Patterson v Humfrey - [2014] WASC 446

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: PATTERSON -v- HUMFREY [2014] WASC 446

CORAM: LE MIERE J

HEARD: 28, 31 MARCH, 1-4, 14, 28 APRIL 2014

DELIVERED : 28 NOVEMBER 2014

FILE NO/S: COR 134 of 2013

MATTER :Skybow Holdings Pty Ltd
Section 232 and 233 of the Corporations Act

BETWEEN: CRAIG PATTERSON
First Plaintiff
LYNDA PATTERSON
Second Plaintiff
RODALE NOMINEES PTY LTD
Third Plaintiff
AND
BARRY HUMFREY
First Defendant
MARY HUMFREY
Second Defendant
KENESTA PTY LTD
Third Defendant

Catchwords:

Oppressive and unfairly prejudicial conduct - Corporations Act 2001 (Cth) s 232 - Misappropriation of company's assets - Whether the Court can grant relief to plaintiffs who hold 50% of the shares - Plaintiffs do not have majority of votes - Defendants had de facto control of company

Relief - Corporations Act 2001 (Cth) s 233 - Order for defendants to acquire plaintiffs' shares by way of buy back - Purchase price of shares

Legislation:

Corporations Act 2001 (Cth), s 180, s 181, s 232, s 233, s 286
Rules of the Supreme Court 1971 (WA), O 45 r 2, O 45 r 11

Result:

Plaintiffs' claim upheld

Category: B

Representation:

Counsel:

First Plaintiff                :     Mr M L Bennett & Mr D Banda
Second Plaintiff            :     Mr M L Bennett & Mr D Banda
Third Plaintiff               :     Mr M L Bennett & Mr D Banda
First Defendant             :     Mr C S Williams
Second Defendant         :     Mr C S Williams
Third Defendant           :     Mr C S Williams

Solicitors:

First Plaintiff                :     Bennett + Co
Second Plaintiff            :     Bennett + Co
Third Plaintiff               :     Bennett + Co
First Defendant             :     Solomon Brothers
Second Defendant         :     Solomon Brothers
Third Defendant           :     Solomon Brothers

Case(s) referred to in judgment(s):

Atlasview Ltd v Brightview Ltd [2004] 2 BCLC 191
Barnes v Addy (1874) LR 9 Ch App 244
Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95; (2008) 66 ACSR 359
Fedorovitch v St Aubins Pty Ltd [1999] NSWSC 776; (1999) 17 ACLC 1558
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 2) (1998) 29 ACSR 290
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672
Gamlestaden v Baltic Partners Ltd [2007] 4 All ER 164
Goozee v Graphic World Group Holdings Pty Ltd [2002] NSWSC 640; (2002) 20 ACLC 1502
Jones v Dunkel (1959) 101 CLR 298
LPD Holdings (Aust) Pty Ltd v Phillips, Hickey and Toigo [2013] QSC 225
National Building Maintenance Ltd v Dove [1972] 5 WWR 410
Rankine v Rankine (1995) 18 ACSR 725
Re Bright Pine Mills Pty Ltd [1969] VR 1002
Re Chime Corp Ltd (2004) 7 HKCFAR 546
Re Golden Bread Pty Ltd [1977] Qd R 44
Re National Building Maintenance Ltd [1971] 1 WWR 8
Re North Coast Transit Pty Ltd [2013] NSWSC 1119
Sanford v Sanford Courier Service Pty Ltd (1986) 10 ACLR 549
Territory Realty Pty Ltd v Garraway [2009] FCA 292
Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104; (2011) 288 ALR 310
LE MIERE J:

Overview

In 1997 Mr Patterson and Mr Humfrey caused Skybow Holdings Pty Ltd to be incorporated as a vehicle through which Mr Patterson, and his wife, their company Rodale Nominees Pty Ltd and Mr Humfrey and his wife, and their company Kenesta Pty Ltd would undertake property developments and investments. The shares in Skybow are held equally by Mr and Mrs Patterson and Rodale on the one hand and Mr and Mrs Humfrey and Kenesta on the other hand. Mr Patterson and Mr Humfrey are the only directors.
From the outset Mr Humfrey, with the consent or acquiescence of Mr Patterson, assumed the day to day management of Skybow and its activities. Mr Humfrey carried out management and other activities of Skybow through Kenesta which trades as Humfrey Land Developments. Skybow undertook or participated in a number of developments or proposed developments including a large scale residential subdivision and development of land located near Geraldton known as the Seacrest Estate, a proposed resort to be constructed on the Abrolhos Islands and a proposed development of land known as Mahomet's Caravan Park or the Back Beach.
In 2012 differences arose between Mr Patterson and Mr Humfrey concerning Mr Humfrey's conduct of the affairs of Skybow. In April 2012 Mr and Mrs Patterson determined that they did not wish to continue their investment in Skybow with Mr and Mrs Humfrey and Kenesta. Mr Patterson informed Mr Humfrey and proposed that the Patterson interests buy out the Humfrey interests or the Humfreys buy out the Pattersons. On 25 July 2012 they made an agreement by which the Pattersons agreed to sell to the Humphreys their shares in Skybow (Share Sale Agreement). The sale was not completed because the Humphreys were unable to obtain finance to purchase the Pattersons' shares in accordance with the Share Sale Agreement. In December 2012 Mr Patterson proposed that the Pattersons buy the Humphreys' shares in Skybow. Mr Humfrey refused to sell the Humfreys' shares because he was required to maintain a 20% shareholding in the Seacrest Estate development through Skybow in order for Kenesta to continue to be the project manager and exclusive selling agent for the Seacrest Estate development.
In July 2013 the plaintiffs, Mr and Mrs Patterson and Rodale, commenced these proceedings against the defendants, Mr and Mrs Humfrey and Kenesta, seeking orders under Corporations Act 2001 (Cth) s 233 on the ground that by reason of the conduct of Mr Humfrey, or the defendants, the affairs of Skybow are being conducted in a manner which is oppressive, or alternatively unfair and discriminatory to the interests of the plaintiffs. The plaintiffs say that Mr Humfrey caused Skybow to make unauthorised loans to Kenesta, to pay management fees to Kenesta to which it was not entitled and to pay expenses, or reimburse Kenesta for expenses, that were not incurred by or payable by Skybow. The plaintiffs also claim that Mr Humfrey failed to cause Skybow to keep proper records and make them available to the plaintiffs. The plaintiffs also claim that in relation to the Woolworths transactions to which I will refer later in these reasons Mr Humfrey misled them and diverted to Kenesta an opportunity which belonged to Skybow. The plaintiffs say that that conduct taken separately or cumulatively is oppressive or unfair and discriminatory to the interests of the plaintiffs. The plaintiffs seek orders that the defendants sell to them the defendants' shares in Skybow or alternatively that the defendants buy the plaintiffs' shares in Skybow.
The defendants submit that no order should be made under Corporations Act s 233 because the plaintiffs have not established any oppressive conduct by the defendants. Alternatively, the defendants say that if oppressive conduct is found and the court concludes that it is appropriate that one of the plaintiffs or the defendants should acquire the others' shares in Skybow, then the court should order the defendants to purchase the plaintiffs' shares.
Skybow has been inactive since 2012. It has $152,000 in its bank accounts but no creditors have been paid directly by Skybow since the commencement of these proceedings. It is unable to deal with creditors unless both directors agree. Mr Humfrey has refused to allow Mr Patterson to become a signatory to the company's bank accounts.

Main characters

The directors of Skybow are Mr Patterson and Mr Humfrey. Mrs Patterson and Mrs Humfrey each hold a share in Skybow but neither of them has played any active role in its management or activities. The directors and shareholders of Rodale are Mr and Mrs Patterson. Mr Patterson controls Rodale and Mrs Patterson plays no active part in the company management.
Mr Humfrey caused Kenesta to be incorporated in October 1988 to carry on a business of property development and project management. The shareholders of Kenesta are Mr and Mrs Humfrey. They, together with Tracey Basile, are the directors. Kenesta has entered into a number of property developments. Kenesta has acted as project manager and usually exclusive selling agent for those developments. Where Kenesta has acted as exclusive selling agent Mrs Humfrey has usually carried out those duties. Otherwise, Mr Humfrey is in control of the management and activities of Kenesta.

Seacrest

Skybow and other investors entered into a syndicate (the Wandina Syndicate) to participate in a joint venture with the State Housing Commission of Western Australia (Homeswest) to develop land owned by Homeswest in Geraldton. The development is known as Seacrest Estate. Springdale Holdings Pty Ltd, a company controlled by Mr Humfrey, was appointed trustee of the Wandina Syndicate and Kenesta was appointed manager of the Wandina Syndicate. In July 1999 Springdale, as trustee for the Wandina Syndicate, entered into a joint venture with Homeswest to develop the Seacrest Estate. Seacrest Corporation Pty Ltd was the joint venture vehicle. Kenesta was engaged by Seacrest Corporation as project manager. Kenesta was also appointed exclusive selling agent for the lots as they were developed.
Over the years as lots have been developed and sold Seacrest Corporation has paid distributions to Springdale, as trustee for the Wandina Syndicate. Springdale has made distributions of the dividends it received to the members of the Wandina Syndicate, including Skybow. The Seacrest Estate development is the most profitable venture undertaken by Skybow. Counsel for the plaintiffs, Mr Bennett, described the Seacrest Estate development as the cash cow which has sustained Skybow.

