Club of the Clubs Pty Limited v King Network Group Pty Limited - [2006] NSWSC 1138

No judgment structure available for this case.

CITATION: Club of the Clubs Pty Limited v King Network Group Pty Limited [2006] NSWSC 1138

HEARING DATE(S): 13, 14, 15, 19, 20, 21 and 22 June 2006. Final written submissions 31 July 2006.

JUDGMENT DATE :
9 November 2006

JUDGMENT OF: Bergin J

DECISION: First plaintiff entitled to declarations in respect of breaches of fiduciary duty and breaches of contract. First defendant entitled to an order in respect of its Cross-Claim.

CATCHWORDS: [CONTRACT] - whether certain resolutions were "in relation to matters listed in clause 13.2" of the Joint Venture Agreement - whether contract purportedly made pursuant to those resolutions valid and/or binding. - [FRAUD ON THE POWER] - whether doctrine applicable - whether principles in Gambotto v WCP Limited applicable. - [FIDUCIARY DUTY] - ambit of fiduciary duties of joint venturers - numerous agreements - lack of precision in authorisation of one joint venturer to sell the Land, the subject of proposed development - whether breach of fiduciary duty - whether accessorial liability for breach of fiduciary duty. - [CONTRACT] - whether breaches of contract - selling Land at an undervalue - whether breaches induced by other parties.

CASES CITED: Arakella Pty Ltd v Paton (2004) 60 NSWLR 334
Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2006] 1 All ER 333
Beswick v Beswick [1968] AC 58
Birtchnell v Equity Trustees Executors & Agency Co Ltd (1929) 42 CLR 384
Cachia v Westpac Financial Services Ltd (2000) 170 ALR 65
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373
DC Thomson & Co Ltd v Deakin [1952] Ch 646
Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473
Fraser Edmiston Pty Ltd v AGT (Qld) Pty Ltd [1988] 2 Qd R 1
Gambotto v WCP Limited (1995) 182 CLR 432
Jones v Dunkel (1959) 101 CLR 298
McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579
News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410
Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1
O'Sullivan v Management Agency and Music Ltd [1985] QB 428
Peters' American Delicacy Co v Heath (1939) 61 CLR 457
Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378
Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309
Twinsectra Ltd v Yardley [2002] 2 AC 164
United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1
Warman International Ltd v Dwyer (1995) 182 CLR 544
Williamson v Hine [1891] 1 Ch 390
Yeshiva Properties No 1 Pty Ltd v Marshall (2005) 219 ALR 112

PARTIES: Club of the Clubs Pty Limited - First plaintiff
IMF (Australia) Limited - Second plaintiff
King Network Group Pty Limited - First defendant
Harry Stamoulis - Second defendant
King Development Group Pty Limited - Third defendant
Spiros Stamoulis - Fourth defendant

FILE NUMBER(S): SC 50131/2004

COUNSEL: BAJ Coles QC/ HWD Stowe - Plaintiffs
IM Jackman SC/ IG Waller - Defendants

SOLICITORS: Ebsworth & Ebsworth - Plaintiffs
Clayton Utz - Defendants

- 4 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

BERGIN J

9 NOVEMBER 2006

50131/04 CLUB OF THE CLUBS PTY LIMITED & ANOR v KING NETWORK GROUP PTY LIMITED & ORS

Para
INTRODUCTION	1-2
The parties and the claims	3-7
THE FACTS
Background to COTC concept	8-10
Introduction to Lenen Pty Ltd	11
The Executive Summary	12-14
Introduction to Mancuso/Arts	15
Lenen agrees to sell the Land	16
Concept and Development Agreement	17-18
Heads of Agreement for sale of the Land	19
Joint Venture Agreement – 4 August 1999	20-21
Statement of Principles	22-23
Works Agreement	24-26
Put and Call Option	27-28
Incorporation of KCOTC	29
Funding problems	30-35
KPMG letter – 8 December 1999	36-39
$2 million paid	40
Supplemental Joint Venture Agreement – 10 February 2000	41-43
Problems encountered – February to May 2000	44-49
Development Approval	50
May Agreement	51
Variation to Put and Call Option	52
Option A exercised	53
Extension of time	54
Clubs commitment unlikely	55
Black appointed as CEO	56
Further variation to Put and Call Option	57
KNG elects for “Real Estate Transaction Only” (Land Play)	58-59
Meeting – 18 September 2000	60
COTC/Dalglish request for a meeting	61-62
Proposal for Overriding Supplementary Joint Venture Agreement	63-65
KNG/Stamoulis letter – 23 September 2000	66
25 September 2000 Meeting	67-68
The OSJVA	69
KPMG letter to KNG/Stamoulis – 26 September 2000	70
KPMG letter to COTC/Dalglish (Shannon) – 29 September 2000	71
KNG/Stamoulis response to KPMG letter of 26 September 2000	72
KCOTC Directors Meeting – 2 October 2000	73-76
Shannon/KCOTC responds to KPMG letter of 29 September 2000	77
Notice of Meeting on 12 October 2000	78
$10.7 million guarantees provided – 6 October 2000	79
KNG/Stamoulis letter to KPMG – 6 October 2000	80
Agendas for 12 October 2000 Meeting	81
Black Report to the Board of KCTOC – 8 October 2000	82
Shareholders Meeting – 12 October 2000	83
Directors’ Meeting – 12 October 2000	84
KCOTC Solvency issues	85
Meeting 13 November 2000 – KNG nominated as purchaser	86
KNG makes another election for Land Play	87-89
Subsequent negotiations	90-99
Notice of Rescission of Land Contract	100
15 March 2001 Meeting	101-103
Notice of Rescission of Put and Call Option	104-107
Notices of Termination	108-109
Dalglish seeks to acquire land	110-113
Macquarie Joint Venture	114-118
Assignment of Causes of Action to IMF	119-122
Caveats	123-134
PROCEEDINGS COMMENCED	135-140
THE LAND PLAY	141-145
CONSENT	146
Failure to complain	147-150
Implicit acceptance	151-154
15 March 2001 Meeting	155-162
VALIDITY OF THE OSJVA	163-165
The September and October resolutions	166-174
“in relation to a matter listed in clause 13.2”	175-184
Raising additional equity or capital	185-187
Any decision etc relating to the $4 million guarantee	188-190
Amendment to agreement	191-193
Admission of a new participant	194-196
Sale prior to completion	197-198
Termination	199-201
CONCLUSION ON VALIDITY OF THE OSJVA	202-205
FRAUD ON THE POWER	206-231
APPLICABILITY OF THE SUPPLEMENTAL AGREEMENT	232-233
BREACH OF FIDUCIARY DUTY OWED BY KNG TO COTC	234-257
ACCESSORIAL LIABILITY – STAMOULIS	258-285
ACCESSORIAL LIABILITY – S STAMOULIS AND KDG	286-293
BREACH OF FIDUCIARY DUTY OWED TO KCOTC BY STAMOULIS	294-310
BREACH OF CONTRACT BY KNG	311
Failure to Share Profits	312
Implied Term – Market Value	313-320
Valuation Evidence	321-322
Brian Cox	323-327
Garrie Raymond Love	328-331
Value	332-334
Under-value	335-337
INDUCING BREACHES OF CONTRACT	338-342
COTC AND IMF/KCOTC DEBTS CLAIMS AGAINST KNG	343-348
CONCLUSION	349-350

Introduction

1 This litigation arises out of a dispute between the participants in a joint venture, the aim of which was to acquire land and construct a resort style development consisting of residential and commercial premises with leisure facilities, including an 18 hole golf course (the Joint Venture). The land comprised Lots 194, 301 and 312 in DP 755701 in the Parish of Cudgen, County of Rous, in South Kingscliff on the North Coast of New South Wales (the Land). The Land abutted the Pacific Ocean coastline with a seafront frontage of 1.184 km. Lenen Pty Limited (Lenen), the directors and shareholders of which at the relevant time were Ian Barclay and Donald Barclay, was the registered proprietor of the Land. The corporate vehicle involved in the Joint Venture was KingsHeath Club of the Clubs Limited (KCOTC) incorporated on 24 August 1999.

2 The Land was not developed pursuant to the Joint Venture and ultimately one of the parties in the Joint Venture purported to assume total ownership of the Land to the exclusion of the other parties to the Joint Venture. It is that conduct and the consequential purported sale of the Land that is at the heart of the issues between the parties to this litigation. The relevant events occurred during the period 1999 to 2003 and the proceedings were not commenced until 2004. Many of the people involved in these events have not given evidence and the claims and counter claims have required a lengthy analysis of the documents and the evidence of those parties who did give evidence.

The parties and the claims

3 The first plaintiff, Club of the Clubs Pty Limited (COTC), is a company of which Ray William Dalglish (Dalglish) and his wife, Maja Dalglish (Mrs Dalglish), are shareholders and directors. It was a party to the Joint Venture. Dalglish was a director of KCOTC from 26 August 1999. The second plaintiff, IMF (Australia) Limited (IMF), claims that KCOTC has assigned certain causes of action in respect of the Joint Venture to it. It purports to bring the causes of action that KCOTC had against the defendants and I will refer to those as KCOTC’s various claims. There is an issue as to whether IMF is entitled to bring these causes of action and I will deal with that aspect of the matter separately.

4 The first defendant, King Network Group Pty Limited (KNG), was a party to the Joint Venture. The second defendant, Harry Stamoulis (Stamoulis), is the son of the fourth defendant, Spiros Stamoulis (S Stamoulis). Stamoulis was a director of KCOTC from 26 August 1999 and a director and shareholder of KNG from 3 September 1999. The third defendant, King Development Group Pty Limited (KDG), is a company of which S Stamoulis was a director and of which he and Stamoulis were equal shareholders from 22 November 2001.

5 There are a number of agreements between COTC and KNG and the other participants in the Joint Venture with which I will deal in detail later in this judgment. Ultimately the Joint Venture did not proceed as originally planned and the Land was acquired by KNG from Lenen for $20.2 million and sold to South Kingscliff Developments Pty Limited (SKD) for $25 million. KDG entered into a subsequent joint venture with SKD to acquire and develop the Land. The shareholders of SKD, in equal shares, were KDG, Hopper No 1 Pty Limited (of which Steven Papadopoulos (a director of Macquarie Bank) was a director, and Macquarie Bank was a shareholder), and Kingscliff South Pty Limited (of which Brian Ray of the Ray Group was a director and shareholder). This second joint venture has been referred to as the Macquarie Joint Venture.

6 The plaintiffs have amended their Summons on four occasions, the last amendment having been made on the fourth day of the trial. The claims the plaintiffs finally maintained are conveniently summarised in the plaintiffs’ final submissions as: (1) COTC claims that KNG breached its fiduciary duty to it by selling the Land to SKD. It is claimed that there was a conflict between KNG’s duty to the participants in the Joint Venture and KNG’s private interests arising from the participation of “a Stamoulis company” in the Macquarie Bank Joint Venture (COTC claim against Stamoulis for breach of fiduciary duty); (2) KCOTC claims that Stamoulis, as a director of KCOTC, breached his fiduciary duty to KCOTC by causing KCOTC to nominate KNG to exercise the Put and Call Option whereby KCOTC transferred a valuable asset, the Land, to KNG for no consideration (KCOTC claim against KNG for breach of fiduciary duty); (3) COTC claims that KNG has breached its contract with COTC by reason of: (a) its failure to share the profits from the sale of the Land on a pari passu basis; and (b) the sale of the Land to SKD at an undervalue (COTC claim against KNG for breach of contract); (4) COTC and KCOTC claim that KNG has breached its contract in failing to honour contractual undertakings to indemnify KCOTC in relation to debts incurred (COTC and KCOTC debt claims against KNG); and (5) COTC makes claims against various parties for assisting KNG and Stamoulis in breaches of fiduciary duties (Accessorial claims).

