McLaughlin v Dungowan Manly Pty Ltd

[2007] NSWSC 197

Reported Decision: 61 ACSR 335

New South Wales

Supreme Court

CITATION:	McLaughlin v Dungowan Manly Pty Ltd [2007] NSWSC 197
HEARING DATE(S):	23/02/07, 27/02/07, 28/02/07, 02/03/07, 07/03/07
JUDGMENT DATE :	9 March 2007
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Barrett J
DECISION:	Application for interlocutory injunction dismissed
CATCHWORDS:	CORPORATIONS - company title home unit company - action by directors to impose levy upon shareholders - whether objects for which levy imposed are objects permitted by constitution - whether levying power of directors exercised for proper purpose - whether forfeiture and sale of plaintiffs' shares for non-payment of levy would be oppressive, unfairly discriminatory or unfairly prejudicial
LEGISLATION CITED:	Corporations Act 2001 (Cth), ss.124, 232, 251A(6), 258C
CASES CITED:	Ashburton Oil NL v Alpha Mining NL (1971) 123 CLR 614 Ding v Sylvania Waterways Ltd (1999) 42 NSWLR 424 Federal Commissioner of Taxation v Western Suburbs Cinemas Ltd (1952) 86 CLR 102 Gambotto v WCP Ltd (1995) 182 CLR 432 Ghabrial v Romolly Pty Ltd (1991) 5 ACSR 611 Goldsmith v Colonial Finance Mortgage Investment and Guarantee Corporation Ltd (1909) 8 CLR 241 Gray v L. Stevenson & Sons Ltd (1899) 25 VLR 476 Harlowe’s Nominees Pty Ltd v Woodwide (Lakes Entrance) Oil Co NL (1968) 121 CLR 483 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 Kirwan v Cresvale Far East Ltd (2002) 44 ACSR 21 Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 59 ACSR 444 McLaughlin v Dungowan Manly Pty Ltd (2006) 59 ACSR 686 New Balkis Eersteling Ltd v Rand Gold Mining Co [1904] AC 165 Nguirli Ltd v McCann (1953) 90 CLR 425 Re Agriculturist Cattle Insurance Co (Stanhope’s Case) (1866) LR 1 Ch App 161 Spackman v Evans (1868) LR 3 HL 171 Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 447 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285
PARTIES:	Patrick David McLaughlin and Jennifer Therese McLaughlin - Plaintiffs Dungowan Manly Pty Limited - Defendant
FILE NUMBER(S):	SC 4924/06
COUNSEL:	Mr S.J. Burchett - Plaintiffs Mr D.A. Priestley - Defendant
SOLICITORS:	Turner Freeman - Plaintiffs Pike Pike & Fenwick - Defendant

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

BARRETT J

FRIDAY, 9 MARCH 2007

4924/06 PATRICK DAVID McLAUGHLIN & ANOR v DUNGOWAN MANLY PTY LTD

JUDGMENT

Background

1 The plaintiffs are members of the defendant company, being the joint holders of a parcel of shares. In these proceedings (in which an originating process was filed on 20 September 2006 and a statement of claim was filed on 7 March 2007), they challenge certain resolutions purportedly passed at a general meeting of the defendant.

2 An application for interlocutory orders restraining the defendant from acting upon and giving effect to the resolutions was heard on 25 September 2006 and dismissed on 27 September 2006: see McLaughlin v Dungowan Manly Pty Ltd (2006) 59 ACSR 686. I am now dealing with a second application by the plaintiffs for interlocutory restraint. That application was prompted by actions the defendant took in January and February 2007.

3 As appears from the earlier judgment, the defendant is a company title home unit company and the plaintiffs are the holders of shares in the defendant carrying the right to occupy (and other defined rights in respect of) one of the flats within the residential flat building at Manly owned by the defendant. The plaintiffs’ flat is flat 4. The building is old, having been constructed in 1919. The defendant has undertaken a program of refurbishment which also entails enlargement of the building so as to include a greater number of flats. As part of the project, two of the existing flats will be demolished to make way for car parking. The holders of the shares related to those flats will, it seems, be given “compensation” by way of buy-back of their shares by the company, subject to the passing of necessary resolutions by members.

4 At the time of the earlier hearing, the refurbishment and extension work was about to start. Thereafter, work began and a building contractor took possession of the site. As a preliminary, all the flats had been vacated. The builder progressed with the works to a certain point but then stopped work. This occurred on 2 February 2007. The problem was that the defendant had struck difficulties in obtaining the loan finance it had expected to have available to undertake and complete the project. It will be necessary to come back to the financing arrangements.

The present application

5 The present application is an application to restrain the defendant from taking action to forfeit and sell the plaintiffs’ shares or otherwise relying on non-payment by the plaintiffs of a levy upon members recently notified to them. The precise order sought by the interlocutory process filed on 21 February 2007 is:

“Pending the determination of these proceedings or further order, the defendant be restrained from taking any action under the Articles of Association of the defendant against the first plaintiff and the second plaintiff on the grounds of failure of the first plaintiff and the second plaintiff to pay a special levy in the sum of $119,771.86 purportedly struck by the Defendant in late January 2007 payable by 12 February 2007, and in particular, be restrained from purporting to forfeit or sell the shares owned by the first plaintiff and the second plaintiff in the defendant on those grounds.”

The defendant’s constitution

6 On 17 December 2006, a further general meeting of the defendant was held. That meeting purported to pass a special resolution altering the constitution of the defendant by adding to article 4 in certain respects. The text of that article, with the added words shown in italics, is as follows:

