Morara Pty Ltd v Kingslane Property Investments Pty Ltd
[2024] WASCA 123
•9 OCTOBER 2024
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT : THE COURT OF APPEAL (WA)
CITATION: MORARA PTY LTD -v- KINGSLANE PROPERTY INVESTMENTS PTY LTD [2024] WASCA 123
CORAM: QUINLAN CJ
HALL JA
SOLOMON J
HEARD: 15 DECEMBER 2023
DELIVERED : 9 OCTOBER 2024
FILE NO: CACV 117 of 2022
BETWEEN: MORARA PTY LTD
Appellant
AND
KINGSLANE PROPERTY INVESTMENTS PTY LTD
First Respondent
EVAN ALEXANDER GEORGE CRANSTON
Second Respondent
JOHN WINDSOR CRANSTON
Third Respondent
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram: HILL J
Citation: MORARA PTY LTD -v- KINGSLANE PROPERTY INVESTMENTS PTY LTD [No 2] [2022] WASC 372
File Number : COR 31 of 2014
Catchwords:
Corporations Act 2001 (Cth) s 232 and s 233 - Oppressive or unfairly prejudicial conduct against a member in their capacity as member - Relevance of delay in bringing proceedings to grant of relief - Breadth of discretion in fashioning relief under s 233
Limitation periods - Limitation period for oppressive conduct - Limitation period for restitutionary claim - Extension of limitation period under s 38(2) and s 43
Delay - Whether the delay was explained by the primary judge - Distinction between foreshadowing a claim and bringing a claim - Whether delay is a discretionary factor under s 233 - Whether delay as a discretionary factor requires prejudice
Oppression - Meaning and principles of 'oppressive conduct to a member in its capacity as a member' - Equitable origins of statutory remedy of oppression - Oppressive conduct and separate legal personality of a company - Oppressive conduct and quasi-partnership - Broad understanding of the interest of a member - Equity upholding the understanding of the formation of a company
Legislation:
Companies Act 1948 (UK), s 222(f), s 459, s 461
Corporations Act 2001 (Cth), pt 2F.1, s 232, s 233
Limitation Act 2005 (WA), s 38(2), s 43
Result:
Appeal dismissed
Cross–appeal allowed
Category: A
Representation:
Counsel:
| Appellant | : | D H Solomon |
| First Respondent | : | G J Douglas |
| Second Respondent | : | G J Douglas |
| Third Respondent | : | G J Douglas |
Solicitors:
| Appellant | : | Solomon Brothers |
| First Respondent | : | Douglas Cheveralls Lawyers |
| Second Respondent | : | Douglas Cheveralls Lawyers |
| Third Respondent | : | Douglas Cheveralls Lawyers |
Cases referred to in decision:
Crawley v Short [2009] NSWCA 410.
Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492.
Falkingham v Peninsula Kingswood Country Golf Club Ltd [2015] VSCA 16.
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97.
Fysh v Page (1956) 96 CLR 233.
House v The King (1936) 55 CLR 499.
Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370.
Melrob Investments Pty Ltd v Blong Ume Nominees Pty Ltd [2022] SASCA 29.
Morara Pty Ltd v Kingslane Property Investments Pty Ltd [2019] WASC 136.
Morara Pty Ltd v Kingslane Property Investments Pty Ltd [No 2] [2022] WASC 372.
O'Neill v Phillips [1999] 2 All ER 961.
R & H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280.
Re a Company [1986] BCLC 376.
Re J E Cade & Son Ltd [1992] BCLC 213.
Re Posgate & Dendy (Agencies) Ltd [1987] BCLC 8.
Re Saul D Harrison & Sons plc [1995] 1 BCLC 14.
Re Wondoflex Textiles Pty Ltd [1951] VLR 458.
Remrose Pty Ltd v Allsilver Holdings Pty Ltd (2005) 225 ALR 588.
Salomon v A Salomon & Co Ltd [1897] AC 22.
Smith Martis Cork & Rajan Pty Ltd v Benjamin Corp Pty Ltd (2004) 207 ALR 136.
Smolarek v Liwszyc (2006) 32 WAR 101.
Szencorp Pty Ltd v Clean Energy Council Ltd (2009) 69 ACSR 365.
Tzavaras v Tzavaras & Sons Pty Ltd [2023] NSWCA 168.
Warrington Management Pty Ltd v Kingslane Property Investments Pty Ltd [2019] WASC 2.
Warrington Management Pty Ltd v Kingslane Property Investments Pty Ltd [2020] WASCA 8.
Table of Contents
Introduction and overview
Factual background
Warrington proceedings
Primary proceedings
Decision of the primary judge
Appeal
Appeal – Ground 1
Appeal – Ground 2
The applicable limitation periods
Substance of Ground 2
Appeal – conclusion
Cross-appeal
First sub-ground – alter ego
Second sub-ground – oppression of Morara
Statutory provisions
Quasi-partnership analogy
Member's interests in other capacities
General conclusions as to a member's interests in that capacity
Cross-appeal – disposition
Conclusion
JUDGMENT OF THE COURT:
Introduction and overview
This appeal and cross‑appeal is the latest in a long history of litigation arising from the breakdown in the commercial relationships between a number of participants, both corporate entities and natural persons, in the property industry. They concern, in particular, the affairs of the first respondent, Kingslane Property Investments Pty Ltd (KPI), a corporate vehicle established by the parties in 2010.
In the primary proceedings, Hill J found, pursuant to s 232 of the Corporations Act 2001 (Cth), that the conduct of the affairs of KPI was oppressive to the appellant (Morara).[1] Her Honour made two separate findings of oppression:
(a)that it was oppressive to Morara, in its capacity as a member of KPI, for the second and third respondents (Evan and John Cranston) as majority shareholders (or their controlling minds) of KPI to fail to agree a remuneration structure with, or pay remuneration to, Mr Christopher Weaver (the sole shareholder and a director of Morara) for work done by Mr Weaver as a director of KPI; and
(b)that it was oppressive to Morara, in its capacity as a member of KPI, for KPI to pay legal fees from company funds in defence of the primary proceedings.
[1] Morara Pty Ltd v Kingslane Property Investments Pty Ltd[No 2] [2022] WASC 372 [7] ‑ [8] (Primary reasons).
The learned primary judge made a number of consequential orders, including orders that KPI pay Mr Weaver $55,092.60 (plus interest), on account of remuneration said to be owing to Mr Weaver by KPI. Her Honour also made orders that Evan and John Cranston reimburse KPI for all legal fees paid by it in connection with the proceedings.
The appeal and cross‑appeal are both, ultimately, directed to the consequential relief granted by the learned primary judge with respect to the remuneration of Mr Weaver. The appeal challenges her Honour's conclusion that the payment to Mr Weaver should be reduced, in the court's discretion, on account of the delay in Mr Weaver and Morara in advancing a claim for remuneration by Mr Weaver.
The cross‑appeal challenges the learned primary judge's finding that the failure to agree, or pay, remuneration for Mr Weaver was oppressive, or commercially unfair to Morara in its capacity as a member of KPI.
There is no challenge to the learned primary judge's finding that it was oppressive for KPI to pay legal fees from company funds in defence of the proceedings or to the orders made in respect to that finding of oppression.
For the reasons that follow, we would dismiss the appeal and allow the cross‑appeal.
As to the appeal, the learned primary judge did not err in having regard to the failure of Morara to advance any claim with respect to Mr Weaver's remuneration until April 2020, by which point any personal claim by Mr Weaver for such remuneration had become statute‑barred (save for the claim for $55,092.60).
Relatedly, the cross‑appeal should be allowed on the basis that the failure to agree, or pay, remuneration to Mr Weaver was not, in the circumstances of this case, oppressive to Morara. Mr Weaver was not a member of KPI and there was an insufficient basis to conclude that KPI was formed on the basis of a foundational understanding that so assimilated the interests of Morara and Mr Weaver that a failure to remunerate Mr Weaver was a detriment to Morara in its capacity as a shareholder.
Factual background
The relevant background is largely uncontroversial.
Mr Christopher Weaver owned and controlled two companies: Morara and Warrington Management Pty Ltd (Warrington). In 2008 and 2009, Mr Weaver undertook property syndication activities through Warrington. John Cranston controlled a group of companies referred to as the 'Kingslane group'. The group included Kingslane Pty Ltd (Kingslane). Evan Cranston is John Cranston's son.
In 2009 and 2010, the Cranstons and Mr Weaver discussed the formation of a company together for property investment and development. This led to the incorporation of KPI on 17 August 2010. Mr Weaver and Evan Cranston were appointed as directors of KPI on its incorporation. A total of 90 ordinary shares were issued in equal thirds between the founders or their corporate vehicles: 30 to Evan Cranston, 30 to Morara, and 30 to Kingslane.
In 2012, the relationship between Mr Weaver on the one hand (and thereby, Morara) and the Cranstons on the other (and thereby, Kingslane) broke down. This led, relevantly, to two sets of proceedings.
Warrington proceedings
First, in December 2013, Warrington issued proceedings against KPI claiming reasonable remuneration by way of restitution for services provided at KPI's request (CIV 2908 of 2013) (Warrington proceedings). The claim in the Warrington proceedings was based on an alleged agreement that Warrington would be paid by a remuneration structure which was to be agreed in accordance with the principle of reward for effort.
Primary proceedings
The proceeding, the subject of this appeal, was commenced by Morara shortly thereafter in February 2014 (primary proceedings). The application was accompanied by a lengthy affidavit of Mr Weaver in support of the originating process.[2] It chronicled the establishment of KPI and the breakdown in the relationship between Mr Weaver and the Cranstons. The affidavit explained the basis for Mr Weaver's contention that KPI had become dysfunctional and deadlocked. Although the issue of reasonable remuneration was not the subject of any relief claimed in the primary proceedings, that issue was explained in the affidavit in the context of the breakdown in the relationship. Consistently with the claim in the Warrington proceedings, the affidavit referred to reasonable remuneration payable to Warrington for services provided to KPI.
[2] GAB 10 - 44.
The affidavit concluded by noting that as a result of the matters set out therein, two proceedings had been instituted. Warrington had commenced the Warrington proceedings to recover reasonable remuneration from KPI for its services, and Morara had commenced the primary proceedings 'seeking the relief sought in the originating process'.[3] The relief sought in the originating process of 19 February 2014 was a share buy‑out or the winding up of KPI. It did not include any claim for reasonable remuneration to be paid to Mr Weaver or any other person or entity.
[3] GAB 44 [112].
The basis for the relief sought in the primary proceedings was that KPI had been rendered dysfunctional due to an irretrievable breakdown of the relationship between its members. Morara claimed it was being oppressed as a minority shareholder as a result of the exclusion of its representative, Mr Weaver, from management of the board of KPI.[4] Thus, the primary proceedings at that time did not include any claim of oppressive conduct towards Morara relating to the remuneration of Mr Weaver.
[4] BAB 46 - 52.
In March 2014, the parties consented to the Warrington proceedings and the primary proceedings being managed together. In June 2015, orders were made (subject to the direction of the trial judge) that the Warrington proceedings be tried together with the preliminary question in the primary proceedings of whether there had been oppressive conduct. The question of remedy was to be deferred. Similar orders appear to have been made in August 2016. Then in August 2017, the parties filed consent orders for the vacation of the order for concurrent trials of the two matters, and in May 2018 his Honour Vaughan J heard just the Warrington proceedings. On 29 May 2018, shortly after that trial, Vaughan J made orders with the consent of the parties that the findings of fact and law in the Warrington decision would be binding in the primary proceedings.[5]
[5] BAB 10; Primary reasons [27].
