Eastmark Holdings Pty Ltd v Kabraji
[2013] NSWSC 1763
•29 November 2013
Supreme Court
New South Wales
Medium Neutral Citation: Eastmark Holdings Pty Ltd v Kabraji [2013] NSWSC 1763 Hearing dates: 14, 16 & 17 October 2013 Decision date: 29 November 2013 Jurisdiction: Equity Division Before: Darke J Decision: (1) The proceedings are dismissed.
(2) The plaintiff is to pay the costs of each defendant.
Catchwords: CORPORATIONS - owners corporation of strata scheme - lot owner seeks to bring derivative action - rule in Foss v Harbottle - exceptions - whether in interests of justice to permit lot owner to sue
PROCEDURE - civil - parties - standing to sue - owners corporation of strata scheme - lot owner seeks to bring derivative action - rule in Foss v Harbottle - whether in the interests of justice to permit lot owner to sue
REAL PROPERTY - strata title - owners corporation - executive committee of owners corporation - duties of members of executive committeeLegislation Cited: Corporations Act 2001 (Cth)
Interpretation Act 1987
Strata Scheme (Freehold Development) Act 1973
Strata Schemes Management Act 1996
Strata Schemes Management Regulation 2010Cases Cited: Australian Coal and Shale Employees' Federation v Smith (1937) 38 SR (NSW) 48
Barrett v Duckett (1996) 14 ACLC 3101
Biala Pty Ltd v Mallina Holdings Ltd (1993) 13 WAR 11
Carre v Owners Corporation - Strata Plan 53020 (2003) 58 NSWLR 302; [2003] NSWSC 397
Clay v Clay (2001) 202 CLR 410; [201] HCA 9
Community Association DP No 270180 v Arrow Asset Management Pty Ltd [2007] NSWSC 527
Cope v Butcher (1996) 20 ACSR 37
Eastmark Holdings Pty Ltd v Kabraji [2012] NSWSC 802
Foss v Harbottle (1843) 2 Hare 461; 67 ER 189
Re President's Club Ltd [2012] QSC 364
Re Steel (1968) 88 WN Pt 1 467
South Johnstone Mill Ltd v Dennis (2007) 163 FCR 343; [2007] FCA 1448
Whitlam v ASIC (2003) 57 NSWLR 559; [2003] NSWCA 183Category: Principal judgment Parties: Eastmark Holdings Pty Ltd (Plaintiff)
Eddie Kabraji (First Defendant)
Hendersenhayes Pty Ltd (Second Defendant)
The Owners - SP 74602 (Third Defendant)
Kris Bruckner (Fourth Defendant)Representation: Counsel: DR Pritchard SC with B Oliak (Plaintiff)
NC Hutley SC with DFC Thomas (First and Second Defendants)
SG Finch SC with KC Morgan (Third Defendant)
CRC Newlinds SC with A Horvath (Fourth Defendant)
Solicitors: Swaab Attorneys (Plaintiff)
Henry Davis York (First and Second Defendants)
TressCox Lawyers (Third Defendant)
Norton Rose Fulbright Australia (Fourth Defendant)
File Number(s): 2011/328524 Publication restriction: Nil
Judgment
Introduction
The plaintiff, Eastmark Holdings Pty Ltd ("Eastmark") is and was at all material times a lot owner in Strata Plan 74602 ("the Strata Plan"). The property that is the subject of the Strata Plan is a large tower in North Sydney known as "Beau Monde". The tower is largely used for residential purposes. The Strata Plan consists of 241 lots.
Eastmark, invoking the so-called fifth or interests of justice exception to the Rule in Foss v Harbottle ((1843) 2 Hare 461; 67 ER 189), complains of wrongs allegedly committed against the Owners Corporation (which is the third defendant) by Mr Eddie Kabraji (who is the first defendant) and Mr Kris Bruckner (who is the fourth defendant). Mr Kabraji was at all material times a member (and indeed the Chairperson) of the Executive Committee of the Owners Corporation, and Mr Bruckner was a member of the same committee. Eastmark alleges that, in relation to the making of a Project and Management Services Agreement on 1 July 2011 between the Owners Corporation and the second defendant (Hendersenhayes Pty Ltd) Messrs Kabraji and Bruckner breached fiduciary duties said to be owed to the Owners Corporation. Mr Kabraji is the sole director and shareholder of Hendersenhayes Pty Ltd ("Hendersenhayes").
The Project and Management Services Agreement ("the Agreement") was entered into following an Extraordinary General Meeting of the Owners Corporation held on 30 June 2011 ("the June EGM") at which an ordinary resolution was passed to the effect that the Owners Corporation enter into an agreement substantially in the form of the draft which was tabled at the meeting. That draft was not in evidence, but this does not seem to be material. It is not suggested that the Agreement is not substantially in the form of the draft which was tabled. The terms of the Agreement are referred to with in more detail at [52] below.
It is alleged that Mr Kabraji, as a member and Chairperson of the Executive Committee of the Owners Corporation, owed fiduciary duties to the Owners Corporation including a duty not to place himself in a position where his personal interests may conflict with the interests of the Owners Corporation. In relation to Mr Bruckner, it is alleged that as a member of the Executive Committee of the Owners Corporation, he owed fiduciary duties to the Owners Corporation including a duty not to act to the detriment of the Owners Corporation or to the benefit of a third person at the expense of the Owners Corporation.
Eastmark relies, in support of the proposition that fiduciary duties of that nature were owed to the Owners Corporation, upon the decision of Else-Mitchell J in Re Steel (1968) 88 WN Pt 1 467. That was a case concerning the council of a body corporate under earlier strata titles legislation. Else-Mitchell J stated, at 470:
I consider that the respondents have failed to appreciate the nature of the duties cast on them as members of the council of a body corporate under the Conveyancing (Strata Titles) Act. Such persons are at least in a position analogous to company directors; they may even have a higher fiduciary duty, and when they are promoters as well this duty has dual basis. It is plain that the respondents have failed to recognize that it is their duty to manage the affairs of the body corporate for the benefit of all the lot holders, and that the exercise of any of their powers in circumstances which might suggest a conflict of interest and duty requires them to justify their conduct....
Reliance was also placed upon the decision of McDougall J in Community AssociationDP No 270180 v Arrow Asset Management Pty Ltd [2007] NSWSC 527, and in particular his Honour's discussion of the decision in Re Steel (supra) at [210] - [215].
As against Mr Kabraji, Eastmark alleges that a conflict existed between Mr Kabraji's personal interests in pursuing entry into the Agreement and Mr Kabraji's duties to the Owners Corporation. It is alleged that in these circumstances he breached his fiduciary duty to the Owners Corporation in that he:
(a) caused Hendersenhayes to propose the Agreement to the Owners Corporation;
(b) caused Hendersenhayes to enter into the Agreement with the Owners Corporation; and
(c) took no steps to inform or warn the Owners Corporation that the Agreement was or might be to his personal advantage.
As far as Mr Bruckner is concerned, Eastmark alleges that he breached his fiduciary duty to the Owners Corporation by certain conduct undertaken at the June EGM. It is alleged that, as the Chairperson of the meeting, Mr Bruckner wrongfully allowed the resolution concerning the Agreement to be put to a vote, and further that, as a proxy, he wrongfully exercised numerous votes favour of the resolution.
