McLaughlin v Dungowan Manly Pty Ltd
[2010] NSWSC 187
•16 March 2010
CITATION: McLaughlin v Dungowan Manly Pty Limited [2010] NSWSC 187 HEARING DATE(S): 21, 22, 23, 24, 25 September, 9 October 2009 and 18 February 2010
JUDGMENT DATE :
16 March 2010JURISDICTION: Equity Division JUDGMENT OF: Ward J DECISION: 1. Declare that the September 2006 resolution approving the payment of a $250,000 fee to Mr Garratt is ineffective and of no effect.
2. Order the defendant to pay to the plaintiffs the sum of $200,000 by way of damages for breach of the contract constituted by the Articles of Association (such breach constituted by the pursuit of the redevelopment insofar as it abrogated, varied or restricted rights of the plaintiffs in relation to the their occupation of their home unit).
3. Order the defendant to pay to the plaintiffs the sum of $59,885.93 by way of interest on 50% of the January 2000 special levy from the date on which demand was first made for its return (21 March 2007) to 30 September 2009.
4. Give leave for the plaintiffs to commence a derivative suit in the name of the company against the directors for breach of statutory duties in relation to the redevelopment.CATCHWORDS: CORPORATIONS – company title – oppression – construction and breach of articles of association – meetings procedure – validity of resolutions – assessment of damages for breach of articles of association and oppression – whether leave should be granted to commence derivative suit – defendant company undertook extensive re-development of block of units – re-development opposed by plaintiffs who were company members – whether conduct of re-development, including the striking of levies and entering into loans to fund re-development, the selective buy-back of shares and a remuneration payment to director were capable of valid resolution and undertaken according to articles of association or amounted to oppression – HELD – re-development project constituted breach of articles of association – resolution to remunerate director invalid due to inadequate notice – decision to undertake re-development in particular manner not oppressive – unequal treatment of plaintiffs in respect of a special levy constituted oppression – leave granted to commence derivative suit for breach of statutory duties LEGISLATION CITED: Trade Practices Act 1974 (Cth)
Corporations Act 2001CATEGORY: Principal judgment CASES CITED: Ashburton Oil v Alpha Mining NL (1971) 123 CLR 614
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Bain & Co Nominees Pty Ltd v Grace Bros Holdings Ltd (1983) 7 ACLR 777
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Corporations Act; Homes v Life Funds of Australia Limited ([1971] 1 NSWLR 860
Crumpton v Morraine Hall Pty Limited (1965) NSWLR 240; (1965) 82 WN (Pt 1) (NSW) 456
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Harlowe’s Nominees Pty Limited v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483
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McLaughlin v Dungowan Manly Pty Limited [2006] NSWSC 1001
McLaughlin v Dungowan Manly Pty Limited [2007] NSWSC 197; (2007) 61 ACSR 335
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Young v Higgon (1840) 6 M & W 49PARTIES: Patrick David McLaughlin (First Plaintiff)
Jennifer Therese McLaughlin (Second Plaintiff)
Dungowan Manly Pty Limited (Defendant)FILE NUMBER(S): SC 258866 of 2006 COUNSEL: S Burchett (Plaintiffs)
D Priestley (Defendant)SOLICITORS: Turner Freeman (Plaintiffs)
Pikes (Defendant)
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
WARD J
TUESDAY 16 MARCH 2010
06/258866 PATRICK DAVID MCLAUGHLIN V DUNGOWAN MANLY PTY LIMITED
JUDGMENT
1 On 26 February 2010 I made orders in these proceedings in respect of various claims brought by Mr and Mrs McLaughlin in relation to the conduct and affairs of the defendant company in which they jointly hold a parcel of shares. I gave a brief summary of my findings at the time and indicated that I would shortly publish my written reasons. These are those reasons.
Introduction
2 Dungowan Manly Pty Limited was incorporated in 1957 as a ‘company title’ home unit company, with the objects, inter alia, of acquiring, managing and conducting a home unit building in Manly known as “Dungowan Flats”. Under its Articles of Association, holders of parcels of shares in the company, such as the McLaughlins, have rights in respect of designated home units within the building as well as rights in relation to the common areas.
3 Broadly, the dispute between the McLaughlins and the company relates to the steps taken over the period from about 2000 onwards for the repair and extensive redevelopment of Dungowan Flats (steps which have involved a costly and unsuccessful appeal to the Land and Environment Court and subsequent modifications to the company’s initial plan for redevelopment of the building).
4 There is no doubt that as at 2000 there was a need for repair to the building (the problems associated with which included concrete spalling and water penetration, as well as fire safety issues and a non-functioning elevator). With hindsight it seems clear that the problems with the building were extensive. Dr Facioni, a civil engineer who was involved in the project and gave evidence in the proceedings, explained that once works to the building commenced it became clear that if no works had taken place the building “had no serviceable life remaining” due to the level of deterioration of the concrete slabs. With high levels of corrosion and low strength of the concrete, Dr Facioni’s report of 10 September 2009 says “It was a building waiting for a catastrophic failure to occur, the consequences of which could have been life threatening”. That evidence was not seriously challenged.
5 However, from 2000 the McLaughlins consistently disputed both the extent of the repair work which was necessary to be carried out and the means chosen by the company to address the building’s structural problems. The McLaughlins’ position was that, because steps were taken to support the front of the building which did not require the demolition of that part of the building, there was no reason to suggest that such steps could not have been carried out to the rear of the building. (The engineering reports do not support such a contention.)
6 The McLaughlins’ initial preference, as I understand it, was that only the minimum repairs necessary to remedy particular problems, as they arose from time to time, should be undertaken. Once it became likely that the minimum level of repair would not be sufficient to address the building’s problems in the medium to long term, then the McLaughlins suggested various steps to enable existing shareholders such as themselves to avoid the risk of incurring substantial repair costs – by calling for expressions of interest for the sale to, or development by others, of the building or by facilitating the buy-out of their shares (on the basis that they did not wish to be part of what they regarded as a speculative development project). The McLaughlins made it very clear throughout the course of the project that they did not support the project and Mr McLaughlin frankly conceded that he and his wife had done everything they could to prevent the project from proceeding (although at one stage in the witness box Mr McLaughlin said that they might have supported a one storey addition, of the kind proposed by the engineer they called in the proceedings – Mr Rickard, (T 67) conceding that such an addition would have cost the company a considerable sum as well.)
