Passey v South American Trading Company Pty Ltd as trustee for the Gardner Family Trust No 4
[2022] FCA 295
•29 March 2022
FEDERAL COURT OF AUSTRALIA
Passey v South American Trading Company Pty Ltd as trustee for the Gardner Family Trust No 4 [2022] FCA 295
File number(s): QUD 396 of 2020 Judgment of: DOWNES J Date of judgment: 29 March 2022 Catchwords: CORPORATIONS – oppression proceedings – shares transferred to plaintiff pursuant to consent order of Family Court – plaintiff obtained financial records and shareholders’ agreements prior to becoming shareholder – plaintiff also had access to company’s records on request – after becoming shareholder, plaintiff alleged oppression in relation to business decisions made and agreements entered previously which had consent of all directors and shareholders – plaintiff also made allegations about failure to buy her shares according to formula in shareholders’ agreement to which she was not a party – plaintiff able to sell shares to third party – oppression not established Legislation: Corporations Act 2001 (Cth) ss 53, 180, 181, 182, 232, 233
Income Tax Assessment Act 1936 (Cth) Div 7A
Cases cited: Allways Resources Holdings Pty Ltd v Samgris Resources Pty Ltd (2017) 121 ACSR 1; [2017] QSC 74
BAM Property Group Pty Ltd as trustee for BAM Property Trust v Imoda Group Holdings Pty Ltd [2019] FCA 1192
Catalano v Managing Australia Destinations Pty Ltd (2014) 314 ALR 62; [2014] FCAFC 55
Exton v Extons Pty Ltd (2017) 53 VR 520; [2017] VSC 14
Hillam v Ample Source International Ltd (No 2) (2012) 202 FCR 336; [2012] FCAFC 73
Hylepin Pty Ltd v Doshay Pty Ltd (2020) 148 ACSR 30; [2020] FCA 1370
Hylepin Pty Ltd v Doshay Pty Ltd (2021) 156 ACSR 562; [2021] FCAFC 201
Power v Ekstein (2010) 77 ACSR 302; [2010] NSWSC 137
Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd (2004) 207 ALR 136; [2004] FCAFC 153
Wayde v New South Wales Rugby League Limited [1985] HCA 68; (1985) 180 CLR 459
Wilmar Sugar Australia Limited v Mackay Sugar Limited (2017) 120 ACSR 1; [2017] FCAFC 40
Division: General Division Registry: Queensland National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 227 Date of last submissions: 9 February 2022 Date of hearing: 1-3 February 2022 Counsel for the Plaintiff: Mr S Hogg Solicitor for the Plaintiff: Sajen Legal Counsel for the Defendants: Mr M Stunden Solicitor for the Defendants: Thomson Geer ORDERS
QUD 396 of 2020 BETWEEN: TALITHA PASSEY
Plaintiff
AND: SOUTH AMERICAN TRADING COMPANY PTY LTD ACN 124 055 830 AS TRUSTEE FOR THE GARDNER FAMILY TRUST NO.4
Fourth Defendant
GUNNA PTY LTD ACN 071 282 436 AS TRUSTEE FOR THE DARREN WALLIS FAMILY TRUST
Fifth Defendant
THEBIGIDEA PTY LTD ACN 133 362 937 (and another named in the Schedule)
Sixth Defendant
ORDER MADE BY:
DOWNES J
DATE OF ORDER:
29 MARCH 2022
THE COURT ORDERS THAT:
1.The plaintiff’s claim is dismissed.
2.By 4 April 2022, the parties shall file and serve submissions as to the appropriate costs orders to be made (limited to 5 pages).
3.By 8 April 2022, the parties shall file and serve any submissions in reply to the submissions filed pursuant to order 2 (limited to 5 pages).
THE COURT NOTES THAT:
1.The parties are not required to provide further submissions about the costs orders to be made in relation to the dismissal of the proceeding against the former first, second and third defendants.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
DOWNES J:
INTRODUCTION
[1]
RELEVANT LEGAL PRINCIPLES
[29]
GENERAL BACKGROUND
[42]
ISSUES
[75]
Conduct in relation to non-payment of dividends
[76]
Conduct in relation to loan to Total Fitouts Corp Pty Ltd
[89]
Ms Passey’s contentions
[89]
Relevant facts
[92]
Consideration
[102]
Conduct in relation to loan to the Canadian Company
[114]
Ms Passey’s contentions
[114]
Relevant facts
[118]
Consideration
[132]
Conduct in relation to the failure to cause Ms Passey to become a party to the Company’s shareholders’ agreement
[149]
Conduct in relation to failure to offer to buy Ms Passey’s shares
[157]
Conduct in relation to payment of fees to Mr Gardner and Mr Darren Wallis
[166]
Whether fees were excessive
[169]
Whether Mr Gardner and Mr Darren Wallis were required to vacate their positions
[182]
Conclusion
[195]
Conduct in relation to payment of legal fees of directors and other shareholders
[196]
Does the cumulative conduct constitute oppression?
[205]
Whether any relief ought to be granted
[212]
CONCLUSION
[225]
INTRODUCTION
Ms Talitha Passey, a 25.5% shareholder in the seventh defendant (the Company), seeks orders under s 233 of the Corporations Act 2001 (Cth) (Act) to remedy alleged oppression, unfair prejudice and unfair discrimination and conduct which she alleges is contrary to the interests of the members as a whole.
The Company is a franchisor for the franchise known as “Smith & Sons Renovations & Extensions”. The Company operates a business in the residential construction industry in Australia and New Zealand, providing a range of renovation and extension services.
The Company was founded by Mr Greg Gardner, who also founded G J Gardner Homes (G J Gardner Homes). G J Gardner Homes is a well-known and reputable construction company.
In a shareholders’ agreement entered in 2009, to which the Company and all of its (then) directors and shareholders were parties, the parties to that agreement expressed an intention to expand the Company’s business internationally. The Company later expanded its franchise operations into Canada, and has financed a related company in Canada to enable it to set up its business and continue to operate.
Ms Passey received a copy of the shareholders’ agreement on 5 October 2017, which was a year before she became a shareholder. She agreed that one of the objects of the Company was to expand its franchise brand internationally and that, in furtherance of that object, a decision was made to expand into Canada. Ms Passey also agreed that the decision to expand into Canada was done with the goal of improving the image, brand and value of, the Company and that improving the brand is a benefit to the Company.
In this proceeding, Ms Passey complains about the loans which had been made to the company in Canada, including loans made prior to when she became a shareholder and for two years after that date, to which she raised no objection.
The shareholders’ agreement entered in 2009 also provided that two of its directors would not initially “draw a wage” from the Company but would be paid in accordance with a clause which was agreed upon by all directors and shareholders at that time.
In this proceeding, Ms Passey complains about the quantum of fees paid to these two directors in 2017 and 2018 (being before she became a shareholder in October 2018) as well as 2020 and 2021. Although she claims that the fees are excessive, Ms Passey does not contend that the payments have not been made in accordance with the shareholders’ agreement.
In 2015, the Company entered into another shareholders’ agreement in relation to another Australian company. Pursuant to that agreement, it agreed to loan money to another company which was set up in Australia to be a franchisor for the provision of services relating to commercial fitouts. That agreement also had the consent of all of the directors and shareholders of the Company at the time that it was entered. Ms Passey was provided with a copy of this shareholders’ agreement in October 2017.
In this proceeding, Ms Passey complains about the loans which had been made by the Company to this Australian company, including loans made prior to when she became a shareholder and for two years after that date, to which she raised no objection.
In 2015, Mr Corey Passey, Ms Passey’s ex-husband and a former director of the Company, arranged for the Company to borrow funds and then to distribute some of those funds to the Company’s shareholders, including a family trust entity connected with Mr and Ms Passey. That distribution was recorded as a loan in the Company’s books, and dividends which were declared by the Company in subsequent years were effected by recording a reduction in the shareholder loans, rather than by paying any funds to shareholders directly. This was in accordance with an agreement of all of the shareholders at that time.
In this proceeding, Ms Passey complains about the Company’s conduct around allocating 80% of the loan to her shareholding and not paying declared dividends to her, although all dividends were later paid to her by no later than January 2021 and there is no evidence that the same conduct will occur again.
In October 2018, Ms Passey became a shareholder of the Company as part of a matrimonial property settlement with Mr Passey. This was pursuant to a consent order of the Family Court of Australia.