“The Directors shall have the right in each year at six monthly intervals or oftener if they shall so determine to make a levy on the holders of shares in the Company for an amount not exceeding the amount of the expenses charged and outgoings referred to hereafter and so that each shareholder shall only be required to contribute to such levy his proportion of these expenses charges and outgoings in the same proportion as the total number of shares in each group bears to the total number of issued shares in the Company save that where any shareholder has or shareholders have not paid an amount previously levied the directors may include any such unpaid amount in a subsequent levy (‘a shortfall levy’) which shall be calculated and payable by the other shareholders on the basis that the shares relating to the shareholder or shareholders who have not paid are excluded from liability in respect of the shortfall levy and the total number of issued shares in the Company for the purposes of the calculation is reduced accordingly. Any unpaid levy amount as aforesaid remains payable to and recoverable by the Company, notwithstanding the striking and payment of a shortfall levy, and when payment of any such unpaid amount is received, the same shall be credited to the account of the shareholders the subject of the shortfall levy in the proportions in which the shortfall levy was struck.
The expenses charges and outgoings abovementioned shall be as follows:-
(a) All rates and taxes.
(b) The amount payable for Federal and/or State Land Tax or other charges imposed upon the said property by any properly constituted body.
(c) Insurance premiums for insurance of the said building and of such of the contents as are the property of the Company against loss by fire storm or tempest premiums for workers compensation fidelity guarantee superannuation Public Risk or such other risks as the Directors may from time to time determine.
(d) The costs of such external painting repairs and maintenance as are in the opinion of the Directors necessary to keep the building in good order and condition.
(e) The cost of colouring repairs and maintenance of such internal and external passages and rooms as are in common use and cleaning thereof and the proper maintenance of gardens lawns paths and grounds and the replacement of articles in common areas.
(f) The carrying out of any requirement of any local or statutory authority except in relation to any particular flat.
(g) the amount payable for electric light and power for outside lighting and in those portions of the building which are in common use.
(h) Expenses of carrying on the Company including directors’ fees accountancy and legal charges management charges caretakers expenses cleaners expenses and lift maintenance and replacement.
(i) Any items of expenditure carried forward from the previous year.
(j) All charges and outgoings which the Board in its discretion considers expedient to maintain or enhance the value of the property.
(k) Such amount as the Board in its discretion considers desirable to provide for future repairs or other contingencies.
(l) Any other expenditure properly incurred in the conduct of the building as first class residential home units.
(m) All money and amounts (in any currency) that the Company is or may become liable at any time (actually, prospectively or contingently, whether alone or not and in any capacity) to pay to or for the account of St. George Bank Limited
ABN 92 055 513 070 and its respective successors, assigns and transferees (whether alone or not and in any capacity). It includes money and amounts:

(a) in the nature of principal, interest, fees, costs, charges, expenses, duties, indemnities, guarantee obligations or damages; and

(b) whether arising or contemplated before or as a result of any assignment (with or without the Company’s consent) or any debt or liability.
For the purposes of this clause the expression “year” shall be the period commencing on 1st July in one year and ending on the 30th June in the succeeding year.”

7 Article 5 provides for notice of a levy to be given to members and states that the levy becomes due and payable fourteen days after notice is given (unless the directors otherwise determine) and may be recovered by court action. Article 5 goes on to say that, if payment is not made, a second notice is to be given and if the levy is still not paid, the company “may enter into possession of the flat which the holder has the right to occupy and evict the holder therefrom or receive the rents therefrom until the amount of the levy is fully satisfied”. It is also provided by article 5 that the company “shall also have a lien upon the shares of the holder until such levy is fully satisfied”.

8 Article 15 states that the company has “a first and paramount lien upon the specific share registered in the name of any member (whether solely or jointly with others) for all calls or instalments due in respect of such share and the levy hereinbefore referred to …”. Article 17 is in these terms:

“The Company may sell in such manner as the Directors think fit any shares on which the Company has a lien but no sale shall be made unless some sum in respect of which the lien exists is presently payable nor until the expiration of fourteen days after a notice in writing stating and demanding payment of such part of the amount in respect of which the lien exists as is presently payable has been given to the registered holder for the time being of the share or the person entitled thereto by reason of his death or bankruptcy.”

9 Article 19 provides, in summary, that the proceeds of any such sale shall be applied in satisfying the amount for which the lien exists and the balance shall be paid to the shareholder.

10 Forfeiture of shares is dealt with in articles 32 and following. Article 32 itself says that if a member fails to pay any levy or instalment of levy on the day appointed for payment, the directors may serve notice requiring payment of the unpaid amount with interest. That notice must specify a further day (not less than 14 days after the date of the notice) on which payment is to be made and state that in default of payment by that day the “shares in respect of which the call was made will be liable to be forfeited” (the procedure as a whole is expressed to apply to non-payment of a call on a share as well as non-payment of a levy, but the part just quoted, which appears in article 33, refers to call but makes no reference to levy; although there is a later provision purporting to apply all the forfeiture provisions to non-payment of a levy or part of a levy).

11 If the notice foreshadowing forfeiture does not produce payment, the member’s shares may be forfeited by resolution of directors. Article 35 then applies:

“A forfeited share may be sold or otherwise disposed of on such terms and at such price and in such manner as the Directors think fit and at any time before a sale or disposition the forfeiture may be cancelled on such terms as the Directors think fit.”

12 It is provided by article 36 that a person whose shares have been forfeited ceases to be a member in respect of the forfeited shares but remains liable to pay the relevant moneys until “the Company receives payment in full of the nominal amount of the shares” (article 36). This article seems to reflect an assumption that the sale or other disposal contemplated by article 35 is in reality re-issue, although the speech of Lord Lindley in New Balkis Eersteling Ltd v Rand Gold Mining Co [1904] AC 165 at p.169 suggests that there is a distinction, in this context, between sale and re-issue. If that is so, it is not entirely clear how the “nominal amount of the shares” would be received by the company in a sale of issued shares.

13 These, however, are matters of detail about which I do not need to worry at this point. It is sufficiently clear that non-payment of a levy by a member may lead to forfeiture of the member’s shares and that the shares may be sold or re-issued to recoup the amount owing and with any balance accruing to the member. But as I read the articles, the company is under no duty to sell or re-issue forfeited shares. There is a power only. Indeed, shares may, in some circumstances, be unsaleable or, for commercial reasons, there may be no willing buyer, so that the absence of duty is understandable. But it must be the case that, if the shares can realistically be sold, they will be, since the powers of forfeiture and sale exist in aid of the company’s right to recover or recoup moneys that the member has failed to pay. This is a matter to which I shall return.

Steps by the company to impose the levy

14 After the notice convening the general meeting of 17 December 2006 had been despatched but before the date fixed for the meeting, the chairman of the defendant’s board of directors (Mr Garratt) sent members a circular explaining that the resolutions to be considered were “required by St George Bank in relation to its lending facility”. The circular went on to say that the bank “required amendments to articles 4 and 27 of the articles of association” and continued:

“Article 4: The bank wanted it to be absolutely clear that the board may strike a levy to raise money to repay the bank, and that if such a levy were imposed and one or other shareholder did not pay his or her share a further levy could be imposed to get in the shortfall needed to repay the bank. The effect of the second levy would not be to excuse those who owed money under the first levy; its purpose is simply to ensure prompt repayment of money owing to the bank.”

15 On 25 January 2007, Robinson Strata Management (which is accepted as having acted on behalf of the defendant) sent to the plaintiffs a document headed “Notice of Levies Due in February 2007”. This document referred to a levy of $119,771.86 and specified a due date of 12 February 2007.

