Carolia Pty Ltd v Crompton

[2010] NSWSC 493

CITATION:	Carolia Pty Ltd & Ors v Crompton & Ors [2010] NSWSC 493
HEARING DATE(S):	29.03.10, 30.03.10, 31.03.10, 01.04.10, 06.04.10, 07.04.10, 08.04.10, 09.04.10, 12.04.10
JUDGMENT DATE :	21 May 2010
JUDGMENT OF:	Windeyer AJ
DECISION:	The orders will be: (1) judgment for the plaintiff Paul Hargreaves against the first and second defendants for $40,000; (2) judgment for the plaintiff Elizabeth Hargreaves against the first and second defendants for $40,000; (3) costs reserved for argument; and (4) proceedings otherwise dismissed.
CATCHWORDS:	CONTRACT – partly written partly oral – 2004 version signed by defendants 2006 version signed by plaintiffs – no significant difference between them – parties accepted they were bound by terms and acted on them – agreement between two groups of shareholders – whether shares to be issued as unpaid or as fully paid in consideration of work to be done CONTRACT – shareholders agreement – each shareholder entitled to be director or appoint director – quorum for directors meeting required attendance by director appointed by each shareholder – two directors resigned but meetings continued – whether resolutions valid DAMAGES – shares lost as result of breach of shareholders agreement – question of damages for value of shares lost CORPORATIONS – shareholders agreement – conduct in breach of agreement – value of shares EVIDENCE – claim of forgery – standard of proof
LEGISLATION CITED:	Corporations Act 2001 (Cth) Fair Trading Act 1987
CATEGORY:	Principal judgment
CASES CITED:	Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; (2001) 117 FCR 424 Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449; (1992) 67 ALJR 170
PARTIES:	Carolia Pty Ltd – first plaintiff Paul Richard Hargreaves – second plaintiff Elizabeth Ellen Hargreaves – third plaintiff Vanessa Crompton – first defendant Jeffory William Herdegen – second defendant Anglesey Secured Investments Ltd – third defendant
FILE NUMBER(S):	SC 08/277318
COUNSEL:	P Greenwood SC/A Hill - plaintiffs F Lever SC/R Higgins - defendants
SOLICITORS:	Hughes & Co – plaintiffs Ferrier & Associates - defendants

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Windeyer AJ

21 May 2010

08/277318 Carolia Pty Ltd & Ors v Vanessa Crompton & Ors

JUDGMENT

Outline

1 His Honour: There are two questions for decision in this case. The first is whether the first and second defendants breached the terms of a contract claimed to have been entered into between them and the second and third plaintiffs so as to repudiate that contract. If they did, then the second and third plaintiffs accepted such repudiation and brought the contract to an end and claim damages for breach. If the plaintiffs fail in that, then there is a second claim under s 233 Corporations Act 2001 (Cth) for relief against oppressive conduct involved in the issue of shares in the third defendant said to have been for the purpose of forcing the plaintiffs out of the company.

2 This sad case concerns a joint venture between, on the one side husband and wife, and on the other side man and long term partner, who for reasons not quite apparent fell into dispute perhaps because their different characters made a joint operation difficult. It is sad because the amounts in issue while not small are not really large and the expenses of the trial which lasted for nine days may well be out of proportion to any possible result, and the actual cost to the parties will certainly be out of proportion.

3 Huge volumes of paper were produced and material produced by way of experts’ reports of computer analysts which in the long run was not used. This must have cost many thousands of dollars. The main question is whether subscribers shares in a company were issued as fully paid in consideration of work to be performed by the shareholders to the stage when the company could commence business or whether the shares were issued on the basis that the issue price remained unpaid.

(a) Carolia Pty Ltd (Carolia), the first plaintiff is a company carrying on business as an incorporated legal practice at Forbes under the name of Palmers Solicitors (Palmers).
(b) Mr Paul Hargreaves, the second plaintiff is a solicitor and the sole practitioner engaged in the legal firm. From time to time I will refer to him as PH.
(c) Mrs Elizabeth Hargreaves is the wife of the second plaintiff. She has for many years been the practice manager of firms in which her husband has carried on his legal practice. From time to time I will refer to her as EH.
(d) Vanessa Crompton, the first defendant who from time to time I will refer to as Crompton, is what she described as the life partner of Jeffory Herdegen, the second defendant who from time to time I will refer to as Herdegen. She and Herdegen are, among other activities, mortgage originators. They are directors of a company Hitite Pty Ltd which carries on business as Waratah Property Finance in premises known as Anglesey House at Forbes.
(e) Anglesey Secured Investments Ltd (Anglesey), the third defendant was formed with the intention of it becoming a second tier mortgage lending company which would issue a prospectus for the purpose of raising money on debenture from the public and then lend that money on mortgage to borrowers. Its name on incorporation was Estate Secured Investments Ltd (Estate) but this was later changed to Anglesey.

4 From time to time in this judgment when I refer to the defendants I mean Mr Herdegen and Ms Crompton.

5 Mr P Greenwood SC with Mr A Hill appeared for the plaintiffs and Mr F Lever SC with Mr R Higgins appeared for the defendants.

Uncontested facts

6 In 2004 Herdegen and Crompton were the owners of a property at Forbes called Anglesey House. They had met PH in the course of their business. In May 2004 PH arranged for Carolia to take a lease of part of Anglesey House for three years with an option for two further three-year terms. PH like many country solicitors was concerned about the downturn in legal work for solicitors in country towns. Conveyancing work was diminishing and competitive and personal injury litigation was drying up.

7 Soon after this the parties began discussions on the possibility of establishing a company which would raise money on debentures pursuant to a prospectus and lend those monies on mortgage. The parties met for dinner at the Forbes Inn on 24 September 2004 partly to get to know each other better and partly to discuss the proposal in outline. Most of the business discussions at that meeting were carried out between Herdegen and PH.

8 The proposed enterprise was attractive to PH as he saw this as an avenue to earn fees by acting for the mortgagee on the mortgages which would be taken as security for the loans. Everybody understood that it was the borrower who in fact paid those fees.

9 Herdegen and Crompton understood why the proposal was attractive to the Hargreaves. They both said that they had wanted to set up such a company for some years; that they had discussed it with another solicitor in Forbes who was not interested but who indicated it would cost about $100,000 to set up the structure. They understood that the Hargreaves had the legal skills required and that they as mortgage originators had the skills needed both to raise funds and obtain applications to borrow those funds on mortgage. How far all this was discussed at the Forbes Inn and how far, if at all, shortly after the dinner does not really matter.

10 PH said that he would prepare an outline or discussion paper setting out steps involved in the proposal. He did this. The document is dated 26 September 2004. He gave the document to Herdegen and Crompton. Among other things, that document included the following steps:

(a) a formal agreement between the promoters covering various matters including shareholdings, directors, roles, and “Funding of the Company from the time of its acquisition up until it becomes self supporting”;
(b) name; and
(c) issue of shares in capital of company (in consideration of ‘start up’ funding).

11 Although there was some dispute about this, I find that there were some further discussions of a relatively informal nature between the parties prior to 27 October 2004.

12 On 27 October 2004 there was a more formal meeting to discuss the proposal further and to consider the matters set out on the discussion outline paper of 26 September. There is some dispute as to what happened but matters agreed upon were that Herdegen would be the chairman, EH would be the secretary and that each of the four would take 25 per cent of the shares. Not all of the items on the outline of steps were reached for discussion.

13 PH produced a file note covering this meeting. He did not suggest that he gave this to the other side or that it is a minute of that meeting. Mr Lever said in closing submissions that the file note was not disputed. Whether that went to authenticity or to accuracy is not quite clear. The file note includes the following:

“PRH tried to divert Jeff and Vanessa back to the company structure which has to be sorted out before anything gets under way. We could not agree on a name for the company. That will have to be resolved before the matter can progress at all. We really need to get the company structure in place and open some banking accounts as the first step. Thereafter, PRH will speak to ASIC about registration of a Prospectus.
The following matters were agreed:-
1. We will all try and identify a suitable company name.
2 Jeff and Vanessa will talk to Shane Kennedy about a possible directorship.
3 Each party will contribute an equal amount to the cost of acquiring the company structure.
4 Once the company structure is acquired, banking accounts will be established.
5 PRH will draw up a shareholders agreement once the company structure is in place and the name has been settled.”

14 It would seem from this that a decision as to name had not been arrived at by 27 October although from notes on the discussion paper made by Crompton it seems that she at least had put forward the name of Anglesey. The Hargreaves say that there was another meeting held on 29 October at which, among other things, the name Estate was agreed. Whatever else happened an order form to Patricia Holdings Pty Ltd (Patricia Holdings) to procure the incorporation of a company of that name was completed and sent to Sydney on that date. Details of the officers and members were written in for the Hargreaves by EH and for Herdegen and Crompton by Crompton. Herdegen was not present when the form was completed. Those parts of the form relating to class of share stated to be “A” and number of shares stated to be 250,000 for each shareholder were completed by EH.

15 The company order form signed by PH appointed Patricia Holdings to sign the application for registration. This application shows the number of shares issued as 1,000,000 and the amount paid on those shares as $1,000,000 with no amount unpaid. If shares are issued other than for cash then there are certain other forms required to be lodged as well. None were. Each of the shareholders were shown to have taken up 250,000 shares and to have paid $250,000.

16 Estate was registered as a public company on 1 November 2004. Each director signed the form of consent to act as director on the same date. Each such consent set out that the director held 250,000 ordinary shares acquired on 1 November 2004 at a price or consideration of $1 per share. The company changed its name to Anglesey on 15 April 2005 but that is not a relevant matter except that the required form was signed by EH and stated again that there were 1,000,000 issued shares and that $1,000,000 had been paid on them and that nothing remained unpaid. I will come back to this later but when on 10 March 2006 a further 40,000 shares were issued to each shareholder on which there was in fact paid by each $40,000 the return signed by EH stated that the total paid for the total shares issued, namely 1,160,000 was $1,160,000 and the other company documents such as the allotment journal stated that $1 cash was paid on each share.

17 Included in the documents provided by Patricia Holdings on formation of the company were share certificates for each shareholder for 250,000 shares. Those certificates set out details of the name and address of each particular shareholder and then stated after name and address “is the holder of ‘Two hundred fifty thousand’ (250,000) Ordinary Shares on which the sum of per share is paid and there remains no amount unpaid subject to the Constitution of the Company”. Mr and Mrs Hargreaves signed the certificates for Herdegen and Crompton and PH and Herdegen signed those for the Hargreaves.

18 In November 2004 PH prepared and provided to Herdegen and Crompton a draft of the shareholders agreement. This was taken from a precedent downloaded from some website. Clause 3(1) is as follows:

“3(1) The shareholders must procure that on the effective date the issued capital of the company is held legally and beneficially as follows:

No. of shares	% Holding
Jeffory William Herdegen	250,000	25%
Vanessa Crompton	250,000	25%
Paul Richard Hargreaves	250,000	25%
Elizabeth Ellen Hargreaves	250,000	25%

and for this purpose each shareholder must subscribe at par for the number of shares specified above.”

19 The names were of course filled in but otherwise the wording is taken direct from the precedent. Clause 9(1) provided the shareholders must contribute in proportion to their shareholdings to the funding requirements of the company.