The shareholders’ agreement for the Company required that the transferor (being the family trust entity) cause Ms Passey to enter a deed to become bound by that agreement, but no deed was entered.
After becoming a shareholder, Ms Passey did not play any active role in the business operated by the Company. Nor did she make any request to become a party to the shareholders’ agreement.
Ms Passey first complained about the affairs of the Company in around mid-2020, when she learned through the Company’s accountant, Mr Daniel Hill, that 80% of the shareholder loan had been allocated to her shares and that dividends which had been declared by the Company would be applied in reduction of this loan (as was the case with the other shareholders).
During the second half of 2020, lawyers for the parties sought to settle the dispute by negotiating the terms of Ms Passey’s exit from the Company.
During these negotiations, the Company expressed a willingness to have an independent third party value Ms Passey’s shares, and to enter into a binding share sale agreement in which the purchase price would be determined by the valuation. The Company also proposed that the payment of the disputed dividends be included in the transaction and be paid on completion of the purchase of the shares.
The negotiations reached the stage that the parties were exchanging a version of a written agreement with tracked changes.
During the negotiations and likely in an attempt to exert pressure on the Company, Ms Passey raised complaints for the first time about other matters to do with the affairs of the Company and some of those complaints have found their way into the statement of claim in this proceeding.
The belated complaints by Ms Passey were rejected by the Company which offered to enter into an agreement with Ms Passey to acquire her shares, failing which it stated that Ms Passey could sell her shares to a third party subject to the defendants agreeing to the proposed incoming shareholder.
Ms Passey did not attempt to sell her shares to a third party which she could have done (according to her the oral evidence of her expert at the trial). Instead, by an originating application filed on 18 December 2020, Ms Passey commenced these proceedings.
In her originating application as filed, Ms Passey sought declarations that the directors of the Company have acted in contravention of ss 180, 181 and 182 of the Act and equitable damages “for loss arising from the aforementioned breach of duty”. The claim for this relief was dismissed during the trial, which dismissal was not opposed, and there is an outstanding issue of the appropriate costs order.
By her originating application, Ms Passey also seeks:
3.An order in terms of Section 233(1)(d) of the Act that the Shareholders purchase the shares of the Applicant in the Company at fair market value.
4.In the alternative, an order in terms of Section 233(1)(e) of the Act that the shares of the Applicant in the Company be purchased by the Company by way of a reduction in share capital.
5.In the further alternative, an order that the Company be wound up pursuant to the following provisions of the Act:
(a)section 233(1)(a) on the grounds set out in sub-sections 232(a), (d) and (e) of the Act; and/or
(b)section 461(1) on the grounds set out in sub-section 461(1)(e), (f), (g) and (k) of the Act.
6.An order pursuant to sub-section 472(1) of the Act, a registered liquidator be appointed to the Company.
During closing submissions, it was made plain that Ms Passey seeks nothing less than an order compelling the other shareholders or the Company to buy her shares.
Further, by her closing submissions, Ms Passey maintained her claim for an order that the Company be wound up, although her counsel conceded that the Company was solvent and that third parties (such as employees and franchisees) would be prejudiced by such an order. Such an order did not appear to be seriously pressed.
By her statement of claim filed on 14 October 2021, Ms Passey maintains her complaint about the previous failure to pay dividends to her, although that failure was rectified. She also makes other complaints including about the loans being made to related companies, that she was not invited to become a party to the shareholders’ agreement, that no offer has been made to acquire her shares pursuant to that agreement and about the quantum of fees paid to two directors in 2017, 2018, 2020 and 2021. Ms Passey also complains that the Company has paid all of the defendants’ legal costs associated with this dispute.
For the reasons below, the claim by Ms Passey will be dismissed.
RELEVANT LEGAL PRINCIPLES
Section 232 of the Act provides that the Court may make an order under s 233 of the Act if the conduct of the company’s affairs, or an actual or proposed act or omission by or on behalf of the company, or a resolution or proposed resolution of the members or a class of members of the company, is contrary to the interests of the members as a whole (s 232(d)) or is oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity (s 232(e)).
The ‘affairs’ of a body corporate are described broadly, including for the purpose of s 232 and s 233, in s 53 of the Act. Those affairs include the formation, membership, business, transactions and dealings, property, profits and liabilities of the company (s 53(a)); the internal management of the body (s 53(c)); the ownership of shares in the body (s 53(e)); the powers of persons to exercise voting rights (s 53(f)); and the circumstances of the acquisition or disposal of shares in the body (s 53(h)): Hylepin Pty Ltd v Doshay Pty Ltd (2021) 156 ACSR 562; [2021] FCAFC 201 at [123] (Hylepin (FC)). It was not in dispute that all of the allegations made in the statement of claim fall within the scope of the affairs of the Company within the meaning of s 232 of the Act.
The task of deciding whether there has been conduct “contrary to the interests of the members as a whole” involves an objective assessment of whether the conduct adheres to accepted standards of corporate behaviour or is in accordance with how reasonable directors would act in attending to the affairs of the company: see Allways Resources Holdings Pty Ltd v Samgris Resources Pty Ltd (2017) 121 ACSR 1; [2017] QSC 74 at [24]; also Hylepin Pty Ltd v Doshay Pty Ltd (2020) 148 ACSR 30; [2020] FCA 1370 at [26] (Hylepin (SJ)).
The expression “oppressive to, unfairly prejudicial to, or unfairly discriminatory against” is a compound expression, meaning that it does not involve separate tests for the elements within it: see Hillam v Ample Source International Ltd (No 2) (2012) 202 FCR 336; [2012] FCAFC 73 at [4]
The essential focus under s 232(e) of the Act is on whether there has been commercial unfairness in the conduct of the affairs of the company: see Hylepin (SJ) at [24]:
The phrase “oppressive to, unfairly prejudicial to, or unfairly discriminatory against” in 232(e) is … concerned with conduct that involves “commercial unfairness”, or “a departure from the standards of fair dealing, or where a decision has been made so as to impose a disadvantage, disability or burden on the plaintiff that, according to ordinary standards of reasonableness and fair dealing, is unfair”: Re Ledir Enterprises Pty Ltd (2013) 96 ACSR 1; [2013] NSWSC 1332 at [178] per Black J. Whether there has been “unfairness” in the requisite sense is to be judged objectively: Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459 at 472-473… per Brennan J. The relevant test is “whether reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other, would have decided that it was unfair to make that decision” (Wayde at CLR 472-473; ALR 234-235; ACLR 96 per Brennan J) or whether “objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair”: Catalano v Managing Australia Destinations Pty Ltd (2014) 314 ALR 62; [2014] FCAFC 55 at [9].
This summary of principles was not challenged on appeal in Hylepin (FC) at [131], which stated at [126] that “the section requires proof of oppression or proof of unfairness. Proof of mere prejudice to or discrimination against a member is insufficient to attract the court’s jurisdiction to intervene”.
The Full Court in Hylepin (FC) also observed at [128] that:
It was noted that mismanagement alone does not constitute oppression, and a court is concerned ‘to avoid an unwarranted assumption of the responsibility for management of the company’: Wayde at CLR 467; ALR 231; ACLR 92 (Mason ACJ, Wilson, Deane and Dawson JJ).
In Catalano v Managing Australia Destinations Pty Ltd (2014) 314 ALR 62; [2014] FCAFC 55 at [9], it was observed that:
The test of unfairness requires an objective assessment of the conduct in question with regard to the particular context in which the conduct occurs. The question is whether objectively in the eyes of the commercial bystander there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair. As the test is objective, whether or not the conduct is oppressive will not depend upon the motives for what was done. It is the effect of the acts that is material.
(citations omitted)
The Full Court also observed the following in Wilmar Sugar Australia Limited v Mackay Sugar Limited (2017) 120 ACSR 1; [2017] FCAFC 40 at [73]:
While the test is objective, in the sense that the purpose or motive of the decision-maker cannot be determinative, purpose or motive may nevertheless be relevant. For example, if the decision-maker was motivated to make a decision to achieve some particular unfairness against a member, that fact might enable it to be concluded more readily that the effect of the decision is as the decision-maker intended (namely, unfair).
