Corbett v Corbett Court Pty Ltd - [2015] FCA 1176

FEDERAL COURT OF AUSTRALIA
Corbett v Corbett Court Pty Limited, in the matter of Corbett Court Pty Limited [2015] FCA 1176

Citation: Corbett v Corbett Court Pty Limited, in the matter of Corbett Court Pty Limited [2015] FCA 1176

Parties: PAUL HERBERT CORBETT v CORBETT COURT PTY LIMITED (ACN 062 978 545), JOHN KEITH CORBETT, RENELLE ANTOINETTE CORBETT and AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

File number: NSD 1432 of 2012

Judge: FARRELL J

Date of judgment: 4 November 2015

Catchwords:
CORPORATIONS – company established by parents for benefit of eight children – one child holds half of the shares and appointed a director with both parents – other seven children hold other half of the shares in the company – company built supermarket and shopping mall using loans from other companies controlled by parents and bank debt – other companies controlled by parents and father provide guarantees of company’s bank debt – parents die intestate – anchor tenant at shopping mall threatened to reduce rent due to level of vacancies in shopping mall – sole director of company refused to appoint independent director and appointed his wife as director instead – company sought to raise capital in order to fund building work to install second anchor tenant in shopping mall – shareholders either refused or ignored two offers to subscribe for shares – seven minority shareholders refused to attend meetings of company after wife appointed as director – shares issued to directors and loans made by them to fund building work to install second anchor tenant

CORPORATIONS – oppression – whether issue of shares to directors contrary to interests of members as a whole or oppressive, unfairly prejudicial to or unfairly discriminatory against minority shareholder under s 232 of the Corporations Act 2001 (Cth) (“Corporations Act”) – whether share issue valid under company constitution – whether conduct of company prior to parents’ deaths gave rise to legitimate expectation that shareholding proportions would be maintained – whether the company needed funds at the time of the share issue – whether other sources of funds available – whether purpose of share issue was to dilute shareholding of minority – whether share issue was commercially fair – consideration of appropriate remedy to order under s 233 of the Corporations Act

Legislation: Corporations Act 2001 (Cth) ss 232, 233

Cases cited: Baloglow v Konstantinidis (2001) 11 BPR 20-721; [2001] NSWCA 451
Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359; [2008] NSWCA 95
Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304
Catalano v Managing Australia Destinations Pty Ltd (2014) 314 ALR 62; [2014] FCAFC 55
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688; [1998] NSWSC 413
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672; [2001] NSWCA 97
Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512
Harrington v Sensible Funerals Pty Ltd (2007) 61 ACSR 359; [2007] SASC 66
Kirwan v Cresvale Far East…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2015] FCA 1176
Decision Date: 4 November 2015

CaseChat Overview and Summary

Corbett v Corbett Court Pty Ltd involved a dispute among the shareholders of a company established by parents for the benefit of their eight children. One child held half of the shares and was appointed as a director, along with both parents. The other seven children held the other half of the shares. The parents died intestate, and the company, which had built a supermarket and shopping mall, faced financial difficulties due to vacancies. The sole director refused to appoint an independent director and instead appointed his wife as a director. The company sought to raise capital to fund building work for a second anchor tenant, but the shareholders refused or ignored two offers to subscribe for shares. Seven minority shareholders refused to attend meetings after the wife was appointed as a director. Shares were issued to the directors, and loans were made by them to fund the building work. The legal issues before the court were whether the share issue was oppressive, unfairly prejudicial, or unfairly discriminatory against the minority shareholders, whether the share issue was valid under the company's constitution, and whether the conduct of the company prior to the parents' deaths gave rise to a legitimate expectation that the shareholding proportions would be maintained. The court found that the share issue was oppressive, unfairly prejudicial, and unfairly discriminatory against the minority shareholders, as it resulted in a massive diminution of their capacity to share distributions and the power to veto resolutions at shareholders' meetings. The court also found that the share issue was not commercially fair and that the minority shareholders had the right to be properly informed and treated equally with the directors. The court ordered the resolution to issue the shares be rescinded and set aside, the issue price paid for the shares to be considered a debt by the company to the directors, and the directors to take steps to rectify the register of members and notify the Australian Securities and Investments Commission accordingly. The court also dismissed the cross-claim filed by the directors and Corbett Court. Costs were reserved, and the parties were required to file and serve any submissions they wished to make as to costs by a specified date.