7 The building repairs were eventually carried out by the company in the course of (and were proposed largely to be funded by) a substantial redevelopment of Dungowan Flats, involving the demolition of the rear of the building, the conversion of two ground floor units to facilitate additional car parking, the construction of three additional floors (with eight new units) at the top of the building, and the internal modification/reconfiguration of existing units (apparently to take advantage of town planning concessions available for “heritage” buildings). What had been a three storey “heritage” home unit building was converted to a six storey home unit building with a car-stacker on the ground floor (under the level on which the McLaughlins’ unit was situated); the extension being modern in character.
8 For the purpose of the redevelopment, various amendments were necessary to be made to the company’s constituent documents (in order to enable the creation of various new share groups with rights in respect of the occupation of the new units which were in due course built). The company also entered into agreements to buy-back the shares relating to the two ground floor units required to be converted for the purposes of the redevelopment, at a price above the then estimated ‘as renovated’ value of those units, which was said to provide “compensation” for the loss by the owners of those shares (respectively, the chairman of the company, Mr Garratt QC, and one of its directors, Mr Heyworth) of their ground floor units (units 22 and 23 respectively). The company further resolved in 2006 to make a $250,000 payment to Mr Garratt for his efforts in progressing the redevelopment to that point (such payment not to be made until completion of the sales of the new units as part of the project).
9 All shareholders of the company, including the McLaughlins, were required to vacate their home units for a period of what transpired to be approximately two years (from September 2006 to November 2008) while the construction works were undertaken. Members have also been subjected to special levies struck by the board totalling a not inconsiderable sum (including a very substantial levy in January this year, after the completion of the hearing, in order to enable the company to discharge debts owing to two of its creditors – the builder, Southern Cross Constructions Pty Limited, and the Australian Taxation Office – in the face of a winding up application commenced by the builder in November last year).
10 The redevelopment project has involved borrowings by the company of somewhere in the order of $20 million. (When the matter came back before me in mid-February this year, the bank debt as at 28 February 2010 was then estimated to be $8.6 million.) Not all of the new units had been sold as at the time of the hearing last year (nor had they all been sold at the time of the subsequent application by the McLaughlins to reopen the hearing and tender further evidence on 12 February 2010). It is not therefore known what will be the ultimate outcome of the project for the company (or its shareholders) from a profit/loss point of view. Nevertheless, by the time the matter came before me in September last year, it was not anticipated that there would be anything more than a nominal profit for shareholders at the end of the day and there was no suggestion that any part of the special levies struck in relation to the project would be refunded to those shareholders who had paid the levies by that time. (Not all of the earlier special levy of January 2007 had been collected by the company as at the time of the hearing.)
11 A strata plan was registered in early 2009 in respect of the building and strata titles have been issued for the respective units. At least until February this year, those strata titles were being held by the financier as security for the company’s borrowings.
12 Since the completion of the hearing in early November last year, the company has updated shareholders (by letters dated 4 and 25 January 2010) on the financial outlook for the project. This led to the application brought by the McLaughlins on 12 February 2010 for leave to re-open the hearing in order for that correspondence, and other material in relation to the financial aspects of the project, to be tendered (and for injunctive relief in relation to a proposal that the company enter into agreements with shareholders for the surrender of their shares in return for the release to them of the strata titles for their respective units). For the reasons I gave on 26 February 2010, I gave leave for the additional material to be tendered in the hearing but denied the application for interlocutory injunctive relief. Subsequently, and on the eve of the final orders I made on 26 February 2010 in these proceedings, the company itself sought to reopen the hearing (though not seeking to challenge the interlocutory decision I had made in its favour) to tender a signed copy of a document which had been tendered in unsigned (and now, it would seem, apparently draft) form on the application by the McLaughlins to reopen. (That document was a deed entered into between the company and the builder, the recitals to which - in the unsigned version – suggested that the company was on notice of a statutory demand in relation to the builder’s debt prior to the conclusion of the hearing before me. As I had expressed concern as to this aspect of the matter in my reasons on the interlocutory application, I considered it appropriate to re-open the proceedings to admit the tender of that deed and did so over the McLaughlins’ objection. It was not, however, a matter relevant to my decision on the substantive proceedings.)
13 From the fresh material received on the respective applications to re-open, it not only appears that the debt owed by the company to St George Bank was expected as at 28 February 2010 to be $8.6 million, but also that there remain other outstanding company debts (of $1.1 million due to the Australian Taxation Office, a balance owing to Southern Cross of about $300,000, and moneys due to each of Mr Garratt and Mr Heyworth under their buy-back agreements (together initially totalling $1.9 million, although included in the latest financial figures, without explanation, at a somewhat lower amount)). It is not clear whether the further amount resolved to be payable by the company to Mr Garratt to remunerate him for his efforts on the project (of $250,000) has been paid.
14 On the company’s latest figures, the highest any estimated return to shareholders out of the redevelopment is put is somewhere in the order of $10,000 - $12,000 and even then this seems uncertain.
15 At the hearing, it had been anticipated that, depending on the prices obtained for the two newly constructed penthouse units, there might be a further special levy to cover any shortfall in respect of the works. That levy has now been struck (albeit not to meet a shortfall as such but rather to pay creditors and avoid a winding up of the company, in advance of the sale of the two new penthouses). In the meantime, shareholders have been back in occupation of their units since late 2008.
16 Having secured the agreement of the bank to apportion its existing debt across the various strata titles, the board put forward a proposal in January this year by which shareholders would be permitted to surrender their shares in release for the strata title to the unit(s) in respect of which those shares give a right of occupation, so that they could refinance or sell their units to fund the latest special levy (and thus both avoid the winding up of the company and reduce the bank debt). The McLaughlins sought, unsuccessfully, to restrain the release of those strata titles. As part of the agreements under which the company proposed to release strata titles to individual shareholders, outgoing shareholders were to be required to accept liability for a proportionate share of any shortfall on a final reconciliation of the company’s asset/liability position as at 28 February 2010. Hence, my concern to have made final orders in relation to any liability of the company in these proceedings prior to the reconciliation date (a matter I had taken into account in weighing the balance of convenience on the McLaughlins’ unsuccessful February injunction application).