In this case, no allegation is made in the statement of claim that any of the defendants acted with any particular purpose or motive. Such a matter should have been pleaded in order to give the defendants fair notice of the case to be made against them at the trial.
In Hylepin (FC), the Full Court considered whether a course of conduct could amount to oppression, even if individual acts do not, and stated as follows:
[133] It can be accepted that findings as to oppressive conduct may be founded on a whole course of conduct. In Aqua-Max, the Court of Appeal observed that:
[61]…There are numerous cases which look to the effect (including the cumulative effect of all the various pieces of unfairness) independently of the question whether the alleged oppressor's actions are legal or comply with the article of association …
[134] Where a course of conduct is relied upon, it is appropriate to have an overview. In John J Starr (Real Estate), Young J said at 72 that:
Although in this sort of case one needs to have an overview, and sometimes a series of a relatively minor matters can add up to oppressive conduct, I think the way to deal with the evidence is … to deal with each of the 16 counts and then draw the various threads together.
…
[136] We accept, however, that depending on the circumstances, an accumulation of conduct, even where none of the separate matters of conduct is found to be oppressive, may have that result.
In this case, the statement of claim pleads each set of facts as falling within either s 232(e) or both ss 232(d) and (e), but does not plead that all of the alleged conduct taken together falls within those sections of the Act. Notwithstanding this, the separate allegations in the statement of claim have also been considered in these reasons as constituting a course of conduct. The defendants’ written closing submissions contemplate that the conduct will be considered collectively as well as individually and so there is no prejudice to them in this regard.
In Exton v Extons Pty Ltd (2017) 53 VR 520; [2017] VSC 14, Sifris J observed at [39] that:
From a review of the authorities the better view is that s 232(d) is separate and distinct from s 232(e) and that a breach may not necessarily involve commercial unfairness. The Court is required to examine all of the relevant facts and circumstances in order to determine whether the conduct under scrutiny is in the best interests of the company as a whole, apart from its members. In this context breaches of duty (whether statutory or fiduciary) by directors and officers may well be conduct that is not in the best interests of the company as a whole. Whether breaches of duty in a small family company, where there is an overwhelming identity of interest between shareholders and directors, fall within the sections is a related matter. There is authority … to the effect that where there is consent or ratification of such conduct, it may, in context and in the circumstances, not be contrary to the interests of members as a whole or indeed unfair.
(emphasis added)
GENERAL BACKGROUND
The Company is a relatively small, private entity which operates within the residential construction industry as the franchisor of the Smith & Sons franchise within Australia and New Zealand. It was described by Mr Peter Haley, the expert called by the Company at trial, as “not a big business at all”.
The Company was established in 2006 by Mr Gardner, Mr Darren Wallis and Mr Passey. At that time, Mr Passey and Ms Passey were married.
Cortal Pty Ltd as trustee for the Passey Family Trust (Passey Family Trust) was one of the original shareholders of the Company along with the fourth, fifth and sixth defendants. These shareholders executed a shareholders’ agreement on around 1 November 2009 which was also executed by Mr Passey, the Passey Family Trust, the Company and others.
Mr Leigh Wallis became a director of the Company in 2011.
Total Fitouts Corp Pty Ltd was incorporated in Australia on 11 October 2013 for the purposes of operating a similar business to that of the Company, but in relation to commercial fitouts. Shortly after its incorporation, its shareholders entered into a shareholders’ agreement dated 15 October 2013. The parties to that agreement included Mr Passey, the Passey Family Trust, the Company and another company called Total Fitouts Group Pty Ltd. In addition, Mr Darren Wallis, Mr Leigh Wallis, Mr Gardner and Mr Jeremy Dyer were also parties. It is common ground on the pleadings that the fourth, fifth and sixth defendants were also parties.
Pursuant to that agreement, the Passey Family Trust was allocated shares in both Total Fitouts Corp Pty Ltd and Total Fitouts Group Pty Ltd, and the directors included Mr Passey. The Company agreed to advance funds to Total Fitouts Corp Pty Ltd pursuant to that agreement, and subsequently did so.
On 15 June 2015, the Company obtained a loan from the Australia and New Zealand Banking Group Limited for $350,000.
In July 2015, the Company advanced some of the funds out of the proceeds of the ANZ Loan to each of its shareholders as loans pursuant to Division 7A of the Income Tax Assessment Act 1936 (Cth) including the amount of $60,000 to the Passey Family Trust. At some stage between this advance and prior to 30 June 2016, Ms Passey received the sum of $22,857 as income from the Passey Family Trust which was derived from the payment made to it of $60,000.
On 30 July 2015, the shareholders signed loan agreements with the Company which included an agreement to pay interest and make certain minimum repayments and with a term of seven years. The shareholders also agreed on this date that, instead of dividends being paid pursuant to their respective shareholdings in the Company, any declared dividends would be applied to reduce the outstanding amount of the loans.
For the financial years of 2016 (and, indeed, until 2019) and in accordance with the agreement reached between the shareholders, the dividends declared by the Company were applied to reduce the amounts owing by each of the shareholders pursuant to their loans.
On 26 August 2016, Ms Passey sent an email to Mr Hill, copied to Mr Passey, thanking him for documents (which appear to have been attached to an email of 12 August 2016) and stating:
… I would also like to see the full financials for these companies and any others that you may have. Could you please explain the adjustments that have been made in the smith and sons statement, in particular the consulting fees and wages.
On 8 September 2016, Mr Hill sent an email to Ms Passey in response, attaching the financial statements and tax returns for the Company and Total Fitouts Corp Pty Ltd for 2014 – 2016, and noting in the covering email that the 2016 figures are draft figures only.
It is common ground that the Company entered into a loan agreement on or around 3 November 2016 with a company incorporated in British Columbia, Canada called Smith & Sons Remodeling Experts Canada Inc (which the parties and witnesses called the Canadian Company during the trial, and so I will adopt the same terminology). The Company agreed to advance funds to the Canadian Company pursuant to that agreement.
An Australian company called Smith & Sons Remodeling Experts Canada Pty Ltd owns 80% of the shares in the Canadian Company. Ms Passy’s counsel called this company the Australian Canadian Company and I will adopt the same terminology.
In 2016 and with the consent of all of its members, the Company commenced to advance funds to the Canadian Company on an unsecured and interest free basis. It has advanced various amounts over a period of approximately five years, with only a small sum being repaid to date. These advances were approved by the directors, some of whom have experience in setting up businesses overseas. Both Mr Darren Wallis and Mr Leigh Wallis gave uncontradicted evidence at trial which justified the continued advances for commercial reasons and which was to the effect that it appeared that advances to the same level would no longer be required.
Mr Leigh Wallis replaced Mr Passey as Chief Executive Officer of the Company in 2017.
On 5 October 2017, Mr Hill sent an email to Mr Passey and Ms Passey which attached certain documents showing his calculations of the share value in the Company and in Total Fitouts Corp Pty Ltd, taking into account profit and loss statements for the 2016 and 2017 financial years. The email also attached the signed shareholders’ agreements for each of those companies.
Mr Passey ceased to be a director of the Company in November 2017.
On 29 January 2018, in response to a request for this information dated 22 January 2018, Mr Hill sent an email to Ms Passey attaching the financial statements and tax returns for the Company, Total Fitouts Corp Pty Ltd and the Passey Family Trust.
On 31 January 2018, Mr Darren Wallis sent an email to Ms Passey offering to pay the Passey Family Trust “$300,000 payable as $100,000 over 3 years (paid Monthly)” for its shares in the Company. Mr Wallis referred to the Company being in a “cash flow issue” and noted that “GJ will loan [the Company] when needed to ensure [the offer] is paid”.
Ms Passey replied to Mr Wallis’ offer on 6 February 2018:
Hi Darren, Leigh and Jeremy
Just wanted to clarify that the shares for both Smith and Sons and Total Fitouts are still held by Cortal Pty Ltd in the The Passey Family Trust of which Corey is the sole director. However, I have a court order that states that he is not authorised to sell, transfer or otherwise deal in the shares unless I have approved the such. Corey & I have come to an agreement (which is soon to be transferred into Consent Orders) that I will receive either 80% of the shares to retain or 80% of the share sale proceeds if we are made an agreeable offer. Also just to clarify, we are able to negotiate & agree on a sale price of the shares before consent orders are issued and I have released Corey to negotiate the sale of his percentage of the shares if he wishes to do so. I hope this clears up things up a bit.
