In the matter of Access Strata Management Pty Ltd
[2022] VSC 639
•21 October 2022
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
IN THE MATTER OF ACCESS STRATA MANAGEMENT PTY LTD (ACN 605 929 039)
S ECI 2021 00355
| BIGNACHES PTY LTD (ACN 105 959 126) | Plaintiff |
| and | |
| ACCESS STRATA MANAGEMENT PTY LTD (ACN 605 929 039) AND OTHERS (according to the attached Schedule) | Defendant |
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JUDGE: | Riordan J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 17 October 2022 and 18 October 2022 |
DATE OF JUDGMENT: | 21 October 2022 |
CASE MAY BE CITED AS: | In the matter of Access Strata Management Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2022] VSC 639 |
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CONTRACT — No evidence of communications between the parties with respect to the alleged contracts — Whether a legally enforceable contract should be inferred — Principles to be applied in determining the existence of a contract — The effect of entries in corporation’s books of account.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr D J Williams KC | Sinisgalli Foster |
| For the Second and Third Defendants | Mr L Molesworth | Holding Redlich |
Contents
Background
Questions for determination
Legal principles
Are there outstanding rent/occupancy payments validly owed by the Company as alleged by the plaintiff at paragraphs 11 to 20 of the Statement of Claim?
Plaintiff’s submissions
Defendants’ submissions
Conclusion on Occupancy Expenses
Are there outstanding Consultancy Fees validly owed by the Company as alleged by the plaintiff at paragraphs 21 to 25 of the Statement of Claim?
Plaintiff’s submissions
Defendants’ submissions
Conclusion on Consultancy Fees
Are there outstanding interest payments validly owed by the Company as alleged by the plaintiff?
Plaintiff’s submissions
Defendants’ submissions
Conclusion on interest
Orders
HIS HONOUR:
By originating process filed 15 February 2021, the plaintiff seeks orders for relief in respect of alleged oppressive conduct arising in relation to the affairs of the first defendant (‘the Company’).
By a statement of claim filed 21 June 2021, the plaintiff sought an order pursuant to s 233 of the Corporations Act 2001 (Cth) (‘the Corporations Act’) that:
(a)the second and/or third defendants purchase the plaintiff’s shares in the Company for their market value; or, alternatively
(b)the second and third defendants sell their shares in the Company to the plaintiff for their market value.
Background
The following background facts were not in controversy:
(a)On 19 March 2015, the Company was incorporated for the purposes of conducting a strata management business. The founding directors of the Company were:
(i)Peter Morey;
(ii)Klair Jones;
(iii)John Kane; and
(iv)Michael Sharpe.
(b)The initial shareholders in the Company were:
(i)Bignaches Pty Ltd (‘Bignaches’), a company associated with Peter Morey, that held 40 shares;
(ii)Ms Jones, who held 40 shares;
(iii)Mr Kane, who held 10 shares; and
(iv)Mr Sharpe, who held 10 shares.
(c)Bignaches:
(i)is the registered proprietor of a property at 6 McGlone Street, Mitcham (‘the Premises’);
(ii)has leased the Premises to Lyndon Peak Pty Ltd (a company wholly owned by Mr Morey) (‘Lyndon Peak’) since July 2016; and
(iii)is the sole shareholder of Access Mercantile Services Australia Pty Ltd (‘Access Mercantile Services’).
(d)The Company operated its business from part of the Premises until it vacated in January 2021.
(e)From May 2014, Mr Kane was engaged by Lyndon Peak as a consultant to provide bookkeeping and accountancy services.
(f)From May 2015 to July 2020, Mr Sharpe was the managing director of Access Mercantile Services.
(g)From 1997 to 2015, Ms Jones was employed as a ‘Strata Manager’ in various capacities at various entities.
(h)From January 2003 to 5 November 2010, Ms Jones and Mr Morey were in a de facto relationship and are the parents of a son born on 22 March 2010.
(i)Ms Jones has been the managing director of the Company since its incorporation.
(j)Between June 2017 and December 2019, the Company purchased four strata management businesses for a total sum of $1,911,489.