Woolworths

The Seacrest Estate development is primarily a residential development. But one of the subdivided lots is a shopping centre site described by the parties as the commercial site. Mr Humfrey obtained the agreement of Seacrest Corporation for Springdale to buy the site. Mr Humfrey informed the Wandina Syndicate of the opportunity to purchase the site on the basis that the syndicate members would need to contribute a total of $2,500,000 to the project. Mr Patterson and Rodale would have to contribute $200,000. The members of the syndicate and Mr Patterson decided not to participate in the investment. Mr Humfrey obtained Mr Patterson's agreement that Mr Humfrey could use Skybow as the entity to undertake the investment on behalf of Kenesta. Kenesta would use Skybow's name for its share in the project and Kenesta would indemnify Rodale from any financial involvement.
Mr Humfrey had discussions with Woolworths about Woolworths purchasing the site. There were various negotiations and arrangements. Eventually Fabsky Pty Ltd agreed to purchase the site. Skybow held 20% of the shares in Fabsky and Fabcot Pty Ltd, a fully owned subsidiary of Woolworths, owned the other 80%. Skybow entered into a put and call option with Fabcot (Put and Call Option Deed) under which Skybow granted to Fabcot an option for Fabcot to purchase the shares held by Skybow in Fabsky and Fabcot granted to Skybow an option for Skybow to require that Fabcot purchase Skybow's shares in Fabsky. Skybow entered into a shareholder agreement with Fabcot and Fabsky (Shareholder Agreement) which involved payments by Fabcot to Skybow for work in relation to the commercial site. The directors of Skybow, including Mr and Mrs Patterson, signed a resolution approving the Put and Call Option Deed and the Shareholder Agreement and ratifying the execution of those documents by Mr Humfrey and Ms O'Meara, Skybow's company secretary.
Settlement of the sale of the commercial site to Fabsky was completed. Fabcot exercised the call option and Skybow's shares in Fabsky were transferred to Fabcot. Fabcot paid Skybow $363,577 in accordance with the Put and Call Option Deed, which Skybow paid to Kenesta. Fabcot also paid Skybow $330,526 for works in relation to the site in accordance with the Shareholder Agreement. Skybow paid that amount to Kenesta.
In their points of claim the plaintiffs assert that Mr Humfrey made misleading or false representations to Mr Patterson in relation to the Woolworths transaction. The plaintiffs say that that was conduct which was contrary to the interests of Skybow as a whole or was otherwise oppressive or unfairly prejudicial or unfairly discriminatory against the plaintiffs. In essence, the plaintiffs say that Mr Humfrey's representation that Mr Patterson and Rodale were required to contribute $200,000 to participate in the Woolworths venture was misleading and false in that Kenesta was not required to, and did not, contribute $200,000 or any amount as asserted by Mr Humfrey. Furthermore, the plaintiffs say that Mr Humfrey and Kenesta made a substantial return for themselves after selling their interest in the venture to Woolworths when the benefit flowing from the transactions should have accrued to all of the shareholders of Skybow.

Back Beach

In April 2002 Skybow presented to the City of Geraldton an expression of interest to lease land in the City of Geraldton for the development of a caravan and tourist park. On 17 October 2011 the City of Geraldton granted a lease of the land which is set aside for the purpose of a caravan park and chalets for a term of 42 years. Mr Humfrey says that he has obtained approval for phases of the development but has not been able to further progress the development due to the dispute with Mr Patterson. The plaintiffs allege, and the defendants deny, that Mr Humfrey caused Skybow to pay Kenesta management fees in relation to the Back Beach development to which Kenesta was not entitled.

Abrolhos Islands

The Abrolhos Islands is a chain of islands located off the coast of Geraldton. It is popular with visitors because of its coral reef but there is no accommodation on the islands and visitors are not permitted to stay overnight. The islands are managed by the Department of Fisheries. Restricted fresh water and lack of amenities such as sewerage is a significant constraint of any settlement.
Since 1996 Mr Humfrey has been pursuing the development of an eco‑tourism resort on one of the islands. Mr Humfrey commissioned feasibility studies and environmental and consultants' reports for the purpose of obtaining approval for the development of a resort. Substantial expenses have been incurred in relation to the project. No resort or other development is likely to be built on the islands in the foreseeable future. The issue with respect to the Abrolhos Islands proposed development is who, or what entity, should be responsible for meeting the costs that have been incurred in relation to the proposed development. The defendants say that Skybow is responsible for the costs because Mr Humfrey and Mr Patterson agreed that the project would be undertaken by Skybow. The plaintiffs say that Mr Humfrey and Mr Patterson agreed that the project would be a 50/50 joint venture between Skybow and Kenesta but Kenesta should be responsible for all of the costs because Mr Humfrey obtained all of the studies and reports and made all of the submissions, including expressions of interest, to the Department in the name of Humfrey Land Developments.
Substantial sums have been incurred in pursuing the project. Those expenses have been paid by Skybow and capitalised in Skybow's financial statements. The balance sheet for the 2010 financial year recorded the expenses incurred in relation to the Abrolhos venture as a non‑current asset of $702,261. In the succeeding years amounts have been written off as 'borrowing costs'. The 2012 balance sheet records the expenses in relation to the Abrolhos venture, after the right off of $165,752 in 2011 and $170,517 in 2012, as an intangible asset of $498,686.

Alleged unrelated expenditure

The plaintiffs say that on numerous occasions Mr Humfrey caused Skybow to incur, or to reimburse Kenesta for, expenses unrelated to its activities. Some of those expenses, although improper, have been repaid. Other unrelated expenses remain outstanding and ought to be paid back to Skybow.

The witnesses

There was a large volume of documentary evidence. In addition each side read into evidence affidavits and the deponents of most of the affidavits were cross‑examined. Mr Patterson was the principal witness for the plaintiffs and Mr Humfrey was the principal witness for the defendants. There is a conflict of evidence between Mr Patterson and Mr Humfrey on some important matters, particularly about whether the Abrolhos venture was to be a joint venture between Humfrey Land Developments and Skybow or a sole venture by Skybow. Before setting out that my findings on the matters in issue I will set out my findings in relation to the credibility and reliability of the witnesses and their credit generally.

Mr Patterson

Mr Patterson is a heavy duty mechanic by training. Mr Patterson is the managing director of Central Earthmoving Company Pty Ltd, a substantial earthmoving and civil contractor. In general I found Mr Patterson to be an honest and straightforward witness.
Counsel for the defendants, Mr Williams, submitted that the court should find that Mr Patterson was not a credible witness. Mr Williams said that Mr Patterson's evidence in cross‑examination on two matters is inconsistent with his affidavits. In his affidavit sworn 18 October 2013 Mr Patterson identified a number of expenses that Skybow had incurred which appeared to be either inconsistent, unusual or unrelated to Skybow's activities. These allegations were incorporated into a schedule of loss and damage. There was insufficient basis for Mr Patterson's allegation in relation to a number of those items. Mr Patterson withdrew those allegations when further material was drawn to his attention. In my opinion Mr Patterson has in some instances been too ready to make allegations of impropriety by Mr Humfrey without sufficient basis. However, as will appear, there was substantial justification for suspicion in relation to the conduct of the company's affairs and I will be finding breaches of fiduciary duty by Mr Humfrey.
Mr Williams correctly submitted that Mr Patterson's evidence about insisting upon co‑signing the final accounts of Skybow in its initial years changed during the course of his evidence when other matters were brought to his attention. I find that Mr Patterson had a poor recollection of those matters but not that he sought to mislead the court. Mr Williams submitted that Mr Patterson's evidence about when he saw some of Skybow's financial statements and his observation of them at the time is inherently incredible. I find that Mr Patterson's recollection of those matters is poor and led to him giving unconvincing evidence concerning some of those matters. However, he was doing his best to recount detailed matters that occurred some years ago.
Mr Williams made other criticisms of Mr Patterson's evidence. I find that on some matters Mr Patterson's recollection of matters, particularly details, is poor and some reconstructions were affected by his belief in the wrongness of Mr Humfrey's conduct. On the whole Mr Patterson was doing his best to give truthful evidence and did not attempt to mislead the court. Mr Patterson gave an honest and reasonably accurate account of his dealings with Mr Humfrey and Skybow.

Mr Rocke

The plaintiffs adduced expert evidence from Clifford Rocke, a chartered accountant and partner at Korda Mentha. Mr Rocke was retained by the plaintiffs' solicitors to review the books and records of Skybow for the financial years ended 30 June 2004 to 30 June 2013 for the purpose of forming a view as to their state and sufficiency and identifying any irregularities in the books and records of Skybow, identifying the financial benefits received by directors originating from Skybow and commenting on specific matters including loans between Skybow and Kenesta, the Abrolhos venture, the Back Beach venture and the Seacrest development. Mr Rocke produced a report dated 2 September 2013 and a further report dated 18 October 2013.

There are some limitations on Mr Rocke's analysis and findings arising from limitations on the material available to him. However, I generally accept Mr Rocke's analysis and opinions.

Mr Mahler

Mr Rocke was assisted in the preparation of his reports by Benjamin Mahler, a forensic accountant and associate director at Korda Mentha. Mr Mahler attended the offices of RSM Bird Cameron, the accountants retained by Mr Humfrey to prepare the financial statements and income tax returns for Skybow, to inspect and examine Skybow's books and records. Mr Mahler gave evidence about his inspection and examination of the books and records which I find to be truthful and accurate.

Mr Watson

The plaintiffs called evidence from Stuart Watson, the sole director and secretary of Triton Building Company Pty Ltd which carries out building work in and around Geraldton. Mr Watson gave evidence as follows. In January 2011 Mr Humfrey requested a quote for roof repairs to a property at 387 Marine Terrace, Geraldton. That property is owned by Kenesta. Mr Watson gave Mr Humfrey a quotation addressed to 'Barry Humfrey'. Mr Humfrey accepted the quotation by telephone. Mr Watson completed the work. On 19 January 2011 Triton issued a tax invoice in the amount of $17,820 to Mr Humfrey and Mr Watson hand delivered the invoice to Mr Humfrey's office. A few days later Mr Humfrey asked Mr Watson to reissue the invoice in the name of Skybow and to change the description of the work to 'consulting fees'. Mr Watson caused Triton to issue a new invoice to Skybow for consulting fees in the amount of $17,820. The invoice was paid by Skybow. Mr Humfrey had helped Mr Watson when he first started his building company in Geraldton. Mr Watson appeared to be uncomfortable giving evidence which was plainly adverse to Mr Humfrey. Mr Watson was a truthful witness and I accept his evidence.