20 Clause 22 is as follows:

“Entire agreement
22 This agreement comprises the entire agreement between the shareholders in relation to its subject matter and no earlier agreement, understanding or representation, whether oral or in writing, in relation to any matter dealt with in this agreement will have any effect from the date of this agreement.”

21 There were discussions between the parties as to the draft shareholders agreement as a result of which PH produced at least one amended document. This is generally referred to in the evidence as either the 2004 or the 2005 shareholders agreement. It included the clauses just set out. Herdegen and Crompton say that they signed this and gave it to the Hargreaves. The Hargreaves deny this. They say that they themselves did not sign it. The copy claimed to have been signed by Herdegen and Crompton is not in evidence. I have come to the conclusion that it was given to Mr and Mrs Hargreaves. On a number of occasions they were asked for a copy of it and although this was not provided there was never any suggestion that it was not held by Mr or Mrs Hargreaves. It is the Herdegen and Crompton parties who rely on that document because they said they did not sign a later one to which I will refer. There would be no reason for them not to produce the document if they had it. I accept their evidence that they signed it and gave it to Mr or Mrs Hargreaves.

22 The shareholders had agreed that a Mr Michael Rendell of WHK D’Arcy Kennedy accountants of Forbes would be asked to act as auditor of the company. He agreed. Notes taken by PH of a conversation he had with Mr Rendell on 19 January 2005 are part of Ex C. Paragraph 4 is as follows:

“4. PRH enquired about the tax consequences of issuing 250,000 x $1 shares to each of JH, VC, PH & EH. Michael says there is no tax consequences in that issue of shares. If the shares are sold at some stage in the future the sale proceeds will be taxable income – or will attract capital gains tax depending on how the law stands at the time.”

This note is not consistent with affidavit evidence of PH that he told Mr Rendell the shares would be issued in consideration of work to be done.

23 Before Anglesey could operate as envisaged, it was necessary for it to obtain an Australian financial services licence issued by the Australian Securities and Investments Commission (ASIC). The original application required a considerable amount of work to be done before it could be lodged. It appears to have been dated 26 May 2005. In a letter of 6 June 2005 ASIC stated that an initial review showed the application was not satisfactory. Among other things it stated that the company would be required to hold “$50,000 of your own funds in liquid form”. It also required a proper up-to-date balance sheet and profit and loss account. A new application was lodged on 31 August and on 23 September ASIC sought further information indicating that the four shareholders who were nominated as responsible officers were not satisfactory and further stating that the statement of financial position did not comply with Australian accounting standards. A statement of position which had been furnished, setting out the financial position as at 31 July 2005 showed as assets, directors loans of $120,000 and under equity showed issued capital of $1,000,000. The note addressed to the issued capital stated: “The issued capital is 1,000,000 shares at $1 per share”. The directors had agreed to each lend $30,000 to Anglesey but had not done so. In no way was the document a proper balance sheet. On 26 September Mr Hargreaves asked Mr Rendell to prepare a balance sheet in accordance with the required standards. By then Mr Rendell had agreed to be auditor. By letter dated 28 September 2005, PH wrote:

“Further to our telephone conversation this afternoon, we enclose copies of the following:
1. Bank statement for June 2005, and
2. Allotment Journal from the Company Register (date of incorporation 1 November 2004).
Paul had a conversation with you about the shareholdings when he consulted with you about the Auditor role. He understood that the shares should be identified as “subscriber shares”. He was concerned that they might be seen as income if they were issued in consideration for the work done in establishing the business.
If the record shows that the directors/shareholders are indebted to the company for $250,000 each for their share issue, we are concerned about the following possibilities:
1. As a debt of that nature would be payable on demand, any dispute could see a 3-1 resolution on the part of the directors to demand payment; and
2. If the company was to forgive the debts, the value of the same may be seen as income in the hands of the shareholders.
Thank you for your assistance with this matter.”

The conversation is that which took place on 19 January 2005 referred to in par 22.

24 As the ASIC concerns were not addressed within the very short period of five days given for this, the application was refused on grounds of non-suitability of responsible officers and concerns about the financial resources of the company. A right to an oral hearing was notified. PH replied on 4 October 2005 stating that Anglesey required this opportunity.

25 In November 2005 Anglesey appointed Mr Tom Watson as its responsible officer and an amended application for a licence was filed and again refused with the matter to proceed to an oral hearing. At a directors’ meeting held on 22 February 2006 it was resolved that each director would contribute $40,000 to take up shares in the company. Payment was made and the shares were issued on 10 March 2006.

26 What is called the administrative appeal or oral hearing took place on 5 April 2006. PH had prepared written statements by each of the directors which became part of sworn evidence on the hearing. In her statement EH said she had prepared, and exhibited to her statement, a revised statement of financial affairs taking into account the new funding of $160,000. Those accounts showed current assets of $160,314, current liabilities of $2,570 and net assets of $157,744. Under the heading “Equity” the following appeared:

“Share Capital 160,000
Accumulated liabilities (2,256)
Total Equity 157,744”

Under that the following notes appear:

“The company changed its name from Estate Secured Investments Ltd
The company has issued 1,000,000 x $1 subscriber shares which remain unpaid
The company has issued 160,000 ordinary x $1 shares which are fully paid
The company has not traded as at 10-3-2006”.

27 PH in his statement incorporated the statement of financial position exhibited to his wife’s statement and may have exhibited it to his own. Whether that statement was produced by PH or the accountants is not quite clear but it was probably produced by the accountants after the letter to them of 26 September 2005 as pars 16 and 17 of his statement are as follows:

“16. ASIC also expressed concerns about the format of the initial statement of financial position. At the time that document was drawn I did not engage the company’s accountants. My preference was not to outlay funds on professional accountancy services at that stage, when the company was not funded. I accept that the form of the initial statement of financial position was non-compliant. That matter has now been resolved.
17. On the grant of an AFS Licence, the company’s accountants will be engaged to complete and format all statements of financial positions for Anglesey. The company’s accounts will be audited quarterly in order to comply with ASIC’s requirements and with the stipulations of the Trustee for debenture holders. I do not expect that my rudimentary accounting skills will be called on by the company in the future. I would respectfully ask ASIC to overlook the deficient state of the initial statement of financial position. That should not be seen as an indicator of any particular attitude on the part of Anglesey or as a sign of incompetence. It was nothing more than an attempt on my part, at that time, to keep costs in check until Anglesey was able to commence its business activities.”

28 The hearing was successful and the company was told a licence would be issued although this did not happen until 11 August 2006. On that date Mr Watson was appointed as a director of Anglesey. This was in accordance with the terms of a contract which the company had entered into with him under which he agreed to become the responsible person in the event of a licence being granted.

29 In March or April 2006 EH prepared a new draft shareholders agreement. The only significant difference between this and what is called the 2005 agreement was that the new clause 3(1) was as follows:

“3(1) The shareholders must procure that on the effective date the issued capital of the company is held legally and beneficially as follows:

No. of shares	% Holding
Jeffory William Herdegen	290,000	25%
Vanessa Crompton	290,000	25%
Paul Richard Hargreaves	290,000	25%
Elizabeth Ellen Hargreaves	290,000	25%”

30 This document was signed by the Hargreaves later on and a signed copy given to the defendants. The defendants said they did not sign it although there is some evidence that they said they were satisfied with it.

31 It is convenient now to set out relevant clauses which appear in both the 2005 and 2006 versions of this document. I have set out these from the later version as there were some numbering errors in the earlier version.