On 7 February 2018, Mr Darren Wallis stated that the offer of 31 January was open until 4.00 pm on 9 February 2018. Ms Passey replied to this email at 1.50pm on 8 February 2018 confirming an “in principle acceptance of the offer however there are some pertinent details” that she wanted to negotiate with Mr Wallis.
On 14 February 2018, after a meeting between them on 12 February 2018, Mr Darren Wallis sent an email to Ms Passey with another offer to purchase 24% of the shares in the Company for $300,000 payable by an initial instalment of $70,000 and thereafter $10,000 per month until the sum was paid.
On 23 March 2018, Mr Darren Wallis sent a follow up email asking how the settlement was progressing between Ms Passey and Mr Passey. Ms Passey requested additional time.
On 27 March 2018, Mr Darren Wallis sent an email to Ms Passey confirming that the solicitors would “hold fire” for two weeks being 10 April 2018. On 8 April 2018, Ms Passey emailed Mr Wallis that she was in contact with her lawyer and her lawyer is “starting the documents on [12 April 2018]”.
On 3 May 2018, Mr Wallis sent an email to Ms Passey requesting an update as he was “about to start the budgeting process with GJ”. Ms Passey did not respond to this email.
In about June 2018, Mr Darren Wallis called Ms Passey and informed her that the Company was withdrawing the 14 February 2018 offer.
On 10 August 2018, a consent order was made by the Family Court which contained the following orders:
6. That within thirty (30) days of the date of these orders, the Respondent in his capacity as the Director of Cortal Pty Ltd ACN 127 410 119 as trustee for the Passey Family Trust transfer to the Applicant 48 ordinary shares in Smith and Sons Renovations & Extensions (Aust) Pty Ltd ACN 119 427 119 and the said shares shall thereafter be the sole and separate property of the Applicant.
7.That within thirty (30) days of the date of these orders the Respondent in his capacity as the Director of Cortal Pty Ltd ACN 127 410 119 as trustee for the Passey Family Trust transfer to the Applicant sixteen (16) ordinary shares in Total Fitouts Group Pty Ltd ACN 166 219 932 and the said shares shall thereafter be the sole and separate property of the Applicant.
…
16. That unless otherwise specified in these orders and except for the purposes of enforcing the payment of any money under these or any subsequent orders:
...
(e) Each party be solely liable for and indemnify the other against any liability encumbering any item of property to which that party is entitled pursuant to these orders; and
…
NOTATIONS
1. In the event the Respondent in his capacity as the Director of Cortal Pty Ltd as trustee of the Passey Family Trust enters into an agreement for the sale of the shares in Total Fitouts Group Pty Ltd prior to these orders being made, then in lieu of the transfer of shares to the Applicant in paragraph 7 above, a distribution of $80,000 shall instead be made to the Applicant from the Passey Family Trust.
This order was made to reflect a property settlement between Mr and Ms Passey who had obtained a divorce.
Mr Passey sold the shares in Total Fitouts Group Pty Ltd prior to the consent order being made and so Ms Passey received $80,000 in lieu of shares in that company.
After Ms Passey became the registered owner of 48 shares in the Company on 30 October 2018, Mr Hill effected a book entry transferring 80% of the loan balance owing by the Passey Family Trust to the Company to Ms Passey’s shares.
On 30 June 2019, the Company declared an unfranked dividend for the 188 shares in the Company in the amount of $154,000. On 30 June 2020, the Company declared an unfranked dividend for the 188 shares in the Company of $60,276. The declared dividends were applied to reduce the loan which was now recorded against Ms Passey’s loan. This was also done in relation to the other shareholders – that is, no amount was paid to any shareholder. Rather, the amount was applied as a book entry to reduce the loan recorded as being owed by each of the shareholders.
Complaint was made by Ms Passey about the non-payment to her of the dividends. Between July 2020 and December 2020, the parties engaged in unsuccessful negotiations, including through their respective solicitors, for the purposes of having Ms Passey exit the Company, and these proceedings were then commenced.
ISSUES
Having regard to the pleadings, the following issues arise:
(1)was the conduct of the directors in relation to the non-payment of dividends to Ms Passey for 2019 and 2020 financial years oppressive to, unfairly prejudicial to or unfairly discriminatory against her?
(2)was the entry by the Company into agreements in 2015 (Total Fitouts Corp Pty Ltd) and 2016 (Canadian Company), and the provision of loans to those companies pursuant to those agreements, contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to or unfairly discriminatory against Ms Passey?
(3)was the failure to cause Ms Passey to become a party to the shareholders’ agreement or offer to buy her shares at a price of $1,847,807.14 oppressive to, unfairly prejudicial to or unfairly discriminatory against her?
(4)was the Company’s payment of fees to Mr Gardner and Mr Darren Wallis in 2017 – 2021 (other than 2019) contrary to the interests of the Company’s members as a whole and oppressive to, unfairly prejudicial to or unfairly discriminatory against Ms Passey?
(5)was the payment of the defendants’ legal fees in relation to the dispute with Ms Passey contrary to the interests of the Company’s members as a whole and oppressive to, unfairly prejudicial to or unfairly discriminatory against Ms Passey?
(6)does the conduct, if established and considered on a cumulative basis, constitute oppression?
(7)what, if any, relief should be granted?
Conduct in relation to non-payment of dividends
The following is a summary of key facts relating to this claim which are either common ground or were not controversial:
(1)on 15 June 2015, the Company obtained a loan from ANZ for $350,000;
(2)each of the shareholders of the Company as at July 2015 agreed to take a loan from the Company on the condition it would be pursuant to Division 7A of the Income Tax Assessment Act;
(3)between 21 and 24 July 2015, each of the shareholders, including the Passey Family Trust, received a cash injection from the loan received from ANZ;
(4)Ms Passey's income in the 2016 financial year included a distribution from the Passey Family Trust of $22,857;
(5)Ms Passey was aware of the shareholder loan because, on 28 March 2018, Mr Hill raised the shareholder loan issue with Ms Passey, asking her in an email of that date, “What happens to the Shareholder loan between Passey Trust and Smith and Sons? I suggest you discuss this with Darren”;
(6)on 20 April 2018, Ms Passey sent an email to Mr Hill in response which stated:
Thanks for highlighting those couple of concerns for me. In relation to the shareholders loan, I will discuss this with Darren. I will ask that Smith and Sons officially forgive this debt as part of our share sale agreement.
(7)on 30 October 2018, Ms Passey became a shareholder of the Company;
(8)in the course of preparing the 2019 financials for the Company, Mr Hill manually adjusted the loans as recorded in the financial records of the Company by transferring 80% of the loan owed by the Passey Family Trust to Ms Passey, being $77,946.22. This was on the basis that Ms Passey had acquired 80% of the shares previously held by the Passey Family Trust in the Company;
(9)when Mr Hill made this adjustment, he did not do it at the direction of either Mr Darren Wallis or Mr Leigh Wallis, but based on his own understanding and how he had done it with other clients;
(10)on 30 June 2019, the Company declared an unfranked dividend for the 188 shares in the Company of $154,000;
(11)it was Mr Hill’s understanding that any dividends declared were to be offset against the loans to the shareholders;
(12)in March 2020, Ms Passey sent Mr Hill a copy of the order of the Family Court;
(13)prior to receipt of the Family Court order, Mr Hill understood that Ms Passey was personally liable for the loan to the Passey Family Trust but that understanding changed when he read the order;
(14)on 30 June 2020, Mr Hill sent an email to Mr Darren Wallis and Mr Leigh Wallis attaching an extract from the Family Court order and which stated, “the court order says that the shares are to transfer over to Talitha but the liabilities (shareholder loan) remain in the Passey family trust. When is a good time to meet up to discuss what this means and what to do going forward”;
(15)later on 30 June 2020, Mr Darren Wallis responded to Mr Hill’s email, copied to Mr Leigh Wallis, stating, “I think this is a bit more complicated than that, and we may need legal advice, as the Div 7A loans are usually linked with a shareholding, so very hard to just cancel in effect”;
(16)on 30 June 2020, the Company declared an unfranked dividend for the 188 shares in the Company of $60,276;
(17)by its solicitors’ letter of 8 October 2020, the Company offered to pay the dividends to Ms Passey in addition to the purchase price for her shares (with such price to be determined by an independent valuer);
(18)the directors caused the Company to make its first payment to Ms Passey of dividends by 4 November 2020, and Ms Passey was paid all of the dividends claimed by her by January 2021;
(19)Ms Passey accepts that she has now been paid the dividends owing to her;
(20)after the initial cash injection in July 2015, no shareholder has received any monetary dividends from the Company other than Ms Passey;
(21)the loan to Ms Passey is no longer recorded against her shares in the Company’s financial records.
