Dr Leo Shanahan v Jatese Pty Ltd

[2018] NSWSC 1088

Supreme Court

New South Wales

Medium Neutral Citation:	Dr Leo Shanahan v Jatese Pty Ltd [2018] NSWSC 1088
Hearing dates:	15,16,17,22,23,24,28,29 May, 4,5 June 2018
Decision date:	16 July 2018
Jurisdiction:	Equity - Commercial List
Before:	Hammerschlag J
Decision:	The proceedings are dismissed.
Catchwords:	CORPORATIONS LAW – OPPRESSION – Corporations Act 2001 (Cth) ss 232-234 – whether the conduct of the affairs of a company, owned as to 43% by the plaintiffs and 57% by the defendants, was contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity – directors appointed by the majority excluded participation of the director appointed by the minority – director appointed by the majority requested and accepted payments contrary to the provisions of a Shareholders’ Agreement that directors not receive any remuneration – where there was unjustified delay in accrediting a new surgeon to conduct surgery at the hospital – directors appointed by the majority appointed a voluntary administrator at a time in which the company was not insolvent or likely to become insolvent in the near future; HELD that the affairs of the company were conducted contrary to the interests of the company as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity; RELIEF – plaintiffs’ claim compensation on the basis that they were induced to sell their shares to the majority at an undervalued price – appropriate approach to valuation; HELD not established that the shares were sold at an undervalue – entitlement to relief not established.
Legislation Cited:	Corporations Act 2001 (Cth)
Cases Cited:	Morgan v 45 Flers Ave Pty Ltd (1986) 10 ACLR 692 Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359 Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 84 ACSR 121 HNA Irish Nominee Ltd v Kinghorn (No 2) (2012) 88 ACSR 427 Re Cumberland Holdings Ltd (1976) 1 ACLR 361 Jenkins v Enterprise Gold Mines NL (1992) 6 ACSR 539 Saykan v Elhan [2004] VSC 83 Saykan v Elhan [2006] VSCA 320 Ubertini v Saeco International Group SPA Societa A Socio Unico (No 4) (2014) 98 ACSR 138 Shelton v NRMA Limited (2004) 51 ACSR 278 Rankine v Rankine (1995) 124 FLR 340 Kizbeau Pty Ltd v WG&B Pty Ltd (1995) 184 CLR 281 HTW Valuers (Central Queensland) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Sellars v Adelaide Petroleum NL & Ors (1994) 179 CLR 332
Category:	Principal judgment
Parties:	Dr Leo Shanahan - First Plaintiff Michael Shanahan - Second Plaintiff Joan Shanahan - Third Plaintiff Dr Stuart Saunders - Fourth Plaintiff Christine Saunders - Fifth Plaintiff   Jatese Pty Ltd ACN 105079436 - First Defendant Optident Pty Ltd - Second Defendant Canberra Eye Services Pty Ltd - Third Defendant Dr Iain Dunlop - Fourth Defendant Dr Martin Duncan - Fifth Defendant Dr Gagan Khannah - Sixth Defendant
Representation:	Counsel: I. M. Jackman SC and S. A. Goodman SC - Plaintiffs M. Ashhurst SC with D. F. Villa - Defendants   Solicitors: Thomson Geer - Plaintiffs Snedden Hall & Gallop - Defendants
File Number(s):	2014/317132

TABLE OF CONTENTS

INTRODUCTION

THE CRUX

THE PROCEEDINGS

THE FACTS

THE EARLY TIMES

THE TROUBLE BEGINS

THE 2009 PROCEEDINGS

THE DEED OF SETTLEMENT AND RELEASE, AND SHAREHOLDERS’ AGREEMENT

ESTABLISHMENT OF CANBERRA MICRO-SURGERY

THE APPOINTMENT OF TEGEN AND CHYNOWETH AS DIRECTORS

TEGEN AND CHYNOWETH TAKE CHARGE

DR FRUMAR

OPPRESSION

THE LEGAL PRINCIPLES

FINDINGS

RELIEF

VALUATION USING MODIFIED CME METHOD

VALUATION USING NRA METHOD

CONCLUSIONS

Judgment

INTRODUCTION

1. HIS HONOUR: Section 232 of the Corporations Act 2001 (Cth) (the Act) gives the Court power to make an order under s 233 if the conduct of a company’s affairs is contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.

2. References to sections are references to the Act.

3. Under s 233 the Court can make any order that it considers appropriate in relation to the company, including requiring a person to do a specific act.

4. An application under s 233 in relation to a company may be made by a person who has ceased to be a member of the company if the application relates to the circumstances in which they ceased to be a member. [1]

   1. Section 234(c).

5. Dr Leo Shanahan and Dr Stuart Saunders, the first and fourth plaintiffs (the minority), are ophthalmologists. The second, third and fifth plaintiffs are associated with them.

6. Dr Iain Dunlop, Dr Martin Duncan and Dr Gagan Khannah, the fourth, fifth and sixth defendants (the majority), are also ophthalmologists. They are cataract specialists. The first, second and third defendants are respectively associated with them.

7. Where I refer to the minority or the majority, I include those plaintiffs or defendants respectively associated with them.

8. The minority and the majority were, until 11 June 2015 when the majority bought out the minority, shareholders in, and members of, Canberra Eye Hospital Pty Ltd (CEH or the Company), which operated an ophthalmic medical facility.

9. The minority complain that the conduct of CEH’s affairs was contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against them.

10. They say that this conduct induced them to sell their shares in CEH to the majority for less than what they were worth.

11. They move the Court for an order that the majority compensate them for the difference between what they their shares were worth and what the majority paid for them.

THE CRUX

12. This dispute arises out of a complex course of dealings over a number of years. The crux of it can, however, be briefly stated.

13. The minority and the majority together owned a company which operated an eye hospital. The minority held 43% and the majority 57% of the shares. The most profitable activity for the hospital was cataract surgery. At some point, the minority stopped doing cataract surgery and then retired from practice altogether, so that they ceased to contribute to the revenue of the hospital.

14. The majority continued on doing surgery, mostly cataract. The minority continued to hold their shares and consequently earn revenue (described as a passive income) from the exertions of the majority.

15. The majority resented this situation. They wanted a succession plan, under which the minority’s shares would be transmitted to them or to other active surgeons who might come to work at the hospital.

16. The minority opposed any such plan, taking the position that they were entitled to keep their shares and to earn the attendant revenue.

17. The majority decided to do their surgery elsewhere. They established their own hospital. CEH was, as a result, put under financial strain.

18. The majority procured the appointment, as supposedly independent directors, of Mr Phillip Chynoweth and Ms Susanne (Susi) Tegen. Mr Chynoweth was Dr Dunlop’s erstwhile brother-in-law. Dr Dunlop was in a sexual relationship with Ms Tegen. Dr Saunders was the third director.

19. The only way forward for CEH to be profitable was to find new surgeons to work there. Dr Saunders identified Dr Kim Frumar as such a candidate. Remarkably, Dr Frumar (and Dr Saunders who was a keen supporter) encountered significant resistance over a period of nine months in trying to achieve Dr Frumar’s accreditation at the hospital.

20. Dr Frumar finally achieved accreditation on 29 October 2014. He planned to start operating at the hospital on 31 January 2015 or 7 February 2015.

21. On 27 January 2015, that is just before Dr Frumar was to start and at a time when CEH was clearly not insolvent, Mr Chynoweth and Ms Tegen used their power as directors to pass a resolution placing CEH into voluntary administration.

22. Dr Frumar passed away unexpectedly and apparently tragically on 10 April 2016.

23. The minority complain that the conduct of CEH’s affairs was contrary to the interests of the members as a whole or oppressive to them because:

• Mr Chynoweth and Ms Tegen preferred the interests of the majority, who appointed them, over the interests of the members as whole;

• Mr Chynoweth, Ms Tegen and the majority unfairly and unjustifiably undermined CEH’s prospects of returning to profitability by obstructing Dr Frumar’s accreditation; and

• Mr Chynoweth and Ms Tegen placed CEH into voluntary administration, when it was not insolvent or likely to become insolvent, for the collateral purpose of bringing about a sale of the minority’s share in the hospital to the majority.