“Objectives
2(1) The objectives of the shareholders in establishing the company are:
(a) to raise loan capital for the company by the issue of Debentures; and
(b) to procure the company to conduct the business of lending funds upon first mortgage or other acceptable security to approved borrowers.
(2) In order to fulfil the objectives listed in cl 2(1), each shareholder must:
(a) cooperate and use the shareholder’s best endeavours to ensure that the company successfully carries on the business;
(b) not use confidential information in a way which damages or is reasonably likely to damage the company or any of the other shareholders;
(c) not unreasonably delay an action, approval, direction, determination or decision required of the shareholder;
(d) make approvals or decisions that are required of the shareholder in good faith and in the best interests of the company and the carrying on of the business as a commercial venture; and
(e) be just and faithful in the shareholder’s activities and dealings with the other shareholders.”
“Board of directors
4(1) Subject to condition 4(2) hereof, the maximum number of directors (excluding alternate directors) shall be five (5), unless the shareholders otherwise unanimously determine. Each shareholder is entitled to appoint one director.
(2) The shareholders must procure that, on the effective date, the board comprises:
Jeffory William Herdegen
Vanessa Crompton
Paul Richard Hargreaves, and
Elizabeth Ellen Hargreaves.
…
(4) The chairman of the board will:
(a) be Jeffory William Herdegen; or
(b) be a director appointed by the Company; and
(c) have a casting vote as chairman in addition to any vote he or she may otherwise have as a director.
…
(6) A board meeting will require at least 10 business days’ prior written notice to be given to all directors unless otherwise agreed by all directors. That notice must include an agenda and, unless all directors otherwise agree, a board meeting may only resolve matters specifically referred to in that agenda. The agenda must be determined by the chairman or/and the company secretary, or/and the chief executive officer after consultation with the board.
(7) A quorum for board meetings is constituted by the attendance (in person or by alternate) of a director appointed by each shareholder that is entitled to appoint a director under cl 4(1).”
“Decision making
5(1) Subject to the Act and this agreement, all decisions of the board or the shareholders in general meeting will be made by simple majority vote.
(2) A decision of the board or the shareholders in general meeting will not be valid unless (in addition to being made by simple majority vote) it is supported, in the case of the shareholders in general meeting, by at least two shareholders or, in the case of the board, the directors nominated by at least two shareholders.
(3) All decisions in respect of the following matters when they are not included in the business plan must be made by unanimous consent of the board:
…
(k) the issue of any shares, or options to take up unissued shares, in the capital of the company;”
“Funding
9(1) Each shareholder must contribute its respective proportion of the funding requirements of the company, as determined by the board from time to time. The shareholders must ensure that on the effective date they have advanced to the company by way of unsecured loan, in accordance with their respective proportions, an aggregate amount of $10,000.00.
(2) The obligation referred to in cl 9(1) (‘funding obligation’) must be satisfied by either:
(a) subscription by the shareholders in accordance with their respective proportions for new fully paid shares; or
(b) the making of loans to the company by the shareholders, in accordance with their respective proportions,
as the board requires.
(3) The board must determine:
(a) the number of new fully paid shares to be issued and allotted under cl 9(2)(a); and
(b) the terms and conditions (including the amount) of loans to be provided under cl 9(2)(b);
in order to satisfy each contribution.
(4) Each shareholder acknowledges and agrees that any breach of the funding obligation by a shareholder (‘defaulting shareholder’) will cause loss or damage to the company and any other shareholder (‘non-defaulting shareholder’), and accordingly, any breach of the funding obligation may be enforced (or damages sought) by the company or the non-defaulting shareholder by legal action against the defaulting shareholder. This right is in addition to any other right that the company or a shareholder may have under this agreement.
(5) If a shareholder fails to subscribe for new fully paid shares or provide loans as required under cll 9(1) and 9(2) (‘defaulting shareholder’), and fails to rectify that breach within 30 days after notice of that breach from another shareholder or director or company secretary requesting that breach to be remedied, the defaulting shareholder is:
(a) deemed to have issued a transfer notice to the board pursuant to cll 11(5) and 12(1) for all of the defaulting shareholder’s shares, and cl 13 will apply to the valuation and sale of the defaulting shareholder’s shares; and
(b) will have all rights attaching to the shares held by the defaulting shareholder suspended until either:
(i) the shares of the defaulting shareholder are sold; or
(ii) the defaulting shareholder subscribes for the new shares or makes the loan under cl 9(2); and
(iii) makes any payments due to the shareholder or the company arising under cl 9.
(6) If a shareholder (‘defaulting shareholder’):
(a) fails to subscribe for new fully paid shares as required under this cl 9, the board may offer for subscription to each shareholder (other than any defaulting shareholder), the new shares for which the defaulting shareholder failed to subscribe;
(b) fails to provide a loan to the company as required under this cl 9, the board may permit the other shareholders or any one or more of them to provide the outstanding loan. In the latter case, the defaulting shareholder will be liable to pay interest to such shareholder or shareholders on the amount of the outstanding loan calculated at the interest rate from the date when the defaulting shareholder became obliged to make the loan until the defaulting shareholder actually makes the loan or ceases to be a shareholder.
(7) Loans made as at the effective date or provided under cl 9(2)(b) will be:
(a) made on identical terms and conditions (except for the amount of the loans if the shareholders’ respective proportions are not identical);
(b) unsecured;
(c) at interest rates to be agreed by the board or, in the absence of agreement, interest-free; and
(d) not assignable by the shareholder or the company.
(8) The shareholders must not provide their shares as security, or create or give any encumbrance over their shares in favour of any party without the prior written consent of all shareholders which may be withheld by each of them at their absolute discretion. This cl 9(8) does not apply to any floating charge over the assets of a shareholder that is in existence on or before the date of this agreement.
(9) Subject to cll 9(8) and 9(10), this cl 9 does not prohibit external borrowings by the company, on terms and conditions determined by the board.
(10) The shareholders must ensure that the company does not undertake any activity including (without limitation) entering into a contract or arrangement to provide services or obtaining external borrowings from a financial institution (or other third party) that requires the shareholders to give a guarantee, bond or other security without the prior written consent of each shareholder. Where the shareholders agree to provide such security and the shareholders agree with the financial institution or third party that any liability is to be assumed jointly, or jointly and severally, by them under that security, the shareholders agree that:
(a) the amount of such liability will be apportioned between the shareholders in their respective proportions; and
(b) notwithstanding any agreement with or action by the beneficiary of such guarantee, undertaking or obligation, the shareholders, between themselves, shall be liable to make contribution to each other and indemnify each other so that any such liability is ultimately borne by the shareholders in their respective proportions.
(11) Any guarantee, bond, undertaking or other security given, either jointly, or jointly and severally, by the shareholders is irrevocable except with the written consent of all shareholders, such consent not to be unreasonably withheld.”
“Transfer of shares
11(1) Unless all the shareholders otherwise agree, a shareholder must not transfer shares except in accordance with cll 9(5), 11(2), 11(3), 11(4) or 20.
(2) (a) A shareholder may transfer all (but not part) of its shares to a wholly-owned subsidiary or a wholly-owned subsidiary of that shareholder’s ultimate holding company (for the purposes of this clause only, ‘subsidiary’) if, in addition to complying with cl 11(6), the shareholder and the subsidiary agree that the shares must be re-transferred to the shareholder if the subsidiary ceases to be wholly-owned by the shareholder or its ultimate holding company.
(b) A shareholder will remain liable for the performance of the duties, responsibilities and obligations assumed by any subsidiary, except that performance by the subsidiary will, to the extent so performed, discharge the shareholder from the performance of those duties, responsibilities and obligations.
(3) Subject to cl 11(2), a shareholder must not transfer, directly or indirectly, its shares except by first issuing a transfer notice to the board in accordance with cl 12.
(4) If there is a change in control of a shareholder then the shareholder is deemed to have issued a transfer notice in accordance with cl 11(5) for all of its shares and cl 13 applies to the transfer of those shares.
(5) A deemed transfer of shares arises, and a transfer notice is deemed to be issued, by operation of cll 9(5), 11(4) or 19, and cl 12 will apply to the sale of those shares and each shareholder waives any rights it may have against the other shareholder to claim relief from forfeiture or to claim that the operation of this clause or cl 19 is a penalty.
(6) Unless all the other shareholders agree, no transfer of shares will be effective, unless the following conditions of transfer are satisfied:
(a) the transfer relates to all of the shares held by the shareholder;
(b) where shares are proposed to be transferred to a third party (including a subsidiary under cl 11(2), the third party must enter into and deliver to each other shareholder a deed of accession; and
(c) subject to compliance with ss 260A and 260B of the Act, all loans from the company to the shareholder transferring its shares are repaid in full and all loans to the company from the shareholder transferring its shares are repaid in full and replaced by loans from the transferee to the company; and
(d) all amounts owing to the company or the other shareholder for new shares for which the shareholder failed to subscribe under cl 9(5).
(7) No transfer of shares may be made to a third party if, in the reasonable opinion of the shareholders (other than the shareholder transferring its shares), the third party is not of good standing, financial substance and reputation.”

Clause 12 provides a procedure for transfer of shares where a transfer notice is deemed to be given. It sets out the persons to whom the shares are to be offered and the price determined by cl 13.

“Determination of sale price
13(1) Within five (5) business days of a transfer notice being issued or deemed to be issued under cl 12(1), the board must agree on a person (‘valuer’) to value the sale shares, or failing agreement procure that the President of the Institute of Chartered Accountants of Australia nominates a valuer, and the board must instruct the valuer chosen or nominated to value the sale shares, adopting the method of valuation that the valuer considers appropriate, but in valuing the sale shares the valuer must:
(a) assume that a reasonable time is available in which to obtain a sale of the sale shares in the open market and for that purpose 90 days will be deemed a reasonable time;
(b) have regard to the following factors (in addition to any other factors which the valuer believes should properly be taken into account) based on the best information available at the time:
(i) prospects of the business;
(ii) the value, at a specified capitalisation rate appropriate to the business, of the estimated future maintainable earnings of the company;
(iii) the yield which an open market investor would reasonably require in an acquisition of the sale shares;
(iv) the net tangible assets of the company as disclosed in the audited accounts for the last preceding financial year, or if no audited accounts of the company are available, as disclosed in the latest management accounts of the company; and
(c) act as an expert and not as an arbitrator.
(2) The sale price will be final and binding upon the seller and the transferee.
(3) The cost of the valuer’s determination must be borne by the shareholders in their respective proportions.
(4) The sale price is final and binding upon the seller and the transferee.
(5) The shareholders acknowledge and agree that the difference (if any) between the market value of the sale shares and the sale price of those shares calculated in accordance with this clause is, and has been agreed between the shareholders to be, a genuine price and that the transfer of those shares at the price calculated in accordance with this clause will not constitute a penalty against the seller or forfeiture of the seller’s shares. Each shareholder waives any rights it may have against the other shareholders to claim relief from forfeiture or to claim that the operation of this clause or cl 12 is a penalty.”

32 There were three important matters to be resolved and put in place before the business could commence. These were the appointment of a trustee for debenture holders, the issue of a prospectus and if possible the obtaining of membership of a group of mortgage lending debenture issuing companies called the Provic Group (Provic). It is not necessary to go into this in detail. Sandhurst Trustees Ltd agreed to be trustee for debenture holders. As to the second, namely the prospectus there was a lot of detailed work and exchange of views on the prospectus from the last quarter of 2006 until August 2007. The document was finally approved by the directors on 25 August 2007. Even then it was still thought that a new photograph of Mr Herdegen should be provided. That part of the document relevant here was that setting out the company’s financial position as at 31 December 2006 which showed it had an issued capital of $160,020 and no mention was made of 1,000,000 shares on which nothing had been paid or which were issued as fully paid. However under the heading of “directors interests” it did show that each of the directors held 290,000 shares with no explanation of this.

33 The published accounts for the year ended 30 June 2006 approved by the directors and audited by the accounting firm of WHK D’Arcy Kennedy of Forbes made no reference at all to issued capital beyond $160,020. The same financial statements were provided to Provic in March 2007.

34 It is necessary now to go back to a meeting of directors held at Mr Watson’s home at Shepparton on 14 and 15 October 2006. An agenda for that meeting had been issued in advance. Item 17 on the agenda was “Pricing of Products (interest rates, establishment fees, etc)”. It was agreed by the parties during the hearing that this agenda item would encompass fees which would be payable by borrowers which would include legal fees, valuation fees and the like. There is a dispute as to what happened in discussion of this item. Legal fees were of the utmost importance to PH as it was the opportunity to earn legal costs which had made him interested in the venture. Retainer of Palmers for the work was essential so far as he was concerned. His evidence is that Herdegen said: “Legal fees have to be competitive. Paul, would you be prepared to take a ‘haircut’ on your legal fees?” to which he replied: “I set my fees at a reasonable rate. I have overheads to cover. If I start reducing my fees then it will cost me to do the work” to which he said Herdegen had replied: ”Palmers won’t be getting the Company’s legal work unless its fees are competitive”. A little later in the discussion PH had said: “My fees are $230.00 per hour plus GST. I consider that to be a very low rate of charge in the current climate. Most Solicitors charge a lot more than that. There is about 5 hours work in a standard mortgage transaction. I would expect that, in most cases, Palmers fees would be in the range of $1,000 - $1,250 plus GST”, to which Mr Watson had said: “That is very reasonable, by current standards”. After a short break discussion was continued.

35 Paragraph 85 of PH’s first affidavit is as follows:

“85 There was a break in the Directors meeting whilst we had a cup of tea. The meeting then resumed. I was very annoyed about the discussion that had taken place prior to the break in relation to the engagement of Palmers. A discussion took place to the following effect:
Jeffory Herdegen said:
‘Let’s move on to the next item on the agenda.’
I said:
‘No. There is something more that I want to say about Palmers doing the Company’s legal work.’
Jeffory Herdegen said:
‘No. We have dealt with that.’
I said:
‘No. We haven’t. I haven’t finished. I want you all to understand that our contribution to the establishment of the Company and getting the AFS License has cost Liz, me and Palmers a great deal of money. Liz has given even more of her time than I have. Liz has drawn a full salary on Palmers whilst she has been doing work for the Company. Palmers’ fees are set at reasonable rates. We have significant overheads to cover. We are not going to do work for discount fees.’
Jeffory Herdegen became red in the face and he was obviously quite angry. He snapped:
‘We’ll be doing what’s best for the Company. Let’s move on to the next item.’
I became quite annoyed with Jeffory Herdegen and I said:
‘I want you people to understand that if you breach your agreement to engage Palmers, you will find out what a difficult bastard I can really be.’
Jeffory Herdegen said:
‘Palmers will not be getting the legal work unless it is prepared to ‘take a haircut’ on its fees!’”