Mr Humfrey

Mr Humfrey's credibility and reliability and his credit generally are relevant to the conflict of evidence between Mr Humfrey and Mr Patterson and to other matters as well. Mr Humfrey caused Skybow to make payments which it should not have made. Mr Humfrey conceded that some of those payments should not have been made by Skybow. Mr Humfrey said that those payments were made by mistake or he does not know why they were made. In relation to payments which Mr Humfrey did not concede should not have been made by Skybow, whether the payments should have been made by Skybow depends on the purpose for which Mr Humfrey caused them to be made. Mr Humfrey's honesty in his business dealings and his credibility as a witness are relevant to those matters.
Mr Humfrey followed a number of occupations before establishing his own property development business. His principal trading vehicle is Kenesta which trades as Humfrey Land Developments. Kenesta is the principal company of the Humfrey group of companies. Mr Humfrey said that he has 22 companies working out of his office in Geraldton. The chief financial officer of the group, Mr Coombs, said that there are 34 companies in the group.
Counsel for the plaintiffs, Mr Bennett, submitted that Mr Humfrey lied on oath, regularly lied to Mr Patterson and other parties, involved Skybow in questionable tax minimisation or avoidance to suit his own interests and was an untruthful witness. It is therefore necessary to spend some time considering Mr Humfrey's honesty in his business dealings and in his testimony.
I find that Mr Humfrey was an untruthful witness and in his business dealings Mr Humfrey engaged in dishonest behaviour and tax evasion. In their closing written submissions the plaintiffs' counsel set out numerous matters which they submit show Mr Humfrey to be an untruthful witness and that he engaged in dishonest and unlawful conduct. Whilst I have considered all of those submissions, I will refer only to those which are sufficient to lead to the conclusions to which I have come.
In April 2005 Skybow paid $10,000 to Roseland Asset, Mr Humfrey's superannuation company, for bookkeeping services. Roseland Asset did not provide bookkeeping services to Skybow. When it was put to Mr Humfrey in cross‑examination that the payment to Roseland was a mistake Mr Humfrey said that it was not a mistake, Kenesta arranged for an invoice to be issued by Roseland so that Mr Humfrey could put some money into his superannuation and not pay as much tax. Later when it was put to Mr Humfrey that Kenesta was not entitled to charge bookkeeping fees Mr Humfrey said:
I don't know the background to that now, because it's so long ago, but if it charged it and it went into Roseland, it would have been just to save tax on it. That's all.
Mr Humfrey appeared to think that there was nothing wrong with tax evasion.
Kenesta hired a corporate box and 'four seats in the Admiral's Suite' at Fremantle Dockers' home games. Mr Humfrey caused Skybow to reimburse Kenesta a portion of those costs. Mr Humfrey swore that people were entertained in the box for purposes relating to Skybow's projects including consultants and people in the tourism industry which related to the Abrolhos Islands development and the proposed Back Beach development. I do not accept that Mr Humfrey hired the seats or the corporate box for the purpose of promoting the Abrolhos or Back Beach developments. Mr Humfrey's attempt to justify charging the expenditure to Skybow was unconvincing and I do not accept it.
A payment of $2,500 to the Fremantle Football Club on 21 April 2005 was a sponsorship of Peter Bell, the club captain, by Kenesta. Mr Humfrey said that the payment of that expense was recorded in Skybow's financial statements and described as 'entertainment expenses'. Mr Humfrey says he caused Skybow to pay the sponsorship of Mr Bell because it was obtained for the purposes of building relationships with consultants for the Abrolhos Islands development. I do not accept any of that evidence. Mr Bell was a business associate of Mr Humfrey. They were directors of P and B Corporation, P for Peter Bell and B for Barry Humfrey, a company formed to carry out developments at Exmouth, Geraldton and Albany. Mr Humfrey was planning to have Mr Bell take over from him as part of his succession planning. Mr Humfrey caused Skybow to pay for these sponsorships without justification. Mr Humfrey's attempt in his evidence to justify the payments was disingenuous.
I do not accept that Mr Humfrey's evidence about loans from Skybow to Kenesta was the whole truth. Mr Humfrey caused Skybow to make substantial loans to Kenesta without the agreement of Mr Patterson. I will refer to those loans later in these reasons when considering Mr Humfrey's conduct of the affairs of Kenesta but for now I will confine my findings to findings concerning the truthfulness of Mr Humfrey's evidence.
Between 2 July 2010 and 30 June 2011 Mr Humfrey caused Skybow to make eight separate loans to Kenesta totalling $518,714.40. Four of the advances were to meet specific payments due by Kenesta: $93,000 on 1 October 2010 for 'September calls', $57,500 on 11 February 2011 for Marina Resort Unit Trust January call, $22,000 on 4 March 2011 for North Cape Development Trust and $31,214.40 on 30 June 2011 for accounting fees for RSM Bird Cameron. The other advances were the round sums of $100,000 on 2 July 2010, $40,000 on 29 April 2011 and $140,000 on 3 May 2011 for 'working funds'. Mr Humfrey accepted, as he had to, that those payments were made by Skybow to Kenesta but said he was not sure how the money was taken out and whether it was in one or more lots. Mr Humfrey said that he did not remember giving staff instructions to take $100,000 out of Skybow and put it in Kenesta's account. When it was put to him that what he was doing was taking money from Skybow hoping he would get a Wandina distribution that would enable him to put some money back into Skybow Mr Humfrey said: 'that could have been the case on the day. It's very possible', but 'I don't know … I do not recollect having that sort of thought process' and he did not recollect thinking about any of those loans. Mr Humfrey was obfuscating the truth by being evasive. Before 2 July 2010 Kenesta's loan account was $27,191.62. The eight advances amounted to $518,714 in the next 12 months. The payments were made because Kenesta needed funding. I do not accept that Mr Humfrey does not recall instructing the advances to be made or whether or not he intended them to be repaid out of Wandina distributions or thinking about the loans at all. Mr Humfrey obscured the truth about unauthorised payments to his company.
Mr Humfrey caused false statements to be made in communications with government ministers or departments about the Abrolhos development. Mr Humfrey instructed his solicitor, Michael Lurie, to write to the executive director of the Department of Fisheries on 19 May 2006. The letter stated, amongst other things, that Humfrey Land Developments had spent approximately $2 million on the project in addition to the time which it had spent on the project. It was not true that Mr Humfrey or his company had spent approximately $2 million on the project in addition to the time which they had spent on the project.
In April 2007 the Department of Fisheries refused a request by Humfrey Land Developments for an increase in the lease period for the Abrolhos Long Island Developments. On 24 October 2007 Mr Humfrey sent an email to the Minister requesting help in obtaining a longer lease. In his email Mr Humfrey said that Humfrey Land Developments had spent $3 million on the project. When it was put to him that it was a lie to say that they had expended $3 million on the project Mr Humfrey said he accepted 'it would have been overstated' and he did not know why $3 million was mentioned. When it was put to him that other statements in the email were not truthful or accurate Mr Humfrey said:
We were generalising, and it was a commercial transaction which we were talking about.
Mr Humfrey instructed his solicitors to write to the State Solicitors Office on 23 November 2007 about the Long Island lease. The solicitors stated that they were instructed that some $2.5 million had been invested by Humfrey Land Developments at that time. In cross‑examination Mr Humfrey admitted that that was not true. The solicitor's letter further said that unless the Minister was willing to grant a longer lease, Humfrey Land Developments would have no option but to withdraw from the project because it would not be commercially viable. When it was put to Mr Humfrey that he had not discussed with Mr Patterson that the project was not commercially viable Mr Humfrey said:
… this is called commercial negotiation. And commercial negotiation is about getting the best deal possible. If I have to go into a situation and say that it is not commercially viable, I will do so, to get a better deal … and that is commercial reality.
When it was then put to Mr Humfrey that by commercial reality he meant lying to the government Mr Humfrey said:
The commercial reality of this is that I was trying to get the best deal possible so that we could progress ‑ so that Skybow would progress this deal in its own right. If we didn't get the 99 years, or didn't get the 80 years, then Skybow would not be able to do it in its own right, and that was what I was trying to achieve. If we only got 52 years, then we would have to go with a financier or banker, or whatever the case may be, and all I was trying to do was to make sure that the commercial reality was that we got the longest term possible.
On 17 March 2010 Mr Humfrey sent an email to the chief executive officer of the Department of Fisheries complaining about expressions of interest being invited from other parties in relation to an Abrolhos development. In the course of the email Mr Humfrey said that Humfrey Land Developments had spent $3 million on all the due processes including a formal PER. When Mr Humfrey was asked if it was okay to overstate and lie to the Department Mr Humfrey said:
Well, no one was lying, but what we're simply saying is that it's a commercial negotiation to try and get the situation where we were the preferred proponent, and that's what happened.
I find that Mr Humfrey knowingly made false statements in negotiations with the government department in an attempt to promote his objectives. Mr Humfrey did not acknowledge that there was anything wrong in doing so.
Mr Humfrey gave inconsistent evidence as to what he was paid for in respect of the $363,527 he received from Woolworths as part of the sale of the Seacrest Commercial site to the Woolworths subsidiary, Fabcot. At first, he claimed the money was for works that he had done on the commercial site. Then he said it was for project management fees. Then he claimed it was for future works on the site. These explanations do not accord with the emails between Mr Humfrey, Mr Turner, or Todd Wood nor the invoices he caused Skybow to issue to Fabcot. Mr Humfrey obfuscated to obscure the truth about the payment.
The Share Sale Agreement was subject to the defendants entering into a binding agreement with a bank or other financier to provide the funds necessary for the share purchase. In cross‑examination Mr Humfrey said that he never had a finance approval for the purchase of the shares from Mr Patterson. He was then shown an email he sent to Mr Patterson on 15 October 2012 in which he said that, as he had mentioned on the phone that morning, he had finally received finance approval and to allow for the paperwork to be completed he requested a settlement extension to 30 November. When it was put to him that that was a lie, Mr Humfrey denied that it was a lie and said that there had been finance approval but it was subject to the valuation of the Back Beach. When it was put to him that he had earlier given evidence that he had never told Mr Patterson that he had finance approval Mr Humfrey said: 'Well, I'm sorry'. I find that Mr Humfrey misled Mr Patterson when he said in the email that he had finance approval. I do not know whether or not Mr Humfrey received conditional finance approval for the purchase of the shares. If he did then he misled the court when he said that he never had a finance approval. If he did not then his evidence that he did was false. Either way, he either misled the court or gave false evidence.
On 31 July 2012 Braddon Mulching submitted an invoice to Skybow in the amount of $8,800 for clearing the Back Beach. On 14 December 2012 Kim O'Meara, Humfrey Land Developments' chief finance officer at the time, sent to Mr Patterson a list of Skybow creditors which showed that an amount of $8,800 was owing to Braddon Mulching and was outstanding for more than 90 days. Mr Patterson queried how Skybow's creditors would be paid. On 22 January 2013 Mr Humfrey informed Mr Patterson by email that the creditors would be funded by Kenesta. At a meeting on 24 January 2013 Mr Patterson said he was concerned that there were liabilities to Braddon Mulching and City of Greater Geraldton. Mr Humfrey stated that he kept in regular contact with both creditors and they understood the proposed restructure of the company. Mr Humfrey had authority to cause Seacrest to make payments and caused the Braddon Mulching bill to be paid out of Seacrest's money. Mr Patterson found out that the bill had been paid by Seacrest. On 3 March 2013 Mr Patterson informed Mr Humfrey that he had been informed that Mr Humfrey had caused Seacrest to pay to Braddon Mulching the debt owed by Skybow. On the same day Mr Humfrey informed Mr Patterson that the account from Braddon Mulching was paid inadvertently by Seacrest, that he had asked for a new invoice to be issued to Skybow and that he would pay the invoice himself on Tuesday morning to ensure that the discrepancy was rectified as soon as possible. Mr Humfrey did not pay the account the following Tuesday morning. He waited until receiving a Wandina distribution and reimbursed Seacrest on 25 March. I do not accept Mr Humfrey's evidence that the payment by Seacrest was inadvertent. Mr Humfrey acted dishonestly in having Seacrest pay the bill and his evidence that it was inadvertent is not true.
I have already referred to Mr Watson's evidence that he carried out some work for Mr Humfrey and issued an invoice to Mr Humfrey for roof repairs. Mr Humfrey asked Mr Watson to reissue the invoice in the name of Skybow and to change the description of the work to consulting fees and subsequently caused Skybow to pay the invoice. Mr Humfrey gave no explanation for the invoice being issued to and paid by Skybow. In cross‑examination he said:
Why was this put in Skybow's name? I honestly don't know.
I find that Mr Humfrey knowingly caused Mr Watson to issue the invoice to Skybow so that Skybow would pay for work which Mr Humfrey knew it should not. Furthermore, I find that Mr Humfrey asked that the invoice record that it was for 'consulting fees' to cover up what he had done. I do not accept Mr Humfrey's evidence that he does not know why the invoice was put in Skybow's name. I find that Mr Humfrey feigned ignorance of the matter to avoid admitting the truth that he had caused Mr Watson to change the invoice so that Skybow would pay for the work which Mr Humfrey knew it should not.
Mr Humfrey was an unsatisfactory witness. On numerous occasions during cross‑examination he was unable to recall matters, which I would expect him to be able to recall, or to provide a coherent explanation of things he had done and why he had done them. On the other hand, Mr Humfrey claimed to recall, to the advantage of his case, conversations which had occurred long ago and of which he had no note. I find that Mr Humfrey was not a truthful witness. I am unable to accept Mr Humfrey's evidence where it is contentious and uncorroborated.