Claims
17 The McLaughlins allege that the conduct of the affairs and acts of the company over the period were oppressive to, unfairly prejudicial to, or unfairly discriminatory against the members of the company or them in their personal capacity within the meaning of s 232 of the Corporations Act 2001. The McLaughlins also allege that various resolutions passed by the board and/or by the company in annual general meeting, including resolutions in relation to the special levies, are invalid (for various reasons, which differ somewhat as between the respective resolutions). The McLaughlins further allege that the redevelopment was carried out in breach of their rights under the company’s Articles of Association to the exclusive occupation of their unit as a home.
18 The McLaughlins had earlier sought injunctive relief from this Court in relation to the project on two occasions: first, to restrain the company from acting upon the first set of resolutions made in relation to the project at a general meeting of the company in September 2006 (relief which was refused by Barrett J for the reasons set out in his judgment of 27 September 2006 – McLaughlin v Dungowan Manly Pty Limited [2006] NSWSC 1001) and, later, to restrain the company from taking action to forfeit their shares or otherwise from relying upon non-payment by them of a levy notified in late January 2007 (relief which was also refused by Barrett J for the reasons set out in his Honour’s judgment on 9 March 2007 – McLaughlin v Dungowan Manly Pty Limited [2007] NSWSC 197; (2007) ACSR 335).
19 Following his Honour’s March 2007 judgment, and the refusal by the Court of Appeal later that month of an application for leave to appeal therefrom, the McLaughlins paid (expressly under protest) the full amount ($119,000) of their portion, as shareholders, of a then due January 2007 levy (which had been the subject of their second application for injunctive relief).
20 Subsequently, the McLaughlins sought a refund from the company of half of the amount so paid, the board having in the interim (and prior to payment by the McLaughlins) resolved that shareholders need pay only a 50% proportion of the levy as initially struck. The McLaughlins’ requests for a refund of 50% of the levy they had paid (made on more than one occasion) were refused. A variety of reasons have, over time, been proffered for that refusal – including concerns as to the McLaughlins’ ability to pay the levy; the fact that the McLaughlins had opposed the levy and had challenged the board’s power to strike the levy; and (quite extraordinarily in my view in the circumstances) on the basis that the payment (expressly made under protest) was a “voluntary advance” payment (as pleaded in the company’s Defence to the Further Amended Statement of Claim). As to this last reason, Mr Garratt in the witness box appeared to concede that a payment under protest would not ordinarily be regarded as “voluntary” but said that the payment was made by the McLaughlins knowing that the company would not accept any condition being imposed thereon (as to it being held in a separate account) (T 538.35 – 538.46). The most recent response in this regard is to be found in the submissions put forward by the company at the conclusion of the hearing, in which it is said that the McLaughlins put forward no legal or equitable entitlement to a refund of any part of the levy.
21 The McLaughlins contend that, on the board’s latest financial information, the project has cost them at least $422,732.45. Prior to that financial information they had assessed their loss and damage, as a result of the project, at $229,626.17 (that said to be comprised of the levies paid by them (as at the date of hearing $320,000 though since then a further $263,357.59 was levied), loss of rent during the period in which the building was unable to be occupied ($69,626.17), and loss of the benefit of alterations which had previously been carried out by them to their home unit ($10,000), offset against what was said by the company to be the estimated increase in value of their unit by reason of the redevelopment ($170,000)).
22 They also claim general damages for breach of the contract between the company and the members constituted by the Articles of Association, by reference to the pain and suffering they have experienced as a result of their treatment by the company (which it is said has deprived them of the use, as their home, of their only significant asset for the past 8 years). (In that regard, it should be noted, however, that the McLaughlins had chosen to rent out their unit well prior to the time at which the eventual building works commenced in late 2006 and, at least in 2004, were contemplating a return to the United Kingdom. Therefore, in practical terms the unit has for some time represented an investment for them, not their home, even though that may not have been their intention when the shares entitling them to occupation of the unit were first acquired.)
23 Alternatively to the loss and damage claimed by way of project losses, a claim is made for loss in the capital value of the shares (assessed at $275,871.56) by reference to what the McLaughlins say would have been the position had alternative repair options been pursued by the company (in particular, an option which had been put forward at an early stage by a firm of engineers, Bonacci Rickard, for the repair costs to be funded by a one storey addition to the building).
24 The McLaughlins claim reimbursement of the January 2007 special levy of $119,771.86 which they paid under protest, subject to any allowance in the capital loss assessment referred to above, or alternatively interest on 50% of the special levy ($59,885.93) from the date on which they made demand for its return (21 March 2007) at least until the balance of the special levy was required to be made by all other members (said to be 30 September 2009).
25 The McLaughlins seek orders pursuant to s 233 of the Corporations Act 2001, including a compulsory purchase order and/or an order for the appointment of a receiver/manager to the company to pursue remedies against the directors. The McLaughlins, alternatively seek leave under s 237 of the Corporations Act to bring derivative proceedings against the directors of the company for alleged breach of their duties as officers of the company to exercise their powers with a reasonable degree of care (s 180 Corporations Act), in good faith in the best interests of the company for proper purposes (s 181 Corporations Act) and not improperly to use their position to gain an advantage for themselves to the detriment of the company (s 182 Corporations Act).
26 The company denies the claims made against it and opposes the grant of leave in relation to the derivative suit sought to be brought in its name against the directors. In its Defence to the Further Amended Statement of Claim, the company alleges that the McLaughlins, in seeking leave to bring derivative proceedings “as in the prosecution of this proceeding throughout”, have been motivated by an improper collateral purpose, that being “to coerce the company or a member or members of the company to purchase [their] shares for more than their value” (paragraph 72 of the Defence to Further Amended Statement of Claim).
27 In respect of the claim for a compulsory purchase order, the company alleges that even if there has been oppressive conduct (which is denied) the McLaughlins are not entitled to such relief because they have already, by their conduct, elected not to accept offers by the company for the purchase of their shares on fair terms (paragraph 73(f) of the Defence to Further Amended Statement of Claim). Particulars of those offers were provided by letter dated 8 October 2009 (Exhibit 13) from the company’s solicitors (Pikes), namely: offers made by letters dated 21 February 2003, 7 May 2003, 4 January 2007, 15 February 2007 and a “standing offer” (said to have existed from 21 February 2003) to purchase the shares on the basis of an independent valuation (that standing offer said to have been confirmed at paragraphs 26 and 27 of the written submissions dated 28 February 2007 which were served on behalf of the company in connection with the second interlocutory application before Barrett J).