7 The defendants deny, on various bases referred to later in this judgment, the plaintiffs’ entitlement to any relief and claim that KNG had an irrevocable right to deal with the Land, that there have been no breaches of fiduciary duties and that the plaintiffs have not suffered any loss or damage. The defendants deny that KNG is obliged to pay any proportion of KCOTC’s unpaid debts. The defendants also make a claim that COTC is estopped from making the various claims and/or asserting that one of the agreements in the Joint Venture pursuant to which KNG purported to sell the Land is invalid, illegal or of no effect on the basis that it consented to that agreement.

THE FACTS

Background to COTC concept

8 In the late 1970s and in the 1980s Dalglish developed and applied a development methodology through a company, Trifleska Pty Limited (Trifleska), whereby the Hyatt Regency Resort at Coolum (the Coolum Resort) was developed, marketed and sold. Dalglish claimed that Trifleska was renamed COTC in 1997 when he developed a marketing plan that targeted the registered clubs market to determine how best to source investment funds and secure pre-sale expressions of interest. On a number of occasions in the late 1990s, in the course of carrying out research into the development of the COTC methodology, Dalglish met with David Nott and other partners of KPMG. KPMG expressed interest in becoming involved in the COTC development concept.

9 In 1992 Dalglish met Chris Shannon (Shannon) through their involvement with the Coolum Resort development when Shannon was selling time shares and residences in the Coolum Resort through his real estate business, Jandawn Pty Limited, trading as Megatron Marketing (Qld) (Jandawn). In 1998 Dalglish decided that he would like to involve Shannon in the marketing side of the COTC development concept. At that stage Dalglish and Shannon agreed that they would work together as “50% partners” on the “next development” specifically to locate a new site and construct a new resort development.

10 Dalglish had been working with KPMG in relation to the possible development of land at Barwon Heads in Victoria and other sites in Hobart in Tasmania and Northern New South Wales. Dalglish suggested that KPMG might be interested in becoming involved in the development of the Land and discussion ensued in relation to that suggestion.

Introduction to Lenen Pty Ltd

11 In 1998 Dalglish and Shannon embarked on a search for a new site for a development. Bob Andersen of Macquarie Bank informed them that the Bank had “an option to develop a site at South Kingscliff” and that the “Barclay brothers” were having some difficulties with the zoning of the site. In late 1998 a meeting was set up at the Macquarie Bank’s Brisbane offices between Dalglish, Shannon, Ian and Don Barclay, Mr Andersen and his colleague Dale Evans. Ian Barclay advised that Macquarie Bank had an option to form a syndicate to purchase the Land that was due to expire in April 1999. Mr Barclay also advised that development consents had been granted by Tweed Heads Shire Council but that the allowed population density was “insufficient”. Dalglish suggested he would be surprised if he could not do something about that and arranged a site inspection of the Land with Mr Barclay.

The Executive Summary

12 On 20 January 1999 Dalglish presented what has been referred to in the litigation as the COTC Executive Summary and Marketing Concept (the Executive Summary) to the Barclays. COTC was described in the Executive Summary as a special purpose vehicle formed for the purpose of sponsoring and taking an interest in an unlisted public company to be incorporated as KCOTC that was to be the “Single Responsible Entity ‘KingsHeath’ ”. The Executive Summary claimed that Dalglish and Mrs Dalglish were the owners of intellectual property of the model contained in the Executive Summary that was in turn based on the intellectual property to the Coolum Resort that was also resident in their intellectual property. The Executive Summary also included a statement that $2.5 million had been expended in the process of market research; searching out and taking steps to acquire suitable sites; developing the concept; compiling a design brief and preliminary costings in conjunction with project managers and consultants up to “ready to construct state” to commence during 1999; and adapting the Hyatt Coolum Sales, Marketing and Corporate Structure to the requirements of the relevant present day legislation. It also recorded that the $2.5m had been provided by Dalglish and Mrs Dalglish and would be reflected in the accounts of COTC as its subscription of foundation capital to KingsHeath for a 25% shareholding in KCOTC when incorporated.

13 The Executive Summary described the “Club of the Clubs theme” as “understated elegance, least grandiose construction, simplest possible architectural design, brilliant landscaping architecture for topographical absorption of building in order to create KingsHeath as a themed variation of the Hyatt Coolum, suited to the Clubs’ market, as a Clubs’ Club and Club Members Residential Club” (par (9)). It also referred to the Land and COTC’s wish to be involved in Lenen’s fresh Development Application to the Tweed Shire Council. It suggested that as a condition precedent to COTC receiving a “sponsor and general counsellor” for the KCOTC project, it wished to enter into a purchase option agreement with Lenen “which at the appropriate time will be assigned to Kingsheath” (par (4)).

14 The Executive Summary recorded the following in relation to class V members:

foundation members/financial partners/stakeholders, rights attached to interests owners of the KingsHeath CLUB of the CLUBS Limited are not entitled to exercise voting rights on their own account in an election of nominated persons to the Board of Governors, but by their own ballot, elect the Board of Directors of the KingsHeath CLUB of the CLUBS Limited (in compliance with the Managed Investments Act). This Single Responsible Entity will exercise its administration and management rights of and to the location, as Trustee/Manager for all classes of membership, and will appoint custodian(s) as and if necessary.

Introduction to Mancuso/Arts

15 In January 1999 Dalglish and Shannon were introduced to Salvatore Mancuso (Mancuso) who was associated with or controlled Arts Investments Pty Limited (Arts). Mancuso advised that he had a wide range of contacts in the business community in Melbourne and that he had a “come and go facility” with the St George Bank. Mancuso advised Dalglish and Shannon that he may be able to help them in their search for investors in “several sites for a clubs style resort”. In late January 1999 Dalglish, Shannon and David Nott from KPMG made a presentation to Mancuso at a meeting in KPMG’s offices in Sydney. At this meeting Dalglish advised Mancuso that he would be prepared to consider recommending that Mancuso receive a 2.5% interest in any subsequent joint venture if he were to find an equity investor.

Lenen agrees to sell the Land

16 In April 1999 Lenen agreed in principle to sell the Land to COTC for $22.5 million.

17 COTC and Jandawn (referred to together in this agreement as COTC) and KPMG executed the Concept and Development Agreement dated 12 May 1999 (the C & D Agreement) which set out the relationship between the parties and the role each of them was to play in identifying potential sites, joint-venture owners and operators, and consummating a property development scheme or schemes to be known as Club of the Clubs (Recitals). The parties acknowledged that "the intellectual property rights pertaining to each Joint Venture contemplated" by the C & D Agreement were owned by Dalglish and Mrs Dalglish (Operative Provisions). KPMG's role was to assist and advise COTC, including undertaking a market demand study and testing the level of interest with key Clubs in New South Wales and Queensland that were KPMG clients (cl 5). KPMG was entitled to fees assessed in accordance with Schedule 1 to the Agreement which provided as follows:

SCHEDULE 1 – PHASE 1 FEES

KINGSCLIFF – LENEN NORTH LAND

KPMG's fees for all aspects of its involvement in Phase 1, including coordination, legal input, prefeasibility and market testing, shall be $400,000 payable within 30 days of rendering an account. An account for the balance shall not be rendered until prefeasibility and market testing has been completed and Development Approval obtained.

KPMG's fees are to be met by the Joint Venture participants in the Club of the Clubs project, having regard to the terms of equity participation or other involvement agreed between Club of the Clubs and the Joint Venture participants, and in consultation with KPMG.

It is agreed between CotC and KPMG that CotC will at all times in its negotiations with Joint Venture Partners make it a condition precedent of any such agreement that KPMG's fees shall be met by the Joint Venture partners and/or equity participants in the project and that this Agreement shall form part of any Joint Venture Agreement entered into.

18 This Schedule was amended on 4 August 1999 so that the first sentence then provided:

KPMG's fees for all aspects of its involvement in Phase 1, including coordination, legal input, prefeasibility and market testing, shall be $400,000 of which $225,000 shall be payable within 7 days of formalisation of the Joint Venture Agreement for the purchase of the land.

Heads of Agreement for sale of the Land

19 On 22 June 1999 Lenen, COTC and Jandawn signed Heads of Agreement which recited that Lenen was prepared to enter into an option agreement for the sale of the Land for $22.5 million. Clause 3 provided that Lenen was to forthwith commence preparation of a Development Application (DA) generally in accordance with plans that had been prepared and to lodge the DA with the Tweed Shire Council within three months or such later date as agreed between the parties. That clause also provided that the final format of the DA was to be advanced with the assistance of the COTC Joint Venture.

Joint Venture Agreement – 4 August 1999

20 In late June 1999 Mancuso introduced Dalglish to Stamoulis and S Stamoulis. On 4 August 1999 COTC, Jandawn, Arts and AWD Springwater Pty Limited (AWD) a company associated with Stamoulis and S Stamoulis (later replaced by KNG), executed a Joint Venture Agreement.

21 The Joint Venture Agreement provided relevantly:

RECITALS

A COTC and Jandawn hold an option to acquire the Site at Kingscliff in the State of New South Wales, and certain intellectual property rights relating to the development of that land as a tourism and leisure precinct. COTC and Jandawn wish to form a joint venture to be known as 'KingsHeath Club of the Clubs Syndicated Joint Venture' to undertake and oversee the development of the Site under the auspices of the Project.

B Each of AWD and Arts Investments wish to invest and participate in that joint venture.

C The Participants have agreed that the joint venture will proceed in the form of an unincorporated joint venture, but that they will incorporate a public company to hold any interest in the Site necessary to carry out the Project.

D The Participants in this agreement wish to set out the principal terms and conditions upon which the joint venture will be conducted.

AGREEMENT

1. Interpretation

1.1 Definitions

…

Intellectual Property Rights means:

(a) the know-how in relation to the Project and the marketing and sale of the properties and interests created as a result of the Project; and

(b) the rights to use the name "Club of the Clubs".

Joint Venture means the joint venture established under this Agreement and known as the "KingsHeath Club of the Clubs Syndicated Joint Venture".

Manager means the company appointed by the Steering Committee to fulfil the role of manager of the Project under a management agreement.

Participants means each of COTC, AWD and Arts Investments.

Project means the development of the Site, and the subsequent sale of properties or interests in properties on the Site once the development is completed, in the manner described in the document entitled "Club of the Clubs - Executive Summary and Marketing Concept", a copy of which is annexed as Schedule 2.

…

Property Rights means the rights of COTC under the option referred to in Recital A of this Agreement.

…

Steering Committee

2 Formation and Structure of the Syndicate

2.1 Formation of Joint Venture

The Participants hereby agree to form the Joint Venture for the purpose of carrying out the Project including:

(a) application for development consent for the Project, which incorporates a plan of subdivision that will optimise income and minimize costs to the Joint Venture;

(b) the appointment of the Manager under a management agreement acceptable to the Participants;

(c) negotiation of a development contract which will include a Trust Agreement and Trust Management Agreement with the Company which will be empowered to act as the Single Responsible Entity for the Project;

(d) the compilation and registration of a printed and electronic prospectus for the sale of properties and/or interests in sections of the Site, once the Project is completed;

(e) the organisation of an appropriately trained sales force; and

(f) to oversee the development of the Project and all aspects and requirements necessary in the completion of the Project.