(k)The purchase of these businesses was financed by:
(i)loans from the National Australia Bank (‘the NAB’) to the Company, which were guaranteed by the four directors. The NAB took further security over the Premises and Mr Morey’s home in Balwyn. The current amount due to the NAB as at 23 February 2022 was $1,253,595.27; and
(ii)a loan from Mr Morey for $180,000, of which the amount currently outstanding is approximately $106,000.
(l)On 27 July 2020, Mr Kane completed a valuation for the acquisition of Mr Sharpe’s shares in the Company, which included the following:
(i)The portfolio valuation of $2,195,749. This portfolio valuation was based on a multiple of 2.95 of annual management fees of $744,321.
(ii)Occupancy fees of $45,000 per year (‘Occupancy Expenses’) which were allowed for the financial years 2018, 2019 and 2020. In relation to the Occupancy Expenses, Mr Kane stated:
I have added back Occupancy Expenses since Michael was well aware of the background for this inclusion and instruction to keep accruing for it. To offset this, I have included the adjustment for myself over the period. There is strong justification to include at least 50 percent of my wage in Access Strata’s figures.
(m)A summary of factors which could affect the EBITDA valuation included:
(i)the adding back of Occupancy Expenses; and
(ii)the subtraction of the consulting fees (‘Consultancy Fees’).
(n)By email of 27 July 2020 to Ms Jones (copied to Mr Kane), Mr Morey agreed with the assumptions and the figure and stated:
We could of course lower this by applying management fees, interest on my loan funds, rent increase etc.
(o)By Deed of Settlement and Release dated 14 August 2020, the Company redeemed the 10 shares owned by Hanacam Pty Ltd for a price of $33,360. The sale price was based on the calculation of the share value completed by Mr Kane.
(p)In September 2020, the relationship between Mr Morey on one part, and Ms Jones and Mr Kane on the other part, deteriorated and consequently there were negotiations for the purchase of the former’s shares by the latter.
(q)In the financial years ending 2019 and 2020, Occupancy Expenses were included in the amount of $45,000 per year.
(r)By emails of 9 October 2020 to Mr Morey, Ms Jones and Mr Kane, John Pope (the Chief Financial Officer of the ‘Access group’ of companies, which includes Bignaches, Access Mercantile Services and Lyndon Peak) attached:
(i)tax invoices for recharge of the Consultancy Fees totalling $328,011[1] from Lyndon Peak to the Company calculated as follows:
[1]The plaintiff does not press the claims with respect to the invoices for FY2014 and FY2015 which precede incorporation of the Company.
Year
Total Invoiced
(inc GST)
Allocation
Recharge
(inc GST)
FY2014
18,810
50%
9,405
FY2015
63,140
50%
31,570
FY2016
75,680
55%
41,624
FY2017
99,902
60%
59,941
FY2018
91,575
65%
59,524
FY2019
101,255
70%
70,879
FY2020 (until March)
73,425
75%
55,069
523,787
328,011
(ii)tax invoices for Occupancy Expenses, totalling $160,875, from Lyndon Peak to the Company calculated as follows:
(1)$45,000 per annum (inc GST) for the financial years ending 2018, 2019 and 2020; and
(2)$4,125 per month (inc GST) for July, August and September 2020.
(s)By an Activity Statement lodged 24 November 2020 for the period July 2020 to September 2020, Lyndon Peak declared GST on accrued amounts including the Occupancy Expenses and the recharge of the Consultancy Fees in the amount of $298,192.73 (exc GST), in accordance with the tax invoices rendered.
(t)The loan balance owed to Mr Morey provided for in the Company accounts as at 29 September 2022 was $106,270.
(u)The financial statements of the Company for the year ending 30 June 2020 include ‘interest on Directors Loan’ of $66,598 (‘interest’). No such allowance is noted for the previous financial year. The only directors loan was a loan to Mr Morey or his associated companies. The balance sheet for the same year shows total current assets of $209,537.16, which Mr Morey infers includes a sum payable to Access Mercantile Services for interest.
(v)By letter of 17 August 2022, to Holding Redlich, Sinisgalli Foster, the solicitors for the plaintiff, asked for ‘[a]n explanation as to why the Accruals of $209,767.15 has not been paid’.