In addition to the breach of fiduciary duty claims, Eastmark contends that the Agreement should be set aside on the basis that 60 votes cast by proxy at the June EGM were invalid, with the consequence that there was no quorum at the meeting. It is contended that the resolution which was passed in favour of entry into the Agreement is thus void. By clause 11(1) of Schedule 2 to the Strata Schemes Management Act 1996 ("the Act") a person is a duly appointed proxy if the person is appointed as a proxy by an instrument in the form prescribed by the regulations. Regulation 28(2) of the Strata Schemes Management Regulation 2010 ("the Regulation") prescribes the relevant form. Eastmark submitted that the addition of the words "or in his absence" to the prescribed form, so as to enable the appointment of "alternate proxies", had the consequence that the purported appointment was invalid because the additional language rendered the form not in substantial compliance with the prescribed form (see section 80(1) of the Interpretation Act 1987). It was also submitted that, upon the true construction of clause 11(1) of Schedule 2 to the Act (read with clause 7(2)), only one person can be appointed as a proxy.
Each of the defendants denies that fiduciary duties were owed as alleged by Eastmark and, to the extent that any duties were owed by members of the Executive Committee, submits that there were no breaches of such duties. The defendants further contend that even if there were any breaches committed in relation to the making of the Agreement, any such breaches were "cured" by a further resolution which was passed at an Extraordinary General Meeting of the Owners Corporation held on 10 November 2011 ("the November EGM").
The defendants also deny that any of the proxies were invalid. It is contended that the relevant provisions of Schedule 2 of the Act permit the appointment of a person as a proxy and, in the absence of that person, the appointment of another person as proxy. Moreover, it is contended that the form of proxy employed in this case substantially complies with the form prescribed by regulation 28(2) of the Regulation.
Finally, each of the defendants challenged Eastmark's standing to bring the proceedings. It was submitted that Eastmark failed to establish what was required in order to bring it within the interests of justice exception to the Rule in Foss v Harbottle. It was further submitted that, in the event that Eastmark's standing was not established, the Court should not embark upon any further consideration of the complaints which Eastmark has raised.
Salient Facts
It is convenient to commence by setting out the salient facts. The facts largely emerge from the documents which were tendered. Only three affidavits were read at the hearing. Eastmark read the affidavit of Luke Derwent who was an employee of the strata managing agent known as Strata Plus, which was the agent until about November 2011. The Owners Corporation read two affidavits. These were an affidavit of Christopher Duggan of Bright and Duggan Pty Ltd, which became the strata managing agent in about November 2011, and an affidavit of John Corrigan, a lot owner and treasurer of the Executive Committee of the Owners Corporation. Messrs Derwent and Corrigan were cross-examined. No affidavit evidence was adduced from either Mr Kabraji or Mr Bruckner.
Eastmark was the developer of the Beau Monde tower which is located in Berry Street, North Sydney. The Strata Plan was registered on 6 April 2005. Since that time Eastmark has gradually disposed of its lots in the Strata Plan, and it presently owns only 4 of the 241 lots.
Eastmark is also the owner of some adjoining property, including the land known as 88 Walker Street, North Sydney. In about March 2009, Eastmark announced its intention to develop the 88 Walker Street site by constructing "an A-grade office building, a hotel with about 200 rooms, and a pedestrian plaza." The office building and the hotel were each proposed to be some 35 to 40 storeys high. The proposed development became the subject of an application made to the Department of Planning, the project being declared to be a "major project" by the relevant Minister.
Mr Kabraji became the Chairperson of the Executive Committee on 30 April 2009. On the same day, Mr Corrigan became the Treasurer of the Executive Committee. It is clear that since that time Mr Kabraji has spent a great deal of time engaged in activities concerning the affairs of the Owners Corporation, including opposing Eastmark's proposed development, and in guiding the Owners Corporation in relation to various disputes with Eastmark.
Eastmark's development application was the subject of discussion at the meeting of the North Sydney Council on 20 July 2009. The minutes of that meeting show that various people, including Mr Kabraji and Mr Corrigan, addressed the meeting in relation to the proposed development. The Council resolved to urge the Minister for Planning to refuse the development application for various reasons, including non-compliance with Council building height and massing controls which would result in "significant to devastating view loss for adjoining residential dwellings above RL 170 .... on the northern portion of 77 Berry Street, North Sydney (Beau Monde)".
On 7 September 2009, the first of many legal proceedings involving Eastmark and the Owners Corporation was commenced. In this instance, the proceedings were commenced by Eastmark which sought, inter alia, a declaration that a resolution passed by the Owners Corporation determining a contribution of $214,000 was void, and an order restraining the Owners Corporation from engaging lawyers, architects, consultants and lobbyists in relation to opposing Eastmark's development application.
Later, the Owners Corporation took proceedings against Eastmark in relation to strata levies said to be outstanding, and issued statutory demands in respect of those amounts. That led to further litigation in which Eastmark sought to have the statutory demands set aside.
Later still, the Owners Corporation commenced proceedings against numerous parties, including Eastmark, seeking relief in respect of alleged defective building work, and in yet further proceedings the Owners Corporation filed a cross-claim against Eastmark alleging that Eastmark breached fiduciary duties owed to the Owners Corporation.
It is not necessary to further consider the details of these numerous disputes, let alone the merits of them, save to observe that from mid-2009 and up to the present day, Eastmark and the Owners Corporation have been almost continuously engaged in litigation against each other in one form or another.
Mr Derwent gave evidence of a number of conversations he had with Mr Corrigan in April and May of 2011 in which Mr Corrigan informed him that Mr Kabraji wanted to be paid for the "past work that he has done for the Owners Corporation" and also "for future work". Mr Derwent told Mr Corrigan that "because of Mr Kabraji's position on the Executive Committee, he may have a conflict of interest" and, accordingly, legal advice should be obtained before any agreement was entered into. Mr Corrigan, a few days later, told Mr Derwent to obtain a fee proposal from Holding Redlich. Although Mr Corrigan had no recollection of such conversations, he conceded that conversations to that general effect may have taken place, and I am satisfied that conversations to the effect of those deposed to by Mr Derwent did occur.
It is apparent that Mr Corrigan, and perhaps other members of the Executive Committee including Mr Bruckner, had some appreciation that an agreement between Mr Kabraji (or a company which he controlled) and the Owners Corporation might at least have the potential to give rise to a "conflict of interest". Mr Kabraji, in an email he sent to Messrs Corrigan and Bruckner on 23 May 2011, referred to these gentlemen as being "sensitive to a potential conflict".
In any event, by 1 June 2011 an estimate of Holding Redlich's fees (in relation to three matters) had been distributed to members of the Executive Committee. Mr Kabraji was evidently keen for the committee to approve a fee estimate in relation to the proposed agreement, and he wanted a general meeting to be held before the end of June after which, he stated, "owners will not be financial". Owners who were "not financial" would be thus unable to vote. Holding Redlich was requested by Mr Derwent to prepare a further fee estimate which dealt only with the proposed agreement.This was done on 2 June 2011, and the estimate was sent to Mr Derwent on the following day.
On 15 June 2011 Mr Derwent informed Holding Redlich that the Owners Corporation had accepted the fee proposal. It appears that this was done on the instruction of either Mr Kabraji or Mr Corrigan, and in advance of the Executive Committee meeting at which the matter was to be considered, which was in fact held on 17June 2011. Given that the meeting was to be what has been described as a "paper EC Meeting" (being a meeting which committee members do not physically attend, but where the business is conducted by way of circulation of documents) it is possible that Mr Derwent had received indications of the attitudes of the members of the committee which were sufficient for him to confidently pre-empt the result. Regardless, nothing appears to turn on this.