On 10 January 2019, Vaughan J published his reasons for dismissing Warrington's claim for reasonable remuneration.[6] In short, Vaughan J found there had been discussions that Mr Weaver, not Warrington, would be remunerated for services to be provided to KPI, with a remuneration structure to be agreed in accordance with the principle of reward for effort.[7] Thus, a claim for reasonable remuneration for services provided between 17 August 2010 and 6 December 2013 was available to Mr Weaver, not Warrington. Vaughan J assessed the quantum of the reasonable remuneration as $683,175.20 (rounded to $683,175), comprising of $285,482.60 for asset management, $342,600 for establishment, including capital raising fees, and $55,092.60 for success fees in relation to a syndicate development in Modal Crescent. For reasons that will become apparent, it is relevant to point out that the funds in respect of the success fee of $55,092.60 were received by KPI in 2017,[8] whereas the other payments related to funds received before it ceased its role as asset manager some years earlier on 6 December 2013.[9]
[6] Warrington Management Pty Ltd v Kingslane Property Investments Pty Ltd [2019] WASC 2 (Warrington).
[7] Warrington [353].
[8] Warrington [126] ‑ [127].
[9] Warrington [387].
On 7 February 2019, Vaughan J made formal orders dismissing Warrington's claim. On 28 February 2019, Warrington filed a notice of appeal against those orders.
On 18 April 2019 (that is, after the filing of the appeal), Vaughan J heard an application by Morara in the primary proceedings for an interlocutory injunction. His Honour published his reasons for refusing the application on 30 April 2019.[10] The precise relief sought in the application is not presently material. In advancing that application, Morara foreshadowed to the court, for the first time, that it intended to amend its claim. The principal claim in the primary proceedings would become that KPI allegedly oppressed Morara by failing to pay reasonable remuneration to Mr Weaver as Morara's nominee director.[11] The claim, cast in that way, adopted the finding of Vaughan J that a claim for reasonable remuneration for the provision of services was available to Mr Weaver. At that stage, Vaughan J's findings were still the subject of challenge through Warrington's appeal. For that reason, in the decision on the application for injunctive relief, Vaughan J observed that the foreshadowed amendment was properly characterised as a 'fall‑back position'.[12] It reflected the position that Morara said it proposed to adopt if its appeal did not succeed.
[10] Morara Pty Ltd v Kingslane Property Investments Pty Ltd [2019] WASC 136 (Injunction reasons).
[11] Injunction reasons [26].
[12] Injunction reasons [69] - [70].
On 17 January 2020, this Court dismissed the appeal against the decision of Vaughan J in the Warrington proceedings.[13]
[13] Warrington Management Pty Ltd v Kingslane Property Investments Pty Ltd [2020] WASCA 8.
On 3 April 2020, as it had foreshadowed to the court in April 2019, Morara amended its claim by a document entitled 'amended list of issues'. A further 're‑amended list of issues' was filed on 15 July 2020. By those amendments, Morara's principal claim for oppression became a claim based on the failure of KPI to pay reasonable remuneration to Mr Weaver for services provided by him to KPI between 17 August 2010 and 6 December 2013. The remedy sought by Morara to cure that oppression included an order that KPI pay $683,175 to Mr Weaver, and that the Cranstons do all things necessary to cause that to happen (including, if necessary, by the Cranstons paying money to KPI to provide it with the required funds). That modified claim by Morara was the only claim made in relation to reasonable remuneration payable to Mr Weaver. Mr Weaver himself has never issued proceedings in respect of such a claim. Morara also advanced a claim for oppression based on KPI's use of company funds to defend the primary proceedings on behalf of all defendants, but that aspect of the claim is not material to this appeal.
In summary, we observe that:
(a)the claim for reasonable remuneration was always part of the factual matrix upon which the primary proceedings were brought;
(b)reasonable remuneration was not claimed as payable to Mr Weaver in the primary proceedings or indeed in any proceedings until April 2020;
(c)in April 2020, the primary proceedings were reformulated to be based on a claim for oppression of Morara by reason of KPI's failure to pay reasonable remuneration to Mr Weaver; and
(d)Mr Weaver has himself never issued proceedings claiming reasonable remuneration.
Decision of the primary judge
The learned primary judge addressed two issues relevant to this appeal. The first issue was whether KPI's failure and ongoing refusal to pay the reasonable remuneration of $683,175 to Mr Weaver amounted, under s 232, to oppressive conduct to a member of KPI, namely Morara in its capacity as a member or in any other capacity. The second issue was to determine the appropriate remedy to cure that oppression under s 233.
In respect of the first issue, the learned primary judge referred to three matters. First, her Honour observed that the findings of Vaughan J in the Warrington proceedings included that 'Morara was effectively Mr Weaver's alter ego'.[14] No distinction was drawn between Mr Weaver and the Cranstons, on the one hand, and the entities in which they held their respective shares in KPI, on the other.[15]
[14] BAB 22; Primary reasons [67].
[15] BAB 22; Primary reasons [67].
Secondly, the entitlement to the reasonable remuneration arose because Mr Weaver was an executive director of KPI and 'Mr Weaver was an executive director of KPI because he was a member of KPI'.[16] Therefore, the relationship between KPI and Mr Weaver, as director, did not arise independently of Morara's membership of KPI.[17]
[16] BAB 22; Primary reasons [68].
[17] BAB 22; Primary reasons [68].
Thirdly, the learned primary judge held that the findings of Vaughan J in the Warrington proceedings grounded a conclusion that the promised reward to Mr Weaver was to occur not only through the increase in shareholder value held by Morara, but also by payment through remuneration to Mr Weaver personally.[18]
[18] BAB 22; Primary reasons [69].
By those observations, her Honour appears to have reasoned that Mr Weaver's entitlement to the remuneration was bound up with Morara's membership of KPI. Certainly, the genesis and formation of KPI demonstrated that Mr Weaver's executive directorship arose as a consequence of Morara's membership of KPI. In that sense, the directorial relationship and the membership relationship were thus interdependent. It should be noted, however, that her Honour's observation that 'Mr Weaver was an executive director of KPI because he was a member of KPI' was not correct.[19] Mr Weaver was not a member of KPI. Morara was a member of KPI.
[19] BAB 22; Primary reasons [68].
The learned primary judge concluded that the Cranstons' failure to act in accordance with the pre‑incorporation discussions and agree the details of Mr Weaver's remuneration structure, and to make any payment to reward him for the effort he expended, was commercially unfair to Morara.[20] Her Honour clarified that there could be no unfairness in the failure to pay Mr Weaver before April 2020, when Morara amended its application to include a claim of oppression based on the failure to pay remuneration to Mr Weaver.[21] Rather, the commercial unfairness was said to arise from the failure of the Cranstons 'to act in accordance with the pre‑incorporation discussions'. Specifically, the unfairness lay in the majority shareholders taking the benefit of Mr Weaver's services 'without agreeing his remuneration structure or making any payment to him'.[22] The learned primary judge added that the oppression was ongoing, as the Cranstons still had not agreed the structure of Mr Weaver's remuneration or made payment to him.[23]
[20] BAB 22; Primary reasons [70].
[21] BAB 22 - 23; Primary reasons [71].
[22] BAB 23; Primary reasons [72].
[23] BAB 23; Primary reasons [73].
Having concluded that there had been oppressive conduct to Morara, the learned primary judge directed attention to the question of remedy under s 233. Her Honour accepted that a claim for oppression under s 232 is not subject to any limitation period.[24] However, her Honour considered that the extent of delay was a relevant factor in the exercise of the discretion in relation to relief,[25] and went on to state:[26]
While I am satisfied the conduct of the defendants in failing to agree Mr Weaver's remuneration or to make any payment to him is oppressive conduct, I do not consider this means an order should be made to require KPI to now pay to Mr Weaver the amount found by Vaughan J to comprise his reasonable remuneration. The delay of Morara (and Mr Weaver) in advancing this claim has not been explained. …
In these circumstances, while I accept that the claim based on oppression is not statute barred and that it would be open to the court to make the orders sought, I decline to exercise my discretion to do so. In my view, at the date of the hearing of this application and the date of delivery of these reasons, it is not commercially unfair for KPI or the majority shareholders to refuse to pay to Mr Weaver an amount that it could not be compelled to pay to him. …
There is one exception to this, namely the amount of $55,092.60 which was received by KPI in 2017 as a success fee in relation to one of the property syndicates. I accept that this is an amount that Mr Weaver could seek payment of.
In my view, the appropriate relief that should be given in this case is that KPI should be ordered to pay Mr Weaver the sum of $55,092.60.
[24] BAB 27; Primary reasons [90].
[25] BAB 27; Primary reasons [91] - [91].
[26] BAB 28; Primary reasons [93] - [96].
Necessarily implicit in her Honour's remark that, as at the date of the hearing, KPI could not be compelled to pay Mr Weaver, is the conclusion that by 19 October 2020 (the date of the hearing) a successful claim by Mr Weaver for remuneration was precluded by the applicable limitation period (save for $55,092.60).[27] That was consistent with the position adopted by the parties in relation to the limitation period of a hypothetical claim brought by Mr Weaver; see the remarks in this regard in relation to Ground 2 below at [49].
[27] BAB 21 - 22; Primary reasons [64].
The learned primary judge's orders required KPI to pay Mr Weaver $55,092.60.
Appeal
Both grounds of appeal assert error in the exercise of the learned primary judge's discretion to reduce the amount payable by KPI from $683,175 to $55,092.60.
Appeal – Ground 1
As noted, the learned primary judge found that 'the delay of Morara (and Mr Weaver) in advancing this claim has not been explained'.[28] Ground 1 essentially complains that the learned primary judge erred in concluding that the delay was unexplained.[29]
[28] BAB 28; Primary reasons [93].
[29] WAB 2; Grounds of Appeal [1].
In asserting that the delay was explained and thereby justifiable (or that in truth there was no delay), Morara pointed to the following matters:
(a)both the Warrington proceedings and the primary proceedings were advanced by companies controlled by Mr Weaver and directed to the same complaint, that is, KPI's failure to pay reasonable remuneration for the services provided through the efforts of Mr Weaver;
(b)under the control of Mr Weaver, Warrington pursued that claim in the Warrington proceedings but was unsuccessful because, notwithstanding some evidence in support of its position, Vaughan J concluded that it was more likely the agreement was to provide reasonable remuneration to Mr Weaver, not Warrington; and
(c)any delay in Morara claiming the reasonable remuneration was due to 'discretionary case management orders' made with the consent of all parties. This resulted in the Warrington proceedings not being heard together with the primary proceedings (as had previously been ordered), and the deferral of the primary proceedings until after the Warrington decision.
The submissions advanced in support of Ground 1 in both written and oral submissions may be reduced to the following contentions. First, it is said that the claim for oppression in the primary proceedings from the very outset was based on services provided for KPI by Mr Weaver, and KPI's failure to agree the payment and to pay it. That is said to be evident from the affidavit referred to in [15] above. Secondly, it was the failure of KPI to agree Mr Weaver's remuneration, and pay it, that formed the basis for the learned primary judge's finding of oppression. In other words, since the commencement of the proceedings, Morara sought relief for the very oppression found by the learned primary judge. Thirdly, Mr Weaver initially pursued the claim for payment through Warrington. There was some evidence to support that position, although Vaughan J ultimately found that the money was payable to Mr Weaver. After the appeal in the Warrington proceedings was decided, Morara modified its case to include the claim for reasonable remuneration payable to Mr Weaver. Fourthly, the delay in the prosecution of the primary proceedings was the result of the court's case‑management orders deferring the hearing of the primary proceedings until after the Warrington proceedings. For these reasons, the appellant submitted, there was no unexplained delay, and the learned primary judge erred in so concluding.