Mr Thomson

John Thomson is a director of RSM Bird Cameron's Geraldton office. Since 30 June 2009 he has had the primary responsibility for preparing the financial statements and income tax returns for Skybow and accounting work for the Humfrey Land Developments Group. Mr Thomson gave evidence concerning Skybow's financial statements and the basis on which he had prepared Skybow's financial statements for the year ended 30 June 2009 and subsequent years.
Mr Thomson has a pecuniary interest in some projects in common with Mr Humfrey. Mr Thomson did not give evidence in the manner one would expect from a professional witness. He did not confine himself to answering the questions put to him in an impartial manner. At times he appeared to be an advocate for Mr Humfrey's case. Mr Thomson was not a credible or reliable witness.

Mr Coombs

Glen Coombs is the chief financial officer of Humfrey Land Developments. He commenced in that position in April 2013. He undertook an investigation of financial records of Skybow and Kenesta in an attempt to explain that the sum of $140,000 advanced by Skybow to Kenesta in 2011 related to expenses incurred by Kenesta on behalf of Skybow or Kenesta was otherwise justified in having the amounts paid by Skybow. Mr Coombs' exercise was a reconstruction from incomplete records. Some of his assumptions were not appropriate. I did not find his evidence to be helpful.

Oppressive conduct of corporation's affairs - Legal principles

Corporations Act s 232 sets out a number of grounds to be satisfied before a court may make an order under s 233. Section 232 provides relevantly that orders may be made by the court if it is satisfied that the conduct of a company's affairs is either:
•contrary to the interests of the members as a whole, or;
•oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.
Section 233 sets out a non‑exhaustive list of orders the court may make if it is satisfied that those grounds exist. The orders include orders for the purchase of the shares of any member by other members, restraining a person from engaging in certain conduct and requiring a person to do a specified act.

Whether conduct is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member or members is to be judged objectively as by a commercial bystander. The content of fairness depends upon the context. Where, as here, the court is called upon to decide an allegation of oppression in the context of a closely held company, the court should consider the dealings between the members. The plaintiffs on the one hand and the defendants on the other hand are equal shareholders. However, with the acquiescence or consent of Mr Patterson who controls the plaintiffs, Mr Humfrey assumed management of the day‑to‑day affairs of Skybow. The plaintiffs assert that Mr Humfrey used funds of Skybow for the benefit of himself or his company, Kenesta, without the authority of Mr Patterson. Such conduct, if made out, is relevantly oppressive or unfair.
The defendants submitted that there are difficulties in applying the oppression principles in s 232 where the plaintiffs and the defendants each hold 50% of the shares in Skybow. The defendants referred to three authorities. The first is Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95; (2008) 66 ACSR 359 where Young CJ in Eq discussed the matter at [387] to [395] without coming to any firm view. In Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104; (2011) 288 ALR 310 at [321] Young JA referred to his observation in Campbell v Backoffice that there were conceptual difficulties in applying the oppression principles to a 50/50 company 'unless there were at least individual strong arm tactics by the person who held the other 50%' but, as in Campbell, found it unnecessary to decide the point. His Honour did observe that it is difficult to say that there has been oppression in a 50/50 company between two persons of equal strength of character.
There is no reason in principle why a holder of 50% of the shares of a company should be denied relief under s 232. In general, the statutory power to intervene in the internal affairs of a company is necessary only where an applicant does not itself have the power to prevent oppression. It would seem unnecessary to protect those who can control, by their majority shareholding, the affairs of a company against the oppression of others in the conduct of those affairs. Justice Chesterman, writing extra‑curially, after reviewing relevant authorities, said that a careful reading of the cases shows that what disentitles a member or members of a company from complaining about oppression is not necessarily a majority of shares but a majority of votes. A member who does not control a majority of votes may seek the court's intervention: The Hon Mr Justice R N Chesterman RFD, Oppression by the Majority - Or of it? (2004) 25(2) Aust Bar Rev 103. As Justice Chesterman points out, when relief is withheld to majority shareholders it is because they were capable of acting, or causing the company to act, in such a way as to remove or overcome the alleged oppression. What confers that power is the majority of votes. In this case the plaintiffs were not able to cast a majority of votes at a general meeting so as to cause Skybow to act in such a way as to remove or overcome the alleged oppression.
Furthermore, Mr Humfrey exercised de facto control of Skybow. Initially, Mr Humfrey assumed that role and Mr Patterson acquiesced in it. Mr Humfrey has maintained and has possession and control of Skybow's books and records. Mr Humfrey has declined to permit Mr Patterson to be a co‑signatory to Skybow's bank accounts. No directors meeting can take place and no resolution can be made by Skybow without Mr Humfrey's concurrence. Mr Patterson is powerless to actively participate in the affairs of Skybow or to take any action to recover loans, management fees and other payments which Mr Patterson says Mr Humfrey wrongly caused Skybow to make to Kenesta. In those circumstances it is open to the court to grant relief to the plaintiffs under s 233 of the Corporations Act notwithstanding that they hold 50% of the shares of Skybow.
The second legal issue raised by the parties relates to the relief sought by the plaintiffs. The plaintiffs seek orders that they purchase the defendants' shares, or in the alternative the defendants purchase their shares. The plaintiffs submit that in assessing the purchase price to be paid by the plaintiffs for the defendants' shares the value of loans outstanding from Kenesta should be calculated by applying a commercial interest rate from the date such loan was incurred until the date of valuation. Further, the plaintiffs say that a sum equivalent to 50% of the amount shown in the ledgers of Skybow in respect of the Abrolhos venture (including any sums written off) should be treated as if it were a loan to Kenesta. In respect of items shown in the accounts or ledgers of Skybow in respect of the Back Beach development (including any amounts written off) the plaintiffs say that any amount included therein in respect of management fees should be treated as if it were a loan to Kenesta. Further, the plaintiffs say any other management fees wrongly paid by Skybow to Kenesta should be dealt with as if they were a loan to Kenesta. In respect of the Woolworths transaction the plaintiffs say the sum of 50% of benefits received by Kenesta from Woolworths Ltd or Fabcot Pty Ltd should be a sum which be brought into account. In respect of each of the items set out in the plaintiffs' substituted schedule of loss and damage the plaintiffs say that insofar as those sums have not been repaid as at the date of judgment and insofar as they have not been otherwise dealt with they shall be treated as if they were loans to Kenesta.
The defendants say that what the plaintiffs claim is in effect for orders for monetary compensation of the company whose affairs were conducted oppressively and that such orders are not usually made when the company could have pursued a claim for compensation or leave to pursue a derivative action could have been sought. The court has power under Corporations Act s 233 to order compensation in favour of the companies whose affairs are in question, notwithstanding the availability of a derivative action: LPD Holdings (Aust) Pty Ltd v Phillips, Hickey and Toigo [2013] QSC 225 (McMurdo J) [44] referring to Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672; Atlasview Ltd v Brightview Ltd [2004] 2 BCLC 191; Re Chime Corp Ltd (2004) 7 HKCFAR 546; Gamlestaden v Baltic Partners Ltd [2007] 4 All ER 164, 172. In Re North Coast Transit Pty Ltd [2013] NSWSC 1119 Brereton J observed that whilst he was not aware of any case in which the remedy for oppression has been a monetary compensation order he readily acknowledged that a similar result can be obtained, as it was in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 2) (1998) 29 ACSR 290, by requiring accounts to be taken before striking a valuation. In this case, if the court makes a share buy back order then a similar result to an order for monetary compensation can be obtained by ordering that before a valuation of the shares there be an adjustment to the accounts to reflect any unauthorised payments Mr Humfrey caused Skybow to make to Kenesta.
The court's primary objective in providing for a valuation of the company's shares is to determine the fair value of the company's shares. Where the defendants' oppressive conduct has reduced the value of the shares then it must logically follow that the valuation must disregard the adverse effects of the oppressive conduct. That principle has been adopted in Australia: Re Golden Bread Pty Ltd [1977] Qd R 44, 54 ‑ 55. In Sanford v Sanford Courier Service Pty Ltd (1986) 10 ACLR 549 the oppressive conduct complained of included the majority remunerating themselves with excessive salaries and emoluments to the financial detriment of the minority shareholder. The court ordered a valuation of the shares to be conducted as if the salaries actually paid were set at a commercial level which had regard to the prudent financial management of the company. Re National Building Maintenance Ltd [1971] 1 WWR 8 was an action brought in the British Columbia Supreme Court by a minority shareholder who claimed relief under the Companys Act 1960 (BC) s 185 on the ground that the affairs of the company were being conducted in a manner oppressive to some of the members. The majority shareholder had taken secret and unauthorised management fees, which were held by Aickins J to be oppressive to the minority shareholder because it reduced the company's profits available for distribution as dividends. His Honour held that the majority shareholder was entitled to relief in the form of a purchase order. The valuation of the minority shares was to be based upon the financial position the company would have been in if the management fees had not been taken. The decision was affirmed by the British Columbia Court of Appeal: National Building Maintenance Ltd v Dove [1972] 5 WWR 410.
When making an order for the purchase of shares the task of the court is to fix a price that represents a fair value in the circumstances. If the oppressive conduct takes the form of misappropriation of the company's assets then the valuation should be carried out in a manner which compensates the applicant for the loss in the company's worth due to the misappropriation or other conduct which is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member within the meaning of s 232. The purpose of an order or orders under s 233 is to remedy the oppressive conduct, usually by bringing it to an end. That may include the purpose of compensating for detriment including any loss that the oppressive conduct has caused. Those purposes may lead to a variety of orders in different circumstances.

