Frauenstein v Farinha - [2007] FCA 1953

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 1
CARL 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 Plaintiff

CARPE DIEM INITIATIVES PTY LIMITED
Second Plaintiff

CARL BONDI JUNCTION PTY LIMITED
Third Plaintiff

CARL WORLD SQUARE PTY LIMITED
Fourth Plaintiff

AND:

TOBIAS FARINHA
First Defendant

MIGUEL FARINHA
Second Defendant

MARCO ZAGATO
Third Defendant

SAN MARCO BONDI JUNCTION PTY LIMITED
Fourth Defendant

SAN MARCO PICCOLO PTY LIMITED
Fifth Defendant

SAN MARCO WORLD SQUARE PTY LIMITED
Sixth Defendant

COCKLE BAY SAN MARCO PTY LIMITED
Seventh Defendant

EQUAL 54 PTY LIMITED
Eighth Defendant

JAMES PANAGOPOULOS
Ninth Defendant

TOBY BONDI JUNCTION PTY LIMITED
Tenth Defendant

MARCO BONDI JUNCTION PTY LIMITED
Eleventh Defendant

MIGUEL BONDI JUNCTION PTY LIMITED
Twelfth Defendant

CINE SAN MARCO PTY LIMITED
Thirteenth Defendant

FIRST CROSS-CLAIM

BETWEEN:

TOBY BONDI JUNCTION PTY LIMITED
First Cross-Claimant

MARCO BONDI JUNCTION PTY LIMITED
Second Cross-Claimant

MIGUEL BONDI JUNCTION PTY LIMITED
Third Cross-Claimant

AND:

CARL BONDI JUNCTION PTY LIMITED
Cross-Respondent

SECOND CROSS-CLAIM

BETWEEN:

CINE SAN MARCO PTY LIMITED
Cross-Claimant

AND:

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 ISSUES
Business Structures
Characterisation of Carl’s Payments
Allocation of Carl’s Payments
Identification of the Debtors
Capital of World Square
Accounting Deficiencies
Oppression
$550,000 Loans
CONCLUSIONS
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…

Grounds of appeal

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

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

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

Consideration

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

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

Continue reading Frauenstein v Farinha

Details

AGLC: Frauenstein v Farinha [2007] FCA 1953
Case: [2007] FCA 1953
Decision Date: 10 December 2007

CaseChat Overview and Summary

The case of Frauenstein v Farinha involved Carl, the plaintiff, suing various defendants, including the Farinhas, for relief under the Corporations Act and for the recovery of loans. Carl claimed that the conduct of the businesses in which he held shares was oppressive, unfairly prejudicial, or discriminatory, and sought orders to buy out his shares. Additionally, Carl, through his company Carpe Diem, sought the recovery of a $550,000 loan made to Cockle Bay, a company controlled by the Farinhas. The defendants, including the Farinhas, contested these claims.

The court was required to determine whether the businesses were conducted in a manner that was oppressive or unfairly prejudicial to Carl, and if so, whether the relief of buying out Carl's shares was appropriate. The court also had to decide on the characterization of the payments made by Carl to the businesses, whether they were loans or otherwise, and whether Carpe Diem was entitled to recover the $550,000 loan from Cockle Bay. The court needed to assess the validity of the allegations of underreporting of revenue and overcharging of fees by the San Marco Group or entities associated with the Farinhas.

The court found that no partnership involving Carl or entities associated with the Farinhas had been established and that the Moda, Momo, and Equilibrium ventures were carried on by Bondi Junction, Piccolo, and World Square respectively. The payments made by Carl were characterized as advances on loan account, and the court ordered that Carl should recover these amounts. The court also found that there was no entitlement for the Farinhas or entities associated with them to acquire Carl’s shares in World Square. The purported allotment of shares to Equal 54 was held to be in contravention of the company's Constitution. The court concluded that the accounts of the Moda and Momo businesses underestimated their revenues and that fees charged by the San Marco Group or entities associated with the Farinhas were not properly accounted for. The court ordered that the Farinhas or entities associated with them should purchase Carl’s shares in Bondi Junction, Piccolo, and World Square, with the price to be determined in a further hearing. Finally, the court ruled that Carpe Diem was entitled to recover the $550,000 loan from Cockle Bay.

The court's decision concluded that judgment should be entered for Carpe Diem against Cockle Bay in the sum of $550,000, together with any interest remaining unpaid at the date of judgment. The court proposed to fix a further time for a hearing to determine the price at which Carl’s shares should be purchased and by whom. The court did not make any order as to costs at that stage.

Orders

Orders of the court

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Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

EMMETT J

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$5,500.00World Square $816,045.55Bondi Junction and Piccolo jointly $424,149.20Bondi Junction, Piccolo and World Square jointly $564,924.80Carl 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.

Ratio Decidendi

Legal Principle Established

Established by: EMMETT J

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.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD2135 OF 2006

BETWEEN:	CINE SAN MARCO PTY LIMITED Cross-Claimant
AND:	CARL WORLD SQUARE PTY LIMITED Cross-Respondent

JUDGE:	EMMETT J
DATE:	10 DECEMBER 2007
PLACE:	SYDNEY