Frauenstein v Farinha
[2007] FCA 1953
•10 December 2007
FEDERAL COURT OF AUSTRALIA
Frauenstein v Farinha [2007] FCA 1953
CORPORATIONS - business ventures – whether carried on by partnerships – where plaintiff made payments in connections with businesses – characterisation of payments – allotment of shares – whether accounts of businesses underestimate revenues earned and overstate expenses incurred – whether unfair or oppressive conduct occurred – whether majority shareholders should be required to buy shares in companies of minority shareholders.
Corporations Act 2001 (Cth), ss 232, 288, 344, 461
Partnership Act 1892 (NSW), s 1CARL FRAUENSTEIN AND ORS v TOBIAS FARINHA AND ORS
NSD2135 OF 2006
EMMETT J
10 DECEMBER 2007
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NSD2135 OF 2006
BETWEEN:
CARL FRAUENSTEIN
First PlaintiffCARPE DIEM INITIATIVES PTY LIMITED
Second PlaintiffCARL BONDI JUNCTION PTY LIMITED
Third PlaintiffCARL WORLD SQUARE PTY LIMITED
Fourth PlaintiffAND:
TOBIAS FARINHA
First DefendantMIGUEL FARINHA
Second DefendantMARCO ZAGATO
Third DefendantSAN MARCO BONDI JUNCTION PTY LIMITED
Fourth DefendantSAN MARCO PICCOLO PTY LIMITED
Fifth DefendantSAN MARCO WORLD SQUARE PTY LIMITED
Sixth DefendantCOCKLE BAY SAN MARCO PTY LIMITED
Seventh DefendantEQUAL 54 PTY LIMITED
Eighth DefendantJAMES PANAGOPOULOS
Ninth DefendantTOBY BONDI JUNCTION PTY LIMITED
Tenth DefendantMARCO BONDI JUNCTION PTY LIMITED
Eleventh DefendantMIGUEL BONDI JUNCTION PTY LIMITED
Twelfth DefendantCINE SAN MARCO PTY LIMITED
Thirteenth DefendantFIRST CROSS-CLAIM
BETWEEN:
TOBY BONDI JUNCTION PTY LIMITED
First Cross-ClaimantMARCO BONDI JUNCTION PTY LIMITED
Second Cross-ClaimantMIGUEL BONDI JUNCTION PTY LIMITED
Third Cross-ClaimantAND:
CARL BONDI JUNCTION PTY LIMITED
Cross-RespondentSECOND CROSS-CLAIM
BETWEEN:
CINE SAN MARCO PTY LIMITED
Cross-ClaimantAND:
CARL WORLD SQUARE PTY LIMITED
Cross-Respondent
JUDGE:
EMMETT J
DATE:
10 DECEMBER 2007
PLACE:
SYDNEY
REASONS FOR JUDGMENT
INTRODUCTION
AMENDMENT
THE WITNESSES
THE ISSUES
THE ESTABLISHMENT OF THE BUSINESSES AND THE DEMISE OF TRUST
RESOLUTION OF THE ISSUESBusiness Structures
Characterisation of Carl’s Payments
Allocation of Carl’s Payments
Identification of the Debtors
Capital of World Square
Accounting DeficienciesOppression
$550,000 LoansCONCLUSIONS
INTRODUCTION
The first plaintiff, Carl Frauenstein (Carl), and the first three defendants, Tobias Farinha (Toby), Miguel Farinha (Miguel) and Marco Zagato (Marco) have been jointly involved in three businesses. The businesses consist of a restaurant business known as “Moda” carried on at the Westfield Shopping Mall at Bondi Junction, a café business known as “Momo” also carried on at Westfield at Bondi Junction and a bar and gaming lounge business known as “Equilibrium” carried on in the World Square Shopping Centre in George Street, Sydney. Toby is Miguel’s father and Marco’s father-in-law. It is convenient to refer to Toby, Miguel and Marco jointly as the Farinhas. I shall generally refer to corporate entities connected with the Farinhas as the San Marco Group.
While the relationship between Carl and the Farinhas began as one of trust and cooperation, the relationship has soured and they have lost trust in each other. As a consequence, they have engaged in expensive litigation to resolve issues that should sensibly have been resolved by mediation or other extra curial means.
The three businesses have been carried on by the fourth, fifth and sixth defendants, San Marco Bondi Junction Pty Limited (Bondi Junction), San Marco Piccolo Pty Limited (Piccolo) and San Marco World Square Pty Limited (World Square) respectively. That is to say, Bondi Junction carries on the Moda business, Piccolo carries on the Momo business and World Square operates the Equilibrium business. However, as will become apparent, the Moda and Momo businesses have tended to merge into one business carried on by Bondi Junction.
A significant issue in the proceeding is whether Bondi Junction, Piccolo and World Square carry on the businesses beneficially or in some nominee or trustee capacity. The Farinhas say that Bondi Junction, Piccolo and World Square carry on their respective businesses as nominee for various partnerships. They say that a partnership, consisting of Toby Bondi Junction Pty Limited (Toby Bondi Junction), Marco Bondi Junction Pty Limited (Marco Bondi Junction) and Miguel Bondi Junction Pty Limited (Miguel Bondi Junction), which are controlled by Toby, Marco and Miguel respectively and Carl Bondi Junction Pty Limited (Carl Bondi Junction), which is controlled by Carl, carries on the Moda and Momo businesses. They also say that Cine San Marco Pty Limited (Cine) which is controlled by the Farinhas, and Carl World Square Pty Limited (Carl World Square), which is controlled by Carl, carry on the Equilibrium business in partnership.
All of the relevant corporate entities have been joined as parties to the proceeding, either as plaintiffs or defendants. Cine and Toby Bondi Junction, Marco Bondi Junction and Miguel Bondi Junction seek orders, by way of cross-claim, that the alleged partnerships be wound up and that an account of profits and losses be taken.
It is common ground that Carl and the Farinhas were to be involved in corporate entities that were to engage in one way or another in the conduct of the three businesses. Further, it is not disputed that Carl made payments exceeding $1,800,000 in connection with the three businesses. However, there is a dispute between the parties as to how those payments should be characterised. Carl claims that all of the payments should be characterised as advances on loan account. The Farinhas say, on the other hand, that the payments should be treated as contributions to the equity of the alleged partnerships.
There is another dispute as to the identity of the entity or entities to which Carl’s payments were made. Carl adduced evidence from Ms Fiona Marie Bateman, a chartered accountant who specialises in forensic accountancy. Ms Batemen reported that, following a detailed examination of the books and records of various entities involved with the businesses, she was unable to determine how some of the payments should be allocated among the three businesses.
There are also particular disputes between the parties concerning the share capital of World Square. The first dispute concerns a written agreement involving Carl, Toby and Marco dated 20 July 2005 (the Letter Agreement), whereby it was agreed that, if a binding written agreement relating to their interest in the World Square project was not entered into by 7 September 2005, then, at the option of any of the parties, Toby and Marco were to arrange for the repayment of all monies invested by Carl in the World Square project and Carl’s interest in the project would be transferred to the other parties. Carl claims that the option was not properly exercised or, if it was, that there is no longer any agreement on foot.
The second dispute concerns the purported allotment of a substantial number of shares in the capital of World Square to the eighth defendant, Equal 54 Pty Limited (Equal 54). The Farinhas now say that, by reason of failure to comply with the Constitution of World Square, the purported allotment was ineffective. Carl, on the other hand, says that, whether or not the allotment was effective, it was an instance of unfair and oppressive conduct in relation to the affairs of World Square. Equal 54 was joined as a defendant but, having regard to the contention by the Farinhas that the allotment was ineffective, it has not played a substantive part in the proceeding.