The alleged oppressive conduct

At the heart of the plaintiffs' case is the allegation that Mr Humfrey misused Skybow's funds and property. In the work by R P Austin, H A J Ford and I M Ramsay, Company Directors, Principles of Law and Corporate Governance, LexisNexis, Sydney, 2005, the authors identify five closely related rules administered by equity and which have an application to conflicts of interest on the part of company directors. They can overlap extensively with one another. The five rules are:
(a)the conflict of interest rule: the director or officer must not, in any matter falling within the scope of his or her office, have an interest that conflicts or may possibly conflict with his or her duty to the company, except with the company's fully informed consent;
(b)the conflict of duties rule: the director or officer must not, in any matter falling within the scope of his or her office, have an inconsistent engagement with a third party except with the company's fully informed consent;
(c)the misappropriation rule: the director or officer must not misappropriate the company's property for their own, or for a third party's benefit;
(d)the profit rule: the director or officer must not misuse his or her position for personal or a third party's possible advantage, except with the company's fully informed consent and, therefore, he or she must account to the company for any gain which they make in connection with the fiduciary office; and
(e)the business opportunity rule: the director or officer (at least if engaged full time in the service of the company) must not divert any profit making opportunity in the same line of business as the company's present or prospective business, to himself or herself or to some other person, except with the company's fully informed consent.
A director also has a duty to exercise his powers and discharge his duties with care and diligence, a duty to act in good faith in the best interests of the corporation and the duty to act for a proper purpose. These duties are contained in Corporations Act 2001 (Cth) s 180 and s 181 and also by the general law.
It is not necessary to give separate consideration to each of these duties. The plaintiffs' case is that Mr Humfrey exercised his powers to loan funds to Kenesta, pay management fees to Kenesta, pay expenses incurred by Kenesta, reimburse Kenesta for expenses incurred by Kenesta and divert a business opportunity to Kenesta without the authority of Mr Patterson, and therefore without the authority of the company, and for the benefit of Mr Humfrey or his company, Kenesta. If those assertions are made good then Mr Humfrey misappropriated the company's property for his own, or for Kenesta's benefit, and breached his fiduciary and statutory duties to Skybow. The plaintiffs contend that, through Mr Humfrey, Kenesta had knowledge of the breaches of fiduciary duty by Mr Humfrey so as to be liable for knowing receipt of the funds or knowing assistance in the breaches under the first and second limbs of Barnes v Addy (1874) LR 9 Ch App 244.
The plaintiffs assert that Mr Humfrey misused Skybow's funds on numerous occasions over a long period. The plaintiffs produced a substituted schedule of loss and damage which specifies 54 items of Skybow funds misused by Mr Humfrey under seven headings. I will consider each.

Outstanding Skybow loan to Kenesta

The first category of alleged misused funds relates to loans which Mr Humfrey caused Skybow to make to Kenesta. The plaintiffs say that Skybow loaned a total of $482,834 to Kenesta without the agreement of Mr Patterson and therefore without the authority of Skybow. The course of the loans can be seen from Skybow's financial statements.
At the end of the 2008 financial year Skybow's financial statements show that its current liabilities included loans at call of $233,808, consisting of a loan of $146,289 from Kenesta and of $87,519 from Rodale. During the 2009 financial year Skybow repaid Kenesta's loan of $146,289 and loaned Kenesta $48,742 whilst no part of the loan of $87,519 owing to Rodale was repaid. During the 2010 financial year the loan owing by Kenesta to Skybow was reduced from $48,742 to $27,191. The loan owing to Rodale was not reduced and remained $87,519.
During the 2011 financial year the loan from Skybow to Kenesta increased from $27,191 to $545,905. That is, during that year over $518,000 was loaned by Skybow to Kenesta. The loan payable to Rodale of $87,519 remained outstanding. The increased loan to Kenesta was made by eight payments between 2 July 2010 and 30 June 2011 of amounts between $22,000 and $140,000. Skybow's books and records describe the loans as 'working funds loan' except for a payment of $31,214.40 which was described as being an RSM invoice incorrectly claimed in Skybow's accounting fees. Three of the loan descriptions bear the notations 'Sept calls', 'MRUT January call' and 'NCOT funds' in addition to the description 'working funds loan'.
In cross‑examination Mr Humfrey agreed that in 2010 he had caused Kenesta to draw over $500,000 of loan funds out of Skybow, that he had done so without Mr Patterson's agreement and that he had done it because Kenesta required funding. Mr Humfrey justified his actions by saying that Kenesta required funding and had done a lot of work for Skybow for which it should be compensated somehow or another. Mr Humfrey's explanation for doing so without raising the matter with Mr Patterson was that Mr Patterson 'wasn't available at that time' and so 'we said, right, if it's going to go in, put it in as a loan until we catch up with Mr Patterson and sort it out, but we never got to that'. During the course of his evidence, Mr Humfrey claimed he did not remember giving instructions for the loan payments to be made and suggested that it may have been done by his CFO or bookkeeper without his authority. I do not believe that Mr Humfrey did not recall the loan payments. It is inconceivable that Ms O'Meara would have made the loan payments without the instructions or express authority of Mr Humfrey. Mr Humfrey does not say that he gave such authority to Ms O'Meara. Ms O'Meara did not give evidence and any suggestion that she caused the payments to be made without the instructions or authority of Mr Humfrey must be rejected. Mr Humfrey's suggestion that any of these payments may have occurred without his authority being sought by Ms O'Meara is obfuscation by Mr Humfrey.
Mr Humfrey did not have authority to cause Skybow to make the loans to Kenesta. There was no written agreement or authority. There was no resolution of the directors of Skybow. Mr Humfrey concedes that he did not even raise the matter with Mr Patterson.
Mr Humfrey sought to justify the loans on the basis that Kenesta required funding, Kenesta was performing a considerable amount of work for Skybow, Skybow had good cash flow and aiding Kenesta benefitted Skybow as Kenesta could continue to perform work for Skybow. Those matters, if established, would not justify the loans. Mr Humfrey applied company property for the benefit of his company, which in effect was for his personal benefit. He did so without the authority of the company. He breached his fiduciary and statutory director's duties.
In any event the matters relied upon by Mr Humfrey to justify the loans are not factually correct. Skybow did not have a good cash flow and the loans did not benefit Skybow. At the time Skybow did not have a good cash flow. Its only source of funds was distributions to be received from the Wandina Syndicate. Those distributions would depend upon sales of the Seacrest lots, distributions by Seacrest Corporation to the Seacrest joint venturers and resolutions of the Wandina Syndicate members to make distributions. At the time distributions were not being made by the Wandina Syndicate with any regularity. Indeed, Skybow's draft accounts for 2013 show that Skybow's outstanding loan to Kenesta is still $482,834.
Mr Humfrey's justification of the loans on the ground that Kenesta was performing a considerable amount of work for Skybow is an after the event justification without merit. The amount of the loans were unrelated to any work done by Kenesta for Skybow. Furthermore, Mr Humfrey had caused Skybow to pay Kenesta management fees for the work done by Kenesta for Skybow.
The loans were made without authority, without any justification and without disclosure to Mr Patterson or the plaintiffs other than appearing in the balance sheet of the 2011 financial statements which were not made available to Mr Patterson until sometime in January 2012. The loans did not benefit Skybow. To the contrary, the loans deprived Skybow of working funds and put Skybow at risk of not recovering the funds it loaned to Kenesta. The loans were unsecured. The loans were made because Kenesta required the money to fund its debts or obligations which it was unable to fund from its own sources. Repayment of the loans depended upon distributions by the Wandina Syndicate to Skybow which in turn would make a distribution to Kenesta.
The conduct of Mr Humfrey in causing Skybow to make substantial loans to Kenesta without the agreement of Mr Patterson was a breach of his fiduciary duty to Skybow, a breach of his statutory duty to exercise his powers and duties with care and diligence, his statutory duty to exercise his powers and duties in good faith in the best interests of Skybow and for a proper purpose and his statutory duty not to improperly use his position to gain an advantage for himself or someone else.