Holding Redlich immediately commenced work on the matter. By 17 June 2011 Holding Redlich had provided to Mr Derwent a draft Consultancy Agreement and draft motions to be considered at an Extraordinary General Meeting of the Owners Corporation.
Also on 17 June 2011 Mr Derwent prepared a Notice of Extraordinary General Meeting to be held at 6.00pm on 30 June 2011. Motion four on the agenda was headed "Consultancy Agreement" and set out motions in accordance with the drafts which had been submitted by Holding Redlich. Those motions referred to a Consultancy Agreement to be entered into by the Owners Corporation, but make no reference to the other party to the agreement, in particular Mr Kabraji or any company associated with him. It appears that Mr Derwent sought the approval of Mr Kabraji to the form of the notice of meeting before it was issued.
The minutes of the Executive Committee record that at a meeting held at 9.00am on 17 June 2011, five members of the committee (including Mr Kabraji) who were present by voting paper resolved to engage Holding Redlich (in accordance with their fee estimate dated 2 June 2011). Further, they resolved that the managing agent be instructed to convene an Extraordinary General Meeting to be held on 30 June 2011 to consider, inter alia, "engaging Eddie Kabraji's consultancy firm". Copies of the minutes of the meeting were sent to lot owners by the strata managing agent.
The draft Consultancy Agreement prepared by Holding Redlich was provided to Mr Kabraji on 17 June 2011. Almost immediately Mr Kabraji expressed dissatisfaction with the draft agreement. Similarly, Mr Kabraji expressed his dissatisfaction with a revised draft agreement which had been forwarded to him on 19 June 2011.
One of the provisions to which Mr Kabraji objected was clause 3.6(a) which would require the consultant to fully and regularly inform the Owners Corporation of all aspects of the performance of the consultancy services. Mr Kabraji appears to have thought that if he was to provide information to the Owners Corporation at a General Meeting "there will be a conflict of Duty and/or a Conflict of Interest in my role as a Chairman and as a Key Consultant. There will be Eastmark's solicitors present, asking me a myriad of difficult questions". Mr Kabraji also expressed the view that he did not want the agreement to:
...negate my ability to exercise control on the Strata to the point I can't give instructions on Strata related matters to the Strata Manager and/or have to abstain from voting at EC and OC Meetings.
This function as a Consultant will work with a sub-committee and recommendations by the sub-committee forwarded to the EC and OC. I believe this needs to be pointed out in the Agreement. The sub-committee will be a closed door committee."
On 21 June 2011 Holding Redlich provided the Owners Corporation with its written advice concerning entry into the proposed Consultancy Agreement. Holding Redlich advised that the Owners Corporation had the power to enter into the agreement in accordance with the applicable legislation by holding an Extraordinary General Meeting and passing an ordinary resolution authorising entry into the agreement. Holding Redlich further advised that the draft agreement contained "industry standard terms that would be expected to be included [in] all such agreements." The solicitors further advised that although it was open to Mr Kabraji to attend the meeting, it was recommended that he should abstain in relation to any motion regarding the Consultancy Agreement "to avoid any potential conflict of interest".
In the lead up to the EGM there were numerous communications between Mr Kabraji and other members of the Executive Committee concerning the terms of the proposed agreement.
On 24 June 2011, Mr Kabraji sent an email to other members of the Executive Committee. The email was sent in advance of a proposed informal meeting between the members of the committee which was to take place at 12.30pm that day, to be followed by a meeting with the lawyers at Holding Redlich. Mr Kabraji indicated in this email that there were several parts of the draft agreement which were unacceptable to him. Mr Kabraji also stated that the agreement should include an indemnity clause whereby the Owners Corporation indemnified the consultant in respect of claims arising out of negligent acts of the consultant in undertaking the services under the agreement. The notion of such an indemnity clause appears to have its genesis in certain risk assessment advice received by Mr Kabraji from an insurance broker. Mr Kabraji suggested that if agreement could be reached about the matters the subject of his email then Holding Redlich could be requested to re-draft the agreement.
No direct evidence was given concerning any meetings held on 24 June 2011 apart from the evidence given on one matter by Mr Derwent who, along with members of the Executive Committee, attended a meeting at the offices of Holding Redlich on that day. Mr Derwent recalls that at the meeting Ms Chudleigh, a partner of the firm, said that Mr Kabraji may have a conflict of interest by virtue of his position on the Executive Committee, and she therefore recommended that a "management protocol" be put in place to ensure that Mr Kabraji was not in a position of conflict with the Owners Corporation during the course of performing services under the Agreement. It may be inferred that the draft agreement was the subject of discussion between members of the Executive Committee, and with Holding Redlich, on 24 June 2011.
On 27 June 2011 Mr Kabraji sent an email to Mr Corrigan in which it was stated that some changes to the agreement were required. These included:
(a) removal of clause 3.7, which was referred to as "the conflict of interest clause". This clause provided for the parties to co-operate to ensure that no conflicts of interest were created during the term of the agreement and, in the event that a conflict of interest did arise, the parties agreed to meet to discuss whether Mr Kabraji should step down as Chairman of the Owners Corporation;
(b) removal of clause 11.5(ii), which provided for an exception to the Owners Corporation indemnity of the consultant (now called the project manager/administrator) if the project manager/administrator has been grossly negligent; and
(c) the removal of clause 13.3(f), which conferred upon the Owners Corporation a power to terminate the agreement if the project manager/administrator was in breach of the agreement and has failed to rectify the breach following a written request to do so.
Mr Kabraji's email also referred to "Brett's proposal". This was a reference to a draft proposal to be submitted by a Mr Brett Davies of Acity Pty Ltd for the provision by Acity Pty Ltd of services of the same type and scope as that proposed to be undertaken by Mr Kabraji. Mr Derwent had advised Mr Corrigan that it was necessary for the Owners Corporation to obtain two quotations in respect of the proposed work. Mr Corrigan then made arrangements for a quotation to be provided by Acity Pty Ltd. Mr Davies of Acity Pty Ltd had earlier provided services to the Owners Corporation and was known to Mr Corrigan.
Early on 27 June 2011 Mr Corrigan sent Mr Kabraji a draft of a proposal which Acity Pty Ltd might submit in respect of the work. In Mr Kabraji's email of 27 June 2011, he expressed the view that the draft proposal appeared to be beyond the scope of what was documented and was a "low bid". His email further stated:
It appears he is bidding. If the owners want him they can have him. He is very limited in what he can achieve.
Although the document was not in evidence, it seems clear that a draft proposal sent the following day by Mr Corrigan to Mr Davies indicated that Acity Pty Ltd proposed a fee of $350,000 for the work. This figure may be compared to the $380,000 which Mr Kabraji said he required. Mr Corrigan said that the figure of $350,000 was arrived at following discussions he had with Mr Davies concerning the work that would be required. He further stated that he sent the draft proposal to Mr Kabraji for him to review because he was "trying to get like with like in terms of comparison of services". Mr Corrigan did not dispute that, in so doing, he may have informed Mr Kabraji of the amount which Acity Pty Ltd would charge for the work.
In any event, a further draft agreement was produced on the evening of 27 June 2011. On the following day Mr Corrigan suggested to Mr Derwent that in order to get the agreement finalised certain changes should be made, including the deletion of clauses 3.7, 11.5(ii) and 13.3(f). In essence, Mr Corrigan was suggesting that Mr Kabraji's required amendments be agreed to.
