they should be set aside because of errors in respect of those findings. It was submitted that the judge’s fact-finding process had been tainted by the making of inconsistent findings regarding the respective credit of Trihey and Richard Rees, and that the treatment of the credit of witnesses for the appellants had been infected by incorrect and irrelevant considerations and findings which were not reasonably open. We will deal briefly with criticisms of each of these witnesses in turn, but before doing so we observe that the principal witnesses called for the appellants were Richard Rees, Geoffrey Rees, Delwyn Rees and Tawil. Each of these witnesses gave lengthy evidence before his Honour, Richard Rees having given evidence in the witness box on no less than fifteen days, Geoffrey Rees on six days, Delwyn Rees on five days and Tawil on four days. Three additional witnesses of the appellants upon whom the trial judge commented unfavourably were Fiddler, Croxford and Patton, each of whom gave lengthy evidence before his Honour on two days. The respondents’ principal witness, Trihey, gave evidence for four days.
The judge’s findings as to credit
It is necessary now to set out some of the specific findings made by the judge in relation to these witnesses. We have referred to them in passing in stating various of his Honour’s findings. His Honour found that the evidence was littered with examples of Richard Rees doing what he liked with respect to records, minutes and accounts. His Honour was satisfied that Richard Rees together with the appellants’ solicitor had obstructed the conduct of the case by failing properly to disclose documents which were clearly relevant and that the events of the first two weeks of the trial had shown that “a campaign was waged by the Rees’ side to obstruct the other side from gathering information”. His Honour found that Richard Rees had prevaricated in answering questions concerning the importance of Trihey to the project in 1992 and had sought to minimise the contribution made by Trihey to the project. The judge said that Rees had scant regard for the obligations that rested upon him as a director of Sietel and Aqua-Max, the interests of the minority shareholders in the two companies or legal formalities, and had treated both Sietel and Aqua-Max as his empires to do what he wished with them. His Honour said that as a witness, Rees “became progressively evasive, prevaricated and sought to put forward arguments rather than answer the questions”. His Honour said that in certain respects Rees had been less than frank and with respect to some parts of his evidence had told deliberate lies. In general his Honour said that he had “formed a very unfavourable view of the credibility of Mr Rees”.
The judge said that he also had formed an unfavourable view of Delwyn Rees, and said of him that he had been less than frank with the Court, seeking to hide behind a bad memory and advancing age. In particular his Honour said that in so far as Delwyn Rees had sought to distance himself from the events of 1993 he had deliberately misled the Court. The judge said that Rees had a central involvement in the events of 1993, and that his hand had been on many of the documents produced during that year. To the contrary of the impression sought to be given, Delwyn Rees, the judge said, was deeply involved in the planning of procedures for the pro rata allotment of shares in October-November 1993 and had been involved in the strategy and tactics which were employed by the Rees’ side and Sietel during that year. In relation to four sets of minutes of directors’ meetings of Sietel which Delwyn Rees had signed as correct, and which recorded the presence of Lillie, his Honour said that Lillie was in fact overseas at the time and Delwyn Rees’s evidence on these issues was rejected.
The judge also found Geoffrey Rees to be an unsatisfactory witness. In particular, in so far as Geoffrey Rees sought to distance himself from the plans that were followed during 1993, and which had the effect of diluting MTA’s shareholding in Aqua-Max, his Honour said that there had been a delay in the implementation of the pro rata issue because the Reeses were following a plan and had to ensure that everything was done properly, and that Geoffrey Rees had been heavily involved in discussions and the implementation of these plans.
The judge also made reference to James Lillie, who, his Honour said, presented as a very vague, confused and elderly man, who had an appalling memory of events, and who obviously had not given any thought to preparing himself before he got in the witness box. His Honour placed very little reliance upon the evidence of Lillie.
The judge also found Tawil an unsatisfactory witness, saying that Tawil had shown a bias in favour of Sietel and Richard Rees, that Sietel and its related entities had been good and valued clients whom Tawil did not wish to lose, and that he had not adopted an impartial position as between Sietel and Richard Rees on the one hand and MTA and Trihey on the other. Tawil’s credit was an important aspect of the appellants’ case, Richard Rees in particular having sworn that Tawil had required Aqua-Max to make the pro rata share issue. Tawil, for his part, swore that the letter of 25 March 1993 which set out his concerns as to Aqua-Max’s financial statements for 30 September 1992 and stated a concern that the company was technically insolvent, followed by his suggesting three possible courses of action, was all his work, assisted by somebody else in his office. His Honour found –
“The sequence of events clearly show that R. Rees received the draft subordination letter prepared by his brother on about 25 March, there was a discussion with his brother G. Rees and also Mr Tawil and the clear inference is that the letter of 25 March, signed by Mr Tawil, was as a result of suggestions made by R. Rees.”