Ms Passey’s pleaded position in this proceeding is that she was entitled to be paid certain dividends as a result of the declarations dated 30 June 2019 and 30 June 2020. Her statement of claim alleges that, instead of paying her these dividends, the directors asserted that her entitlement would be offset against the loan owed by the Passey Family Trust and then only paid her $20,619.15 after demands were made by her lawyers with the majority of her dividend entitlement being paid after this proceeding was commenced.
Although Ms Passey accepts through her counsel that “no remedy flows directly from this ground of oppression”, it is submitted on her behalf that this conduct should be regarded as part of an overall course of conduct.
Reliance is placed in Ms Passey’s submissions on the difference between the evidence of Mr Darren Wallis and Mr Hill, and the Court is urged to accept the evidence of Mr Hill.
Mr Darren Wallis gave evidence that Mr Hill’s original advice to him had been that the loan obligation stayed with the shares (which advice Mr Wallis believed) but then Mr Hill changed his mind, he “changed his tune”. Because of this, Mr Wallis said that he was not sure exactly what to believe, it’s “obviously more complicated” and “I thought we would probably need some … further advice or something”. Mr Darren Wallis was not challenged on this evidence. The evidence which he gave about this matter was given in a frank and direct manner, and he appeared to be giving evidence of his genuine recollection.
By contrast, Mr Hill gave brief evidence that his email of 30 June 2020 was the first time that he had advised Mr Darren Wallis and Mr Leigh Wallis on this issue.
Having regard to the manner in which Mr Darren Wallis gave evidence about the advice given by Mr Hill prior to his opinion changing, and that the advice said to have been given by Mr Hill coincided with the view which Mr Hill actually held until he saw the Family Court order, it is likely that Mr Hill did advise Mr Darren Wallis in the way stated by Mr Wallis at trial and that he has forgotten that he did so. Further, the fact that Mr Hill did not give the same evidence as Mr Darren Wallis does not mean that Mr Wallis’ evidence should not be accepted.
In any event, it is not apparent what Ms Passey seeks to make of this difference in the evidence between these witnesses unless it is in support of a submission that the directors acted with a particular motivation. That issue will now be addressed.
By her submissions, Ms Passey complains that the directors did not accept the advice of Mr Hill dated 30 June 2020 and maintained a position even by their defence in this proceeding that Ms Passey was not owed dividends by pleading that there was a lien over the shares, which conduct was therefore unfair. It is submitted that:
On a charitable view to the respondents, they simply misunderstood the way loans and liens work. The better view though is that they either deliberately adopted their position, or wilfully shut their eyes to the obvious because they had other motivations for not paying the applicant her dividend. While proving motive is not necessary to succeed in an oppression action, the applicant submits that it is relevant, both to the gravity of the conduct at the time and the remedy to be crafted.
(emphasis added)
Ms Passey then relies upon the following evidence to support this submission:
a) Mr Darren Wallis being a qualified accountant and having a law degree. For him to assert that he did not know how the particular loan worked because it was an exotic ‘Div 7A loan’ should not be accepted.
b) Both Mr Darren Wallis and Mr Leigh Wallis said in cross-examination that they thought it was unfair that Ms Passey should receive a cash dividend when none of the other shareholders had. Mr Leigh Wallis went even further, saying:
I think it’s fairly natural not to want to give other people money when it’s – you know, like, that’s normal in business, I think. Like, you know, she had her hand out for money and we didn’t think it was right. So I think it’s only natural that we should oppose it.
This attitude of course overlooks the fact that the other shareholders received a cash payment back in 2015 which they were never going to have to repay to the Company by virtue of the Div 7A arrangements.
c) Mr Leigh Wallis writing in an email on 1 July 2020 that ‘there is no cash available for a dividend’ and ‘there is [no] way the company can pay cash out as dividends’.
d) Mr Leigh Wallis writing in the same email that ‘if the current loan to the Passey Family Trust is written off then all shareholders will have to inject significant funds to keep the liquidity of the business going.’
(footnotes omitted)
However, it is not open to find that the defendants deliberately adopted the position which they did, or “wilfully shut their eyes to the obvious”, in a manner which was “oppressive to, unfairly prejudicial to, or unfairly discriminatory against” Ms Passey because:
(1)such a case was not pleaded, and nor was such a case put to these witnesses under cross-examination. It is unfair for Ms Passey to advance such a case in closing submissions particularly as the defendants did not have an opportunity to be heard in relation to it;
(2)the facts relied upon to justify the submission are insufficient to lead to the claimed inference in any event;
(3)advice had been given by Mr Hill, who then changed his opinion after he read the consent order. Mr Darren Wallis held a valid concern about this change of position and wanted further advice, which is not unreasonable or commercially unfair, especially as the Company had cash flow issues and no other shareholder was receiving a dividend by way of transfer of funds;
(4)the Company’s previous lawyers engaged with Ms Passey’s lawyers in negotiations to buy Ms Passey’s shares and to seek to resolve the dispute about the non-payment of the dividends. This was a reasonable and commercially justifiable step to take in the circumstances, especially as Ms Passey had shown no interest in being involved in the Company and she had previously accepted an offer to sell the shares “in principle”;
(5)the current lawyers for the Company prepared and filed a defence in this proceeding on 8 November 2021 which pleaded that Ms Passey was not entitled to be paid the dividends because of a lien which had arisen pursuant to the constitution of the Company. No application was brought by Ms Passey to strike out this part of the defence or to seek summary judgment, which tells against any finding that it was or ought to have been “obvious” to the directors that the dividends were payable to Ms Passey. In the circumstances, Ms Passey appears to have accepted that the position was at least arguable;
(6)the evidence does not indicate that the directors of the Company were motivated to make a decision to achieve some particular unfairness against Ms Passey.
Taken as a whole and regarded objectively, the conduct of the directors of the Company surrounding the failure to pay to Ms Passey her share of the declared dividends was not so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair.
Accordingly, Ms Passey has failed to demonstrate that the conduct of the directors relating to the non-payment of dividends to her was oppressive to, unfairly prejudicial to, or unfairly discriminatory against, her as alleged.
Conduct in relation to loan to Total Fitouts Corp Pty Ltd
Ms Passey’s contentions
Ms Passey alleges that the provision of the loan to Total Fitouts Corp Pty Ltd has decreased the assets of the Company and has provided financial benefits to companies in which the directors have a financial interest to the detriment of the value of Ms Passey’s shareholding in the Company.
During closing submissions, counsel for Ms Passey submitted that the assets of the Company were decreased because the loan was unrecoverable “but I can’t press that submission as hard as I can with respect to the Canadian loan”. It was also submitted that Ms Passey derives no benefit from the loan and that the detriment to Ms Passey’s shareholding “would be whether or not the loan was unrecoverable”. It was submitted that:
[there] would be a decrease in the assets of the company, which would, therefore, decrease the value of my client’s shareholdings. But in order to show it’s a decrease in the assets of the company I would need to show that that loan was unrecoverable.
Counsel for Ms Passey accepted that if the loan to Total Fitouts Corp Pty Ltd was not found to be unrecoverable, then it would not be to the detriment of the value of Ms Passey’s shareholding in the Company.
Relevant facts
Total Fitouts Corp Pty Ltd was incorporated on 11 October 2013. Shortly after its incorporation, its shareholders entered into a shareholders’ agreement dated 15 October 2013.
Business was defined in the shareholders’ agreement as the Business of franchising commercial fitouts under the Total Fitouts Corp Pty Ltd brand.
The recitals to that agreement stated:
A. The parties to this shareholders agreement have agreed that Total Fitouts Corp Pty Ltd conduct the Business.
…
C. The shareholders have created (or will create) Total Fitouts Corp Pty Ltd and enter into this agreement as a means of regulating their relationship as shareholders.