2.2 Structure of Joint Venture

The Participants agree that each of them will be tenants in common holding a share in the undivided assets and interests of the Joint Venture, the size of that share being determined in accordance with clause 2.3.

2.3 Interests in the Joint Venture

(i) COTC and Jandawn agreeing to exercise, or deal with, the Property Rights in a manner that procures that the Company will own the Site; and

(ii) COTC agreeing to grant a licence to use its Intellectual Property Rights to the Joint Venture,

and in consideration of moneys expended by COTC and Jandawn to acquire the Property Rights and Intellectual Property Rights, COTC and Jandawn will each be granted a twenty-five per cent (25%) share in the assets and interests of the Joint Venture.

(b) The Participants agree that in consideration of them performing their respective obligations under clause 3.1, each of AWD and Arts Investments will be granted their respective Agreed Shares in the Joint Venture.

(c) The Participants agree that if additional funding is required by the Joint Venture in order to complete the Project, (which may also include any funding required in order to acquire the Additional Land), the nature of the additional funding and their respective obligations with respect to that additional funding will be determined at a meeting of Participants convened under clause 13.

(d) The Participants will procure that the Manager obtains quotations from consultants it proposes to retain for the purposes of the Project, and uses its best endeavours to include a provision in each engagement of such a consultant that, any fees charged by that consultant which are in excess of its quotation will be due only after the Project is completed.

…

3 Obligations of Participants

3.1 Obligations of AWD and Arts Investments

(i) deposit in the KPMG Legal Melbourne Trust Account, the sum of five hundred thousand dollars ($500,000), on behalf of Ray William and Maja Dalglish, within three Business Days of the execution of this Agreement, provided that it receives from Ray William and Maja Dalglish a research and development invoice for that sum; and

(ii) subject to Arts Investments complying with its obligations under paragraph 3.1(b), on or before 13 August 1999 (or such later date as is agreed by the Participants), procure or provide a standby letter of credit (or comparable instrument), in favour of, and exercisable by, the Company, upon terms acceptable to the other Participants for the amount of two million dollars ($2,000,000). The Participants agree that they will procure that the Company does not exercise its rights under, or otherwise enforce, such standby letter of credit (or comparable instrument) for a period of two (2) years commencing on the date of that this Agreement is executed.

(b) Arts Investments agrees that, on or before 13 August 1999 (or such later date as is agreed by the Participants), it will procure a financial guarantee, upon terms acceptable to the other Participants, in favour of, and exercisable by, the Company, for a minimum amount of four million dollars ($4,000,000) and up to such maximum amount as the Participants consider appropriate.

(c) The Participants agree that no distributions of any property, whether in the form of cash or assets, may be made to the Participants by or on behalf of the Joint Venture, until all amounts invested or committed by AWD under paragraph 3.1(a) have been returned or reimbursed to AWD. To the extent that the Joint Venture has property available to be distributed to the Participants, that property must first be applied for the purposes of returning or reimbursing such amounts to AWD.

3.2 Obligations of COTC

(a) Once each of AWD and Arts Investments has complied with their obligations under clause 3.1, COTC will grant to the Company (as the nominee and trustee for the Participants) a non-exclusive licence to use, commercialise and exploit all of the Intellectual Property Rights and will provide to the Company a copy of all the documentation and information in the possession, custody or control of COTC relating to those Intellectual Property Rights. The licence granted under this clause will continue until this Agreement is terminated.

(b) COTC will procure that, at the time at which the Property Rights must be exercised, those rights are exercised so that the Company purchases the interest in the Site.

3.3 Application of Funds

The Participants agree that the amount invested pursuant to paragraph 3.1(a) may be drawn down by, and used for the sole benefit of, Ray and Maja Dalglish in partial recognition of amounts expended for the purposes of the Project. The Participants further agree to procure that Ray and Maja Dalglish will pay the sum of five hundred thousand dollars ($500,000) to AWD when a contract is entered into for the construction of the Project.

4 Conduct of Joint Venture

(a) The Participants agree that, unless specified or provided otherwise in this Agreement, the principles upon which the Project is to proceed, and those concerning the relationship of each Participant to the others, will be those specified in the Statement of Principles.

(b) The Participants agree that the management and overseeing of the Project will be conducted by the Joint Venture, and that the decisions of the Steering Committee in relation to the Joint Venture will, subject to clause 13, bind each of them. The Participants acknowledge that certain property and other interests may, from time to time, be held by the Company, and they agree that they will procure that the Board will implement and follow all decisions made by the Steering Committee in respect of the Project.

(c) Each participant covenants and agrees with each other Participant:

(i) to diligently observe and perform its obligations and commitments pursuant to this Agreement;

(ii) not to engage (whether alone or in association with others) in any activity in respect of the Project except as provided or authorised by this agreement or as agreed by a majority of the Participants; and

(iii) each Participant hereby commits to use its best endeavours to ensure the Project is carried out successfully and agrees to do all things necessary to enable the Project to be carried out.

…

6 Steering Committee

(a) The Participants agree to establish the Steering Committee, whose function will be to:

(i) procure and ensure that the Joint Venture pursues and achieves its purposes as stated in clause 2.1;

(ii) oversee the conduct and progress of the Project;

(iii) make decisions on behalf of the Participants regarding all matters arising in the course of the Project;

(iv) procure the preparation of the accounts and financial statements recording the revenue, expenditure and activities of the Project;

(v) liaise with the Manager, and receive progress reports in relation to the Project;

(vi) determine all business and other policies relating to the conduct of the Project and dealings with the Site after the Project is completed; and

(vii) such other functions as the Participants may delegate to the Steering Committee from time to time.

KPMG)

(c) If a particular member of the Steering Committee retires, is removed or is unable to attend meetings of the Steering Committee, a person nominated by the Participant who originally nominated that member will replace him or her.

(d) Each member of the Steering Committee, save for the person nominated by KPMG, will be entitled to cast one vote in relation to any resolution put to the Steering Committee. In the event that there is an equality of votes in relation to a given resolution put to the Steering Committee, the person nominated by KPMG will have a casting vote, and the Participants agree to be bound by the casting vote of that person.

7 Conduct of Meetings of Steering Committee

(a) Each member of the Steering Committee will be entitled to one vote at a meeting of the Steering Committee, and in the event that there is an equality of votes in relation to a resolution or matter being considered by the Steering Committee, no Steering Committee member will have a casting vote.

(b) The Participants agree that a meeting of the Steering Committee may not proceed unless a quorum of members is present in person or by means of a telephone conference or other appropriate means of communication technology recognised as being appropriate for the conduct of such meetings. For the purposes of this Agreement, the presence of at least three members of the Steering Committee, of which at least one must be a representative nominated by either COTC or Jandawn, on the one hand, at least one must be a representative of either AWD or Arts Investments, will constitute a quorum.

(c) An agenda of each meeting of the Steering Committee must be circulated to each committee member at least two Business Days before the date on which the meeting is to take place. Such agenda will list all the matters to be considered and determined by the Steering Committee, and must be accompanied by such documents as are necessary to enable each committee member to make an informed decision as to each matter being considered by the Steering Committee.

…

11 KingsHeath Limited

11.1 Incorporation of the Company

The Participants agree that, as soon as practicable after the execution of this Agreement, they will procure the incorporation of the Company. The Participants agree that the Company will fulfil the role(s) outlined the document annexed in Schedule 2 and the Statement of Principles.

11.2 Board of the Company

(a) Upon incorporation the members of the Steering Committee will be appointed as the first Board. From that time onwards, until the prospectus (referred to in paragraph 2.1(d)) is registered (or this Agreement is terminated, whichever occurs first), any person nominated to the Steering Committee will, by virtue of that nomination, be appointed as a director of the Company. A person who ceases to be a member of the Steering Committee, for any reason, must resign or may be removed by the Shareholders.

(b) The Participants agree that if a member of the Steering Committee is ineligible under the Corporations Law to be appointed as a director of the Company, that person’s nomination to the Steering Committee must be revoked, and he must be replaced by a person who is so eligible.

11.3 Shareholding in the Company

As soon as practicable after the Company is incorporated, the Participants will procure that the Board meets and issues Shares to each of the Participants. The percentage shareholding to which each Participant is entitled will be the same as their percentage interest in the Joint Venture.

11.4 Relationship of Joint Venture and Company

For the avoidance of doubt, the Participants agree that, in their respective capacities as Shareholders, they must exercise their rights as Shareholders in a manner that is consistent with the objectives of the Project and the Joint Venture, and consistent with any decisions or resolutions made by the Steering Committee or a meeting of Participants, as the case may be.

…

13 Meetings of Participants

13.1 Convening Meetings

The Participants will meet monthly to discuss and review the Project and to receive a report from the Steering Committee. Any two Participants may, by notice to the other Participants, convene a meeting of Participants on occasions other than the monthly meetings. Any such notice must state the nature of business, and any resolutions, to be discussed at such meetings.

13.2 Powers of Participant Meetings

The Participants agree that the management and control of the Project and the Joint Venture will vest with the Steering Committee, save for the following matters, in respect of which a determination by a meeting of all Participants under this clause will be final and binding:

(a) any proposals regarding the raising of additional equity or capital for the purposes of the Project or the Joint Venture;

(b) any decision regarding the acquisition of the Additional Land;

(c) any proposals regarding the raising of any funding for the purposes of the Project (including the acquisition of the Additional Land) which require the provision of any form of security or encumbrance over any Joint Venture assets;

(d) any decision, resolution or action relating to the undertakings or guarantees given pursuant to paragraph 3.1(b), including any calls, any reduction of the amount of the undertaking or guarantee or the release of parties from those undertakings or guarantees as the case may be;

(e) approval of the prospectus to be issued by the Company;

(f) determination of the timing of the sale of, and approval of the selling campaigns for, each of the stages of the Project;

(h) the admission of a new Participant to the Joint Venture;

(i) the sale or disposal of the Joint Venture’s entire interest in the Project, prior to the completion of that Project; and

(j) the termination of the Project or this Agreement.

13.3 Resolutions at Participants’ Meetings

All matters and resolutions put before a meeting of Participants will be deemed to have been approved or passed by the Participants if Participants representing more than fifty per cent (50%) of the total interests in the Joint Venture present and voting at that meeting, vote in favour of it. Notwithstanding the previous sentence, a resolution in relation to the matters listed in clause 13.2 will be deemed to have been passed only if Participants representing more than seventy-five per cent (75%) of the total interests in the Joint Venture (whether or not present) vote in favour of it.

…

15 Default

(i) the Participant transfers the whole or part of its interest in the Joint Venture otherwise than in accordance with this agreement;

(ii) the Participant continues to breach any obligation under this agreement (other than an irremediable breach) for seven (7) days after receiving notice from the other Participants or the Manager specifying the breach and requiring it to be remedied;

(iii) the Participant repeats a breach after having received notice from the other Participants or the Manager warning that repetition of the breach will, or is likely to result, in the other Participants or the Manager regarding that Participant as being in default under this clause 15(a).