Carl owns 40% of the issued capital of Bondi Junction and 40% of the issued capital of Piccolo. Until the purported allotment to Equal 54, Carl held 30% of the issued capital of World Square. Carl claims that the affairs of World Square, Bondi Junction and Piccolo have been conducted in a manner that is oppressive or unfairly prejudicial to or unfairly discriminatory against Carl in his capacity as a shareholder and in a manner that was or would be contrary to the interests of the members of those companies as a whole. He therefore claims orders, under s 461 of the Corporations Act 2001 (Cth) (the Corporations Act), that the Farinhas or entities associated with them be required to buy his shares in those three companies for a value determined on the basis that the alleged unfair or oppressive conduct had not occurred.
The allegations of oppressive conduct involve an examination of allegations made by Carl of under reporting of revenue of the three businesses and overcharging of management, administration and other fees payable by the three businesses to the San Marco Group. The parties accept that the question of the value to be attributed to Carl’s shares in the three companies, if the relief claimed by him were to be ordered, should be the subject of a further hearing at which further evidence could be adduced and further submissions would be made.
Carl and the second plaintiff, Carpe Diem Initiatives Pty Limited (Carpe Diem), also seek declarations that Carpe Diem lent $550,000 to Toby and Marco or alternatively to the seventh defendant, Cockle Bay San Marco Pty Ltd (Cockle Bay), in order to fund a payment to Sherbet Creative Enterprises Pty Ltd. Cockle Bay is controlled by the Farinhas. In the further alternative, Carl and Carpe Diem sought a declaration that the loan was guaranteed by Toby and Marco, without saying who was the borrower. They claim that the loan fell due to be repaid to Carpe Diem on 30 November 2005.
As I apprehend the contentions of the parties, it is now common ground that, in March 2005, loans totalling $550,000 were made to Cockle Bay. However, the Farinhas say that the loan was made by Carl personally and not by Carpe Diem. Carl and Carpe Diem seek judgment in favour of Carpe Diem against Cockle Bay and do not press for declarations that the repayment of the loans to Cockle Bay was guaranteed by Toby or Marco.
The stance adopted by the Farinhas in relation to the loans totalling $550,000 is an essentially tactical one. The tactical consideration appears to be that, if a partnership that involved Carl personally came into existence, the taking of accounts may require a further payment by Carl. If the loans of $550,000 are owing to Carl, there may be a right of set off. In the light of the conclusions that I have reached that no partnership was entered into involving Carl personally, the issue may not matter.
AMENDMENT
Following the end of the oral evidence, Carl applied for leave to amend the statement of claim further and to file a further amended originating process. It is fair to say that certain of the amendments were prompted by questions raised in the course of argument. The amendments relate to the recovery of the payments made by Carl. The amendments were proposed under two rubrics, namely, “Monies Lent” and “Monies Had and Received”. Prior to the amendment application, the originating process had claimed declarations that the payments made by Carl had been advances to World Square, Bondi Junction and Piccolo on loan account. The originating process also claimed orders that those companies repay the amounts. Thus, it was clear that Carl had claimed repayment of the monies that he had paid and the proceeding was conducted on the basis that he was seeking repayment. Insofar as the amendments sought recovery of monies advanced on loan account, the proposed amendments did not change or extend the nature of the claims made in the proceeding. Accordingly, there was no real opposition from the Farinhas in relation to that aspect of the proposed amendments.
However, the claims under the rubric “Monies Had and Received” gave rise to difficulties. The Farinhas said that, in so far as the proposed amendments sought to raise claims on common money counts, the pleading was defective because it failed to plead properly a case of unjust enrichment. The Farinhas contended that it would be necessary for Carl to establish that each of the three companies was in fact enriched unjustly to the extent that it had received the monies in question, either on the basis of a total failure of consideration, or on the basis of some mistake as to the legal relationship which existed between the parties.
The Farinhas contended that they would be prejudiced by an amendment to plead such a case at that stage because they had conducted their defence up to that time on the basis of the existing pleadings, which did not call for the adducing of evidence, so they say, as to the precise manner in which the payments by Carl should be allocated between the three businesses. They contended that any cause of action must depend upon some notion of unjust enrichment, which they said they had not had the opportunity to address. More importantly, however, the Farinhas indicated that, in answer to such claims, they would wish to raise the defence of change of position. While they accepted that the existence of a partnership had been an issue addressed by them in the conduct of the proceeding, the question of whether or not Bondi Junction, Piccolo and World Square had in fact received payments from Carl to the use of those companies had not been addressed. The Farinhas said that such matters would need to be addressed by further evidence. They claimed that they would require at least several weeks before such evidence could be adduced.
It was not suggested that the Farinhas might have adopted a different course in the conduct of the proceeding if the proposed amendments had been pleaded originally. Accordingly, any unfairness to the Farinhas and the entities associated with them resulting from the proposed amendments, was able to be accommodated by affording them the opportunity to adduce additional evidence. In the circumstances, I granted leave to Carl to make the amendments under both the rubric of “Money Lent” and the rubric of “Monies Had and Received”, on the basis that the first to seventh defendants would be entitled to file a defence to any further amended statement of claim and would be afforded the opportunity of adducing evidence and making further submissions in relation to the issues raised by that defence. However, after several weeks, the Farinhas indicated to the Court that they do not wish to adduce further evidence on the new questions.
THE WITNESSES
Carl and the Farinhas are all South African born but they now live in Australia. Carl is qualified as a mechanical and aeronautical engineer. In 1990 he became a management consultant and worked in that capacity from 1992 until 2000 when he retired. Toby has been involved in running restaurant, hotel and liquor store businesses for over 40 years.
Carl was introduced to the Farinhas through a solicitor, Mr Colin Steingold. Another connection between Carl and the Farinhas, prior to the events that are the subject of the proceeding, was Mr Alan Saidman, an accountant who acts for both Carl and the Farinhas. While each of Messrs Saidman and Steingold may have been able to throw light on factual matters that are in dispute between Carl on the one hand and the Farninhas on the other, neither of them was called to give evidence by either side. While mechanisms would have been available for either to be called as a witness by the Court, if necessary, neither side availed itself of such mechanisms.
Carl met Mr Saidman in 1997 when Mr Saidman became his accountant. In 2001, Mr Saidman introduced Carl to Mr Steingold who then became Carl’s solicitor. In 2003, Mr Steingold introduced Carl to the Farinhas.
Carl gave evidence in chief both by affidavit and orally and was cross examined. Carl’s oral evidence in chief was clear and unequivocal. Some of his evidence as to relevant conversations given by affidavit were not disputed by the Farinhas. Despite the fact that Carl’s evidence may have been rehearsed, I consider that he should be accepted as a truthful witness. Accordingly, in so far as the conversations that occurred between Carl on the one hand and the Farinhas on the other are relevant to the issues, I accept the evidence given by Carl as a reliable version of those conversations. In several instances, Carl did not give evidence in chief in relation to important conversations. In those instances, I consider that the version given by Toby is a reliable version of the communications that occurred orally.
