Owston Nominees No. 2 Pty Ltd v Branir Pty Ltd

[1995] FCA 951

IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY )   No. NG 3184 of 1995
GENERAL DIVISION               )

Between:OWSTON NOMINEES NO. 2 PTY LTD

First Applicant

WARREN PERRY ANDERSON

Second Applicant

And:BRANIR PTY LTD

First Respondent

TOVEHEAD PTY LTD

Second Respondent

ABURIZAL BAKRIE

Third Respondent

REASONS FOR JUDGMENT

EINFELD J                 SYDNEY              31 JULY 1995

It is desirable that judgment be given this matter, even though it is late in the evening and in the ordinary course it would have been preferable to reserve judgment.  However, for various reasons, that will not result in anything better being available in the short term than what I can say now.  What I therefore intend to do is to give reasonably brief reasons for the decision to which I have come and, if necessary, expand on them at a later time.

The applicants come before the Court to obtain substantive and interlocutory relief against the respondents in respect of some
properties in the Northern Territory of which the respondents have become the owners over a period which commenced in November 1989 and appears to have concluded some time in 1993.  On 21 April 1995 the applicants moved the Court ex parte for, and obtained, injunctive relief in respect of what was alleged to be a lease proposed to be granted to a Hong Kong company (Aman) over the homestead (the Tipperary homestead) which exists on one of the properties concerned (the Tipperary property).  At the same time an injunction was also granted against the sale of or other dealings with a number of items of plant or equipment which operated in or in relation to the Tipperary property including certain aircraft.  Both those injunctions were continued by consent on different occasions right up to today when it was agreed on behalf of the applicants that the injunction with regard to the plant and equipment should be discharged, and this has already been done.  I should record that the proceedings were apparently not served on the third respondent, a citizen of Indonesia, and he has taken no specific part in the proceedings, although he appears to be the person in control of the two respondent companies.

The applicants seek a continuation of the injunction restraining the sale or lease of the Tipperary homestead to Aman.  The matters which fall for determination now are whether, in the usual way applicable to interlocutory injunctions, there is a substantial issue to be tried in the proceedings, and, if so, whether the balance of convenience favours the granting or withholding of the injunction.

At an early stage in the proceedings I ordered the applicants to file a statement of claim, and this was done on 22 May.  This pleading raises a number of issues for trial, but in the interlocutory proceedings the applicants have said that the only issue on which they seek to be judged for interlocutory relief is the one set out in paragraph 33(b)(1), which concerns the proposal to grant the lease to Aman over the Tipperary homestead.  Therefore the first matter to be considered is whether a prima facie or arguable case has been made out for the trial of such an issue.

The Tipperary homestead sits on a small section of a very large cattle property on which a very substantial holding of cattle could and has been intended to be run.  The homestead is in fact a series of very lavish buildings.  At the present time these buildings are largely unoccupied and unused but they are alleged to represent a drain on the resources of the companies which own them.  The evidence establishes, at least prima facie, that they cost of the order of half a million dollars per annum to maintain and that they are irrelevant to the conduct of the rest of the Tipperary property as a cattle station because there have been a number of improvements erected on what is called the "Honeymoon Hill" site from which the cattle property can be adequately conducted.

It is apparently the intention of Aman, which is a well known Asian tourist site operator, to convert the Tipperary homestead, after the expenditure of some millions of dollars, into a vacation or tourist site presumably designed to attract tourists from other parts of the world, especially Asia.  The alleged arrangement with Aman is that it will take a lease of the site for some 30 years and that it will pay a basic rent of the greater of $200,000 per annum and 7.5 per cent of gross turnover of the tourism complex.  It is not suggested that the 7.5 per cent figure is likely to exceed $200,000 in the near term but Aman apparently wishes to have access to the site early in August this year in order to commence the improvements necessary to translate it into an appropriate tourist facility.  If it does not get access to the site by such time, it will not be possible to perform sufficient of the improvements by the beginning of the next wet season as to make the site available for tourism in the 1996 dry season.

Hence the matter attains some degree of urgency.  Moreover, it is said that if the Aman group cannot get access to the property by the middle of August, it may pull out from the deal altogether.  There is no evidence that it will do so if the time frame is not met but that is the way in which the case is presented.