28 In relation to the McLaughlins’ claim for a refund of the special levies paid by them, the company alleges that any such refund would be unjust without a full accounting to the company of the benefits which have flowed and will flow to the McLaughlins in respect of their shares as a consequence of the work carried out by the company (paragraph 73(g) of the Defence to the Further Amended Statement of Claim). Those benefits are particularized in Exhibit 13 as including the increase in the capital value of the McLaughlins’ shares as a result of the works, the increased rental income for the McLaughlins as a result of the works and the avoidance of losses (in the form of increased general levies, greater and further special levies, reduced capital value of the shares and reduced rental income for the McLaughlins) had the works not been undertaken. (The McLaughlins, however, complain that as a result of the company’s actions they are at risk of being left as minority shareholders in a company with no real assets.)
29 In paragraph 74 of the Defence to Further Amended Statement of Claim, it is pleaded that if, which is denied, a defect, irregularity or deficiency of notice or time has occurred of any of the kinds alleged by the McLaughlins in relation to the various resolutions, the same has not caused and will not cause the McLaughlins any substantial injustice.
30 What is abundantly clear from a review of the correspondence tendered during the hearing (and, dare I say, from the tone of the submissions filed for both parties) is that this dispute is one which has engendered a considerable degree of acrimony, reflected by (and no doubt from the company directors’ view a product at least in part of) the fact that outside of these proceedings the McLaughlins have not been averse to voicing their opinions on the competence and integrity of (nor to ascribing improper motives to) many of those associated with the project and, in particular, have made serious (and unsubstantiated) allegations of fraud (and, in one instance, perjury) against the chairman of the company.
31 It is the McLaughlins’ view, which has been forcefully (and at times inappropriately) expressed, that the board has acted improperly and in breach of its duties in relation to the project and has consistently failed to provide them with adequate information either to assess the project or to facilitate a sale of their shares in the company. (In that regard, although it was put to Mr McLaughlin that the reason he had continued to ask for information about the project was because he might be able to have the decision stopped if the board failed to give enough information, I considered Mr McLaughlin’s emphatically put response, in the witness box, to be heartfelt namely that he and his wife had pressed for information “because it was our home and it was costing us a lot of money to be a member of that company” (T 62). (See also Mr McLaughlin’s response to similar effect at T 64, T 74.) Mr McLaughlin’s frustration in the witness box at the manner in which the company had dealt with him was manifest, as was his wife’s distress in the courtroom when some of the evidence was being given.)
32 What the McLaughlins (perhaps understandably) seem to have wanted from the outset (and what, perhaps not surprisingly, the board was not always in a position to provide) were definitive answers as to what was wrong with the building and as to the minimum cost of the repairs and/or of the project (and/or assurances as to their exposure in that regard). However, what they sought was a level of detail perhaps more appropriate for those with the management responsibility for the company (ie the board) in circumstances where they were not personally undertaking obligations to third parties in the project (their liability being limited, as members of the company, to the shares they held in the company). In any event, the fact that the company was not always able (or prepared) to provide such information is not of itself evidence of any oppressive conduct and the criticism levelled by the McLaughlins and their legal representatives against the board in that regard was not in my view always warranted.
33 It is the company’s position, on the other hand, that repairs to be building were essential; that the redevelopment works provided the only practical means of effecting the repairs at minimal cost to the shareholders and thus were for their benefit; that the shareholders were kept appropriately informed of matters in relation to the works (and, indeed, the evidence adduced by the company in the hearing established that the shareholders were broadly kept up to date with matters in relation to the redevelopment even if not with the minutiae of detail demanded by the McLaughlins); that the McLaughlins were not genuinely interested in any information of the kind that they had sought (other, perhaps, than insofar as it might provide a basis for attacking the board); and that the McLaughlins were simply seeking to put pressure on the company to buy out their shares at a price above market value. (Mr McLaughlin agreed that he had done everything he could to stop the development but insofar as he sought information he said this was not as a tool to block the project but because he needed the information for potential purchasers:
- We were looking for information to see how bad it was because we were trying to sell the unit. We required as much information as we could get to make it in fact sellable rather than the current situation that was put by the chairman that it was in an imminent state of collapse, that it could collapse at any stage, that the building was going to be evacuated at any stage (T 103-104).)
The McLaughlins lawyer, Mr Bonanno confirmed that his recollection was that on many occasions the company was asked for information and it was not forthcoming (T 160). I note also that it was not as if the McLaughlins’ requests for information suddenly commenced (or were manufactured) once lawyers became involved from mid 2005. Their demands for information were a constant theme from at least 2000 onwards.
34 Mr Priestley, however, went so far as to submit that the McLaughlins “saw an opportunity to leverage advantage for themselves from the difficulties confronting all shareholders at the expense of the other shareholders which they then determinedly pursued. They wished to be bought out by the others at a premium to market value. To increase their prospects, they applied pressure to the other shareholders by opposing the project by any means at their disposal, including dishonest means” (my emphasis). (There was no evidence of dishonesty, nor was such an allegation made. There was, however, evidence of serious and unsubstantiated allegations having been made with what seems to be best described as reckless abandon by Mr McLaughlin, to which no doubt Mr Garratt took (and was entitled to take) objection.)
35 As to the contentious issue of a buy-back of their shares, I note that the McLaughlins have contended, at least since the approval in 2006 by the general meeting of an amount of $950,000 each to buy-back the shares for the ground floor units, that the “market value” of their shares should be determined by reference to what two of the directors were to obtain for their ground floor units as part of the project. (That said, the McLaughlins had earlier been prepared to sell their shares for an amount commensurate with the lower value which had been placed on their unit during the course of the Land and Environment Court hearing.)
Issues
36 The issues to which the pleadings give rise may be summarised as follows:
(i) Were the impugned resolutions, or any of them, invalid, void and of no force or effect and/or was the conduct of the company in breach of the contract constituted by the Articles of Association?