As the overview of the primary proceedings set out above demonstrates, it may be accepted that, from the commencement of the proceedings, the factual matrix of the alleged oppressive conduct in the proceedings did include the failure to agree the terms of, and pay, reasonable remuneration for the services provided by Mr Weaver to KPI. Nevertheless, Morara's contentions pay insufficient regard to the fact that the issue of reasonable remuneration was not the focus of its claim until April 2020, and did not feature at all in the relief sought until that time. Indeed, the affidavit that accompanied the application commencing the primary proceedings concluded by drawing a distinction between the claim for reasonable remuneration that was the subject of the Warrington proceedings (which was a claim by Warrington), and the relief of a buy‑out or wind‑up sought in primary proceedings on the basis of KPI's dysfunction and deadlock.[30] Accordingly, while the oppression found by the learned primary judge was, relevantly, 'the conduct of the defendants in failing to agree Mr Weaver's remuneration or to make any payment to him',[31] that alleged conduct had not been the focus of, nor the subject of the relief sought in, the primary proceedings until April 2020.
[30] GAB 10 – 44.
[31] BAB 28; Primary reasons [93].
Significantly, as noted above, the claim for reasonable remuneration has never been the subject of a claim brought by Mr Weaver himself. That is so, notwithstanding that Mr Weaver was a party to the Warrington proceedings and that, by January 2019, Vaughan J had made plain that a personal claim by Mr Weaver was available. At that time, the limitation period had not expired and would not have expired for almost a further year in December 2019. Despite all this, Mr Weaver still did not commence any claim for his remuneration.
Mr Weaver elected ultimately to pursue the claim for his reasonable remuneration in the form of a remedy based on the oppression of Morara. The absence of any claim by Mr Weaver himself, and the delay in the reformulation of Morara's claim after the decisions of Vaughan J and the Court of Appeal, were indeed unexplained. The learned primary judge was not in error in so concluding. This is all the more so, given that Vaughan J recognised in the interlocutory decision of April 2019 that Morara's foreshadowed modification of its claim was a 'fall‑back position'. The failure to take steps to secure that fall‑back position other than by Morara merely foreshadowing its intention to modify its claim, such as by Mr Weaver issuing his own claim, remained unexplained.
In our view, the learned primary judge was correct to find that the delay in Morara actually making a claim in respect of remuneration from January 2019 (when Vaughan J published his reasons in the Warrington proceedings), and then from 17 January 2020 (the date of the Court of Appeal's decision) until 3 April 2020, was not adequately explained.
As for the first of these periods (from January 2019 to January 2020), counsel for Morara submitted that, until the publication of the Court of Appeal's decision, it was inappropriate for Morara to make the modification to its claim.[32] We reject that submission. First, Morara did not hesitate to bring an application for an injunction on the basis of its foreshadowed fall‑back position. Secondly, given that Morara had plainly considered the fall‑back position, there was no impediment to that being the basis of a claim by Mr Weaver himself or by Morara, even if it were to be framed in the alternative. These matters are all the more inexplicable because Morara had already foreshadowed (and therefore presumably formulated) the claim in April 2019 at the time of its injunction application.
[32] Appeal hearing ts 17.
In any event, there remained no explanation for the delay of more than two and a half months after the Court of Appeal's decision on 17 January 2020. It would no doubt be said on Morara's behalf that the limitation period had expired at the time of the decision of the Court of Appeal. On appeal, however, Morara contended that Mr Weaver might have been entitled to an extension of the limitation period under the Limitation Act2005 (WA), or that indeed the limitation period had not begun to run (because the oppression was ongoing). Those contentions cannot be reconciled with an argument that seeks to excuse Mr Weaver's delay following the Court of Appeal decision on the basis that the limitation period had by then expired.
In the circumstances, there was no error in the learned primary judge's conclusion that there was unexplained delay. Ground 1 must therefore be dismissed.
Although Ground 1 is based on the assertion of error on the part of the learned primary judge in 'holding … that there was unexplained delay',[33] the submissions for Morara under the heading of Ground 1 appear to travel somewhat beyond that asserted error. The submission extended to the contention that independently of the error of unexplained delay, the learned primary judge erred in principle.[34] Morara issued proceedings for oppression promptly in February 2014. The modification of the claim foreshadowed in April 2019, and put in place in April 2020, related only to the particular form of relief. The claim of oppression and the broad factual circumstances relied upon did not alter. By taking account of the delay merely in the modification of the remedy, the learned primary judge erred in principle.
[33] WAB 2; Grounds of Appeal [1].
[34] WAB 15; Appellant's submissions [25].
This aspect of the appeal is concerned with the breadth of the discretion available to the learned primary judge rather than any error in relation to the explanation for delay. It is not readily apparent how such a contention comes within Ground 1. However, as it overlaps in any event with Ground 2, it is appropriate to address the point in the context of that ground.
Appeal – Ground 2
Ground 2 is principally concerned with the learned primary judge's consideration of the limitation period of any claim that might have been brought by Mr Weaver and its relationship to the claim for oppression by Morara. It is convenient first to clarify the position in relation to the limitation periods for the oppression action and the hypothetical claim of Mr Weaver.
The applicable limitation periods
The learned primary judge held, following the decision in Hylepin Pty Ltd v Doshay Pty Ltd,[35] that a claim for oppression under s 232 is not subject to any limitation period. There is no challenge to that conclusion.[36]
[35] Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370; (2020) 148 ACSR 30 (Hylepin).
[36] BAB 27; Primary reasons [90].
As to a claim by Mr Weaver personally, it is to be recalled that the parties in the primary proceedings were bound by the findings of Vaughan J in the Warrington proceedings. Vaughan J found that KPI ceased its role as asset manager (by which it became entitled to fees giving rise to an entitlement of Mr Weaver) on 6 December 2013, and that the reasonable remuneration for services provided between 17 August 2010 and 6 December 2013 was $683,175.[37] As noted at [19] above, Vaughan J clarified that the funds in respect of the success fee of $55,092.60 were only received by KPI in 2017. The parties appeared to proceed on the basis that the balance of the funds were received by KPI by 6 December 2013, which is consistent with the findings of Vaughan J.[38] Morara's counsel accepted that to the extent that there might have been an applicable limitation period to a hypothetical claim brought by Mr Weaver, time would have commenced to run on 6 December 2013 and expired on 5 December 2019.[39] As the learned primary judge recorded, KPI's position was that any claim, other than the amount of $55,092.60, by Mr Weaver would have been statute‑barred by December 2019.[40] The learned primary judge referred to 3 December 2013 rather than 6 December 2013, but nothing appears to turn on that difference.
[37] Warrington [387], [416], [490] - [491].
[38] See for example, Warrington [289].
[39] Appeal hearing ts 11, 25, 32.
[40] BAB 21 - 22; Primary reasons [64].
It was thus common ground that the limitation period for the hypothetical claim of Mr Weaver was December 2019.[41] Against that background, it is to be recalled that on 18 April 2019, Morara foreshadowed the amendment of its oppression action to claim payment to Mr Weaver of the reasonable remuneration identified by Vaughan J, but did not so amend its claim until 3 April 2020.
Substance of Ground 2
[41] We note that in the appellant's case it raised the possibility that the limitation period for a hypothetical claim by Mr Weaver had not yet begun to run. We have dealt with in at [61] below.
Ground 2 contends, in substance, that the learned primary judge erred in the exercise of the discretion in fashioning the remedy under s 233, by taking account of the limitation period that would have applied to a claim by Mr Weaver himself. The ground includes a number of subparagraphs and sub‑subparagraphs which identify the following bases for the alleged discretionary error:
(a)the primary judge erred in holding, in effect, that a claim by Mr Weaver in April 2019 would have been statute‑barred, except to the extent of $55,092.60, because the limitation period for that claim would not have expired until December 2019;[42]
(b)the primary judge failed to take into account that in April 2019, Mr Weaver would in any event have had good prospects of extending the limitation period under s 38(2) and s 43 of the Limitation Act2005 (WA);[43] and
(c)the primary judge erred in regarding the delay in a hypothetical claim by Mr Weaver as a relevant discretionary factor in circumstances where:
(i)relief sought in the form of an oppression claim by Morara was not statute‑barred;[44]
(ii)the oppression was found to be ongoing;[45]
(iii)as the oppression was ongoing, the limitation period in an action by Mr Weaver would 'arguably not have commenced';[46]
(iv)the primary judge did not explain the conclusion[47] that, at the date of the hearing, KPI could not have been compelled to pay Mr Weaver, in circumstances where all the possible causes of action or industrial remedies or the possible extension of limitation periods had not been identified;[48]
(v)the 'delay until April 2019' did not cause any identifiable detriment to KPI or the Cranstons;[49]
(vi)the claim under s 232 and s 233 was statutory. In the circumstances, the equitable doctrine of applying a common law limitation period by analogy was not applicable.[50]
[42] WAB 8 [2.1].
[43] WAB 8 [2.2].
[44] WAB 8 [2.3].
[45] WAB 8 [2.3.1].
[46] WAB 8 [2.3.1].
[47] BAB 28; Primary reasons [94].
[48] WAB 8-9 [2.3.2].
[49] WAB 9 [2.3.3].
[50] WAB 9 [2.3.4].
It must first be observed that Ground 2 (and indeed aspects of Ground 1) appear to proceed on the basis that the delay in Morara bringing the claim for reasonable remuneration extended until April 2019, at which point the delay ceased. It will be recalled that April 2019 was the point at which Morara merely foreshadowed to the court in oral submissions that it intended to reframe Morara's claim for oppression to be based on the failure to pay reasonable remuneration to Morara's director, Mr Weaver. No claim was in fact made until the primary proceedings were modified in April 2020.
In that context, the parties' written and oral submissions suggested some confusion, or perhaps even error in the learned primary judge's various references to April 2019 and April 2020 as the points at which Morara initiated the reformulated claim for oppression based on the failure to pay Mr Weaver. In particular, attention was directed to the learned primary judge's comments that 'until April 2019, no claim was made by Mr Weaver in his personal capacity to any entitlement to remuneration'.[51]
[51] BAB 27 - 28, Primary reasons [92].
The learned primary judge's position, notwithstanding some infelicity in her Honour's remarks, is tolerably clear. In April 2019, as part of its submissions in an interlocutory application, Morara foreshadowed the modification of its claim. No such claim was in fact made by Morara until April 2020. And no claim by Mr Weaver in his personal capacity has ever been made.
Turning to the bases advanced by Morara for its contention that the learned primary judge erred in the exercise of the court's discretion, the bases referred to in [510] and [510] above may be dealt with briefly. The first basis proceeds on the incorrect assumption that the learned primary judge held that a claim by Mr Weaver commenced in April 2019 would have been statute‑barred. That assumption appears to stem from the incorrect premise that her Honour considered that the delay ceased in April 2019. For the reasons explained, that assumption and that premise are incorrect. The relevant delay in advancing a claim was until April 2020. The learned primary judge's remarks in relation to the limitation period that would have applied to a claim by Mr Weaver were premised on that period expiring in December 2019.
The second basis, namely that the learned primary judge failed to consider that Mr Weaver would have had good prospects of the limitation period being extended under s 38(2) of the Limitation Act 2005, must also be rejected. In the first place, the contention also proceeds upon the incorrect assumption that the relevant delay was until April 2019.