His Honour, as we have said, also commented unfavourably on the evidence given by Patton, Fiddler and Croxford.
The appellants principally attacked the submissions made by his Honour in relation to Richard Rees and Tawil. In so far as Rees was concerned, it was submitted that there was no evidence whatever to support the view that Tawil’s letter of 25 March 1993 was prepared by Rees, and that the conclusion was insupportable and wrong. This finding was then said to be the principal basis for the judge’s incorrect conclusion that the pro rata issue of shares made on 3 November 1993 was not made for the purpose of raising capital in Aqua-Max or for any purpose to benefit the company or its shareholders as a whole, but rather was made for the dominant purpose of diluting the interest of MTA in Aqua-Max.
The credit of Tawil
The judge noted that Tawil had made an agreement with Richard Rees under which Sietel was to forego a claim against Duesburys (the company’s auditors) for rent, if Duesburys reduced the audit fee to $9,500. His Honour said that the making of this deal compromised Tawil’s independence when it came to dealing with Sietel and Aqua-Max. The appellants’ first complaint in relation to his Honour’s findings as to the credit of Tawil was that the arrangement was merely a commercial set-off which could not reasonably have been regarded as affecting Tawil’s independence. The rent obligation had been incurred by a different Duesburys partner acting as receiver for the company. It was submitted that there was nothing sinister in the arrangement and nothing improper about the making of it. Secondly, complaint was made that his Honour had found that Tawil was “very close to the Rees side”, because he had taken instructions from Richard Rees regarding the accounts and had spoken to Geoffrey Rees, who was advising Sietel. Thirdly, his Honour had found that Tawil lacked independence because he “showed a bias in favour of Sietel” and Richard Rees and “did not adopt an impartial position”. The appellants submitted that the evidence showed that Tawil did no more than agree with the evidence called on behalf of Sietel regarding the circumstances surrounding the pro rata issue, which fell far short of bias or lack of impartiality. It was also submitted that he had no reason for being biased or partial to Sietel, and that by the time he gave evidence he had ceased to be auditor for the Sietel group.
In our view the judge’s conclusion that Tawil was close to the “Rees side” and had not adopted an impartial position was well supported in the evidence. Tawil had been the auditor of Aqua-Max for five years and in that period had had frequent discussions with Richard Rees. He said in evidence that in that time he had never interviewed Trihey. Notwithstanding the variety of disputes about matters such as rental and interest payable by Aqua-Max to Sietel Tawil had not found it necessary even to speak to Trihey about these matters. It was Tawil who suggested to Richard Rees that another director of Aqua-Max be appointed after Trihey had refused to sign the accounts of Aqua-Max for the year ended 30 September 1992. Tawil was well aware of the existence of the various disputes as to the accounts between Trihey and Richard Rees, which led to Trihey’s refusal to accept the accounts by signing them. In these circumstances the making of the suggestion to Richard Rees that a further director be appointed to Aqua-Max, thus enabling the new Aqua-Max board to bypass Trihey’s refusal to sign the accounts, seems to us quite inconsistent with his claim to be independent of the shareholders. We would not ourselves have placed particular weight upon the fact that Tawil had confirmed the arrangement with Richard Rees whereby Sietel was to forego its claim against Duesburys for rent. But it is in our view perfectly clear that the judge’s unfavourable view of Tawil as a witness was based on a proper assessment of his evidence as a whole. On no view could those findings be said to be “glaringly improbable” or “contrary to compelling inferences”[30]. As to the real authorship of Tawil’s letter to the directors of Aqua-Max dated 25 March 1993, the judge had said that –
“The sequence of events clearly show that R. Rees received the draft subordination letter prepared by his brother on about 25 March, there was a discussion with his brother G. Rees and also Mr Tawil and the clear inference is that the letter of 25 March, signed by Mr Tawil, was as a result of suggestions made by R. Rees.”