24. For the reasons which I follow, I find that:

1. the complaint that CEH’s affairs were conducted contrary to the interests of the members as a whole and oppressive to, unfairly prejudicial to and unfairly discriminatory against the minority has been made out;

2. the minority were induced to sell their shares in CEH to the majority as a consequence of this;

3. the minority did not, however, receive less than what the shares, valued as if the conduct complained of had not occurred, were worth. In fact, they received more than what the shares were worth;

4. relief must be refused.

THE PROCEEDINGS

25. The trial occupied eleven hearing days.

26. Mr I. Jackman SC and Mr S. Goodman SC appeared for the minority. Mr M. Ashhurst SC together with Mr D. Villa of counsel appeared for the majority.

27. The Court Book of evidentiary material comprises 19 volumes containing over 5,000 documents. The Court was taken to a significant amount of evidentiary material. The affidavits approach 700 pages.

28. There was significant cross-examination, especially of the majority, Ms Tegen and Mr Chynoweth.

29. The Court received written and oral submissions.

30. I have had regard to all the arguments, but have not re-stated them.

THE FACTS

31. The case is fact heavy.

32. I have of course had regard to all of the evidence. I observed the witnesses under cross-examination. I have recounted only those facts which I consider necessary to facilitate an understanding of why I have made the findings I have made.

33. I have ordered the facts into two chronologies. The first chronology deals with the general history of the matter, excluding the detailed history of the accreditation of Dr Frumar and other doctors. The accreditation history is more readily understood in a discreet chronology, rather than interspersed with the general history. The general history is of course the context in which the Dr Frumar issue played out. I have included in the general history a few important events relevant to the Dr Frumar issue to assist in relating the two.

THE EARLY TIMES

34. In about 1974, Dr Shanahan and Dr Saunders started practising in association with one another in Canberra, Australian Capital Territory. In about 1985, they established a day surgery. From about 1988, they worked from a house at 13 Theodore Street, Curtin, which Dr Shanahan owned. They had consulting practices and performed ocular surgery.

35. In about 1990, Dr Dunlop started assisting them in their consulting practices and later with surgery. In about 1992, Dr Dunlop was invited to join them. Dr Saunders and Dr Dunlop each bought a one third interest in the Theodore Street house from Dr Shanahan.

36. In 1996, the day surgery was accredited by the Australian Council on Healthcare Standards. By all accounts, Dr Dunlop’s efforts in achieving this were significant.

37. In 1999, it was decided that the day surgery should be incorporated and named Canberra Eye Hospital. The establishment of a separate corporate entity facilitated contracts with private health funds.

38. To this end, the Company was formed in May 1999. Each doctor became a director and was issued one share.

39. In about 2001, Dr Shanahan stopped performing surgery. He continued to consult until about 2005.

40. In December 2001, Dr Saunders stopped performing surgery. He continued to consult until December 2015, when he too retired from practice.

41. In about 2002, with the assistance of builders and a real estate agent, Drs Shanahan, Saunders and Dunlop started developing a block of land at 14 Wormald Street, North Symonston, Canberra, as an eye surgery hospital and consulting rooms.

42. At about this time, Dr Duncan and Dr Khannah started working at the existing day surgery. They were studying for their higher medical degrees. They assisted Drs Shanahan, Saunders and Dunlop with surgical operations.

43. On 30 October 2002, Dr Khannah bought 19% of CEH. On 1 July 2003, Dr Duncan bought 19% of CEH. Each paid $285,000.

44. In 2003, a shelf company, Canberra Eye Hospital Management (CEHM), was acquired to be CEH’s management company.

45. In May 2003, Dr Shanahan’s son Michael Shanahan (who rendered accountancy services for the benefit of CEH) and Dr Khannah were appointed directors of CEH.

46. In October 2003, the building of the hospital at the North Symonston premises began.

47. On 1 July 2004, the shareholding structure of CEH was altered so as to consist of an issued share capital of 300 shares, held as follows:

• Dr Shanahan and his wife, Joan - 57 shares

• Michael Shanahan - 15 shares

• Dr Saunders and his wife, Christine - 57 shares

• Dr Dunlop and his company, the third defendant, Canberra Eye Services Pty Ltd (CES) - 57 shares

• Dr Khannah’s company, Optident Pty Ltd, the second defendant - 57 shares

• Dr Duncan’s company, Jatese Pty Ltd, the first defendant - 57 shares.

48. Shares were apparently issued to Michael Shanahan in recognition of the accounting services he provided without being remunerated.

49. In mid-2005, CEH moved from the Theodore Street premises and started functioning as ‘Canberra Eye Hospital’ (the hospital) at the North Symonston premises. The hospital consisted of a day surgery, consulting rooms and a laser centre. The laser centre was formally owned by another entity, CEH Laser.

50. On 18 July 2005, CEH (as tenant) took a lease [2] of the hospital (a strata scheme). There was a variation of lease in November 2007. CEH had options to extend the lease, which, if exercised, would have had its tenancy ending not earlier than 2027. About 60% of the leased area of the hospital was taken up by consulting rooms, 30% by the day surgery and 10% by the laser centre. There was also a small one bedroom caretaker’s flat, which was occasionally occupied by Dr Saunders when he needed to stay overnight in Canberra.

    2. The landlord was Blackwall Property Funds.

51. The hospital was officially opened by the Chief Minister of the ACT on 19 August 2005. By this time, Drs Shanahan and Saunders had practiced in Canberra for about 30 years. Dr Shanahan had ceased consulting and Dr Saunders was not consulting every day of the week.

52. CEH derived its income from charging patients for services associated with the preparation of patients for surgery, from provision of an operating theatre and nursing and support staff during the surgery, and from providing after surgery care and medications.

53. Surgery performed at the hospital fell broadly into three categories:

• cataract surgery;

• ocular plastic surgery, which includes surgical procedures on the eyelids, tear ducts and the eye itself; and

• intravitreal injections. [3]

  3. Injections into the vitreous, which is the jelly-like fluid that fills the eye.

54. In addition to the shareholder doctors, other ophthalmologists used the consulting space and the hospital. Over time, these included Dr Rohan Essex, Dr Phil Larkin, Dr Salim Okera, Dr Christiane Lawin-Bruessel and Dr Andrew Chang.

55. CEHM provided rooms, office staff, orthoptists, a practice manager, furniture and some equipment to doctors who consulted and performed surgery at the hospital. CEHM and CEH shared certain costs including internet services, electricity and cleaning.

56. CEHM paid rent monthly in arrears to CEH for the use of the consulting rooms under an undocumented arrangement.

THE TROUBLE BEGINS

57. When the hospital opened, Dr Shanahan was no longer practising and Dr Saunders was no longer doing surgery and had reduced his consulting times significantly. Although the minority were contributing little to the income of the hospital, their entitlement as shareholders to share in the profits remained unchanged.

58. This was a source of discontent for the majority. It is something which has rankled them throughout and has driven their dealings with the minority.

59. In September 2006, Drs Dunlop, Duncan and Khannah broached with Dr Saunders and Michael Shanahan the subject of an exit strategy for CEH. They suggested that if shareholders in the hospital did not continue to refer patients to the hospital, their shares should be bought back by CEH or sold to existing or future shareholders in CEH.

60. An exit strategy set out in two reports by CEH’s accountant was circulated in late 2006. It did not find favour with Drs Shanahan and Saunders. They took the position that the shareholders were the owners of the business and were entitled to receive a dividend for so long as it was carried on.

61. An exit strategy was again proposed by Dr Dunlop in early 2007. It too did not find favour with Drs Shanahan and Saunders.

62. Dr Dunlop recounted a conversation with Dr Shanahan, in which Dr Shanahan said he was not obliged to sell his shares, to which Dr Dunlop protested that this would mean that the active shareholders would fund Dr Shanahan indefinitely and when he died would continue to fund his heirs. Dr Shanahan did not demur to the proposition.

THE 2009 PROCEEDINGS

63. Drs Dunlop, Duncan and Khannah then purported, by notice, to convene an Extraordinary General Meeting of CEH to be held on 21 February 2008 for the purposes of passing a resolution for a quarterly performance fee be paid to ‘Executive Directors’, who were described in the notice as registered practising specialist ophthalmologists who either performed at least 15 surgical procedures in a financial year or referred at least 30 surgical cases to another Executive Director to be performed at the hospital. Self-evidently, this was intended to benefit the majority.