D. The shareholders have created (or will create) Total Fitouts Group Pty Ltd.
E. Total Fitouts Corp Pty Ltd has been (or will be) granted an exclusive license by Total Fitouts Group Pty Ltd to operate the business as Franchisor in Australia, New Zealand, the USA, and elsewhere.
…
G. The shareholders have entered into this Agreement to record their aims and objectives in relation to Total Fitouts Corp Pty Ltd and to provide for the operation and administration of Total Fitouts Corp Pty Ltd.
Clause 11.2 provided:
[The Company] agree to fund the initial start up of Total Fitouts. The amount is at [the Company’s] discretion and will be assessed monthly. Any amount funded or advanced to Total Fitouts Corp or Total Fitouts Group will be classified as a loan and repayable prior to any dividends being paid out.
Clause 8.9 (the second one) provided:
Prior to the payment of Dividends by Total Fitouts Corp, Total Fitouts Corp must first repay any outstanding loans to [the Company], related companies or other companies associated with any of the directors or shareholders of Total Fitouts Corp.
Mr Leigh Wallis gave evidence that the Company has loaned funds to Total Fitouts Corp Pty Ltd since its incorporation in October 2013. He gave evidence that the loans were to support the establishment and ongoing business of Total Fitouts Corp Pty Ltd and to ensure its success. He expressed the opinion that the loans were recoverable.
Mr Darren Wallis gave evidence that the loans to Total Fitouts Corp Pty Ltd were interest free and were not secured. He agreed that there was no cross-branding between Total Fitouts Corp Pty Ltd and the Company, but also gave uncontradicted evidence that there was a “lot of benefit” to Total Fitouts Corp Pty Ltd from the Company and “vice versa”. He said that “behind the scenes” there was “a hell of a lot of crossover”.
Under cross-examination, Ms Passey agreed that she was aware that the Company was supporting the “Total Fitout business” financially before she became a shareholder. Indeed, she agreed that she had known this since August 2016. She also knew that the Company was making loans to Total Fitouts Corp Pty Ltd which were utilised for the establishment and payment of ongoing expenses of that company. Such concessions are supported by the following evidence:
(1)on 12 August 2016, Mr Hill sent various documents by email to Mr and Ms Passey to assist them with “the marriage split”. The covering email stated, “I have consolidated all the Total Fitout entities into a 3 year analysis. You can see the business has made losses for the last 3 years and is being funded by [the Company]. Let me know if you have any questions or need any further information”. One of the documents sent to Mr and Ms Passey was a list of the companies in which the Passey Family Trust held shares. The list included both Total Fitouts Corp Pty Ltd and Total Fitouts Group Pty Ltd;
(2)by email from Mr Hill dated 8 September 2016, Ms Passey was sent 2014 – 2016 financials for Total Fitouts Corp Pty Ltd and the Company (although the 2016 financials were in draft only). Each of the financial statements showed a loan from the Company to Total Fitouts Corp Pty Ltd;
(3)on 5 October 2017, Mr Hill sent an email to Mr and Ms Passey which attached a copy of the shareholders’ agreement for Total Fitouts Corp Pty Ltd, to which the Company was a party;
(4)by email dated 29 January 2018, Ms Passey was sent the 2017 financials and tax returns for, amongst others, Total Fitouts Corp Pty Ltd. The attachments included reference to an unsecured loan from the Company in the amount of $101,175. The same unsecured loan was reflected in the financial statements of the Company which were also attached to this email;
(5)Ms Passey became a shareholder of the Company in October 2018, at which time the outstanding balance of the loan owed by Total Fitouts Corp Pty Ltd was $127,323.09.
On 20 August 2021, Mr Dyer sent an email to Mr Leigh Wallis and Mr Darren Wallis proposing that Total Fitouts Corp Pty Ltd start to repay the loan at $5,000 a month.
As at September 2021, the amount of $110,323.09 was owing on this loan.
Consideration
The Company committed to provide funding to Total Fitouts Corp Pty Ltd some five years before Ms Passey became a shareholder of the Company. This commitment was contained in a shareholders’ agreement to which all of the (then) members of the Company were parties, and pursuant to which all members derived a benefit, namely a shareholding in Total Fitouts Corp Pty Ltd.
At some stage after August 2016, the Passey Family Trust ceased to be a shareholder of Total Fitouts Corp Pty Ltd and Mr Passey ceased to be a director.
Ms Passey, who was legally represented, consented to an order pursuant to which she became a shareholder of the Company in October 2018 with prior notice of the shareholders’ agreement dated 15 October 2013, the Company’s commitment to provide funding pursuant to that agreement, the identity of the shareholders in Total Fitouts Corp Pty Ltd and the quantum of the unsecured loans which had been made by the Company to Total Fitouts Corp Pty Ltd, which loans had increased over time since 2014. She also accepted $80,000 in lieu of shares in Total Fitouts Group Pty Ltd, being the company which granted the license to Total Fitouts Corp Pty Ltd to operate its business as referred to in the shareholders’ agreement dated 15 October 2013.
The overall net asset position of the Company did not change by reason of this loan and it remains due and owing.
There is no cogent evidence to indicate that the loan to Total Fitouts Corp Pty Ltd will not eventually be repaid or that it is “unrecoverable”. To the contrary, repayments have been made in the past and there has been a commitment by Mr Dyer (one of the directors) to repay the loan to the Company by a set amount each month. There is no evidence to indicate that such a commitment was not genuine or would not be maintained. Indeed, since Ms Passey became a shareholder, the amount of the outstanding loan balance has been reduced by the net amount of $17,000.
In light of these matters, counsel for Ms Passey submitted that the Court “can take a more optimistic view of the repayment of this loan”. Such a view is taken.
In the circumstances, the premise of Ms Passey’s complaint in relation to the loan to Total Fitouts Corp Pty Ltd has not been established. In particular, it has not been established that the loan is “unrecoverable” which, according to the submissions of counsel for Ms Passey, has the consequence that the assets of the Company have not been decreased and the loans are not to the detriment of the value of Ms Passey’s shareholding in the Company. That conclusion is, on its own, a sufficient basis to reject this aspect of Ms Passey’s case.
It is also a relevant factor that Ms Passey seeks to complain about the conduct of the Company in entering into a legal commitment to provide a loan to a related company, and in making advances to that company, in circumstances where that commitment was made prior to the date on which she became a shareholder and with the support of the entirety of its members. At the time that the commitment was made, there were only four shareholders and each of those shareholders was associated with a director. There was therefore an “overwhelming identity of interest between shareholders and directors” and “consent or ratification” of the kind described in Exton v Extons Pty Ltd. Further, all advances which were later made (at least prior to October 2018) occurred with the consent and support of all of the members of the Company. Finally, Ms Passey chose to become a shareholder of the Company on notice of this commitment, and of advances made pursuant to this commitment. After becoming a shareholder, no complaint was made by Ms Passey about this loan until 23 October 2020.
With these matters in mind and assessed objectively, the conduct of the Company at the time of making the legal commitment to loan money to Total Fitouts Corp Pty Ltd was not so unfair that reasonable directors who consider the matter would not have thought the decision fair. That is because all of the shareholders at that time supported the decision and each obtained a shareholding in Total Fitouts Corp Pty Ltd. The conduct of entering the shareholders’ agreement in 2013, and advancing funds pursuant to it prior to October 2018, could not have been unfair to Ms Passey because she was not a shareholder when that conduct occurred. Further, in all of the circumstances and having regard to the unanimous support of its directors and shareholders, the entry by the Company into the shareholders’ agreement in 2013, and the advancement of funds pursuant to that agreement prior to October 2018, adheres to accepted standard of corporate behaviour.
Further and assessed objectively, the conduct of the Company in continuing to advance funds to Total Fitouts Corp Pty Ltd after Ms Passey became a shareholder was not commercially unfair. Ms Passey was aware of the existence of the loan and of the approximate outstanding balance but did not complain about the loan until two years after she became a shareholder. Further, the overall balance of the loan has been reduced since Ms Passey became a shareholder. Further, there were “behind the scenes” operational benefits in supporting the operations of Total Fitouts Corp Pty Ltd which tend to justify the continued financial support. Finally, had the Company ceased to advance further funds to Total Fitouts Corp Pty Ltd when Ms Passey became a shareholder, then it may be inferred from the fact that the Company provided ongoing financial support that there is at least some prospect, if not a likely prospect, that Total Fitouts Corp Pty Ltd would have ceased its business operations. This would have had the result that the loan to Total Fitouts Corp Pty Ltd might not have been repaid, either in full or at all. The continued advances after October 2018 were therefore commercially justifiable for this reason.
