Elhan v Saykan (No 3)
[2009] VSC 324
•10 August 2009
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 8291 of 2002
| ADNAN (aka "ANTHONY") ELHAN and ELBEK INVESTMENTS PTY LTD | Plaintiffs |
| v | |
| NEBAHAT SAYKAN & ORS | Defendants |
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JUDGE: | HANSEN J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 30 July 2009 | |
DATE OF JUDGMENT: | 10 August 2009 | |
CASE MAY BE CITED AS: | Elhan v Saykan (No 3) | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 324 | |
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COSTS – Oppression case - Defendants offered $220,000 before trial to purchase second plaintiff’s shares and settle (different) proceeding with no order for costs - Plaintiffs rejected offer - Interlocutory order pre-trial that second plaintiff sell shares to defendants for $220,000 but reserving question of fair value of shares – Plaintiffs contended shares worth significantly more - Plaintiffs successful in establishing oppression – Fair value of shares ultimately held to be $224,826 – Whether plaintiffs acted unreasonably in rejecting offer and pursuing litigation – Plaintiffs did not act unreasonably in the circumstances – Discretionary factors – Plaintiffs entitled to costs.
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APPEARANCES: | Counsel | Solicitors |
| The First Plaintiff in person and, by leave, for the Second Plaintiff | ||
| For the First and Second Defendants | Mr C R Northrop | Goldsmiths |
| No appearance by or on behalf of the Third and Fourth Defendants |
HIS HONOUR:
Introduction
The issue now for determination is who should pay the costs of the proceeding. The issues of oppression (or liability) and the fair value of the second plaintiff Elbek’s shares have been the subject of earlier judgments[1].
[1]See [2004] VSC 83 and [2009] VSC 306.
In essence, the parties’ respective positions are as follows. The first plaintiff, who is known as and may conveniently be referred to as Anthony, submitted that the defendants should pay the plaintiffs’ costs, as the plaintiffs had established oppression by the defendants, and Anthony had been forced to sell his shares for less than what he believes they were worth. Counsel for the first and second defendants (who I also refer to as Nebahat and Selahattin where convenient) submitted that Anthony ought pay his clients’ costs, alternatively that there be no order for costs. Counsel relied on a Calderbank letter, dated 21 November 2002, sent to Anthony’s then solicitors one day before the plaintiffs commenced the subject proceeding[2], by which Nebahat and Selahattin offered to pay $220,000 to purchase Elbek’s shares and settle the proceeding which they (Nebahat and Selahattin) had already commenced[3], with each side to bear its own costs of that proceeding. Counsel submitted that the offer in the letter was reasonable, given that Anthony had ultimately recovered only $4,826 more than the amount of $220,000 his clients had offered (and had always been willing) to pay, and later had in fact paid, for Elbek’s shares. In effect, counsel submitted, Anthony had taken a chance, but failed, at establishing that the shares were worth much more than $220,000.
[2]Proceeding 8291 of 2002.
[3]Proceeding 8134 of 2002.
In order to assess the merits of the parties’ submissions, it is necessary to set out some relevant background matters. I do not recite all the facts, as that has been done in the two earlier judgments, but I note the following matters.
Background
The Elhan family operated a business manufacturing doors for kitchen cabinets. The business was conducted by way of a company called Unique Doors Pty Ltd (“Unique Doors”). The business was a financial success but there was a bitter falling out within the family. Anthony found himself opposed by his sister Nebahat and her husband Selahattin (“the first and second defendants”) and his brother in law Selfet (“the third defendant”) who held his shares through the fourth defendant. That is, all the other shareholders and directors opposed Anthony and sought to force him from the company.