16 Documents in evidence suggest that all the directors (or, in one case, a director’s alternate) subscribed to a written resolution dated 24 January 2007 in the following terms:

“The Directors resolve, noting that debts totalling $2.8 million have been incurred by the Company in relation to the renovation and construction works in progress in relation to the Company’s building at 7 South Steyne, and having regard to the continuing delay in the provision of funds to the Company by St George Bank Ltd to pay those debts, to strike a special levy in the amount of $2.8 million payable by the shareholders in proportion to their shareholdings in the Company on 12 February 2007.

The Directors resolve further to instruct the Company’s managing agents to serve levy notices accordingly, and that a default notice be served promptly on any shareholder who or which opposes payment of the levy.”

17 On 1 February 2007, the defendant’s solicitors wrote to the plaintiffs’ solicitors saying, among other things:

“We … have been instructed by our client to advise the special levy struck in January 2007 has been struck to put the company in a position to meet its obligations.”

18 The letter went on to say that the loan conditions imposed by St George Bank had not been met and that the builder would not continue without payment, concluding:

“In the circumstances the company had no alternative to striking a special levy.”

19 On 6 February 2007, Mr Garratt sent a circular to shareholders. The circular began:

“You will have recently received notification of a substantial special levy struck by the board on 24 January 2007.
The special levy has become necessary in order for the board to place the company in a position to pay outstanding moneys to the builder and to others in respect of the project so far.
Southern Cross is well advanced with the works, having exposed and carried out reinforcement works (by concrete injection) to the existing footings; having stripped away much degraded concrete in the existing floors to support them; and having commenced preparatory work for the car stackers. The costs of all work on the project to date are $2.8 million. I enclose a summary of the costs provided by our development manager, Steve Bartrop.”

20 After discussing the unavailability of the expected bank financing, the circular said:

“In the circumstances the board was left with no alternative but to strike a special levy to meet the costs of the project to date. It was necessary to do so in order for the company to be able to meet its debts, and to give assurance to the builder that this was the case. The board considers that the substantial payment of the special levy should result in the bank allowing funding drawdowns to proceed, even if issues concerning the McLaughlins have not been resolved. It is expected that the other two requirements made by the bank will be satisfied in the short term. The effect of the payment of the special levy will significantly improve the bank’s position, as the bank would be lending less, less interest will accrue over the life of the loan, and the estimated shortfall on completion of the sale of the new units will be nil.”

21 Attached to the circular was the schedule of expenses referred to therein. It is headed “Expenses Incurred & Billed January 2007”. The entries are as follows:

CREDITOR	TO DATE	END JAN. ‘07	TOTAL
SOUTHERN CROSS CONSTRUCTIONS	$1,630,000.00	$570,000.00	$2,200,000.00
HAMPTONS DEVELOPMENT	$ 136,400.00	$ 39,600.00	$ 176,000.00
McGRATHS REAL ESTATE	$ 86,200.00	$ 86,200.00
CHANGING LANES	$ 19,500.00	$ 19,500.00
STANE PROJECT SERVICES	$ 150,700.00	$ 17,600.00	$ 168,300.00
PIKE, PIKE & FENWICK	$ 40,000.00	$ 11,000.00	$ 51,000.00
VALENTINE & ASSOCIATES	$ 32,000.00	$ 32,000.00
SURVEYOR	$ 3,000.00	$ 3,000.00
PRIVATE CERTIFIER	$ 8,000.00	$ 4,000.00	$ 12,000.00
VALUATION	$ 2,000.00	$ 2,000.00
SUNDRY CREDITORS	$ 50,000.00
INCLUSIVE OF GST	TOTAL	$2,800,000.00

22 On 13 February 2007, the defendant, over the signature of Mr Garratt, wrote to the plaintiffs noting that the levy payable in respect of their shares and due on 12 February 2007 had not been paid. This letter drew attention to provisions of the constitution concerning non-payment of levies. The letter reads in part as follows:

“The Articles (namely Articles 32 to 38) permit the company to serve a notice in respect of any unpaid levy requiring its payment, and to forfeit the shares in relation to which the unpaid levy is owing if the outstanding levy is not paid by a day fixed by the notice that is 14 or more days from the date of the notice. The Articles also provide that the company has a lien over shares in respect of unpaid levy and may sell the shares after notice to the shareholder (see Articles 15 to 19).
By this letter Dungowan Manly Pty Ltd gives notice that it requires payment of the special levy by the day which is 15 days after the date of service of this letter, namely 28 February 2007.
Unless the special levy is paid in full by that date, or an arrangement in writing satisfactory to the company has been made in the meantime, your shares (and accordingly unit 4) will be liable to immediate forfeiture and sale without further notice.
If the company sells your shares, the balance of the sale price after payment of the outstanding balance of the special levy (which is secured by a lien over the shares) and payment of all sale and recovery expenses will be remitted to you or such other person as may be entitled thereto.”

The company’s attempts to obtain finance

23 It is now necessary to refer to other aspects of the evidence. The plaintiffs have always expressed opposition to the refurbishment and extension project. There is a long history of disagreement between them and the defendant’s directors. The plaintiffs voted against the special resolution passed on 17 December 2006. They also voted against the resolutions passed at a meeting of 9 September 2006. The possibility that the defendant itself might buy back the plaintiffs’ shares or find a buyer for them has been pursued on several occasions. No acceptable basis has been found.

24 In negotiating for finance to undertake the project, the defendant had apparently been confident that an acceptable basis would be found for arranging buy-out of the plaintiffs This emerges from a letter of 10 January 2007 from Mr Garratt to the plaintiffs’ solicitors:

“The banking documentation has all been completed. As part of that documentation, the bank required each shareholder to sign an acknowledgement form, to which reference was made in my letter to shareholders of 8 December 2006. An exception was made in the case of your clients. The bank was expecting that your clients would be selling their shares in the short term. This is apparently no longer the case.”

25 The consequences of the plaintiffs’ remaining shareholders, from the bank’s perspective, were then stated:

“The bank has now told the Company that although finance is approve, as your clients are continuing as shareholders and have litigation on foot against the company, the bank will not at this time allow a drawdown without your clients signing the acknowledgement form and resolving their litigation.”

26 The letter then went on to state what would happen if the plaintiffs did not meet the bank’s wishes by signing the particular form of acknowledgment required by the bank and “resolving their litigation”, that is, these proceedings:

“If your clients are not prepared to take these steps by 5 pm on Friday 12 January 2007, the Board will need to strike a special levy next week payable within 14 days. The amount of the levy would be approximately $2.5 million. The figure is being calculated now. Enforcement action would need to be promptly taken against any shareholder who did not pay on time. A copy of this letter would be distributed to all shareholders to explain why this course was necessary.”