(w)By letter dated 22 August 2022 to Mr Morey, Ms Jones responded stating ‘As per response to Balance Sheet June 2022 above’, which is a reference to:
Balance Sheet – June 2022 (Accruals $208,872)
$3,000 – Accrual for Accounting Fees & Tax Return EOY 2022 - not payable till May 2023
$3,504 – Accrual for June 2022 NAB loan interest loans 1, 2 & 3 – paid July 2022
$202,368 – Remainder. The reasons for the non payment of the remainder have been provided previously and our position remains unchanged.[2][2]Bold added.
(x)By letter to the Company’s solicitor dated 7 January 2021, Sinisgalli Foster demanded payment of
(i)Occupancy Expenses in the amount of $160,875, on the basis that since 2018, the Company’s financial statements had recorded such expenses by entries made by Mr Kane;
(ii)Consultancy Fees on the basis that in Mr Kane’s email of 27 July 2020, he said ‘[t]here is strong justification to include at least 50% of my wage in Access Strata’s figures’; and
(iii)the loan outstanding to Access Mercantile Services together with interest on the basis that:
[T]here appears to be a provision for interest on Director Loans of $66,598. It is not clear if Mr Morey or related entity is entitled to these funds. Please provide additional detail and if the amount is outstanding … to My Client (or related entity) payment is requested within 14 days of the date of this letter.
Questions for determination
For the purposes of determining the dispute, the parties have agreed to the following terms and requested the Court to determine the following questions:
(a)The second defendant and/or third defendant purchase the plaintiff’s shares in the Company based on a valuation of $666,135, less allowances for any liabilities referred to in paragraph 4d below.
(b)If the second defendant and/or third defendant fail to complete the purchase by the fixed date referred to above in paragraph 4a, the plaintiff purchase the second and third defendants’ shares in the Company for a price to be calculated by reference to the Court’s valuation to be completed by a date to be fixed by the Court.
(c)If the plaintiff fails to complete the purchase by the fixed date referred to above in paragraph 4b, the Company be wound up pursuant to s 461(k) Corporations Act.
(d)The Court is to determine the following questions:
1.Are there outstanding rent/occupancy payments validly owed by the Company as alleged by the plaintiff at paragraphs 11 to 20 of the Statement of Claim filed 21 June 2021 (‘the Statement of Claim’)?
2.Are there outstanding consultancy fees validly owed by the Company as alleged by the plaintiff at paragraphs 21 to 25 of the Statement of Claim?
3.Are there outstanding interest payments validly owed by the Company as alleged by the plaintiff?
Legal principles
It is trite law that the major elements necessary for the formation of a contract are:
(a) offer and acceptance;
(b) consideration;
(c) intention to create legal relations; and
(d) certainty of terms.[3]
[3]Michael Furmston, Cheshire, Fifoot and Furmston’s Law of Contract (Oxford University Press, 11th ed, 2017).
The Court ascertains objectively whether there was an intention to create contractual relations by asking what each party, by words and conduct, would have led a reasonable person in the position of the other party to believe.[4] The circumstances that are properly taken into account ‘are so varied as to preclude the formation of any prescriptive rules’.[5]
[4]Molonglo Group (Australia) Pty Ltd v Cahill [2018] VSCA 147, [131] (Maxwell ACJ, Whelan and Kyrou JJA) citing Pavlovic v Universal Music Australia Pty Ltd (2015) 90 NSWLR 605, 616 [65] (Beazley P with whom Bathurst CJ and Meagher JA agreed).
[5]Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95, 105 [25] (Gaudron, McHugh, Hayne and Callinan JJ).
When ascertaining intention, what is considered is that which is ‘objectively … conveyed by what was said or done, having regard to the circumstances in which those statements and actions happened’;[6] and what is not considered are the uncommunicated subjective motives or intentions of the parties, which are irrelevant.[7] The parties’ subsequent communications may be relevant for the purpose of determining what terms were essential or important, whether there were admissions, and whether the parties intended to enter into a binding contract.[8]
[6]Ibid 105–6 [25] (Gaudron, McHugh, Hayne and Callinan JJ).
[7]Ibid.
[8] Queensland Phosphate Pty Ltd v Korda [2017] VSCA 269, [37] (Tate, Beach JJA and Sifris AJA).