36 Herdegen denied the reference to a hair cut. Crompton agreed that the words were said and I find that they were. The evidence is really contrary to the version of the Hargreaves as to the terms of issue of shares. PH said in response to a question from me that it was a heat of the moment statement.

37 This event is still put forward as a fundamental breach of agreement. I do not think that it could possibly amount to that. In the long run PH agreed that for Palmers to get the work its fees would have to be competitive and he had said that he would match those of two other law firms engaged in mortgage work in Forbes. It was never suggested Palmers would not get the work if they were competitive. PH could not really expect anything else bearing in mind his duties to the company. It is however clear that this argument at Shepparton made him very angry and it seems to have been the commencement of the falling out between the two sides.

38 There were other matters of concern to the plaintiffs in 2007 which are pleaded as breaches of agreement. The claimed conduct was:

(a) non co-operation as to insurances and prospectus;
(b) non co-operation as to changes to the prospectus;
(c) deception re David Tequet;
(d) breach of representations to ASIC through suggestions for a loan committee; and
(e) non co-operation - directors meetings at short notice.

39 In the end little attention was paid to any of these matters. Counsel for the plaintiff did not address them. If it had been necessary to make any finding I would have found none of the conduct alleged would have amounted separately or taken together to a repudiation of the agreement claimed. Items (a) and (b) were not established. Item (d) was a suggestion. Item (e) was agreed at Shepparton and item (c) was inconclusive. The more important fact is that the Hargreaves did not attend any meeting of directors after 27 August 2007. That was I think a clear breach of the agreement but it is not their conduct which is under challenge.

40 On 21 September 2007 PH wrote to Herdegen and Crompton setting out in some detail his concerns about Palmers obtaining the legal work and then continuing:

“… You can imagine my reaction, Jeff, when you ambushed Liz and me at Shepparton with your announcement that Palmers was not assured of doing the legal work for the Company. Vanessa, you looked on knowingly, nodding agreement – obviously having discussed that matter and approving of Jeff’s pronouncement.
At that point, Liz and I had probably invested a quarter of a million dollars (in money and professional time) to procure the AFS Licence and advance the Company to that stage. We had done that, of course, in reliance on the agreements that were made beforehand. We could not comprehend your lack of integrity in attempting to renege on our agreement.
Frankly, the Shepparton meeting was a watershed in our personal relationships. From that point onwards, trust was gone! Liz and I have needed to remain ever vigilant, in order to protect our position.
There have been two subsequent occasions when each of you has confirmed your intention to dishonour our agreement. You raised the matter, Jeff, during one of Tony’s visits to Forbes – when we had a meeting in ‘the cave’. You raised the issue, Vanessa, (and then almost choked on your tongue) on an occasion when we met in your office.
I pause here to note that, if it is necessary, I will have no hesitation in enforcing the agreement.
From the Shepparton meeting onwards, relationships have gradually deteriorated. I have dealt with those matters in our other recent correspondence.
If the Company is to go forward from here then Liz and I require that formal undertakings be given and minuted to the following effect:
1. So long as Palmers represents the Company in a proper and professional manner and charges legal fees at prevailing market rates, Palmers will be engaged to do all of the Company’s legal work;
2. That you, Jeff, will keep you temper under control and behave in a civil manner towards all of your colleagues in the Company;
3. That you, Jeff, will restrict your activities to your own portfolio of promotion and development and that you will not meddle in areas where you are unqualified;
4. That you, Jeff, will accept the decisions made by the Board and will refrain from re-agitating matters on which the Board has passed resolutions – unless there is a material change of fact which warrants review of a resolution;
5. That you, Jeff, will abstain from discussing the Company’s internal business with others without first procuring approval from the Board of Directors;
6. That you, Jeff, will stand aside as Chairman of Directors and that (if he will accept it) Tony Watson be appointed as Chairman.
Jeff, if you give the above undertakings and adhere to them, you and I will be able to maintain a civil relationship. In that event, Anglesey may achieve its potential.
At the present time, the four of us shareholders are in danger of losing our money. The significant financial problem has been the delay in progressing the Prospectus – constant procrastinating and going over and over the same ground time and time again. The Company made resolutions at its last Directors’ meeting as to completion of the Prospectus. Based on those resolutions, I have re-drafted the Prospectus and sent it to Sandhurst for approval. A copy is enclosed.
Jeff, I know that you wanted to substitute your photograph in the Prospectus – but here we are three weeks later and you have done nothing about that! Notwithstanding that, there will be the opportunity to include a better photograph before the Prospectus goes to final print. Sandhurst’s approval is required as to the substance of the document only.
So far as Liz and I are concerned, the matter is squarely in your court. We expect disciplined and acceptable conduct of ourselves. We expect the same from both of you. We also expect agreements to be honoured!”

41 Herdegen replied on 25 September as follows:

“You suggest to Vanessa that ‘it is time to put rhetoric to one side’, yet you continue not do so yourself, by veiling it in allegory an attempt to smear my name, and position in the Company.
Quite simply, the Company cannot progress with the ‘formal undertakings’ that you request, and for the following reasons.
1. At no time, have any Directors been opposed to Palmers solicitors performing the legal work for Anglesey Secured Investments Ltd. The only concern held by the Directors, (Herdegen, Crompton & Watson) was that your legal fees needed to be competitive, in order to keep the mortgage loans competitive, and therein acting in the best interests of the Company and it’s prospective clients. You see Paul, there was no need for you to lose control as you did at the Shepparton meeting, when you professed in getting your own way that ‘you can be a proper bastard’.
Perhaps if you lengthened your own temperamental fuse, then you would have avoided this silly misapprehension and misunderstanding that you have.
2. Every Board member has at some time expressed anger over issues, but no-one has done so, with the frequency and volatility that you have.
It is strange that you (and perhaps your wife) are the only ones that even concur with your view that I have a problem so I will ask you to desist from trying to smear by defacing my character with this fallacious paper trail with what appears to be some attempt to construct a legal case against me.
We have all dusted your bad behaviour to one side, in order to maintain some civility in the Boardroom. This has been done in good faith and with consideration for the Company. It is a pity that you could not have reciprocated.
It is unfortunate that you refused to accept my copy of the publication ‘Boardrooms That Work’ by Margaret Cairnes, that I offered to you at our meeting in December 2006.
3. Your insistence that I do not contribute to areas outside marketing and promotion would leave me abandoning my responsibility as a Company Director.
Perhaps you should be asking yourself the question of why we have to query legal issues and advice, especially where it may impact heavily on marketing, development, and the general operation of the Company for it to achieve it’s goals.
4. I have never had a problem with accepting resolutions made by the Board, unless there is a ‘material change of fact which warrants review’. The problem has been in your difficulty in accepting the facts.
5. I would like you to identify the supposed areas where I have taken internal Company information to the public arena without the Board’s approval.

I have always respected this, and have no problem with this request, dare I say that I expect the same from you and all Directors.
6. I will not stand aside as chairman on the whim of a temperamental request by you. Once again, you have asserted yourself above the democratic processes of the Board, and I remind you to refrain from your bad behaviour and start to act in good faith with the members of the Board.
Your dominating behaviour has been highlighted before, and yet another example appears with your drafting of the Prospectus and forwarding it to Sandhurst Trustees Ltd without circulating it to Directors, as resolved at our last Board Meeting.
Paul, I also expect all Directors to conduct themselves with acceptable behaviour and to honour agreements.
So I say to you and Elizabeth, that in the clear light of day the successful operation of this Company has never been dependent upon any one Director, but it relies upon total collective unity, and it needs to be void of the fragmentation that you encourage.”

42 On 25 September 2007 Watson resigned as a director and on 11 January 2008 ceased to be the responsible officer for Anglesey.

43 Palmers had moved from Anglesey House on 15 July 2007. EH, as secretary had taken all the company books and records to the new office. A meeting of directors held on 26 November 2007 which the Hargreaves did not attend although they had notice of, resolved that the registered office be changed to the office of Waratah Property Finance in Anglesey House. It was also resolved that the directors provide V & E Finance with their financial details and other figures required to obtain finance for a computer package purchased from Advance Computers. Herdegen wrote to EH as secretary requiring the books and records of the company to be transferred to the new registered office. That did not happen, but something must have happened because PH wrote to Herdegen, Crompton and their employee Sue Cohen on 27 November 2007 stating that they were not welcome at Palmers and if they entered again they would be treated as trespassers. It followed correspondence to the defendants claiming that Anglesey had no present entitlement to the documents. In the midst of negotiations for settlement Palmers claimed a lien over the company documents on the basis of a bill of costs rendered. It is not necessary to resolve this although it is clear the documents were not held by Palmers as solicitors. It was at this time that Mr Ferrier, solicitor now acting for Herdegen and Crompton, queried the terms of allotment of the original shares and sought copies of documents relevant to this. This gave rise to further heated correspondence. On 7 December, Mr Ferrier reiterated concern as to the original shares issued and sought the documents to resolve the matter. On 7 December 2007 PH wrote by email to Ferrier & Associates stating the company folder held the documents which they sought but he claimed a lien over the documents. The email transmission enclosing that letter had the following words:

“Sent: Saturday 30 October 2004 5.54am”.

This email has caused the expenditure of vast amounts of money and the engagement of experts to examine computers and to produce reports eventually not put into evidence.

44 On 10 December Palmers, through PH wrote to Ferrier & Associates enclosing a memorandum of fees and stated the lien claimed could be resolved by payment. He went on to say:

“It seems to me that your clients are proceeding upon a convenient misunderstanding as to share ownership. I expect that pre-incorporation file notes and post-corporation minutes will disabuse them of any false notions.”

He advised that the company folder contained certain categories of documents. On 13 December Palmers sent to Ferrier & Associates copies of documents listed in that letter namely:

“1. Company Minutes.
2. Directors Minutes contained in the Company folder.
3. Allotment Journal.
4. Register of Directors and Office Bearers.
5. Register of Shareholdings.
6. Members Register.
7. Copies of forms lodged with ASIC.
8. Share Certificates.”

Included with those documents but not listed was a copy of the following file note dated 29 October 2004:

“Discussion between PRH, EH, Jeff & Vanessa Re: Company Name.
Agreed to call the company ‘Estate Secured Investments Ltd’ – with proviso that we may review this after incorporation and before trading. No-one was particularly happy with the name – none of us could think of anything more suitable in the short term.
Palmers will procure the incorporation of the company.
The company will issue 250,000 shares to each of us in consideration of the work that will be done by each director in the promotion of the company and obtaining the necessary approvals.”

45 Ferrier & Associates, in response to PH, referred to concern about this file note stating that it was out of character and was not supported by the material supplied. PH replied, saying, among other things:

“As to the file note dated 29 October 2004, I do not appreciate your scurrilous innuendo. You will have noted that this document pre-dates the incorporation of the Company. You should also direct your mind to the Order Form addressed to Patricia Holdings Pty Ltd – which was partially completed in Vanessa Crompton’s own handwriting.”