27 The letter also said:

“The striking of the special levy can only be avoided, at this time, if your clients sign and return the shareholder acknowledgement required by the bank and resolve the litigation, or if they sell their shares and resolve their litigation.”

28 This letter was accompanied by a copy of the acknowledgment that the plaintiffs were asked to sign.

29 The bank’s facility offer is in evidence. It is dated 12 January 2007 – which makes curious Mr Garratt’s statement in the letter of 10 January 2007 that the “banking documentation has all been completed”. The facility amount is $20,887,000. There are numerous conditions to be satisfied before the facility can be used. One of them is that “pre-sales contracts” in form and substance satisfactory to the bank and conforming to certain specifications must be produced in respect of “an aggregate gross sale value of not less than $12,650,000”. This appears to mean that loan funds for the project would not be advanced unless sufficient of the proposed new units had become subject to binding contracts with purchasers (technically, allottees) to account for gross proceeds of $12,650,000.

30 Another condition of the facility is, in effect, that all shareholders have received “independent legal and financial advice” in relation to the “special levy payable by each Shareholder under or in connection with this Facility Offer”. Among the things to be acknowledged by shareholders after receiving such advice is liability to pay the special levy “(which is anticipated to be in excess of $150,000 for Shareholder)”, that liability to pay it “continues and will not be released or discharged until all money owing under or in connection with this Facility Offer and the securities are repaid in full to us (i.e, the bank] “and that the shareholder has the financial capacity to pay the special levy as and when it may be payable.

31 Availability of the loan is also subject to conditions concerning the plaintiffs. One of these is:

“The contract for the sale of unit 4 of the Security Property must be provided to us and be in form and substance acceptable to us.”

32 Another condition precedent involving the plaintiffs is that they provide to the bank, in form and substance acceptable to it and its solicitors, a “waiver” of certain rights they may have, an undertaking to the defendant not to make “demands or claims of any nature against” the defendant or any shareholders of the defendant and not to institute or continue any proceedings concerning the defendant or any shareholder or asset of the defendant. These present proceedings are obviously within that description.

33 The evidence suggests that all shareholders other than the plaintiffs have signed the acknowledgment the bank requires. I do not seem to have any evidence about the status of the condition requiring committed pre-sales if $12,650,000. The conditions involving the plaintiffs and flat 4 have not been satisfied. It is, of course, entirely a matter for them whether or not they will act in a way that would facilitate the raising of the bank finance by the defendant.

34 As at late December 2006, the defendant was hopeful that the bank would provide draw-downs even though some conditions precedent had not been satisfied. At that point, however, the bank identified three problems. The first was a prior encumbrance on the shares of one member (that being relevant to the security for which the bank had stipulated). The second was an uncompleted sale (which presumably meant that the buyer had to be brought into the arrangements with the bank). The third concerned the plaintiffs and the fact that they had not done the things necessary to meet the bank’s particular conditions relevant to them. It seems that the first two problems have now been resolved (or, at least, the defendant’s solicitor thinks they have) but the third, of course, remains.

35 It thus appears that, by late January 2007, the defendant had been placed by the bank in a position where the finance would not be provided unless the litigation instituted by the plaintiffs had been resolved and either the plaintiffs had signed an undertaking in the form accepted by all other shareholders or disposed of their shares.

36 I am not called upon to address the question whether a responsible board of directors, acting prudently, would have allowed a situation to arise in which builders had started work but no binding promise of loan finance was available. The fact is that the defendant found itself in that position in late January 2007 and that the builder stopped work early in February. It was in those circumstances – and after expenses of about $2.8 million had been incurred – that steps were taken to initiate action to levy members.

Shareholders’ reactions to the levy

37 It is to be inferred from the evidence as it currently stands that all shareholders were given notice of the levy at or about the same time, with each required to pay the proportion of the total sum that the individual holding bears to the total share capital. The individual holdings are not the same. In many cases, however, the holding is 2,750 shares. Some holdings are 1,750 or 2,250 shares. One is 2,550 shares. The plaintiffs hold 2,250 shares. Their levy amount of $119,771.86 compares with $146,387.83 for a shareholding of 2,750 shares, $93,155.89 for a shareholding of 1,750 shares and $135,741.44 for the shareholding of 2,550 shares.

38 The due date for payment was 12 February 2007. In the week ended 26 February 2007, part payments were made by the shareholders in respect of flat 5 ($7,000), flat 22 ($10,000) and flat 3 ($12,000). No other payments had been made as at 26 February 2007.

39 Several shareholders wrote to the chairman, Mr Garratt, after receiving notice of the levy. One said:

“I wish to advise that it may take a month for me to be able to pay amount required. I can only hope that the board may find a way to obviate the necessity for the payment of the levy.”

40 Another said that the member “will agree to pay the special assessment over a 3 month period, in instalments …”.

41 A third said it “could mostly pay the special levies … within 90 days” and asked whether “an advance payment of around $2,400” could be made “fairly promptly”.

42 A fourth said (on 25 February 2007) that half could be paid “in the next few weeks” but it would “require a few more weeks to raise the rest”, adding:

“I understand from our conversation that some resolution is expected this week that could result in the levy being substantially less in which case there would be no issue.”

43 There is no evidence that the defendant responded to the express and implied requests conveyed to it by this shareholder correspondence.

The plaintiffs’ contentions

44 The plaintiffs say that they are not liable to pay the sum of $119,771.86 demanded of them by the defendant and that, if they do not pay that sum as asked, there will not accrue to the defendant any right to forfeit their shares. The plaintiffs put their case on four bases:

1. The alterations to article 4 purportedly adopted on 17 December 2006 are not binding on the plaintiffs.
2. Even if the plaintiffs are bound by the alterations, the levy, as made, was not authorised by article 4 as amended.
3. The decision of the directors of the defendant to make the levy notified on 25 January 2007 was made for an improper and collateral purpose, that is, the purpose of intimidating the plaintiffs to give undertakings to the bank or to sell their shares or to settle these proceedings (or a combination of the foregoing).
4. Action by the defendant to forfeit the plaintiffs’ shares for non-payment of the levy would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, the plaintiffs.

Ground 1

45 Ground 1 may be dealt with briefly. The defendant does not rely on any part of the additional content purportedly introduced into article 4 on 17 December 2006. Its contention is that the levy was regularly and properly made and validly affects the plaintiffs whether or not that additional content is binding on the plaintiffs. I therefore need not address the question whether the purported additions are binding on the plaintiffs – a matter to which the plaintiffs addressed submissions by reference to s.140(2)(b) of the Corporations Act and the decision of Austin J in Ding v Sylvania Waterways Ltd (1999) 42 NSWLR 424. Nor is it necessary to address the question whether, if it is correct to regard the purported additions as creating a new basis on which shares may come to be forfeited, those additions overstep the limits recognised in Gambotto v WCP Ltd (1995) 182 CLR 432.