In any event, there is no basis to conclude that there were good prospects of Mr Weaver being granted an extension of time within which to bring a claim after December 2019, such as 3 April 2020 (when Morara in fact modified its claim). An application under s 38(2) would have required the court to be satisfied that the delay in commencing the action was attributable to fraudulent or other improper conduct. There is no suggestion here of fraudulent conduct. Nor is there any relevant improper conduct. The delay in commencement was due to the way that Mr Weaver elected to frame his claim through Warrington and then through Morara. An application under s 38 of the Limitation Act 2005 had negligible, if any, prospect of success. In any event, given the breadth of the discretion as discussed below, it is doubtful whether the learned primary judge's failure to refer to this consideration would reflect error in the exercise of the discretion.
The other bases identified in [51] above relate, in substance, to the merits of the exercise of the discretion under s 233. In this regard, it is important to note that the challenge to the learned primary judge's grant of relief under s 233, in contrast to a finding of oppression under s 232, is a challenge to the exercise of a discretion.[52] It is not demonstrative of error simply to contend that a different conclusion may reasonably have been reached, or that various factors ought to have been given more or less weight. Morara must, rather, establish that the learned primary judge's treatment of delay in the exercise of the statutory discretion proceeded upon a wrong principle, took into account some extraneous matter, was based upon an error of fact, ignored a relevant and material matter, or reached a result which is so plainly unreasonable or unjust as to lead to an inference that there has been a failure properly to exercise the discretion.[53]
[52] FexutoPty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97 [3] (Spigelman CJ) (Fexuto).
[53] House v The King (1936) 55 CLR 499, 504 - 505 (Dixon, Evatt & McTiernan JJA); Falkingham v Peninsula Kingswood Country Golf Club Ltd [2015] VSCA 16 (Falkingham) [89] (Whelan JA).
For reasons already explained, Morara's contention that the learned primary judge was mistaken as to the facts relating to the delay cannot be accepted. As to an error in principle in the exercise of the discretion, it is important to note that the discretion committed to the court by s 233 has been held to be 'very wide and unconstrained'.[54]
[54] Szencorp Pty Ltd v Clean Energy Council Ltd (2009) 69 ACSR 365 [56] (Goldberg J).
There can be no doubt that delay is a permissible factor to which regard may be had in the exercise of the discretion: see Falkingham and Hylepin cited by the learned primary judge.[55] As explained, there can also be no doubt that Mr Weaver himself has never made a claim and that by the time Morara modified its claim to include the issue of reasonable remuneration to Mr Weaver in April 2020, a claim by Mr Weaver himself would have been subject to the limitation period. It may well have been open to the court to consider that a limitation period applicable to a claim framed differently and brought by another person, namely Mr Weaver, ought not to preclude a successful claim framed as an oppression claim by Morara. There was, however, no error in the learned primary judge concluding otherwise; namely that in all the circumstances, the remedy should be reduced by the amount that would have been statute‑barred had Mr Weaver brought the claim, which he never did. These are matters of evaluative weight on which reasonable minds may differ; they do not disclose error. That is so notwithstanding that the oppression may have been ongoing.
[55] BAB 27; Primary reasons [90].
It is also not correct to say that the learned primary judge did not explain her conclusion that KPI could not have been 'compelled to pay [Mr Weaver]'. Reading the reasons as a whole, it is plain that her Honour came to this conclusion on the basis that, by April 2020 when the claim was modified, and certainly by October 2020 when the claim was heard, a suit by Mr Weaver himself would have been statute‑barred. Morara's contention that the learned primary judge did not consider 'all of the possible causes of action or industrial remedies'[56] rises no higher than speculation and discloses no error in the learned primary judge's exercise of the court's discretion. The submission that time had not begun to run in relation to a claim by Mr Weaver himself (because the oppression was continuing) was not developed in any detail. In any event, that submission cannot be accepted as any claim by Mr Weaver would plainly have been a restitutionary claim, and not a claim based on oppression.
[56] WAB 9 [2.3.2.1]
Nor did the learned primary judge purport to apply the equitable doctrine of applying a common law limitation period by analogy. Morara's complaint that the doctrine was not applicable because the cause of action was statutory is of no moment.
Morara also asserts that delay without identified prejudice cannot amount to a discretionary factor. In support of that proposition, counsel for Morara pointed to Whelan JA's remarks in Falkingham that:[57]
The submission … that an attempt to analyse distinctions between the equitable doctrine of laches on the one hand, and the relevance of delay in the exercise of the statutory discretion on the other, is somewhat academic, is, in my view, well‑founded. Insofar as declaratory relief was sought, it is clear that it was open to the judge to refuse that relief in the exercise of his discretion on the basis of delay. Insofar as relief was sought under the oppression provisions, delay was a relevant matter for the judge to take into account in the exercise of the wide discretion given to him under those provisions. I would adopt the approach of Pennycuick J in Re Jermyn Street in treating the analysis as being, in practical terms, essentially the same.
[57] Falkingham [88].
On the basis of that passage, counsel for Morara submitted that delay and laches were to be analysed by reference to the same test. Laches required prejudice, and accordingly it was necessary to identify prejudice in order for delay to be a discretionary factor.
It may be accepted that, generally speaking, the prerequisites for a successful laches defence include prejudice.[58] But this is not invariably so. In a classic formulation of the equitable doctrine, Dixon CJ, Webb and Kitto JJ explained in Fysh v Page:[59]
If a plaintiff establishes prima‑facie grounds for relief the question whether he is defeated by delay must itself be governed by the kind of considerations upon which the principles of equity proceed. If the delay means that to grant relief would place the party whose title might otherwise be voidable on equitable grounds in an unreasonable situation, or if, because of change of circumstances, it would give the party claiming relief an unjust advantage or would impose an unfair prejudice on the opposite party, these are matters which may suffice to answer the prima‑facie grounds for relief.
It is apparent from that passage that prejudice is not invariably an element of laches. Other equitable considerations may be sufficient.
[58] See Crawley v Short [2009] NSWCA 410 [163] (Young JA).
[59] Fysh v Page (1956) 96 CLR 233, 243.
More fundamentally, the fact that Whelan JA in Falkingham eschewed academic distinctions between the equitable doctrine of laches and delay more generally does not suggest that the identification of prejudice is to be elevated to a rule in the application of s 233. That would be an impermissible fetter on the statutory discretion, and an unjustified gloss on the statutory text. The learned primary judge considered that in exercising the statutory discretion, fairness led to the view that Morara's and Mr Weaver's unexplained delay in all the circumstances ought to lead to a reduction of the remedy by the sum that would have been subject to a limitation period had Mr Weaver brought a claim. Other judges may have reached a different conclusion, but no error of principle is disclosed in her Honour's reasons. For the same reasons, the submission made in the context of Ground 1 referred to in [45] to [46] above cannot be accepted.
Appeal – conclusion
For the foregoing reasons, the appeal must be dismissed.
Cross-appeal
By the cross‑appeal, the respondents contend that the learned primary judge erred in finding that the failure to agree, or pay, remuneration to Mr Weaver constituted oppression of Morara. While, the commercial unfairness identified by her Honour as emanating from the findings of Vaughan J in the Warrington proceedings may have constituted an unfairness to Mr Weaver personally, that unfairness, the respondents contend, could not amount to oppression of Morara in its capacity as a member of KPI or any other capacity.
The respondents framed the cross‑appeal as two sub‑grounds. The first sub‑ground asserted an error of fact in the learned primary judge's finding referred to at [26] above that Mr Weaver was Morara's alter‑ego. The second sub‑ground asserted an error of law in the learned primary judge's finding that the respondents' conduct was commercially unfair to Morara, rather than Mr Weaver.
First sub-ground – alter ego
In setting out the parties' submissions, the learned primary judge recorded Morara's reliance on certain 'findings' of Vaughan J in the Warrington proceedings. Those findings included that Morara was 'effectively Mr Weaver's alter ego with respect to KPI'.[60] The learned primary judge's use of that phrase, however, was taken from Morara's written submissions in the primary proceedings, and not from Vaughan J's decision. That is, the learned primary judge appears to have accepted Morara's characterisation of Vaughan J's decision as a finding that Morara was Mr Weaver's 'alter ego'. The words 'alter ego', however, do not appear in Vaughan J's reasons in the Warrington proceedings.
[60] BAB 20; Primary reasons [59].
In their submissions to this Court, the parties (and the respondents in particular) placed considerable emphasis on the learned primary judge's adoption of the term 'alter ego', the meaning of that term and its deployment in various legal contexts. As will be explained, however, the resolution of the cross‑appeal does not depend upon labels, but upon the substance of the nature and content of the relationships upon which KPI was founded. That question in turn requires careful attention to Vaughan J's actual findings in the Warrington proceedings. Simply put, whether the learned primary judge was correct to accept Morara's paraphrase of Vaughan J's findings by use of the term 'alter ego' is beside the point. The question is one of substance, not form.
While we will return to this aspect of the cross‑appeal, it is therefore convenient to address the second sub‑ground of the cross‑appeal, which is concerned with that substantive issue.
Second sub-ground – oppression of Morara
The second sub‑ground of the cross‑appeal is concerned with the ultimate question of whether, in all the circumstances, the conduct complained of by Morara constituted commercial unfairness to (and therefore oppression of) Morara as a shareholder of KPI or in some other capacity.
As noted above, the respondents contend that any unfairness, with respect to his remuneration, was suffered by Mr Weaver, and not by Morara. The statutory provision requires oppression to the member, that is, Morara, not Mr Weaver. Fundamentally, the respondents contend, Mr Weaver chose to incorporate Morara as a separate legal entity and the creation of Morara as a separate legal entity cannot be ignored at Mr Weaver's commercial convenience. To do so would be to overlook a fundamental feature of company law contrary to the rule of separate legal personality accepted in Salomon v A Salomon & Co Ltd.[61]
[61] Salomon v A Salomon & Co Ltd [1897] AC 22.
Counsel for Morara unambiguously framed its response to the cross‑appeal on the basis that the failure to agree terms and pay remuneration to Mr Weaver was oppressive to Morara in its capacity as a member (that is, a shareholder) of KPI.[62] That was the basis upon which it advanced its case before, and upon which it was accepted by, the learned primary judge.
Statutory provisions
[62] Appeal hearing ts 50.
The relevant statutory provisions appear in pt 2F.1 of the Corporations Act:
Part 2F.1 – Oppressive conduct of affair
232Grounds for Court order
The Court may make an order under section 233 if:
(a)the conduct of a company's affairs; or
(b)an actual or proposed act or omission by or on behalf of a company; or
(c)a resolution, or a proposed resolution, of members or a class of members of a company;
is either:
(a)contrary to the interests of the members as a whole; or
(b)oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.
For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company.
…
233Orders the Court can make
(1)The Court can make any order under this section that it considers appropriate in relation to the company, including an order:
(a)that the company be wound up;
(b)that the company's existing constitution be modified or repealed;
(c)regulating the conduct of the company's affairs in the future;
(d)for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law;
(e)for the purchase of shares with an appropriate reduction of the company's share capital;
(f)for the company to institute, prosecute, defend or discontinue specified proceedings;
(g)authorising a member, or a person to whom a share in the company has been transmitted by will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company;
(h)appointing a receiver or a receiver and manager of any or all of the company's property;
(i)restraining a person from engaging in specified conduct or from doing a specified act;
(j)requiring a person to do a specified act.
In accordance with s 232(e) Morara was therefore required to demonstrate that it (that is, Morara) had suffered conduct that was oppressive to it in its capacity as a member, or in any other capacity.