(iv) an order is made for the winding up or dissolution of the Participant;

(v) a receiver, receiver and manager, voluntary administrator, trustee, provisional liquidator or similar officer is appointed for all or any part of the assets or undertaking of the Participant;

(vi) the Participant enters into, or resolves to enter into, an arrangement, composition or compromise, or assignment for, the benefit of its creditors generally, or any class of creditors, or proceedings are commenced to sanction such an arrangement or compromise;

(vii) the Participant stops payment of or is unable to pay its debts as and when they fall due; or

(viii) the Participant ceases to carry on business.

the defaulting Participant

default notice

(ii) a copy of the default notice to the Auditor together with an instruction to determine within thirty (30) days of the Auditor’s receipt of the copy of the default notice:

(1) the value of the default Participant’s interest in the Joint Venture as at the date of the default notice; and

the non-defaulting Participants

the damages

(i) assume that a reasonable time is available in which to obtain a sale of that interest in the open market and for that purpose sixty (60) days will be deemed a reasonable time;

(ii) have regard to such factors as the Auditor in his sole discretion believes should properly be taken into account based on the best information available at the time;

(iii) act as an expert and not as an arbitrator.

(d) The non-defaulting Participants will have an option to acquire the interest of the defaulting Participant on a pro-rata basis.

(i) by serving written notice of exercise on the defaulting Participant with a cheque for the purchase price for the interest in the Joint Venture being purchased by each non-defaulting Participant;

(ii) within (30) days of receipt of the Auditor’s valuation;

(iii) at a purchase price for the interest in the Joint Venture equal to the Auditor’s valuation less:

(1) any payments incurred by the non-defaulting Participants for and on account of the defaulting Participant

(2) the damages assessed by the Auditor;

(3) the costs of the Auditor in making the valuations.

22 Pursuant to clause 4(a) COTC, Jandawn, AWD and Arts agreed that their relationship to each other and the principles upon which the Project was to proceed were governed by sections 1 to 6 of the Statement of Principles. Section 1 provided relevantly:

ON ASSET OWNERSHIP :

They are to be owned as tenants in common with other venture syndicates. Each syndicate and its participants own a specific and undivided share of each asset.

ON RIGHTS TO INCOME

It is received separately by venture syndicates. Each syndicate participant determines its income independently of the other syndicate participants by including in its income the proceeds derived from the sale of its share of the product or resources produced by the venture.

ON LIABILITIES INCURRED

Syndicates and therefore syndicate participants are responsible only for the share of liabilities incurred by way of activities undertaken within the terms of this agreement in order to produce the sales product and resources.

ON AGENCY STATUS

23 Section 4 of the Principles provided as follows:

OBJECTIVES OF THE KINGSHEATH SYNDICATED JV

Form a Steering Committee

Make application for Development Consent (through Lenen Pty Ltd)

Plan of Subdivision

Steer the majority of the land subdivided into a development contract

The development contract will also contain a Trust Agreement and a Trustee Management Agreement between the parties. Thus, KingsHeath Ltd will be empowered to act as the Single Responsible Entity (SRE), that is both trustee and manager

- share the income of the KingsHeath CotC development as it materializes after payment of costs;

- gain unfettered control of the proportionate interests which will materialize when appropriate in the form of residential allotment entitlements which in themselves arise from permission in the development consent for quality medium density residential development as ancillary and incidental to the primary intent for the zone of tourism development.

Proceed with the compilation and registration of a printed and electronic Prospectus,

Set up and train a sales force

residential memberships marketing plan,

Works Agreement

24 On 18 August 1999 COTC, Jandawn, AWD and Arts executed an agreement with Richtech Pty Limited (Richtech) setting out the obligations of the parties for the "Works" (the Works Agreement). "Works" were defined in the Agreement as “the infrastructure works external to the Land comprising water, sewer, electricity, telecom and a made road to the Land as are required by the Local Authority to enable the Land to be further subdivided in accordance with and consistent with the purposes and concept of the Project”. Although “Project” was not defined, the word “Projects” was defined to mean “the development of the Land into an integrated tourist facility incorporating a five star hotel, 18 hole golf course, residential developments, retail areas and other associated uses”. The “Works Price” was $2,500,000. “Land Contract” was defined as “the Contract for the purchase of Lots 1 and 2 on the VGF Land between Lenen Pty Limited as Vendor and COTCJV [each of COTC, Jandawn, AWD and Arts] or its nominee as Purchaser”.

25 Clause 2 of the Works Agreement provided as follows:

2 Engagement

26 The draft Land Contract attached to the Works Agreement for Lots 1 and 2 recorded a purchase price of $8 million.

27 On 18 August 1999 COTC, Jandawn, AWD and Arts (referred to together as COTCJV) and Lenen entered into a Put and Call Option in relation to the sale and purchase of the land. It is clear that at least at this time the parties anticipated a novation of the Put and Call Option as they anticipated the incorporation of KCOTC. Clause 1.4 provided as follows:

1.4 COTCJV

to nominate

Lenen acknowledges that COTCJV has entered into this Agreement in anticipation of the incorporation of KingsHeath Club of the Clubs Limited. Lenen agrees that upon such incorporation it will agree to enter into a new agreement with KingsHeath Club of the Clubs Limited in terms identical with this Agreement as if KingsHeath Club of the Clubs Limited was the party in place of COTCJV provided that:-

(1) COTCJV shall pay to Lenen its reasonable legal costs incurred in entering into such agreement; and

(2) COTCJV shall jointly and severally guarantee the obligations of KingsHeath Club of the Clubs Limited under such agreement in such form as Lenen may reasonably require.

28 The Put and Call Option also included the following:

3 Condition Precedent

3.1 COTCJV shall within seven days of the date hereof provide to Lenen an irrevocable bank guarantee for an amount of $4,000,000 (the “Bank Guarantee”) in such form as Lenen shall reasonably require as security for its obligations under this Agreement and the Contracts.

3.2 In lieu of the Bank Guarantee Lenen may in its discretion accept a Letter of Credit Facility.

3.3 If the Bank Guarantee or such Letter of Credit Facility reasonably acceptable to Lenen is not provided within the said period of seven days or such further period as Lenen may agree, then Lenen may by notice in writing to COTCJV terminate this Agreement in which event neither party will have any rights against the other.

4 Grant of Call Options

4.1 Upon the signing of this Agreement COTCJV shall pay the Call Option Fee to Lenen (the receipt of which is hereby acknowledged).

4.2 In consideration of the Call Option Fee, Lenen grants to COTCJV options to purchase the Properties on the terms set out in the Contracts.

4.3 Each Call Option is an irrevocable offer by Lenen to sell the Properties under the relevant Contract which may be accepted by COTCJV as set out in Clause 5.

5. Exercise of Call Option

(1) the Development Approval on reasonable terms and conditions; or

(2) the decision of the Court granting approval to the said Development Application

Whichever is the earlier

(1) after the expiration of three months from the date hereof but before the 22nd May 2002.

(a) the Development Approval on reasonable terms and conditions; or

(b) the decision of the Court granting approval to the Development Application.

PROVIDED HOWEVER that if Call Option A has been exercised then this condition 5.2(2) shall be deemed to have been satisfied.

…

6. Nominee

6.1 COTCJV may appoint a nominee to exercise the Call Option. The nominee may be one ore more persons including COTCJV.

6.2 COTCJV may only appoint the same Purchaser or a related entity within the meaning of the Corporations Law as its nominee for all Contacts.

6.3 If a nominee is appointed, COTCJV guarantees to Lenen the performance by the Purchaser of the Purchaser’s obligations under each Contract as set out in Clause 21.

7 Grant of Put Option

7.1 Upon the signing of this Agreement Lenen shall pay the Put Option Fee to COTCJV (the receipt whereof is hereby acknowledged).

7.2 In consideration of the Put Option fee, COTCJV grants to Lenen an option to require COTCJV to purchase Lots 1 and 2 on the terms set out in the Contract for such Lots (“Put Option A”).

7.3 In consideration of a Put Option Fee, COTCJV grants to Lenen a further option to require COTCJV to purchase Lots 3, 4, 5 and 6 on the terms set out in the Contracts for such Lots (“Put Option B”).

Incorporation of KCOTC

29 KCOTC was incorporated on 24 August 1999. The original directors were Dalglish, Shannon and Stamoulis. The original shareholders were Arts (125 shares), Jandawn (250 shares), KNG (375 shares) and COTC (250 shares).

Funding problems

30 Although under the Joint Venture Agreement, Arts agreed that it would procure a guarantee for a minimum amount of $4 million on or before 13 August 1999, it did not do so. AWD was only required to procure or provide a standby letter of credit in the amount of $2 million once Arts procured the guarantee. Clause 3.1 of the Put and Call Option dated 18 August 1999 required “COTCJV” (being COTC, Jandawn, AWD and Arts) to provide within seven days of the date of the Put and Call Option an irrevocable Bank Guarantee for $4 million in a form required by Lenen. Lenen had the discretion to accept a Letter of Credit Facility in lieu of the Bank Guarantee. On 30 August 1999 Lenen’s solicitor, David Beattie advised KPMG that Lenen would not accept a Letter of Credit from any insurance company and that it required a Bank Guarantee. It is apparent that the Joint Venturers, through KPMG, were making enquiries with HIH Insurance for the provision of a guarantee. Mr Beattie advised that Lenen was willing to extend the time within which to provide a guarantee but that it would not accept a guarantee from HIH Insurance because it did not meet its criteria.

31 On 23 September 1999 KPMG wrote to Dalglish, Shannon, Mancuso and Stamoulis and advised that various consultants had been engaged on the assumption that the financial arrangements agreed to by Stamoulis for a $2 million operating account “are in place pursuant to an ANZ Bank Guarantee”. This appears to be a reference to AWD’s obligation under clause 3.1(a)(ii) of the Joint Venture Agreement. At this stage of course, Arts had not complied with its obligation to procure a $4 million bank guarantee and AWD’s obligation was only triggered after Arts provided its guarantee. The condition precedent under the Put and Call option was that the Joint Venture would provide the $4 million guarantee within 7 days of 18 August 2000 (cl 3.1). KPMG noted that no Bank Guarantee was in place and that it was “critical” to focus on putting the necessary financial arrangements in place before committing further to the Project. KPMG advised that unless Stamoulis was willing to commit funds immediately, they could not recommend that any consultants be formally engaged or committed to by KCOTC.

32 On 6 October 1999 Lenen agreed to an extension of time until 18 October 1999 for the provision of the guarantee. On 14 October 1999 KPMG wrote to Stamoulis advising that it understood, from discussions with Dalglish, that Stamoulis would be willing to authorise the release of the Guarantee obtained from ANZ Bank for the purpose of funding the Project upon receipt of confirmation from Lenen that it was willing to release title upon payment of $8 million. Stamoulis wrote back on 15 October 1999 suggesting that Dalglish had misunderstood his comments regarding his obligations to the Joint Venture. He advised that once Lenen was satisfied as per the terms of the Put and Call Option Agreement he would then provide the Bank Guarantee required.

33 On 14 October 1999 KPMG also wrote to Lenen advising of the plans to put in place security pursuant to the Put and Call Option Agreement. Lenen responded on 18 October 1999 with complaints about its directors’ inability to make contact with Dalglish and Mancuso. That letter included the following:

The agreement between our companies requires as a condition precedent the lodgement of a bank guarantee acceptable to us and this was due to be lodged by the 25 August, 1999. We have previously advised you of a standard bank guarantee format that is acceptable to us and that we require such a guarantee to be issued by a recognised Australian bank.