Ground 2

46 The defendant maintains that the levy is supported by one or more of paragraphs (d), (f), (j) and (l) of article 4.

47 Submissions made by Mr Priestley of counsel on behalf of the defendant emphasised that the constitution of a company must be construed as a commercial document and, moreover, read as a whole, so that where, as here, it consists of memorandum and articles, the two must be considered as a composite whole. I accept that these submissions are supported by the judgments of members of the Full Federal Court in Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 59 ACSR 444.

48 Mr Priestley referred to the objects of the defendant as stated in clause 3 of the memorandum of association. These include purchase of the particular residential flat building at Manly (clause 3(1)), management of that building as “first-class homes” (clause (3)(2)) and, as specified in clause 3(5):

“To develop and turn to account any land acquired by the Company or in which it is interested and in particular by laying out and preparing the same for building purposes constructing altering pulling down decorating maintaining fitting up and improving buildings and by planting paving draining cultivating and letting on building lease or building agreement and by advancing money to and entering into contracts and arrangements of all kinds with builders and others.”

49 Clause 3 refers to numerous other objects but it is not necessary to set them out. For present purposes, it is sufficient to note that the objects of acquiring and managing the particular building at Manly co-exist with an object of developing and turning to account any land acquired by the company (including, obviously enough, the Manly land) and “constructing altering pulling down decorating maintaining fitting up and improving buildings” (including, obviously enough, the Manly building).

50 These provisions of the memorandum stating the defendant’s objects are relied upon not to counter any suggestion that the defendant does not have power to undertake the program of refurbishment and extension (in view of s.124 of the Corporations Act, any such suggestion is simply unsustainable) but, rather, to provide a context for the construction of article 4. I accept that the provisions of the memorandum may be used for that purpose.

51 It is to article 4 that I now return. That article 4 refers variously to “the said property”, “the said building”, “the building” and “the property”. Article 2 defines “the building” as “the property known as Dungowan Flats, South Steyne, Manly”. The expression “the said building” should be given the same meaning. The reference is, clearly enough, to the building which was in existence at the time of the signing of the articles (9 April 1957). The expressions “the property” and “the said property”, by contrast, may have a somewhat wider meaning. It is true that the definition of “the building” refers to “the property known as Dungowan Flats, South Steyne, Manly”, but clause 3(1) of the memorandum, which delineated the company’s object of acquisition, referred to “the fee simple of that land upon which is erected the building known as ‘Dungowan Flats’” and went on to refer to an area of 24 ¼ perches and a specific title reference. I am prepared to think that references in the articles to “the property” (or “the said property”), rather that to “the building” (to which a defined meaning is given) or “the said building”, are wide enough to refer not only to the building as such but also the parcel of land as a whole. (In saying this, I do not mean to imply that “the building” does not include appurtenances such as fences, paths, gardens and lawns.)

52 In deciding whether the levy is supported by the particular paragraphs of article 4 on which the defendant relies, it is necessary to consider the purpose for which the levy has been made. Mr Garratt’s circular of 6 February 2007 makes it clear that the purpose was “to meet the costs of the project to date”. The accompanying schedule of expenses incurred and billed to January 2007 (see paragraph [21] above), although not explaining in any explicit way the purposes of the several expenses, provides sufficient indication of the purpose or likely purpose of some of them.

53 The first item referable to Southern Cross Constructions is obviously a debt to the building company, no doubt for building and preparatory work. Hamptons Development is a planning and development consultant and that item is therefore directly related to the refurbishment and extension project. McGraths Real Estate, it may be inferred from such evidence as there is, has provided services in connection with forward sales of the new units expected to become available for occupation upon completion of the project. Stane Project Services is a project management firm which has apparently had general oversight of the total project. I need not go on. I am prepared to think that, on the evidence as it now stands, all of the items relate directly to the project as a whole (including creation of additional flats and invitations to subscribe for new shares relating to them) and were incurred in the course of pursuing that project. A partial exception to this, I should note, is legal fees (Pike Pike & Fenwick) which, to the extent that they relate to these proceedings rather than the project, are clearly within paragraph (h).

54 It is then necessary to consider the nature of the project and what it will achieve. There is no dispute that part of the work to be undertaken in the project involves repair and maintenance of the existing building which is old and in need of attention, including some structural work. There is also an element of refurbishment involving improvement of the existing flats. But, as I have said, the project also involves extension of the building so as to create several new flats, as well as demolition of two of the existing flats so that the space can be used for car parking. The project as a whole thus involves more than repair and maintenance of the building. There are obvious elements of renewal and enlargement (cf Federal Commissioner of Taxation v Western Suburbs Cinemas Ltd (1952) 86 CLR 102). Viewed as a whole, the expenditures listed at paragraph [21] above which the levy is intended to cover thus relate to renewal and enlargement of the building as well as its maintenance and repair.

55 It follows that on this interlocutory application those expenditures should be regarded as relating to:

(a) repair and refurbishment of the existing building;

(b) extension of the existing building by the addition of further flats; or

(c) marketing plans or marketing efforts in respect of the new flats – or, more precisely, obtaining subscribers for the new shares proposed to be allotted, being shares carrying rights to occupy the new flats.

56 When one looks at paragraphs (d), (f) and (l) of article 4 (being three of the paragraphs said by the defendant to support the levy), it seems to me that the following picture emerges:

1. Any aspects of the total project that entail external repairs and maintenance judged necessary by the directors to keep the existing building in good order and condition are within paragraph (d) and, to the extent that the levy relates to those aspects or elements, it is authorised by article 4.

2. If any local or statutory authority has actually imposed a requirement for work to be carried out (such as by way of installation of fire safety measures) and some part of the expenditure has been incurred to satisfy the requirement, that part of the expenditure will, because of paragraph (f), justify the levy, but only if and to the extent that the relevant official requirement is one in relation to all the flats or the building as a whole, not just a particular flat or particular flats less than the whole.

3. To the extent that any part of the expenditure has, as an objective matter, been “properly incurred” in the “conduct” of the existing building “as first class residential home units”, paragraph (l) will support the levy.

57 It seems to me that all the matters in the foregoing 1 to 3, involving paragraphs (d), (f) and (l) of article 4, are concerned with the building as it existed on 9 April 1957 and continued to exist thereafter, albeit with such physical changes as may have resulted from keeping it in that form. Each of the paragraphs entails an inquiry the answer to which might well be that the conditions necessary to warrant a levy are satisfied as to part of the overall expenditure referred to at paragraph [21] above. At the same time, however, there are parts of that expenditure which, as matters now stand, could not, in my view, be brought within any of those paragraphs. An obvious example is expenditure related solely to marketing of the new flats to be created. That has nothing to do with “the building” as defined. The evidence as it stands does not permit firm findings about the extent to which the total of $2.8 million referred to at [21] above is covered by paragraphs (d), (f) and (l) in the ways to which I have referred. But it is clear that it is not wholly covered.