Carl, Toby, Marco and Miguel all gave oral evidence in the proceeding and each was cross-examined. Each swore affidavits, some of which were quite extensive. The affidavits dealt with numerous conversations between them concerning the projects at Bondi Junction and at the World Square development. The evidence in chief in relation to significant disputed conversations was given orally. On the other hand, several affidavits sworn by the Farinhas accepted that the conversations deposed to by Carl took place as he said and those parts of the Farinhas’ affidavits were tendered as admissions. In all of the circumstances, I have some confidence in making findings concerning the substance of relevant conversations.
THE ISSUES
In his written submissions to the Court, Carl formulated eight factual issues. The Farinhas did not quarrel with that formulation. Some of the issues are interrelated and overlap. The issues as I propose to address them may be summarised as follows.
(1)Whether the Moda, Momo and Equilibrium businesses were owned by Bondi Junction, Piccolo and World Square beneficially, or whether those three companies were nominees of partnerships, consisting of entities associated with the Farinhas and Carl, which acted as trustees of trusts associated with the Farinhas and Carl.
(2)Whether payments made by Carl in connection with the businesses should be characterised as contributions to equity (whether of partnerships or otherwise) or as advances on loan account and, if the latter, to whom.
(3)Whether the option conferred by the Letter Agreement was effectively exercised and, if so, whether any agreement is still on foot.
(4)Whether the purported allotment of shares in the capital of World Square to Equal 54 was effective.
(5)Whether the accounts of the Moda and Momo businesses underestimate the revenues earned in relation to those businesses and whether management fees, consultancy fees, administration expenses and training costs that have been charged to the three businesses by the Farinhas, or entities associated with them, were properly charged to those businesses.
(6)Whether the affairs of World Square, Bondi Junction and Piccolo have been conducted in a manner that would attract the exercise of jurisdiction under s 461 of the Corporations Act.
(7)Whether the loans totalling $550,000 that were made to Cockle Bay in March 2005 were made by Carl or by Carpe Diem.
I shall state my conclusions in relation to each of those issues. That will involve factual findings and some legal conclusions from those findings. In that regard, it is necessary to describe in some detail the dealings between Carl and the Farinhas that led to the establishment of the businesses and their falling out.
THE ESTABLISHMENT OF THE BUSINESSES AND THE DEMISE OF TRUST
Bondi Junction was incorporated on 24 February 2004. On 31 March 2004, Toby and Mr Steingold were appointed as directors of Bondi Junction. At that stage, Carl had no involvement with any of the proposed ventures.
In late April or early May 2004, Carl and Mr Steingold had discussions concerning the possibility of the two of them participating with the Farinhas in the three proposed ventures. Shortly thereafter, a discussion involving Carl, Mr Steingold and the Farinhas took place. Carl gave no evidence in chief about such a discussion. However, in cross-examination he did not deny that such a discussion took place and I accept that it did.
In the course of the discussion, Toby said that the Farinhas were happy to do the Bondi Junction deal with Carl and Mr Steingold on a 50/50 basis, with Carl and Mr Steingold being the financiers and the Farinhas managing the businesses. Mr Steingold said that he and Carl were happy with that. Toby said that, for the World Square business, the Farinhas would want a controlling interest so they would do that on a 60/40 basis, again with Carl and Mr Steingold as the financiers. Carl and Mr Steingold both said that was fine with them. Toby then asked Mr Steingold to draw up a partnership agreement for the ventures after he had spoken to Mr Saidman. Mr Steingold said that he would.
Another meeting took place at Mr Saidman’s offices at some time in the first part of 2004. Toby says that the meeting was attended by Marco, Miguel, Carl, Mr Steingold and himself. Miguel also gave evidence about such a meeting but I do not regard Miguel’s evidence of the meeting as reliable: he made no mention of it in a statement that was provided in connection with the proceeding and was unable to give a satisfactory explanation, when giving oral evidence, as to how he subsequently came to recall the meeting. Marco also gave evidence of a series of meetings that he attended at Mr Saidman’s offices during April and May 2004, some of which were attended by Carl. He said that the way in which the businesses would be structured was discussed. Carl gave no evidence in chief about such a meeting. However, while he said in cross-examination that he did not recall such a meeting, he did not deny that a discussion such as deposed to by Toby may have occurred. In the circumstances, it is difficult to form any firm view as to the precise discussion that occurred at any such meeting. However, on the balance of probabilities, I consider that such a meeting occurred and proceeded substantially as deposed to by Toby.
At the meeting, Toby told Mr Saidman that Carl, Mr Steingold and the Farinhas had agreed that Carl and Mr Steingold would take 50% and the Farinhas would take the other 50% of the Bondi Junction businesses as a partnership, and that the Farinhas would take 60% and Carl and Mr Steingold would take 40% of the World Square business as a partnership. Toby asked Mr Saidman whether he had any suggestions as to how they should structure the arrangements so as to be most tax effective for everybody. Mr Saidman asked whether they planned to sell the businesses in the future. Toby said that they may want to sell the Bondi Junction operation when it was up and running and profitable.
Mr Saidman said that it would probably be best if they established ‘hybrid trusts’ for each of their usual family trusts and made them the partners in the partnerships. He said that he would form new nominee companies to carry on the businesses on behalf of the partnerships. He said that the new companies would only be nominees of the partnerships, so that all income would flow through to the hybrid trusts and the companies would file nil returns for tax purposes. He said that each of the participants would hold shares in the nominee companies in proportion to their interests in the businesses. Mr Steingold said that he would draw up agreements on that basis. No one gave any evidence as to the meaning of the term “hybrid trust”. It could possibly refer to a trust that had characteristics of different kinds of trust, such as a discretionary trust and a unit trust. Nothing appears to turn on the meaning of the term.
World Square was incorporated on 4 June 2004 with an issued capital of 10 shares. Of those shares, 6 were issued to Cockle Bay and 2 were issued to each of Carl and Steingold. Toby, Miguel, Marco and Mr Steingold were appointed as directors of World Square. On 8 June 2004, Marco, Miguel and Carl were also appointed directors of Bondi Junction.
On 24 June 2004, Carl received a draft partnership deed from Mr Steingold. At about the same time, Toby and Marco also received a copy of the draft. The draft was expressed to relate to the conduct of a restaurant business at the Westfield Shopping Mall at Bondi Junction. It provided that Bondi Junction would act as nominee of the partnership in accordance with the directions of the partners. The partners were to be companies controlled by each of Toby, Miguel, Marco, Carl and Mr Steingold, which were referred to in the draft respectively as Toby Co, Miguel Co, Marco Co, Carl Co and Colin Co. Companies by that name have never existed. According to the draft partnership deed, the respective proportions of the partners in the partnership were to be:
Toby Co: 25.84%
Miguel Co: 7.50%
Marco Co: 16.66%
Carl Co: 25.00%
Colin Co: 25.00%
The draft partnership deed provided expressly that Bondi Junction was not to be a member of the partnership. It also provided that the partnership was to be managed and controlled by a committee to consist of nominees appointed by each partner.
After he received the draft Carl considered it in some detail and made a number of handwritten notations on the draft. Where he did not make a note against a provision of the draft, he placed a tick. He said that the tick simply indicated that he had read, but had no comment on, the provision. He denied that it signified any approval of the provision.
Carl also showed the draft to Mr Jonathan Hendy, a lawyer friend of his from South Africa, who happened to be visiting Sydney at the time. Mr Hendy made some handwritten notes on the draft and handed it back to Carl shortly before he, Mr Hendy, returned to South Africa. Carl did not discuss the draft with Mr Hendy and he did not consider Mr Hendy’s notes particularly carefully. Mr Hendy’s notes recorded that, under the structure proposed by the draft, a partnership would own the restaurant business and that Bondi Junction would conduct the business. His notes indicated that the partners would participate in profits and losses. The notes also indicated that the partnership was “not limited” and said “liability not restricted”.