To summarise the findings in my first judgment, the defendants conducted the business in a manner oppressive to Anthony (or more precisely to his company Elbek as the minority shareholder in Unique Doors). It was in the context of the following severe oppression that the litigation commenced in November 2002. Relevantly, there was the defendants’ initial decision to close a profitable business in July 2002, which was commercially illogical. The decision was bred and made in anger and spite, peremptorily and without any proper consideration of the commercial alternative. The defendants effectively forced their position on Anthony. This was followed by a voluntary administration which should not have been undertaken. The appointment of administrators was a contrivance undertaken for the purpose of meeting Nebahat’s object that she be rid of Anthony from the company. The administration had the effect of wasting a deal of the company’s money, and no reasonable group of directors would have allowed it to happen. The defendants quickly regretted their decision to appoint administrators, and took steps to end the administration. Selahattin was advised that the only way of getting the administrators out of the business was for the four shareholders to reach an agreement. It was in this context, that is to say circumstances of great urgency and of the defendants’ own making, that the parties signed the heads of agreement dated 2 August 2002 by which Anthony and Elbek agreed to accept $220,000 as full payment for the shares and their withdrawal from involvement in Unique Doors. In short, Anthony had been against closing the business, and had raised the proper objection to administration on the basis that the company was solvent, but was overridden and pressured into making an urgent decision on Selahattin’s offer. As Anthony said in evidence, he was not happy but he accepted the offer as “it was a better option than the company going into liquidation”. Accepting the offer meant that he would get some money back.
In these circumstances, it was perhaps not surprising that Anthony subsequently had second thoughts about the August agreement, refused to sell Elbek’s shares, and ultimately sought to purchase the other parties’ shares. As I found, at a meeting on 30 September 2002, the shareholders present concluded an agreement whereby Anthony was to purchase the other shareholders’ shares for $660,000, to be paid as soon as practicable but with no fixed date set. The 30 September agreement did not unleash a mutual feeling of goodwill. Rather, as set out at [69] to [88] of my judgment, events in the following weeks had the effect of shutting Anthony out of the business, making his position as manager untenable, and hindering his ability to complete the purchase of the shares and thus acquire the business pursuant to the September agreement. In dismissing the first and second defendants’ appeal, the Court of Appeal[4] considered that the defendants’ conduct of the affairs of Unique Doors was “on any objective analysis plainly unfair and discriminatory against [Elbek] as a member of the company”[5].
[4][2006] VSCA 230.
[5]At [33] per Nettle JA (Ashley JA and Smith AJA agreeing).
It was in this context, then, that the litigation commenced.
The first proceeding, commenced by Nebahat and Selahattin on 14 November 2002, effectively sought specific performance of the August agreement, that is that for the payment of $220,000 Elbek transfer its shares and Anthony resign as a director.
Then, by the letter from Nebahat and Selahattin’s solicitors to Anthony’s solicitors dated 21 November 2002, Nebahat and Selahattin offered to pay $220,000 pursuant to the August agreement in exchange for a transfer of Elbek’s shares, with each side to bear its own costs. The offer was stated to be open until 12.00pm the following day. The letter concluded by stating that “if your client does not accept this offer and your client does no better than the offer at the trial or final hearing of this proceeding then our client shall seek their costs on a solicitor-client basis”. It was implicit in the offer that Anthony would also resign as a director, as that was consistent with the relief sought in the proceeding based on the alleged August agreement.
The plaintiffs did not accept the offer.
On 22 November 2002 the plaintiffs commenced the subject proceeding, seeking orders under the oppression provisions of the Corporations Act2001, specifically for the purchase by the plaintiffs of the defendants’ shares, for regulating the affairs of Unique Doors in the future, or alternatively that the company be wound up. In other words, by his proceeding Anthony sought the reverse of that sought by the other shareholders/directors in their proceeding.
Anthony’s desire to purchase the other shareholders’ shares was, however, soon overtaken by events. For reasons I have explained in my earlier judgments, in December 2002 during the interlocutory stages of the proceedings, I ordered that Elbek sell its shares to Selahattin for $220,000. As I have explained, those orders were made on the basis that the question of the fair value of Elbek's shares had not been resolved and remained an issue for determination in the litigation, along with the issue of oppression. Indeed, on the day I made the orders, the plaintiffs’ counsel stated that her clients did not accept that the fair value of the shares was $220,000. In that regard, counsel relied on an affidavit sworn by Anthony’s accountant, Hasan Kaygusuz, who estimated that the fair value of Elbek’s shares was $492,472.50.