The applicants point to the fact that virtually no objective evidence by way of audited accounts has been brought to show that the respondent companies are in fact losing the sums claimed in respect of the upkeep and maintenance of the Tipperary homestead but there is no contrary evidence and there is oral evidence that this cost is correct.  Some little support for that oral evidence has been presented and I am prepared to proceed, and think I ought to proceed, on the basis that it is fundamentally correct.

Thus the arguments against the assertions of the applicants are these:

1. Although the $200,000 rent is agreed to be a very small return on the capital expended, the Tipperary homestead in particular is hopelessly overcapitalised and therefore the rent cannot be assessed on the usual basis of a proportion of capital value.

1. No options other than the rental proposition have been seriously presented to the respondents to enable them to reduce their losses.

The respondents argue that the applicants are "spoilers" in this operation.  They point out firstly that the arrangement which exists at the moment is that the first applicant, a company controlled I think by the second applicant, is to be a minority shareholder in one or other or both of the respondent companies but the shares which it is to have are to be paid for out of dividends declared from time to time.  As no such dividends have yet been declared and are unlikely in the foreseeable future, the shares are wholly unpaid for at the present time and will remain so for some time.

In addition, the second applicant has been seeking appointment as a director of one or other or both of the respondents but this has been denied.  Accordingly, the respondents argue that a company which is at the present time an unpaid shareholder and its controller who is not a director of the companies with ultimate responsibility for looking after the assets, are seeking some form of veto over the companies' actions.  They say that the respondent companies are being funded entirely by the third respondent's group of companies, that they are in a position to know that the resources of those entities are being drained to maintain the Tipperary homestead, and that in all the circumstances that situation cannot be allowed to continue.

In these regards there was significant evidence that the applicants have over some time been seeking a purchaser for the whole of the property.  The applicants say that to hive off the Tipperary homestead for leasing would substantially reduce the capacity to sell the whole property or would reduce the price that could be obtained for it because the homestead area would have been demised for 30 years.  Evidence was given of some four or five potential purchasing situations.  There is one still spoken of, namely the Government of Azerbaijan, but it is very difficult for me to treat this suggestion with any great seriousness because no evidence other than of trips by Mr Anderson to Baku has been led in support of the suggestion that the Government of Azerbaijan is a serious potential purchaser of the properties.  If it is, nothing has been vouchsafed about what it is prepared to pay for the properties.  I am asked not to
speculate about the matter, which is, I suppose, a reasonable enough request at this stage of the case.  At the same time, when a minority shareholder who has not yet paid for its shares is seeking to upset a decision of companies taken by the directors whose duty under the law is to act in the interests of all the shareholders, I think that a certain degree of critical analysis must be undertaken.  Especially is this so when it is suggested that the reason why an injunction should go to prevent that decision of the directors taking effect is that they are not acting in the interests of the shareholders and preserving the value of the property concerned.

I am afraid that I look with some degree of scepticism at the idea of a purchaser being in the wings, when evidence could have been brought by the applicants to give some confidence in any realistic possibility, and at the suggestion that only time was necessary in order to secure a satisfactory deal.  There is, as I have said, some evidence about the matter, but it falls very far short of anything persuasive that the offer was realistic enough to support a minority shareholder's attack on the directors' decision.

The evidence is that the directors would willingly sell the whole property to any genuine purchaser, and would not hesitate to substitute a real and reasonable offer for the proposed lease to Aman.  With all the restrictions appropriate for the stage this litigation has reached, I accept that evidence for present purposes.  But the past experience of the directors, as the evidence also reveals, and I also accept on the same basis, is
that a number of proposed purchasers have come and gone without anything emerging that made realistic the likelihood that the Azerbaijani Government was not going to follow the same course as all previous candidates.

Even now, as it seems to me, it is unlikely that the lease with Aman is going to be signed, sealed and delivered shortly.  No doubt there are many matters still to be negotiated to enable the lease to be finalised.  It seems to me quite unlikely that the respondents would go ahead with Aman if, in the period between now and the latest time the lease needs to be signed, a real purchaser came forward for the whole of the property at a realistic price.