The Farinhas did not consider that the draft partnership deed was acceptable. They thought that it favoured Carl and Mr Steingold unfairly. In any event, nothing further was done in relation to the draft.
On 5 August 2004, Mr Steingold sent to Mr Saidman a draft Unit Trust Deed establishing “the Carl Bondi Junction Trust”. Mr Saidman responded on 6 August 2004, saying that he had reviewed portions of the draft trust deed and expressed a preference that “Carl’s trust” should also be a party to the trust deed and that certain units should be issued directly to that trust rather than to Carl.
On 13 August 2004, Mr Saidman sent to Carl a copy of a communication received from the Australian Taxation Office (ATO) that assigned a tax file number and an Australian Business Number for the Carl Bondi Junction Trust and its trustee. At around the same time, Carl Bondi Junction and Carl World Square were incorporated. It is tolerably clear that those companies were intended to be trustees of trusts ultimately controlled by Carl and that they were intended to be members of the partnerships that were to be formed to carry on the three businesses.
On 10 September 2004, Mr Saidman sent two letters to Carl, one relating to the Carl World Square Trust and one relating to the Carl Bondi Junction Trust. The letters enclosed trust deeds establishing the Carl World Square Trust and the Carl Bondi Junction Trust respectively, together with draft minutes of meetings of the directors of Carl World Square and Carl Bondi Junction. The letters also attached invoices for fees due to Mr Steingold’s firm in connection with the preparation of the trust deeds and ancillary documents. Carl paid those invoices.
The trust deeds for Carl World Square Trust and Carl Bondi Junction Trust were apparently executed in early October 2004 since, on 12 October 2004, Mr Saidman’s personal assistant thanked Carl for dropping off the signed documents in the previous week. However, there is no evidence as to whether resolutions were passed or contemplated by the draft minutes that Mr Steingold sent to Carl.
On 8 February 2005, Mr Saidman sent to Mr Steingold a copy of the first two pages of the trust deed establishing the Carl World Square Trust. The copy of the first two pages shows that the deed bore the date 10 September 2005 and that it had been duly stamped. The balance of the deed was not in evidence. There was no evidence as to what the trust property was or who the beneficiaries are. Whether the trust deed established a hybrid trust is totally unclear.
Piccolo was incorporated on 30 June 2004, when Toby, Miguel, Marco, Mr Steingold and Carl were appointed directors. As at 30 June 2004, the issued capital of each of Piccolo and Bondi Junction was 100 shares. 50 shares in Piccolo were held by San Marco Group Pty Limited and 50 shares in Bondi Junction were held by Cockle Bay. 25 shares in each of Piccolo and Bondi Junction were held by each of Carl and Mr Steingold.
During August 2004 Carl told Mr Steingold that he was no longer prepared to lend him funds for the ventures on the terms that Mr Steingold wanted. As a consequence, there was a falling out between Carl and Mr Steingold. Carl told Toby and Mr Saidman, at a meeting in mid-August 2004, that he would be happy to walk away from the ventures if they did not want him to participate, having regard to his falling out with Mr Steingold. Toby said that they wanted Carl with them. In late August and in early to mid September, Carl had discussions with Toby concerning the basis upon which Carl would take over either part or all of Mr Steingold’s interest in the ventures.
In early October 2004, the Momo business opened for trading. Work was continuing on the Moda premises at that stage. It appears that the landlord was required to carry out further works to strengthen a floor to support a mezzanine level.
On 11 October 2004 Mr Saidman wrote to Toby, saying that he was enclosing a “draft memorandum” that he had prepared to give effect to what he understood the arrangements to be with Mr Steingold. He said that he had not passed it on to either Carl or Mr Steingold at that stage, since he thought he would first get Toby’s confirmation. Carl subsequently received a copy of the letter with the enclosed memorandum. There are at least three versions of the memorandum and the circumstances surrounding the preparation of the successive versions are somewhat obscure.
The terms of the memorandum are not particularly significant in themselves, in that they deal with the proposed arrangements with Mr Steingold. However, all of the various versions of the memorandum refer to a proposed partnership in relation to the World Square development. Thus, the memorandum again corroborates the evidence of the Farinhas to the effect that the parties contemplated that a partnership would be established. On the other hand, the terms of the memorandum also indicate that, at that stage, no finality had been reached as to the terms of any partnership.
On 23 December 2004, Mr Steingold ceased to be a director of World Square, Piccolo and Bondi Junction. On 7 February 2005, 15 shares in the capital of Bondi Junction were transferred from Mr Steingold to Carl and 10 shares were transferred from Mr Steingold to Cockle Bay. The consequence was that the shareholdings in Bondi Junction were then Farinhas 60% and Carl 40%. On 21 and 22 March 2005, 64 shares in the capital of World Square were issued to Cockle Bay, 23 shares were issued to Carl and three shares were issued to Shadean (World Square) Pty Ltd (Shadean), a company controlled by Mr Steingold. At the same time, the two shares in World Square held by Mr Steingold were transferred to Shadean. The consequence was that the shareholdings in World Square were then the Farinhas 70%, Carl 25% and Mr Steingold 5%.
By March 2005, the design for the World Square project had been finalised and timelines for construction had been prepared. A building contract was entered into for a sum of $6,500,000 with construction to start in March or April 2005.
On 30 March 2005, Carl wrote to Marco concerning a proposed guarantee for additional funding from the Bank of New Zealand. The letter began as follows:
“To date, I have fully funded my personal obligations to the project. I have furthermore fully funded the obligation of Colin Steingold in the project. I have also partially funded a small portion of the San Marco Group obligations in the project. I have now been approached to provide further support in the form of a bank guarantee to the value of $AUS750,000.”
The letter went on to set out the conditions upon which Carl would be prepared to give a bank guarantee. Marco responded on 31 March 2005, indicating that certain of Carl’s conditions would not be agreed to, since they involved a dilution of the Farinhas’ shares in the ventures.
In early April 2005 Moda opened for trading.
On 13 April 2005 Carl wrote to Toby concerning the World Square project. He began by referring to the proposed San Marco World Square Partnership and the status of participation. He said that the proposed participation in the partnership was 60/20/20 and the “managing company” was registered accordingly. Carl said, however, that that was always subject to finalising the individual contribution of each participant. To that end, he said, Mr Steingold approached him for a loan that would enable him to participate to the level of a 20% partnership.
Carl then went on, in his letter, to describe the breakdown of his relationship with Mr Steingold such that Carl could not provide funding to Mr Steingold. Carl referred to a proposal whereby Mr Steingold would participate to 5%. Carl said that he had not heard back from Mr Steingold since writing to him on 31 March 2005 and that he was therefore withdrawing from negotiating as to any more proposals for Mr Steingold to have 5% of the World Square project.
Carl also said that he was not going to consider or accept any “proposed partnership participation” until such time as an amicable funding structure was agreed. He said that he had been funding in excess of 45% of the project needs and therefore requested that no partnership structure or participation be deemed to be agreed until such time as a fair agreement could be concluded based on participation, contribution and risk exposure. He suggested that the four directors of World Square call a meeting as soon as practicable to resolve the matter.