While it is correct that, unlike the other shareholders, Ms Passey has no financial interest in Total Fitouts Corp Pty Ltd, “mere prejudice to or discrimination against” Ms Passey is “insufficient to attract the court’s jurisdiction to intervene”, especially having regard to all of the relevant circumstances: Hylepin (FC) at [126].
For these reasons, Ms Passey has failed to demonstrate that the provision of the loan to Total Fitouts Corp Pty Ltd was oppressive to, unfairly prejudicial to, or unfairly discriminatory against, her as alleged. Nor was this conduct contrary to the interests of the members as a whole because, assessed objectively, it is in accordance with how reasonable directors would act in attending to the affairs of the Company.
Conduct in relation to loan to the Canadian Company
Ms Passey’s contentions
Ms Passey complains about the loan agreement entered by the Company with the Canadian Company in 2016, being an agreement which was entered prior to the date on which she became a shareholder and which was entered with the consent and approval of all of the Company’s (then) shareholders. She complains that the entry into the agreement as well as the making of advances pursuant to that agreement falls within ss 232(d) and 232(e) of the Act.
Ms Passey complains that the loan is unsecured and interest free, and that the directors of the Company have a financial interest in the Canadian Company because, through their corporate entities, they own the shares in the Australian Canadian Company which, in turn, owns 80% of the shares in the Canadian Company.
During closing submissions, counsel for Ms Passey submitted that the assets of the Company were decreased because the loan to the Canadian Company was unrecoverable. It was also submitted that Ms Passey derives no benefit from the loan as she is not a shareholder in the Australian Canadian Company and that the detriment to Ms Passey’s shareholding “would be whether or not the loan was unrecoverable”.
Clause 21.6(g) of the constitution provides that:
Vacation of director’s office
The office of a director becomes vacant if:
…
(g) the director holds any other office of profit under the Company, except that of managing director, without the consent of the Company in general meeting.
(emphasis added)
Ms Passey alleges that no general meeting has been held where consent was provided to Mr Gardner and Mr Darren Wallis holding the office of consultant and being paid consultant fees and, in the premises and having regard to the constitution, they were required to vacate their positions as directors upon being paid the consultancy fees. However, that allegation has not been established for the following reasons.
By her submissions, Ms Passey appears to accept that the words “any other office of profit” in clause 21.6(g) is a reference to an office other than the office of director. I agree with that construction. That is because, if directors are to be paid remuneration in their role as a director, clause 21.3 applies. In this context, the word “other” in clause 21.6(g) means that, if a director hold an “office of profit” other than the office of director, then clause 21.6(g) applies.
Ms Passey contends that Mr Gardner and Mr Wallis are being paid as consultants and that this is an “office of profit” within clause 21.6(g). However, clause 4.3 of the shareholders’ agreement (as cited above) makes plain that the payments to be made to Mr Gardner and Mr Wallis are by reason of their status as directors. It refers to the payments to be made to them “for their input as directors”.
This means that, on the proper construction of the constitution and having regard to the expressed and agreed basis of the payments to Mr Gardner and Mr Wallis pursuant to clause 4.3 of the shareholders’ agreement, these directors do not hold any “other office of profit” within the meaning of clause 21.6(g) of the constitution. Rather, they have been paid fees by reason of their status as directors.
This has the consequence that clause 21.3 of the constitution applies and these directors were entitled to be paid remuneration as determined by the Company in general meeting.
However, a general meeting was not held in or about November 2009 for the purposes of approving the payments pursuant to clause 4.3 of the shareholders’ agreement.
Notwithstanding that there was no general meeting as required by clause 21.3, it is significant that the shareholders’ agreement dated 1 November 2009 was entered into by all of the shareholders of the Company. By the agreement, the commitment then made by the Company to make the proposed payments to Mr Darren Wallis and Mr Gardner had the unanimous consent of its shareholders. In these circumstances, it is difficult to envisage what more could have been achieved by holding a general meeting to approve the proposed remuneration to these directors. Any such general meeting, if held, would have undoubtedly resulted in approval of the payment of the proposed remuneration. At best for Ms Passey, there has been technical non-compliance with the constitution.
Further, at the time that the shareholders’ agreement was entered and all shareholders consented to the remuneration being paid, there were only four shareholders and each of those shareholders was associated with a director. There was therefore an “overwhelming identity of interest between shareholders and directors” and “consent or ratification” of the kind described in Exton v Extons Pty Ltd. This tells against a finding that there has been oppression or conduct which is contrary to the interests of the members as a whole.
An additional relevant matter is that, prior to becoming a shareholder, Ms Passey was aware that consulting fees were being paid. Mr Passey informed her in 2008 that Mr Gardner and Mr Darren Wallis were going to be paid consultancy fees once the Company was making enough money to raise his salary as CEO. She also specifically asked Mr Hill for information about the consultancy fees in August 2016. Ms Passey then became a shareholder in late 2018. By the time she became a shareholder, the fees for the 2017 and 2018 years had been paid but no complaint was made by her about this at this time. No fees were paid in 2019 but they were paid in 2020. The first occasion that Ms Passey complained about the fees being paid to Mr Gardner and Mr Darren Wallis was in the course of these proceedings. Further, complaint was made by her in circumstances where, on her own evidence, she was not aware of what they did to justify the payment of the fees. However, also on her own evidence and that of Mr Hill, Ms Passey could have asked at any time and would likely have been provided with the answer.
Prior to Ms Passey’s complaint being made in this proceeding, the payment of the fees to Mr Gardner and Mr Darren Wallis, and their continued role as directors, had either the express consent of all of the shareholders of the Company or, for more than two years after October 2018, the implicit consent of Ms Passey and the express consent of the other shareholders. In these circumstances, it is not unfair for the Company to comply with its contractual obligations where the contract was entered with the consent of all of the shareholders at the time in the circumstances described above. Nor is it contrary to the interests of the members as a whole to do so.
For these reasons, Ms Passey has failed to establish that the payment of the fees to Mr Darren Wallis and Mr Gardner “should not have occurred” because they “were required to vacate their positions” as is pleaded in the statement of claim.
Conclusion
Taking into account all of these circumstances and assessed objectively, the payment of the fees to Mr Gardner and Mr Darren Wallis in the 2017, 2018, 2020 and 2021 years was not so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair. Further and for the same reasons, such conduct is in accordance with how reasonable directors would act in attending to the affairs of the Company.
Conduct in relation to payment of legal fees of directors and other shareholders
This proceeding was brought by Ms Passey against the directors of the Company (who were the first, second and third defendants) and the other shareholders (being the fourth, fifth and sixth defendants) as well as the Company (seventh defendant).
By the originating application, Ms Passey sought declaratory relief and equitable damages against the directors. However, no leave of the Court was ever obtained to bring the proceedings against the directors and the statement of claim did not plead any cause of action which would give rise to the relief sought against the directors. Although the claim against the directors was dismissed during the trial, it is unlikely that the directors having the same legal representation as the Company, with the Company bearing those costs, added to the Company’s legal costs to any significant degree because no case was ever pleaded against them.
As to the other shareholders, the relief sought by Ms Passey is limited to seeking an order that they purchase her shares at fair market value. The only substantive allegations relating to the shareholders in the statement of claim related to an offer which was made to acquire Ms Passey’s shares (paragraph 44) and an offer that they did not make (paragraph 45), neither of which were controversial allegations. It is therefore unlikely that the shareholders having the same legal representation as the Company, with the Company bearing those costs, added to the Company’s legal costs to any significant degree.
The statement of claim pleads the amount which has been spent by the Company to its solicitors since 1 July 2020 but there is no adequate basis pleaded or established on the evidence to show that the Company would not have incurred most, if not all, of those legal costs in relation to this dispute or in defending this proceeding in any event. Nor is there any evidence adduced about the amount by which the Company’s legal costs were increased because it paid the costs of all of the defendants. Without such evidence, it is difficult to assess the impact on the members of the Company or the nature of any prejudice to Ms Passey.