The general principles applicable to s 232 and s 233 are well established and need not be set out at length. We respectfully adopt, without repeating, the summary recently adopted by the New South Wales Court of Appeal in Tzavaras v Tzavaras & Sons Pty Ltd.[63]
[63] Tzavaras v Tzavaras & Sons Pty Ltd [2023] NSWCA 168 [74] (Gleeson JA, Adamson JA & Griffiths AJA).
An important feature of the statutory remedy is its remedial nature and the breadth of its reach. The jurisdiction was described by Spigelman CJ in Fexuto in the following terms:[64]
The statutory formulation has been extended over the years to confer on the court a wide‑ranging remedial jurisdiction. The addition of the words 'unfairly prejudicial to' and 'unfairly discriminate against', to the original statutory reference to 'oppressive', indicates an intention that the jurisdiction should not be confined by technical distinctions.
Quasi-partnership analogy
[64] Fexuto [4] (Spigelman CJ) (references omitted).
A well‑established species of oppression can arise in what has been called the 'quasi‑partnership' context. Many small companies are formed in the nature of a quasi‑partnership where a limited number of people operate the enterprise on the basis of mutual trust and confidence and joint decision‑making, notwithstanding the formal incorporation of their interests into a company governed by a constitution.
Commonly, in that situation, a shareholder may be said to have a legitimate expectation that the company will continue to operate in the nature of a quasi‑partnership. In such circumstances, a minority shareholder may legitimately expect to continue to participate in the management of the company and the denial (or frustration) of that expectation by the majority shareholder or shareholders, although effected strictly in accordance with the company's rules or constitution, may amount to oppression. The statutory concept of oppression, which emanates from principles of equity, regards it as inequitable to permit one quasi‑partner to insist on their strict legal rights at the expense of the legitimate expectations of the other. Ford, Austin and Ramsay's Principles of Corporations Law[65] describe this principle in the following terms:
Even where the constitution is observed an exclusion from management may call for a remedy where it is inconsistent with a common understanding between members outside the company's constitution which gave rise to a member's legitimate expectation of participating in management.
[65] Austin RP and Ramsay IM, Ford, Austin and Ramsay's Principles of Corporations Law (17th ed, 2018) [10.460.15] (references omitted).
This passage (and its predecessors) have been cited with approval in the case law many times, including in this Court.[66]
[66] See Smolarek v Liwszyc (2006) 32 WAR 101 [77] (Steytler P, McLure and Buss JJA); Remrose Pty Ltd v Allsilver Holdings Pty Ltd (2005) 225 ALR 588 [73] (Hasluck J).
The issues raised by the cross‑appeal in this case test the outer limits of this principle and, in particular, the circumstances in which particular conduct is properly to be understood as oppression of a shareholder in that capacity. It is therefore instructive to examine a number of the earlier cases in which the principle has been developed. An appreciation of the genealogy of the principle assists in understanding its appropriate application in a particular case.
In this context, it is important to recognise that many of the earlier cases were concerned with applications by shareholders pursuant to a jurisdiction for a court to wind up a company when the court was of the opinion that it was 'just and equitable' to do so. The statutory remedies under provisions such as s 233 of the Corporations Act have since evolved to include far broader discretionary remedies that do not necessitate the comparatively drastic step of winding up. In addition, the statutory provisions have been expanded such that those remedies are now available for oppressive conduct against a member in the capacity as a member or in any other capacity. It is therefore necessary to bear in mind that a number of the earlier cases were decided in a statutory context in which those reforms were yet to unfold.[67]
[67] For an overview of the relevant history, see Ford at [10.430].
An important decision in the development of the law in Australia and elsewhere was ReWondoflex Textiles Pty Ltd.[68] In that case, Smith J said:[69]
[G]enerally speaking, a petition for winding up, based upon the partnership analogy, cannot succeed if what is complained of is merely a valid exercise of powers conferred in terms by the articles … To hold otherwise would enable a member to be relieved from the consequence of a bargain knowingly entered into by him … But this, I think, is subject to an important qualification. Acts which, in law, are a valid exercise of powers conferred by the articles may nevertheless be entirely outside what can fairly be regarded as having been in the contemplation of the parties when they became members of the company; and in such cases the fact that what has been done is not in excess of power will not necessarily be an answer to a claim for winding up. Indeed, it may be said that one purpose of [the just and equitable provision] is to enable the Court to relieve a party from his bargain in such cases.
[68] ReWondoflex Textiles Pty Ltd [1951] VLR 458 (Re Wondoflex Textiles).
[69] ReWondoflex Textiles Pty Ltd, 467.
To similar effect was the House of Lords decision in Ebrahimi v Westbourne Galleries Ltd.[70] That case dealt with an application for a share by-out or winding up of a company by Mr Ebrahimi, one of three shareholders. The other shareholders were Mr Nazar and his son George. Mr Ebrahimi and Mr Nazar founded the company and held 400 shares each. George held 200 shares, so the Nazars together held a majority of the shares. All three were directors of the company. The company made good profits which were paid as directors' fees. No dividends were paid. A dispute arose and the Nazars removed Mr Ebrahimi as a director by resolution of a general meeting. Mr Ebrahimi sought, relevantly, an order under s 222(f) of the Companies Act 1948 (UK) that the Nazars should purchase Mr Ebrahimi's shares, sell him their shares or that it was just and equitable that the company be wound up.
[70] Ebrahimi v Westbourne Galleries Ltd [1973] AC 360; [1972] 2 All ER 492 (Westbourne Galleries).
Mr Ebrahimi had been removed as a director and excluded from management. His shareholding remained intact. Lord Wilberforce considered the submission advanced on behalf of the Nazars that in a company, however small, the rights of its members are to be governed by the articles of association which have contractual force and the court ought not to excuse parties from observing the contractual bargain.[71] In what has been described as a 'celebrated' passage,[72] Lord Wilberforce explained that the jurisdiction conferred by the statute, emanating as it does from equity, can permit a court to look beyond the legal force of the governing articles and behind the corporate veil notwithstanding the well‑established principle of separate legal corporate personality:[73]
The words ['just and equitable'] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The 'just and equitable' provision does not, as the respondents [the company] suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.
[71] Westbourne Galleries, 375.
[72] Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, 19 (Hoffmann LJ).
[73] Westbourne Galleries, 379 (Lord Wilberforce).
Subsequent English decisions built on these principles in the context of the broader remedial orders available where a company's affairs had been conducted in a manner which was unfairly prejudicial to the interests of a members or members.
In Re a Company,[74] for example, a petition sought a buy‑out of the petitioners' shares on the basis of prejudice. The petitioners were a husband and wife, Mr and Mrs S, who owned and operated a successful company, 'A'. The couple entered into an agreement with a company, 'O', under which O purchased all the couple's shares in A. In return, the couple were given some shares in O and a promise that O would invest substantial sums in A, that the husband would be engaged formally as A's managing director and become a director of O, and that the association between the couple and the controllers of O would be one of 'partnership'. O did not invest any money in A, and A became worthless. The husband was removed from his position as managing director of A. The couple brought proceedings against O and its principals alleging oppression on the basis of O's false representations. They sought an order that O or its principals be required to buy the couple's shares in A at their original value before they were sold to O.
[74] Re a Company [1986] BCLC 376 (Re a Company).
The petition in Re a Company was brought under s 459 of the Companies Act 1985 (UK) which provided:
A member of a company may apply to the court by petition for an order under this Part on the ground that the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.
Section 461 provided for the remedies available to the court if satisfied that the petition was wellfounded. This included a range of matters including providing for the purchase of the petitioner's shares by other members of the company.
Sir Leonard Hoffmann (then a judge of the High Court of Justice, Chancery Division) dealt with a motion to strike out the petition on the basis that the allegations amounted to wrongs committed against the couple in their capacity as defrauded vendors of their shares in A, or against the husband in his capacity as the managing director of A. They were not matters that could constitute oppression of the couple in their capacity as shareholders of O. In support of the application to strike out, it was submitted that the section was limited to conduct that was oppressive or prejudicial to members in the capacity as members, not to other interests of persons who happened to be members.[75]
[75] Re a Company, 378.
While accepting that the allegations were in substance a claim for damages for deceit and breach of contract, Hoffmann J noted that s 459 founded the jurisdiction of the court to grant relief under s 461 on the ground that '… the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of some part of the members (including at least himself) …'.[76] His Honour accepted, in principle, that the section was directed to the interests of members in that capacity and not to interests that were independent of a person or entity's membership. Nevertheless, Hoffmann J considered that the application of that principle must take into account that the interests of a member are not necessarily limited to his or her strict legal rights, and the statutory provision enabled the court to have regard to wider equitable considerations.
[76] Re a Company, 378.
His Honour went on to refer to the case of a small private company of two or three members and said:[77]
The member's interests as a member who has ventured his capital in the company's business may include a legitimate expectation that he will continue to be employed as a director and his dismissal from that office and exclusion from the management of the company may therefore be unfairly prejudicial to his interests as a member.
[77] Re a Company, 379.
Hoffmann J dismissed the application to strike out the petition (albeit with some reservation in the circumstances), concluding that the statutory provision operates:[78]
within so potentially wide a frame of reference and gives the court so broad a discretion that I do not think that I can say that no evidence which the petitioners might bring in support of the petition could satisfy a court at the hearing that [the husband's] employment as a director of A was not in all the circumstances part of his legitimate expectations as a member of O.
[78] Re a Company, 380.
Some months later in Re Posgate & Dendy (Agencies) Ltd,[79] Hoffmann J reiterated that the statutory jurisdiction enabled the court to take into account understandings between members that went beyond rights provided by the company's articles or constitution. Hoffmann J cautioned, however:[80]
Section 459 enables the court to give full effect to the terms and understandings on which the members of the company became associated but not to rewrite them. (emphasis added)
[79] Re Posgate & Dendy (Agencies) Ltd [1987] BCLC 8 (Re Posgate).
[80] Re Posgate & Dendy (Agencies) [1987] BCLC 8, 14 (Hoffmann J).
The scope of what amounts to prejudice to a 'member's interests' under s 459 was again considered in Re J E Cade & Son Ltd.[81] In that case, brothers Tony and John Cade were part of a large family farming partnership that had grown over many years. A complicated arrangement was put in place to split the partnership business and assets. To that end, Tony and his wife purchased part of the farmland that was farmed by John's interests. Tony granted to a company a licence to farm that land. The company was controlled by John, and Tony was a minority shareholder and a director. After certain events, Tony refused to extend the licence, and sought possession of the farmland. John alleged that the farm enjoyed a special statutory protection that prohibited Tony from taking possession.
[81] Re J E Cade & Son Ltd [1992] BCLC 213 (Re Cade).
Tony brought a petition under s 459 and s 461 of the Companies Act 1985, seeking relief which included possession of the farm, a share purchase or the winding up of the company. Tony complained that with the expiration of the license, the company under John's control remained in possession of the farmland without payment. Tony alleged that the circumstances amounted to unfairly prejudicial conduct against him and that the conduct affected him in his capacity as a member of the company. In substance, that was because the parties had agreed to use the company structure, including Tony's minority shareholding, as the vehicle to implement the broad agreement and arrangement. Therefore, it was argued, conduct that was inconsistent with, or undermining of the agreement, was prejudicial or unfair to Tony in his capacity as a member of the company.
As to the extent of the protection of a member's interests under s 459, Warner J in Re J E Cade & Son accepted that the application of equitable principles referred to by Lord Wilberforce in Westbourne Galleries was not limited to quasi‑partnerships, but could potentially apply to a wide variety of situations.[82] Nevertheless, adopting a familiar biblical allusion to practical but unprincipled justice, Warner J observed that while the court had a very wide discretion under s 459 and s 461, 'it does not sit under a palm tree'.[83]
[82] Re J E Cade & Son, 232.