The references to a partnership in Carl’s letter support the Farinhas’ contention that a partnership structure was contemplated. However, it is clear from the terms of the letter that no consensus as to the terms of any partnership had been reached at that stage.
On 21 April 2005, Mr Saidman sent to ANZ Private Banking, Carl’s bankers, a letter of 21 April 2005 from Marco and Miguel. Mr Saidman’s letter said that the interests held by Carl in the various ventures were held by entities owned and controlled by him rather than by him personally. The letter also said that the ventures were “operated as partnerships” and that Carl’s entities had partnership shares equal to the percentages set out in the enclosed letter. The enclosed letter, signed by Marco and Miguel, said as follows:
“We would like to confirm that Carl Frauenstein has 40% of the two ventures in Westfield Bondi Junction being San Marco Bondi Junction Pty Ltd trading as Moda Bar & Restaurant and San Marco Piccolo Pty Ltd trading as Momo’s Bar and Café. Carl currently has 25% of San Marco World Square Pty Ltd and is negotiating a further 5%. We also confirm that Carl Frauenstein has invested $1,658,930 in the three ventures mentioned above.”
There was no evidence that the letter was sent to Carl, who says that he does not recall seeing the letter, notwithstanding that it was being sent to his own bankers. The Farinhas place some store on the contents of the letter. However, while it confirms the parties’ intention of establishing partnerships, it does not itself constitute evidence of the establishment of any partnership at that stage.
On 17 May 2005, Carl met with Toby and Miguel at Moda. Carl said that he was particularly concerned about the lack of transparency and management of the finances for the ventures. He said that he had no accurate idea of how the businesses were trading and how the capital expenditure was going. Carl suggested that they should have formal operational budgets agreed for all ventures and in particular for Momo and Moda. He said that the budgets for Momo and Moda would need to be agreed before mid-June and the budget for World Square before mid-August, when the Equilibrium business was to open. Toby said that he agreed. Carl said that he could not be expected to put more money into the ventures without having agreed to budgets and the degree of expenditure. Toby said that he would see to it that those matters were “actioned”.
On 18 May 2005, Carl sent an email to Marco and Mr Saidman, in which he referred to the meeting with Toby and Miguel on 17 May 2005. The email summarised the points discussed and agreed at the meeting under the following topics:
·management of business;
·sale of business to other parties (arms length sale);
·sale of business at time of death;
·sale of business in the event of default of agreement;
·contribution to the establishment of the business;
·contribution when running the business (this contribution scenario should be kept separate from the “establishment” scenario);
·format of contributions; and
·cost of partnership agreement.
Carl ended the email by saying to Mr Saidman:
“We need your input here as soon as possible, please. I would like to get your input incorporated in the agreement (I have sent you Tim’s draft in electronic format in the event it is of benefit). I would then like to send the draft off to Tim to finalise.”
Carl followed that email with another email to Mr Saidman on 30 May 2005 asking whether the matter was being followed up and actioned, since he had not heard anything back.
On 12 June 2005, Carl had a discussion with Toby, in which he told Toby that he was not happy with the status of things. He referred to the meeting on 17 May 2005 and said that he had minuted the points they had agreed on, which he had followed up with an email on 30 May 2005, to which he had not received a response. Toby agreed that they needed to attend to the matter and suggested a meeting with Mr Saidman as soon as possible. Carl said that he was not willing to put in any more money until such time as he had budgets agreed and a better insight into the trading of the restaurants and the expenditure for the restaurants. Toby said that he would speak to Marco and that he would get that information to Carl.
On 20 June 2005, Carl, Marco, Miguel and Mr Saidman attended a meeting at Mr Saidman’s office. Mr Saidman sent an email to Carl and Marco on 21 June 2005, attaching a memorandum recording the points that were discussed on 20 June 2005. The email confirmed that the points did not reflect any agreement but reflected the issues that were tabled and discussed. Mr Saidman suggested that once they had all had a chance to think about the issues they should reconvene and try to reach an agreement.
The attached memorandum was headed “Partnership issues to be agreed re San Marco World Square Pty Limited, San Marco Bondi Junction Pty Limited”. The memorandum contained a preamble as follows:
“A meeting was held on 20th June 2005… Various issues were raised regarding proposed clauses to be inserted in a Partnership Agreement in the above two businesses and the following is a list of those issues. These issues are set out for consideration and do not constitute an agreement at this stage.” [emphasis added]
Various issues were then set out under the following headings:
Budgets
Regular Management Meetings
Voting Rights
Expenditure Limits
Come-along and Tag-along Clauses
Exit Mechanism for Carl
Position in the Event of Death
Refurbishment
Management Fees
Different Shareholdings
Access to Businesses
Default Provisions
Rights of First Refusal
Head Office Expenses
Financial Contributions
It is clear that, at that stage, no consensus had been reached.
On 23 June 2005, Carl sent an email to Mr Saidman and a copy of the email was provided to the Farinhas at the same time. In his email, Carl said that he wanted to summarise his sentiments. He made a number of complaints including the following:
·he was over contributing substantially;
·he had been required to sign a bank guarantee for $AUS1 million out of the blue;
·project costs on Moda went from $AUS1.7 million to $AUS2.3 million then to $AUS2.8 million and then stood at $AUS3.2 million;
·the World Square construction contract had a current value of $AUS7.4 million and he had no idea as to the value of the contract until construction started;
·week to week project cost management was not taking place; and
·he had no idea of what the project cost situations were.
Carl suggested in his email that there were “two scenarios going forward”, being either a partnership or mezzanine finance. Under the rubric “Partnership”, Carl suggested:
“(a) we split everything 70/30;
(b) we split our respective agreements with Colin 70/30;(c)a partnership agreement is in place with:
(i)full visibility…
(ii)full monthly reporting,
(iii)full visibility of what is planned and what is happening…
(iv)an exit opportunity for me anytime after five years…
(v)a put option or ‘forced sale’ clause should any party be in breach of significant and material items after ‘written notice…etc’;
(d)I will ignore any over contribution on my side from an ‘interest payment’ point of view but will not be required to provide any further funds;
(e)my over contribution loan account will take priority over respective ‘ownership based’ contribution loan accounts;
(f)I will roll over my loan with Toby and Marco for three months…
(g)I will roll over my loan with Miguel for three months…”
Under the rubric “Mezzanine Finance”, Carl proposed the following:
“(a) we convert all the loans I have with them into Mezzanine…
(b)the interest rate will be 12.5% and will be adjusted upwards and downwards with the bank rate…
(c)is a minimum of three years…
(d)I sign the Members Equity agreement but will have a side letter from Sam Marco, Toby, Miguel, Cockle Bay indemnifying me from all guarantees…
(e)should my guarantees be required for longer than the period of the Mezzanine loan, the loan shall continue until such time as the guarantees are released.”
Carl said that his “absolute preference” was the partnership scenario and would only go to the mezzanine finance scenario if the Farinhas were not comfortable to have him as a partner on the terms he suggested.
Carl’s email was the subject of discussion at a meeting subsequently held on 28 June 2005. At the meeting, Toby said that the Farinhas would like to take up the partnership scenario but could not agree to change their shareholding in the ventures such that the shareholding of Momo and Moda was the same as the shareholding in World Square. Marco said that they would address all of Carl’s issues about financial reporting and make sure that he got timely reports on the ventures as he wanted. Carl said that he was not prepared to make any further funds available to the ventures until they had budgets agreed and that was not an unreasonable requirement. Marco said that he would get the budgets done as soon as possible.