58 I come then to paragraph (j) which identifies as a matter in respect of which levies may be raised “charges and outgoings which the Board in its discretion considers expedient to maintain or enhance the value of the property”. In approaching this provision, I bear in mind what I have already said about the meaning of “the property” as distinct from “the building”. It is obvious that the board has formed an opinion that it is expedient to incur the outgoings of $2.8 million. The question is whether it was open to the board (or would have been open) to regard the expediency as related to maintaining or, more pertinently, enhancing the “value of the property”. As a matter of logic, any enlargement or extension of a building forming part of a property which causes the enlarged building to contain more flats available for occupation entails enhancement of the value of the property of which the building forms part or on which it is situated. A property which includes 26 or 28 habitable flats must be of a greater value than a property which includes 20 or 22 such flats – at least during times when letting or granting occupation rights at a profit may be contemplated (this may not have been the case in relation to a building on the beach front at Manly in 1942).

59 I am of the opinion that paragraph (j) will support the aspects of the expenditure going to extension of the building. Mr Burchett of counsel, who appeared for the plaintiffs, drew attention to the case of Ghabrial v Romolly Pty Ltd (1991) 5 ACSR 611. That was a case in which a building was to be extended by constructing garages for all but one of the existing flats. I quote from the judgment of Cohen J at p.613:

“The provision as to levies does not seem very appropriate for raising funds for substantial expenditure of a capital nature. See art 21(f) which excludes the cost of structural alterations. It was hovever accepted by the plaintiffs that the call for funds for expenditure of the type envisaged here could have been made under para (i) of art 21 which refers to charges and outgoings which the board considers expedient to maintain or enhance the value of the property.”

60 The paragraph (i) referred to by Cohen J (really paragraph (j), as is shown by the full text of the judgment at BC8101689) was in the same terms as paragraph (j) in the present case. It seems to me that the concession as to the applicability of the paragraph was correctly made in the case before Cohen J. The addition of garages no doubt enhanced the value of a property containing a residential flat building which previously had no garages. While one can understand Cohen J’s observation that a levy provision such as the present article 4 does not seem very appropriate for raising funds for substantial expenditure of a capital nature (an observation upon which Mr Burchett placed weight), his Honour did not suggest that the levy provision before him (including its paragraph (j)) was incapable, as a matter of construction, of covering the extension by the addition of garages. I am satisfied that paragraph (j) covers the extension aspects in the present case.

61 In summary, therefore, I accept the submission of the defendant that, between them, paragraphs (d), (f), (j) and (l) of article 4 together support the levy to the extent that it seeks to recoup expenses and outgoings incurred in repairing and refurbishing the existing building and constructing the additional flats that are to be added to it.

62 Looking at the list of expenses set out at paragraph [21] above, however, this conclusion does not account for the whole of those expenses. Part is related to marketing of the new flats or, rather, to the obtaining of services directed towards the solicitation of interest in subscribing for the groups of shares that will carry rights to occupy the new flats. That expenditure cannot be brought within any of paragraphs (d), (f) and (l) of article 4. Nor, as I see it, can they be brought within paragraph (h) as “[e]xpenses of carrying on the Company”. They are more likely to be of the nature described in s.258C of the Corporations Act:

“A company may pay brokerage or commission to a person in respect of that person or another person agreeing to take up shares in the company.”

63 That section puts beyond doubt a company’s power to make such payments which might otherwise be regarded as entailing unlawful reduction of capital. But the existence of the power to make the payments is, of course, irrelevant to the question whether this particular company may recoup such expenditure by levies upon members. No provision of the constitution of the defendant expressly allows a levy to be raised to meet payments by the company of brokerage, commission or other forms of monetary reward in respect of subscriptions for shares in the company. But, of course, payment of such brokerage, commission or other reward will, in the ordinary course, lead to a situation where flats otherwise empty become occupied. That may well be conducive to the enhancement (or, at least, the maintenance) of the value of the property – in that a property in which several flats are permanently empty is likely to be less attractive and less sought after than one that is fully occupied. On that basis, the elements of the outgoings concerned with marketing of the new flats and obtaining subscribers for the shares representing them may be regarded as within paragraph (j) of article 4.

64 At this point, I mention another submission made by Mr Burchett, that is, that article 4 does not authorise special or “one-off” levies. The only levies permitted, it is said, are periodic levies. The submission is based on the opening words of article 4:

“The directors shall have the right in each year at six monthly intervals or oftener if they shall so determine …”

65 It is submitted that the “oftener” specification allows a cycle or sequence more frequent than six monthly but that a cycle or sequence within a year is still essential. I do not think that construction can be correct. The word “oftener” seems to me to indicate that any particular levy may be made outside the normal cycle or sequence. This is borne out, I think, when one has regard to the fact that some financial needs may arise unexpectedly and on an isolated basis, for example, a requirement of a local or statutory authority (paragraph (f)). It cannot have been intended that action to meet such a special need should necessitate some reprogramming of a cycle or sequence of levies as distinct from allowing a special levy to be struck.

66 My conclusion in relation to Ground 2 is that the situation before me is one in which, in light of the descriptions of the costs and expenditures in paragraph [21] and the defendant’s clear statement to members that the levy notified by the circular of 6 February 2007 was to cover those costs and expenditures, it is likely to be found at trial that the levy as a whole was authorised by and made in accordance with the company’s constitution. There is some element of doubt about the aspects of the expenditures directed towards marketing of the new flats but the question to be tried in that respect is by no means a strong or serious one.

Ground 3

67 The decision to be made here is whether there is a serious question to be tried to the effect that the directors of the defendant acted to impose the levy for a purpose that is an impermissible purpose, having regard to their position as fiduciaries and the fiduciary nature of their power to impose levies (a matter on which I do not understand there to be dispute).

68 The power of the directors of the defendant to impose levies upon members is, in one sense, akin to their power to issue shares. I say “in one sense” because an issue of shares has two aspects to it: the raising of capital and the creation of new issued shares. A levy of the kind now under discussion entails the raising of funds but leaves the configuration of ownership of shares unchanged – unless and until the imposition of the levy leads on to forfeiture of shares.