Our company’s position on this matter remains unchanged.

Should the option for lots 1 and 2 be exercised, the agreement between us also requires payment of an interim amount of $4,000,000 cash within 3 months of development approval. Payment of a further amount of $4,000,000 for the land and in addition a further amount of $2,500,000 cash for services to the land is payable at settlement for lots 1 and 2. We do not wish to vary this agreement

…

34 On 20 October 1999 Mr Beattie advised KPMG that Lenen would extend the date to 29 October 1999 and that it should not be expected that any further extensions would be granted. Numerous meetings occurred in the following weeks with prospective financiers and also with Lenen. On 4 November 1999 KPMG wrote to the directors of KCOTC reporting upon these meetings and in particular advising that Ian Barclay had outlined two possible options for KCOTC to consider, as follows:

1 they [Lenen] will agree to proceed with DA in consultation with KHCotC - but you should assume that this will not be with total co-operation if the $4.0m guarantee is not in place soon. If KHCotC have not complied with the terms of the Put & Call Option Agreement by the date DA is lodged (read 19 or 22 November at the latest) then they will terminate the agreement.

might

35 On 29 November 1999 Lenen wrote to Mancuso and suggested that it was important to arrange for their respective legal representatives to finalise a new Put and Call Option and Works Agreement in the name of KCOTC. This was not done.

36 On 8 December 1999 KPMG wrote to Dalglish, Shannon, Stamoulis and Mancuso in relation to a meeting between them that day at KPMG’s offices. That letter referred to the recommendation for a revised shareholding structure to reflect, amongst other things, the need to put in place sufficient funding to enable the Project to proceed over the next three months and beyond and to ensure that those equity participants, by virtue of any revised structure, were adequately compensated for the risk/exposure they had to the Project in the "two different circumstances contemplated going forward". The letter included the following:

Two revised structures are proposed. Both assume that the Stamoulis interest will pay $2.25m (10% of the purchase price) to Lenen this Friday to "secure" the Agreement with Lenen and hence give KHCotC control over the Project. It is a requirement that the Joint Venture shall have the right to exchange "deposit monies" for the $4.0m Guarantee at any time in the course of the next 3 months, ie., on or before 10 March 2000, in the event that an appropriate equity participant can be secured to underwrite the Financial Guarantee to be provided through HIH and St George Bank with Capital Finance, or other interests such as a builder.

Structure 1 - Assume Bank Guarantee is in place by 10 March 2000

§ Stamoulis pays $2.25m to Lenen (subject only to the right to substitute with a Guarantee).

§ The respective Director’s companies or their interests (Dalglish/Shannon/Mancuso) shall each contribute $100,000 to fund the Project over the course of the next 3 months. These funds are to be paid into the company operating account by Friday 17 December 1999.

§ Upon acceptance of the Guarantee by Lenen, Stamoulis shall release its $2.0m Guarantee to enable funding of the Project.

Stamoulis shall be granted the rights to an option for an additional 15% shareholding in the Project in the event that the Guarantee is not put in place by 10 March 2000.

Structure 2 – Bank Guarantee not provided by 10 March 2000

§ Stamoulis pays $2.25m to Lenen.

§ As the Guarantee has not been provided, Stamoulis will have a greater exposure to the Project and the liability to release $2.0m to fund the Project by 10 March 2000.

§ In these circumstances, the equity shareholding will change as follows:

- Stamoulis interest 52.5%

- Dalglish interest 15%

- Shannon interest 12.5%

- Mancuso interest 10%

§ If this structure arises and the Dalglish/Shannon and Mancuso interests have not contributed $100,000 respectively, then Stamoulis shall be entitled to an increased shareholding of 2.5% from each of the non-contributing entities, in which case, in the event no one interest has contributed and Stamoulis has had to fund all of the Project Costs until March 2000 (including KPMG’s costs) the shareholdings would be revised as follows:

- Stamoulis interest 60%

- Dalglish interest 12.5%

- Shannon interest 10%

- Mancuso interest 7.5%

In this instance there will be no Guarantee and Stamoulis will have the major exposure and hence the right to deal with the property in one of the three following ways:

1. Proceed with the Project with the current Joint Venture Company.

2. Proceed with the Project, but sell down its equity.

3. Deal with the property as a real estate transaction only – sell and realise any gains pari passu to the then existing shareholdings net of all costs.

I trust the above accurately reflects what was proposed in the meeting. In my view it fairly reflects the risk to Stamoulis if the Guarantee is not put in place. It appears likely that the Guarantee will be in place in the near future.

The proposed structure has the advantage of giving KHCotC leverage over other parties seeking an equity participation and should reduce the shareholding they may seek with a resultant increase in all existing shareholders interests over what is currently contemplated by Capital Finance taking a 40% stake.

37 This KPMG letter appears to be the first time that the option for Stamoulis/KNG to deal with the Land as a “real estate transaction only” was recorded. On 9 December 1999, Dalglish responded to KPMG’s letter of 8 December 1999 in the following terms:

In response to your letter of 08 December

- In each scenario, including the third one – Harry’s offer is impeccable.

- Grant Park has not yet had the opportunity to discuss risk and reward.

- Sam and Chris – as does KPMG – have moneysworth roles to play.

- The best security for Harry – pending HIH – Capital Finance being put in place would seem to be first registered mortgage debenture over CotC JV – KHCotC Limited assets.

38 On 9 December 1999 KPMG wrote again to the directors of KCOTC with a revised basis of financial arrangements for the Joint Venture. On this occasion KPMG advised that both structures now contemplated that the Stamoulis interest would pay $2 million (10% of the purchase price, excluding any amounts under the Works Agreement) to Lenen by 10 December 1999. KPMG advised that on this basis KCOTC would have control over the Project. It was noted that the Stamoulis interests would concurrently provide a cheque to KCOTC for $250,000 to enable funding of the Project. This revised structure anticipated a new equity shareholder and KPMG advised that if that new shareholder required more than 15% but less than 20%, the additional 5% would be contributed pari passu from the Dalglish/Shannon and Mancuso interests. If the new participant required greater than 20% shareholding then the share in excess of 20% would be provided pari passu by all shareholders. Structure 2 referred to in the 8 December 1999 letter changed to accommodate the payment of $2 million to Lenen with a change in shareholding to Stamoulis at 75%, Dalglish at 12.5%, Shannon at 7.5% and Mancuso at 5%. The letter continued:

§ KPMG will agree to cap its total fees recoverable from the Joint Venture at $500,000 subject only to it having first charge over the net assets of KingsHeath Club of the Clubs Limited, after satisfying the vendor (Lenen), in the event the Stamoulis interests proceed under Point 3 above [the real estate transaction].

39 On 10 December 1999 KPMG advised that it would draft a new agreement to reflect the changes to the structure of the Joint Venture. There had been continuing debate about the need to pay creditors and KPMG strongly recommended that $250,000 be paid into the account promptly to facilitate the early payment to outstanding creditors “utilising the structure and methods for authorisation of payment already in place”. There was also continuing debate about the payment of KPMG’s fees. At the meeting of KCOTC directors on 13 December 1999 the matter of KPMG’s fees was clarified. It was noted that KPMG had agreed to cap their fees at $500,000 in the event that the Project did not proceed and became a “land sell off/wind up of the company”.

$2 million paid

40 KNG paid $2 million to Lenen by 10 December 1999. On 15 December 1999 Mr Beattie confirmed that he had arranged for the sum of $2 million to be placed on fixed deposit with the ANZ Bank for the period of one month and that KCOTC had the right to substitute that cash deposit with a $4 million Bank Guarantee at any time prior to 10 March 2000 or 7 business days after the granting of development approval, whichever was the later. Mr Beattie confirmed that if the substitution did not occur and if the Put and Call Option was exercised the $2 million would be applied as a deposit equal to 10% of the purchase price under each Contract. Mr Beattie also advised that in view of the new arrangements Lenen required new agreements rather than assigning or novating the existing agreements. KPMG advised that the directors of KCOTC objected to the drafting of new agreements as an unnecessary incursion of costs.

Supplemental Joint Venture Agreement – 10 February 2000

41 KPMG drafted a “Supplemental Agreement Kingsheath, Club of the Clubs Joint Venture” (the Supplemental Agreement) for execution by the directors of KCOTC, COTC, Jandawn, KNG (replacing AWD) and Arts. The Minutes of a meeting of directors of KCOTC on 17 January 2000 record that Mr Holland from KPMG requested a motion to adopt the Supplemental Agreement so that it could be used in discussions with builders and hoteliers. The Minutes record that Dalglish moved that the Supplemental Agreement be adopted. After Mancuso suggested some changes to the proposed clauses, Shannon seconded the Motion moved by Dalglish. The Minutes do not record a resolution adopting the Supplemental Agreement but it is apparent that each of COTC, Jandawn, KNG and Arts signed the Agreement that is dated 17 January 2000. For reasons that are a mystery, the parties signed the Supplemental Agreement again on 10 February 2000. The Minutes of the meeting of directors of KCOTC on 10 February 2000 record that the Supplemental Agreement was “tabled for agreement/signing/sealing” and that “all copies were signed”. I will refer to the Supplemental Agreement as having the date of 10 February 2000.

42 The Supplemental Agreement provided relevantly:

RECITALS

A . On 4 August 1999, the Joint Venturers entered into the Joint Venture Agreement under which they agreed to form the Joint Venture and to incorporate the Company.

B . The percentage interests in the Joint Venture that each of the Joint Venturers agreed to acquire was specified in Schedule 1 of the Joint Venture Agreement, and the Joint Venturers agreed that their respective shareholdings in the Company would be the same as their percentage interests in the Joint Venture.

C. The Joint Venturers have agreed revised structures for the shareholding in the Joint Venture and the Company in order to facilitate the Joint Venture introducing an appropriate equity participant to underwrite a Financial Guarantee to be provided by the Joint Venture pursuant to the provisions of the Put & Call Option Agreement between the Joint Venturers and Lenen Pty Ltd ACN 001 045 816.

…

2 Performance of Obligations of KNG

2.1 KNG shall pay the sum of Two Million Australian Dollars (AUD$2,000,000.00) to Lenen Pty Ltd by Friday, 10 December 1999. This sum shall be payable by bank cheque and deposited into the trust account of Lenen Pty Ltd’s solicitor, David J Beattie of Level 3, 22 Clarendon Street, Sydney, New South Wales, 2000. This payment will be made subject to the Joint Venturers’ right to substitute the sum paid for a $4 million bank guarantee in accordance with the provisions of the Put & Call Option Agreement.

2.2 KNG shall pay a further amount in the sum of Two Hundred and Fifty Thousand Australian Dollars (AUD$250,000) into the Company operating account at Westpac Banking Corporation by Friday, 17 December 1999 which moneys shall be applied to fund the Project in accordance with the terms of the Joint Venture Agreement.

2.3 The Joint Venture shall within three business days of provision by KNG and acceptance of the $4 million bank guarantee by Lenen Pty Ltd, pay into the operating account of the Company referred to in clause 2.2, the AUD$2,000,000 which it shall receive as a disgorgement from the trust account of David J Beattie in accordance with the terms of the Put & Call Option Agreement. These moneys shall be applied to fund the Project in accordance with the terms of the Joint Venture Agreement. On receipt of these funds by the Company, it shall immediately pay all debts owed by the Company properly relating to the Project including KPMG’s Phase One Fees as defined in Schedule One of the Joint Venture Agreement.