There followed attempts by Richard Rees and Sietel to prevent MTA proceeding with the application it had filed in the Federal Court on 8 November 1993, the most significant of which involved the meeting of members of MTA on 16 May 1997. The meeting was actually called by Patton and Croxford, but the judge found that Rees, Patton, Croxford and Fiddler planned to try to take over MTA and bring the present proceedings to a conclusion. His Honour accepted the evidence of Albert Trihey as to what happened at this meeting, at which Rees tried to take over the meeting by demanding co-chairmanship. Rees said at the meeting that Sietel would offer MTA $50,000 in cash for settlement of the litigation, an offer which was, of course, rejected. His Honour stated that what happened at this meeting clearly indicated the measures to which Delwyn and Richard Rees would go to further their ends and destroy MTA.
The inevitable conclusion from all the foregoing is, in our judgment, that the judge’s findings in proceeding no. 8017 of 1994, that MTA is entitled to relief under s.260 in relation to the formula issue of 6 April 1993 and the pro rata issue of 3 November 1993, on the ground that these issues amounted to conduct which was oppressive and unfairly prejudicial to and unfairly discriminatory against MTA as a member of Aqua-Max must stand, and the appeal against liability in this action therefore fails.
Appeal in matter No. 5966 of 1993
It will be recalled that the first proceeding, No. 5966 of 1993, was taken by Aqua-Max and Sietel against MTA, Malz and Trihey, in order to prevent the making of an application to wind-up Aqua-Max. There was in addition a farrago of allegations of misrepresentation, misleading and deceptive conduct and breach of fiduciary duty in relation to the joint venture; all these claims failed. The defendants made a number of counterclaims, most of which succeeded. Aqua-Max and Sietel appealed against the dismissal of their claims for misrepresentation and other wrongful conduct and against other determinations on a large number of grounds, almost all of which have been abandoned. The only survivors are those which attack the judge’s decision upholding one of the defendants’ claims made by way of counterclaim. This was the claim by Malz against Aqua-Max for bonus payments pursuant to the consultancy agreement entered into between them for the purposes of the joint venture. Judgment was given for Malz against Aqua-Max in the sum of $176,431. Aqua-Max makes two complaints. In the first place, it says that the judge was wrong in holding that, in the events which had happened, there was any liability on its part to make bonus payments. In the second place, it says that, if it was rightly adjudged liable, the judge nevertheless erred in determining that it should pay interest on the amount awarded in respect of the period before payment was demanded. (In deciding, shortly before the hearing of the appeals commenced, to deal at the outset only with liability rather than amount, we indicated that we would dispose of both questions in relation to the bonus payments in order completely to dispose of what remains of the appeal in this proceeding save for one point about the order for costs.)
Whether Malz succeeded in terminating the consultancy agreement
Clause 3 of the consultancy agreement required payment of a fee by Aqua-Max to Malz and gave effect to a schedule which itself provided:
“The fee shall be paid monthly in advance, commencing on the commencement date and shall be a sum sufficient to cover the following expenses of [Malz]:
the remuneration of John Massey Trihey consisting of:-
(i) a salary, initially, at the rate of $12,000.00 per annum;
(ii)as from the date (the Appointed Date) when the directors of [Aqua-Max] decide, in good faith, that [Aqua-Max] has the requisite financial resources from sources other than Sietel loan funds:-
(a)a salary at the rate of $48,000.00 per annum;
(b)a bonus calculated by multiplying $3,000.00 by the number of months from the date of this agreement to the Appointed Date;
(iii)in the event of the termination of this agreement prior to the Appointed Date, otherwise than pursuant to clause 8.1.1, 8.1.2, 8.1.3 or 8.2 a bonus calculated by multiplying $3,000.00 by the number of whole months from the date of this agreement to the date of its termination.
All amounts of money referred to in sub-paragraphs (i), (ii) and (iii) above shall be adjusted annually from the date of this agreement to reflect variations in the Consumer Price Index Number (All Groups) Melbourne.”
Clause 8 of the agreement provided for its termination by Aqua-Max in the event of certain breaches by Malz and also for its termination if commercial production of the heaters was not practicable.