64. The minority engaged lawyers who demanded that the notice be withdrawn. The meeting did not go ahead.

65. On 7 August 2008, Dr Dunlop convened an Extraordinary General Meeting for 4 September 2008 to pass resolutions that:

1. Michael Shanahan and Dr Shanahan be removed as directors;

2. Michael Shanahan be removed as secretary; and

3. Dr Dunlop be appointed in his place as secretary.

66. The meeting was held and the resolutions were passed.

67. The directors of CEH were then Drs Saunders, Dunlop, Duncan and Khannah.

68. Dr Saunders says that at the meeting Dr Dunlop said:

This is about succession planning. We will get a valuation of the shares and make you an offer for your shares.

69. On 21 October 2009, the directors of CEH (Dr Saunders abstaining) purported to pass a resolution that directors be paid a quarterly performance fee derived from 50% of the gross income billed by CEH from the surgical activity of the directors, to be divided equally between the directors. This resolution (which was also clearly intended to favour the majority) was apparently not implemented.

70. On 19 November 2009, Dr Dunlop purported to convene an Extraordinary General Meeting to pass as ordinary resolutions the following resolutions:

1. That Directors be paid a fee described as a ‘Quarterly Performance Fee’

2. The Quarterly Performance Fee is to be determined at the end of each quarter by dividing the Directors Quarterly Revenue equally between the Directors.

3. The ‘Directors Quarterly Revenue’ is 50% of the quarterly gross income billed by the Company for the surgical activity of the Directors.

4. The balance of the quarterly gross income billed by the Company for the surgical activity of the Directors is to be retained, along with income derived from the surgical activity of non-Directors, and taken into account when determining any dividends to be distributed.

5. Dividends are to be distributed to shareholders in proportion to the number of shares held by each shareholder.

71. These resolutions were clearly intended to favour the majority.

72. On 10 December 2009, the minority brought proceedings against the majority in the Federal Court of Australia. Amongst others, they sought a declaration that the proposed resolutions required special resolutions and claimed that the resolutions were oppressive to, unfairly prejudicial to, or unfairly discriminatory against them within the meaning of s 232.

73. On 15 December 2009, at an Extraordinary General Meeting of CEH the proposed resolutions were purportedly passed as ordinary resolutions.

74. Dr Saunders says that sometime in 2010 he discovered that Drs Dunlop and Khannah had sold a refractive laser machine owned by CEH Laser to a new company formed by them and had commenced billing patients through the new entity using the Laser Centre name.

75. On 28 September 2010, Dr Dunlop resigned as a director and secretary of CEH.

THE DEED OF SETTLEMENT AND RELEASE, AND SHAREHOLDERS’ AGREEMENT

76. On 25 October 2010, after a mediation, the Federal Court proceedings were settled by the parties entering into a Deed of Settlement and Release, and a Shareholders’ Agreement.

77. Drs Dunlop and Khannah agreed to pay $90,000.00 to Drs Shanahan and Saunders, in instalments as a settlement in connection with the laser machine.

78. The Shareholders’ Agreement contains the following relevant provisions:

1   DEFINITIONS AND INTERPRETATION

1.1 Definitions

In this Agreement:

Founder Directors are those Directors appointed by the Founders under clause 4.

Founders means any of Dr Shanahan, Dr Saunders, Mrs Saunders, Mrs Shanahan and Mr Shanahan and any of their heirs, beneficiaries, trustees, Related Entities or Related Parties;

Supermajority Resolution means in relation to meetings of the Shareholders, a resolution passed by Shareholders that together hold more than 90% of the total voting rights of all Shareholders.

4    DIRECTORS

4.1    Appointment of Founder Directors

For so long as they hold any Shares, the Founders will jointly be entitled to appoint one Director to the Board as a Founder Director, and may remove that Director and appoint another Director by written notice to the Company.

4.2    Remuneration of Directors

The parties agree that, from 1 January 2010, Directors will receive no remuneration from the Company for acting in their capacity as Directors.

5   DISTRIBUTION POLICY

5.1    Net Profit of the Company

The parties agree that, from 1 January 2010, 50% of the net profits of the Company generated from:

(a)    the surgical operations performed-by Shareholders; and/or

(b)    referrals for surgery made by Shareholders,

will be paid to those Shareholders, apportioned according to the fees generated by their surgical activity and/or their referrals for surgery.

5.2    Distribution

The Shareholders will procure that, to the extent permitted by law, the Company distribute the remaining net profits of the Company, on a quarterly basis, to the Shareholders as fully franked dividends.

6    DECISION MAKING

6.1    Matters Requiring Supermajority Approval

The Company must not, and each Shareholder must, by exercise of its Shareholder Control, ensure that, except by Supermajority Resolution, the Company may not:

(a)    remuneration: save as provided in clause 5 above, pay any remuneration, commission, fee, distribution, compensation or any other payment whatsoever to the Directors, Shareholders or any of their Related Parties, Related Bodies Corporate or Related Entities;

(b)   Equity Securities: issue, allot, redeem, purchase, buy-back or grant options over any Equity Securities or re-organise the share capital of the Company in any way, including by way of capital reduction;

(c)   liquidate, etc: voluntarily liquidate, wind up, merge its operations or Dispose of all or a substantial part of its Business or assets; or

(d)   approve any change to dividend policy: approve any amendment to the distribution policy referred to in clauses 5.1 or 5.2.

ESTABLISHMENT OF CANBERRA MICRO-SURGERY

79. The Federal Court litigation had concluded. But the underlying grievance of the majority that profits of the hospital continued to be distributed to the minority remained.

80. Dr Dunlop’s view (which was apparently shared by Drs Duncan and Khannah) was that the dispute was intractable and the only way forward was to establish a new hospital where the profits generated by carrying out ophthalmic surgery would be shared amongst those shareholding doctors who generated the work.

81. The majority agreed amongst themselves to establish a new hospital. They established Canberra Micro-Surgery Pty Ltd (CMS), of which they became shareholders and directors.

82. In early November 2010 Drs Duncan and Khannah resigned as directors of CEH. On 16 February 2011, Michael Shanahan was appointed a director of CEH.

83. By the end of 2012, it was anticipated that CMS would be ready to start in July 2013. Dr Dunlop approached CEH’s hospital manager and undoubtedly a valued employee, Ms Gabby Moreland, to come over to CMS.

84. On 14 November 2012, the majority made a written offer of employment to Ms Moreland. She accepted with a start date of 4 February 2013. On 25 November 2012 she resigned from CEH with effect from 21 December 2012.

85. An issue arising out of Ms Moreland’s moving to CMS arose with respect to her continued access to emails directed to CEH. There was correspondence between lawyers.

86. At or about this time, Kate Symon, an accountant working for CEH, also resigned. She too joined CMS.

87. On 6 February 2013, the majority gave written notice to CEH that from 1 July 2013 they intended performing the majority of their cataract surgery at CMS and that they expected that their other surgery and intravitreal injections would be performed for the foreseeable future at both CEH and CMS. Cataract surgery was the most profitable for the hospital.

88. From about this time, Dr Saunders started trying to find new doctors to perform cataract surgery at the hospital. He spoke to Drs David Tridgell, David Dickson and Kate Reid but they declined. He also spoke to Dr Maciek Kuzniarz who was working at the Calvary Clinic in the ACT. Ultimately, Dr Kuzniarz did operations at CMS. Dr Saunders spoke to Dr Kerrie Meades, but this went no further. He had conversations with Drs Okera, Lawin-Bruessel, Larkin and Essex, all of whom ultimately moved to CMS or Calvary hospital.

89. On 16 May 2013, Denise Nichols, CEH’s Director of Nursing, resigned. She too went over to CMS.

90. On 3 June 2013, CEH appointed Ms Fiona Carruthers as hospital manager.

THE APPOINTMENT OF TEGEN AND CHYNOWETH AS DIRECTORS

91. Dr Dunlop says that towards the end of June 2013, he formed the view that the then current directors of CEH were unable to bring an independent mind to the best interests of CEH and that the shareholders were conflicted by their own self-interest and were incapable of putting the past history of disputes between shareholders behind them. He believed that the long-term interests of CEH and its shareholders meant it was necessary to appoint independent directors to the CEH board.

92. He therefore proposed the appointment of Ms Tegen and Mr Chynoweth to the CEH board.

93. Ms Tegen and Mr Chynoweth were, however, anything but independent. I do not accept Dr Dunlop’s evidence that he thought they were. He is far too intelligent a man to have thought so. To the contrary, in my view, his true motivation for selecting them was that he anticipated they would favour the interests of the majority over the minority. I also do not believe that he was motivated by CEH’s long term interests.