2.4 In consideration of KNG providing the $2.25 million payments and providing a $4 million Bank Guarantee provided for in clause 2.1 of this Agreement, KNG is hereby granted an option to receive a transfer of shares in the Joint Venture and the Company of a further 15% shareholding in addition to its existing interests. This option is conditional upon the $4 million bank guarantee not being provided by NewCo to Lenen Pty Ltd by the later of 10 March 2000 or the date of issue of Development Consent.

3 Obligations of Participants

3.1 Transfers of Interests in Joint Venture

In further consideration of KNG’s payment under clause 2.1 of this Agreement, the Joint Venturers agree to make transfers of their respective interests in the Joint Venture necessary to effect the following revised interests in the Company:

(a) KNG 52.5%

(b) Jandawn 12.5%

(c) COTC 15%

(d) Arts Investments 10%; and

(e) KPMG 10%

…

5 No Bank Guarantee

(a) KNG shall pay the AUD$2 million held by D J Beattie & Co on trust for the Company to Lenen Pty Ltd as provided in clause 2 of this Agreement.

(b) KNG shall be entitled to elect to proceed as follows:

(ii) complete the Project but dispose of its equity in the Joint Venture and the Company; or

(iii) complete the Purchase Contract as a Real Estate Transaction only, and meet any losses or share any gains on a pari passu basis with the then Joint Venturers after payment of all approved Project costs.

5.2 For the purposes of this clause 5, the shareholding shall be adjusted as follows:

(a) KNG 75%

(b) Jandawn 7.5%

(c) COTC 12.5%; and

(d) Arts Investments 5%

5.3 If KNG elects to complete the Real Estate Transaction only, then KPMG will cap its total recoverable fees from the Joint Venture and the Company at AUD$625,000 subject only to KPMG being granted and holding a first registered Fixed and Floating Charge over the net assets of the Joint Venture and the Company.

5.4 KNG’s right to complete the Real Estate Transaction only is dependent on the Joint Venture and the Company failing to achieve committed pre-sales of trust units in the Project equivalent to 40% of the total construction costs by 1 August 2000. The cost of construction is to be estimated by Rider Hunt pursuant to the final Development Approval to be issued by Tweed Shire Council.

5.5 In any event, the Company must pay KPMG its Phase One Fees and Disbursements by 31 March 2000.

6 Confirmation of Joint Venture Agreement

For the avoidance of any doubt, but subject to the provisions of this Agreement, the parties to this Agreement acknowledge and confirm the continuance of the Joint Venture Agreement and all rights accruing to, and obligations binding, the Joint Venturers under the Joint Venture Agreement.

43 On 24 January 2000 COTC, Jandawn, AWD and Arts lodged a caveat over the Land in which the nature of the estate or interest in the Land was described as an equitable interest pursuant to the Put and Call Option Agreement dated 18 August 1999.

Problems encountered - February to May 2000

44 Between 10 February 2000 and 27 May 2000 a number of problems were encountered. Although negotiations with builders and hoteliers proceeded, it was clear that Baulderstone Hornibrook Pty Limited (BHE) wanted to know what the level of interest from the Clubs was before it committed to appointment as the builder for the Project. There were problems in respect of the Development Approval in that Lenen had applied for a subdivision of the land into six Precincts. The directors of KCOTC thought that such plan may be beneficial to the Joint Venture and that in the circumstances the Directors may wish to change the structure of the payments in relation to the new subdivision. It is apparent that the Council provided Draft Consent Conditions on 13 March 2000 but it was not clear when the Council would formally approve the DA.

45 KPMG were also negotiating with Mr Beattie in respect of amendments to the Put and Call Option. On 10 April 2000 the Directors of KCOTC met for a lengthy meeting that was adjourned to 11 April 2000. The Minutes of the meeting of 11 April 2000 noted Dalglish’s objection to proceeding without Stamoulis. Dalglish requested the Board to address the issue of funding the Project. The Minutes record “no funding – no project”. KPMG and Dalglish worked on the tax implications in respect of the Project and a document entitled “Information Memorandum” was prepared for the purposes of providing due diligence material to the proposed builder and hotelier.

46 By late May 2000 neither a builder nor a hotelier had been appointed and it is clear that some of the Directors, in particular Stamoulis, were expressing concern about that delay. At meetings of the Directors of KCOTC on 22 and 23 May 2000 these concerns were discussed. At the meeting on 22 May 2000 Stamoulis stated that he had areas of concern in relation to putting forward the $4m guarantee. His areas of concern included not knowing the level of interest in the Project from the Clubs; the lack of commitment from BHE; and the fact that an hotelier had not been appointed. Stamoulis informed the meeting that he would particularly like to see the market testing done, however Shannon observed that if KCOTC did not have Stamoulis’ financial backing the Joint Venture could not go forward, and in particular, “market test” without funds. Stamoulis advised the meeting that “there will not be a Bank Guarantee provided within 7 days” but he did not think that the Project would “fall over”.

47 At this meeting Mr Holland referred to the outstanding invoices and in particular the amount owed to KPMG which was in excess of $750,000. Mr Holland advised that unless KPMG’s invoice for $400,000 was paid, together with those of other consultants, KPMG would not be involved in the Project any further. Stamoulis advised that he felt that the whole process of the appointment of an hotelier and a builder had dragged on for too long. The Minutes record the following:

He [Stamoulis] further explained that he is not walking away from the project but he (and his family) would like a greater level of comfort before committing further.

RD [Dalglish] stated that the agreement with Baulderstones could have been made prior to Easter and Baulderstones are still willing to commit on the following terms:

a) Building Contract;
b) certain level of sales are achieved prior to construction commencing; and
c) design and construct contract.

48 The Minutes of the meeting of 23 May 2000 record that Stamoulis felt that KPMG were being obstructive and unhelpful in response to which Mr Holland reiterated that unless the Joint Venturers stated how they were going to fulfil their obligations to the Project and make payments to all consultants, KPMG would be left with no choice but to disassociate itself from the Project. Dalglish advised that working capital was always going to be a problem and that it was not Stamoulis’ job to fund costs. He observed that S Stamoulis’ level of comfort would be raised considerably if the BHE situation was finalised.

305 The defendants submitted that KCOTC’s acquisition of an interest in the Land under the 21 February 2001 Put and Call Option is properly characterised as the mere implementation of the Land Play under the Supplemental Agreement. The plaintiffs submitted that such proposition is erroneous because at no stage after KNG’s election on 21 November 2000 to complete the OSJVA Land Play did Stamoulis or KNG evince an intention to act in accordance with the Land Play provisions of the Supplemental Agreement. It was submitted that such Land Play effectively involved the transformation of the Joint Venture from one concerned with the development of the Land, to one concerned only with its sale. It was further submitted that although the Supplemental Agreement Land Play contemplated that the Land would be sold, the sale was unquestionably within the rubric of the Joint Venture and for the benefit of all participants, evidenced by the fact that they were to share in the gains “pari passu”. I agree with this latter submission.

306 It is true that KNG purported to act in accordance with the OSJVA, however as a result of the findings I have made in relation to the September and October resolutions KNG was only authorised to complete the Land Play pursuant to its election of 18 September 2000, that is, pursuant to clause 5 of the Supplemental Agreement. The lack of specificity as to how such Land Play was to be completed allowed KNG to complete the Land Play in the most effective and efficient way it thought fit, so long as it sold the Land for fair or market value and did its best for the other participants in ensuring as many “gains” as possible were achieved and as few “losses” were incurred in which they were to share on a pari passu basis.

307 I am of the view that in the rather complex and unsatisfactory circumstances of this case and as a consequence of my finding that the OSJVA is not a valid or binding agreement, it is appropriate to characterise KCOTC’s acquisition of an interest in the Land under the 21 February 2001 Put and Call Option as the mere implementation of the Land Play under the Supplemental Agreement. It was a mechanism that was open to KNG in the absence of any express agreement as to how the authorised Land Play was to be achieved. The participants agreed that KNG could complete the Land Play and it seems to me that clause 11.4 of the Joint Venture Agreement meant that KCOTC would do whatever it could to assist KNG with the completion of the Land Play in accordance with its obligations to the other participants.

308 The proper characterisation of the process is that KCOTC was the participants’ nominee to enable KNG to complete the Land Play on the participant’s behalf as it was required to do pursuant to clause 5.1(b)(iii) of the Supplemental Agreement. Stamoulis utilised KCOTC in the OSJVA Land Play that I have found was not authorised and such steps were in breach of his duties as a director and in breach of fiduciary duty to KCOTC not to involve it in unauthorised transactions. However I am not satisfied that Stamoulis would have been in breach of his fiduciary duty to KCOTC in utilising it in the process to complete the Land Play under the Supplemental Agreement.

309 Stamoulis’ breach in this regard probably entitles KCOTC to nominal damages to be assessed in due course.

310 Although there were accessorial claims against S Stamoulis and KDG in respect of this breach I am not satisfied that the plaintiff has established the requisite knowledge of this breach. This was a process adopted by Stamoulis and there is nothing in the evidence that establishes S Stamoulis’ requisite knowledge of this process and/or breach.

Breach of Contract by KNG

311 There are two claims made by COTC against KNG for breach of contract. The first is the alleged breach of clause 5 of the Supplemental Agreement in failing to share the profits of the Land Play with COTC on a pari passu basis. The second is an alleged breach of an implied obligation in the Land Play pursuant to the Supplemental Agreement to use its best endeavours to sell the Land at no less than market value.

Failure to share profits

312 There does not seem to be any defence to the claim that KNG failed to comply with its obligations under clause 5 of the Supplemental Agreement. I am satisfied that the plaintiffs have established this breach.

Implied term - Market Value

313 It appears from the defendants’ submissions that there was little resistance to the claim that an implication arose from the terms of the Supplemental Agreement that if KNG made an election to complete the Land Play it would use its best endeavours to sell the Land for no less than fair or market value. However the defendants claim that the plaintiffs have not established that the Land was sold at an under-value.

314 Stamoulis was asked in cross-examination about his opinion of the value of the Land at the time of the sale. He denied that he thought the Land was worth at least $28 million in mid 2001 (tr 237). He was then taken to paragraph 197 of his first witness statement dated 25 October 2005 that referred to a conversation he had on 23 April 2001 with a Mr Sahba Abedian in which Stamoulis stated: “I received your letter. To enable us to consider your proposal we need to agree on a price for the land. I believe its value is 28 million”. The following cross-examination then took place (tr 238):

Q. At the time you had this conversation Mr Stamoulis did you believe the land was worth 28 million?
A. No.

Q. Just to make it clear, the question I asked you was at the time of this conversation with Mr Abedian on 23 April 2001 did you believe that the value of the land was 28 million?
A. In April 2001, no.

Q. Then why did you say it Mr Stamoulis?
A. That's what I was trying to recoup, 28 million and that's what I told him I thought it was worth so I can try and entice him to pay that money.