46 On 21 December notice was given of a directors meeting to be held on 31 December 2007. The purpose of the meeting was to discuss a proposed resolution that the shareholders make a contribution of $20,000 each to capital so as to leave a financial buffer of adjusted surplus liquid funds over and above required minimum funds thought to be $50,000. The notice set out accounts said to be due and to be presented to the board for payment which included $38,678.80 due to Advance Computing. As the application to V & E Finance had been refused other items were listed which would bring the total in all to $53,656.50 and the balance was said to cover other ongoing expenses to bring the company to a trading position such as printing the prospectus, training a new responsible officer, directors’ expenses, Sandhurst Trustees lawyers’ expenses, and other expected outgoings. PH responded to this notice on 22 December stating that he and his wife would be on leave at that time and they would not be attending the meeting. The meeting was held on 31 December. Mr and Mrs Hargreaves did not attend. The following resolution was passed:

“That the shareholders make a contribution of $20,000 each, on a call of unpaid shares, in order to comply with adjusted surplus liquid funds (ASLF) requirements and to meet payments of outstanding and ongoing commitments.”


The motion was put, but after discussion on future requirements, Provic requirements and ASIC compliance contribution amount, an amendment to the motion was moved to increase the amount to $25,000 and it seems this was agreed.

Little turns on this as Anglesey did not proceed to make this call. A further meeting was held on 14 January 2008 at which it was resolved to pay Palmers the amount of their bill in excess of equal contribution by the four shareholders. Whatever is meant by that is also not entirely clear but presumably it meant Herdegen and Crompton would pay one half.

First claim for breach, repudiation and termination

47 On 16 January 2008 Palmers on behalf of the Hargreaves wrote to Anglesey, Herdegen and Crompton as follows:

“In or about July 2004 an agreement (the Agreement) was made between myself, Paul Richard Hargreaves, and Elizabeth Ellen Hargreaves (of the one part) and yourselves, Jeffory William Herdegen and Vanessa Crompton. The essential terms and conditions of the Agreement were that:
1. Hargreaves would cause an unlisted public company to be incorporated (later called Anglesey Secured Investments Ltd) (the Company);
2. Each of Paul and Elizabeth Hargreaves, Herdegen and Crompton would become a director of the Company;
3. Elizabeth Hargreaves would become the Company’s Secretary and Public Officer;
4. Hargreaves would do all of the legal work which was necessary to procure the approvals which the Company would require to raise public funding by the issue of debentures for first mortgage lending;
5. Herdegen/Crompton would promote the Company’s loan products and its debentures, once the approvals were in place;
6. Elizabeth Hargreaves would be employed as the administrator of the Company;
7. All directors would co-operate with each other/the Company in the procurement of the approvals, the publication of a Prospectus and the advancement of the Company;
8. The directors would procure the Company to retain Palmers Solicitors & Attorneys to do all of its legal work (including representing the Company in all of its mortgage transactions); and
9. In consideration of the services which were to be provided by Hargreaves and Herdegen/Crompton, the directors would procure the Company to issue 250,000 fully paid shares to each of them.
In performance of the Agreement:
A. Hargreaves (through Palmers) procured the Company structure;
B. Hargreaves, Herdegen and Crompton took directorships in the Company;
C. Elizabeth Hargreaves accepted the appointment as Company Secretary and Public Officer;
D. Hargreaves procured the issue of an AFS Licence to the Company on 11 August 2006;
E. Hargreaves procured Sandhurst Trustees Limited to accept the appointment as Trustee for the Company’s proposed debenture holders;
F. Hargreaves wrote a Prospectus for the Company;
G. Hargreaves wrote the Company’s Business Manual;
H. Herdegen recruited Anthony Watson to be a Director and Responsible Officer of the Company;

I. Herdegen and Crompton took part in the Directors Meetings and in the re-writing of the draft Prospectus;
J. Herdegen, Crompton and Hargreaves procured the Company to issue 250,000 shares in the capital of the Company to each of Hargreaves and Herdegen/Crompton;
K. Hargreaves and Herdegen/Crompton procured the Company to agree that the issued share capital would be noted as fully paid.
In breach of the Agreement:
(i) Herdegen/Crompton neglected and refused to complete and publish the Company’s Prospectus;
(ii) Herdegen/Crompton procured the Company to decline to retain Palmers as its solicitors and attorneys;
(iii) Herdegen engaged in a litany of breaches of his director’s duties, particulars of which have been the subject of previous correspondence;
(iv) On and after 10 October 2007 Herdegen and Crompton purported to sever all relationship between themselves and Hargreaves and between the Company and Hargreaves; and
(v) Herdegen and Crompton procured the Company to resolve that shares issued to Hargreaves pursuant to the Agreement would be treated as ‘unpaid capital’ and on 31 December 2007 Herdegen and Crompton procured the Company to make a call upon Hargreaves for a cash payment of $50,000 for such shares.
The breaches on the part of Herdegen/Crompton and the Company aforesaid were breaches of fundamental terms and conditions of the Agreement. Despite many requests, Herdegen/Crompton have neglected and refused to perform and carry into effect their obligations under the Agreement. The said breaches constitute a repudiation of the Agreement by Herdegen, Crompton and the Company.
Hargreaves do hereby accept the repudiation of the Agreement. In consequence of such repudiation, Hargreaves do now hereby determine the Agreement.
Hargreaves and Palmers reserve all of their rights. They now propose to institute proceedings in the Supreme Court of New South Wales for appropriate relief including declaratory relief, damages, interest and costs.
In consequence of the conduct of Herdegen, Crompton and the Company, the interests of the Company and Hargreaves are now in conflict. Hargreaves now resign all offices in the Company. Formal resignations are enclosed in separate correspondence.”

48 On 8 February 2008 the plaintiffs commenced proceedings by way of statement of claim seeking:

(a) a declaration that the Hargreaves were each the proprietor of 290,000 fully paid shares in the capital of Anglesey;
(b) a declaration that the resolutions of the meetings of 31 December 2007 and 14 January 2008 were void;
(c) an injunction restraining the defendants from dealing with the shares held by the Hargreaves in the capital of Anglesey;
(d) an injunction restraining the defendants from breaching the shareholder agreement pleaded in the documents; and
(e) damages, interest and costs.

In that document the shareholder agreement pleaded was said to be made in or about July 2004 and was partly written and partly oral.

49 The facts set out up to this stage unfortunately at considerable length are those which are relevant to the plaintiffs’ main claim as to the basis upon which the original shares were issued. There is a second contract claim and also by late amendment, an oppression claim which I may have to come to. There are also claims based on estoppel and s 42 of the Fair Trading Act 1987. It will not be necessary to deal with them as I consider there was a contract and in fact no final submissions addressed them.

Pleadings and first issue – first contract claim

50 One of the extraordinary things about this action is that in the current pleading the plaintiffs plead an agreement made between July and November 2004 partly written and partly oral, with no specification of the written and oral terms. The pleaded terms so far as are important were stated to be:

(a) that the Hargreaves would do what was necessary to procure licences and approvals to enable the corporation to raise public funding by the issue of debentures for first mortgage lending;
(b) that each of the individual parties would co-operate with the others to do all that was necessary to advance the business of the company;
(c) that the individual parties would secure the corporation to retain Palmers to do all the legal work for the corporation;
(d) that in consideration of the services to be provided to the corporation by the Hargreaves, Crompton and Herdegen to the time that Anglesey made its first loan to borrowers, they would procure Anglesey to issue to each of them 250,000 $1 fully paid ordinary shares in the capital of the corporation.

51 It is then pleaded in par 16A that Anglesey entered into an agreement with its shareholders in September 2006. The difficulty about this is that the Hargreaves deny signing what in evidence was called the 2004/2005 agreement yet they sue on it. The individual defendants deny signing the 2006 Agreement. Whether signed or not I find that the 2004/2005 document included the terms of a contract agreed by the parties as both sides relied on it. The only significant difference between the documents was cl 3. The main question as to terms arising from the written document is the question of the basis for allotment of the original shares. The only substantial question outside the agreement is the basis on which Palmers were to be engaged. Both versions of the written document included an entire agreement clause. This bears on the claimed agreement as to legal work and the claimed agreement as to paid up shares. The defendants admit they are bound by the 2004/2005 document and in the alternative by the 2006 document. As they did not keep a copy of the earlier document but purported to act in accordance with the 2006 document I find that the contract between the parties included all the terms of the 2005 document up to the time of the 2006 document and thereafter included the same terms as the earlier document with its alteration to cl 3. There was no real dispute about this. The defendants say one of those documents comprised the whole of the agreement. I find it was also a term of the contract that Palmers would get the legal work but that this was subject to the fees being reasonable and competitive. PH accepted that in his oral evidence.

52 The third further amended statement of claim ranges over pleaded facts and breaches from 2004 to September 2009 but, it is necessary first to determine whether there was a repudiation when the Hargreaves wrote the termination letter on 18 January 2008.

53 Mr Greenwood in his final address and in written notes for that address set out the central question on the first contract claim as follows:

“did the parties agree that they would receive their shares in the company in return for the work that were to contribute for the establishment and operation of the company or did they agree to contribute their efforts and owe the company $250,000 each?”

I accept that the answer to that question will determine whether there was a fundamental breach amounting to repudiation which entitled the Hargreaves pursuant to the letter of 18 January 2008 to accept the repudiation and bring the contract to an end. The repudiation or breach arose from the assertion that the shareholders each owed the company $250,000 entitling the company to make a call on the shareholders to contribute $250,000 each to the capital of the company.

Consideration of central question

54 I turn to the additional evidence relevant to this question. PH had prepared a document dated 26 September 2004 headed “Outline of steps required to establish secured investment lender”. Items 1 and 3 were as follows:

“1. Formal agreement (prepared by PRH) between promoters as to:
1.1 Shareholdings to be held in Company;
1.2 Directorships in Company;
1.3 What role each is to fulfil in the promotion and establishment of the Company;
1.4 Funding of the Company from the time of its acquisition up until it becomes self supporting;
1.5 Non competition with the business of the company;
1.6 Exclusive use of intellectual property gained during promotion for benefit of the Company;
1.7 Anything else that is necessary to ensure that benefits flow fairly from the enterprise to the promoters/shareholders;
…
3. Issue of Shares in capital of company (in consideration of ‘start up’ funding) and appointment of directors (by agreement)”.

55 It was this document which formed the basis for discussion on 27 October 2004 to which the file note of 27 October referred. There was discussion as to procuring a company. As far as the issue of shares was concerned PH dealt with this in an affidavit sworn 25 February 2009 in part of par 16:

“I said:
‘Who is to be the Company Secretary?’
Jeff Herdegen said:
‘Would you do that Liz? You have the administrative background.’
Elizabeth Hargreaves said:
‘Yes. I am happy to be the Secretary.’
I said:
‘Presumably, each of us will own 25% of the shares in the company.’
Both Herdegen and Crompton said:
‘That is agreed.’
Jeffory Herdegen then said:
‘How are we going to pay for our shares?’
I said:
‘They will be subscriber shares. We will pay with our work. We have each quite a lot of work to do to get the company up and going. Liz and I will have plenty to do in getting the approvals. You’ve got a lot of work in front of you on the marketing side.’
Jeff Herdegen said:
‘Yes, of course.’
I said:
‘Can I take it then that we are all agreed on those things.’”