94. Dr Dunlop had been the President of the Royal Australian and New Zealand College of Ophthalmologists. In that capacity, he had interviewed Ms Tegen for the position of CEO of that organisation, a position to which she was appointed. In his lengthy principal affidavit, [4] Dr Dunlop explained why he thought Ms Tegen was appropriate to be appointed a director of CEH. His affidavit, however, did not disclose that they were then in a sexual relationship. In his evidence, Dr Dunlop described their relationship as ‘romantic.’ Ms Tegen described it as a ‘nice distraction.’ She ‘slept with him a few times’, she found him ‘interesting and nice’ but would only see him ‘now and then’ and she was not interested in any long-term relationship. Either way, these are not the hallmarks of independence. Ms Tegen gave unconvincing evidence that she never discussed CEH business affairs with Dr Dunlop.

    4. Sworn 16 November 2016.

95. Dr Dunlop and Mr Chynoweth had known each other since the early 1980s. They would see each other socially and occasionally played golf together. Mr Chynoweth’s wife was the sister of Dr Dunlop’s ex-wife.

96. Dr Dunlop says that he explained to Ms Tegen, amongst others, that she would not be remunerated and that he gave a similar explanation to Mr Chynoweth.

97. It should be observed that there was no legal requirement for them to be independent. They could never properly be said to have been independent because they had associations with Dr Dunlop. I take Dr Dunlop, in his use of the term ‘independent’, to have meant impartial.

98. Their duty was to act in the interests, and for the benefit, of CEH. What they did, however, was to take sides with the majority against the minority rather than act in the interests of CEH.

99. As appears below, Mr Chynoweth ultimately asked the majority for money and was, without the minority ever being told, paid a not insignificant sum by the majority. This is a hallmark of partiality.

100. On 28 June 2013, Dr Dunlop convened an Extraordinary General Meeting of CEH to be held on 24 July 2013 at the offices of Snedden Hall & Gallop, the solicitors who have, in these proceedings, acted for the majority. The Notice of Meeting identified the following as proposed resolutions:

1. That the directors of the Company, Stuart Hunt Saunders and Michael

John Shanahan be removed as directors with effect from the close of the meeting.

2. That Susanne Tegen of PMB 38 Fox Lane, Furner SA 5280 and Philip James Chynoweth of 91 Buxton St, Deakin 2600 be appointed as directors of the

Company with effect from the close of the meeting.

101. The financial statements for CEH as at 30 June 2013 [5] show that for the year the hospital earned income of $5,489,418 and incurred expenses of $3,743,603 resulting in an operating profit of $1,745,815. It had retained profits at the end of that year of $1,650,145 and net assets of $1,650,742.

     5. Recorded in the financial statements as at 30 June 2014.

102. Between 5 July and 24 July 2013, the majority and the minority corresponded through their respective lawyers about the validity of the proposed resolution removing Dr Saunders.

103. The meeting took place as scheduled. On the votes of the majority, resolutions were passed removing Dr Saunders and Michael Shanahan as directors of CEH and appointing Ms Tegen and Mr Chynoweth.

104. Under clause 4.1 of the Shareholders’ Agreement, the minority (as Founders) had the right to appoint a director.

105. On 25 July 2013, the minority, through their solicitors, gave notice that Dr Saunders was appointed as a director and that he appointed Michael Shanahan as his alternative. It is difficult to discern a rational or legitimate reason for the removal of Dr Saunders.

TEGEN AND CHYNOWETH TAKE CHARGE

106. From the outset, Ms Tegen and Mr Chynoweth deliberately excluded Dr Saunders and his alternate from participation as a director in the affairs of CEH. They purported to act as the Board of CEH, without his participation or that of his alternate. Where I refer to Dr Saunders not being included (or being excluded) this includes Michael Shanahan as his alternate unless otherwise stated.

107. An early example of this is that on 8 August 2013 they directed a letter to the solicitor then acting for CEH, Mr Werksman of Holding Redlich, purportedly on behalf of the Board of CEH, in the following terms:

The Board of The Canberra Eye Hospital Pty Ltd wishes to inform you that any past discussions with and instructions to you re the IT, emails and/or property previously under Ms Gabby Moreland’s jurisdiction as Manager of the Hospital are no longer of concern.

The issues identified have been unfounded and are of no relevance to the future of The Canberra Eye Hospital.

We therefore advise you to close the case.

Kind regards

The board of Directors

Mr Phillip Chynoweth

Mr Michael Shanahan for Dr Stuart Saunders (on leave until end August 2013)

Susanne Tegen

Canberra Eye Hospital Pty Ltd

108. Dr Saunders was away at the time. On his return, he wrote to Ms Tegen complaining that he had not been informed of any resolution to send the letter and had not been consulted about it. He added that he was looking forward to working with her in the interests of all the shareholders.

109. The letter purports to be under the hand of the board of directors, but Michael Shanahan was not shown a copy of it before it was sent. He says if it had been shown to him, he would have disagreed with the statement that the issues were unfounded or of no relevance to the future of CEH.

110. Other examples of exclusion are described later.

111. The approach to Ms Moreland reflects the partiality of Ms Tegen and Mr Chynoweth to the interests of the majority. There is no evidence that Ms Tegen or Mr Chynoweth sought to obtain from Mr Werksman the results of his investigations concerning Ms Moreland.

112. On 13 December 2013, Mr Werksman wrote to the majority copied to Ms Tegen and Mr Chynoweth, amongst others, that the minority had email correspondence in which it was clear that during Ms Moreland’s employment with CMS she diverted potential employees of CEH to the service of CMS.

113. In my view, Ms Tegen and Mr Chynoweth’s desire was to exonerate Ms Moreland, irrespective of the merits of the complaint, for the benefit and convenience of the majority as the owners of CMS. Ms Moreland was clearly a valued employee first of CEH and then of CMS.

114. In August 2013, Drs Dunlop, Duncan and Khannah ceased cataract surgery at CEH. At the same time Drs Okera, Lawin-Bruessel, Larkin and Essex also stopped surgery at the hospital and started doing it at CMS or Calvary Clinic.

115. In early September, Ms Tegen and Mr Chynoweth, without the participation of Dr Saunders (and clearly without his knowledge), retained a solicitor, Mr Della Marta of Aitken Lawyers, to advise them and CEH on various matters. This included advising CEH in relation to obligations owed by directors and in relation to legal and commercial aspects as they arose.

116. Mr Della Marta provided a six-page advice addressed to them as directors of CEH on 9 September 2013. There is no suggestion that Dr Saunders was ever made privy to it or given the benefit of it.

117. An informal meeting of shareholders was planned for 10 September 2013, but had to be cancelled because of fog in Canberra. Nevertheless, Ms Tegen and Mr Chynoweth had an impromptu meeting with Dr Duncan during which, amongst others, they gave him an overview of what had been going on over the past few months. Dr Saunders was never favoured with any such overview.

118. CMS officially opened on 20 September 2013.

119. On 24 September 2013, after speaking with Dr Saunders, Mr Chynoweth wrote to Ms Tegen including the following:

I do not think we should be exerting ourselves to find options to make the CEH stay afloat when the answer lies, and in control with, the current shareholders. They should deliver the 'break even case' then we can work on the upside. What do you think?

120. She responded, on the same day, including the following:

I tend to agree with you. I can also understand why those doctors working are not happy about the way those who don’t work are receiving an income – so while some of the doctors are willing to work for break even, they will also say why should we when the other shareholders are doing nothing to work towards it.

121. On 15 October 2013, Ms Tegen and Mr Chynoweth had a telephone conference with Mr Della Marta during which they discussed the financial position of CEH and possible options to be set out in a briefing document for shareholders. Dr Saunders was not included.

122. On 17 October 2013, Mr Della Marta had a telephone conversation with an insolvency specialist, Mr Jamieson Louttit. They discussed aspects of a members’ voluntary liquidation and voluntary administration. In this context, Mr Della Marta obtained from Mr Chynoweth or Ms Tegen a copy of CEH’s lease of the hospital.

123. Mr Della Marta rendered his account to CEH for the attention of Ms Tegen and Mr Chynoweth. Dr Saunders was not included in these dealings.