315 The available conclusions from this evidence include that Stamoulis gave false evidence when he denied that he believed that the value was $28 million or he made a false representation to Mr Abedian to entice him into a transaction. In any event, Stamoulis gave evidence in his statement of the efforts undertaken by KNG to sell the Land. This included meetings with Consolidated Properties in March 2001, Colliers International at about the same time, Mr Sahba Abedian of Sunland Limited in Melbourne in April 2001 and the Ray Group in mid 2001. The asking price for the Land was $28 million and Stamoulis gave evidence that Mr Ray advised him that he had discussed this price with Consolidated Properties and Macquarie Bank but that they did not believe the asking price of $28 million was representative of the market. Mr Ray argued that the property next door, Casuarina Beach, was two and a half times the size of the Land and that Casuarina Beach did not get much more than $30 million.

316 Stamoulis gave evidence that when Mr Ray put to him that the Macquarie Bank’s interest in a Joint Venture would be at a price of $22.5 million, he said that the proposal sounded “great” but said that “we need $28 million”. In response to this statement Mr Ray said: “the money you want for the land will be recouped in the project. This is an opportunity. Harry look at the players we have ready to do a deal”. It was during this discussion with Mr Ray and the representative of the Macquarie Bank that the price of $25 million was agreed to as a compromise between the two amounts $28 million and $22.5 million. S Stamoulis said, “we are comfortable with $25 million and happy to look at the proposed joint venture”.

317 The defendants submitted that Stamoulis’ detailed evidence of KNG’s attempts to sell the Land were not challenged. That is true. There is no evidence of any higher offer from any other party. The price was agreed in principle on 21 June 2001 and there is no expert evidence in the case directed to a valuation at that time. However the plaintiffs claimed that Stamoulis frustrated negotiations in relation to the sale of the Land. In this regard reliance was placed on a file note made by Mr Barclay recording the contents of a telephone conversation with Mr Ray on 25 January 2001. That note included a statement by Stamoulis that he wished to await the resolution of what was referred to as the “contractual situation” before proceeding to negotiate for the sale of the Land. The plaintiffs submitted that this evidence supports a finding that Stamoulis was seeking to “shut out” the other participants from dealing with the Ray Group. I disagree. By January 2001 the relationship between the participants was less than satisfactory. The Joint Venture was in financial distress. The only certain way that funding could be obtained was through KNG and the “contractual situation” was obviously complicated. It is obvious that KNG was seeking advice from Mallesons and although I have found that KNG acted in breach of its fiduciary duty I have no doubt that at least in January 2001 Stamoulis was hoping that the “contractual situation” could be resolved and indeed should be resolved before the sale of the Land was finalised.

318 It seems to me that Stamoulis stumbled badly in February 2001 when he made what I have referred to earlier as the “secret” arrangements with Lenen in respect of the new Put and Call Option between KCOTC and Lenen and the guarantee between KNG and Lenen. I do not believe that what he said in January 2001 was for the purposes of frustrating negotiations for the sale of the Land by other participants. Indeed it has to be remembered that in January 2001 Stamoulis advised Shannon that KNG was willing to divest itself of its interests in the Project and the Joint Venture for $16.5 million. COTC and/or Jandawn were unable to raise such funding to buy KNG out.

319 An additional matter that convinces me that the plaintiffs’ submission in this regard lacks foundation is the history recounted earlier in relation to the approaches made by Dalglish’s/COTC’s solicitors to KNG in relation to the possible purchase of KNG’s interest in the Land and the Joint Venture. That correspondence is dealt with elsewhere but it does not seem to me to be consistent with an attempt to frustrate the sale of the Land.

320 The plaintiffs submitted that the Land was sold by KNG at a discount to facilitate S Stamoulis’ entry into the Macquarie Joint Venture. The defendants submitted that this claim has to be balanced with the fact that KDG was required to put capital into the Macquarie Joint Venture. Even accepting that to be the case I am satisfied that Stamoulis/KNG accepted $25 million because S Stamoulis wanted entrée to the Macquarie Joint Venture and because S Stamoulis was “comfortable” with $25 million. I am also satisfied that the suggested prospect of recouping the balance of the asking price ($3 million) from the Macquarie Joint Venture caused Stamoulis/KNG to accept $25 million.

Valuation evidence

321 The plaintiffs relied on the evidence of Brian Cox, a registered valuer carrying on practice in Queensland. There are two reports from Mr Cox, the first dated 25 October 2005 (first report) and the second dated 12 June 2006 (second report). The defendants relied upon the evidence of Garrie Raymond Love, a senior director of C B Richard Ellis (C) Pty Ltd and valuer, also carrying on practice in Queensland.

322 The two valuers approached the task of valuing the land using different methods. Mr Cox used the comparative sales method and Mr Love used the discounted cash flow method that utilised comparative sales relative to the various products that were to be developed. Both valuers referred to the development south of the subject land known as Casuarina Beach Estate.

323 Mr Cox was involved in valuing the Land during the Joint Venture. His valuation dated 31 August 2000 (the 2000 Valuation) valued the Land at $20 million with a gross realisation value of $48.686 million. In the 2000 Valuation Mr Cox referred to the traditional methods of valuation of a property of the nature of the Land as consisting of two “basic” methods: the direct comparison method; and the residual cash flow analysis. The 2000 Valuation included the following in relation to the valuation rationale:

The direct comparison method is used as the basic valuation method, particularly given the nature of the subject property, in addition to its scope for development alternatives and assumptions.

The resultant value is then tested by way of the residual cash flow analysis.

This is a preferred approach utilised by sophisticated land developers, however is more relevant with a specific development scheme in place.

324 In his first report Mr Cox said this in relation to the 2000 Valuation:

Those valuations were made based on a development plan prepared by Bligh Voller Neild Architects representing an interpretation of initial concept plans devised by Victor G Feros Town Planning Consultant, which accorded with the May 2000 approval.

While the May 2000 approval comprised 600 twin keyed condominiums, hotel units or attached houses, the valuation adopted 1110 entitlements largely represented by the number of rooms produced by this product. The applied rate per entitlement (approximately $18,000) reflected the increased numbers of less valuable entitlements.

325 It was suggested to Mr Cox in cross-examination that the 2000 Valuation did take into account the new LEP. Mr Cox resisted that suggestion and gave evidence that the 2000 valuation was based on the Club of the Clubs concept that in turn was based on the 1987 LEP (tr 189). He suggested that the 2000 Valuation was a hybrid of the Club of the Clubs product but not including a premium that attached to the timeshare sales (tr 191). He suggested that such concept was an inferior product to that which was ultimately redesigned and subsequently sold (tr 192).

326 The 2000 Valuation reached a value per entitlement of $18,000. For the purposes of his first report Mr Cox was asked to assess the market value of the site as at 23 January 2002 and 25 June 2002. He was also requested to assess the “Put and Call Price” of the Land as at 23 January 2002. Mr Cox valued a rate per entitlement of $30,000 as at 23 January 2002. That translated into a market value at that date of $33 million. He then valued the rate per entitlement at 25 June 2002 at $35,000 which translated into a market value of of $37 million. He assessed the market value as at the date of the Put and Call option of 23 January 2002 at $35 million.

327 In cross-examination Mr Cox accepted the validity of the discounted cash flow analysis but indicated that he did not have the time to produce such an analysis. In re-examination he said that such a process would “span weeks” (tr 204). It is not clear to me why such a process could not have been embarked upon prior to trial because Mr Cox was provided with Mr Love’s analysis as long ago as October 2005. It is apparent that he was simply not asked to provide such an analysis. The defendants submitted that Mr Cox’s reports were flawed because he failed to provide such an analysis. In this regard the defendants relied upon Mr Cox’s endorsement of the method in the 2000 Valuation as the “preferred approach”. That statement in the 2000 Valuation has to be read in context. The context was the utilization of that approach to “test” the value resulting from the direct comparison method.

Garrie Raymond Love

328 As I have already said Mr Love embarked upon a different analysis and provided a series of valuations of the site. Those valuations were: (1) “As is” site value of $28.5 million; (2) Stage 1A land value with Development Approval at $15 million; (3) Stage 1B land value with Development Approval at $1.9 million; (4) Residual en globo value after development of stages 1A and 1B without Development Approval at $27 million; (5) Stage 1A gross realisations at $61.455 million; and (6) Stage 1B gross realisations of resort units at $52 million and commercial premises at $11.69 million.

329 Mr Love described Stage 1A as comprising 27 beachfront blocks, 6 of which were larger signature lots and 21 being standard sites. In applying a value to the beachfront lots reference was made to sales within Casuarina Beach Estate and also to sales of beachfront property within other Tweed Coast localities. Mr Love expressed the view that the most comparable evidence was in the Casuarina Beach Estate because it shared a similar locality and similar but slightly inferior land with inferior ocean views. Stage 1A also had a number of beach side blocks within it. The blocks at the Casuarina Beach Estate were narrower parcels of land. That was a matter that Mr Love took into account in his valuation.

330 Mr Love described Stage 1B as the built product in the Outrigger Resort. The subject units comprise a mixture of one and two bedroom self-contained units. The smallest unit was 70.5 square metres including a balcony and all are of a size suitable for most financiers for end-retail financing. Some of the units in this Stage have views over the ocean and towards the hinterland. Nearly all have some form of view whether it is hinterland or ocean or ocean glimpses over the roofs of adjoining houses.

331 Mr Love used comparable sales in the analysis of both Stages. One of the factors built into Mr Love’s valuation was the unknown outcome of an application to the local council to adjust or amend the approval. Mr Love expressed the view that in the overall context of the valuation, a 5% discount was a minor matter (tr 372). He accepted that if one were to take out the possible double counting of infrastructure included in the two stages, the overall valuation would be higher but would need to be discounted for the sheer size of the development. He accepted that the repetition or double counting of the infrastructure costs meant that the valuation should be higher (tr 375).

Value

332 The plaintiffs final submissions did not contest the valuation made by Mr Love of $27.1 million (being the $28.5 million less the 5% discount of $1.4 million) subject to three qualifications. The first qualification related to the amount of discount for the “town planning risk”. The plaintiffs accepted that any quantum of reduction is difficult and endorsed Mr Love’s suggestion that it is very much “opinion based”. Both experts agreed that some discount should be applied. The plaintiffs submitted that an appropriate risk would be no more than half of what was allowed by Mr Love being $1.5 million resulting in a figure of $750,000. That seems to me to be an appropriate figure by which to adjust the amount.

333 The second qualification related to the alleged erroneous assumptions by Mr Love in relation to projected sales rates. Mr Love assumed a sales rate of 8 per month and agreed that if such rate were doubled, it would have a very significant impact on the overall discounted value. Mr Cox reviewed the Casuarina sales schedules and concluded that the rates of sale within the relevant periods were in the order of 16-20 per month. The plaintiffs claim that there could be no reasonable criticism directed at them for not reproducing Mr Love’s discounted cash flow analysis. I am not so sure about that. As I have said earlier, Mr Cox had Mr Love’s report in October 2005 and gave evidence that such an analysis could be produced within “weeks”. Be that as it may, the plaintiffs’ submission was that a reasonable adjustment would be in the order of $1 million. I am of the view that some adjustment should be made and that a reasonable amount in the circumstances is $850,000.

334 The third qualification was that there should be an adjustment to the value of $27.1 million to reflect the “Put and Call Price”. I am satisfied that there should be an adjustment in this regard and that an appropriate premium is 5%. The valuation with the adjustments of $750,000 and $850,000 results in a figure of $28,700,000. Adjusting that figure by 5%, $1,435,000, results in a final figure of $30,135,000.