56 Paragraph 18 of his affidavit is as follows:

“18 On about 29 October 2004 Elizabeth Hargreaves and I had a further meeting with Vanessa Crompton and Jeffory Herdegen at the office of Waratah Property Finance. We had a discussion to the following effect:
I said:
‘I wondered if ‘Estate Secured Investments Limited’ would be an appropriate name for the Company?’
Jeffory Herdegen said:
‘Estate sounds like death to me.’
I said:
‘I was thinking of it more in terms of ‘real estate’. I thought that might be good enough to get the company incorporated. There will be plenty of time to consider a name change after that. I would like to get the process underway as quickly as I can.’
Vanessa Crompton said:
‘That would be alright with me.’
Jeffory Herdegen said:
‘I don’t like the word ‘Estate’ very much. I am happy to use it for the purpose of getting the company started – but I would really like to come up with something different.’
Elizabeth Hargreaves said:
‘I’m not that fussed on ‘Estate’ as a name either.
I said:
‘Well, let’s get it established and review the name at a later stage. In terms of shareholdings, I had in mind that the Company should issue 250,000 shares to each of us.’
Vanessa Crompton said:
‘How did you come up with that figure?’
I said:
‘We are going to have to do a fair bit of work to get the Company set up. We want to be reasonably rewarded for that. We also don’t want to just issue one share each so that it looks like a ‘mums and dads company’.’
Vanessa Crompton said:
‘I see. I am agreeable to that.’
Jeffory Herdegen said:
‘That’s okay with me.’
Elizabeth Hargreaves said:
‘That’s fine with me.’
I said:
‘I’ll get in touch with the people in Sydney today, and get the Company incorporated. We will each be Directors. Liz will be the Company Secretary. Jeff will be the initial Chairman of Directors.’”

57 In her affidavit of 6 March 2009 in par 7 EH gave the following version of the same part of the meeting of 27 October:

“Paul Hargreaves said:
‘They will be subscriber shares and they will be payment for the work that we have to do to establish the business. Liz and I will have quite a bit to do to get the approvals and after that, you two will have a lot of work in front of you getting the money in and out.’
Jeff Herdegen said:
‘Yes, of course.’
Paul Hargreaves said:
‘So, I take it that we are all agreed on those things.’
Herdegen and Crompton said:
‘Yes.’
I said:
‘Yes.’”

58 Paragraph 9 of the affidavit of EH sets out her evidence as to the meeting on 29 October 2004. It is as follows:

“9 On about 29 October 2004 Paul Hargreaves and I had a further meeting with Vanessa Crompton and Jeffory Herdegen at the office of Waratah Property Finance. We had a discussion to the following effect:
Paul Hargreaves said:
‘I wondered if ‘Estate Secured Investments Limited’ would be an appropriate name for the Company?’
Jeffory Herdegen said:
‘’Estate’ sounds like someone has died to me.’
Paul Hargreaves said:
‘I was thinking of it more in terms of ‘real estate’. I thought that might be good enough to get the company incorporated and we can think about a name change after that. I would like to get this started as soon as possible.’
Vanessa Crompton said:
‘That would be alright with me.’
Jeffory Herdegen said:
‘I don’t like the word ‘Estate’ very much. I am willing to use it to get started but I would like to come up with something better.’
I said:
‘I’m not that fussed on the word ‘Estate’ either.
Paul Hargreaves said:
‘Let’s get it established and we can review the name later. I had it in mind that the Company should issue 250,000 shares to each of us.’
Vanessa Crompton said:
‘How did you come up with that figure?’
Paul Hargreaves said:
‘We are all going to have to do a lot of work to establish the Company and I think we all want to be reasonably rewarded for that. If we issue just one share each then it looks like a ‘mums and dads company’.’
Vanessa Crompton said:
‘I understand that. That’s sounds alright to me.’
Jeffory Herdegen said:
‘That’s okay with me.’
I said:
“Yes, fine with me.’
Paul Hargreaves said:
‘We’ll order the company today. We will each be Directors. Liz will be the Company Secretary and Jeff will be the initial Chairman of Directors.’”

59 It will be seen by comparing the two versions that they are in almost exactly the same words with a few minor changes. There are 78 paragraphs in the affidavits where the wording is almost identical. I will return to this.

60 Crompton in her affidavit of 12 June 2009 addressing the meeting of 27 October said that the name Estate Secured Investments was agreed at that time. As far as the issue of shares was concerned her evidence in that affidavit as to this is as follows:

“Paul said:
‘The next important point is that I am going to nominate that the company will issue 250,000 ordinary shares to each of the directors/shareholders of the Company. This is a reasonable number of shares that will hopefully be worth something one day. It’ll look better on a company search if all directors have more than the usual one ordinary share each.’
Jeff said:
‘Why 250,000 each?’
Paul said:
‘Why not, it looks more substantial when people are looking to invest in a company with a million shares rather then [sic] with one each. A million looks like we are serious.’
I said:
‘I hadn’t thought of it that way, I guess it does look better that way, I will be guided by you. OK I agree.’
Elizabeth said:
‘Yes, I agree.’
Jeff:
‘I see what you mean and I agree with that.’”

61 As to what happened on 29 October Crompton said there was no meeting on that date as she was at the office at Anglesey House and that Herdegen was on their farm. She said that EH brought her some documents to be filled in for Patricia Holdings for the incorporation of the company. She completed the information for herself and Herdegen on the company order form and returned it to EH. She completed the form putting in the wrong birth place of Herdegen as being Coffs Harbour where as it should have been Kempsey.

62 Herdegen's evidence as to this was much the same as that of Crompton. He said that there had been a discussion prior to the meeting on 27 October at which various names for the company were suggested and that it was agreed on 27 October that they would start the company with the name Estate on the basis that it would be changed when they agreed on a better name. As far as the issue of shares was concerned his evidence in par 32 of his affidavit of 12 June 2009 was that PH said:

“We will need to decide on the number of shares in the company capital and I suggest that the company issue 250,000 shares to each of us. I chose the figure of a million shares in total, so it doesn’t sound like a mums and dads company with only a few or four shares.”

To which he said:

“That makes sense.”

He denied that there was discussion about “subscriber shares”.

63 Herdegen said that there was no meeting on 29 October and that he was at his irrigation farm 30 kilometres from Forbes from which he made several telephone calls on that day. I should say here that the first of such calls was made at 10:21am. This does not necessarily establish that he was not in the office before that time. On this matter I accept the Hargreaves version. Their recollection was clearer than that of the defendants. The file note of 27 October 2004 supports their version. The Patricia Holdings order form could have been completed by Crompton after Herdegen left to go to the farm which I accept he did. A meeting to agree on a name would not take very long. I thought on listening to the evidence that when the defendants saw the file note and saw the affidavits of the plaintiffs they were surprised and tried to recollect where they were on 29 October and Herdegen having recalled that he was at the farm that day concluded he was not in the office.

64 In cross-examination PH said that the question of the method of payment for subscribers shares was discussed and agreed on 27 October but that the number of shares to be issued was not settled until 29 October. His recollection was that it was agreed on 27 October that they would hold 25 per cent of the shares each and that it was on 29 October that he proposed that each would hold 250,000 shares. He agreed that the file note of 27 October did not state that the shares would be paid for by work to be performed in the future. He said that this was discussed on 27 October. He said “the file note is events of the 29th”. Later on in the cross-examination (T p 115) the following appears:

“Q: The question of issuing shares in consideration of work performed was not discussed, even on your account of the meeting on 29 October 2004, was it?
A: No. It was not discussed on that day.”

Later he confirmed that he did not assert that there was discussion of this on 29 October. Thereafter he said the file note was not made “not so much to record what happened then, but what was to be done”.

65 This file note of 29 October was not put into evidence by the plaintiffs. PH gave some explanation of this stating he did not consider it was admissible as it was not a business record and went only to his credit. I do not accept that evidence. On its face it was the only document he had which supported his version of the agreement. It clearly did not go to credit. It was the only document which could have been relevant to the 10 December 2007 communication referred to in par 44.

66 The affidavit evidence of Mr Feller makes it clear PH took an unsustainable technical point to prevent access being given to the original of the file note on the somewhat specious grounds that it was not included in a list of discovered documents and later that it was in some way a privileged document given to the other side in preparation for a mediation which was to take place. There was no basis for these objections which were later withdrawn.

67 It is necessary now to decide what has been described as the central question. There are facts which would support the plaintiffs’ version of events, and facts which would support the version of the defendants. Those which would support the plaintiffs’ version are the file note of 29 October; the fact that I find there was a meeting on 29 October; the fact that it would be strange for shareholders such as those here to accept a liability to pay $250,000 each to the company on a call; the fact that the share certificates stated no amount remained unpaid, and the fact that the increase in capital of $160,000 was brought about not by a call on issued shares but by the issue of new shares.

68 As to this last matter both Herdegen and Crompton said that none of the shareholders wanted to contribute money unless their ASIC licence was gained and a prospectus issued. That was the reason for the earlier agreement as to loan funds rather than capital introduced by way of allotment of shares. When Herdegen was cross-examined as to this issue being made rather than by way of call on contributing shares he said that PH had suggested redeemable preference shares be issued because if the ASIC application were unsuccessful the company could redeem the shares. He said however that PH had later said the shares would have to be ordinary shares. There is a note of the meeting which goes some way to support this by reference to redeemable preference shares. Crompton confirmed this evidence. I accept it.

69 The difficulty about all of this from the plaintiffs’ point of view is that the only note of the alleged arrangement is that of 29 October. There is no mention of it in the file note of 27 October. If it was a matter of such significance it would reasonably be expected that it would appear in that file note. Evidence that the later file note was just evidence of something to be done was quite unconvincing.

70 The facts which support the defendants’ version and claim the shares were always unpaid include the following: (a) no version of the written document stated the shares were issued as fully paid in consideration of future work yet it was a significant matter. The draft agreement was prepared after the meeting of 27 October: it did not contain this provision and was contrary to it. The 2006 document although different did not suggest shares were issued as paid up in consideration of work to be done. Insofar as it is important the entire agreement clause would be relevant here; (b) the accounts to which I have referred particularly those provided to the ASIC oral hearing, and the accounts with the agreed prospectus; (c) the failure to put the 29 October file note into evidence; (d) the correspondence with the accountants which on any basis did not state that the shares were issued as fully paid and the file note of the meeting with the accountant on 19 January 2005. Issue of shares in consideration of future work could create a tax liability on issue; issue of contributing shares would not. However PH said in affidavit evidence that Mr Rendell said there was no tax implication if shares were issued for a non-cash consideration; (e) the file note of 27 October made no reference to share issues but did refer to equal contribution to acquire the company structure; (f) the fact that there was no reason for the defendants to resist the claim that the shares were fully paid if they were as this would have been to their advantage.

71 It is necessary to deal with the whole agreement submission of Mr Lever. There is no doubt that cl 3 of the first agreement is contrary to the contract alleged by the Hargreaves. However in a case where different agreements were signed by different sides but both of which set out the agreed terms a whole agreement argument is less strong when it goes to parol evidence contrary to the terms of a written document when there are two documents not precisely the same. I consider that so far as is possible a trial judge should refrain from entering into the discussion and admissibility of parol evidence in such a case. The fact that in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; (2001) 117 FCR 424, pp 542, 543 Allsop J listed 17 cases supporting one view or the other is sufficient to discourage a further attempt. I prefer to treat the matter as I have done as a matter to support the defendants’ case and not as in any way a knock out blow.