The suggested changes were put to Holding Redlich for their comment. In relation to clause 3.7 Holding Redlich stated:
We have removed this clause from the agreement. This clause was intended to cover the possibility (albeit a small one) that Mr Kabraji could be placed in a position of conflict in the future because he sits on both sides of the agreement, in different roles. If the Owners Corporation is not concerned regarding this, then we agree the clause can be removed.
In relation to clause 13.3(f) Holding Redlich recommended that the clause remain. They stated:
To ensure the agreement is fair, the Owners Corporation must have a right to bring the agreement to end should Hendersenhayes Pty Ltd continue to be in breach of the agreement.
In relation to clause 11.5(a)(ii) Holding Redlich stated that they were unsure as to what amendment was being sought.
It was put to Mr Corrigan in cross-examination that the deletion of clauses was something the lawyers were advising against. Mr Corrigan accepted that this was the position, but stated that he (and others) made a commercial decision to accept the changes as sought by Mr Kabraji. He agreed that he did not take steps to inform the lot owners that the lawyers for the Owners Corporation had recommended against the removal of certain clauses.
On 28 June 2011 the proposal from Acity Pty Ltd was received by Mr Derwent. It is not clear whether this proposal was tabled at the June EGM but Mr Derwent recalls that Mr Corrigan referred to the proposal at the meeting and said words to the effect that the Owners Corporation had received a proposal from Acity Pty Ltd for the performance of the services as described in the agreement with Mr Kabraji's company, and that the proposal was "for around the same fixed fee amount". In the final proposal the Acity Pty Ltd fee was stated to be $352,000.
It is apparent that there was further discussion amongst members of the Executive Committee on 29 June 2011 concerning the changes to the draft agreement sought by Mr Kabraji. At that time the Executive Committee comprised, apart from Messrs Kabraji, Bruckner and Corrigan, Messrs Contractor, Pedersen, Salahifar and Rosenberg. It seems that most, if not all, members of the Executive Committee ultimately accepted that the clauses which Mr Kabraji wanted removed should be so removed. Certainly, it is apparent that Mr Derwent provided instructions on behalf of the Executive Committee to Holding Redlich to delete clause 13.3(f) and the gross negligence exception to clause 11.5(a)(ii). Holding Redlich, for their part, recommended that those amendments not be made.
According to the minutes of the meeting, the EGM held on 30 June 2011 commenced at 6.06pm and continued until 7.15pm. Mr Bruckner chaired the meeting. Aside from the minutes themselves there was very little evidence given as to what occurred at the meeting. Reference has already been made to the evidence given by Mr Derwent as to what Mr Corrigan said about the Acity Pty Ltd proposal. Mr Derwent further deposed that, apart from Mr Corrigan's statement, there was no discussion at the meeting "about engaging Acity". Mr Derwent also stated that the majority of the discussion at the meeting (which, to his recollection lasted about 30 minutes) was solely in relation to the proposed agreement. According to Mr Derwent, such discussion included at least some mention of the fact that Mr Kabraji was involved with Hendersenhayes. Mr Corrigan, who was present at the meeting, did not include in his affidavit any details of what was said at the meeting, and he was not asked questions in cross-examination on that topic.
It is clear, however, that copies of the latest draft of the proposed agreement were taken to the meeting by Mr Derwent, and during the course of the meeting the draft agreement was tabled. It is also clear that Mr Kabraji left the meeting and took no part in the discussion or voting on the motion concerning entry into the proposed agreement.
Two amendments to that motion were moved at the meeting. The first was to the effect that the contract be amended to give the Owners Corporation the right to terminate on 30 days notice. The second was to the effect that a provision be inserted in the contract to link the remuneration with satisfactory performance. Both amendments were defeated. A minor amendment to ensure that the motion reflected the actual title to the agreement (being Agreement for Project Management and Administration Services) was passed. Resolutions were then passed for the Owners Corporation to enter into such agreement and do all things necessary to achieve that result.
The owners of 21 lots (including Mr Kabraji) were present in person. A further 79 lot owners were present by appointed proxy. Of that latter number, 60 of the proxies were in the form of "alternate proxies" which Eastmark contends are invalid.
By clause 12 of Schedule 2 to the Act, there is a quorum for considering and voting on a motion at a general meeting if:
(a) at least one-quarter of the number of persons entitled to vote on the motion is present, either personally or by duly appointed proxy, or
(b) at least one-quarter of the aggregate unit entitlement of the strata scheme is represented by the persons who are present and entitled to vote on the motion, either personally or by duly appointed proxy.
Eastmark has calculated that the owners of 41 lot owners were required to be present in order to constitute a quorum for the meeting. Accordingly, if the 60 "alternate proxies" were invalid, there was not a quorum.
The Owners Corporation entered into the Agreement with Hendersenhayes on 1 July 2011. Under the Agreement, Hendersenhayes was obliged to provide particular services to the Owners Corporation in return for a fee of $380,000 per annum (excluding GST). The services, which were defined rather diffusely in an annexure to the agreement, may be described in general terms as providing assistance in relation to the various disputes with which the Owners Corporation was involved (which included, but were not limited to, the disputes with Eastmark). The term of the Agreement was two years, subject to a right of termination by either party after 12 months (see clause 6.1). If the Owners Corporation exercised such right, an early termination fee of $95,000 (excluding GST) was payable (see clause 6.2). As noted earlier, the terms of the Agreement reflected, in a number of respects, the requirements advanced by Mr Kabraji. These included clause 11.5 which provided for an indemnity in favour of Hendersenhayes even if the services were carried out in a grossly negligent manner. A further amendment to clause 11.5(a)(iii) was made to the final draft. This amendment appears to be cognate with the amendment to clause 11.5(a)(ii) which had earlier been agreed to. Nothing appears to turn on this.
By September 2011, Holding Redlich had produced a Conflict of Interest Protocol to deal with the situation where Mr Kabraji's company was providing services to the Owners Corporation at the same time as Mr Kabraji was Chairman of the Executive Committee. In that document Holding Redlich referred to the fiduciary duty of company directors to avoid conflict of interests and stated that "it is believed that members of the Executive Committee of an Owners Corporation have a similar duty". It is not clear whether the protocol was ever formally adopted or implemented.
The Annual General Meeting of the Owners Corporation took place on 29 September 2011. Mr Kabraji chaired the meeting. A resolution was passed for the adoption of the minutes of the meeting of 30 June 2011 "with the amendment that the contract for project management and consultancy service was not required to be sent out".
On 14 October 2011 the present proceedings were commenced by Eastmark. On 24 October 2011 a letter was sent by the members of the Executive Committee to lot owners in relation to the proceedings. Reference was made to the allegations made by Eastmark in its Statement of Claim, and there was a lengthy description of the various efforts being made by the Executive Committee. The letter concluded with an exhortation that the lot owners stand united in opposition to Eastmark.
The Executive Committee resolved on 26 October 2011 that an Extraordinary General Meeting be held on 10 November 2011. Notice was thereafter given of a motion to be put to the meeting in the following terms:
That the Owners Corporation resolve that they have received the Project Management and Administration Agreement which was available at the office of Strata Plus and was adequately discussed at the EGM of 30 June 2011. The Agreement was tabled at that Meeting. The Owners that were present at the meeting at the time resolved not to send this agreement out and the signing of the agreement could be affected. As Eastmark has served a Statement of Claim on Eddie Kabraji (Chairman) and Hendersenhayes (Project Management Company of the Chairman) ... the Owners Corporation needs to re-resolve that they both have received and understand the terms of this arrangement and have no objection to using the company's services to project manage and administer legal matters and authorize its use.