Next, at a directions hearing on 21 February 2003, it was apparent that the parties were in disagreement as to the fair value of the shares. Anthony’s counsel submitted that it was appropriate to refer that question to a special referee for determination before the trial on liability. The first and second defendants’ solicitor opposed that course on the basis that a valuation would incur unnecessary expenses and if his clients succeeded in their proceeding for specific performance, the effect would be that they were entitled to purchase Elbek’s shares for $220,000 pursuant to the August agreement, so the question of the fair value of the shares simply would not arise. As I observed at the time, the August agreement was no answer to the oppression case, which, if established, would have an overarching effect. In the circumstances, the pressing issue between the parties was the oppression case, and I considered that the appropriate order was to set both proceedings down for trial, with the question of the fair value of the shares to await the outcome on liability. Accordingly, on 21 February 2003 I fixed the proceedings for hearing on 11 March 2003.
At the trial, the plaintiffs’ counsel submitted in closing address that if oppression was established, the appropriate relief was that the first and second defendants, being the oppressors and in control of the company, pay the plaintiffs the fair value of Elbek’s shares. In addition, the company should repay Anthony his loan account of $51,000. In other words, Anthony’s position at trial was that he sought payment of money rather than orders permitting him to purchase the others’ shares. Counsel for Nebahat and Selahattin formally reserved their position on relief in closing address. Nevertheless, in opening counsel said that Nebahat and Selahattin were still prepared to sell their shares to Anthony “upon payment of what is acknowledged to be the fair price as between the shareholders, namely $220,000 for each quarter of the total shareholding”. Also, during his closing address, counsel referred at various stages to the price of $220,000 being common ground between the directors as to the value of the shares, in the sense that the August and September agreements and the December orders were based on that figure, and that was the figure on which the parties had conducted themselves. The relevant point for present purposes is that the defendants’ approach at trial was that the fair value of the shares was the $220,000 Anthony had already received, and not some lesser amount.
Following a bitterly contested trial on liability, on 7 April 2004 I gave judgment. I dismissed the proceeding brought by Nebahat and Selahattin with costs, and upheld the oppression case. There was a declaration that the conduct of the affairs of Unique Doors in the period from 26 July 2002 was oppressive to, unfairly prejudicial to, or unfairly discriminatory against Elbek, and I made orders for the determination of the fair value of Elbek’s shares (including the filing of experts’ reports), adjourned the further hearing to 30 July 2004 and reserved the costs of the trial, of the day on 26 March 2004 and 7 April 2004, and ordered that the plaintiffs pay the defendants’ costs of the day on 2 April 2004.
On 19 April 2004 the first and second defendants filed a notice of appeal against my orders. Nevertheless, while the appeal was pending the parties took steps and there were interlocutory hearings in relation to the question of the fair value of the shares. I referred to this in my recent judgment on the fair value of the shares. The appeal was ultimately dismissed with costs on 26 October 2006.
As to the steps taken in preparation for the hearing on the fair value of the shares, on 4 October 2004 the plaintiffs’ expert Dowling filed his first report which estimated that the amount payable to Anthony in respect of Elbek’s shares was $336,000. In effect, as Anthony had already been paid $220,000, he was entitled to a further $116,000. It is to be noted that while this was a significant revision downwards from the figure of $492,472.50 stated in the affidavit of Hasan Kaygusuz, the plaintiffs still maintained that they were entitled to significantly more than the $220,000 already received.
The first and second defendants’ expert Hawkes filed his first report on 25 October 2004, which concluded that Anthony should have received only $87,210 in respect of the shares and his loan. In effect, having already been paid $220,000, the result was that he had been overpaid $132,790.
Further reports were later filed by both experts, there was tendentious correspondence as to the experts’ respective conclusions, some figures were amended, and there was a joint conference of the experts who prepared a joint report. Without going into the detail of these matters, it is to be noted that while both sides reduced the amounts they claimed to be entitled to[6], the fact remained that each side sought payment of money from the other side. That is, Anthony sought to recover an amount in addition to the $220,000 he had already received, whereas Nebahat and Selahattin contended that Anthony had been overpaid and should repay them some of the $220,000 he had already received.