72 As there are facts supporting each side it is necessary to go to the question of credit. PH and EH both asserted on many occasions during their oral evidence that their affidavits were their own independent recollection. PH did say that he gave to his wife some headings and introductions to events which should be dealt with, leaving it to her to complete the details of conversations and other matters. EH said that her affidavit was her own work; that she did not have a copy of her husband’s affidavit; that he gave her headings and she completed the affidavit from her own recollection. There is no doubt this is all quite untrue. The affidavit of PH was completed first. There are, I think, 78 paragraphs some of which are set out in Ex 4, others of which are listed in that exhibit where the words of conversations and other matters are in the same order and in almost the same words. There are some minor changes to wording which I have no difficulty in finding were made so as to give some appearance of independence. It would not be possible for this to happen by some memory feat of conversations four or five years previously. There are parts of the affidavit where the same number of dots appear before introducing words and in one case a mistaken word “one” instead of “on” appears in each affidavit. The paragraphs on damages in the affidavit of EH clearly came from the affidavit of her husband. PH, on being challenged with this consistently claimed that he had only given his wife headings. Eventually as to a paragraph on damages in response to a question from me he ultimately conceded that he must have given the words to his wife. EH denied any such collaboration even on that paragraph.

73 It might not have mattered if these deponents had stated the obvious: that one of them copied the work of the other, yet had said that is how he or she remembered what happened. EH refused to do so at all saying that although it seemed strange she did not copy her husband’s affidavit. I find that to be false. I find the evidence of PH as to those parts which he did not admit he gave to his wife also to be false. Suggestions as to how his wife’s affidavit was brought about by being settled by Mr Hughes, solicitor, had no ring of truth about it. Mr Hughes was in court but did not give evidence.

74 This is of course a serious finding to make and particularly against a solicitor but it must be made. It is perfectly obvious that PH gave his affidavit to his wife and that he or she made some amendments but in effect, copied the affidavit into the affidavit of EH. Her evidence about this was untrue throughout. PH had read his wife’s affidavit. If he did not know before this she had copied his, he must have known when he read that of his wife. These are serious findings on credit, but they are to some extent a collateral matter, being untrue evidence which it was quite unnecessary to give. It cannot determine the question of which version is the most probable but must be taken into account in dealing with the question.

75 Although there were some parts of her evidence which caused me concern I thought Crompton was generally quite a reliable witness. Herdegen’s evidence that he always considered he held shares on which nothing had been paid, but that he did not consider this to be a liability until a call was made might seem a little hard to accept. However, I accept he did not think the company could need that amount, that he knew a call would have to be made on all shareholders and that he and Crompton at that stage had or could raise the funds. As with Crompton I thought his evidence generally acceptable. Later evidence as to the reason for raising additional funding of $60,000 per shareholder reinforced that view. He said he realised that if the Hargreaves did not contribute they could lose their shares but that was not the reason for the capital raising. I accept that.

76 It is necessary to return to the file note of 29 October. The defendants’ case is that this is a forgery. There is an admission by the defendants in the following terms:

“The defendants admit that computer forensic examinations conducted on 28 and 29 October 2008 and 1 April 2009 revealed that the document dated 29 October 2004 (Ex A 1.1.2) was created when the clock of the computer recorded the time as being 29 October 2004 at 12:37pm.”


The email of 7 December 2007 to which I have referred was sent when the time clock on the computer was set at 30 October 2004 at 5:54am. There is in evidence as Ex D a document described as application event log. There is an agreement between the parties that this document established the following:

(1) At some time the computer clock showed a time of 7.12.07 at 8:05am.
(2) At some time after this the computer clock showed a time of 30.10.04 at 12:08am.
(3) At some time after this the computer clock showed a time of 7.12.07 at 5:40am.
(4) The log does not show how much time passed between each of the above three times.

Counsel for the plaintiffs made no use of this document but he did point out that there was another email transmission in evidence which clearly showed an incorrect sending time. Counsel for the defendants argued that this document showed, when taken with the other emails in evidence, that the computer clock was correct at the first time, that it was set back at some time on 7 December to a time before or on 30 October 2004; after that it was altered again to show a time prior to the first time which he said could not have happened by way of correction by an internet website as EH appeared to suggest. When taken with the admission in the preceding paragraph he said the inevitable inference was that the computer clock was set back to create the file note of 29 October and not adjusted forward until it was too late.

77 There is no sensible explanation as to how this happened. I do not accept the explanation of EH. The coincidence of the error being the date by day and year following that of the challenged document makes it unlikely that there was a computer error rather than human manipulation. If there were the system in place to correct such errors as EH seemed to suggest then it would be reasonable to assume that system would bring about an accurate time adjustment which it did not.

78 Mr Lever also said, correctly, that no other document falling within the description “pre-incorporation file notes” referred to in par 44 of this judgement was produced and it was never mentioned as being sent to the defendants although it was sent.

79 I bear in mind that the defendants withdrew an affidavit and expert report of a Mr Wills but I do not consider any inference can be drawn from that. Had it gone in, the hearing would have been greatly extended as counsel said it was not necessary to establish the claim of forgery.

80 It is a serious matter to determine that a document produced by a party to litigation is a fabrication perhaps particularly when that document was not put into evidence by a party against whom that allegation is made. The matter must be determined on the balance of probabilities. In deciding this it is important to bear in mind that the document supports the case of the plaintiffs and is contrary to the case of the defendants yet PH by his actions seemed concerned to keep it out of evidence. The allegation of forgery is made by the defendants. In Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449; (1992) 67 ALJR 170 in discussing statements which had been made in cases about the requirement for clear, cogent or strict proof of fraud, Mason CJ, Brennan, Deane & Gaudron JJ in their joint judgment said: “Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct”. Bearing that in mind I have nevertheless come to the regrettable conclusion that the note of 29 October is not genuine. Its only purpose must have been to support the plaintiffs’ case as to the terms of the original allotment. PH said it was his file note; who typed it I do not know, but PH sent it to the solicitors for the defendant.

81 This finding, my finding as to the untrue evidence of the Hargreaves as to the preparation of their affidavits and my consideration of the balancing facts makes me conclude that I should prefer the evidence of Herdegen and Crompton that the shares were not issued as fully paid. I so find. There was no repudiation and no valid termination thus the shareholders agreement remained in force after 18 January 2008. I should add that the finding of forgery has not itself led to a conclusion that the version of the Hargreaves is not true. A finding that a party has produced a false document must go to credit but more importantly, it means the document does not support the case of the plaintiffs.

82 I should add that although he addressed no submissions to it, Mr Greenwood said he continued to rely on the claimed breach of the agreement that the legal work would go to Palmers. As to this I do not think it could be held the legal work would go to Palmers whatever the cost. In the end it was accepted the fees must be competitive. This breach was not made out. In fact there had been no chance to earn fees. Mr Lever argued that nothing was said in the agreement about legal fees and the entire agreement clause was a complete answer. That is incorrect. Legal fees were not a “subject matter” of the written document (see Branir).

83 If I were wrong in this and the shares were issued as fully paid it would, I consider have been a fundamental breach to assert otherwise and then to purport to make a call on those shares as if they were unpaid. But all the Hargreaves had to do to prevent that happening was to attend the meeting on 31 December 2007 and vote against the resolutions. They would have retained their shares fully paid or unpaid. And, if I were wrong that is in fact what the result would have been. Their real complaint at that stage was the uncertainty of getting the legal work but up to that stage there was no legal work and no breach. The resolution on the call was not followed through. The Hargreaves had their shares and there was no damage. The damage occurred when the shares were lost. Even assuming the shares were fully paid they were worth no more. It was not contended that the value of the work done which might be called goodwill was something for which any purchaser would pay.

Second contract claim

84 The next breaches of the shareholders agreement to which attention was given in evidence were (a) that meetings were held without the required notice, (b) that meetings were called without an adequate agenda, and (c) that Herdegen secured Anglesey to pass resolutions on 31 December 2007, 14 January 2008, 16 July 2008, 29 January 2009 and 1 September 2009 in the absence of the agreed quorum of directors. While not entirely clear on the pleadings it can be accepted that the breaches under (c) were also claimed to be a breach of clauses 2(2)(a) and (c) of the shareholders agreement.

85 The claimed breaches (a) and (b) referred to can, I think, be ignored. At the Shepparton meeting the directors decided 48 hours of notice of meeting was sufficient, and that if any director was not present after 10 minutes the meeting could proceed. That resolution could I think reasonably be a variation of the shareholders agreement at least as to notice. In any event any breach of those provisions is not shown to be a fundamental breach causing damage. Item (c) however is significant. As stated, the Hargreaves did not attend any meeting of directors or shareholders of Anglesey after August 2007. The meeting of 31 December 2007 resolved to make a call on unpaid shares of $25,000 per shareholder but as the company did not act on this it can be put aside; the meeting of 14 January resolved to pay outstanding accounts amounting to about $46,000 and to pay part of Palmers outlays. The meetings of 13 June 2008 and 16 July 2008 together resolved to raise $240,000 as additional capital necessary for the company to operate; the meeting of 29 January 2009 resolved to transfer the shares of the Hargreaves who had not paid the required amounts of $60,000 each pursuant to the resolution of 16 July 2008 and to transfer those to Herdegen and Crompton in equal shares on the basis of payment to the company of $16,633.50 by each transferee. The meeting of 1 September 2009 resolved (a) to ratify the appointment of Mr Gorman and Mr de Ridder as directors; (b) that 176,000 new shares in Anglesey be issued at $1 per share as to 88,000 each to Mr Shortall and Mr de Ridder; and (c) that the transfer of 88,000 shares to Mr Gorman be registered. Those shares were 44,000 from each of Herdegen and Crompton and included the 40,000 shares each acquired by purchase of the Hargreaves’ shares. They were shares to which specific numbers had been allocated. A meeting of 29 July 2009 had resolved to cancel the one million unpaid shares.

86 The breach of the quorum requirement is said to arise through failure to comply with cll 4(1), 4(7) and 5(3)(k) of the shareholders agreement. Those clauses appear in both the 2006 and the earlier document, although the numbering in the earlier document is clearly mistaken.

87 Whatever may be the effect of the Shepparton resolution, I do not think that it could be sufficient to amount to a variation of the important provision of the shareholders agreement as to a quorum. The agreement required any amendment to be in writing. It is true that the Hargreaves brought about the inability of the company to proceed in accordance with the shareholders agreement by resigning as directors and not appointing nominees in their place for meetings. Although counsel for the defendants argued that it was the action of the Hargreaves which brought about the problems for the company, and to some extent that is true, this case is not about the conduct of the Hargreaves but about the conduct of the other shareholders. It must be remembered that had the Hargreaves continued to attend directors meetings and not resigned as directors they would have exercised their votes as directors against the resolutions which were claimed to have been validly passed. It could therefore in some ways be said that their failure to attend made no difference to the ultimate result.

88 It may have been possible to say that the conduct of the Hargreaves in failing to attend meetings or by resigning as directors was a breach of the agreement as to co-operation and the just and faithful provisions thereby discharging the other parties from their obligations under the agreement, but again that is not this case. The defendants relied on the agreement to do what they did but the agreement did not allow them to do what they did. The impasse could have grounded an application to wind up Anglesey which it turns out in hindsight might have been a wise course.