(ii) Have the affairs of the company been conducted oppressively or otherwise within the prohibition in s 232 of the Corporations Act ?
(iv) Should leave be granted to the McLaughlins (and/or should a receiver be appointed) to pursue a derivative suit in the name of the company against its directors for alleged breach of their duties to the company?(iii) If there has been a breach of the Articles of Association in relation to the steps taken by the company, or a breach of s 232 of the Act, what is the appropriate relief?
Summary
37 In summary, for the reasons set out below, I have concluded that:
(i) Validity of resolutions / breach of Articles of Association
38 Subject to the following qualifications, the respective resolutions were either validly passed (or, in the case of those of the impugned September resolution to amend the company’s Articles, which had not properly been notified as a special resolution, validly ratified) or, if affected by procedural irregularity, any irregularity was not such as to cause substantial injustice which could not otherwise be remedied by orders in these proceedings. (A number of the earlier resolutions of which complaint was made had no operative effect in any event, as had been noted by Barrett J in his first interlocutory judgment.)
39 The qualifications I make are, first, that I find that the resolution approving the amount of a compensation payment to the chairman for his efforts in relation to the project was ineffective by reason of the inadequacy of notice of such a resolution and the failure to disclose all relevant or material information in relation to that resolution. (In particular, the extent of Mr Garratt’s interest in the company and the basis of which such a sum was recommended).
40 Secondly, (applying the reasoning in Wilson v Meudon Pty Limited [2005] NSWCA 448) I find that the redevelopment abrogated, varied or otherwise restricted the rights of the McLaughlins under article 3 of the Company’s Articles of Association insofar as the creation of a car stacker on the level directly under that of their unit affected the amenity of their unit and, as such, the pursuit of the redevelopment project required their consent, which was never given. There was, therefore, a breach by the company of the contract with the McLaughlins constituted by the Articles of Association, for which a remedy in damages will lie.
(ii) Oppression
41 I find that the affairs of the company have been conducted oppressively (within the meaning of s 232 of the Corporations Act) but only in relation to the unfair and discriminatory treatment of the McLaughlins in relation to the January 2007 levy (namely, in the refusal by the company of their request for a refund of 50% of that levy in circumstances where all other shareholders had not been required to pay the full amount or otherwise to satisfy the company of their ability/intention to pay the balance of the levy).
(iii) Relief
42 I have assessed the damages for breach of contract at $200,000. I consider that the appropriate remedy for the oppressive conduct is an order for the payment to the McLaughlins of interest on 50% of the January 2007 special levy from the date of the request for a refund (21 March 2007) to the date to which payment of that sum by all other shareholders was deferred (quantified by the McLaughlins at $59,885.93).
(iv) Derivative suit
43 I consider that the McLaughlins have established a basis on which leave should be granted to bring a derivative suit in the name of the company against the directors for breach of their statutory duties as directors. In particular I consider that there is a serious question to be tried as to such a breach of duty in relation to the circumstances in which construction contracts were entered into in advance of satisfaction of the conditions to which finance for the project was subject and in light of the non-disclosure to shareholders of the extent of Mr Garratt’s beneficial shareholding in the company (in the context of the resolutions put to the members both to approve the buy-back of certain of his shares for $950,000 and the $250,000 payment to compensate him for his efforts in relation to the project, information which might have led the meeting to a different result in relation to those resolutions).
Facts
44 Given the history of this dispute (and the exhortation by Mr Priestley, Counsel for the company, in his submissions of the need for examination of the primary sources), it is necessary to set out the facts giving rise to this dispute in some detail. I do so in paragraphs 47 - 279 below.
45 Mr and Mrs McLaughlin acquired their parcel of shares (designated as share group “D”) in the company in 1996. Ownership of that parcel of shares entitled the holder under the Articles of Association to the use and enjoyment of unit 4 (which, as part of the redevelopment, is now renumbered unit 6) in Dungowan Flats and to the use of common areas in the building.
46 It appears that in October 1994, Mr Garratt, the now chairman of the company, or his service company (Loafer Pty Limited) had acquired an interest in the company through an undisclosed agent, Ms Sheridan Pether. That interest related to the (former) unit 17. In 1995 and again in 1997, shares entitling the holder to occupation of two other units (the former units 20 and 11, respectively) were acquired by Ms Candida Ashford, as undisclosed agent for either Mr Garratt or Loafer Pty Limited. (Ms Ashford was for some period in 1999/2000 a director of the company.)
47 In 1997, a parcel of shares (in relation to the then numbered unit 6) was acquired by Mr Peter O’Meagher as undisclosed agent of Loafer Pty Limited (in evidence was an Agency Agreement between Mr Garratt, Loafer Pty Limited and Mr O’Meagher in relation to that acquisition.)
48 Thus, by 1997, Mr Garratt had a beneficial and apparently undisclosed interest (directly or indirectly as the case may be) in at least four units in the building.
49 Mr Garratt’s interest in the building, by 2000, also included shares in respect of two other units, one in the name of an associated company, Garmen Pty Limited, and another by his service company Loafer Pty Limited. A seventh unit (unit 22) was acquired in his and his wife’s name. In the witness box Mr Garratt was unsure of the precise number of units (6 or 7) in which he or his companies or agents had held an interest as at 2000 (T 411) but conceded that he was the company’s largest shareholder. Mr Garratt’s evidence was that he purchased the first four units in the names of other people as he was not on the board and (as those people were then living in the building) this was a means of keeping tabs on a “significant investment” (T 419) (an explanation the immediate logic of which escaped me). More understandable was his evidence that his interest in the building was at first undisclosed in effect so as not to push up the price for shares in respect of other units in which he ht later acquire an interest (T 420). In either event, it seems to belie the suggestion that Mr Garratt’s interest in the outcome of the project was the same as any other shareholder. In relative terms, the greater the size of his investment the more he had to gain (or less he had to lose) overall on the outcome of the project (a matter which in my view was material when the general meeting came to consider the proposal for him to be remunerated for efforts thus far voluntarily provided in relation to the project).