On 5 July 2005, Mr Steingold transferred 5 shares in World Square to Cockle Bay and transferred 5 shares to Carl. The result was that Cockle Bay held 70% of the capital of World Square and Carl held 30%.
On 14 July 2005, Carl had a further meeting with Toby and Marco at which Carl provided them with an Excel spreadsheet showing Carl’s understanding of the total cash input for the ventures. The spreadsheet showed that Carl had already contributed $1,850,000.00, which represented an over contribution of $759,265.61 on one view, or an over contribution of $808,397.22 after adjustments for training and administration costs. Marco said that he could not say that the figures were correct but that “the logic is certainly right”. Carl suggested that the Farinhas should pay interest on Carl’s over-contribution. Marco agreed to that proposal with effect from 1 July 2005.
On 18 July 2005, Carl departed Australia for Los Angeles on his way to Canada. Prior to his departure from Australia, Carl gave power of attorney to Mr Tim Somerville, a solicitor. On 20 July 2005, Mr Somerville, acting as Carl’s attorney, signed the Letter Agreement. The Letter Agreement relevantly provided as follows:
“1. The parties shall use their endeavours to cause a binding written agreement to be entered into between the entities controlled by them respectively relating to the interest of the parties in the World Square Project by 7 September 2005.
2.If no such written agreement is entered into (by reason only of the parties being unable to agree to the terms of such agreement, after negotiating in good faith) by 7 September 2005 then at the option of any of the parties, to be exercised before 14 September 2005, Tobias Farinha and Marco Zagato shall arrange for the repayment of all monies invested by Carl Frauenstein or any entity under his effective control relating to the World Square Project within 12 months of any party exercising such option, whereupon all interests of Carl Frauenstein in such project shall be transferred to the other parties equally, or their nominees.”
The terms of the Letter Agreement have some significance in relation to the question of whether a partnership agreement had been entered into. The clear assumption underlying the Letter Agreement was that no binding agreement was on foot at that stage.
On 1 August 2005, Carl received a document requiring him to act as a guarantor on a loan of $1,970,000 from Multiplex, which was the builder of the World Square premises where the Equilibrium venture was to be located. The guarantee was subsequently executed on Carl’s behalf by Mr Somerville under the power of attorney granted by Carl. On 3 August 2005, Carl received a text message from Marco saying that there was no time for discussions or signing an agreement in relation to the loan. Carl telephoned Marco and told him that he could not give further signatures or guarantees until such time as Marco, Toby and Miguel had executed formalised agreements for loans totalling $550,000. Carl also said that he needed those loans to be secured by the people who are providing guarantees. Marco replied that he was not happy but conceded that Carl’s request was not unreasonable. He said that Toby would not agree to give personal guarantees for the loans.
Over the weekend of 6 and 7 August 2005, Carl received a telephone call from Toby. Carl told Toby that he was very unhappy with everything that had taken place. Toby said that he understood Carl’s position but that they needed him to get Mr Somerville to sign the Members Equity loan documents. Carl said that he was not prepared to sign anything until his position was secured in relation to the $550,000 loan to Cockle Bay. He said that he had sent documents to Mr Somerville and wanted him to draw up the documentation for Toby and Marco to sign. Toby said that Carl was making it very difficult for him and gave Carl an assurance that he would repay every cent that he owed. Carl said that the difficult position was not of his making and that, if the Farinhas paid back the loans of $550,000, he would have more than enough money to cover his side. Toby said that the document had to be signed on Monday, 8 August 2005 and told Carl that he should trust him and that he would repay every cent owed. Carl again said that he was not happy but that it appeared that again he had no choice. He told Toby that his resources were being seriously stretched by the way things were going. Carl gave instructions to Mr Somerville on 8 August 2005 to sign the Members Equity loan documents.
Early in the morning of 5 September 2005, Carl asked Mr Saidman by email for Mr Saidman’s documented notes of the points about which agreement had been reached at their meeting held on or around 28 June 2005. Mr Saidman replied early in the afternoon saying that he had just spoken to Toby and that he thought that they all needed to sit around the table:
·to review the figures that Ms Judy Kyu, the office manager of the San Marco Group, had prepared, which he stressed had not been audited; and
·to finalise the items that he believed that they had essentially, but not finally, agreed on as to the terms of the partnership agreement, so that a solicitor could be instructed to draw a contract setting out those agreements.
Carl responded by email shortly afterwards, saying that the partnership agreement was the first priority that should have been addressed and completed prior to spending any money. He pointed out that there was a deadline on the partnership agreement of 7 September 2005 unless otherwise agreed to by all parties in writing. That was clearly a reference to the Letter Agreement. Carl also said that the current financial status still required a bit of work on his side, which could involve obtaining further information. He said that he doubted that they would be able “to put it to bed” before 7 September 2005 and that he would not be able to satisfy himself that the figures accurately reflected the current status. He went on to say that it was his understanding that most points concerning the partnership agreement were agreed but that, because he did not have Mr Saidman’s notes of their last meeting, he was unable “to make a call” on what was still outstanding.
Later in the afternoon, Mr Saidman responded by email, attaching another copy of his memorandum of the 20 June 2005 meeting. He said that, as far as he could recall, that memorandum set out the discussions that they had, save for a few subsequent issues that were discussed on 28 June 2005. He said that the issues that he thought still required resolution were as follows:
·Carl was going to make a proposal as to how the training costs should be split.
·Carl was going to make a proposal as to how the San Marco administration costs should be accounted for.
·They needed to agree on remuneration for the Farinhas for managing the ventures.
·Some of the detail in the memo of 20 June 2005 needed to be agreed to.
Mr Saidman asked Carl to let him know how Carl wanted to progress the matter and said that he thought it would be better to resolve the outstanding issues around the table rather than for a solicitor to be instructed on an incomplete basis.
Also on 5 September 2005, Toby and Carl had a discussion at Carl’s home in Mosman concerning a bank guarantee with BNZA. Carl said that he would telephone BNZA to arrange a meeting. Carl and Toby also discussed the proposed partnership agreement. Carl said that, unless he was shown otherwise, he understood that all aspects of the agreement had been agreed to and that the only step remaining was that it needed to be drafted into a legal document. Toby agreed to instruct Mr Saidman to forward all the documents relevant to the partnership agreement to a solicitor to be suggested by Mr Saidman, so that the Letter Agreement could be complied with. Carl prepared minutes of those discussions, which he subsequently gave to Toby.
On 6 September 2005, Carl met Toby in Mr Saidman’s office. Before Mr Saidman joined them, Toby told Carl that he was worried about Carl’s exposure. He said that there was a lot happening, that he was worried and that the Farinhas were over exposed with the restaurants, the World Square project and “the building”. Toby told Carl that he had been very good “to us”. After Mr Saidman joined them, Toby told Mr Saidman that he was very worried about Carl’s exposure and suggested that Carl consider exiting the World Square venture. Carl said that he would have to think about things overnight and that they could not achieve anything without having Marco and Miguel present. Toby and Carl agreed to meet the following day, 7 September 2005. Carl pointed out that 7 September 2005 was the deadline under the Letter Agreement.
Carl met Toby at the Momo premises at about 12.30 pm on 7 September 2005, when Toby asked Carl whether he had received a letter that Toby said he had faxed the previous day. Carl said that he did not know what Toby was talking about and that he had not received a letter.