What has struck me from the evidence is that the fact that this property was conceived, substantially inspired, and built by the second applicant, and the affection he obviously has for it, have resulted in his forming a very elevated view about its likely popularity as a sale proposition on the general market.  In fact, the evidence has adequately established that the property is heavily overcapitalised, that it provides such a unique and elite level of facilities as to exclude the vast majority of potential purchasers, and that the worldwide market for such a property must, of necessity, be extremely limited.  The likelihood of a purchaser emerging for the total property in one line is very remote indeed.

Indeed, that is what has in fact occurred.  The consequence is that if the applicants are to succeed at the trial, it may have to be established that the directors of the respondent companies are acting selfishly, or with at least some degree of self-interest or egotism, or with some idea of oppressing or causing duress to the minority shareholder and perhaps other shareholders, if there are any.  A conclusion may have to be reached that the directors' decision to lease to Aman was taken, in effect, in defiance of the interests of the company as a whole.  The reasoning would be that unless some evidence to this effect was available, it would not in the circumstances be possible to say that the applicants had made out a case for the continuing injunction.

I have formed no conclusion that that type of approach could even really be argued in the matter at this stage.  It is certainly possible that if the directors proceed with the Aman lease they will make a decision with which others could disagree.  I mentioned during the hearing that it was invidious to constitute a court as a type of mediator between competing views in companies as to what was in their best interests, particularly in an interlocutory matter where the evidence is very sparse, there is very little material upon which such a decision could be made, and there is clearly a battle for control of the respondent companies or their properties.

With a property of this size and significance, that task is even harder.  What I have seen is a large number of photographs of the property.  I have heard evidence from valuers, but have seen virtually no accounts, and know very little of the history of the matter other than as I have outlined.  In addition there was presented today an affidavit by the second applicant very largely consisting of correspondence which has gone between the parties in the period June-July 1995.  The effect of this correspondence is to make the Court aware of the fact that on 28 June the applicants made an offer to the respondents to lease the homestead area for some 30 years, or a lesser term if the respondents wish, at an annual rental of $250,000.  They said in this respect that this offer was substantially better than the offer from Aman.

It is not necessary for me to determine that matter right now, but what can be said about it is that although the annual rental offered is more than the base rent offered by Aman, it does not contain the alternative 7½ percent of gross turnover when that exceeds $200,000.  The offer was subsequently rejected, although there was an exchange of correspondence suggesting that it was being treated as a serious offer.  It has in fact not been suggested here, and has been specifically denied, that the respondents do not accept it as a serious offer and do not accept that the offer would subsist after today if the continuing injunction is refused.

The significance of the offer is that it contained two special additions.  One is that if a buyer was found for the whole of the Tipperary Station, the applicants would be willing to negotiate
a surrender of the lease after the repayment of any capital outlay to enable the best possible sale to be negotiated.  As framed, that offer amounts to an effective veto by the applicants on the proposed or suggested purchase.  As an alternative, the applicants said that they were willing to stand by an earlier offer of December 1994 to enter into a lease of the whole station for a term to be agreed at an annual rental of half a million dollars.

As I said, these offers were all refused by letter of today's date from the solicitors for the respondents.  Once again, as it seems to me, these are decisions which have been made by the directors and once again, unless it can be suggested that the directors have acted in disregard of their legal obligations to the shareholders of the company and to the company as a whole, it would not be sufficient to my mind to support the continuing grant of the injunction.  I take the view that if a minority shareholder wishes to upset the decision of directors, which this injunction would have the effect of doing, there should at least be presented some evidence which could be argued on a final hearing to constitute a basis for believing that the directors of the respondent companies have made a decision which is not only incorrect, but is one which they have made in effect in disregard of or inattentive to their duties to shareholders as directors of companies.  I have seen no such evidence and gained no such impression from listening to what evidence has been presented.

In the circumstances, it is my view that the injunction should not be continued.  I therefore dismiss the application for interlocutory injunction number 1 as set out in the amended application filed on 30 June 1995.

AFTER FURTHER ARGUMENT

I order that the applicants pay the respondents' costs to be assessed.