Although a contract may be inferred without proof of offer and acceptance, a contract based on a demonstrated intention to enter into legal relations of certain terms may still be inferred. The circumstances in which a contract will be inferred were explained by Sundberg J in Adnunat Pty Ltd v ITW Construction Systems Australia Pty Ltd as follows:
A contract may in certain circumstances be inferred from conduct, even where no offer and acceptance can be identified. However the existence or otherwise of an enforceable agreement depends ultimately on the manifest intention of the parties, objectively ascertained. Where mutual promises are sought to be inferred, the conduct relied upon must, on an objective assessment, evince a tacit agreement with sufficiently clear terms. It is not enough that the conduct is consistent with what are alleged to be the terms of a binding agreement. The evidence must positively indicate that both parties considered themselves bound by that agreement.[9]
[9][2009] FCA 499, [39] (citations omitted); quoted with approval by the Court of Appeal in P’Auer AG v Polybuild Technologies International Pty Ltd [2015] VSCA 42, [11] (Whelan JA, with whom Ferguson and Kaye JJA agreed).
In Woolcorp Pty Ltd v Rodger Constructions Pty Ltd, the Court of Appeal identified the following considerations to be ‘kept in mind’ in considering whether the facts allow a contract to be inferred:
(1) Circumstances in which a contract will be inferred are rare.
(2)Before the inference may be drawn, a party must establish that the conduct positively indicated that both parties considered themselves bound by the contract. It is not enough to establish that conduct was merely consistent with the alleged terms of the contract.
(3)In the absence of an offeree’s express consent, acceptance of an offer may be inferred if an objective bystander would conclude from the offeree’s conduct, including its silence, that the offeree has accepted the offer and has signalled that acceptance to the offeror.[10]
[10][2017] VSCA 21, [9] (Santamaria, Kyrou JJA and Elliott AJA) (citations omitted).
In summary, even in the absence of proof of offer and/or acceptance, the Court will infer that the parties have intended to be legally bound to contractual terms if ‘the parties’ conduct, including what was said and not said and including the evident commercial aims and expectations of the parties, reveals an understanding or agreement or, as sometimes expressed, a manifestation of mutual assent, which bespeaks an intention to be legally bound to the essential elements of a contract’.[11]
[11]Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424, 525 [369].
Accordingly, the question is whether the dealings, between the Company and the relevant companies associated with Mr Morey, ‘viewed as a whole and objectively from the point of view of reasonable persons on both sides, would be taken to bespeak a concluded bargain’ to enter into the alleged contracts.[12]
[12]PRA Electrical Pty Ltd v Perseverance Exploration Pty Ltd (2007) 20 VR 487, 489 [6] (Nettle JA). See also Vroon BV v Foster’s Brewing Group Ltd [1994] 2 VR 32, 81-3 (Ormiston J).
In making this determination, the courts may have regard the following:
(a)The relevant intention must be manifest and it is not enough that the conduct is consistent with what are alleged to be the terms of a binding agreement.
(b)An intention to enter legal relations may be inferred even if it is unclear precisely when the contract arose.[13]
(c)Circumstances in which a contract will be inferred are rare.[14]
[13]P’Auer AG v Polybuild Technologies International Pty Ltd [2015] VSCA 42, [12] (Whelan JA, with whom Ferguson and Kaye JJA agreed).
[14]Ibid [11].
With respect to the plaintiff’s reliance of the Company’s books of account, s 1305 of the Corporations Act provides, with respect to the admissibility of books in evidence:
(1)A book kept by a body corporate under a requirement of this Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book.
(2)A document purporting to be a book kept by a body corporate is, unless the contrary is proved, taken to be a book kept as mentioned in subsection (1).
The evidentiary effect of an entry in a company’s book was explained by Austin J in Australian Securities and Investments Commission (ASIC) v Rich:[15]
The statement in s 1305(1) that the company’s books are prima facie evidence of a matter stated or recorded in them does more than merely to convey that they are the starting point to proof or a “first view”. All other things being equal, the fact that a matter is stated in a book kept by a company is sufficient to prove that matter in civil proceedings. That does not reverse the onus of proof in the proceedings in any general way, but it means that the tendering of the book is evidence of the matter recorded in it and that matter will be thereby proven unless other evidence convinces the tribunal of fact to the contrary, on the balance of probabilities.