On 4 November 2011, Eastmark sent a letter to lot owners concerning the Agreement. The letter contained a summary of the Agreement and an assessment of various aspects of it. The Statement of Claim which had been recently filed by Eastmark was attached. The letter contained further commentary concerning the management of the Owners Corporation since 2009, including in relation to the litigation it was involved in. The letter concluded:
In light of the matters set out in this letter, we invite you to carefully consider the performance of Mr Kabraji's Executive Committee over the past three years and critically examine the decisions he (or the executive committee under his chairmanship) recommends to the OC to take in future.
On 9 November 2011 Mr Kabraji sent to lot owners a response to Eastmark's letter. It is not necessary to deal with the terms of this letter in any detail save to note that Eastmark takes issue with much of its contents and indeed contends that it contains false and misleading statements. In this regard, Eastmark pointed to various statements including that the term of the Agreement was only for one year not two years, and that the Agreement was signed following "informed consent".
At the Extraordinary General Meeting held on 10 November 2011 it was unanimously resolved (in the absence of Mr Kabraji, who left the room when discussion and voting on the motion took place) as follows:
That it be noted that the Owners Corporation has received the Project Management and Administration Agreement which was available at the office of Strata Plus and was adequately discussed at the EGM of 30 June 2011. The Agreement was tabled at that Meeting. The Owners that were present at the meeting at the time resolved not to send this agreement out and the signing of the agreement could be affected. As Eastmark has served a Statement of Claim on Eddie Kabraji (Chairman) and Hendersenhayes (Project Management Company of the Chairman) for a directional hearing in the Supreme Court on 11 November 2011 and Eastmark deems there is both a "Conflict of Interest" and a "Breach of Fiduciary Duty", the Owners Corporation re-resolved that they both have received and understood the terms of this arrangement and have no objection to using the company's services to project manage and administer legal matters and authorize its use.
According to the evidence of Mr Duggan, which was not disputed, the quorum for this meeting was 39 lot owners. It appears that 21 lot owners were present in person and a further 28 lot owners were present by appointed proxy. There were no "alternate proxies" appointed in relation to this meeting. However, Eastmark submits that the 24 proxies which Mr Bruckner voted in favour of the resolution should not have been voted because, as a defendant to the proceedings, he was interested in the outcome of the resolution.
Eastmark further contends that in any event the resolution is not effective to "cure" any of the earlier breaches of fiduciary duty because there was not full and frank disclosure made of the material facts concerning the making of the Agreement and the breaches of fiduciary duty associated with it.
The Agreement remained in operation for the entirety of the stipulated two-year term. On 1 July 2013 a further agreement for Project Management and Administration Services was entered into between the Owners Corporation and Hendersenhayes.
Legislative Context
It is necessary to refer to some of the applicable statutory provisions.
The relevant strata scheme is a freehold strata scheme under the Strata Scheme (Freehold Development) Act 1973. In essence, the management of such a scheme is governed by the Strata Schemes Management Act 1996 ("the Act").
Section 3 of the Act provides that its objects are to provide for the management of strata schemes and for the resolution of disputes arising in connection with the management of strata schemes. The arrangements for the management of strata schemes are primarily found within Chapter 2 of the Act. A key provision is section 8 which provides:
(1) On the registration of a strata plan for a strata scheme, there is established an owners corporation for the strata scheme in accordance with Part 2.
(2) An owners corporation for a strata scheme has the principal responsibility for the management of the scheme.
By s 9 of the Act it is provided that an owners corporation may be assisted in the carrying out of its management functions under the Act by an executive committee of the owners corporation established in accordance with Part 3.
Part 3 of Chapter 2 of the Act is contained within ss 16 to 25. Section 16 provides for the appointment of an executive committee by an owners corporation. Section 21 of the Act relevantly provides:
(1) A decision of an executive committee is taken to be the decision of the owners corporation, subject to subsection (4).
(2) However, the following decisions may not be made by the executive committee:
(a) a decision that is required by or under any Act to be made by the owners corporation by unanimous resolution or special resolution or in general meeting,
(b) a decision on any matter or type of matter that the owners corporation has determined in general meeting is to be decided only by the owners corporation in general meeting.
(3) An owners corporation may in general meeting continue to exercise all or any of the functions conferred on it by this Act or the by-laws even though an executive committee holds office.
(4) Despite any other provision of this Act, in the event of a disagreement between the owners corporation and the executive committee, the decision of the owners corporation prevails.
The evidence was not clear as to whether the decision to enter into the Agreement could have been made by the Executive Committee, or whether it was a matter which, due to the amount of expenditure involved, had to be the subject of a resolution of the Owners Corporation (see s 80A of the Act). Holding Redlich's letters of advice (including the letter of 21 June 2011) are not definitive on that question, although they do suggest that a general meeting was necessary. In any case, the decision was in fact made by the Owners Corporation in general meeting.
Section 61 of the Act (which is in Chapter 3 of the Act headed "Key management areas") provides that an owners corporation has, for the benefit of the owners, the management and control of the use of the common property of the strata scheme, and the administration of the strata scheme.
Chapter 5 of the Act concerns disputes in relation to a strata scheme. Provision is made for the making of applications to the Consumer, Trader and Tenancy Tribunal ("CTTT") for orders in respect of disputes. There is no power to award damages, and there is no specific power to set aside agreements, but there is a power to make an order invalidating a resolution passed at a meeting of an Owners Corporation if the provisions of the Act have not been complied with in relation to the meeting (see s153(1) of the Act). Some applications are referred to an Adjudicator, and others are dealt with by the CTTT itself (see ss 137 and 137A of the Act). An appeal lies to the CTTT against orders made by an Adjudicator (see s 177 of the Act). An appeal lies to the District Court against orders made by the CTTT (see s 200 of the Act).
Schedule 2 to the Act, which deals with meetings and procedure of an owners corporation, provides in clauses 10 and 11 for the appointment of a proxy to vote at a general meeting of an owners corporation. Clause 10(3) provides that the voting rights of an owner (unless a corporation) may be exercised in person or by proxy or (if a corporation) by the company nominee in person, or by proxy appointed by the corporation.
Clause 11 relevantly provides:
(1) A person is a duly appointed proxy for the purposes of this Part if the person is appointed as a proxy by an instrument in the form prescribed by the regulations.
(2) The prescribed form is to make provision for the giving of instructions on:
(a) whether the person appointing the proxy intends the proxy to be able to vote on all matters and, if not, the matters on which the proxy will be able to vote, and
(b) how the person appointing the proxy wants the proxy's vote to be exercised on a motion for the appointment or continuation in office of a strata managing agent.
...
(5) A proxy cannot exercise a vote in relation to a matter if the person who appointed the proxy is exercising personally a power to vote on that matter.
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(7) If the instrument appointing a proxy limits the manner in which the proxy may vote at a meeting, a vote by the proxy that does not observe the limitation is invalid.
Clause 14 provides that the Chairperson at a general meeting of an owners corporation may rule a motion out of order if:
(a) the chairperson considers that the motion, if carried, would conflict with this Act or the by-laws or would otherwise be unlawful or unenforceable, or
(b) except in relation to a motion to amend a motion, clause 35 (3) [which concerns notice of a motion] has not been complied with in relation to the motion.