Management fees - overview

The plaintiffs claim that Mr Humfrey caused Skybow to pay management fees to Kenesta on 11 separate occasions without the agreement of Mr Patterson or any lawful entitlement of Kenesta. The defendants make five responses to that claim. First, the plaintiffs and the defendants agreement in relation to the development of the Rudd's Gully land was for Rodale and Kenesta to perform work and be paid at cost and Skybow's future activities were undertaken on the same terms that had been agreed in respect to the development of the Rudd's Gully land. Secondly, the fees were a reasonable fee for Kenesta performing work for the benefit of Skybow's projects. Thirdly, Mr Patterson accepted that it was appropriate that Mr Humfrey could charge Skybow for the efforts of Mr Humfrey's administrative employees. Fourthly, Mr Humfrey cannot recall the circumstances of the payment of fees due to the passing of time and it cannot be inferred that there was no proper basis for some fees to be paid. Fifthly, whilst neither Mr Humfrey nor Mr Patterson can recall an express agreement that Mr Humfrey would have authority to cause Skybow to undertake expenditures it can be inferred that such an agreement was reached.

Management fees - no agreement on Rudd's Gully syndicate deed

The first development carried out jointly by the plaintiffs and the defendants was the development of a farming property in Rudd's Gully south of Geraldton. On 1 August 1996 Springdale Holdings, Kenesta and Rodale executed a deed to form a syndicate known as the Rudd's Gully Syndicate. The deed provided that Kenesta through its managing director, Mr Humfrey, shall be the manager and agent of the syndicate and shall manage the business and affairs of the syndicate and that as manager of the syndicate Kenesta shall be paid or reimbursed:
(a)all reasonable out of pocket and disbursements (including all survey and application fees for subdivisions all stamp duties and legal and account fees) incurred on behalf of the Syndicate; and
(b)a fee equal to Five (5) per cent of the gross selling price of the land payable in instalments upon the settlement of the sale of the various lots comprising the subdivision.
In or about April 1999 Mr Humfrey and Mr Patterson agreed on advice from a solicitor that the interest of Kenesta and Rodale in the Rudd's Gully Syndicate would be transferred to Skybow. In or about April 1999 Kenesta, Rodale and Skybow executed a sale agreement by which Kenesta and Rodale sold to Skybow all of the interest of Kenesta and Rodale in the Rudd's Gully Syndicate. In cross‑examination Mr Humfrey agreed that after the execution of the sale agreement the Rudd's Gully Syndicate agreement would fall away and everything that occurred within Skybow would thereafter have to be agreed between himself and Mr Patterson to apply to Skybow. Mr Humfrey further agreed that he never negotiated or agreed with Mr Patterson a management agreement for Kenesta.
In re‑examination Mr Humfrey said that his understanding about the role of Kenesta as manager following the execution of the sale agreement was that they 'would just simply follow on whatever that agreement was'. Counsel for the defendants submitted that on this basis Kenesta would be entitled to payment of fees representing the cost to Kenesta of the services that it performed for Skybow. I do not accept that argument for two reasons. First, there was no agreement between Mr Patterson on behalf of the plaintiffs and Mr Humfrey on behalf of the defendants that Kenesta would be entitled to payment of fees for work it carried out on behalf of Skybow on the same basis or terms set out in the deed establishing the Rudd's Gully Syndicate. Secondly, the Rudd's Gully Syndicate deed entitled Kenesta to be paid reasonable out of pocket and disbursements incurred on behalf of the Syndicate and a commission or fee upon sales. It did not entitle Kenesta to be paid a management fee.