[15](2009) 236 FLR 1, [396]; approved in Federal Commissioner of Taxation v Clark (2011) 190 FCR 206, 225 [65] (Edmonds and Gordon JJ).
The effect of s 1305 is limited to the entry being prima facie evidence of the matter stated or recorded in the book. The weight to be attached to that evidence will be measured in accordance with common sense.[16] It is not prima facie evidence of any underlying transaction. As was observed in Whitton v Regis Towers Real Estate Pty Ltd:[17]
Section 1305 of the Corporations Act does not elevate the entry to prima facie evidence that any such transaction (or series of transactions) exists. It can be no more than prima facie evidence that an unknown person formed an opinion on an undisclosed basis that, in the absence of any directly recordable transaction nevertheless, as a balancing entry, such a figure should appear in the accounts.
Are there outstanding rent/occupancy payments validly owed by the Company as alleged by the plaintiff at paragraphs 11 to 20 of the Statement of Claim?
[16]Re St George Development Company [2022] VSC 295, [20] (Nichols J).
[17](2007) 161 FCR 20, 36 [59] (Buchanan J, with whom Marshall and Tracey JJ agreed).
Plaintiff’s submissions
Counsel for the plaintiff submitted that the Court should find that there were occupancy fees of $173,250 owing under an implied contract between Lyndon Peak and the Company the terms of which included that the Company would pay Occupancy Expenses, calculated at $45,000 per year from incorporation until at least 31 December 2020, when its cashflow permitted. The contract is to be inferred from:
(a)the fact that the Company had been in occupation of the Premises from prior to FY2018 until at least 31 December 2020;
(b)the Company accounts since FY2018 had included such expenses; and
(c)the Company accounts since FY2018 had been adopted by Mr Morey, Ms Jones and Mr Kane.
Defendants’ submissions
On behalf of the defendants, it was submitted that the Court should find that there was no agreement by the Company to pay Occupancy Expenses to Lyndon Peak, for the following reasons:
(a)No invoices for Occupancy Expenses were issued until October 2020 despite the invoices claiming Occupancy Expenses for the period from 1 July 2017.
(b)Mr Morey’s evidence was that the rent paid by the Company was first discussed with Mr Kane in 2018 and that Ms Jones was not part of that discussion.
(c)Mr Morey said that there was agreement prior to the conversation in 2018 to charge rent and he ‘assumed that it would start then and there’. He conceded that it was incorrect to charge rent from 1 July 2017 and the first invoice for $45,000 should be disregarded. He said that the Occupancy Expenses should have been charged from 2018 but he was ‘not sure of that date’.
(d)There was no written agreement for the charging of Occupancy Expenses and no board minutes or other communications evidencing such an agreement.
(e)Mr Morey said he never agreed to an amount of rent and he ‘let [Mr Kane] determine the amount’. He was unaware of the amount of rent being accrued.
(f)Lyndon Peak did not record any receipt of rent from the Company prior to issuing the invoices in late 2020.
(g)In all of the circumstances, it was inherently unlikely that the Company would agree to pay $45,000 per annum, being the Occupancy Expenses, as rent of the subleased area which was 7% of the whole of the building that Lyndon Peak leased for $108,000 per annum. The ancillary services of car parking and telephone answering were of limited value.
Conclusion on Occupancy Expenses
Despite the fact that the entry for ‘Occupancy fees $45,000’ in the profit and loss statements for financial years 2018, 2019 and 2020 is prima facie evidence of the incurring of an expense for Occupancy Expenses in those years, in my opinion, it cannot be inferred that the Company entered into a contract with Lyndon Peak to pay occupancy fees of $45,000, for the following reasons:
(a)The evidence of Mr Morey was that the entries for Occupancy Expenses were the result of a conversation he had with Mr Kane in 2018. In substance, his evidence was that because the Company was starting to make money, he told Mr Kane that ‘I think it’s appropriate they now contribute to the costs of the building’; and he asked Mr Kane to determine a fair and reasonable amount.