[6]In effect, by the time the matter was before me this year, Anthony sought to adopt Efthim AsJ’s report which concluded that he had been underpaid by only $4,826, while Nebahat and Selahattin sought to establish that Anthony had been overpaid by about $90,000, or alternatively $30,000.
It was in these circumstances that the question of the fair value of the shares fell to be determined. There were a number of interlocutory hearings before me in 2004 and 2005 dealing with disputes between the parties as to the provision of material relating to the share valuation and the preparation of expert reports, all of which caused unnecessary vexation and costs. Then, the plaintiffs’ solicitors ceased to act on 17 November 2005, which was just four days before the share valuation case was fixed for hearing. In the circumstances, as a matter of fairness to an unrepresented litigant trying to pick up the running of his case at short notice, on 21 November 2005 I adjourned the hearing of the share valuation to a date to be fixed, to enable Anthony to seek pro bono assistance, or otherwise prepare his case on valuation as he may be advised. Ultimately, it was not until 30 May 2008 that I referred to Efthim AsJ the question of the fair value of Elbek’s shares.
The above is a sufficient overview of the circumstances in which the litigation commenced and how it evolved.
Decision
It is axiomatic that costs is a matter in the discretion of the Court, such discretion to be exercised judicially in light of all the relevant circumstances. Ordinarily costs will follow the event but, nevertheless, the particular circumstances may warrant a different conclusion[7]. In the present case, the final result was that Anthony was held to be entitled to $224,826 in respect of Elbek’s shares. From a monetary perspective, the offer of $220,000, made at a time when relatively little cost had been incurred, compares favourably with the final result achieved by Anthony. In short, and considered alone the amount of time, money, and stress exerted on fighting the case only to recover a few thousand dollars more than what he was offered more than six years ago, seems out of all proportion.
[7]Among the many authorities see Ritter v Godfrey [1920] 2 KB 47.
In effect, that was the premise of the submission made by counsel for the first and second defendants. Namely, that Anthony effectively did no better than the initial offer, hence he should pay the first and second defendants’ costs of the proceeding, or alternatively not have his costs of the proceeding. The submission is superficially attractive, but in my view places undue reliance on the benefit of hindsight and overlooks other factors referred to below.
It is first necessary to say something about the offer. It was expressed as an offer to settle the proceeding brought by Nebahat and Selahattin. That was not surprising as it preceded the commencement of the plaintiffs’ proceeding. But the fact is that it was an offer to settle the proceeding brought by Nebahat and Selahattin and that proceeding - which sought to hold Anthony and Elbek to the alleged August agreement and thus to the price of $220,000 – was dismissed on the merits with costs. In other words, Anthony and Elbek had a 100% win against the offer.
The next point is that the defendants did not make an offer in the plaintiffs’ proceeding. Rather, they fought the plaintiffs, first to defeat the oppression case and then to establish a lower valuation than $220,000.
I would next make the following observations. At the time the offer was made, Anthony did not wish to sell Elbek’s shares. The proceeding he commenced the following day sought an order that he purchase the others’ shares. If Anthony had accepted the offer in November 2002, he would necessarily have had to abandon his hope of purchasing the others’ shares. And while it was apparent when I made the orders in December 2002 that Anthony was not in a position to purchase the other shareholders’ shares, and no doubt for that reason Anthony’s counsel at trial sought only the fair value of the shares rather than an order that Anthony purchase the shares, it does not follow that Anthony should have resigned himself to selling Elbek’s shares in November 2002. For Anthony had suffered badly at the hands of the defendants, and had a very strong case of oppression on the merits. Given the depth of feeling between the parties at the time, and the conduct to which he had been subjected, it was not unreasonable that Anthony rejected the offer and commenced the proceeding to establish oppression and the related relief.
I do not overlook the fact that following the December 2002 orders that Elbek sell its shares, and by the time the cases went to trial, the oppression proceeding was not premised on the idea that Anthony, if successful, would purchase the others’ shares. Indeed, as I have noted, Anthony’s counsel did not seek such an order, but rather confined himself to seeking that the plaintiffs receive the fair value of the shares. But the point then was that the parties were locked in combat, the defendants’ purpose being to defeat the claim of oppression, that being the plaintiffs’ gateway to a valuation, and thus have the proceeding dismissed. For his part Anthony had no choice but to fight or give up on the basis of accepting the $220,000 and, it would seem, orders for costs being made against him and Elbek.