50 In late 1997, the McLaughlins, with board approval, undertook renovations to their home unit, including the removal of an internal wall, balcony floor levelling and treatment of what was described as “concrete cancer” at a cost of $10,000. (Part of their present complaint relates to the reconfiguration of their unit which renders useless those earlier works.) By 2000, Mr Garratt and/or companies associated with him had an interest in six or seven of the then 22 units in the building although the extent of his interest in the building would not have been apparent from an inspection of the company’s register of members. (The company records (to Mr Garratt’s apparent surprise in the witness box) did not disclose, for example, that the shares held by Ms Ashford and Ms Pether were not beneficially held by them.)
51 In May 2000, Mr Garratt was elected to the board of the company at an extraordinary general meeting called by Mr Garratt apparently due to his concerns as to the then financial stewardship of the company. Mr McLaughlin held similar concerns at that time (T 21.45).
52 Ironically, in light of the complaints subsequently made by the McLaughlins, it seems that Mr Garratt had expressed his dissatisfaction with the level of information provided to members of the company and had disputed the company’s contention that he was disqualified from voting for non-payment of certain levies (which he had disputed because of a lack of information as to that for which the moneys were being levied).
53 It seems that there had been ongoing problems from at least 1982 in relation to the structural condition of the building with concrete spalling (or concrete cancer) and water penetration (though Mr McLaughlin would only concede that there were minor structural issues with the building as at May 2000 or, as he put it, ‘minor maintenance issues of the kind you would associate with any building’ (T 22)).
54 In August 2000, Mr Garratt, writing as chairman to shareholders not long after his appointment, referred to 20 years’ worth of company records indicating problems in relation to the water/concrete issues and the necessity to attend to a proper understanding of the structural condition of the building (TB 200-202).
55 In 2000, the building lift broke down. Reports were obtained by the board in 2000 in relation to the repairs necessary to the lift and to the building generally (see Exhibit 9, TB pp 203-204). In the meantime, in October 2000, a special levy of $200,000 was struck for the repairs to the lift or for replacement of the building’s lift. The payment of the levy was to be spread over two years, apparently in recognition of the fact that many of the shareholders had limited financial means (see Mr Garratt’s letter TB 205-206). However, the proposed repairs to the lift were, in the main, not carried out until the redevelopment took place and then only as part of that redevelopment, a matter of no little complaint by the McLaughlins. (In that regard, although Mr McLaughlin seemed to resist the proposition that the board had advised shareholders what was happening with the lift – T 43 – he ultimately accepted that the board had given shareholders information in the form of a letter on this issue.)
56 The correspondence reveals that consideration was given by the board as to whether it was appropriate to do minimum work to reinstate the lift (and later replace the lift to an acceptable standard), as recommended by one firm of engineers, Close Consultants, (TB 203-4) or whether the cost of immediate lift repairs would simply be wasted expenditure if further repair work was required to the building. Mr Garratt said in his evidence that there was doubt as to whether the minimum work necessary to reinstate the lift would meet WorkCover/insurance requirements and it was considered likely that the lift would require replacement in any event within one to two years. A decision was ultimately made by the board to postpone the lift repairs and to investigate ways in which to carry out the more extensive repairs required to deal with the structural conditions of the building (namely, the concrete spalling and water penetration problems).
57 At about the same time as the “lift” levy was struck, the board resolved to appoint two firms of engineers (Bonacci Rickard and Close Consultants) to review the structure of the building. By letter dated 16 October 2000, Mr Garratt engaged those two firms to provide a preliminary report as to the building’s structural condition and to address the ability of the building to support penthouses on the roof or reconstruction, strata title, lift replacement/refurbishment and fire protection. (A report as to the safety and fire protection issues was also sought.) Interestingly, given the terms of Mr Garratt’s letter, it would seem that the possibility of an extension to the building (whether or not with the aim of funding the repairs) was something which first emanated from Mr Garratt, or the board, not the engineers who were advising in relation to the structure of the building, though nothing turns on this.
58 In November 2000, Bonacci Rickard gave a preliminary report to the directors on the building’s condition, proposing that one extra storey be constructed with two to four new units. It was said that this would allow tenants to use the new units as units were upgraded. (This proposal seems to have been made with a view to utilising the funds generated from the renovation to pay for the repairs; not because the repair work of itself necessitated an extra storey being added to the building.) This report recommended that additional tests be carried out, as well as maintenance of the lifts in the short term but with their replacement in the master plan (TB 207-219). (Close Consultants had reported that the fire safety protection work could be carried out without major building works but recommended further investigation.)
59 Although much emphasis was in due course placed by the McLaughlins on the recommendation contained in this report, it was clear from Mr Rickard’s evidence that the recommendation was very much preliminary in nature at that stage. Mr Rickard (at T 235) acknowledged that the extent of the concrete cancer in the building had not been quantified. The basis of the conclusion that a one storey addition could be made to the building also seems to have been a preliminary view in that he expressed the opinion that the roof was the principal cause of the building’s problems (that being a waterproofing issue) and he said that in his experience the ‘rule of thumb’ was that there could be up to a 25% weight increase to a building without the need for (expensive) underpinning of a building. Hence, his recommendation that the board consider addressing the roof problem by adding one floor to the building, which he said would create a new capital asset “if not to offset, to equal the cost of repairs”.
60 Mr Rickard said that he did some broad costing, based on the quantity surveyor WT Partnership’s figures, in effect excluding car park costings and underpinning, and attributed a cost per floor of $1.1 million for the extension.
61 From the outset, the McLaughlins were critical of the board’s decision not to carry out the lift works (for which the $200,000 levy had been struck) and as to the extent of the repairs pursued by the board. In particular, the McLaughlins were critical of what they say was the failure of the board to carry out any further investigation of the proposal put forward by Bonacci Rickard for repairs to the building to be funded by one additional level to the building rather than (as the board ultimately chose to do) by pursuing a more ambitious redevelopment. Mr McLaughlin persisted, up to and during the hearing, in contending that (what I might call patchwork) remedial repairs from a local builder, Joe Clancy, would have been sufficient by way of repair, an assertion which flies in the face of the expert evidence as to the building’s problems.
62 According to Mr Garratt, by January 2001 the board realised that very extensive repairs were required to the building and that neither the company nor the shareholders had the funds to pay for them.