(b)Mr Kane gave evidence of a conversation in about April 2018 after Mr Morey called him into Mr Sharpe’s office. His evidence was as follows:
(i)In the presence of Mr Sharpe, the conversation was:
Peter [Morey] says “I need you to take up an entry in the books to reduce the profit.” And I said, “Why?” He says, “Well, when I decide to take out Klair to, to terminate her I want the share price to be lower”.
(ii)After Mr Morey left the office, Mr Kane said he had the following conversation with Mr Sharpe:
“Well jeepers, what are we gonna do?” And I said to Michael [Sharpe], “Look, the line that’s missing from our P&L is occupancy so that’s the line, we’ve just gotta think of a figure”. So we, we just ah spoke about it for 15-20 minutes and we said, “Right, 45 per annum.” Um and it covers, you know, your coffee, tea and going to the toilet, um bit of stationery, bit of photocopying, whatever so we thought that was okay, you know. Not great but it, it had to be a figure that had an impact. Like it couldn’t be like 5 grand, it had to be a figure that could materially affect the financials. That’s what [Mr Morey] wanted.
I accept Mr Kane’s evidence over the evidence of Mr Morey, for the following reasons:
(a)I observed Mr Kane to give his evidence clearly and confidently and he included details that might be expected of someone who had a distinct recollection of a conversation, including who was present and the place of the conversation. On the other hand, Mr Morey’s evidence was absent any detail indicative of an independent recollection of the conversation with Mr Kane.
(b)I consider that Mr Morey was generally prepared to tailor his evidence to his advantage when he considered it in his interests. An example is his insistence that Mr Kane was not in truth an employee of Lyndon Peak but was only a contractor through his company Quickwood Pty Ltd (‘Quickwood’). He was unable to reconcile this opinion with the fact that, on his own case, Mr Kane worked 11 hour days, 5 days a week and 48 weeks per year exclusively for companies associated with Mr Morey. This evidence was also inconsistent with the propositions put by counsel for the plaintiff in cross-examination of Mr Kane, to the effect that Mr Kane was in truth an employee.
(c)Mr Kane’s version is consistent with the note made by Mr Kane in his valuation of 27 July 2020 that ‘I have added back Occupancy Expenses since Michael [Sharpe] was well aware of the background for this inclusion and instruction to keep accruing for it’. This note is:
(i)consistent with his evidence that Mr Sharpe was present when the direction was given to reduce the profitability shown in the accounts of the Company; and
(ii)explains why Mr Sharpe would not accept a valuation based on the profit being reduced for Occupancy Expenses.
(d)On the other hand, Mr Morey gave no explanation as to ‘the background’ of which Mr Sharpe was ‘well aware’ or why he did not query the adding back of the Occupancy Expenses in response to the note in Mr Kane’s valuation. In fact, in his email of 27 July 2020 in reply, Mr Morey suggested that the profitability could be lowered ‘by applying management fees, interest on my loan funds, rent increases etc.’; but did not suggest the possibility of retaining the Occupancy Expenses.
Even if Mr Morey’s version was to be accepted, I would not infer that the circumstances manifested an intention by Lyndon Peak and the Company to be bound by a contract for Occupancy Expenses for any sum that Mr Kane recorded in the accounts of the Company subject only to an obligation of good faith, as contended for by counsel for the plaintiff. My reasons for this conclusion are as follows:
(a)There was no evidence that Mr Kane had authority on behalf of the Company to commit it to pay Occupancy Expenses of $45,000 or any other sum; and the proposition that Lyndon Peak would authorise Mr Kane to fix an occupancy fee to which it would be bound is commercially nonsensical.
(b)Prior to October 2020, by which time the relationship between the parties had deteriorated to the extent that there were negotiations by the defendants to purchase the plaintiff’s shares, there was no demand or record of an entitlement to Occupancy Expenses recorded in the books of Lyndon Peak.
(c)No payment of any Occupancy Expenses was made by the Company at any time.
(d)There was no evidence of any written or oral communication between the relevant parties confirming or even referring to an agreement by the Company to pay Occupancy Expenses.
Are there outstanding Consultancy Fees validly owed by the Company as alleged by the plaintiff at paragraphs 21 to 25 of the Statement of Claim?