To justify her claim, Ms Passey submits that it is the other shareholders of the Company against whom the “primary relief is sought” and that they should bear the majority of the costs of the proceeding, not the Company. However, other than a costs order, only one of the remaining four orders which are sought by Ms Passey is directed at the other shareholders, being a compulsory buyout order.
In circumstances where a compulsory buyout order is sought against existing shareholders, the Company has an interest in relation to such relief. As stated in Power v Ekstein (2010) 77 ACSR 302; [2010] NSWSC 137 at [119]:
It seems to me that an application for a compulsory purchase order against a corporate defendant brings the company’s interests into play and it can no longer be said that the dispute is purely between shareholders. The company (that is, the body of members as a whole) has an interest in resisting a compulsory purchase order; ensuring that the burden of the order, if made, falls fairly on all relevant defendants; and making sure that the terms of any such order as to matters such as valuation of the shares are fair in the company’s interests …
In short, the Company has an interest in relation to all of the substantive relief which is being sought by Ms Passey at present.
In all of the circumstances, Ms Passey has failed to establish that the Company’s payment of the legal costs associated with the dispute the subject of this proceeding is contrary to the interests of the members as a whole or is oppressive to, unfairly prejudicial to, or unfairly discriminatory against, her.
That is because the decision by the directors to cause the Company to pay all of the defendants’ legal costs was not so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair. This is especially as the Company had an interest in the relief being sought against the shareholders and the balance of the remaining relief seeks substantive orders against the Company itself, including an order that it be wound up. Further, such conduct is in accordance with how reasonable directors would act in attending to the affairs of the Company.
Does the cumulative conduct constitute oppression?
In the case of the loans to Total Fitouts Corp Pty Ltd and the Canadian Company, Ms Passey has failed to establish the case advanced by her, which was premised on a finding that these loans are unrecoverable.
In the case of the fees paid to Mr Gardner and Mr Darren Wallis, Ms Passey has failed to establish her pleaded case including, in particular, that the fees were excessive.
Ms Passey has otherwise advanced a claim in relation to the previous non-payment of dividends to her, which non-payment has been rectified and there is no evidence to suggest that there will be a repetition of this conduct.
Ms Passey has also advanced a claim that she was not invited to become a party to the shareholders’ agreement (but did not herself ask to be a party) and that no offer has been made to acquire her shares in accordance with the formula in that agreement (when there was no obligation on any defendant to make such an offer). Ms Passey could have, but chose not to, attempt to sell her shares to a third party.
Ms Passey brings proceedings against the directors of the Company but does not progress them, and then complains that the Company has paid their legal fees. She also complains that the Company has paid the legal fees of the other shareholders when the Company has an interest in the relief sought against those shareholders.
Ms Passey’s case has failed in relation to each and every allegation made by her. She has failed to adduce adequate evidence in relation to some claims and otherwise failed to address critical facts which impact upon the ultimate findings sought by her. Ms Passey’s case takes no account of her own conduct including her own willingness to become a shareholder of a company which had previously made various arrangements and entered into transactions of which she had notice and which had the unanimous consent of all of the shareholders at the time. Ms Passey’s case takes no account of her own lack of complaint or objection to the conduct of the Company’s affairs for a period of more than two years after she became a shareholder.
For these reasons, the alleged conduct, even when considered cumulatively, is not contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, Ms Passey.
Whether any relief ought to be granted
It follows that, as Ms Passey has failed to establish any of her claims, she is not entitled to the primary relief which is sought by her, being that her shares be compulsorily acquired by either the other shareholders or by the Company.
For the same reasons, no winding up order will be made as sought by Ms Passey.
The parties have requested that a finding be made as to the price which would have been fixed for the acquisition of Ms Passey’s shares even if Ms Passey’s claim is dismissed. The difficulty with doing this is that the purpose of granting a remedy between parties in an oppression case is “to compensate the oppressed shareholder for the oppression which has taken place”: Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd (2004) 207 ALR 136; [2004] FCAFC 153, [72]. As stated by Derrington J in BAM Property Group Pty Ltd as trustee for BAM Property Trust v Imoda Group Holdings Pty Ltd [2019] FCA 1192 at [89]:
… In cases where the relief to be granted is the compulsory purchase of shares, that object [of compensation] is achieved by the Court having a wide discretion to fix a price that “represents a fair value in all the circumstances”: Smith Martis Cork (145-146 [70]-[72]). That does not necessitate fixing a price only by reference to ordinary valuation principles: Smith Martis Cork (146 [73]-[78]) and Re Bird Precision Bellows Ltd [1986] 1 Ch 658, 669. The question is to identify the price which should be paid in the circumstances.
Notwithstanding this and subject to one matter, the parties appear to have agreed as to the price which should be fixed in any event.
Although Ms Passey called Mr Darren Van Zyl as an expert witness at the trial, the closing submissions for Ms Passey make this submission:
If the Court finds there has been no oppressive conduct, the applicant suggests her shares should be valued using the respondents’ expert Mr Peter Haley’s calculations under the ‘Scenario B’ column of the set out in the joint expert report. Mr Haley’s method assumes the consulting fees and staffing costs are legitimate expenses and the loans to Smith & Sons Canada Inc and Total Fitouts Corp are fully recoverable.
(footnote omitted)
The amount identified in the Scenario B column in the joint expert report as being Mr Haley’s valuation is $275,377.
The closing submissions for the defendants make this submission:
In fixing a price for Passey’s shares that “represents a fair value in all of the circumstances” the Respondents submit that the Court would adopt the valuation of Passey's shares of Mr Haley namely $275,377 as at 30 September 2021.
(footnote omitted)
This means that Mr Haley’s valuation, which both parties accept should be adopted if his assumptions are found to be established (which was the case), is $275,377.
Had the parties not been in agreement about which value to adopt, and had I been persuaded to order that there be a compulsory buyout of Ms Passey’s shares, I would have adopted the valuation by Mr Haley of $275,377 for the purposes of fixing a price for Ms Passey’s shares for the same reasons as submitted by the parties.
An additional reason for adopting Mr Haley’s valuation is that the assumptions underlying Mr Van Zyl’s valuation were not established. Further, for reasons which are not the fault of Mr Van Zyl, numerous appendices to his expert report were not adduced into evidence. This included his letter of instructions, index to brief and other information which was relied upon by Mr Van Zyl in forming his opinions. In addition, Mr Van Zyl did not speak to the directors of the Company about various matters, which he considered had an impact on his opinions. These matters necessarily reduced the weight to be attached to his opinions to the extent that they conflicted with that of Mr Haley.
It is relevant that Mr Van Zyl’s valuation based on the same assumptions was only approximately $5,000 more than that of Mr Haley, being $280,546. With two independent experts coming to a valuation which is almost identical and notwithstanding the underlying problems with Mr Van Zyl’s expert evidence, this provides further support for acceptance of Mr Haley’s valuation of $275,377.
Ms Passey also submits that:
If the Court finds that the seventh respondent’s anticipated increase in wages expenses is reasonable, it is submitted then that it should also increase the total income. An increase in wages expenses of $352,000 including superannuation is approximately 20 percent of the total operating costs of $1,510.921 calculated by Mr Haley or $1,517,990 calculated by Mr Van Zyl. This 20 percent increase should therefore also be added to the Total Income figure at the top of the table on Trial Bundle p 2063.
(footnotes omitted)
However, an increase in wages costs will not necessarily increase revenue to the business, either at all or in the manner submitted by Ms Passey. Neither expert adjusted their valuation based on such reasoning. For this reason, the adjustment to the “Total Income figure” as proposed by Ms Passey will not be made.
CONCLUSION
Ms Passey’s claims against the first to third defendants (being the directors) were dismissed during the trial.
Ms Passey has failed in her claim against the fourth to seventh defendants (being the other shareholders and the Company).
I will hear the parties as to costs. I will defer consideration of the appropriate costs order in relation to the first to third defendants and address the issue of costs in relation to all of the defendants at the same time after hearing further from the parties.
I certify that the preceding two hundred and twenty-seven (227) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Downes. Associate:
Dated: 29 March 2022
SCHEDULE OF PARTIES
QUD 396 of 2020 Defendants
Seventh Defendant:
SMITH & SONS RENOVATIONS & EXTENSIONS (AUST) PTY LTD ACN 119 427 119
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