Under-value

335 I am satisfied that KNG’s best endeavours were compromised by the desire to facilitate S Stamoulis’ entrée into the Macquarie Joint Venture. The prospective joint venturers who were keen to enter into the Memorandum of Understanding in June 2001 were certainly companies of financial substance and if the factor of trying to facilitate his father’s entrée into the Macquarie Joint Venture had been removed I have little doubt that the asking price could have been achieved. The value of the Land in January 2002 was $30.135 million.

336 KNG did not use its best endeavours to sell the Land at fair or market value. It knew that the Ray Group was interested as early as January 2001. It was steered on a course by its director who, I am sure, felt constrained in the way that he marketed the Land because of his concern over the “contractual situation”. KNG promised in the MOU that it would not seek to negotiate with any other parties once the figure of $25 million was struck in June 2001. It ceased any further efforts to market the Land in July 2001. KNG/Stamoulis had little difficulty persuading the prospective Macquarie Joint Venturers to pay $25 million and I have little doubt that if S Stamoulis had not stepped in and ended the negotiations by stating that he was comfortable with $25 million and a part of the Joint Venture, the market value could have been achieved.

337 I am satisfied that KNG breached clause 5 of the Supplemental Agreement by failing to sell at fair or market value of $30.135 million and failing to share the gains on a pari passu basis with COTC. Damages will be assessed in due course.

338 COTC claims that Stamoulis, S Stamoulis and KDG induced or procured KNG to breach the Supplemental Agreement. The plaintiffs relied upon the following statement in C Thomson & Co Ltd v Deakin [1952] Ch 646 at 694 per Jenkins LJ:

… there seems to be no doubt that if a third party, with knowledge of a contract between the contract breaker and another, has dealings with the contract breaker which the third party knows to be inconsistent with the contract, he has committed an actionable interference.

339 Reliance was also placed on the following passage from Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473 in which the Court said at 512:

171. The position may be stated, we think, as follows. The plaintiff must prove that the defendant intentionally procured the breach. The requirement that the defendant have sufficient knowledge of the contract is a requirement that he have sufficient knowledge to ground an intention to interfere with contractual rights. Ignorance of the existence of the contract or of its terms born of inadvertence or negligence is not enough. On the other hand, reckless indifference or wilful blindness to the truth may lead to a finding of the necessary intention.

340 For the reasons given earlier in relation to the breach of fiduciary duty, I have no doubt that Stamoulis knew that KNG was obliged to achieve fair or market value in the Land Play and that in allowing his father to “call the shots” in the negotiations and accept the $25 million on the basis that KDG, KDG, of which he was a shareholder, would have an interest in the Macquarie Joint Venture, KNG was in breach of its contract with COTC. I am satisfied that he induced KNG to breach its contract with COTC.

341 It was claimed that S Stamoulis/KDG knew that KNG had not advertised the Land; that KNG had failed to obtain a valuation of the Land; that KNG had failed to sell by public auction; and that the sale between KNG and SKD was a transaction in which KNG had interests which conflicted with the obligation to obtain the best price reasonably possible in relation to the Land; namely the interest of procuring for KDG an opportunity to participate in the Macquarie Joint Venture.

342 I have referred earlier to Stamoulis’ evidence in relation to the information that he provided to S Stamoulis. Once again, in the absence of any evidence from S Stamoulis caution is needed in this assessment. It is obvious from Stamoulis’ evidence that S Stamoulis took over the negotiations when it reached a point when S Stamoulis decided that he would be “comfortable” with $25 million with an entrée to the Macquarie Joint Venture. I have already dealt with the Arts invoice. That evidence and the absence of any evidence from S Stamoulis viewed in the surrounding circumstances referred to earlier convince me that S Stamoulis knew that the participants were entitled to a share of the proceeds of the sale of the Land and I have no doubt that he knew that the figure reached was to suit him and not them. He was intervening in the affairs of KNG albeit that his son was allowing him to do so in these negotiations. I am satisfied that he induced KNG to breach its contract with COTC. Based on the same reasoning, KDG is also liable in this respect.

343 The total unpaid debts of KCOTC amount to $1,200,420.24. The debts claimed in the Third Further Amended Summons are set out in annexure A as follows:

Annexure “A”

Date	Creditor	Quantum
28 July 2000	Bligh Voller Nield	$132,288.43
October 2000	Bridges Project Consultants	$6,270
11 August 2000 7 September 2000 12 October 2000 10 November 2000 6 December 2000	Cardno MBK	$109,147.50
March 2003	CB Richard Ellis	$2,500
May 2003	Geoff Provest of the Tweed Heads Bowling Club	$8,242.50
King Network Group	$250,000
Soundhouse Studios	$4,339
Structured Risk Alternatives	$11,838.01
Thomson Wolveridge & Perrett Pty Ltd	$7,920
31 August 2000	Tribal Pty Limited (SMS Management & Technology)	$46,274.80
Arts Finance Pty Limited	$117,100.00
Jandawn Pty Limited	$157,000
Club of the Clubs Pty Limited	$347,500
TOTAL 70%	$1,200,420.24 $840,294.17

344 The claim in the Third Further Amended Summons is that by reason of the May Agreement KNG is contractually liable, at the suit of COTC, to indemnify KCOTC in the amount of $840,294.17, being 70% of the total unpaid debts incurred by KCOTC.

345 The May Agreement included “Step 3” of the “Action Plan”. There is no issue between the parties that such Step made clear that the obligations to pay the related party creditors arose only when both the Heads of Agreement with BHE and the underwriting by a hotelier had been arranged. There is also no issue that such precondition was not fulfilled. In those circumstances the amount should exclude the amounts in relation to the related parties being KNG ($250,000), Arts ($117,100), Jandawn ($157,000) and CTOC ($347,500). That reduces the claim to $328,820.24 of which 70% is $230,174.17.

346 The plaintiffs agreed that COTC has not fulfilled its obligation under the May Agreement to pay 15% of all debt. The defendants claimed that in order to obtain relief in equity, COTC is obliged to do equity, by fulfilling its own obligations. This was on the basis that the way in which the plaintiffs’ claim is framed is for a decree of specific performance of the kind approved in Beswick v Beswick [1968] AC 58. The plaintiffs concede that COTC is obliged to fulfil its own obligations and they consent to the orders sought in KNG’s cross-claim seeking indemnity from COTC on the same basis.

347 The defendants submitted that the May Agreement was clarified and amended by the OSJVA. Having regard to my findings in respect of the OSJVA I am not satisfied that the adjustment to the May Agreement was approved and accordingly the position is that KNG is liable to pay $230,174.17.

348 There was an alternative claim by IMF that it is the beneficiary of a trust of promises made in the May Agreement. I agree with the defendants’ submissions in this regard that there is no evidence of any intention to create such a trust and that it would have been contrary to the intention of the Joint Venture Agreement for the participants to confer on KCOTC paramount rights against themselves. I also agree with the submission that KCOTC was intended to act as a trustee for the relevant stakeholders, not the other way around. In any event I am satisfied that the claim at the suit of COTC succeeds.

Conclusion

349 COTC has established that: (1) the OSJVA is not a valid and/or binding agreement on COTC; (2) that KNG breached its fiduciary duty to COTC in selling the Land at an under-value and failing to share the gains from the sale of the Land with it; (3) that Stamoulis, S Stamoulis and KDG are liable as accessories for KNG’s breach of fiduciary duty to COTC; (4) that KNG breached the terms of the Supplemental Agreement; and (5) that S Stamoulis and KDG induced KNG to breach the Supplemental Agreement. KCOTC has established that Stamoulis breached his fiduciary duty by involving KCOTC in an unauthorised transaction. COTC also succeeds against KNG in respect of its proportion of KCOTC’s unpaid debts. KNG is entitled to an order on its cross-claim against COTC for its proportion of KCOTC’s unpaid debts.

350 Damages are yet to be assessed. Draft Short Minutes of Order may be prepared to reflect these findings and any agreed orders in respect of damages or any other aspect of the matter. The matter will have to be re-listed for further directions in relation to the finalisation of the matter. The parties should make contact with my Associate by no later than 8 December 2006 to re-list the matter.

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Citations

Club of the Clubs Pty Limited v King Network Group Pty Limited [2006] NSWSC 1138

Most Recent Citation

Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574

Cases Citing This Decision

1

Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574

Cases Cited

17

Statutory Material Cited

0

Fightvision Pty Ltd v Onisforou [1999] NSWCA 323

Arakella Pty Ltd v Paton [2004] NSWSC 13

CITATION:	Club of the Clubs Pty Limited v King Network Group Pty Limited [2006] NSWSC 1138
HEARING DATE(S):	13, 14, 15, 19, 20, 21 and 22 June 2006. Final written submissions 31 July 2006.
JUDGMENT DATE :	9 November 2006
JUDGMENT OF:	Bergin J
DECISION:	First plaintiff entitled to declarations in respect of breaches of fiduciary duty and breaches of contract. First defendant entitled to an order in respect of its Cross-Claim.
CATCHWORDS:	[CONTRACT] - whether certain resolutions were "in relation to matters listed in clause 13.2" of the Joint Venture Agreement - whether contract purportedly made pursuant to those resolutions valid and/or binding. - [FRAUD ON THE POWER] - whether doctrine applicable - whether principles in Gambotto v WCP Limited applicable. - [FIDUCIARY DUTY] - ambit of fiduciary duties of joint venturers - numerous agreements - lack of precision in authorisation of one joint venturer to sell the Land, the subject of proposed development - whether breach of fiduciary duty - whether accessorial liability for breach of fiduciary duty. - [CONTRACT] - whether breaches of contract - selling Land at an undervalue - whether breaches induced by other parties.
CASES CITED:	Arakella Pty Ltd v Paton (2004) 60 NSWLR 334 Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2006] 1 All ER 333 Beswick v Beswick [1968] AC 58 Birtchnell v Equity Trustees Executors & Agency Co Ltd (1929) 42 CLR 384 Cachia v Westpac Financial Services Ltd (2000) 170 ALR 65 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 DC Thomson & Co Ltd v Deakin [1952] Ch 646 Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473 Fraser Edmiston Pty Ltd v AGT (Qld) Pty Ltd [1988] 2 Qd R 1 Gambotto v WCP Limited (1995) 182 CLR 432 Jones v Dunkel (1959) 101 CLR 298 McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1 O'Sullivan v Management Agency and Music Ltd [1985] QB 428 Peters' American Delicacy Co v Heath (1939) 61 CLR 457 Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378 Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309 Twinsectra Ltd v Yardley [2002] 2 AC 164 United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 Warman International Ltd v Dwyer (1995) 182 CLR 544 Williamson v Hine [1891] 1 Ch 390 Yeshiva Properties No 1 Pty Ltd v Marshall (2005) 219 ALR 112
PARTIES:	Club of the Clubs Pty Limited - First plaintiff IMF (Australia) Limited - Second plaintiff King Network Group Pty Limited - First defendant Harry Stamoulis - Second defendant King Development Group Pty Limited - Third defendant Spiros Stamoulis - Fourth defendant
FILE NUMBER(S):	SC 50131/2004
COUNSEL:	BAJ Coles QC/ HWD Stowe - Plaintiffs IM Jackman SC/ IG Waller - Defendants
SOLICITORS:	Ebsworth & Ebsworth - Plaintiffs Clayton Utz - Defendants