Plaintiff’s submissions
Counsel for the plaintiff submitted as follows:
(a)The Court should find that the Consultancy Fees, amounting to $287,037 for the financial years ending 30 June 2016 to March 2020, were owing under a contract between Lyndon Peak and the Company,[18] the terms of which included that the Company would pay 50% of the sums paid by Lyndon Peak to Quickwood, (the company associated with Mr Kane to which his ‘consultancy services were paid’).
(b)The contract is to be inferred from:
(i)the consultancy services which were provided to the Company at a time when Mr Kane was engaged and paid as a consultant by Lyndon Peak; and
(ii)in a valuation the Company prepared by Mr Kane in July 2020, he stated that there is ‘strong justification to include at least 50% of [his] wage in Access Strata’s figures’.
(c)The parties entered into the contract at or about the time of the preparation of the valuation document.
(d)Counsel for the plaintiff submitted that the Court could disregard the amounts claimed in the invoices, to the extent they exceeded 50% of the amounts paid to Quickwood, on the basis the additional claims were an ‘overreach’ by Mr Morey.
[18]The plaintiff does not press the claims with respect to the invoices for 2014 of $9,405 and 2015 of $31,570, which precede incorporation of the Company.
Defendants’ submissions
On behalf of the defendants, it was submitted that the Court should find that there was no agreement for Lyndon Peak to recharge 50% or any other percentage of the amounts paid to Quickwood to the Company, for the following reasons:
(a)Mr Morey conceded that the invoices for financial years 2014 and 2015 should not have been issued because it was prior to the incorporation of the Company.
(b)Mr Morey conceded that there was no agreement before July 2020 for Consultancy Fees to be charged; and Mr Gagic and Mr Mohan also conceded they were not aware of any agreement.
(c)The invoices for Consultancy Fees issued in October 2020 were around 50% higher than the Consultancy Fees referred to in the valuation prepared by Mr Kane on 27 July 2020.
(d)There was conflicting evidence about who calculated the percentage applied in the invoices. Mr Pope said it was Mr Morey and Mr Gagic said that he did it (after consulting with Mr Morey).
(e)Considering the hours worked by Mr Kane and the annual fees paid to him, it is not plausible that there was an expectation that Mr Kane would not perform any work for the Company without reimbursement to Lyndon Peak.
Conclusion on Consultancy Fees
I reject the plaintiff’s submission that Lyndon Peak and the Company entered into a contract for the recharging of 50% of the Consultancy Fees paid to Quickwood, to the Company, based on the communications at or about the time of the preparation of the valuation document.
In the valuation of 27 July 2020, Mr Kane states:
To offset [the Occupancy Expenses], I have included the adjustment for myself over the period. There is a strong justification to include at least 50% of my wages in Access Strata’s figures.
In my opinion, a reasonable business person would interpret Mr Kane’s statement, in the circumstances in which it was made, as being a suggestion for an adjustment to be made in the profit and loss statement of the Company for the purposes of valuing the business and therefore setting the acquisition price of the shares of Mr Sharpe. It was not open to be interpreted as being a contractual promise on behalf of the Company to pay Lyndon Peak 50% of the Consultancy Fees for the period from financial year 2016 to March 2020 or any other period.
Neither do I consider that the acceptance of the valuation by Mr Morey and Ms Jones, as a basis for acquiring Mr Sharpe’s shares, could found an inference of such a contract.
The evidence was that there was no prior agreement or discussion about the Company reimbursing the Consultancy Fees to Lyndon Peak; and no claim was made for such fees prior to the issue of the invoices in October 2020 (by which time the relationship between the parties had deteriorated as previously noted). Further, the amounts in the invoices included:
(a)claims for the financial years 2014 and 2015, prior to the incorporation of the Company, which were not pressed; and
(b)claims for the later years, which were for percentages greater than 50%. Although there was evidence about whether the higher percentage fairly represented the work performed by Mr Kane for the Company, there was no suggestion in the evidence that the higher percentages were ever agreed or referred to prior to delivery of the invoices.
Are there outstanding interest payments validly owed by the Company as alleged by the plaintiff?
Plaintiff’s submissions
Counsel for the plaintiff submitted as follows:
(a)The Court should find that there is interest payable on the Access Mercantile Services loan of $66,598 on the basis of an agreement to be inferred between the Company and Access Mercantile Services.