Clause 31(3) provides for the requisitioning of an extraordinary general meeting by a person or persons who, either alone or together, have a unit entitlement which is at least one quarter of the aggregate of unit entitlements.
Clause 36(1) provides:
Any person entitled to vote at a general meeting of an owners corporation on a motion that does not require a unanimous resolution may, by notice in writing served on the secretary of the executive committee, require inclusion in the agenda of the next general meeting of the owners corporation of a motion set out in the notice and the secretary must comply with the notice.
Schedule 3 to the Act concerns the constitution and meetings of the executive committee of an owners corporation. Clause 6 provides for notice of executive committee meetings to be given to owners, and clause 16 provides for copies of minutes of executive committee meetings to be given to owners. By clause 14, any owner is entitled to attend a meeting of the executive committee, but may not address the meeting unless authorised by resolution of the committee.
Eastmark's Standing
It is both logical and convenient to deal first with the question of Eastmark's standing to bring these proceedings which concern the enforcement of rights of the Owners Corporation.
In Carre v Owners Corporation - Strata Plan 53020 (2003) 58 NSWLR 302; [2003] NSWSC 397 Barrett J (as his Honour then was) held that the proper plaintiff rule in Foss v Harbottle applied to an owners corporation governed by the Act (see at [20]-[25]). All parties appeared to accept the correctness of that proposition. All parties also appeared to accept the existence of the interests of justice exception to the rule in Foss v Harbottle. I would in any event reach that conclusion, based on the reasons advanced by Barrett J in Carre (supra) at [34]-[40].
However, each of the defendants submitted that the present case was not one of those "rare" or "unusual" cases in which it was in the interests of justice to permit a plaintiff, who is unable to bring itself within one of the four well-recognised exceptions to the rule in Foss v Harbottle, to nonetheless pursue a derivative action. It was further submitted by the defendants that in order for Eastmark to bring itself within the interests of justice exception to the rule, it was necessary for Eastmark to demonstrate:
(a) that it brings the action bona fide in the interests of the Owners Corporation and not for an ulterior purpose;
(b) that normal corporate procedures have failed to achieve the justice sought;
(c) that there is no other remedy to address the alleged wrong; and
(d) that serious injustice would arise if it was precluded from pursuing the derivative action.
The defendants relied upon various authorities in support of the contention that the four matters listed above were requirements that had to be satisfied before the interests of justice exception could be found to apply. These authorities included Barrett v Duckett (1996) 14 ACLC 3101 at 3106 (a decision of the English Court of Appeal), Cope v Butcher (1996) 20 ACSR 37 at 40, and Biala Pty Ltd v Mallina Holdings Ltd (1993) 13 WAR 11 at 73.
Eastmark, for its part, submitted that, unlike the statutory regime which now exists under the Corporations Act 2001 (Cth) (see ss 236 and 237), there was no list of matters which needed to be "ticked" in order for the interests of justice exception to apply. Eastmark further submitted that Cope v Butcher (supra), a decision of Johnston AM of the Supreme Court of Western Australia, should not be regarded as an authority for the proposition that it is necessary to show that normal corporate procedures have failed to achieve the justice sought. Otherwise, Eastmark appeared to accept that the matters identified by the defendants were at least relevant to whether the interests of justice exception applied in this case. It was further submitted by Eastmark that the circumstances of the present case were analogous to those which existed in Biala v Mallina Holdings Ltd (supra) in which Ipp J found that the interests of justice required that he allow the minority shareholder in a company to pursue a derivative action in relation to breaches of fiduciary duties owed to the company. In this context it was also submitted that (as in Biala v Mallina Holdings Ltd (supra)) where the Court has received all of the evidence concerning the alleged breaches of fiduciary duty, and where that evidence establishes those breaches, it would be absurd for the action to be defeated by a complaint of a lack of standing.
Nevertheless, as mentioned earlier, it seems to me that it is both logical and convenient to deal first with the question of standing. There is no reason why the question of the applicability of the interests of justice exception cannot be so dealt with in this case. Moreover, it seems to me that, at least as a general rule in cases of this kind, the Court should not embark upon a determination of the merits of alleged causes of action unless it has first determined that it is in the interests of justice that such causes of action be able to be pursued by the plaintiff. To do so would tend to undermine the rule in Foss v Harbottle.
Eastmark essentially contended that it was in the interests of justice to permit it to bring the action because:
(a) the Court should take a strict approach to breaches of fiduciary duties;
(b) the case was "very strong", and was brought without delay;
(c) the Owners Corporation has not sought to set aside the Agreement, or otherwise assert its rights, but has instead actively resisted the attempts by Eastmark to do so (including by unsuccessfully withholding production of documents relevant to the Agreement on the grounds of client legal privilege), which attempts are manifestly for the benefit of the Owners Corporation;
(d) an earlier attempt by the defendants to have the proceedings dismissed or struck out (including in relation to the issue of standing) was unsuccessful (see Eastmark Holdings Pty Ltd v Kabraji [2012] NSWSC 802);
(e) until early 2012 the same solicitors acted for both the Owners Corporation and Mr Bruckner;
(f) the Owners Corporation (or its Executive Committee, members of which were involved in the events giving rise to the alleged breaches of fiduciary duties) has attempted to "poison the minds of Lot Owners against Eastmark and the merits of its claim" such that the Court could not be satisfied that a true and proper resolution on the issue could be achieved at a further meeting of the Owners Corporation;
(g) the case involves a substantial sum (referable to the $380,000 plus GST payable each year by the Owners Corporation under the Agreement), and when the proceedings were commenced Eastmark had a lot entitlement of 11.65%; and
(h) the defendants do not assert that Eastmark was acting in bad faith or for a collateral purpose in bringing the proceedings.
In relation to the last point, it should be noted that Eastmark ultimately accepted that it had the onus of establishing its standing, including insofar as that required a demonstration of its bona fides and a proper purpose. It maintained, however, that it was not necessary for it to adduce direct evidence going to its bona fides and its purpose in seeking to bring the proceedings, and it did not adduce such evidence. The defendants submitted that Eastmark's forensic decision in that respect had the consequence that the Court could not be satisfied that Eastmark was acting bona fide and for a proper purpose, particularly having regard to the evidence of long-standing antagonism between Eastmark on the one hand, and the Owners Corporation and Mr Kabraji on the other.
The defendants also submitted that Eastmark had failed to show that the justice sought could not be achieved through normal corporate procedures, or through the dispute resolution regime contained in Chapter 5 of the Act. In this regard, emphasis was placed on the absence of any evidence to show that the Owners Corporation was at any relevant time under the control of the alleged wrongdoers. It was contended that Eastmark had failed to seek to have the matter raised at any subsequent general meeting (pursuant to its rights under clause 36 of Schedule 2 to the Act), and had failed to seek relief pursuant to Chapter 5 of the Act.
The defendants further submitted that Eastmark had failed to show that serious injustice would ensue in the absence of the proposed derivative action. Here, emphasis was placed on the unanimous resolution passed at the November EGM which demonstrated, so it was said, a strong desire on the part of the lot owners (who were not shown to be under the control of the alleged wrongdoers) to uphold the Agreement and receive the services for which it provided.