Management fees - no implied agreement

The second basis on which the defendants say that Kenesta was entitled to be paid a management fee is that Kenesta undertook significant work for the benefit of Skybow's projects. Mr Humfrey's evidence is that he caused payment of fees that he thought were reasonable in light of the work undertaken by Kenesta and this was significantly less than what a commercial manager would have charged. This argument is in effect that a promise to pay reasonable remuneration for the management services rendered by Kenesta should be implied because Kenesta rendered management services of value to Skybow and Skybow took the benefit of those services.
I will first consider whether any promise to pay reasonable management fees should be implied for the year ended 30 June 2000 in which project management fees of $13,649.88 were paid. In his affidavit sworn 6 December 2013 Mr Humfrey said that given the passage of time he could not then recall what those project management fees were for or to whom they were paid or locate any documents relating to them. In his affidavit of 10 February 2014 Mr Patterson said that the project management fees of $13,649.99 were never discussed with him and were never disclosed in Skybow's financials.
A number of matters point against any implied agreement that Skybow pay Kenesta the management fees. First, Kenesta, together with Mr and Mrs Humfrey, held 50% of the shares in Skybow and was entitled to 50% of the profits made by Skybow. Secondly, the Rudd's Gully Syndicate deed between Kenesta and Rodale which preceded the Skybow venture did not entitle Kenesta to a management fee. Thirdly, the major project undertaken by Skybow at this time was the Seacrest Estate development through the Wandina joint venture syndicate. The Wandina Syndicate deed made 5 November 1998 provided that Kenesta was appointed the manager of the syndicate. The deed expressly provided that Kenesta was not to receive any funds for carrying out its obligations as manager. The syndicate members agreed that Kenesta was to be paid $50,000 in consideration of the work undertaken by Kenesta in developing the project. Kenesta was also appointed manager of the Seacrest Estate joint venture and was entitled to management fees. Kenesta was also entitled to sales commissions for sales under the joint venture agreement. Fourthly, Mr Humfrey could have, but did not, ask for Mr Patterson's agreement that Kenesta be paid a management fee. In all the circumstances no agreement should or could be implied on the part of Skybow, or the plaintiffs, for Skybow to pay reasonable management fees to Kenesta for the year ended 30 June 2000. The same conclusion must apply to subsequent years unless there are some relevant different circumstances.
The plaintiffs' substituted schedule of loss and damage under the heading of project management fees includes $16,150 for 'Profit on Sale of Batavia Gardens' on 23 July 2003. That item is taken from Mr Rocke's report. In s 5 of his report Mr Rocke refers to Batavia Gardens. Mr Rocke says that he was instructed that Batavia Gardens' transactions relate to the subdivision and development of an area of land into a residential housing estate. Skybow purchased certain lots and sold some of them to Seagrove, a company associated with Mr Humfrey. Mr Humfrey says that Seagrove carried out the development on behalf of a syndicate of investors which included Skybow. Mr Humfrey says that Kenesta was paid management fees and sales commission for work done with respect to the Batavia Gardens project. Skybow's general ledger includes the item 'profit on sale of Batavia Gardens' of $16,150. The extracts from Skybow's books produced by Mr Rocke do not disclose that that amount was paid to Kenesta or credited to Kenesta's loan account. Mr Rocke said in his report that in relation to the Batavia Gardens transactions there was a general lack of books and records. An agreement that Skybow should pay Kenesta management fees for managing the Batavia Gardens project should not be implied. However, I am not satisfied that the entry referred to evidences the wrongful payment of a management fee to Kenesta.
I make the same conclusion in relation to Item 19 of the plaintiffs' substituted schedule of loss and damage being 'Profit on Sale ‑ Batavia Garden' of $6,750. There are three items on the plaintiffs' substituted schedule of loss and damage for the year ended 30 June 2004 which appear to relate to profits or sale commissions on Batavia Gardens' lots - Items 20, 21 and 23. I am not satisfied that those items relate to management fees paid by Skybow to Kenesta or credited to Kenesta's loan account with Skybow.
Item 24 on the plaintiffs' substituted schedule of loss and damage is an amount of $19,107 for 'Management and Sales Commission on Lot 310, Exmouth Pebble Beach Lot' on 23 February 2004. Mr Humfrey says that Skybow purchased lot 310, Exmouth, known as the Pebble Beach lot, from Springdale Holdings, a company which Mr Humfrey controlled, in August 2001 for the purpose of Skybow developing the lot. After Skybow purchased the lot Mr Humfrey undertook work toward its development. However, development was hindered by issues including a power easement and a need to conserve a sea eagles' nest. Consequently, Skybow sold the lot in December 2003. The $19,107 management and sales commission paid to Kenesta on 23 February 2004 was remuneration for the work Kenesta, by Mr Humfrey, had undertaken attempting to facilitate a development of and then selling the lot. Mr Humfrey says that given the passage of time he cannot recall a specific conversation in which he and Mr Patterson discussed Kenesta's role in relation to the proposed development of the lot or Kenesta's remuneration.
Mr Patterson says that the issues relating to the presence of a sea eagles nest and restricted access for power occurred when Springdale Holdings owned the lot and before the lot was purchased by Skybow. Mr Patterson says he never discussed developing the lot with Mr Humfrey and the management and sales commission fee paid to Kenesta was not disclosed to him. Mr Humfrey has not produced any project management and sales agreement between Kenesta and Skybow in relation to Pebble Beach. I do not accept Mr Humfrey's evidence that Kenesta carried out any work developing the lot. In any event, no promise to pay reasonable management and sales commission fees can be implied in relation to the Pebble Beach Lot.
Mr Rocke's analysis of Skybow's financial records, which I accept, show that Skybow paid Kenesta $27,272.73 for 'Project Management Fee ‑ Proposed Caravan Park' on 31 January 2008 and $45,000 for 'Project Management services for Caravan park' on 15 May 2009. The defendants say that the $27,272.73 fee was not paid in cash but was paid by way of a $30,000 ($27,272.73 plus GST) reduction in Kenesta's loan account. Whether it was paid in cash or by way of a reduction in Kenesta's loan account, the management fee was paid or credited to Kenesta. There was no express agreement for the payment of the management fee.
Mr Humfrey gave evidence concerning the caravan park project as follows. Kenesta undertook work on Skybow's behalf in relation to the caravan park project. Other than meeting Mr Humfrey onsite on one occasion to discuss sewerage and power requirements Mr Patterson did not undertake any work towards the project. Mr Patterson was not involved in the day‑to‑day management of Skybow. Mr Humfrey did not consult Mr Patterson with respect to causing Skybow to make payments to other persons and Mr Patterson did not seek to be involved or to be consulted as a director on the day‑to‑day management of Skybow until the dispute arose in 2012. Prior to that time Mr Patterson had not complained to Mr Humfrey about Skybow's affairs being managed in that way. Mr Humfrey caused Skybow to pay to Kenesta what he considered, based on his knowledge of the industry, reasonable fees for the extensive work undertaken by him and other persons who were employed by Kenesta. If an external consultant had been engaged then significantly higher fees would have been incurred. The payment of, amongst other things, project management fees in the amount of $90,909.09 on 6 July 2006 and $14,400 on 12 January 2010 were brought to Mr Patterson's attention in 2012.
Mr Patterson says that he recalls Mr Humfrey contacted him regarding project management fees and he verbally agreed to the payment of $90,909 to be paid to Kenesta.
There was no written agreement for Skybow to pay management fees to Kenesta for work done in relation to the Caravan Park or Back Beach proposed development. There was no oral agreement, except that Mr Patterson agreed to the payment of management fees of $90,909 by Skybow to Kenesta on 6 July 2006. There is no basis for implying an agreement to pay the fee of $27,272 on 31 January 2008 or the fee of $45,000 on 15 May 2009.
The plaintiffs say that Skybow paid Kenesta $14,400 for management fees on 12 January 2010. Mr Patterson says he did not agree to such a payment. There is no basis for implying an agreement to pay it.
The plaintiffs say that Skybow paid Kenesta $30,000 for 'Project Management Fees in addition to the distribution' on 12 January 2010. Mr Humfrey's explanation for the payment of this fee is as follows:
The payment of $130,000 on 12 January 2010 … was partly a distribution to Kenesta of part of a distribution that Skybow had received from the Wandina Syndicate and partly a payment of project management and accounting fee. On 11 January 2010 Skybow received a $240,000 distribution from the Wandina Syndicate. On 12 January 2010 Skybow paid a $100,000 distribution to each of Kenesta and Rodale. The balance of the $130,000 paid to Kenesta was a $30,000 project management and accounting fee.
The rationalisation of the fee of $30,000 is artificial. There was no attempt to relate the fee to any particular period. There was no attempt to calculate the cost of services provided by Kenesta by reference to the time spent by its employees or otherwise. There is no basis for implying an agreement to pay a management fee of $30,000 at the same time as making a profit distribution to Kenesta.
When each of the management fees referred to are considered in context there is no basis for implying an agreement on the part of Skybow to pay management fees to Kenesta. The amounts were paid at irregular intervals. They did not relate to any particular period or particular services rendered. There was no attempt to calculate the cost of the services provided. They were simply amounts which Mr Humfrey decided to pay to Kenesta.

Management fees - Patterson did not agree they are appropriate

The defendants' assertion that Mr Patterson accepted that it was appropriate that Mr Humfrey could charge Skybow for the efforts of Mr Humfrey's administrative employees arises from Mr Patterson's evidence in cross‑examination. Mr Patterson was questioned about Skybow's profit and loss statement for the 2008 financial year. The statement disclosed expenses of $52,327 for salaries and wages and $4,709 for employee superannuation contributions. Mr Patterson agreed that Skybow had no employees and that he presumed that Mr Humfrey was charging for his administrative employees. Mr Patterson agreed that it was appropriate that Mr Humfrey could charge Skybow for the efforts of his administrative employees. That was a proper concession for Mr Patterson to make. Skybow had no employees. Its management and accounting was attended to by Kenesta. An agreement to that effect is to be implied from the conduct of Skybow's directors, Mr Humfrey and Mr Patterson. A term may reasonably be implied as a matter of fact that Skybow would reimburse Kenesta for any expenses incurred by Kenesta on behalf of, or carrying out work for, Skybow. However, the management fees which Mr Humfrey caused Skybow to pay Kenesta were not of that character. The amounts were paid at irregular intervals. They did not relate to any particular period or particular services rendered. There was no attempt to calculate the cost of the services provided by Kenesta to Skybow. They were simply amounts which Mr Humfrey decided to pay to Kenesta.

Management fees ‑ express agreement has been forgotten

The defendants submit that whilst neither Mr Humfrey nor Mr Patterson can recall an express agreement that Mr Humfrey would have authority to cause Skybow to undertake expenditures it can be inferred that such an agreement was reached. I do not accept that argument. First, the payment of management fees is not an indemnity or reimbursement of expenses incurred by Kenesta on behalf of Skybow. It is remuneration for services rendered by Kenesta. The evidence does not permit a finding that there was an express agreement that Skybow would pay management fees to Kenesta in relation to all or some of the affairs of Skybow. Mr Patterson, whose evidence I accept, denies that any such agreement was made.

Management fees - Humfrey's inability to remember circumstances of payment

The defendants say that Mr Humfrey cannot recall the circumstances of the payment of management fees to Kenesta due to the passing of time. The defendants submit that it cannot be inferred that there was no proper basis for some fees to be paid.
Kenesta had no right to remuneration in the form of management fees unless there was an express or implied agreement by Skybow to pay such fees or the payment of the fees was later ratified by Skybow through its directors, Mr Humfrey and Mr Patterson. There was no express or implied agreement and no ratification. In the absence of any express or implied agreement or ratification there is nothing from which it can be inferred that there was a proper basis for Mr Humfrey to cause the management fees to be paid to Kenesta.

Management fees ‑ summary

There was no express or implied agreement that Skybow would pay management fees to Kenesta for all or some of its activities or some or all of the projects it participated in except for the management fee of $90,909 paid by Skybow to Kenesta on 6 July 2006 which Mr Patterson agreed to. Kenesta had no entitlement to the management fees which Mr Humfrey caused Skybow to pay to Kenesta except for the management fees of $90,909 referred to.
Mr Humfrey, without the agreement of Mr Patterson, and without disclosing to Mr Patterson, took management fees for Kenesta from Skybow. The management fees were not a genuine estimate of the cost or value of services provided by Kenesta to Skybow. Mr Humfrey caused the payments to be made as and when Kenesta required funds.
The conduct of Mr Humfrey in causing Skybow to pay management fees to Kenesta without the agreement of Mr Patterson and without disclosing the fees to Mr Patterson was a breach of his fiduciary duty. Mr Humfrey's conduct was also a breach of his statutory duties of care and diligence, good faith and not to use his position to gain an advantage for himself or someone else.

Abrolhos Islands

Twelve of the items of expenditure or reimbursement on the plaintiffs' substituted schedule of loss and damage are for the reimbursement to Kenesta of expenses incurred in relation to the Abrolhos Islands development. The issue in relation to the Abrolhos Islands project is who is, or should be, responsible for the expenses incurred by Skybow in relation to the Abrolhos Islands development of an eco‑tourism resort. The defendants say that the project was undertaken by Skybow pursuant to an agreement between Mr Humfrey and Mr Patterson. The plaintiffs say that Mr Patterson and Mr Humfrey agreed that Skybow would participate on a 50‑50 basis with Kenesta in a joint venture to develop the resort but that Kenesta and Mr Humfrey should be responsible for all the expenses incurred by Skybow in relation to the development. The plaintiffs say that is so because the ownership rights or proposed licence with respect to the development always remained a matter over which Mr Humfrey had complete discretion and he kept it to himself or Humfrey Land Developments, that is Kenesta.
Mr Humfrey has been interested in developing a tourist resort on the Abrolhos Islands since the mid‑1990s. The islands are managed by the Department of Fisheries and are classified as an A class reserve. There is tourist demand to visit the islands because of the coral reef, fishing, the wreck of the Batavia and the beaches but only day trips are possible because there is no accommodation on the island. From about 1996 Mr Humfrey engaged in negotiations with the Department of Fisheries about the possibility of developing a tourist resort on the Abrolhos Islands. Mr Humfrey undertook those negotiations on behalf of Kenesta trading as Humfrey Land Developments.
In about 2002 the Department of Fisheries invited Mr Humfrey to submit an expression of interest for approval to develop a tourist resort on one of the islands. Mr Humfrey discussed the opportunity with Mr Patterson. Mr Humfrey says that he said words to the effect '[lets] put this in Skybow's name, rather than Humfrey Land Developments' and Mr Patterson agreed. Mr Humfrey further says that he and Mr Patterson decided to keep using the name Humfrey Land Developments in dealings with the Department so as not to confuse the issue. Further, Mr Humfrey says that the Minister at the time advised him not to change the name until they got to final documentation which at the time was still years away due to the need to complete a Public Environmental Review (PER).