69 The power of directors to issue shares will be abused by them if exercised for a purpose of “benefiting some shareholders or their friends at the expense of other shareholders or so that some shareholders or their friends will wrest control of the company from the other shareholders” (Nguirli Ltd v McCann (1953) 90 CLR 425 at p.440); “a purpose … of maintaining control of the company in the hands of the directors themselves or their friends” (Harlowe’s Nominees Pty Ltd v Woodwide (Lakes Entrance) Oil Co NL (1968) 121 CLR 483 at p.493); “the purpose of defeating the wishes of an existing majority of shareholders or maintaining their [the directors’] own control of the company” (Ashburton Oil NL v Alpha Mining NL (1971) 123 CLR 614 at p.640); or “the purpose of a new majority which did not previously exist” (Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 at p.837).

70 A finding of abuse will follow if the impermissible purpose (whether a “dominant” purpose or “but one of a number of significantly contributing causes”) was “causative in the sense that, but for its presence, the power would not have been exercised”: Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 at p.294 per Mason, Deane and Dawson JJ.

71 Permissible purposes are distinguished from impermissible purposes by reference to the nature of the power, the reason for its existence, the reason it is entrusted to the directors and the compatibility of the particular purpose with the interests directors are bound to serve. According to the traditional approach, those interests are “the interests of the company as a whole” – a formulation that, in Kirwan v Cresvale Far East Ltd (2002) 44 ACSR 21 at p.56, Giles JA found left “much unanswered”. His Honour preferred at p.57 to view matters in terms of “the interests which could be taken into account in considering the benefit of the company as a whole”.

72 In the present case, the defendant is committed to the particular program of repair, refurbishment and enlargement. The work must be paid for and associated expenses must be met. Efforts have been made to raise bank finance. These have so far been unsuccessful. Things have reached a point where the need for cash is pressing. Levying of members, within the limits allowed by the constitution, is an available means of raising cash. Indeed, with the bank’s requirements not met (and not able to be met) and the company, because of the particular share structure, having no practical scope to raise equity capital by the issue of shares in the conventional way, resort by directors to the power to levy members may represent the only realistically available means of satisfying the immediate need for cash.

73 It may well be that, if the plaintiffs are financially unable to meet a validly and regularly imposed levy, the final upshot will be that their shares are forfeited and sold. But that, as it presently appears, would be no more than a by-product of action taken by the directors vis-à-vis all members to raise obviously needed funds by apparently proper and legitimate resort to their power to levy. That power can only be exercised in such a way that all members are levied in proportion to the numbers of shares held by them. This is one of the requirements of article 4. If the directors exercise the levying power to meet a particular financial exigency, it is not open to them to differentiate among shareholders except as to quantum and then only strictly according to the proportions in which shares are held.

74 The board of directors of the defendant would no doubt heave a collective sigh of relief if the plaintiffs ceased to be shareholders. The plaintiffs have been strenuous in their efforts to prevent the project. Their failure to

co-operate in the financing arrangements in a way that has commended itself to all other shareholders has led to the financing impasse. It is to be emphasised, however, that in taking that stance, the plaintiffs have acted entirely within their rights.

75 But the evidence does not support an inference that removal of the plaintiffs (by forfeiture and sale of their shares) is an actuating purpose attending the decision to impose the levy on all shareholders. It cannot be said, according to the Whitehouse v Carlton formulation, that the directors’ power to impose the levy would not have been exercised in the way it was exercised “but for” a purpose of bringing about elimination of the plaintiffs from the ranks of membership. The pressing financial needs of the company and the apparent absence of means other than levy to satisfy them must, in my judgment, have led to the decision to impose the levy regardless altogether of impact on the plaintiffs and the possibility that it might result in such elimination.

76 As to procedure and purpose, the directors have, on the evidence available at this point, proceeded in accordance with article 4 and for purposes intended to be achieved by resort to that article. I am not at all persuaded that the plaintiffs have shown an arguable case of abuse of directors’ powers of the kind suggested by Ground 3.

Ground 4

77 As far as the evidence shows, there has been no action taken actually to forfeit the plaintiffs’ shares. The most that is shown is that the defendant, by Mr Garratt’s letter of 13 February 2007 (see paragraph [22] above), informed the plaintiffs that their shares will be “liable” to forfeiture and sale if one of two things did not happen, that is, payment of the levy or the making of an arrangement satisfactory to the company. Importantly, the reference to forfeiture was accompanied by a reference to sale. The action the defendant has foreshadowed is thus the composite action of depriving the plaintiffs of their shares and selling those shares.

78 The constitution makes it clear that there must be no discrimination among members (except by reference to their proportionate holdings) when it comes to imposing levies. But differentiation is permitted – and may even be required – thereafter. Directors are not obliged to move with mindless uniformity when it comes to decisions to sue for unpaid levies, to take steps towards forfeiture and sale of shares or otherwise to bring home to the company the moneys intended to be raised by the levy. The power to forfeit and sell shares is only one of several means by which the directors, acting for the company, may seek to recover moneys to be raised. The choice of the means to be employed is a choice to be made by directors in good faith according to the circumstances.

79 In the analogous case of unpaid calls on shares, it was observed by Lord Cranworth LC, sitting in the Court of Appeal in Chancery, in Re Agriculturist Cattle Insurance Co (Stanhope’s Case) (1866) LR 1 Ch App 161 at p.169, that the power of forfeiture could not be exercised for the purpose of freeing the holders of partly paid shares from their unpaid liability. By parity of reasoning, the power could not properly be exercised for the purpose of ridding the company of a member who did not see eye to eye with the directors and the other shareholders in matters of policy regarding the company’s activities. Lord Cranworth said that the power of forfeiture was exercisable where the directors were unable to obtain payment of the call. It is important to quote his words:

“It is true that by the 125th clause the directors had the power of declaring forfeited the shares of any shareholder neglecting or refusing to pay his calls. But this obviously, looking to the context, refers to a case where the directors are unable to obtain payment of the call. It was not intended to supply them with machinery whereby, under the pretence of forfeiture, they should be able to deprive the continuing shareholders of the liability of all those for whose joint liability with themselves they had originally stipulated.”

80 This is a view Lord Cranworth later repeated in the House of Lords in litigation involving the same company. In Spackman v Evans (1868) LR 3 HL 171 at p.186, his Lordship said of provisions conceptually similar to those now under consideration:

“These provisions are strong to shew that the power to declare shares forfeited was intended only to give to the directors additional means of compelling payment of calls, or other money due from the shareholder to the company by virtue of the deed. The shares are, in substance, made a security to the company for the money from time to time becoming due from the shareholder. The duty of the directors, when a call is made, is to compel every shareholder to pay to the company the amount due from him in respect of that call; and they are guilty of a breach of their duty to the company if they do not take all reasonable means for enforcing that payment. In the present case it has never been even suggested that the Appellant was insolvent, that he was not perfectly able to pay the full 30 s. per share, which was the amount of his call; and it was a plain breach of trust in the directors to take, in discharge of money due from the Appellant, shares over which they had power as a security only for the money due, but which shares they knew to be valueless. They were bound, as trustees for the body of shareholders, to enforce payment of the whole 30 s. per share, and for that purpose to take all proper legal proceedings, unless they bonâ fide believed that he was not in circumstances which would enable him to pay the sum for which he was sued, and there has never been even a suggestion that this was the case.”