It was also put that there was no evidence that such services could be provided with greater skill than that offered by Mr Kabraji, or at a lower cost. The evidence suggested, and I accept, that as at June 2011 Mr Kabraji already had considerable experience in providing services of the type which were to be the subject of the Agreement. The evidence also established that at least the other members of the Executive Committee were satisfied with the services which were being provided. The alternative quote from Acity Pty Ltd was for a figure only $28,000 per annum less than the amount Mr Kabraji wanted. I was invited by Eastmark to draw the inference that Mr Davies of Acity Pty Ltd (who had also earlier provided services to the Owners Corporation) was better qualified than Mr Kabraji to provide the services, but I do not think that any such inference can be drawn from the limited evidence available. In this context, it was further put that in circumstances where the Agreement has now been fully performed, the relief available to the Owners Corporation would be restricted to payment of an amount representing the extent (if any) to which Hendersenhayes was paid more than a reasonable remuneration (or more than the amount of a just allowance).
As far as Mr Bruckner is concerned, the additional point was made that the only relief sought against him was a declaration that he breached his fiduciary duty to the Owners Corporation, and it could not be said that the pursuit of proceedings in order to obtain such relief was in the interests of the Owners Corporation, let alone that a serious injustice would arise if Eastmark was prevented from bringing such a claim.
I agree with Eastmark's contention that the four matters identified by the defendants should not be seen as factors, each of which must invariably be established before a plaintiff can invoke the interests of justice exception to the rule in Foss v Harbottle. I do not think that the exception ought to be so confined. However, the four matters are each plainly relevant to the question whether the exception applies in any particular case, and the failure of a plaintiff to establish any one of them will generally indicate that the exception is not applicable. In the present case, I accept the general thrust of the submissions made by the defendants concerning those matters, and, for the reasons which follow, I have concluded that Eastmark has failed to show that, in all the circumstances, it would be in the interests of justice for it to be permitted to prosecute the derivative claims it seeks to bring.
As to the question of Eastmark's bona fides, it was submitted by Eastmark that there was no evidence of any bad faith or ulterior motive on its part, and that the mere existence of conflict and litigation between it and the Owners Corporation does not, by itself, establish such. That may be accepted, as may the submission that it is not necessarily fatal that Eastmark adduced no evidence as to its bona fides (see Re President's Club Ltd [2012] QSC 364 at [50]).
However, the existence of ongoing disputes between Eastmark and the Owners Corporation is an important part of the context in which the Agreement arises. Indeed, the very subject matter of the Agreement is the provision of services to the Owners Corporation designed to assist its position in relation to those disputes. In these circumstances, it seems to me that in the absence of any affirmative evidence as to Eastmark's purpose in bringing the proceedings in which that Agreement is attacked, it is difficult for the Court to conclude in Eastmark's favour that it is indeed acting in good faith and for a proper purpose. Whilst I do not make any positive finding that Eastmark is acting in bad faith or for an improper purpose, I do not think that, on the evidence which has been placed before the Court, I can infer in Eastmark's favour that in bringing these proceedings it is acting in good faith and for a proper purpose (compare South Johnstone Mill Ltd v Dennis (2007) 163 FCR 343; [2007] FCA 1448 at [68] - [69]).
In any event, a consideration of the other factors identified by the defendants would lead me to the conclusion that Eastmark has failed to establish that the interests of justice exception should apply in this case.
Eastmark points out, rightly, that the pursuit of relief under Chapter 5 of the Act could yield neither an award of damages nor an order setting the Agreement aside, and that any orders which would have the effect of causing the Owners Corporation to terminate the Agreement could expose it to an action for damages. Against that, it is theoretically possible that an order invalidating the resolution of the Owners Corporation to enter into the Agreement could have been made under s 153 of the Act, in which case the Agreement itself might have been rendered unenforceable. More importantly, however, the fact remains that it has always been open to Eastmark to seek to utilise the procedures of the Owners Corporation itself to cause it to pursue the claims against the other defendants.
In particular, it has always been open to Eastmark to exercise its right to have a motion put before a general meeting of the Owners Corporation to the effect that appropriate action be taken in relation to the alleged breaches of fiduciary duty and in relation to the alleged irregularities in the voting of proxies. Since June 2011 there have been three annual general meetings (in addition to the November EGM). It is not to the point to submit, as Eastmark did, that it would be futile to put a motion to a general meeting because "the outcome would be the same". There is no evidence that any of the lot owners are, or have been, relevantly subject to control by Mr Kabraji, Mr Bruckner or anyone else. The fact that the resolutions concerning the Agreement were passed at the general meetings held in June and November 2011 is entirely consistent with the notion that the lot owners who voted (whether in person or by proxy), did so freely in pursuit of their own interests as they saw them.
As was pointed out by Barrett J in Carre (supra) at [40]:
One of the important themes running through the cases in this area is the reluctance of the courts to interfere in a situation that is capable of being resolved by an appropriate resolution of the members of a company. Where an individual shareholder seeks to assert a claim of the company in relation to some supposed cause of action and the company declines to proceed, the court will be reluctant to assist or to play any role at all unless and until it is seen that the matter cannot be resolved by a resolution of shareholders. The rationale was explained thus by Lawrence Collins J in Konamaneni v Rolls Royce Industrial (India) Ltd [2002] 1 WLR 1269 at 1277-1278 [25]; [2002] 1 All ER 979 at 987 [25]:
Where what has been done amounts to a fraud and the wrongdoers are themselves in control of the company, the rule is relaxed in favour of the aggrieved minority who are allowed to bring a minority shareholders' action on behalf of themselves and all others. The reason for this is that if they were denied that right, their grievance would never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue: Edwards v Halliwell [1950] 2 All ER 1064 at 1067; the Prudential Assurance Co Ltd case [1982] Ch 204 at 211...
Reference should also be made to the judgment of Jordan CJ in Australian Coal and Shale Employees' Federation v Smith (1937) 38 SR (NSW) 48 at 54.
In the present case, not only has Eastmark declined to invoke its rights to seek to have the Owners Corporation pursue the alleged wrongs against it, but the Owners Corporation, in general meeting in November 2011, unanimously resolved to in effect uphold the Agreement notwithstanding the allegations which Eastmark was making in proceedings in this Court. It is noteworthy that Eastmark attached a copy of its Statement of Claim to the letter it sent to each of the lot owners on 4 November 2011. It seems to me that, even if the disclosure of information at that time was insufficient to amount to full disclosure for the purposes of "curing" any antecedent breach of fiduciary duty, the information which was provided concerning the complaints made by Eastmark was such that the resolution unanimously passed at the meeting in November 2011 should be understood as a clear rebuff to any suggestion that steps be taken to move away from performance of the Agreement and seek redress from Mr Kabraji and/or Hendersenhayes. Eastmark itself seems to accept that there is no enthusiasm amongst lot owners for its cause, but suggests that their minds have been "poisoned". I do not accept that proposition.
It is true that some of the statements made by Mr Kabraji to lot owners on 9 November 2011 were inaccurate and, indeed, the tone of the letter is extravagant and somewhat emotional. However, the essential nature of the issues which existed between Eastmark and Mr Kabraji was disclosed by the information which went to lot owners. There was a debate over highly contentious matters to do with the lot owners' property interests. Both sides participated in that debate. Rightly or wrongly, the lot owners who subsequently voted on the resolution overwhelmingly supported Mr Kabraji's position. Presumably they did so in their perceived self-interest. In my opinion, this is not case where a serious injustice would be suffered if Eastmark is not permitted to pursue its derivative action.