124. A shareholders’ meeting was scheduled for 13 November 2013.

125. On 2 November 2013, Mr Chynoweth wrote to Ms Tegen (but not to Dr Saunders) providing ‘an outline for our report for the shareholders (sic) meeting’. The headings included Financial Position and Outlook, Hospital Accreditation, Governance and Human Resources. Under Governance, the following item appeared:

Changes required to shareholders agreement (sic) and arrangements in the interests of the development of the Hospital

126. On 7 November 2013, Dr Saunders wrote to the majority, Ms Tegen and Mr Chynoweth setting out matters which the minority wished to discuss at the meeting with a view to obtaining agreement between all the shareholders as to the future direction of CEH. The subjects were entirely appropriate for a shareholder and director to raise and the tenor of the letter was unobjectionable. The subjects included what Dr Saunders considered might be done to ensure that the business carried on in a profitable manner to the benefit of all shareholders. He remarked that the new directors did not appear to have made any serious attempt to identify new surgeons who would be willing to conduct their practices at CEH. He asked whether the majority were prepared to return to operating at CEH.

127. Ms Tegen’s reaction was swift. It is difficult to justify as befitting a director in her position. She wrote to Mr Della Marta that she could no longer work with Dr Saunders on the board and that there was a clear breach in governance. It emerged during her evidence that she took offence that Dr Saunders appeared to have written the letter with legal help. This was despite the fact that she and Mr Chynoweth were throughout taking advice from a lawyer without Dr Saunders’ knowledge.

128. There was a board meeting on 13 November 2013. Before this meeting, Ms Tegen and Mr Chynoweth obtained written advice on a series of issues from Mr Della Marta. No doubt on their instructions, he produced an Executive Summary for the shareholders’ meeting. The advice runs to nine pages, the Executive Summary to ten pages. The Executive Summary deals in some detail with the financial position of CEH, fundamental issues facing it, and possible ways forward. It also deals with governance issues and a revised strategic direction for the hospital. These instruments were brought into existence without the participation or knowledge of Dr Saunders. They were presented to him at the directors’ meeting. The benefit of his input was not obtained. Dr Saunders says that Mr Chynoweth read quickly through the points contained in the Executive Summary and he did not have an opportunity to read the documents during the directors’ meeting.

129. The shareholders’ meeting took place immediately after the directors’ meeting. There was a professional note-taker apparently arranged by Ms Tegen and Mr Chynoweth. The notes taken were sub-standard.

130. As at 22 November 2013, CEH’s Medical Advisory Credential Committee (MAC) consisted of Dr Dunlop, Dr Duncan, Ms Carruthers and Dr Thomas Lo (Dr Lo became ill and was unavailable for the credentialing committee meeting on 4 September 2014 referred to later. He subsequently passed away).

131. On about 29 November 2013, Dr Benjamin Burt, an ophthalmologist based in Bendigo, Victoria, specialising in ocular plastic surgery, applied to CEH for accreditation. Dr Burt did have experience in cataract surgery but proposed to practice predominately in extraocular surgery at CEH. Dr Burt was identified by Dr Saunders.

126. On 3 December 2013, Mr Chynoweth wrote to Ms Tegen (but not to Dr Saunders):

Here's what I think we should do:

1. we send a draft of the new shareholders agreement terms to the "active" [6] shareholders for comment prior to a meeting before Christmas.

2. We send the same to the “inactive” [7] shareholders for reference and with a request for what their contribution will be to the future income and profitability of the hospital.

3. The changes to the shareholders agreement (sic) will include the percentages that will encourage more work through the hospital as well as succession rights and the need for insurance covers in the event that existing active shareholders cannot operate due to illness or death.

We can get simon [8] (sic) to help put this together.

For the minutes.. Fiona [9] is asking Joan for her “statement”. I can make the changes to my statements, you should do the same for yours. Send a draft to lain, Martin and ? (sic) To update the accuracy of their record before we send on to the others to do the same.

After this we can file the minutes.

6. This is a reference to the majority.

7. This is a reference to the minority.

8. This is a reference to Mr Della Marta.

9. This is a reference to Ms Carruthers.

133. On 3 December 2013, Mr Chynoweth wrote to Ms Tegen (but not to Dr Saunders):

I am flying out tomorrow and will be back later next week. I am thinking about having a session with Iain (and others) maybe thursday evening next week in Canberra? I will send out an email to Iain, Martin and Khannah in the coming days when I have had a chance to work through the shareholders agreement. I will send through my workings to you before we send them out. Sound workable?

Can you send through a copy of the shareholders (sic) agreement? I am assuming that it will be a scanned version.

We should develop some options and present these in spreadsheet form so that everyone can work out the impact of the proposed changes.

I expect that the “inactive” shareholders will not agree to the changes but I think it is important that we get their ‘lock back’ (sic) at the same time we get their ‘null response’ on assistance with the business of the hospital.

That then releases us to justify decisions in the Hospitals interest down the track.

134. On 9 December 2013, Ms Tegen wrote to Mr Chynoweth (but not to Dr Saunders) relevantly:

Hi Phil

We will need to work on the following as well;

- meeting with surgeon shareholders to discuss options

- meeting with board

- meeting with all shareholders

135. On 10 December 2013, Dr Dunlop circulated comments on draft minutes for the 13 November 2013 meeting amongst the majority.

136. On 11 December 2013, Ms Tegen wrote to the majority and Mr Chynoweth (but not the minority):

As feedback to the comment made by lain, we agree and are also not happy with the type of minutes we received, despite brief. That being said we have what we have, and the outcomes we took away from the meetings are;

1. That we hold another meeting with the surgeon shareholders to discuss their involvement in the business moving ahead ie what are people to do in terms of work

2. That we discuss with the shareholder surgeons what would be workable in terms of a shareholders (sic) agreement

3. That we discuss with the non doctor (sic) and non operating (sic) or working surgeons what contribution they will make to bring funding into the CEH business

4. That we bring to te (sic) table of all shareholders any offer that migt (sic) be made by one of the two groups i.e. Buy out, review of shareholder’s (sic) agreement etc

We are in the process of following up on these now.

Salim [10] adn (sic) Martin, please could you just check your areas and add to the document that you have been forwarded from Iain. Phil is waiting for feedback from the non surgeon (sic) shareholders and they will be added when he receives them. We are aiming to send the minutes out prior to the end of the year.

10. This is an incorrect reference intended to refer to Dr Khannah.

137. On 14 December 2013, Mr Chynoweth wrote to Dr Dunlop, copied to Ms Tegen (but not to the minority):

lain,

I have attached a copy of the first iteration of the business model for CEH. I have not been able to refine the model to calculate casual staff requirements as case loads increase, but this can be developed later.

Changes to the shareholder percentage allocation in CEH Shareholders Agreement

• The attached model is a tool to work out the impact in changes in profit distribution, case load mix and revenue break even requirements.

• Please have a look. My recommendation is that the 'active shareholder' allocation should be increased from 50% to 80% or 100%. Please talk with the other majority shareholders to determine what % you would accept to encourage further work at the hospital.

• The current break-even level (based on current cost assumptions and procedures) is $82,729 per month which means (for example) 20 plastics, 94 Injections and 7 cataracts.

• At current revenue levels, the distribution of profit is so small to render the discussion as of little interest. So we need to reach a balance between percentage profit allocation and increase in the level of income to motivate more activity at the hospital.

Other changes to shareholders agreement

• We would like to recommend ‘succession rights’ or arrangements that provide for the transfer of shares when shareholders no longer provide work for the hospital - for what ever reason. This ideally should be similar to arrangements present in other shareholders agreements used by other hospitals. It would be reasonable for CEH to accept arrangements that are already in use by the profession 'at large'.

• We would like to include insurance arrangements to protect the hospital and shareholders in the event of illness, physical impairment or death.

• We would like to include arrangements which define the share price when shareholders want to sell their shares and who may purchase these shares.

Future development of the CEH

• It is the view of two of the directors of the hospital (S Tegen and myself) that there is a role for CEH as a specialist hospital that is equipped for procedures that complement and 'work with' the Canberra Microsurgery and other hospitals in Canberra. There is more than enough demand for opthalmic (sic) health care in the ACT region and the current business plan review will allow us to reposition the hospital to fit a revised niche in a changing health environment. We would like to work with the majority shareholders to define this role in the coming months.

• An example we discussed is the growing demand for retinal specialists and a facility based in canberra (sic) for them to operate.

Shareholders meeting minutes

• We intend to send out a copy of the transcription of the shareholders (sic) meeting. It has taken us some time as the quality of the record was not as good as we had hoped and it is taking time to get feedback from all people present. We will send out a summary (as you suggest) included with the transcript with attachments when it is ready.