From Anthony’s point of view, the real purpose of the oppression proceeding was to establish an entitlement to be paid more than $220,000 for Elbek’s shares. Of course, with the benefit of hindsight, it can be seen that Anthony only achieved $4,826 (plus interest) more than the $220,000 figure. Nevertheless, at the time the proceeding was brought, in my view it was not unreasonable for Anthony to consider that there were reasonable prospects of establishing that the fair value of Elbek’s shares was more than $220,000. The initial advice Anthony received to the effect that the amount owing to him was in the order of an additional $300,000 seems to have been inflated. And certainly, the figure was reduced dramatically by Dowling, but that did not occur until after the judgment on liability. And even then, the amount Dowling estimated to be owing for the shares was $116,000. The short point is that at the time of the offer, and at the time of the trial on liability, Anthony believed (as indeed he still does) that the shares were worth significantly more than $220,000. Further, it is not to be overlooked that the defendants opposed the determination of the fair value of the shares before the trial on liability, effectively requiring Anthony to establish his oppression case before the question of the fair value of the shares could be determined.
In my view, in all the circumstances Anthony did not act unreasonably in continuing to prosecute the oppression proceeding. Indeed, he was successful in establishing oppression. In the circumstances, it is appropriate that the defendants pay the plaintiffs’ costs of the proceeding on liability.
As to the costs of the valuation aspect of the case, I conclude as follows.
Having pursued the valuation to the end, it is true that Anthony obtained only a few thousand dollars more than the amount of the “offer” and the amount he later received in respect of Elbek’s shares. But as I have said, the offer relied on by counsel was made in respect of a different proceeding, which Anthony successfully defended. In assessing the parties’ success or otherwise on the share valuation, comparing that pre-trial offer with the final valuation is of limited assistance. That is especially so given that the first and second defendants’ position on the valuation changed after judgment on liability.
At the trial on liability, the defendants did not submit that the shares were worth less than $220,000 and that Anthony would therefore have to repay money. Rather, their position was that the fair value was $220,000 (and they were prepared to sell their shares for that amount), or that they be entitled to purchase Elbek’s shares for $220,000 under the August agreement. In contrast, by October 2004, when the legal landscape had changed, the first and second defendants relied on Hawkes’ first report to claim that Anthony should pay them back about $130,000. And while they ultimately chose not to rely on Hawkes’ reports[8] in the valuation hearings before Efthim AsJ and myself, their position remained that Anthony should repay them about $90,000 (or at least $30,000). In effect, then, the share valuation was not merely an exercise in Anthony seeking to establish that he was entitled to more than $220,000, but also concerned Anthony seeking to resist the first and second defendants’ claim that they had overpaid him and that he (Anthony) should return money to them. Again, Anthony was locked in and had no option but to go on in his proceeding.
[8]Except the joint report of Hawkes and Dowling.
Hence, notwithstanding his success in establishing oppression, Anthony had to deal with the first and second defendants’ claim that he pay money back to them. And there seemingly was no prospect of settling the proceeding at this point, as each side insisted on an entitlement to payment from the other side. In the circumstances, Anthony had to bring the share valuation back before the Court so as to finalise the question of the fair value of the shares and the ultimate disposition of the case, one way or the other. And while Anthony’s receiving a few thousand dollars more than $220,000 might seem to be only a slight victory in pure dollar terms, he was successful in resisting the first and second defendants’ claim that he repay a significant sum of money to them. Indeed, the overall result achieved by Anthony on the valuation was nearly $100,000 more favourable to him than the primary position sought by the first and second defendants’ counsel, namely that Anthony should repay his clients about $90,000. In the circumstances, I reject counsel’s submission to the effect that Anthony pursued the share valuation without success.
Considering the circumstances overall, in my view it is just and appropriate that the defendants pay the plaintiffs’ costs of the proceeding including reserved costs up to and including 7 April 2004, and thereafter the first and second defendants pay the plaintiffs’ costs of the proceeding including reserved costs.
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