The various points raised by Eastmark which are summarised in paragraph 83 above do not lead to any different conclusion. The last of those points (concerning Eastmark's bona fides) is dealt with above, as is the point about the poisoning of minds. Of the remaining points, some of them appear to me to have little or no relevance. For example, the fact that the defendants were unsuccessful on their application to have the proceedings dismissed or struck out, the fact that the Owners Corporation and Mr Bruckner shared the same solicitor for a time, and the fact that the Owners Corporation made claims for privilege over certain documents, do not seem to me to be particularly relevant. Similarly, the fact that the Owners Corporation has resisted (and continues to resit) Eastmark's attempts to seek redress in relation to the Agreement seems to me to be of little consequence in circumstances where so acting appears to entirely accord with the desires of the lot owners, and where Eastmark's efforts are not shown to be manifestly for the benefit of the lot owners.
Insofar as the extent of Eastmark's lot entitlement is relevant, that lot entitlement has diminished to around 5% since the commencement of the proceedings as Eastmark now only owns four lots in the Strata Scheme.
I also do not accept Eastmark's submission that the circumstances of the present case are analogous to those which existed in Biala v Mallina Holdings Ltd (supra). As Ipp J noted (at 75), that case was, factually, a most unusual case. It is readily distinguishable from the present case, not least because the wrongdoers had (at least at the time of commencement of those proceedings) control over the company which they had wronged. Conversely, no question of fraud on the minority has been raised here.
Insofar as Eastmark contends that it has a very strong case and that a strict approach should be taken in relation to breaches of fiduciary duties, it is sufficient to note that I do not agree that the claims of breach of fiduciary duty which Eastmark wishes to pursue can be described as very strong or even strong. Even if it is assumed that the members of the Executive Committee owe fiduciary duties to the Owners Corporation of the nature contended for by Eastmark, it is doubtful in my view that either Mr Kabraji or Mr Bruckner breached such duties.
There is no doubt that Mr Kabraji, through Hendersenhayes, had a significant personal interest in the making of the agreement. Nevertheless, it is difficult to see how Mr Kabraji permitted that personal interest to come into conflict with any duty he owed to the Owners Corporation as a member (including as Chairman) of the Executive Committee.
Eastmark submitted that Mr Kabraji placed himself in conflict with his duty to obtain the most favourable commercial terms for the Owners Corporation, and that Mr Kabraji favoured his own interests over the discharge of that duty. It was contended that Mr Kabraji breached his fiduciary duty by proposing the Agreement to the Owners Corporation, and then causing Hendersenhayes to enter into the Agreement.
On 17 June 2011 the Executive Committee resolved to convene an EGM to consider "engaging Mr Kabraji's consultancy firm". It has not been suggested that the members of the Executive Committee who so resolved were in breach of any duty. Thereafter, Mr Kabraji, acting on behalf of Hendersenhayes, negotiated the terms of the proposed agreement with members of the Executive Committee who were acting on behalf of the Owners Corporation. These members had the benefit of legal advice to guide them. The proposed agreement was then put to the June EGM where it was considered (in Mr Kabraji's absence), and it was resolved that the Owners Corporation enter into the Agreement.
Aside from the decision to convene an EGM to consider the matter, that process did not involve any decisions on the part of the Executive Committee or Mr Kabraji as its Chairman. Mr Kabraji's conduct throughout the process was otherwise undertaken as an officer of Hendersenhayes.
At one point Eastmark's complaint seemed to be that by proposing and then entering into the Agreement, Mr Kabraji engaged in self-dealing. However, the decision of the Owners Corporation to enter into the Agreement was made, not by Mr Kabraji or the Executive Committee, but by the lot owners in general meeting. It is not truly a case of self-dealing (see Clay v Clay (2001) 202 CLR 410; [201] HCA 9 at [51]). Moreover, the mere proposing, by a member of the Executive Committee, of an agreement for the Owners Corporation to consider in general meeting does not seem to me to involve a breach of any fiduciary duty owed to the Owners Corporation.
The breach of fiduciary duty case against Mr Bruckner is also problematic. The breaches alleged against him are essentially that:
(a) as Chairperson of the June EGM, he permitted the resolution concerning the Agreement to be put to a vote when he knew or should have known that Mr Kabraji was in a position of conflict about which full disclosure had not been made to the lot owners, and that Mr Kabraji would be in breach of fiduciary duty if the Agreement was entered into; and
(b) as the holder of proxies, he voted them in favour of the resolution that the Owners Corporation enter into the Agreement.
There was no allegation that Mr Bruckner was in any position of conflict. It was contended, however, that he was in breach of a duty not to act to the detriment of the Owners Corporation or to the benefit of a third person.
The conduct said to be in breach of fiduciary duty did not take place in Mr Bruckner's capacity as a member of the Executive Committee, but rather as the Chairperson of the June EGM and as the holder of proxies. Whilst I accept that Mr Bruckner had the power under clause 14 of Schedule 2 to the Act to rule the relevant motion out of order if he considered that the motion would, if carried, conflict with the Act or by-laws or would otherwise be unlawful or unenforceable, I do not think that his allowing the motion to be put to a vote can be said to be a breach of any fiduciary duty owed to the Owners Corporation in circumstances where:
(a) the minutes of the 17 June 2011 Executive Committee meeting (which were sent to lot owners) stated that the EGM would consider "engaging Eddie Kabraji's consultancy firm";
(b) the draft agreement was tabled at the EGM; and
(c) Mr Kabraji took no part in the discussion at the EGM concerning the proposed agreement.
In addition, I do not think that Mr Bruckner, in voting proxies (whether at the June EGM or the November EGM), can be said to have breached any fiduciary duty he owed to the Owners Corporation (compare Whitlam v ASIC (2003) 57 NSWLR 559; [2003] NSWCA 183 at [150]-[154])
Eastmark, in its written submissions, stated that the so-called "third exception" to the rule in Foss v Harbottle, being that "the plaintiff complains that his personal rights have been infringed" was relied upon as another factor in support of the application of the interests of justice exception. In this regard, Eastmark points to the difference between the position of a shareholder in a company and the position of a lot owner in a strata scheme. It was put that the liability of the former is limited whereas lot owners are liable to pay continuing levies. I accept that the consequences of a breach of fiduciary duty may be felt more directly by a lot owner as compared to a shareholder, but that circumstance does not in my view mean that the breaches of fiduciary duty complained of by Eastmark should be regarded as infringements of its personal rights. The submission that the "infringement of personal rights exception" applied in this case was not further developed, whether in writing or orally, and it does not seem to me to be correct.
For all the above reasons, I conclude that Eastmark does not have standing to bring the derivative claims the subject of these proceedings.
It was strongly urged upon me by the defendants that if I concluded that Eastmark lacked standing then I should consider the case no further and dismiss the proceedings forthwith. I propose to adopt that course in circumstances where Eastmark accepted that it was open to the Court to do so, and no party suggested that, if a decision on the question of standing was made adversely to Eastmark, any part of the proceedings would remain alive.
Accordingly, the proceedings will be dismissed. Costs will follow the event. It was submitted on behalf of Mr Bruckner that the case against him should be dismissed with indemnity costs on the basis that Eastmark should always have considered that the case was doomed to fail. There is some force in that submission. However, in circumstances where applications to summarily dismiss the proceedings were refused (see Eastmark Holdings Ltd v Kabraji [2012] NSWSC 802), I decline to make an order for indemnity costs.
The orders of the Court will be:
(1) The proceedings are dismissed.
(2) The plaintiff is to pay the costs of each defendant.
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Decision last updated: 29 November 2013
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