• This is an important record of the current status of the business as well as a clear identification of issues that are currently in dispute. We will be working with everyone to review remedies and will rely on a reasonable compromise that is in the best interest of CEH and its stakeholders.

Phil

138. In late 2013, Mr Chynoweth asked the majority to compensate him for his time and effort as a director of CEH. He approached Dr Dunlop who talked to Drs Duncan and Khannah. Drs Dunlop, Duncan and Khannah agreed to pay Mr Chynoweth and bear that burden equally. Details of the payments are set out below.

139. None of this was disclosed to the minority. Mr Chynoweth and the majority did not disclose it in their affidavit evidence.

140. More than this, cl 4.2 of the Shareholders’ Agreement is an agreement between the minority and the majority that directors of CEH were to receive no remuneration for acting in that capacity.

141. The payments were made through Canberra Eye Laser Eye Services Pty Ltd, which is owned by the majority, to Mr Chynoweth’s company Kizmet Consulting Group Pty Ltd (Kizmet). The evidentiary material concerning these payments is incomplete. Revealingly, it includes tax invoices rendered by Kizmet for consulting services ‘for Canberra Micro-Surgery.’

142. At least $84,000 was paid by the majority for Kizmet as follows:

17 December 2013	$16,000
1 January 2014	$16,000
32 January 2014	$8,000
20 March 2014	$8,000
26 June 2014 [11]	$16,000
5 August 2014	$8,000
19 November 2014	$12,000

11. There is evidence consistent with, but not sufficient to establish, payment of an additional $16,000 on this date.

143. These circumstances, on their own, warrant a finding of oppressive conduct. Mr Chynoweth used his position as a director of CEH to ask for and obtain, secretly, money from one faction contrary to the Shareholders’ Agreement governing the relationship between the two factions. It was symptomatic of his conscious alignment with the majority and his lack of integrity when it came to dealing fairly with the minority. The making of the payments by the majority displaces any suggestion on their part that they believed that Mr Chynoweth was independent or that he would act in any way other than to benefit their interests.

144. On 1 February 2014, Dr Frumar submitted his accreditation application to CEH for appointment as a Visiting Medical Officer (VMO).

145. The MAC (Dr Duncan, Dr Lo and Ms Carruthers – there were apologies from Dr Dunlop) met on 5 February 2014. They accepted Dr Burt’s credentials, but requested additional information and clarification from Dr Frumar.

146. Dr Burt’s appointment was confirmed in writing on 6 February 2014.

147. On or about 21 February 2014, Dr Angelo Tsirbas applied to CEH for accreditation as a VMO. Dr Tsirbas is not a cataract surgeon. His predominant interest is ocular plastic surgery.

148. The financial statements of CEH for the year ended 30 June 2014 disclose that its total income was $1,167,802 [12] and its total expenses $1,356,625 [13] resulting in an operating loss of $188,823. [14] Its retained profits at the end of the financial year were $978,974. [15]

     12. Down from $5,489,418 for 2013.

     13. Down from $3,743,603 for 2013.

     14. Compared with an operating profit for 2013 of $1,745,815.

     15. Down from $1,650,145 for 2013.

149. On 18 August 2014, the majority gave notice to CEH of their intention to re-locate their intravitreal injection procedures to CMS with effect from 20 October 2014.

150. On 25 August 2014, without the knowledge of Dr Saunders, Mr Chynoweth and Mr Della Marta met with Mr Louttit. Mr Louttit’s file note shows that, amongst others, voluntary administration was discussed.

151. On 26 August 2014, Ms Tegen and Mr Chynoweth had a telephone conference with Mr Della Marta and Mr Louttit. Dr Saunders was not included.

152. On the same day, Mr Louttit sent Mr Della Marta a letter addressed to Ms Tegan, Mr Chynoweth and Dr Saunders enclosing documents for the appointment of an administrator. The evidence suggests that this was on-sent by Mr Della Marta to Ms Tegen and Mr Chynoweth but not to Dr Saunders.

153. On 29 August 2014, Mr Della Marta spoke to Mr Louttit on the phone. Mr Della Marta’s fee note records that Mr Louttit advised that ‘[there] probably should not be appointment of administrator just yet, perhaps orderly winding up of the business.’

154. A meeting between Ms Tegen, Mr Chynoweth and the majority was arranged for 2 September 2014. The minority were not invited.

155. On that day, Ms Tegen wrote at length to the majority and Mr Chynoweth (but not the minority) about the options which they ‘as Directors’ (apparently to the exclusion of Dr Saunders) believed they had for the majority to consider. The letter included the following:

Dear All,

As you are aware, both Phil and I as Directors of the CEH will be providing Michael Shanahan a financial update and the options that we believe we need to consider for the CEH. He will intern (sic) pass this information on to the remainder of the shareholders so that they can consider the situation and the business's future.

We provide you with the options that we believe we have for you to consider, including the cash flow projections until the end of October. As mentioned, we still believe that you remaining at the CEH until the end of the year would assist us with the options we have open to us as Directors.

Following are points outlining the situation and options we have available to us as Directors.

10. The options available to the hospital include:

(a)    Continue the business in an attempt to make it financially viable by engaging additional doctors to replace the work provided by Drs Dunlop, Duncan and Khannah to get back to the financial state CEH is currently. This would involve a review of the current composition of the credentialing committee and a focus on hiring 3 to-4 new doctors by the end of the year (to replace the cash-flow required beyond the replacement of the resigned doctors and make a considerable profit) and sign the head lease over to the 70% lessee.

(b)    Sale - The CEH seeks a sale of the business or a 3rd party take over the 30% lease obligations current held by CEH, with the head lease moved to 70% lessee. The CEH winds up current operations in preparation for re-lease/sale.

(c)    Close down the business - The shareholders of CEH seek a voluntary members liquidation and the CEH operations are wound up and obligations paid out and the head lease signed over to the CEH Consulting rooms (70%) lessee.

11.    If the shareholders cannot agree on a path, the Directors will eventually be forced to place CEH into voluntary administration. This will occur once the directors come to the view that CEH is insolvent (i.e. unable to pay its debts when and as they fall due) or likely to become insolvent. Before CEH ceases to be in a position to pay its debts when they fall due the company should be placed in the hands of an administrator.

In the interim, we believe that we need to move the head lease liability (the largest risk and ongoing expense) from the CEH to the majority tenant (70%) and as such will make a strong recommendation that the lease be taken over by the CEH consulting rooms, seeing that CEH only have 30% of the rental costs.

We look forward to your considerations and assistance with a path forward.

kind regards (sic)

Susi Tegen

Director

156. On 3 September 2014, Dr Duncan wrote to Ms Tegen, Mr Chynoweth and the majority:

Hi Susi and Phil

Thank you for all of this and for your counsel on the situation last night. Sorry I don’t have a better idea about what should happen to CEH, as was evident when you asked me to start the discussion!

Here are some more thoughts on the matter. It's a possibility that one of the public hospitals would be keen to relocate some of their day case ophthalmology lists to CEH, as they could just walk in and start. Calvary would be the main contender, but even TCH might be interested for their VR cases. I presume they would bring their own nurses and doctors. We could supply machinery and disposables for a desirable basic price. Perhaps Fiona could estimate an appropriate fee, if others agree. At least 2 Calvary public surgeons (Dr Okera and myself) are familiar with CEH and would be happy to do public lists there. I will discuss with Calvary admin tomorrow. It has to be a cost saving for them and we could make a little bit to keep things going.

Another option is that we could rent the space out to someone else, non-ophthalmic. It would be a good dental surgery, or even a GP's rooms, but the lease is only 3 more years. I'm not sure about Drs Tsirbis and Burt being there, it could introduce more complexities. I think any private ophthalmic use is unpalatable for any of the CEHM doctors.

With the transfer of the Head lease to CEHM we would need to have permission from all the Directors of CEHM, including Drs Lawin Bruessel and Okera. I don’t think ID GK and I can decide for them on this potential liability. It would help to have an ironclad agreement upfront (trust fund or joint account) for CEH to cover the rent, as discussed last night. I am the designated liaison for the landlord for discussions on transfer of this Head Lease and I wouldn’t be keen to go ahead without an agreement in place either. Can we work on this asap?