Shortly afterwards, Marco joined them. Carl said that they needed to finalise the shareholders agreement and that it was 7 September 2005 and they had not yet discussed the final terms. Toby gave evidence that he said that the deadline could be extended by mutual agreement although Carl gave evidence that Toby said they would extend the deadline by mutual agreement. Carl made a diary note upon his returning home from the meeting in which he said that Toby had agreed to extend the deadline at Carl’s request and that he, Toby, would inform Mr Somerville the next morning. I accept Carl’s version of the discussion.
In the middle of the afternoon of 7 September 2005, Carl received a facsimile from Toby dated 6 September 2005, in which Toby expressed disagreement with the contents of Carl’s minutes of their discussion on 5 September 2005, which Carl had given to Toby. In relation to the proposed partnership agreement, Toby said that his understanding was that, when they met with Mr Saidman on 20 June 2005, there were certain essential matters that Carl raised that he was going to follow up on as follows:
·Carl was going to follow up and advise how best to deal with the training costs.
·Carl was going to advise how he thought the San Marco head office administration costs should be dealt with: they were unresolved as to what salaries would be paid to members of the Farinha family for working at the various ventures.
·They still needed to agree as to which matters required unanimous consent.
Toby said that, although an outline of various points was discussed, the parties were not resolved on certain essential terms. The matters mentioned by Toby correspond fairly closely to the matters mentioned in Mr Saidman’s email to Carl late in the afternoon of 5 September 2005.
Toby’s facsimile then went on to say that he thought that they were not in a position to forward documents to a solicitor regarding the partnership arrangements until the matters so raised were finalised. Toby also confirmed that Carl said he wanted to speak to Mr Saidman regarding the spreadsheet and that discrepancies should be provided to Mr Saidman so that Mr Saidman could finalise the schedule.
On 8 September 2005, Carl left a voice mail message when Toby did not answer his mobile phone. Carl asked Toby to ring Mr Somerville about the extension of the Letter Agreement. Later that day, Toby telephoned Carl and asked that Carl meet with Toby, Marco and Miguel at Carl’s home at 3 pm the following day. Carl again asked Toby to speak to Mr Somerville straight away about the Letter Agreement.
On 9 September 2005, Toby arrived at Carl’s home without Miguel and Marco and suggested that they have lunch together without Marco and Miguel. During the course of lunch, Toby told Carl that he, Carl, should consider not being part of the World Square project because it was a very high risk. Toby also said that he was worried that Carl and Marco did not seem to get on together. Carl said that the only problem he had with Marco was when Marco made commitments, such as to provide employment and revenue figures, and did not deliver. Carl said that, if there was a funding concern that meant that he had to exit the venture in order to allow another investor so that the venture succeeds, he would do that on the basis that his exit would be treated in a fair and equitable manner.
Later in the course of lunch, Carl said that he was concerned that Toby had not yet spoken to Mr Somerville regarding the extension of the Letter Agreement. Toby said that there was no need to be concerned because he always keeps his word. Toby suggested that they meet the following day with Marco and Miguel. On the following day, 10 September 2005, Carl was unable to speak to Toby because his mobile telephone was switched off. He then spoke to Marco who said that Toby had gone home because he had a sore throat. Carl said that he had been hoping to meet with Toby, Miguel and Marco to discuss their agreement.
At 9.06 am on 12 September 2005, Carl sent a facsimile in response to Toby’s facsimile of 7 September 2005. After referring to the BNZA facility, Carl said that the meeting in Mr Saidman’s office of 20 June 2005 was not the last meeting and therefore Mr Saidman’s memorandum of that date was not the most recent status of the agreement. Carl suggested that they meet with Mr Saidman to discuss and determine what, if anything, was still outstanding. Carl also agreed that they should meet with Mr Saidman as soon as possible in relation to the current costs spreadsheet. He said that he had met with Marco on the afternoon of 10 September 2005, when they had agreed that they should meet with Mr Saidman to discuss all the items at hand prior to Marco’s departure on 13 September 2005.
Toby replied at 4.51 pm on 12 September 2005, agreeing with Carl’s comments in relation to the BNZA facility. Toby also confirmed that he had met with Carl on at least three occasions in an attempt to discuss matters outstanding under the proposed partnership arrangement. He pointed out that the memorandum of 20 June 2005 from Mr Saidman clearly highlighted unresolved issues, being issues that continued to be unresolved. He said that their understanding was that they had not reached any agreement on the partnership issues and that, despite repeated attempts, Carl did not wish to discuss the matter but rather preferred to resolve the amounts owing to him. Toby also confirmed that they should meet with Mr Saidman as soon as possible to discuss any issues arising under the costs spreadsheet.
The language of Toby’s email makes clear that it was his understanding, at that stage, that no agreement had been reached as to the terms of any partnership agreement. That is not necessarily inconsistent with there being a partnership in existence. However, when coupled with the language of the Letter Agreement, it is clearly inconsistent with there being any express partnership agreement. That is confirmed by the events of the following days.
At 6.51 pm on 12 September 2005, Carl received an email from Toby to which was attached a letter signed by Marco and Toby. The letter relevantly said:
“We hereby give you notice that we are exercising the option under the letter agreement of 20 July 2005 entered into between Tobias Farinha, Marco Zagato and Carl Harold Herbert Frauenstein (‘Letter Agreement’) to purchase your interest in the World Square Project as set out in the Letter Agreement.”
Carl responded by facsimile of 14 September 2005, relevantly saying:
“1.I do not accept that the letter of 20 July 2005 accurately reflects the arrangements between us; and
2.Even if the option you refer to is valid (which is not admitted here) it is not capable of exercise as the condition precedent to this exercise has not been fulfilled. That is to say you have not negotiated with me in good faith to achieve the written agreement referred to in clause 1 of the letter of 20 July 2005.
Accordingly I do not recognise your purported exercise of the option as valid and I reserve my rights.”
Over 14, 15 and 16 September 2005 there was an exchange of correspondence between Carl and the Farinhas concerning a dispute that World Square had with Sherbet Creative Enterprises and NJ Electrical Contracting Services Pty Ltd. In essence, Toby was seeking Carl’s agreement to a proposed settlement of the dispute. Carl adopted the stance that he did not know enough about the affairs of World Square and in any event would not contribute any further funds.
In the circumstances, I am satisfied that the affairs of each of the three companies have been conducted oppressively to, unfairly prejudicially to, and unfairly discriminatorily against Carl as a shareholder. The Farinhas control the majority of the share capital of the three companies. I consider that it would be appropriate, therefore, to require the Farinhas, or entities associated with them, to purchase Carl’s shares in the three companies for a value that is determined after taking appropriate account of the underreporting of revenue and the overcharging of expenses and ignoring the purported allotment to Equal 54.
The evidence before me at present does not enable any attempt to be made to arrive at an appropriate value. However, I will afford the parties the opportunity of making further submissions as to the mechanism that should be adopted for determining an appropriate value. That mechanism would include the adducing of further evidence, if need be, on behalf of both parties as to the way in which the value should be determined. In so far as the Farinhas are able to establish a reasonable basis for determining the value of administrative services provided to the companies by the San Marco Group, that value would be taken into account in valuing the shares in the companies held by Carl.
$550,000 Loans
In late February or early March 2005 Marco approached Carl and said that the Farinhas needed more funds to pay creditors. Carl replied that he had put in more than his required share and that he had set his budget and relied on his money for mezzanine finance income. He said that it was up to Marco and Toby to make funds available in proportion to their ownership of the companies.