63 In January 2001, a consultant retained by Close Consultants (Savcor Pty Limited) reported to Close Consultants as to the building condition and recommended that a pilot repair of one unit and area of façade (costing $45,000 to $65,000) be carried out. Savcor’s estimate was that it would cost approximately $1.3 to $1.6 million for the repairs in total to be carried out, subject to the findings once the pilot repair was carried out. (Mr McLaughlin said in the witness box that he accepted the Savcor report’s conclusion that there be a test on one unit to find out the extent of the problem (T 26.22-25).)
64 By letter dated 4 January 2001, shareholders were advised as to the preliminary reports which had been received from Bonacci Rickard, Close Consultants and Savcor. The state of the lift was said to be of pressing importance. It was recommended that shareholders think carefully about taking on tenants for longer than six month leases (due to the possibility of building repairs). The prospect of significant levies was drawn to shareholders’ attention. It was noted that shareholders would be presented with a proposal outlining costs, risks, delays and benefits (TB 235-237).
65 Close Consultants’ report of 31 January 2001 concluded that major works were required and also recommended (as had Savcor) that there be a pilot repair of one unit. An estimate of $2 million for total repair costs was given, subject to the results of the pilot test (TB p 238).
66 In February 2001, the directors decided to defer the lift repair works pending the building restoration proposal. According to the minutes of the 4 February board meeting it seems that Mr Garratt and Close Consultants informed the board that building repairs were not feasible (Exhibit 9) and that a full report as to options would be given to directors and shareholders. It is not clear why the recommendation for a pilot repair was not adopted (as advised in Mr Garratt’s letter of 17 May 2001).
67 By letter dated 27 February 2001 the McLaughlins were provided with copies of the reports of Close Consultants and Bonacci Rickard, as well as the minutes of the board of directors meeting on 4 February 2001 (Exhibit 10).
68 Almost immediately, Mr McLaughlin raised complaints as to lack of information in relation to the repairs. He also (by email of 7 March 2001 – TB 256-257) sought clarification of the extent of Mr Garratt’s interest in the company (an odd request unless by then he had some reason to believe Mr Garratt had a greater interest than in one unit). Mr Garratt (who, in the witness box, suggested that, at least by 2006, there was no secrecy in relation to his interest in the company) responded to Mr McLaughlin that the board (not he) would respond to Mr McLaughlin. The board does not seem to have so responded and the extent of Mr Garratt’s beneficial interest in the company was not apparently made clear to the McLaughlins until his evidence in these proceedings. What the knowledge of other shareholders was in this regard is not clear but, in the absence of disclosure of that interest at the relevant meetings, I can only assume that Mr Garratt’s overall interest in the building (as the company’s largest shareholder) was not generally known – a matter of some relevance when I come to consider the information put before the meeting when Mr Garratt’s compensation payment was approved.
69 By letter dated 17 May 2001, Mr Garratt advised the shareholders that Savcor had recommended a pilot project be conducted on a vacant unit, at an estimated cost of $45,000 to $60,000, and that Close Consultants had advised the board to add to that cost estimate the costs of fire safety works, lift replacement, and repair/restoration works on the windows and balconies, for a general budgeted cost of $2.5 million or more. Mr Garratt’s letter (TB 268), relevantly in the context of Mr McLaughlin’s complaints on this issue, advised that the board had decided there was no point in proceeding with a pilot work at that time and that it should investigate the options available in relation to the repair, renovation or reconstruction of the building. The letter noted that one (unidentified) owner had raised the possibility of selling the building (but did not suggest that the board was actively pursuing that possibility). The letter also noted that, after further testing, Savcor had advised that it was essential for an inspection of the concrete below the floors to assess the extent of the cracking and the action required to prevent the possibility of structural failing caused by the cracks. The letter noted the fact that a special levy of $250,000 had been raised for the purpose of the lift replacement (or its complete renovation) and advised that the board was keeping the situation with the lift under review.
70 Mr Garratt’s concern at that stage was said to be that the company investigate options for the greatest value in order to enhance individual investments and fund development (TB 277-287).
71 By May 2001, an issue had arisen between the then company secretary (Mr Adrian Stark) and the McLaughlins (who had apparently expressed strident criticism as to his competence and/or integrity). Whether for that reason or otherwise, Mr Stark advised Mr McLaughlin in a letter dated 19 May 2001, that the board would not release any records except to an agreed accountant but that the board minutes were available (Exhibit 10).
72 Notwithstanding Mr McLaughlin’s insistence to the contrary, it does not seem seriously able to be disputed that, as at 2001, the common areas of the building were in a poor state and there was a need for repairs to be carried out to part or all of the building (to address water penetration, concrete cancer problems and to repair or replace the lift). During 2001 steps were taken by the company to investigate the options for the company to fund repairs to the building by way of a redevelopment of Dungowan Flats (see TB 288-290).
73 In 2001, the board, having been provided with certain recommendations from Architectural Projects Pty Limited (a firm retained in that regard), advised Architectural Projects that it was proposing to proceed with one of the then identified options of rebuilding (option 3), namely for a four storey addition to the building (TB 291).
74 In September 2001, the McLaughlins vacated their unit and rented it out for $415 per week. (Mr McLaughlin’s evidence in the witness box was that this occurred after Mrs McLaughlin was assaulted – T 84.) They have not occupied their unit as a home since then (nor is it suggested that they now wish to do so).
75 In October 2001, shareholders were given notice of the Annual General Meeting, together with a summary of information in relation to the condition of the building. They were advised that the cost of repairing the slabs was likely to be in the order of $1.3 to $1.6 million and that the current building would not support more than one additional storey on the roof. Mr Garratt’s 19 October 2001 letter to shareholders also noted the engineers’ proposal for demolition of the rear and the construction of four additional floors with ten new units. The letter advised as to the possibility that shareholders would have the opportunity to be included in the design process and might be able to reconfigure or retain particular features of their units. (Mr McLaughlin says he did not ask for anything in this regard as he understood the board was proposing to build as per the development application subsequently obtained, which indicated that heritage features were to be retained (T 53).)