The first question raised by the appeal is whether the judge was right in holding that the consultancy agreement had been terminated within the meaning of sub-paragraph (iii) of the schedule. Malz said that it had terminated the agreement by the acceptance of a repudiation of the agreement by Aqua-Max. By the time of the supposed termination Aqua-Max was in arrears in respect of about seventeen monthly payments it was required to make under the agreement. It is not contended that the judge was wrong in determining that this failure to pay amounted to a repudiation or that – subject to the one point about to be mentioned – the repudiation was not accepted by Malz so as to terminate the agreement within the meaning of the schedule provision. What is said by Aqua-Max is that Malz was not entitled to terminate the agreement on the morning of 28 April 1993, as it purported to do, because it had on 19 April 1993 written to Aqua-Max demanding payment of the sum outstanding - $18,688.77 – and stating that it would rescind the agreement if payment was not received on or before 28 April 1993. The argument is that in these circumstances Malz was not at liberty to terminate the agreement, as it purported to do, at about 11.30 a.m. on 28 April, when it communicated to Aqua-Max its decision to terminate the agreement.
Notwithstanding the points taken in the appellants’ written submissions, counsel for Aqua-Max chose to advance only a single submission against the validity of the purported termination. This was that the giving of the notice threatening to rescind the agreement if payment was not made on or before 28 April precluded Malz from terminating the agreement until that day had come and gone. This argument was put to the judge, although without citation of any authority. It was rejected by him as without substance.
Before us, the appellants at first argued only that the case was governed by the doctrine of election. A little later they advanced also the alternative submission that Malz was estopped. Their primary submission was that the case was one of election. They described the letter of 19 April 1993 as the communication of an election “not to rescind at this time” or alternatively an election not to make a decision whether to terminate the agreement until after 28 April. The difficulty which counsel for Aqua-Max experienced in identifying the inconsistent rights as between which Malz was said to have elected is significant. In our view it reflects the circumstance that what Malz did cannot properly be characterised as an election to exercise one of two alternative and inconsistent rights. The second variant of election put forward by Aqua-Max – an election not to make a decision whether to rescind until after 28 April – itself points up the difficulty of analysing what took place in terms of the determination of an election. The first variant – an election not to rescind “at this time” – as advanced in argument did not mean an election not to terminate by reason of the repudiation that had occurred down to the time of the supposed election: this would have been a submission – albeit untenable on the facts – that an election had been determined. “At this time” had in the submission only a temporal signification.
The fact of the matter is that what was done by Malz on 19 April was not the determination of an election. The alternative and inconsistent rights which Malz had available to it were a right to terminate the agreement and a right to insist on its performance. Neither of the variants formulated by counsel for Aqua-Max could be regarded as identifying inconsistent rights for the doctrine of election.
The appellants cited two decisions. The first is Holland v. Wiltshire[51]. There a contract for the sale of land required payment of the balance of the price on 14 January 1952 and provided that, if default was made in due payment of it, the vendor might without notice sell the land and rescind the contract and any moneys paid on account of the purchase should be forfeited to the vendor as liquidated damages. The purchasers paid the deposit stipulated for – the modest sum of two pounds – but, before 14 January 1952, they asked for an extension of time for payment of the balance of the price, which was agreed to by the vendor. In about the second week in March 1952 their solicitor told the vendor that they would not proceed with the purchase, and the vendor, on 17 March 1952, gave the purchasers notice requiring them to settle by 28 March and informing them that, if settlement was not made by that date, he would sue them for breach of contract. The purchasers failed to complete the purchase and on 10 June 1952 the vendor resold the land. He sought to recover as damages the difference between the contract price (less the two pound deposit) and the price achieved on resale; the purchasers contended that he was entitled only to forfeiture of the deposit. The High Court held that the resale had been effected, not under the rescission clause of the contract, but independently of it, and that the vendor was entitled to recover the damages claimed.
[51](1954) 90 C.L.R. 409.
It is important to realise that Holland v. Wiltshire, unlike the present case, was not an example of service of a notice threatening rescission if payment is not made by a certain date, followed by what is then said to be premature rescission, that is, rescission before that date has come and gone. The question was whether the vendor had rescinded the contract under the rescission clause or independently of it. The Court was in no way concerned with what the effect would have been of a purported rescission during the currency of the notice of 17 March 1952. Dixon, C.J. observed, at 415, “This was not an unconditional affirmance of the contract notwithstanding the renunciation. It was a demand for performance coupled with an intimation that refusal or failure to perform would result in proceedings for damages. That is to say it kept the contract open for a limited time and conditionally upon compliance.” Taylor, J., at 423, said of the notice that it was a clear intimation that if the purchaser continued in default after 28 March 1952 the vendor would elect to treat the contract as at an end and sue to recover damages. Counsel for Aqua-Max relied only on what was said by Kitto, J. at 420:
“A second opportunity for the vendor to determine the contract arose when the purchasers’ solicitor informed him that Mr Holland (implying Mrs Holland also) would not go on with the contract. But the next step he took was to give the purchasers the notice of 17th March. This notice did not accept the repudiation; it ignored it and insisted upon the contract being performed. Beyond a peremptory demand for completion by 28th March, there was nothing in it but a warning that failure by the purchasers to complete by that date would be treated as a breach of contract for which a legal remedy would be sought. After this clear election, the right of the vendor to end the contract because of the repudiation conveyed by the solicitor was plainly gone.”