Orders

Orders of the court

1. The resolution of the directors of the first defendant (“Corbett Court”) made on or about 7 May 2012 whereby it was resolved to issue 50,000 shares to the second defendant (“John Corbett”) and 50,000 shares to the third defendant (“Renelle Corbett”) for an issue price of $1.00 per share (“Share Issue”) be rescinded and the Share Issue be set aside.

2. The issue price paid for the shares referred to in order 1 constitutes a debt by Corbett Court to John Corbett and Renelle Corbett as to $50,000 each, such debt being payable within 14 days of demand being made in writing to the Company.

3. John Corbett and Renelle Corbett must forthwith take all steps necessary to rectify the register of members of Corbett Court by deleting all reference to the Share Issue and cause to be lodged with the Australian Securities and Investments Commission (“ASIC”) by 4 pm on Wednesday, 11 November 2015 notice of correction of Corbett Court’s register of members accordingly. John and Renelle Corbett must serve on the members of Corbett Court by email notice that they have complied with this order and file a copy of that notice with the Court by no later than 4 pm on Monday, 16 November 2015.

4. The cross-claim of John and Renelle Corbett and Corbett Court filed on 5 February 2013 be dismissed.

5. Costs be reserved.

6. Paul Corbett and John and Renelle Corbett must file and serve any submissions they wish to make as to costs by 4 pm on 11 November 2015, such submissions to be no longer than three pages each. Submissions filed and served after that date will not be taken into account unless they are made in writing and at the express written invitation of the Court.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

Neither of the Share Offers provided the minority shareholders with the option which John and Renelle said they were taking of providing funding by way of 10% equity and 90% debt. According to the terms of the mortgage which Corbett Court gave to John and Renelle, this debt bore interest (albeit only marginally above the cost of funds to John) and was said to be repayable in three years. The arrangement which John and Renelle told the siblings on 7 May 2012 that they were taking was less burdensome than the 100% equity contribution the siblings were asked to make, and make on the basis that it may not proceed unless they all subscribed. No satisfactory explanation has been offered for this difference in treatment between the Share Offers made to the siblings and the mixture of equity and debt funding used by John and Renelle. It is true that John and Renelle controlled whether or not they demanded repayment of the debt so that they ran less risk of insolvent trading by incurring that debt than they would have if they had offered the same terms to John’s siblings who would expect to be repaid on the due date. However, that is not an explanation John offered and it may well have been possible to craft a solution which did not give rise to the same concerns if John had not, at the same time, been seeking to leverage a resolution of how the loans from the estates would be dealt with. Conclusion on fairness John said that the siblings would not fund Corbett Court. In light of the pleaded Understanding which was supported by evidence given by his siblings, John might be right; that is something we cannot know. Had the siblings been provided with expert advice as to whether the Share Offers were in the interests of minority shareholders and/or had they been offered the opportunity to subscribe for shares and lend money to Corbett Court on the same basis as John and Renelle (assisted by expert advice), it may be that some of them would have provided their share of funds or at least participated in shareholder meetings. The very fact of independent advice may have made all of the siblings more willing to engage with and trust John. Whether or not that is true, all members of Corbett Court had the right to be properly informed, to be treated equally with the directors in relation to the basis on which they were offered the opportunity to invest in the Company and the right to have the directors use their power to issue shares for a proper purpose. In the circumstances it is not fair to the minority shareholders that John and Renelle should rely on articles 38(1) and (2) to make the Share Issue under article 38(3) and the impact of the Share Issue is unfairly prejudicial to them as shareholders having regard to the massive diminution in their capacity to share distributions of dividends or capital by Corbett Court and the loss of the power to veto resolutions at shareholders’ meetings when acting together. That is an ongoing detriment. I am satisfied that Paul has made out a claim under s 232(e) that the Share Issue was oppressive to, unfairly prejudicial to, and unfairly discriminatory against both himself and the six other minority shareholders.