81 There is thus emphasis upon the need for directors to take a case by case approach to questions of forfeiture. In a large company with numerous members who are not known to the directors, the scope to draw distinctions may be limited by lack of relevant knowledge. But directors must always remember that their power to forfeit and sell shares exists, along with all other relevant powers (such as the power to cause the company to maintain a debt recovery action and the power to make instalment arrangements), for the purpose of obtaining for the company the money that is its due. If the directors are aware that a relevant shareholder has the financial capacity to pay, an action to recover the moneys may be indicated. If the shareholder is known to be impecunious and there is a real prospect of recovering the moneys through sale of his or her shares, forfeiture and sale may be the more appropriate course for the directors to take. If a shareholder cannot pay now but will be able to pay at some time in the reasonably near future or by instalments over a reasonable period, that may be the course that should, as a matter of prudence, be followed by directors. If the amount is not great and the flat to which the shares relate is let, the appropriate course may be for the company to take the rent until the deficiency is made good. The important point is that directors are not bound to treat all shareholders in the same way when deciding how best to recover moneys the shareholders owe. Dicta to the contrary at first instance in Gray v L. Stevenson & Sons Ltd (1899) 25 VLR 476 at p.485, which did not refer to the extensive treatment of the matter in the House of Lords, may be left to one side.

82 In the present case, the evidence shows that some members have already made part payments and others have communicated with the chairman of the defendant foreshadowing or inquiring about instalment arrangements or deferred payment possibilities. The evidence does not show whether the defendant has acceded to any such requests. It is, however, within the powers of the directors to do so, bearing in mind that their responsibility, once a levy has been made, is to act in a prudent and reasonable way, in the interests of the company, to obtain payment by one of the several available methods.

83 In the case of the plaintiffs, the chairman’s letter expressly recognises the possibility of a mutually acceptable payment arrangement. It also recognises the possibility of forfeiture and sale. An acceptable payment arrangement would, it is made clear, avert forfeiture and sale of the shares. But if, as seems to be indicated, the plaintiffs do not have the necessary financial resources to enable them to pay and if, in addition, they are unwilling or unable to negotiate an acceptable payment arrangement, resort by directors to the powers of forfeiture and sale would be appropriate.

84 To the extent that Ground 4 is cast in language of the kind found in s.232 of the Corporations Act, (“oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members …”), it relies upon notions explored by the High Court in Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 447. A key sentence in the judgment of

Mason ACJ, Wilson, Deane and Dawson JJ (at p.468) is:

“It has not been shown that those decisions of the Board were such that no Board acting reasonably could have made them.”

85 That comment applies with equal force here, bearing in mind that the defendant does not have in mind forfeiture alone as a penalty for non-payment (see the discussion in Goldsmith v Colonial Finance Mortgage Investment and Guarantee Corporation Ltd (1909) 8 CLR 241) but has foreshadowed the composite action of forfeiture and sale as a means of making good any failure by the plaintiffs to pay.

86 There is no serious question to be tried in relation to Ground 4.

Balance of convenience

87 My findings on the matter of serious question to be tried mean that there is, strictly speaking, no need to address the balance of convenience or balance of hardship. I nevertheless do so briefly.

88 The defendant has on its hands a stalled building project and an urgent need for cash. Bank finance is dependent on co-operation by all shareholders. The plaintiffs alone among the shareholders are unwilling to co-operate. All holders of existing shares are in a position where, pending completion of the project, they can neither occupy their flats nor obtain income by letting them. Action by the company to raise the money intended to be obtained through imposition of the levy is of great importance to the protection of the interests of the individual members and those of the defendant company itself. Financial hardship will continue to accrue to the company and the members while progress with the project is interrupted.

89 The plaintiffs may lose their shares if they do not pay the levy or succeed in negotiating an acceptable payment arrangement of the kind mentioned in Mr Garratt’s letter of 13 February 2007. But if the shares are forfeited in order to be sold, following a decision by directors that that is, in the particular case of the plaintiffs, the most appropriate way in the circumstances of seeking to obtain the money sought through the levy upon members, the plaintiffs’ shares will then be sold, according to Mr Garratt’s letter. And as that letter makes clear, any eventual surplus will be remitted to the plaintiffs.

90 Such a course of action would be consistent with the company’s constitution. It may be expected that the company would recognise a duty, in connection with any such sale, akin to that of a mortgagee exercising power of sale. The final result, therefore, may be expected to be receipt by the plaintiffs of the fair value of their shares (whatever it might be in the circumstances), after deduction of the levy and associated expenses. Their shares would be replaced by money.

91 The balance of convenience, if it were relevant, would strongly favour the defendant.

Some other matters

92 I should mention in conclusion some other matters raised by the plaintiffs.

93 They regard as suspicious the fact that the written resolution of directors dated 24 January 2007 was not produced promptly in response to a notice to produce and the absence of the evidence of any director authenticating it. Reference is also made to the inability of the defendant’s solicitor to explain why he came by the document “in a flurry of faxes, letters and emails on 27 and 28 February 2007”. The fact is that the book containing the minutes of proceedings of directors was produced in court and was acknowledged to contain the written resolution. Under s.251A(6) of the Corporations Act, the recording in the book is evidence of the resolution “unless the contrary is proved”. There has been no proof to the contrary.

94 The plaintiffs also regard it as suspicious that the levy notice addressed to the plaintiffs was sent out direct by Robinson Strata Management, whereas the notices for all other shareholders were sent by that firm to Mr Garratt. Why that should be suspicious is not explained, bearing in mind that, as is shown by the shareholder communications to which I have referred, shareholders generally have received their notices.

95 The plaintiffs also refer to a number of contentions and arguments concerning “compensation” to the owners of the two flats that are to be demolished. These matters, in my view, have nothing to do with the present application.

96 The plaintiffs also question whether the board acted prudently in causing all the flats to be vacated and having the builders start work before loan financing was secure. That, as I have already said, is a matter about which one may wonder but it is not of immediate relevance to the application.

Disposition

97 The plaintiffs’ interlocutory process filed on 21 February 2007 is dismissed with costs.

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