76 The Annual General Meeting was held on 14 November 2001 (the minutes of which are at TB 338-339). There were presentations at the meeting, which was attended by a heritage architect (Mr O’Reilly) a fire services consultant and a consultant town planner. Mr McLaughlin accepts that he raised various questions at the meeting. (He was not, however, entitled to vote at that meeting due to non-payment of levies.) The McLaughlins say that at that meeting it was said that the board expected there to be a surplus from the proposed development. (I interpose at this stage to note that the McLaughlins have taken issue with the varying estimates given over the course of the project as to the likely final outcome of the development. However, at no stage does it seem that any assurances were given by the board as to the financial outcome of the project, nor would I have expected it likely that the board would have been in a position to do so given the uncertainties associated with any redevelopment project of this kind.)
675 It has been said that whether there is a serious question to be tried can be answered only by reference to an infringement of some legal or equitable right or the commission of some legal or equitable wrong (Goozee, above, ACSR at 542 and Ragless v IPA Holdings Pty Ltd (in liq) [2008] SASC 90, at [40]; (2008) 65 ACSR 700; 254 LSJS 225).
676 It seems to me that there are sufficient aspects of the matter which raise concerns as to the disclosure to members and as to the prudence of committing the company to significant exposure at a time when bank funding was not secured (and/or the company’s ability to satisfy the conditions precedent to draw down had not been established) to warrant the conclusion that there is a serious question to be tried as to whether the directors or some of them have breached their duties to the company. I have set out above the chronology of events which makes clear (as ultimately accepted by Mr Garratt) that when the steps were taken which (whether together with other factors or of themselves) left the company with no practical choice but to proceed with the project (the vacation of the building and commencement of work by the builder) the company was in the position that there was no assurance that the conditions for draw down of the necessary funds would be satisfied.
677 I think there is also a serious question to be tried as to the conduct of the directors in putting before the members the compensation proposals in relation to both the buy-back amount for the ground floor units and Mr Garratt’s remuneration, without (it would seem) more than a broad brush assessment of what would be the proper amounts to pay in all the circumstances and without disclosure of the extent of Mr Garratt’s interest in the company, matters which may have had a material effect on shareholders’ consideration of those resolutions at the relevant meeting(s). (In that regard, Mr Garratt’s assertion that his interest in the building was well known (T 424) is to be understood in light of his acknowledgement that there was no disclosure in terms of that interest at shareholder meetings and the fact that there is no disclosure on the corporate records of any beneficial interest.)
678 Notice of proceedings to company – Finally, section 237(2)(e)(ii) contemplates that a court can grant leave even if the applicant has not given written notice to the company of the intention to apply for leave and of the reasons for applying. In these circumstances, where the company has been on notice of the McLaughlins’ intention to seek relief of this kind since the commencement of the proceedings, and they were brought in the first instance on an urgent basis for the grant of interlocutory relief, I consider that the failure to notify of an intention to make such an application strictly within the section should not preclude the grant of leave.
679 Accordingly, I consider it appropriate to grant leave to bring the derivative proceedings. I think it appropriate that such leave be granted to the McLaughlins and not to a receiver, since it is a matter for the McLaughlins to determine whether the pursuit of the proceedings at this stage (and bearing in mind their partial success of the proceedings before me) is worth incurring the further costs and stress of litigation.
Conclusion
680 For the reasons set out above, I have concluded that:
1. In general, the complaints made in relation to the passage of resolutions by the company and/or its directors have either not been established or give rise to no ultimate remedy in particular because the earlier resolutions of which complaint is made had no operative effect in relation to the development or have since been ratified or ought to be the subject of orders under s 1332 of the Corporations Act .
- 2. In respect of the resolution purportedly approving a compensation payment to the chairman for his efforts in relation to the project, I am of the view that this was ineffective by reason of the inadequacy of notice of that resolution and the failure to disclose all relevant information in relation to that resolution.
- 3. I find the conduct of the company in pursuing the development was in breach of the contract constituted by the Articles of Association between the company and the McLaughlins insofar as it affected the amenity of the McLaughlins’ right of occupation of the unit then numbered 4 in the building by the creation of a car stacker under their unit. For this breach of contract a remedy in damages will lie and I have assessed the McLaughlins’ damages on the evidence before me at $200,000.
- 4. I find that the affairs of the company have been conducted oppressively within the meaning of s 232 of the Corporations Act in relation only to the refusal by the company to entertain or accede to the McLaughlins’ request for a refund of half of the January 2007 levy. The appropriate remedy for this is an order for the payment of interest on that portion of the January 2007 levy from the date on which requests for its return were made until the date on which other unit holders were required to pay the levy and that has been quantified by the McLaughlins at $59,885.93.
- 5. I consider that leave should be granted to the McLaughlins to bring a proceeding on behalf of the company in relation to the alleged breach of directors’ statutory and fiduciary duties in circumstances where:
(i) It is probable that the company will not itself bring proceedings;
(ii) I am satisfied that the McLaughlins are acting in good faith in seeking to bring such an application (and the defendant concedes as much);
(iv) It is in the best interests of the company that leave be granted and appropriate for that purpose for that leave to be granted.(iii) There is a serious question to be tried as to whether, in committing the company to arrangements with Southern Cross Constructions in relation to the development project, before satisfying itself that it would be in a position to meet the conditions precedent to approval of the finance for the project, it put the company at great risk and/or in entering into arrangements for the buy-back of units 22 and 23 and the payment to Mr Garratt personally of a $250,000 gratuity, one or more of the directors have been in breach of their fiduciary and statutory duties to the company; and
681 On 26 February 2010, I made (and now confirm) the following declarations and orders:
1. I declare that the September 2006 resolution approving the payment of a $250,000 fee to Mr Garratt is ineffective and of no effect.
2. I order the defendant to pay to the plaintiffs the sum of $200,000 by way of damages for breach of the contract constituted by the Articles of Association (such breach constituted by the pursuit of the redevelopment insofar as it abrogated, varied or restricted rights of the plaintiffs in relation to the their occupation of their home unit).
4. I give leave for the plaintiffs to commence a derivative suit in the name of the company against the directors for breach of statutory duties in relation to the redevelopment.3. I order the defendant to pay to the plaintiffs the sum of $59,885.93 by way of interest on 50% of the January 2000 special levy from the date on which demand was first made for its return (21 March 2007) to 30 September 2009.
682 I will arrange for the matter to be listed at a convenient time to consider any submissions as to the costs orders which should be made.
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