Ratio Decidendi

Legal Principle Established

In the plaintiff’s written outline of opening submissions and in opening submissions, Counsel for Paul advised that Paul did not press the claim set out in ASOC [16] that the Share Issue was invalid because it did not comply with articles 38(2) and 95. Paul’s Counsel did not indicate that the claim for declaratory relief that the Share Issue was invalid had been abandoned. Paul’s Counsel submitted that the constitutional invalidity of the Share Issue was relevant to establishing that the Company’s affairs have been conducted in a manner which is oppressive or contrary to the interests of members as a whole and therefore made submissions on that issue. s 232 Corporations Act The Court’s powers to make orders under s 233 of the Corporations Act derives from s 232 if the Court is satisfied that:(a)the conduct of a company’s affairs; or(b)an actual or proposed act or omission by or on behalf of a company; or(c)a resolution, or a proposed resolution, of members or a class of members of a company;is either:(d)contrary to the interests of the members as a whole; or(e)oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.Conduct of case Paul conducted a case which was broader than the “central issue” of whether the Share Issue was an “act” of Corbett Court which fell within either s 232(d) or s 232(e) as pleaded. Paul’s case also relied on an unpleaded course of conduct of the Company’s affairs which included:(1)The claim that from the time of his father’s death John operated the Company for the benefit of himself and his interests by invoicing the Company in 2010 for an amount of $761,244 for work done over the preceding 10 years (and the invoice was in part paid), arranging for the Company to lend Renelle $237,318 and arranging for the Company to lend Corbett Constructions $207,572 in 2010 and to lend J & R Corbett Pty Ltd $308,816 in 2011;(2)The appointment of Renelle as a director on 2 February 2011 and the refusal to appoint Mr David Kenney of Hall Chadwick, chartered accountants and business advisers, as an independent director;(3)The context of the growing animosity between the siblings as a result of family provision proceedings commenced by John in May 2011 and discontinued in August 2012; and(4)The claim that John knew that his siblings could not afford to take up the First and Second Share Offers (the “Share Offers”). I do not consider the statement of claim was adequately pleaded to disclose the material facts on which Paul relied. I do not accept argument put by Paul’s counsel that it was not necessary to plead these matters as they went to remedy in relation to the pleaded ground of oppression that the Share Issue was made for an improper purpose and not to establish separate grounds of oppression. However, I am satisfied that John was in a position to (and did) address these issues which largely became apparent from evidence filed by Paul to which John responded with his own affidavits and with the affidavit of Mr Peter Campbell.CONTEXTJohn’s role in Corbett Court

Citation:	Corbett v Corbett Court Pty Limited, in the matter of Corbett Court Pty Limited [2015] FCA 1176
Parties:	PAUL HERBERT CORBETT v CORBETT COURT PTY LIMITED (ACN 062 978 545), JOHN KEITH CORBETT, RENELLE ANTOINETTE CORBETT and AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
File number:	NSD 1432 of 2012
Judge:	FARRELL J
Date of judgment:	4 November 2015
Catchwords:	CORPORATIONS – company established by parents for benefit of eight children – one child holds half of the shares and appointed a director with both parents – other seven children hold other half of the shares in the company – company built supermarket and shopping mall using loans from other companies controlled by parents and bank debt – other companies controlled by parents and father provide guarantees of company’s bank debt – parents die intestate – anchor tenant at shopping mall threatened to reduce rent due to level of vacancies in shopping mall – sole director of company refused to appoint independent director and appointed his wife as director instead – company sought to raise capital in order to fund building work to install second anchor tenant in shopping mall – shareholders either refused or ignored two offers to subscribe for shares – seven minority shareholders refused to attend meetings of company after wife appointed as director – shares issued to directors and loans made by them to fund building work to install second anchor tenant CORPORATIONS – oppression – whether issue of shares to directors contrary to interests of members as a whole or oppressive, unfairly prejudicial to or unfairly discriminatory against minority shareholder under s 232 of the Corporations Act 2001 (Cth) (“Corporations Act”) – whether share issue valid under company constitution – whether conduct of company prior to parents’ deaths gave rise to legitimate expectation that shareholding proportions would be maintained – whether the company needed funds at the time of the share issue – whether other sources of funds available – whether purpose of share issue was to dilute shareholding of minority – whether share issue was commercially fair – consideration of appropriate remedy to order under s 233 of the Corporations Act
Legislation:	Corporations Act 2001 (Cth) ss 232, 233
Cases cited:	Baloglow v Konstantinidis (2001) 11 BPR 20-721; [2001] NSWCA 451 Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359; [2008] NSWCA 95 Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 Catalano v Managing Australia Destinations Pty Ltd (2014) 314 ALR 62; [2014] FCAFC 55 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688; [1998] NSWSC 413 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672; [2001] NSWCA 97 Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512 Harrington v Sensible Funerals Pty Ltd (2007) 61 ACSR 359; [2007] SASC 66 Kirwan v Cresvale Far East…