89 I consider that the actions which Herdegen, Crompton and later Ferrier took as directors breached the terms of the shareholders agreement as to quorum, and as they had such serious repercussions for the Hargreaves resulting in loss of their shares this amounted to a repudiation which the Hargreaves could accept and then terminate the agreement. That by late amendment is their second contract claim.

90 As a result of this finding it is not really necessary to consider the claimed breaches of cl 2 of the shareholders agreement. However it is desirable to state shortly some facts and conclusion:

(a) Had it not been for the quorum agreement meetings of directors would have been conducted in accordance with the constitution of the company and a call could have been made to pay up 60,000 of the unpaid shares and failure to pay that could have led to forfeiture. There could however have been no resolution requiring subscription to new shares.

(b) It is said that the decision to issue the 240,000 new shares was a breach of the just and faithful provision first because new capital was not necessary, and second because a call could have been made on the shares so that the real purpose of the resolutions was to put the Hargreaves out of the company. On the evidence Anglesey did not need further capital to remain in existence provided the monies owed to Herdegen and Crompton remained unpaid. Those amounts came to $100,887.67. Herdegen and Crompton did each apply for 60,000 new shares and the company resolved that as to the amount of $100,887.67 the purchase price for the new shares was to be satisfied by payment of that debt or extinguishment of that debt so that the only amount which went to the company was $19,112.73. If the company were to go forward there is no doubt that it needed additional funds even if ASIC did not require it to hold $50,000 in liquid funds which Crompton thought was a requirement. It was not a breach of agreement to raise the capital even if Herdegen and Crompton realised that if the Hargreaves did not contribute they could lose their shares. The purpose of the raising was not to bring that about. As to the second matter I accept it was not a real option to make a call the subscribers shares as the statement of claim in this action seeking a declaration that the shares were fully paid was filed on 8 February 2008.

91 It is also claimed that the valuation of the forfeited shares was not conducted in accordance with the requirements of cl 13 of the shareholders agreement. The valuation was done by Mr Dion Cannell of Bonsella Business Solutions. The Hargreaves were given the opportunity to put forward a valuer but did not do so. Mr Cannell expressed some doubts about preparing a valuation while the position as to the unpaid shares remained unresolved but seems did so when the record was amended to show that the shares were unpaid. He produced his valuation based on 2008 financial statements which contained the 2007 comparative figures. The relevant part of his report dated 19 January 2009 is as follows:

“We have reviewed the 2008 financial statements containing the 2007 comparatives. Based on no trading history and as such no goodwill, in our opinion we do not believe the value of the company could be anything more than that of it’s [sic] net assets at the date of valuation. At 30 June 2008, Net Assets per the balance sheet were $64,134.00. As a Going Concern, we believe $64,134.00 represents the fair value of Anglesey Secured Investments Limited.”

That figure was accepted by the directors. They offered the 290,000 shares held by each of the Hargreaves to Crompton and Herdegen respectively for $16,033.50 for each block of shares. They accepted the offer. While the valuation may be of the company on an assets basis and not of the forfeited shares that would not be a basis for its rejection.

92 The valuer was required under cl 13(b) to have regard, based on the best information available at the time to among other things: (a) the prospects of the business; (b) value at a specified capitalisation rate of estimated future maintainable earnings; (c) the yield on open market an investor would require; and (d) the net tangible assets. As there was no earnings history it was not possible to have regard to (b) and probably not to (c). The valuer was not given any of the cash flow projections produced from time to time by Mr Herdegen. The following appears in cross-examination of Herdgen at T p 435:

“Q. You never gave the valuer any cash flow projections, did you?
A. No.

Q. You never gave the valuer any instructions about how you were proposing to build the book of this company?
A. Yes, I - look, I didn't give it to him because when I asked him about potential performance, he said this is a start-up company and there is no way that he could look at any projections.

Q. So you knew as a fact then that the valuer had not done what was required under the shareholders' agreement to value these shares, didn't you?
A. No, that is - that is incorrect. He had the shareholders' agreement before him which delineates the - the requirements of a valuation and it was for his own eyes to read as well as what he had instructed.

Q. And you failed to provide him with the information that would enable him to do his job pursuant to the shareholders' agreement?
A. He declined to want it. He said he did not want anything because this is a start-up company. He said, ‘I can't put any good will into it. It's - there is nothing in performance to demonstrate it’.”

There is no doubt that some investors are prepared to consider prospects in making investment decisions. Some investors on the basis of confidence in the directors and prospects of the company invest in cash box companies paying more for shares than the net assets value would justify. I consider that to make a valuation as required by the agreement the valuer needed to be given or to require more information. It is possible that this might have borne on the valuation. I find it was not in accordance with the agreement. By the time the valuation was made if the resolutions to raise new capital were valid the Hargreaves would have lost their shares. The invalid valuation would be relevant on damages.

Pleading problems

93 There were difficulties in the way the third further amended statement of claim is pleaded so far as the second contract claim is concerned as it is alleged that all the purported resolutions were invalid and then par 17C states:

“On about 29 January 2009 the Defendants removed from the Register of Members of the Third Defendant the names of the Second Plaintiff and the Third Plaintiff and asserted that, thereafter, the Second Plaintiff and the Third Plaintiff were no longer shareholders in the capital of the Third Defendant.”
(emphasis added)

94 Under the damages heading was a claim for loss arising inter alia from the facts alleged in par 17C. I re-listed the matter so that I could be satisfied that on this part of the claim the plaintiffs were asserting that they had lost their shares. Mr Greenwood stated that was their claim – that the oppression claim was an alternative claim – and that damages were sought on the basis the shares were gone and the contract terminated. It was agreed that he would prepare an amendment. This is as follows:

“18. By their conduct in 2008 and 2009 referred to in paragraphs 17(iA), 17A(c) and 17C above, the defendants repudiated the Contract and Shareholder Agreement, which repudiation the Plaintiffs accepted, thereby terminating the Contract and Shareholder Agreement.”

The defendants consented to this amendment which I have allowed. I do not think it is really clear but as the matter has gone forward on the clear basis that the plaintiffs claim they have lost their shares and seek damages for that loss, I proceed on that basis.

Damages

Value of lost shares

95 The evidence of the defendants is the Bonsella Business Solutions valuation. The evidence of the plaintiff is sparse. It consists of a schedule of cash flows produced by Herdegen commencing on 1 July 2007 showing an income – meaning investors funds – totalling $45 million for the first 12 months while setting out monthly expenses against monthly income with projected figures beyond this. Those figures which were taken from a report of Fiona Bateman, most of which was rejected, and were in any event adjusted by her, but so far as they were not adjusted were included with the application to ASIC for the necessary financial services licence. Herdegen said that they were optimistic and that he had prepared many such documents based on much lower cash flows including one based on a cash flow of $8 million. He said the figure in 2008 would be lower than that. It was accepted that there would be no profit until a cash flow of $10 million was achieved. At the time of hearing, the amount raised pursuant to the prospectus finally issued was only $150,000. The cash flows are not an admission and have no real evidentiary value. It seemed to be suggested that I would somehow discount those figures and arrive at my own assessment of future earnings. It is just not possible to do so.

96 There is then evidence that two investors, Mr de Ridder and Mr Shortall were each prepared to pay and did pay $88,000 for 88,000 shares which would give them a 20 per cent share in Anglesey. The shares were not issued until September 2009 but the payment was agreed and in fact made in June 2009. That is said to lead to a conclusion that the company was worth $440,000. These allotments resulted in additional funds of $176,000 being paid to the company. If that were the position then prior to allotment it might be argued that the company was worth $264,000 and a one half share of $132,000 which would give a considerable component for goodwill. That was not put for the plaintiffs but nothing concrete was put. The transcript reveals I asked for more submissions on damages but got little assistance. It could well be the investors thought the company had a better future without the Hargreaves as shareholders. The question is one of expectation damages, or damages for loss of a chance of future income on the shares but really it is a question of valuation of the shares based on those expectations. While the original breach was the purported resolution to raise capital the loss to the Hargreaves came from the continuing breaches resulting in the resolution to transfer their shares to the defendants in January 2009. When those particular shares by share numbers were transferred to Mr Gorman in September 2009 that put them beyond the final reach of the plaintiffs even if the loss occurred before that date.

97 I do not consider the Bonsella valuation can be accepted. Neither can I come to any reasoned conclusion based on cash flow projections which I do not accept are properly based or relevant. The best evidence available is that new shareholders were prepared to apply for new shares on allotment in Anglesey at $1 per share. I can do no better than that. That price was determined close to whichever event was relevant, namely January or September 2009. For this loss each of the Hargreaves is entitled to $40,000. The unpaid shares were a liability not an asset.

98 There is also a claim for loss of directors’ fees. There is some evidence that it was proposed that directors’ fees would be paid when the company was operating successfully although this is denied. There would be little point in paying directors fees if the shareholders were the only directors. It is also relevant that the Hargreaves resigned as directors before the second claimed repudiation. This claim is so uncertain it cannot stand. The company may never be successful.

Claim of Carolia

99 This claim is for loss of income which would have been earned for legal fees on mortgages and mortgage related work carried out by Palmers. I have found it is accepted that Palmers would get the work if their fees were competitive and there is evidence the fees per transaction would be somewhere between $1,000 and $1,500. There is some evidence that general practice overheads of country firms with which PH had been involved had overheads of between 60 per cent to 70 per cent of fees earned. Palmers has been operating since 1 July 2004, but there is no evidence of the cost to fees ratio, or whether or not it is making a profit. There is no evidence which would allow me to come to any reasoned conclusion as to when if ever Anglesey would raise sufficient funds to enable it to commence lending money on mortgage, the number of loans it would be likely to make in any year, and the net income which might be obtained by Carolia from acting on mortgages to secure the loans. Any decision I come to would be a guess and not a reasonable estimate. It is possible although unlikely that Palmers would get the work. No loans have been made so there is no loss to date. That is why the argument of Mr Lever that there is no costs agreement is irrelevant on this aspect of the claim. Had there been no termination of the shareholders agreement it is likely Anglesey would have been wound up on the just and equitable ground as unfortunately the two warring sides were quite unlikely to be able to work together. In that event there would be no legal fees to be earned.

Final matters

100 There is pleaded a claim under s 42 of the Fair Trading Act 1987. This is really an alternative to the first contract claim and would fail for the same reasons. No submissions were addressed to it. There is also pleaded a claim for unjust enrichment but this is in the alternative to the damages claim. No submissions were addressed to it.

Oppressive Conduct

101 This claim was an alternative to the contract claim. As the plaintiffs have succeeded on the second contract claim it does not arise. If it had been necessary to decide it and oppression had been found the result would have been the same. The Hargreaves were seeking a compulsory buy out order for the purchase of their shares. There was to be no further evidence of value. That is why the result would have been the same.

Orders

102 The orders will be:

(1) judgment for the plaintiff Paul Hargreaves against the first and second defendants for $40,000;
(2) judgment for the plaintiff Elizabeth Hargreaves against the first and second defendants for $40,000;
(3) costs reserved for argument; and
(4) proceedings otherwise dismissed.

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