(b)The interest was calculated on the basis of interest rates provided to Mr Kane by Mr Mohan. The plaintiff is unable to particularise the calculation of the interest but the contract is to be inferred from the following:
(i)The Company has been relevantly financed by Mr Morey’s family trust, the Moresk Family Trust, advancing funds to enable the Company’s early business expansion, such advances being progressively recorded in the Company’s accounts and reaching $240,962 in 2017 before being subsequently repaid (but without interest) as to $100,000 in 2020, and as to the balance in 2021.
(ii)Since FY 2020, the Company has accrued in its accounts a liability for interest in the sum of $66,598 to Moresk Family Trust, which accounts had been adopted by Mr Morey, Ms Jones and Mr Kane.
Defendants’ submissions
The defendants submitted that the Court should find there was no agreement to pay interest on the directors’ loan, for the following reasons:
(a)Mr Morey gave evidence that he was not aware of any agreement to pay interest on the loans advanced to the Company.
(b)No invoice or demand has ever been issued in respect of interest on the loans. No request for payment of interest on the loan from the family trust was made prior to the filing of the third affidavit of Mr Morey in this proceeding on 11 October 2022.
(c)The claim for interest is based solely on an entry in the accounts and not any agreement.
(d)Mr Mohan’s evidence was that no interest has ever been accrued or treated as derived by Mr Morey or his family trust and no interest has ever been charged on amounts loaned by Mr Morey to related entities.
(e)Mr Pope gave evidence that no interest due on directors’ loans have been recorded as accrued in Mr Morey’s associated entities.
Conclusion on interest
It was not disputed that Mr Morey’s family trust, the Moresk Family Trust, loaned funds to the Company which reached the sum of $240,962.17 before being repaid (without interest) in 2021. However, the general ledger of the Company from financial 2020 included the following entry, which it was accepted related to this loan:
Accrual for Director Loan Interest (01/07/15-30/6/20) $66,598.
Mr Kane’s evidence was that he first made this entry in the Company’s accounts in or around July 2020 at the direction of Jacob Mohan, the financial controller of the Access Mercantile Group. His evidence was as follows:
I recall going into Mr Mohan’s office. Sat down and said “Jacob, Access Strata has a problem.” He said “John, what is it?” I said “there’re made a good profit.” He said “right”, he said “look what I want you to do is to take up an entry for interest on Peter’s director’s loan.” I said “do you want me to credit his own”; he said “no don’t do that, just take up” … I said “okay”, I said “Jacob, what do I do about interest rates?” He said “don’t worry I’ll give them to you.” That’s the exact conversation I had and I’ll go to my grave saying that’s what I said.
Mr Kane gave evidence that Mr Mohan gave him the interest rates to be applied for each year and he completed the calculation which resulted in the figure of $66,598.
Mr Mohan gave evidence that Mr Kane was incorrect and he never discussed entering an accrual for director loan interest into the Company accounts with Mr Kane in July 2020 or at any other time. He also stated that Mr Morey never charged interest on his loans to associated companies.
It is not necessary for me to determine whether the entry was made by Mr Kane on the instruction of Mr Mohan. Whether it was or was not, there is no basis to infer a contract in July 2020, or at any other time, for the Company to pay interest to the Moresk Family Trust, for the following reasons:
(a)There was no evidence of any agreement or even discussion about the payment of interest on loans from Mr Morey or his associated entities.
(b)Mr Morey specifically gave evidence that he was not aware of any agreement with the Company for interest to be paid on his loans.
(c)No invoice or a claim for interest has ever been made on the Company prior to litigation.
(d)No interest was ever accrued or treated as being derived by Mr Morey or the Moresk Family Trust.
(e)There was no submission that either Mr Kane or Mr Mohan was authorised by the Company or the Moresk Family Trust to enter into the alleged contract.
Orders
In accordance with the above reasons, I answer ‘no’ to each of the questions for determination and therefore order that:
(a)By 6 December 2022, the second defendant and/or third defendant purchase the plaintiff’s shares in Access Strata Management Pty Ltd based on a valuation of $666,135.
(b)There is liberty to apply.
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