I am aware of your nervousness as Directors in this situation and your eagerness to depart. I would urge you to please hold on for a bit longer, we are not yet insolvent, (I think?).

Also Susi could you please note the comment in red below and amend?

Once again thank you both very much,

Martin Duncan.

157. There is no evidence that Ms Tegen and Mr Chynoweth gave the benefit of their counsel to the minority, as they apparently did to the majority, as recorded by Dr Duncan.

158. There was a directors’ meeting on 3 September 2014 attended by Ms Tegen, Mr Chynoweth and Michael Shanahan. Ms Carruthers was also in attendance. At the meeting, Ms Tegen and Mr Chynoweth presented to Michael Shanahan a document entitled ‘Following are points outlining the situation and options we have available to us as directors.’ The document, it seems, was an extract of the document which Ms Tegen had sent to the majority (but not the minority) on 2 September 2014. Michael Shanahan was not shown the document before the meeting and did not have the opportunity to read it until after the meeting.

159. According to Michael Shanahan’s notes, a significant part of the meeting was devoted to the issue of credentialing and Dr Frumar. The minutes of the meeting do not reflect this.

160. Michael Shanahan’s notes, but not the minutes, record that Mr Chynoweth said that if an administrator was appointed the Shareholders’ Agreement was not applicable.

161. It will be observed that both in Ms Tegen’s 2 September 2014 letter and Dr Duncan’s 3 September 2014 letter, there is reference to the transfer of the Head Lease from CEH to CEHM. This is clearly a matter which was the subject of discussion between Ms Tegen, Mr Chynoweth and the majority before the 3 September 2014 directors’ meeting.

162. After the meeting, Michael Shanahan was presented with minutes which falsely record that there had been a decision to move the Head Lease from CEH to CEHM. According to Michael Shanahan (whose evidence I believe), there was no discussion of this subject at the meeting. He wrote saying this and objecting to any assignment of the Head Lease. [16] It is clear that there was no agreement to it from the minority side. This was understood by Ms Carruthers, who was at the meeting. On 4 September 2014, she wrote to Ms Tegen and Mr Chynoweth:

I'm happy with minutes, all though somewhat concerned about the "agreement to move the lease" I had a very broad conversation with Lisa this morning in the presence of Rina and felt that the transfer of the lease arrangements was not an arrangement the consulting side were prepared to take on.

I did send the txt (sic) through this morning requesting clarification and Suzi confirmed it was still at the discussion stage, so is right to minute that we have an agreement?

16. 11 September 2014.

163. On 4 September 2014, Ms Tegen wrote to the majority (but not the minority):

Dear Martin, Gagan and lain

Thank you for speaking with Fiona over the last day. We had a large list of items to follow ip (sic) so that we can move ahead ina (sic) positive manner, including speaking with the land agent re the change of head lease.

I will be sending you the agreement between the entities also for you to review. Considering we have been using this for many years now between the entities, may I suggest you look at the document and then once the swap notes of the entities are on the paper, Fiona can send back to the lawyer to execute.

Phil will need to sign he (sic) transfer of head lease document and the agreement between the entities on behalf of the Board, as it was in the special meeting notes last night that we recommended we transfer the head lease.

324. Conventionally, the business (if it would have been profitable) is to be valued using the capitalised maintainable earnings (or CME) method which entails an assessment, as at the appropriate date, of what the maintainable annual earnings before interest and tax (EBIT) were and applying to the figure a capitalisation multiple. There is added to this the value of surplus net assets, that is, the assets owned but not necessary to generate the maintainable earnings.

325. The application of the CME method requires a determination of the annual maintainable earnings of CEH on the basis that Dr Frumar would have started when he could and would have, in other words, a determination of the profits that would have been earned directly and indirectly as a result of Dr Frumar’s work at the hospital. Profits would have been earned directly from his own exertions and, the minority submit, indirectly from his presence which would have attracted other surgeons to work at the hospital.

326. I record that the minority argued that in assessing CEH’s maintainable earnings the Court should take the approach, with respect to the potential profit that might have been emanated from other surgeons, which is taken in assessing damages where future or hypothetical events are to be taken into account and proof of them is necessarily unattainable. In such cases, the Court assesses the degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect that degree of probability. A lost commercial advantage or opportunity is a compensable loss, even where there is a less than 50% likelihood that the commercial advantage will be realised:  Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 at 643; The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 125; Sellars v Adelaide Petroleum NL & Ors (1994) 179 CLR 332 at 349.

327. This approach would entail taking the full amount of revenue which each notional additional surgeon would earn and discounting it to reflect the degree of probability that the surgeon would have generated it.

328. I do not think that this approach is apposite to this case. The Court is not assessing damages or a lost opportunity, but the value of shares in CEH derived on a maintainable earnings basis. Earnings are not earnings, let alone maintainable earnings, if, on the probabilities, they would not have been made. The capitalisation multiple takes account of the risk to the maintenance of the earnings as assessed.

329. In any event, I am not satisfied that the evidence extends to establishing any meaningful likelihood that Dr Frumar’s presence would have attracted any other surgeons who would have contributed to the revenue of the hospital. Efforts to attract other surgeons by Dr Saunders had very limited success. Realistically, the majority were never going to help in this quest. I am not satisfied that Dr Burt, who was an oculoplastic sub-specialist, was likely to start doing any significant cataract work. Even if the oppressive conduct had not occurred, the majority and the minority would still most probably have remained at loggerheads. Drs Burt and Tsirbas were not willing to commit to hospital lists of any type whilst the dispute between shareholders remained. Even if I were to adopt the loss of opportunity analysis, the percentage reduction would be so great as to make the lost benefit of no real value.

330. I do not think that there was any realistic possibility that the non-shareholder surgeons at CEH would have returned.

331. I also think it is unlikely that Drs Dunlop and Khannah would have continued to perform their injection procedures at the hospital for any appreciable length of time.

332. The consequence of this is that I am not satisfied that any revenue equivalent to that which Dr Frumar (or some replacement doctor) would have generated would have continued, in effect, in perpetuity that is maintainable for the conventional application of the CME method.

333. The experts agree that on this basis, the business would become unprofitable after Dr Frumar’s death and that the appropriate valuation method is, therefore, to assume that the business would operate for two years until Dr Frumar’s death and then be liquidated and the proceeds distributed to shareholders. They produced agreed models based on varying assumptions to reflect this approach.

334. They assumed both a multiple of 4x and Dr Frumar’s revenue ceasing after two years. In their opinion, these assumptions were inconsistent because they account for the risk of Dr Frumar’s death in both the multiple and the earnings. However, removing the risk of Dr Frumar’s death from the multiple would increase it to 5.125x, but the effect of doing this would be to increase the value of the shares by an immaterial amount. Additionally, the multiple of 4x is for an annuity in perpetuity. Given Dr Frumar’s death, the experts adjusted it to reflect its application to a limited period which is to a multiple of 1.62x as at 1 March 2014.

335. Ignoring the oppressive conduct, if the business would not have been profitable, the appropriate method is to ascertain the amount of the dividend the shareholders would receive had CEH been placed into liquidation. The dividend would represent the entitlement to share in the company’s net realisable assets. This method of valuation is known the Notional Realisation of Assets (or NRA) method.

336. The experts produced a series of valuations resting on different assumptions. Ultimately, they produced a series of joint valuations as at 1 March 2014 and 27 January 2015 respectively.

337. As will be observed later, based on the assumptions which I consider are to be adopted and which follow from the findings which I will now make, the amount which the minority received for their shares well exceeds what those shares were worth on either approach.

338. As to the net revenue that would have directly been earned from Dr Frumar’s exertions, this requires findings as to when he would have started, how many operations he would have carried out annually, the fee that would have been charged for each procedure and what increased variable costs would have been incurred in generating the additional revenue. The capitalisation multiple is applied to the figure which is yielded.

339. Discussion between the experts resulted in consensus that 46.9% is the appropriate variable cost rate to be applied to all additional revenue.

340. There was no consensus on whether the value of the minority shares should be discounted because it was a minority holding. I do not consider that a minority discount is appropriate. The control provisions in the Shareholders’ Agreement, including the supermajority provision and the embargo on directors being paid, effectively kept the minority on an equal footing with the majority.

341. There was no legitimate reason for delaying Dr Frumar’s accreditation beyond 17 April 2014 and maybe, not beyond 1 April 2014. For present purposes, the difference between these dates and 1 March 2014 is immaterial. The valuation should be done on the footing that 1 March 2014, as selected by the experts, should be adopted.