Of this passage two things may be said. In the first place, his Honour’s view of the effect of the notice differed from that of the other two members of the Court, both of whom held that the notice was not an election to require performance of the contract. In the second place, what Kitto, J. was concerned with was the question (which the present case in no way raises) whether a notice had been given which elected to affirm the contract. In other words, Kitto, J. was not concerned with what has since been described as suspension of the exercise of a right of rescission; and in any event his Honour’s view of the effect of the notice was a minority one.
The only other decision relied on by the appellants on this point is Tropical Traders Ltd. v. Goonan[52]. Like Holland v. Wiltshire, that was a case in which a vendor of real estate gave the purchaser an extension of the time for completion, but it too was a case in which there was no purported termination of the contract by the vendor within that extended time. The balance of the purchase price was due on 6 January 1963. On the following day the purchasers told the vendor that they were unable to make the final payment and asked for an extension of up to three months. Next day, 8 January, the vendor’s solicitors told the purchasers of the vendor’s power to rescind, but added that in order to give the purchasers a further opportunity of finding and paying the money it would not exercise its powers under the contract until 14 January. On 9 January the vendor’s solicitors wrote to the purchasers confirming the telephone conversation and describing what the vendor was doing as an act of grace and without prejudice to its right to the strict enforcement of the contract. Payment of the balance was not made on 14 January and on the following day the vendor’s solicitors wrote to the purchasers stating that their client had rescinded the contract. The contract was held to have been validly rescinded. The leading judgment is that of Kitto, J. At 55 his Honour rejected the purchasers’ contention that by granting the extension of time the vendor had elected to affirm the contract:
“Time being of the essence the appellant became entitled, as soon as 6th January 1963 had passed, to elect for or against rescinding the contract. Any act done by it and consistent only with the continuance of the contract on foot the law would hold to constitute an election against rescinding; and an election once made could not be retracted. But the appellant was not bound to elect at once. It might keep the question open, so long as it did nothing to affirm the contract and so long as the respondents’ position was not prejudiced in consequence of the delay: Clough v. London & North Western Railway Co.[53]; Scarf v. Jardine[54]. By telling the respondents it would not rescind before Monday, 14th January, and that they would have to pay £50 for the additional accommodation to cover interest, costs and expenses, the appellant did no more than promise that it would not elect to rescind the contract before 14th January and that if the £17,500 and the additional £50 should be paid before that date the contract would stand affirmed. In the language of Fry L.J. in Howe v. Smith[55], ‘this was not a stipulation postponing the time for completion generally, but merely limiting the exercise of a consequential power’[56].
The granting of the extension of time, therefore, far from constituting an election by the appellant to affirm the contract, was the announcement of an intention to refrain from electing either way until either the £17,500 should have been paid or 14th January should have arrived.”
Among the brief additional observations made by Menzies, J. was this, at 60-61:
“Upon the main point, it appears to me on principle that a vendor becoming entitled to rescind for non-payment of purchase money upon the stipulated date for payment, who does no more than give the purchaser the opportunity to pay within a limited time thereafter, is not thereby electing not to rescind for non-payment on the due date nor is he representing that time is not of the essence; rather he is intimating that he intends to exercise his right to rescind unless payment is made within the time of grace.”
[52](1964) 111 C.L.R. 41.
[53](1871) L.R. 7 Exch. 26, at pp.34, 35.
[54](1882) 7 App. Cas. 345, at p.360.
[55](1884) 27 Ch.D. 89.
[56](1884) 27 Ch.D., at pp.103, 104.