[83] Re J E Cade & Son, 227. The reference is to Deborah's administration of justice under a palm tree (Judges Chap 4, verse 5). The implication that the justice dispensed by Deborah was unprincipled is, at least arguably, unfair. There is nothing in the biblical text to suggest that there was anything unprincipled or untoward about the quality of justice dispensed under the 'Palm of Deborah' (on the contrary, R. David Altschuler of Prague (1687-1769) suggests the open and public context was to enhance transparency). By contrast, there were a number of male judges in the Bible whose decisions were transparently 'problematic'. None of them have become synonymous with unprincipled or unsophisticated justice.
In that regard, Warner J concluded that, the petition was in substance pursuing Tony's interests as the freehold owner of the farmland, and not his interests as a member of the company. Indeed, his interests as a freehold owner were adverse to the interests of the company. The fact that Tony had become a shareholder as part of a broader arrangement which he was defending and seeking to preserve, did not transform the interest he was defending to the interest of a shareholder in the capacity of a shareholder. Put another way, the fact that Tony had become a shareholder as a result of, and as part of, a broader agreement in respect of which he alleged unfairness, did not mean that the unfair conduct impacted upon him as a shareholder.
In Re Saul D Harrison & Sons plc,[84] Hoffmann LJ (by now in the Court of Appeal) said, regarding the expectation of shareholders that arises out of agreements or understandings beyond a company's governing documents:
I have in the past ventured to borrow from public law the term 'legitimate expectation' to describe the correlative 'right' in the shareholder to which such a relationship may give rise. It often arises out of a fundamental understanding between the shareholders which formed the basis of their association but was not put into contractual form, such as an assumption that each of the parties who has ventured his capital will also participate in the management of the company and receive the return on his investment in the form of salary rather than dividend. These relationships need not always take the form of implied agreements with the shareholder concerned; they could enure for the benefit of a third party such as a joint venturer's widow.
[84] Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, 19.
In R & H Electric Ltd v Haden Bill Electrical Ltd[85], Mr Pitt, Mr and Mrs Hogg and Mr Watkins established a company, Haden Bill Electrical Ltd (Haden Bill). Each of the four held 25% of the shares and initially they were all directors. Mr Pitt also controlled another company, R & H Electrical Ltd (R & H). At the establishment of Haden Bill, Mr Pitt's company, R & H, provided Haden Bill with funds for all of its working capital. R & H remained a creditor of Haden Bill. Mr Pitt fell out with the other three directors and shareholders of Haden Bill. Mr Pitt was then removed as a director of Haden Bill at a general meeting.
[85] R & H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280 (R & H Electric Ltd v Haden Bill).
Mr Pitt issued a petition under s 459 of the Companies Act 1985 asserting that the conduct of Haden Bill was unfairly prejudicial to him, and seeking to require the other three to buy his shares at a fair value or, alternatively, to have Haden Bill wound up on the just and equitable ground. The proceedings alleged that Haden Bill had been established on the basis of mutual trust and confidence in the nature of a quasi‑partnership, and on the basis that Mr Pitt was to retain certain entrenched rights of control for so long as R & H remained a creditor of Haden Bill.
The respondents' opposition to Mr Pitt's application included the submission that Mr Pitt's only real involvement was as an agent for R & H, which was a loan creditor, not a shareholder, of Haden Bill. Further, the investor with a real complaint was R & H, and it would be contrary to principle to ignore the distinction and treat Mr Pitt as if he were identical to R & H.
Robert Walker J referred to a number of earlier decisions, including Westbourne Galleries and Re a Company, noting that although the relevant conduct must be limited to conduct which affects the interest of a member as a member, the cases support the general proposition that the court should take a broad view of what may properly be regarded as a petitioner's interest as a member.[86] There should, however, be a limit beyond which further extension is not permissible.[87] His Honour observed that if Mr Pitt himself had been the principal creditor in the establishment of Haden Bill, the conduct would clearly come within the scope of the statutory provision and amount to unfair prejudice to Mr Pitt in his capacity as a member. Such an arrangement would be a reflection of and sufficiently closely connected with Mr Pitt's membership of Haden Bill to be within the scope of s 459. The question was 'whether the fact that Mr Pitt and R & H were separate legal persons is a crucial distinction which should lead to a different conclusion', a question in turn about the 'inviolability of the corporate veil on a … s 459 petition'.
[86] R & H Electric Ltd v Haden Bill, 292-293.
[87] R & H Electric Ltd v Haden Bill, 294.
Robert Walker J expressed his conclusion in R & H Electric Ltd v Haden Bill in the following terms:[88]
On the whole I have come to the conclusion that I should not treat the separateness of Mr Pitt and R & H as excluding him from seeking relief under s 459 on the basis that R & H's loans to Haden Bill were procured by Mr Pitt and formed part (and an absolutely essential part) of the arrangements entered into for the venture to be carried on by that company. That way of looking at the matter seems to me to be in line with the broad approach adopted in the cases already referred to. It is also (and this is to my mind very important) the way that the parties themselves seem to have looked at the matter. They are not lawyers or accountants and they all seem to have regarded R & H as Mr Pitt's company[.]
…
In these circumstances Mr Pitt did in my judgment have a legitimate expectation of being able to participate in the management of Haden Bill, at least for as long as R & H remained a significant loan creditor (and so long as Mr Pitt was closely associated with R & H).
[88] R & H Electric Ltd v Haden Bill, 294 – 295.
It is important to pay regard to that conclusion with some precision. Robert Walker J found that the corporate veil and legal distinctiveness of the company R & H was not a barrier to a finding that Haden Bill's affairs had been conducted in a manner which was unfairly prejudicial to the interests of Mr Pitt personally in his capacity as a member. It was Mr Pitt personally who was the member, and it was Mr Pitt himself who had been removed as a director. Adopting a broad understanding of a member's interests, notwithstanding the separate corporate personality of R & H, the arrangement of Mr Pitt having funded Haden Bill through R & H was nevertheless a reflection of, and sufficiently closely connected with, Mr Pitt's membership of Haden Bill.
In 1999, the House of Lords delivered O'Neill v Phillips.[89] The case was again concerned with s 459 and s 461 of the Companies Act. Lord Hoffmann, as his Lordship now was, delivered the leading judgment.
[89] O'Neill v Phillips [1999] 2 All ER 961 (O'Neill v Phillips).
The facts in O'Neill v Phillips were, briefly, as follows. Mr Phillips owned all the shares in Pectel Ltd. Mr Phillips was also the managing director. Pectel then employed Mr O'Neill. Mr Phillips was initially very impressed with Mr O'Neill. In due course, Mr Phillips gave Mr O'Neill 25% of the shares and made him a director. There was discussion of Mr O'Neill taking over management of the company and taking 50% of the profits, with a view to Mr O'Neill, upon reaching certain targets, becoming a 50% shareholder. Mr O'Neill did in fact take over management of the business. He was also credited with half the profits by Mr Phillips. Using part of the profits credited to him, Mr O'Neill put some of his own earnings into the capital of the company. He also guaranteed the company's bank account and mortgaged his house in support of the guarantee. Discussion ensued regarding Mr O'Neill obtaining a 50% shareholding and draft documents were prepared. At that point, due to a change in economic circumstances, the company's performance deteriorated. Mr Phillips then had a change of mind and became disillusioned with Mr O'Neill's management. Mr Phillips resumed management of the company to the exclusion of Mr O'Neill. Mr Phillips stopped crediting Mr O'Neill with 50% of the profits and declined to proceed with allocating him a 50% shareholding. Mr O'Neill was left as an ineffectual director/employee and a 25% shareholder.
Mr O'Neill issued a petition under s 459. In the petition, the allegations of unfairly prejudicial conduct came down to two complaints: the termination of Mr O'Neill's equal profit sharing, and the repudiation of the alleged agreement for the allotment of more shares. The claim was dismissed at first instance on two grounds. First, the trial judge found that notwithstanding Mr O'Neill's expectations, Mr Phillips had not committed himself permanently and unconditionally to an equal sharing of profits and no concluded agreement had been reached for the additional shares. Mr Phillips had made no commitment that rendered it unfair for him to resile from the discussions. The second ground was that the prejudice to Mr O'Neill's interests from the reduction in his profit‑share and refusal to give him more shares was not suffered in his capacity as a member. The profit share and the proposed additional shares were a reward and incentive for working in the company; they were not an incident of his 25% shareholding. His expectation would have been the same even if he did not hold 25% of the shares. Mr O'Neill's membership was irrelevant to his expectations.
The decision of the trial judge was reversed, and Mr O'Neill's claim was upheld on appeal. The matter then came before the House of Lords.
In his consideration, Lord Hoffmann emphasised both the necessary formal aspects of a company, and the historical function of equity in its development:[90]
In the case of s 459, the background has the following two features. First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.
The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.
[90] O'Neill v Phillips, 967.
Lord Hoffmann then discussed the capacity in which Mr O'Neill claimed the prejudice was suffered and explained:[91]
In a case of expulsion, where the equitable restraint on the exercise of the power is based upon the terms upon which the petitioner became or continued as a member of the company, the prejudice will be suffered in the capacity of a member. It is the terms, agreement, or understanding on which he became associated as a member which generates the restraint on the power of expulsion.
[91] O'Neill v Phillips, 973.
His Lordship concluded that the findings of the trial judge were an insuperable obstacle to a conclusion that Mr Phillips' conduct was unfair. Mr Phillips had made no commitment or agreement to bestow the benefits which Mr O'Neill claimed. There was, therefore, no basis consistent with the established principles of equity to hold that Mr Phillips had conducted himself in a manner that was oppressive.
Lord Hoffmann went on to explain what the position might have been if Mr O'Neill also had the benefit of a contractual entitlement to a half share in the profits or to be given additional shares. His Lordship continued:[92]
[A]ssuming there had been a contractual obligation, I would not exclude the possibility that prejudice suffered from the breach of that obligation could be suffered in the capacity of shareholder. As I have said, the initial gift of 25 shares in 1985 did not in my view change the essential relationship between the parties. Mr Phillips remained controlling shareholder and Mr O'Neill remained an employee who had some shares. If at that stage Mr Phillips had promised another 25 shares and then broken his promise, I do not think that Mr O'Neill would have suffered prejudice in his capacity as an existing shareholder. I agree with the judge that the case would have been no different if Mr O'Neill had had no shares and Mr Phillips had broken a promise to give him 50. On the other hand, once Mr O'Neill had invested his own money and effort in the company, the situation may have changed. A promise to give Mr O'Neill more shares or a larger share in the profits may well have been based not merely upon his position as an employee but on the fact that he already had a stake in the company. As cases like R & H Electrical Ltd v Haden Bill Electrical Ltd, Re Haden Bill Electrical Ltd [1995] 2 BCLC 280 show, the requirement that prejudice must be suffered as a member should not be too narrowly or technically construed. But the point does not arise because no promise was made. (emphasis added)
[92] O'Neill v Phillips, 973.
In the hypothetical case referred to by Lord Hoffmann, however, it would not be the contractual obligation itself that might render the breach of promise conduct that is prejudicial to the interests of the shareholder. Rather, consistently with the observations in R & H Electrical v Haden Bill, it is the breach of a promise or contractual obligation in a manner that in the particular circumstances is relevant to the person's membership, in the sense that the impact of the breach arises from, or is a reflection of, and is sufficiently closely connected with the person's membership of the company. In R & H Electrical v Haden Bill, the financial accommodation granted by Mr Pitt through his company was part and parcel of the setting up of the company, Mr Pitt's stake in the company and his role in management of the company. In Lord Hoffmann's hypothetical, Mr O'Neill's existing stake in the company by investing capital and guaranteeing its bank account may have been sufficient to render the promise of more shares, a promise that was a reflection of and sufficiently closely connected with his interests as a shareholder.