342. The evidence shows that Dr Khannah performed about 9 cataract procedures per day, Dr Duncan about 11 and Dr Dunlop about 8. Dr Frumar was a highly experienced cataract surgeon. I think that 10 should be adopted.

343. By all accounts, Dr Frumar was extremely busy and operated at various places. He spent some weeks of the year operating in Cambodia. I think he would have operated at CEH for no more than 40 weeks per year.

344. There was argument about the fees earned from a cataract procedure. $2,150 was the price charged to insured patients. Uninsured patients may have paid less. I do not see why it should be assumed that Dr Frumar would have taken any less than the price charged to insured patients. This was the figure used in business plans and models prepared for the directors in October 2013 and February 2014.

345. I am satisfied on the evidence that Dr Frumar would have been likely to have had a list once a week in Canberra. The board minutes of 29 October 2014 record an intention on his part to come two days a week. I do not consider that there is a sound evidentiary basis for a finding that he would have operated more than two lists per week. Two (perhaps a little generously) is the number I consider should be adopted.

346. The valuations which follow from these findings are as follows:

VALUATION USING MODIFIED CME METHOD

1. Assumptions

(a) Valuation date 1 April 2014

(b) Revenue based on annualised actual revenue for 8 months to Dec 2014

(c) Revenue from associated doctors (Drs Essex, Lawin-Bruessel, Larkin and Okera):

▪ excluded except Okera for plastics

▪ Dr Okera plastics equal to Okera actual annualised revenue for 8 months to Dec 2014

(d) EBIT Multiple

4.0x

(e) Dr Frumar:

Dies in April 2016 (hence EBIT multiple of 4x)

01-Apr-16

Number of Dr Frumar's surgeries per year:

▪ at 10 surgeries per list and 2 lists per week for 40 weeks

800

Revenue from each of Dr Frumar's surgeries

2,150

(f) Variable expenses as percentage of additional revenue

46.9%

(g) Revenue from Dr Burt [19] 

12,516

(h) Revenue from Dr Tsirbas [20] 

0

(i) Surplus net assets

Cash

628,768

+ Taxation refund receivable

113,805

– Trade creditors

5,225

– Tax liabilities

6,402

730,900

(j) Minority discount

0%

(k) Valuation rounding factor

$1,000

2. Valuation 

Amended EBIT

Operating EBIT (Annualised 8 months Mar to Dec 2014)

-321,903

+ EBIT changes

Additional Dr Frumar

1,720,000

Drs Essex, Lawin-Bruessel, Larkin and Okera (associated doctors) [21]

-44,381

Dr Okera plastics [22] 

43,085

Variable costs associated with above revenue

-806,072

Total EBIT changes

912,632

= Amended EBIT [23] 

590,729

EBIT multiple

4.0x

Implied capitalisation rate [24] (r)

25%

Number of years to Dr Frumar's death in April 2016 [25] (n)

2.00

Annuity factor in advance [formula =(1-(1+r)^-n)/r*(1+r) ]

1.800

Annuity factor in arrears [ formula =(1-(1+r)^-n)/r ]

1.440

Annuity factor mid-point (average of above) = Adjusted multiple [26]

1.620

Maintainable EBIT based on amended EBIT

590,729

x Adjusted multiple

1.62x

= Business value [27] 

956,981

+ Surplus net assets

730,900

= Value of 100% interest [28]  (A)

1,687,881

+ Net assets (other than those in the surplus net assets) in April 2016

Assets

Trade debtors

101,619

+ Plant and equipment

150,005

= Total other assets

251,624

– Liabilities

Blackwall Property Funds - lease liability [29]

293,384

+ Blackwall Property Funds - contra for mitigation [30]

Unknown

= Blackwall Property Funds - net liability

293,384

+ Loans payable

3,000

+ Employee entitlements including superannuation

0

= Total other liabilities

296,384

= Other net assets in April 2016 (i.e. excluding those in surplus net assets) (rounded)

-44,800

x PV factor [31] 

0.6400

= PV of other net assets/ (liabilities) (B)

-28,672

– Liquidation costs after Dr Frumar's death [32]

Cost of realising plant and equipment

30,000

+ Cost of liquidator

20,000

= Total liquidation costs

50,000

x PV factor

0.6400

= PV of liquidation costs (C)

32,000

= Value of 100% interest after notional realisation of assets in April 2016 (A+B+C)

1,627,209

x Pro-rata interest

43%

= Pro-rata value of 43% interest

699,700

– Minority discount

0

= Value of 43% minority interest (rounded)

$700,000

VALUATION USING NRA METHOD

Assets

Cash

628,768

Trade debtors

101,619

Taxation refund receivable

113,805

Plant and equipment

150,005

Rounding

1

Total Assets

994,198

– Liabilities

Blackwall Property Funds - lease liability

293,384

Blackwall Property Funds - contra for mitigation

Unknown

Blackwall Property Funds - net liability

293,384

Trade creditors

5,225

Tax liabilities

6,402

Loans payable

3,000

Employee entitlements including superannuation

Total liabilities

308,011

=

Net assets

686,187

– Liquidation costs

Cost of realising plant and equipment

30,000

Cost of liquidator

20,000

Total liquidation costs

50,000

= Value of 100% of shares

636,187

x Pro-rata interest

43%

= Pro-rata value of 43% shareholding

273,560

– Minority discount

N.A.

= Value of 43% minority interest (rounded)

$274,000

Notes:

(a) Assets realised and liabilities paid before formal members' voluntary liquidation

(b) Liquidator returns surplus capital to shareholders

(c) Assets and liabilities at 1/3/14 per balance sheet at 30 June 2014

(c) Assets and liabilities at 27/1/15 as per Report as to Affairs (CB 6152 to 6159)

Assumptions

(a) Plant and equipment is realised for book value less 20% realisation costs

30,000

(b) Costs of liquidator

20,000

(c) No capital gains tax payable on liquidation

19. The assumed revenue from Dr Burt ($12,516 in all scenarios). This has no effect on the calculations because Dr Burt’s revenue is already included in the actual annualised operating EBIT.

20. The assumed revenue from Dr Tsirbas ($nil in all scenarios). This has no effect on the calculations because Dr Tsirbas’ revenue (at $nil) is already included in the actual annualised operating EBIT.

21. Deducts the revenue from the associated doctors which is included in the actual EBIT ($44,381 in all scenarios).

22. Adds back the “plastics” revenue from Dr Okera which is included in the actual EBIT ($43,085 in all scenarios).

23. Amended EBIT including all hypothetical increases in EBIT arising from additional surgeries undertaken by Dr Frumar and the loss of revenue from associated doctors.

24. The EBIT multiple to an implied capitalisation rate (25% for all scenarios).

25. Two years for the valuation date of 1 March 2014.

26. Adjusted to reflect that the earnings being capitalised are for a limited period rather than in perpetuity.

27. The business value of the operations for the period until Dr Frumar’s death.

28. The value of the business operations (adopting the CME method) for the period until Dr Frumar’s death after taking into account surplus net assets.

29. Rent for the remaining lease term.

30. Reflects the possibility that the lessor would be able to mitigate its loss by, for example, renting the premises to an alternative lessee. Mr Halligan and Dr Ferrier were unable to determine the amount of any such mitigation, and it is shown as an unknown amount.

31. Present value factor necessary to express the other net assets as at the date of valuation.

32. As derived from NRA method applied below.

357. Thus, the CME method results in a valuation of the minority shares of $700,000 and the NRA method $274,000.

358. Even if one were to adopt the assumption that Dr Frumar’s earnings would have lasted in perpetuity (derived from another practitioner after his passing), the value of CEH based on the CME method, plus the value of surplus net assets, is $3,093,816 of which the minority share would be $1,330,341, still below the amount they were paid. [33]

     33. Maintainable EBIT $590,729 x 4 = $2,362,916 + surplus net assets $730,900 = $3,093,816 x 43%.

CONCLUSIONS

359. Whilst the minority have made out their complaint of oppressive conduct, they have failed to establish that, had it not occurred, they would have been in a better position than they are now.

360. It follows that the proceedings must be dismissed.

361. I will hear the parties on costs and on any other issues which are required to be resolved, including the correction of any arithmetical errors which I may be revealed to have made.

362. The exhibits are to be returned.

Endnotes

Decision last updated: 16 July 2018