It was on the passage from the judgment of Kitto, J. already cited that the appellants mainly relied for their contention that there had been an election in the present case. In our opinion the passage does not support this contention. At the end of it Kitto, J. used the words of Fry, L.J. in Howe v. Smith[57] to describe the vendor’s grant of an extension of time: “This was not a stipulation postponing the time for completion generally, but merely limiting the exercise of a consequential power.” But neither Fry, L.J. in using, nor Kitto, J. in adopting, this description was concerning himself with the question whether the grant of the extension prevented rescission while the extension was current; no such question arose on the facts of either case. Kitto, J. was concerned to distinguish between acts which were properly to be regarded as elections and acts which were not, since they did no more than keep open the question of termination of the contract. The word “limiting” in the phrase “limiting the exercise of a consequential power” is not to be taken as conveying that the vendor is obliged to keep the contract on foot until the expiration of the extended period. The true rule in such cases is that (leaving aside facts giving rise to an estoppel) the only limitation on the vendor’s power resulting from the grant of the extension is that if the breach is cured within the extended period the right to rescind is gone. This is made clear by the following instructive passage in Carter, Breach of Contract, 2nd ed., pp.427-8, on the effect of Tropical Traders:
“However, the vendor’s notice overcame this difficulty by going further and stating a specific date for payment. In other words, the vendors’ election was a conditional election which would only become absolute (final) if the purchasers complied with the notice. Had the purchasers so complied there is no doubt that the vendors would have been precluded from relying on the earlier default as a ground for termination. No doubt, also, if the purchasers had relied on the extension to such an extent that it would have been inequitable to permit termination, the vendors would have been estopped during the currency of the notice. However, once the notice expired there was no impediment to termination and the vendors’ election was justifiable by reference to the purchasers’ breach of contract, rather than their failure to comply with the notice.” (Footnote omitted.)
[57](1884) 27 Ch.D. 89 at 103-4.
That this is the correct approach is supported by the decision of Wootten, J. in Wilson v. Kingsgate Mining Industries Pty. Ltd.[58], where the facts bear some resemblance to those of the present case. In the events which had happened a contract for the sale of land required completion within two months after 5 April 1973. On 17 May the purchaser’s solicitor wrote to the vendor’s solicitor enclosing requisitions on title and stating that on receiving answers to requisitions he would be in a position to settle the matter. On 22 May the vendor’s solicitor wrote a letter answering the requisitions. On 13 June, having heard nothing further, he telephoned the purchaser’s solicitor’s office and left a message for the solicitor (who was away ill) that unless the contract was settled by 15 June he would have to rescind it. He emphasised that this message was “without prejudice”. The purchaser’s solicitor did not read this message until he came to his office on Friday 15 June. On that day a letter from the vendor’s solicitor was delivered by hand to the purchaser’s solicitor’s office rescinding the contract.
[58][1973] 2 N.S.W.L.R. 713.
In an action by the purchaser for specific performance the vendor was held to have validly rescinded the contract on 15 June. What was said by its solicitor on 13 June did not stand in the way of rescission two days later. In the first place, Wootten, J. considered that the vendor’s solicitor had not on 13 June granted an extension of time at all. He had simply said that unless the contract was settled by 15 June he would have to rescind; he had not said that he would not rescind before. We shall not add to the length of this judgment by setting out the letter of 19 April from Malz which is said by Aqua-Max to have granted an extension until 28 April. Without expressing any opinion on the point, we shall assume, in favour of Aqua-Max, that the letter does intimate that the contract will not be rescinded until after 28 April. Even on this assumption, it did not in our view give rise to any impediment to rescission on 28 April.
Wootten, J. went on to hold that, even if an extension of time had been granted on 13 June, there was nothing to prevent the vendor rescinding on 15 June. At 728-730 his Honour, after considering Tropical Traders and other authorities, concluded that even if an extension of time had been granted the vendor was free to rescind during the period of the extension unless something had happened which made it inequitable to do so. As to this, on the assumption that a promise could be spelt out from what the vendor’s solicitor had said, two essential elements of a promissory estoppel were missing: the message had not induced any belief in the mind of the purchaser or those acting for him (since it did not come to the knowledge of anyone who had capacity to act on behalf of the purchaser until after the notice of rescission had been delivered), and the purchaser had not acted on the faith of or altered his position as a result of the promise. Wootten, J. then went on to hold that the case was not one of election. (His Honour dealt also with “waiver”, something not invoked in the present case.) Wootten, J. held, at 730-732, that there had been no election. His Honour discussed whether there was any requirement in the case of an election that the other party should have committed himself to a particular course of action. (He did not have the benefit of the decision of the High Court in Sargent v. ASL Developments Ltd.[59] on this question.) Wootten, J. held that there had been no determination of an election, the inconsistent alternative rights being the right to rescind the contract and the right to insist on its performance.