Marco then said that, at the moment, they were stretched because their “the Market Street building project” was behind schedule and asked Carl whether he could help them by making a loan to Marco and Toby, so that they could meet their obligations. Marco said that they would pay interest along the lines of a previous loan that had been made to Toby.
Carl said that he could only consider helping them for two months. Marco asked whether Carl could make it three months and said that he was 100% sure he could repay the amount. Marco said that Sherbet Creative Enterprises was shouting for payment of invoices and needed $300,000. Marco said that it would also be good if Carl could lend them an extra $250,000 so that they could pay some other bills.
Carl said that it seemed that he had no choice and that he would lend the money to Marco and Toby so that they could make their contribution. Carl also said that they had to make a very firm commitment to repay the money by the end of May. Carl said that an interest rate of 12.5% plus an establishment fee would be charged. He asked about security but Marco said that second mortgage security over their homes might prejudice negotiations that were being conducted with banks for further facilities. Marco said that he and Toby would give personal guarantees. Carl said that if he was personal guarantees that he would get his money back by 1 July 2005, he would make the loan.
At some stage thereafter a document describing the loans was signed by Miguel and Marco. Underneath the signature of each was the following:
“Accepted and providing personal guarantees for the capital amount and all fees payable under the loan.”
The document referred to drawdown dates of 11 March 2005 for a sum of $300,000 and 15 March 2005 for a sum of $250,000. The document referred an annual interest rate of 14%, payable in advance, and establishment fees of $2,071.23 and $1,438.36, for the two loans. The document stated a repayment date of 1 July 2005. There appears to be no other written evidence of the loans.
In oral evidence, Miguel accepted that he signed the document but said that he did so on behalf of Toby, at the insistence of Carl. As I have said earlier, Carl and Carpe Diem do not assert any personal liability on the part of Miguel, but claimed, in the alternative, a declaration that Toby and Marco were personally liable for the loan. As I have also earlier indicated, I do not understand any claim now to be pressed in respect of personal liability on the part of Toby and Marco. The only question is the identity of the lender.
On 27 July 2004, a deed was entered into between Carpe Diem and Miguel and his wife in order to evidence a loan by Carpe Diem to Miguel and his wife. That loan was secured by a mortgage in favour of Carpe Diem. The relevance of that evidence is that it indicates that, where a loan had previously been made to one of the Farinhas, it was made by Carpe Diem. That has some relevance to the identity of the lender who made the loans totalling $550,000 to Cockle Bay.
I consider that the loans were made by Carpe Diem and not by Carl personally. The most telling evidence in support of that conclusion is the stance adopted by the Farinhas in a proceeding commenced in the District Court of New South Wales by Carpe Diem for recovery of the loan. The proceeding was commenced by Carpe Diem against Toby and Marco and Cockle Bay. In its amended statement of claim, verified on 10 May 2006, Carpe Diem asserted that, in early March 2005, Carpe Diem agreed to make a loan to Toby and Marco in the amount of $550,000. The terms of the loan were then pleaded, including a variation concerning the date for repayment of the loan. The statement of claim then asserted that Carpe Diem, at the request of Toby and Marco, advanced $300,000 of the loan to Sherbet Creative Enterprises on 11 March 2005 and on 15 March 2005, at the request of Toby and Marco, advanced $240,990.41 of the loan to Cockle Bay, being the balance of the loan after deducting the establishment fee and interest on the loan to 30 March 2005. The statement of claim alleged, in the alternative, that the loan was made to Cockle Bay.
In his amended defence filed in the District Court, which was sworn on 18 July 2006, Toby asserted that in or about the middle of February, Marco, on behalf of Cockle Bay, entered into an agreement with Carpe Diem whereby Carpe Diem agreed to lend $250,000 to Cockle Bay. Toby asserted that on 11 March 2005, Carpe Diem provided $300,000 to Sherbet Creative Enterprises as part of Carl hybrid trust’s partnership contributions to the partnership operated through Bondi Junction. No suggestion was made in the defence that any loan was made by Carl personally. In his defence sworn on 18 July 2006, Marco made the same assertions as Toby did in his defence. That is to say, neither of them denied that loans were made by Carpe Diem. There was no suggestion that the loans were made by Carl personally.
The District Court proceeding was subsequently discontinued and it is common ground, in the present proceeding, that the loans totalling $550,000 were made to Cockle Bay. The payments were in fact made by Carpe Diem. There is no evidence to suggest that the payments were made by Carpe Diem on behalf of Carl or any other person. Further, interest was paid by Cockle Bay to Carpe Diem on thirteen occasions from 31 March 2005 to 3 May 2006 at the rate of 14% per annum. No suggestion was made that the interest was payable to Carl. It is common ground that 14% was the agreed rate of interest.
In the circumstances, there should be judgment for Carpe Diem against Cockle Bay in the sum of $550,000 together with any interest remaining unpaid at the date of judgment.
CONCLUSIONS
For the reasons indicated above, I have reached the following conclusions on the issues stated above:
(1)No partnership involving Toby Bondi Junction, Marco Bondi Junction, Miguel Bondi Junction and Carl Bondi Junction has come into existence and no partnership involving Cine and Carl World Square has come into existence. Further, the Moda, Momo and Equilibrium ventures have been carried on by Bondi Junction, Piccolo and World Square respectively in their own rights.
(2)The payments made by Carl should be characterised as advances on loan account as follows:
Piccolo$5,500.00
World Square $816,045.55
Bondi Junction and Piccolo jointly $424,149.20
Bondi Junction, Piccolo and World Square jointly $564,924.80
Carl should have judgment accordingly.
(3)There is no entitlement for the Farinhas, or entities associated with them, to acquire Carl’s shares in World Square.
(4)The purported allotment of shares in the capital of World Square to Equal 54 was made in contravention of its Constitution and would be liable to be set aside.
(5)The accounts of the Moda and Momo businesses underestimate the revenues earned by those businesses and management fees, consultancy fees, administration expenses and training costs charged to the three businesses by the San Marco Group, or entities associated with the Farinhas, have not been properly charged to those businesses.
(6)The Farinhas, or entities associated with them, should be required to purchase Carl’s shares in Bondi Junction, Piccolo and World Square for a consideration to be determined after further evidence and argument.
(7)Carpe Diem is entitled to recover the sum of $550,000 from Cockle Bay and should have judgment accordingly.
I propose to fix a further time for further hearing to determine the price at which Carl’s shares should be purchased and by whom. At this stage, it is not appropriate to make any order as to costs.
I certify that the preceding two hundred and thirty-three (233) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate:
Dated: 10 December 2007
Counsel for the First to Seventh and Tenth to Thirteenth Defendants: Mr DL Cook
Solicitor for the First to Seventh and Tenth to Thirteenth Defendants: Miltons Lawyers
Counsel for the Eighth and Ninth Defendants:
Solicitor for the Eighth and Ninth Defendants:
Mr G George (appeared on 18 and 20 June 2007)
Pateman Legal
Counsel for the Plaintiffs: Mr AJ McInerney with Mr CN Bova (Mr Bova appeared on 18, 20, and 21 June; 2, 5, 9 and 10 July) Solicitor for the Plaintiffs: Foulsham & Geddes Date of Hearing: 18, 20, 21 and 22 June; 2, 5, 9, 10, 11, 12, 16, 19, 23, 24, 25, 26 and 30 July 2007 Date of Judgment: 10 December 2007
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