As emerges from the cases discussed above, the conception of a member's interests is to be widely construed. Oppression may be perpetrated against a shareholder in that capacity not only by exclusion from management. Relevantly, it may also occur by the denial of other legal entitlements or benefits in a manner that is contrary to the foundational understanding of the company such that the impact of the denial of those entitlements is a reflection of and closely connected with the person's membership. Nevertheless, it is important, in such a case, that the nexus between the denial of entitlements and the person's membership be carefully identified.
Member's interests in other capacities
As we have observed, the cases discussed above were all concerned with the interests of a shareholder in the capacity as a shareholder. As noted above at [75], it was in that capacity that Morara alleged it had been oppressed.
In those circumstances, Morara's capacities beyond its capacity as a member, or in the statutory language, 'in any other capacity', are therefore not strictly relevant. It is nevertheless worth noting that, notwithstanding the broad scope by which the interests of a member may be considered, s 232(e) is wider still than its predecessor provisions.
The previous statutory formulations required the prejudice or oppression to be against the member in their capacity as member. That led, as discussed above, to a broad conception of a member's interest. The statutory provision, however, is no longer limited in that way, and includes conduct prejudicial to the member 'in any other capacity'. The Full Court of the Federal Court explained the position in Smith Martis Cork & Rajan Pty Ltd v Benjamin Corp Pty Ltd:[93]
As the learned authors of Ford's Principles of Corporations Law, looseleaf Butterworths Australia 2000 point out at [11.470], s 232(e) is wider than its predecessor, under which it was necessary to establish oppression of the member as a member and not in any other capacity. The authors state that it is clear that conduct which removes a member from a directorship can attract relief, but it is not every relationship of a member to a company which demands relief.
The question will, as the authors observe at [11.470], turn on the size and nature of the company and whether the particular relationship has significance independently of membership of the company. The text continues as follows:
… Whether the section is attracted would seem to depend on whether, in the circumstances, the employment relation was a way in which the member received a return for investment or whether the employment was independent of being a member.
So, for example, where a small company is so organised that benefits are tied to being a director rather than a shareholder, a member‑director who is unfairly prejudiced as director no longer has to resort to an application for winding up on the just and equitable ground …
…
There is English authority, referred to in Ford, that the oppression remedy is available where the member is affected in the capacity of a creditor even though the loan was not made by the member but through another company which the member controls: see R & H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280.
[93] Smith Martis Cork & Rajan Pty Ltd v Benjamin Corp Pty Ltd (2004) 207 ALR 136 (Smith Martis Cork) [105] - [108] (Wilcox, Marshall & Jacobson).
The learned authors of Ford in the section set out above refer to R & H Electrical v Haden Bill in the context of a discussion regarding oppression to a member in 'any other capacity'. It is nevertheless to be observed, as explained above, that Robert Walker J reached his conclusion on the basis of the member's interest as a member.
The decision of the Federal Court in Smith Martis Cork was more recently discussed by the South Australia Court of Appeal in Melrob Investments Pty Ltd v Blong Ume Nominees Pty Ltd.[94] The analysis in that decision was in the somewhat different context of trusts, and a member's capacity as a beneficiary of a trust controlled by the company. Nevertheless, Bleby JA (Lovell and David JJA agreeing) made the following germane observations:[95]
I would not hazard to express a general, let alone universal, delineation of the relationships between members of a company and beneficiaries of a trust of which the company is trustee that will, and will not, engage the operation of s 232(e). Whether the interests of a member in some other capacity have been affected such as to engage s 232(e) should be approached on a case‑by‑case basis, bearing in mind the general principle that the section is to be construed broadly.
In any event, it does not require a particularly broad reading of the section to conclude that where a member is, say, a beneficiary of a fixed trust of which the company is trustee, and the wealth controlled by the company resides in that trust, oppressive conduct against the member in its capacity as beneficiary would qualify.
At the other end of the spectrum, and even taking a broad view of the section, it should be accepted that some relationships would be too remote to qualify.
General conclusions as to a member's interests in that capacity
[94] Melrob Investments Pty Ltd v Blong Ume Nominees Pty Ltd [2022] SASCA 29 (Melrob Investments).
[95] Melrob Investments [119] ‑ [121].
With the introduction of s 232(e) of the Corporations Act it may be accepted that that oppressive conduct against a person who is both a member and a director will no longer invariably require as expansive a scope to be applied to the notion of a member's interests in that capacity where the prejudice or unfairness is more directly against the member in their capacity as director (such as exclusion from the board). That may also be so in the circumstances of a quasi‑partnership where the founders are both the directors and the shareholders. That does not mean, however, that the inclusion of 'any other 'capacity' in s 232(e) ought to result in a more limited construction of the notion of a member's interest 'in that capacity' for the purposes of s 232.
An ongoing justification for the now well‑established broad approach to the scope of a member's interests, as member, may arise, for example, in the not uncommon circumstance where the owner/directors have chosen to hold their shares through a tax‑effective corporate vehicle as part and parcel of the company's foundation. As the cases referred to above illustrate,[96] the expanded notion of member's interests is not limited to circumstances where the director who is unfairly excluded from management is also the member. Depending upon the circumstances, oppression might be found in such a case where the company is founded on the understanding that the 'member' is the corporate vehicle of the individual director and the director is the nominee of the corporate shareholder.
[96] For an example in this jurisdiction, see Remrose Pty Ltd v Allsilver Holdings Pty Ltd (2005) 225 ALR 588.
This is not to say that in every such case a corporate shareholder of another company is to be regarded as, in all respects, synonymous with a director of the company who is related to the corporate shareholder, or that any unfairness to the director is ipso facto unfairness to, or oppression of, the corporate shareholder. On the contrary, as the authorities make clear, the court's jurisdiction under s 232 does not entitle it to simply dispense with the separate legal identities of the corporate member and a related director. That is why attention to the foundational understanding or assumptions between the shareholders which formed the basis of their association is so critical.
Similarly, just as a corporate member may be oppressed in that capacity by the exclusion of its nominated director contrary to the foundational understanding of the company, oppression might also be found in other forms of unfairness to a corporate shareholder's nominated director that are inconsistent with the foundational understanding of the company. The authorities we have discussed, for example, leave open the possibility that the denial of legal entitlements to a director who is the nominee of a corporate member, in circumstances where that is contrary to the foundational understanding of the company, may amount to oppressive conduct against that corporate member. That is because the impact of that denial or breach of promise may be sufficiently closely connected with, and a reflection of, the corporate member's capacity as a shareholder.
Again, this is not to say that the denial of a nominee director's entitlements can be equated with the exclusion of a nominee director from management of the company or will equally give rise to a claim for oppression of the corporate member in that capacity. In that regard, it may be observed that the exclusion from management of a nominated director is a matter of direct concern to a shareholder whose interests in the good management of the company are no longer represented by its nominated director. That unfairness impacts the shareholder directly in its capacity as a shareholder. By contrast, the denial of entitlements to a nominee director is more removed from the member's interests as a member and, indeed, the financial interests of a director may well be adverse to the interests of the company and so adverse to the member's interests as a member.
Nevertheless, the breadth of the statutory text and remedial nature of the jurisdiction conferred by it are such that s 232 of the Corporations Act cannot be confined to any particular a priori categories of case, including cases such as the present. In some circumstances, for example, the foundational understanding of a company might well include the complete assimilation of the interests of corporate members and each of their nominated directors. That understanding may well, in turn, encompass the sharing of the benefits of the commercial enterprise between each corporate member and its nominated director as part and parcel of the company's establishment. In such a case, the benefit to each founder of the company might be understood to include the aggregate benefit to the corporate shareholder of the value of shares and the payment of dividends, together with the benefit to the nominated director of the entitlement to director's fees or other benefits.
If that were, indeed, part and parcel of the foundational understanding of a company, then the failure to agree the terms of payment, and/or to pay the director fees for services rendered, might amount to oppression of the corporate member that nominated the director. The shareholder's interests in its capacity purely as a shareholder may not be prejudiced as obviously or as directly as it is by the exclusion of its nominated director from management of the company. But the directness and immediacy of the impact are matters of degree, not principle. The object of preventing or remediating unfair conduct to the shareholder based on the equitable principle of preserving the parties' understanding in the formation of the company, may be equally served where the oppression manifests in depriving the nominee director of his or her benefits.
In this respect, while each case will necessarily depend upon a careful examination of its own circumstances, some broad principles may be distilled from the cases and discussion above:
(a)the statutory jurisdiction embodied in s 232 has its genesis in, and reflects, the principles of equity. It enables the court to look behind the formal and legal rights of the parties to preserve understandings in the formation of the company where strict adherence to the company's constituent documents would be oppressive or unfairly prejudicial to a shareholder;
(b)the statute in its previous iterations required the conduct to be oppressive or unfairly prejudicial to the interests of a shareholder in that capacity. In that context, however, the interests of a shareholder are to be construed widely;
(c)the current provision has been expanded to include the interests of a shareholder 'in any other capacity'. That expansion does not, however, diminish the breadth by which the interests of a shareholder may be understood;
(d)a common circumstance in which oppression or unfairly prejudicial conduct may be found is that in which a director has been excluded from management strictly in accordance with a company's constitution, but contrary to the foundational understanding upon which the company was established;
(e)the jurisdiction is also capable of operating in a manner that pierces or overlooks the corporate veil, such as where the member is a company controlled by a person, and that person is the company's nominee director whom it was understood at the formation of the company would participate in management;
(f)in such a case, oppression might also be found in forms of unfairness to a corporate shareholder's nominated director other than exclusion from management, if that unfairness is inconsistent with the foundational understanding of the company. It is neither possible nor desirable to list all the circumstances that may justify the operation of the statutory jurisdiction;
(g)generally, oppression of a member in that capacity will arise where the impact of the unfair conduct is a reflection of, and sufficiently closely connected with, the membership of the company. That is likely to occur when the unfair conduct impacts upon the relationships, agreements or understandings that lay behind the foundation of the company;
(h)some relationships will be too remote to lead to a finding of oppression. For example, the fact that a person became a shareholder as part of a broader agreement in respect of which there is unfairness, does not of itself mean the unfairness is prejudicial to the person in the capacity of a shareholder;
(i)the relationships and agreements that the jurisdiction is concerned to preserve need not always take the form of implied agreements with the shareholder concerned; they could inure for the benefit of a third party. Similarly, the jurisdiction may look behind the corporate veil to preserve the foundational understanding that formed the genesis of the company;
(j)whether the breach of a promise or other obligation will attract the statute's intervention depends upon whether its prejudicial impact is a reflection of, and sufficiently closely connected with, membership of the company;
(k)the statute enables the court to give full effect to the understandings on which the members of the company became associated, but not to rewrite them; and
(l)the foundational understanding forming part and parcel of a company's establishment is capable of including the assimilation of the interests of a company's corporate members with each of its nominated directors, such that it was intended by all involved that the benefits of the enterprise would be shared and aggregated between each corporate member and its nominated director. In those circumstances, the denial by the majority of legal entitlements to one director may amount to oppressive or unfairly prejudicial conduct to the corporate member that nominated, and whose interests are assimilated with, that director. That is because the impact of denying that entitlement may well be a reflection of, and sufficiently closely connected with, the corporate member's membership of the company.