[59](1974) 131 C.L.R. 634.
Thus Gillard, J. was right in holding that Malz had terminated the consultancy agreement.
We turn to the second point raised by the appeal, namely, whether the judge was correct in his view that the case fell within s.58 of the Supreme Court Act 1986 as one in which the debt or sum recovered was payable by virtue of a written instrument and at a date or time certain. It is with the phrase “and at a date or time certain” that we are concerned. By s.58(3), a date or time is to be taken to be certain if it has become certain. Sub-section (3) is a simplified version of sub-s.(2) of the substituted s.78 which was introduced into the Supreme Court Act 1958 in 1962 by Act No. 6874, s.2. The substituted section was based on the recommendations of the Chief Justice’s Law Reform Committee, which criticised, among other things, restricted interpretations of the phrase “time certain”. The old law will also be found discussed by Ellicott, J. in Commonwealth of Australia v. Crothall Hospital Services (Aust.) Ltd.[60].
[60](1981) 36 A.L.R. 567 at 583.
Malz contended that the bonus was, by virtue of the consultancy agreement, payable at a date which had become certain and so was to be taken to be certain, that being the date of termination of the agreement, 30 April 1993. Aqua-Max said that the amount recovered was not payable at a date certain and that interest should therefore run, not from 30 April 1993, as Malz contended, but from the time when demand of payment was made, that being the date on which the claim was made by the amendment of the pleadings. The judge accepted Malz’s contention, taking the view that it was enough that date or time could be ascertained from the written instrument “without reference to any other criteria or indicia”. We entertain no doubt about the correctness of the judge’s view that the case fell within the section.
The submission to us on behalf of Aqua-Max was that the date on which the bonus was payable by virtue of the consultancy agreement was not certain because it was difficult to ascertain the date, a dispute having arisen about whether the bonus was payable and the decision of the court being necessary in order to determine whether, on the law as applied to the facts, Malz had terminated the consultancy agreement. But the circumstance that, a dispute having arisen, questions of fact or law or both may have to be determined by a court does not mean that the written instrument does not make the sum payable at a date or time which has become certain. The facts are the facts and the law is the law: there may be difficulty in finding the one or in stating the other, but, unless it is impossible in a given case to find the facts which have to be determined, the necessary certainty exists. In other words, it is not difficulty but impossibility which will prevent its being said that the date or time at which the sum was payable has become certain.
This view makes it unnecessary to rule upon the application by Malz for leave to amend the counterclaim so as to include alternative allegations concerning repudiation and acceptance of repudiation.
The appeal in the first proceeding, in so far as it challenges the decision on the counterclaim by Malz, must fail. There will remain for subsequent determination a question about an order for costs made by the judge.
Finally we should mention that Malz is in liquidation. It is being wound up by the Court, and was placed in liquidation on 18 March 1996. At some stage before or during the trial his Honour intimated that he would be willing to grant leave pursuant to s.471B of the Corporations Law to proceed with the first proceeding against Malz. But it seems that no application for leave was ever formally made and that leave was never granted. In addition, the title to the proceedings has never been amended to reflect the fact that Malz has gone into liquidation. Aqua-Max has filed a summons seeking leave under paragraph (a) of s.471B to proceed with the appeal against Malz if leave is required. The grant of leave is not opposed by Malz. On the question whether leave is necessary, we were referred by counsel for Malz to what was said by the Court of Appeal of New South Wales in Skinner v. Jeogla Pty. Ltd.[61]. Without expressing any opinion on whether leave is necessary, we will grant leave, if needed.
[61][2001] N.S.W.C.A. 15; (2001) 37 A.C.S.R. 106.
---
·“Y” = total loan funds provided by Sietel under clause 7(2),
(3) and (4) - $2,840,247·“X” = additional loan funds provided by Sietel under clause 7(4)
(being the total funds provided under that clause - $1,760,247
less the amount of its commitment under clause 7(4) ($52,318 x 4)
$209,274) - $1,550,973· “St” = 2,000
Therefore, additional formula shares = 2,000 x = 1,092 shares.
47
0
0