In light of these principles, we turn to the particular facts of this matter.
Cross-appeal – disposition
Whether the learned primary judge was correct, or erred, in finding that the failure to agree, or pay, remuneration to Mr Weaver constituted oppression of Morara may, ultimately, be reduced to the question of whether, on the facts, this case fell within the broad principles referred to at [130(1)] above.
In this regard, facts that led to the conclusions of the learned primary judge were based entirely on the findings of Vaughan J in the Warrington proceedings. No material further evidence was adduced before the learned primary judge. Morara in its written submissions before the learned primary judge stated plainly that it relied on the findings made by Vaughan J in the Warrington proceedings.[97] The resolution of the cross‑appeal therefore entirely turns on whether Vaughan J's findings support a finding of oppression. There being no other relevant evidence, this Court is in as good a position as the learned primary judge to determine that question.
[97] BAB 83; Plaintiff's submissions [3].
It is, first, appropriate to properly understand the issues to which Vaughan J's findings were directed. Relevantly, his Honour described the issues in the Warrington proceedings as follows:[98]
(1)Was there a pre‑incorporation 2010 oral agreement that Warrington was to be remunerated for services to be provided by it to KPI … with a remuneration structure to be agreed at a later date in accordance with the principle of reward for effort?
(2)Alternatively, was there a pre‑incorporation 2010 oral agreement that Mr Weaver would provide such services through a company to be nominated, with that company to be remunerated for the services provided to KPI with a remuneration structure to be agreed at a later date in accordance with the principle of reward for effort? If so, did Mr Weaver nominate Warrington as the company to be remunerated for those services? (footnotes omitted)
[98] Warrington [295].
In the context of those issues, Vaughan J described the history of the relationship between Mr Weaver and the Cranstons which led to the incorporation of KPI. His Honour explained that the parties assumed different roles in the enterprise. Vaughan J found that the matters about which there was a broad consensus included:[99]
[T]he parties would have different roles and responsibilities. Mr Weaver, in particular, would have an executive role. He was to be the managing director of KPI. … Warrington would have a property management role in respect of property syndicates as they were established and would thus derive income from those activities. …
[99] Warrington [111].
Vaughan J then set out the following background to KPI's establishment:[100]
KPI was incorporated on 17 August 2010. Mr Weaver and Evan Cranston were appointed as directors of KPI on its incorporation. A total of 90 ordinary shares were issued: 30 to Evan Cranston, 30 to Morara and 30 to Kingslane Pty Ltd.
Morara was a company associated with Mr Weaver. It was common ground that it was a company owned and controlled by Mr Weaver. Kingslane Pty Ltd is a company associated with and controlled by John Cranston; it is the trustee of his family trust. John Cranston and his wife are the sole directors and members of the company. (footnotes omitted)
Thus, looking through the shares in KPI held by other corporate entities, the shares in KPI were held one third by Mr Weaver, one third by Evan Cranston and one third by John Cranston.
[100] Warrington [120] - [122].
The parties were at odds as to whether the final paragraph set out immediately above justified the learned primary judge's attribution to Vaughan J of a finding that Morara was Mr Weaver's 'alter ego'. For the reasons we gave at [71] above, it is not ultimately necessary to resolve that issue. Nevertheless, in our view, Vaughan J's identification of the ultimate 'parents' of the shares in KPI (i.e. 'looking through the shares in KPI held by other corporate entities') does not justify attributing to his Honour a finding that each of the corporate shareholders were the 'alter ego' of their respective owners, if that expression is intended to convey the notion that no distinction could, or should, be drawn between the corporate shareholders in KPI and the natural persons controlling those corporate shareholders. On the contrary, Vaughan J's description of the corporate structures was an unremarkable way of describing, for ease of understanding, the association between the various persons and entities involved in the dispute in the Warrington proceedings.
For that reason, while it is not dispositive of the appeal, we would uphold the first sub‑ground of the cross‑appeal.
More substantively, however, Vaughan J's description of the corporate structures fall well short of a finding from which it may be inferred that there was a foundational understanding in the formation of KPI that the interests of Morara were agreed to be assimilated entirely with the interests of Mr Weaver personally or that Mr Weaver's reward for the enterprise was to be aggregated and shared between himself personally and Morara in a manner that drew no relevant distinction between them.
On the contrary, Vaughan J's findings as to the distinct role for Mr Weaver in the management of KPI, set out at [135] above sits uncomfortably with such a conclusion. The distinct role and reward for Mr Weaver personally was repeated by Vaughan J in his findings. In that context, his Honour referred to the discussions between the parties which related to a proposed 'reward for effort remuneration'.[101] The tenor of those discussions, as found by Vaughan J, was that Mr Weaver's involvement in KPI was to be distinct in that he would undertake the executive and other work for KPI for which he could expect a separate and distinct reward based on those efforts. That reward was to be personal to him, and not to come through Morara's shareholding in KPI. Indeed, Vaughan J expressly accepted Mr Weaver's evidence denying that 'reward was to come through shareholdings'.[102]
[101] For example, see Warrington [202].
[102] Warrington [323].
Vaughan J's findings as to the distinct role and commensurate reward of Mr Weaver personally, do not amount to, or support, a finding that there was a mutual understanding in the establishment of KPI that assimilated the interests of the corporate shareholders, and their own shareholders (in other capacities). Nor are the other matters relied upon by Morara in support of its contention that Morara was Mr Weaver's alter ego[103] sufficient to establish an understanding or agreement of that nature. The findings of Vaughan J regarding the foundation of KPI, and Mr Weaver's role and proposed reward, reflect an arrangement more akin to that considered by Lord Hoffmann in O'Neill where the benefits were associated with the directorship and a reward for services rather than as an incident of membership.
[103] BAB 86; Plaintiff's submissions [16], Rows 24-32 of the attached schedule.
In explaining the breakdown in the relationship between the various individuals, Vaughan J recorded in some detail the parties' references to a cessation or split in the 'partnership', meaning, Mr Weaver on the one hand, and the Cranstons on the other. In explaining the restitutionary claim brought by Warrington, Vaughan J made the following remarks:[104]
[T]he claim by way of restitution for reasonable remuneration has as its genesis the alleged agreement between Mr Weaver and the Cranstons. Collectively those three men consisted of KPI's two directors (Mr Weaver and Evan Cranston) as well as its de facto chairman (John Cranston). They also represented the whole of KPI's membership either personally (in the case of Evan Cranston) or through entities they controlled (in the case of Mr Weaver, through Morara, and in the case of John Cranston, through Kingslane Pty Ltd).
KPI was a company conducted without formality before the dispute between Mr Weaver and the Cranstons arose. That is best illustrated by the fact that John Cranston controlled the company's finances, and effectively acted as the company's chairman, despite never being appointed as a director.
[104] Warrington [300] - [301].
Reading his Honour's findings as a whole, it may be accepted that Vaughan J found that KPI was incorporated as a form of quasi‑partnership between Mr Weaver and the Cranstons and was, to an extent, conducted informally based on a relationship of trust and confidence. Significantly, however, Vaughan J found on the facts that a clear distinction was to be drawn, and intended to be drawn, between Mr Weaver personally and his other company Warrington. Indeed, that distinction was, ultimately, the basis upon which Warrington's claim failed. Given that clear distinction between Mr Weaver's various roles and capacities, the findings of Vaughan J cannot support a finding that there was a foundational understanding in the establishment of KPI that the interests of Morara were to be assimilated entirely with the interests of Mr Weaver personally or that Mr Weaver's reward for the enterprise was to be aggregated and shared between himself personally and Morara in a manner that drew no relevant distinction between them.
Ultimately, Vaughan J concluded:[105]
I have accepted that there were pre‑incorporation discussions as to an intended remuneration agreement providing for reward for effort. I am, however, not satisfied that this was in terms that Warrington would provide the services and be remunerated for them. Rather, the likelihood is that the discussions were as to Mr Weaver being remunerated for services to be provided to KPI with a remuneration structure to be agreed at a later date in accordance with the principle of reward for effort. (original emphasis)
[105] Warrington [353].
This conclusion, and his Honour's factual findings leading to that conclusion, do not provide a basis from which to infer a foundational agreement or understanding of the kind that would assimilate commercial unfairness to Mr Weaver in his personal capacity or his capacity as a director, into commercial unfairness to Morara in its capacity as a member.
It is significant in this regard that, until Morara foreshadowed the amendment of its claim in April 2019, neither Morara nor Mr Weaver ever contended that Morara itself was oppressed or prejudiced by the failure to pay Mr Weaver personally. Indeed, the entire basis of the Warrington proceedings was that the alleged remuneration was not attributable to Mr Weaver but to Warrington. That is, the Warrington proceedings were conducted upon the basis that emphasised, rather than elided, the distinction between Mr Weaver and the corporate persons of which he was the controlling mind. In those circumstances, it could hardly be supposed that there was a mutual understanding or assumption that would assimilate Mr Weaver's interests with those of those corporate persons. That is, it is difficult, to say the least, to infer a foundational understanding as an intrinsic feature of the establishment of KPI when such an understanding was not so much as asserted for almost nine years after the formation of the company (notwithstanding ongoing and intense litigation).
In our view, there is an insufficient foundation in the findings of Vaughan J to ground the conclusion of the learned primary judge that no distinction was to be drawn between Mr Weaver and the entity in which he held shares in KPI (see [26] above). In particular, Vaughan J's findings do not support the conclusion that a foundational understanding in the formation of KPI included the assimilation of interests between Morara and Mr Weaver such that a failure to remunerate Mr Weaver was a detriment to Morara as a shareholder.
Similarly, Vaughan J's findings did not provide a sufficient basis to establish that the impact of the failure to agree terms and remunerate Mr Weaver was a reflection of, and sufficiently closely connected with, Morara's shareholding in KPI so as to amount to oppression to Morara. As noted at [29] above, the learned primary judge's finding that Mr Weaver was an executive director because he was a member of KPI was not factually correct. While it may be said that the learned primary judge's understanding of the interdependence of the two relationships is tolerably clear, the gravamen of her Honour's reasoning was the assimilation of the interests of Mr Weaver and Morara in the commercial enterprise of KPI. As we have explained, the findings of Vaughan J do not go that far, and no further evidence was adduced in the primary proceedings.
The third matter referred to by the learned primary judge (see [28] above) was that the promised reward to Mr Weaver was to occur not only through the increase in shareholder value held by Morara, but also by payment through remuneration to Mr Weaver personally. Even accepting that to be the case, such an expectation would still fall short of a foundational understanding that would render the denial of the reward a prejudice to Morara in its capacity as a shareholder.
For these reasons, in our view, the findings of Vaughan J did not establish that KPI's conduct in respect of Mr Weaver amounted to oppressive or unfairly prejudicial conduct in respect of Morara. The learned primary judge erred in finding that the relevant conduct was commercially unfair to the interests of Morara.
It follows that we would uphold the second sub‑ground of the cross‑appeal. The cross‑appeal must be allowed.
Conclusion
In light of the above, the appeal must be dismissed and the cross‑appeal allowed. It follows that the orders made by the learned primary judge requiring KPI to pay Mr Weaver $55,092.60 (plus interest), being orders 1 and 2, should be set aside.
We would hear the parties as to the final orders, including as to the costs of the appeal, the cross‑appeal and the primary proceedings.
I certify that the preceding paragraphs comprise the reasons for decision of the Supreme Court of Western Australia.
KT
Principal Associate to the Hon Chief Justice Quinlan
8 OCTOBER 2024
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