In the respects I have set out in these reasons, Mr Humfrey exercised his powers and discharged his duties without the required care and diligence, failed to exercise his powers and discharge his duties in good faith in the best interests of Skybow and for a proper purpose and he acted improperly by using his position to gain an advantage for himself or Kenesta.
The conduct of Kenesta is inextricably bound up with that of Mr Humfrey. Kenesta, through Mr Humfrey, had knowledge of the breaches of fiduciary duty by Mr Humfrey so as to be liable for knowing receipt of the funds or knowing assistance in the breaches under the first and second limbs of Barnes v Addy. In a practical and commercial sense, Kenesta by receiving unauthorised loans and management fees and issuing invoices and receiving payment from Skybow for expenses not incurred by, or for the purposes of, Skybow, acted in a burdensome, harsh and wrongful way that was productive of unfair prejudice to the interests of the Pattersons and Rodale. The conduct of Kenesta in receiving those payments and rendering the invoices was a course of conduct designed to, and which did, advance its own interests to the detriment of Skybow and the other shareholders.
The conduct of Skybow's affairs by Mr Humfrey and Kenesta is oppressive to, unfairly prejudicial to and unfairly discriminatory against the plaintiffs in their capacity as members of the company. The court has power to make an order under Corporations Act s 233.

Relief

Corporations Act s 233 confers on the court discretion to make any order that it considers appropriate in relation to the company. It is appropriate to grant relief in this case. Court orders are necessary to put an end to the oppression.
Section 233(1) provides that the court may grant any order it considers appropriate if it is satisfied that oppression has taken place. The section lists a number of types of order that may be made, including winding up the company and requiring the purchase of shares by a member of the company. Neither the plaintiffs nor the defendants proposed that the company be wound up. It is not appropriate to order that the company be wound up because its principal asset is the income stream from its interest in the Wandina Syndicate, which will be received after future sale of lots in the Seacrest Estate.
In their points of claim the plaintiffs sought orders that the plaintiffs purchase the shares held by the defendants in Skybow, that the defendants account to or compensate Skybow in respect of any amounts used for purposes unrelated to Skybow's activities, loans advanced to the defendants and management fees paid to the defendants and that the plaintiffs set off any amounts held by the court to be due and owing by the defendants to the plaintiffs in payment and satisfaction of the plaintiffs' purchase of the shares held by the defendants in Skybow.
At the conclusion of the trial the plaintiffs produced two minutes of proposed orders. The plaintiffs' preferred orders are for Skybow to purchase by way of buy back all of the shares issued to the defendants at a price to be fixed by a registrar on the taking of an inquiry (the Purchase Price). The plaintiffs propose that the Purchase Price should be assessed on a net asset value per share with no discount applying for the fact that such shares are held in a proprietary limited company and is to be fixed by an independent expert. The plaintiffs propose that in assessing the Purchase Price adjustments should be made in respect of the loans outstanding from Kenesta by applying a commercial interest rate at the overdraft rate charged by Bankwest on the Skybow overdraft account and the amount of the loan together with such interest should be recorded at its full value with no discount applied as to its recoverability. The amount of the loan should be set off against the Purchase Price determined by the registrar. There should be a further adjustment in respect of the amount in the ledgers of Skybow in respect of the Abrolhos venture. The full value, or alternatively 50%, of the amount shown in the Skybow ledgers should be treated as if it were a loan to Kenesta and dealt with in the same way as the loans outstanding from Kenesta in Skybow's ledgers. The plaintiffs said that in respect of items shown in the accounts or ledgers of Skybow in respect of the Back Beach development (including any amounts written off) any amount included in respect of management fees should be treated as if it were a loan to Kenesta and dealt with in the same way as the loans recorded in the accounts. Further, any other management fees identified by the plaintiffs should be dealt with as if they were a loan to Kenesta. In respect of each of the items set out in the plaintiff's substituted schedule of loss and damage they should be treated as if they were loans to Kenesta and dealt with in the same way as the loans recorded in Skybow's accounts.
The plaintiffs put forward an alternative minute of proposed orders for the purchase of the plaintiffs' shares by Skybow, which was the plaintiffs' non‑preferred option. The proposed orders provided for the purchase price of the shares to be fixed by a registrar and for the value of the shares to be assessed on a net asset value on the same basis as if the defendants' shares were bought out. Again, the proposed orders provide for adjustments to the purchase price in respect of loans outstanding from Kenesta, the amounts showing in the ledgers of Skybow in respect of the Abrolhos venture, items shown in the accounts or ledgers of Skybow in respect of the Backbeach development, management fees and the items set out in the plaintiffs' substituted schedule of loss and damage.
The primary position taken by the defendants was that no order should be made. That would not address the oppressive conduct I have found. The defendants submitted that if any order was to be made it should be that the defendants buy the plaintiffs' shares. The plaintiffs submitted that that was not an appropriate order because the defendants do not have the capacity to buy the plaintiffs' shares. Counsel for the defendants, Mr Williams, submitted that that eventuality should be allowed for by giving the defendants the opportunity to buy the plaintiffs' shares and if they did not exercise that opportunity then to allow the plaintiffs to buy the defendants' shares.
The appropriate remedy is one which will regulate the affairs of the company in a way that avoids further oppression or unfair conduct. The least intrusive and most appropriate relief, given the breakdown in the relationship between the Pattersons and the Humfreys, is for one faction to buy out the other.

Who should buy out the other?

In Campbell v Backoffice Investments Pty Ltd Young CJ in Eq said that an order under Corporations Act s 233 is to provide a remedy for the oppression and in relation to s 233(1)(d) it is to do so through the shareholder being bought out. The exercise of the discretion should be with a view to ending the oppression. Young CJ in Eq said:
A buy out order is not to compensate for the shareholders' loss (although it may have that effect), but to separate the oppressor and the oppressed, and so albeit unusually, can be an order that the oppressor sell to the oppressed: Re A Company (No 00789 of 1987); Ex Parte Shooter (1990) BCLC 384; Re Brenfield Squash Racquets Club Ltd (1996) 2 BCLC 184 [122].
In Fedorovitch v St Aubins Pty Ltd [1999] NSWSC 776; (1999) 17 ACLC 1558 Young J considered Corporations Law s 246AA, the predecessor to Corporations Act s 232. His Honour said that although the remedy in s 246AA allowed the court to mould a remedy to suit the circumstances of a case, it was in the public interest that courts adopt a uniform approach to remedy cases of oppression. A policy underlying s 246AA was that it entitled an oppressed member to be released from the company as a result of the oppression. Ordinarily, the proper order was for the oppressor to purchase the shares of the oppressed. His Honour said at [24] that this approach is consistent with the policy of s 246AA that what the oppressed is entitled to is to be released from the company if he finds that because of the opponent's oppression he or they can no longer have their capital invested in it. In Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672 Spigelman CJ described the remedy of allowing a minority to acquire the shares of a majority as 'extraordinary and virtually unprecedented'.
The principal argument advanced by the plaintiffs as to why they should buy out the defendants' shares is that the defendants would be unable to pay out the shareholding of the plaintiffs. There is evidence that the defendants may not be able to purchase the plaintiffs' shares. The plaintiffs' counsel submitted that at best Kenesta is asset rich and cash poor. I am not satisfied that the evidence rises so high as to establish that the defendants do not have the capacity to buy out the plaintiffs' shares. The evidence of the assets and liabilities of Mr and Mrs Humfrey and Kenesta is not sufficient to make that determination. Nevertheless, the evidence shows that the defendants may not have sufficient funds to buy out the plaintiffs. An order for the defendants to buy out the plaintiffs may be frustrated. The same is true in relation to the purchase of the defendants' shares by Skybow. The evidence does not establish that Skybow has the capacity to acquire the plaintiffs' shares or the defendant's shares by way of share buy back or reduction of capital.
It is appropriate that the defendants acquire the plaintiffs' shares rather than that the plaintiffs acquire the defendants' shares. That is so for three reasons. First, that is consistent with the purpose of s 233(1)(d) that the oppressed are entitled to be released from the company if they find that because of the opponent's oppression they can no longer have their capital invested in it. Secondly, Mr Humfrey has managed Skybow from its inception. Mr Humfrey has brought projects to the company, and has managed the day‑to‑day affairs of the company. Initially, Mr Patterson concerned himself with the affairs of Skybow and regularly conferred with Mr Humfrey about the company. However, since about 2007 Mr Patterson has played a less active role. He has had limited access to the company's books and records and has in practice been little more than a passive investor. Thirdly, Mr Humfrey is required to maintain a 20% shareholding in the Seacrest Estate development through Skybow in order for Kenesta to continue to be the project manager and exclusive selling agent for the Seacrest Estate development. That entitlement would be put at risk if the defendants sell their shares to the plaintiffs with no corresponding benefit to the plaintiffs.
The plaintiffs say that an order that the defendants buy out the plaintiffs would render the plaintiffs' interest vulnerable and exposed for a considerable and indeterminate period of time and effectively provide a commercial concession to the defendants, namely the ability to use Skybow's future income to pay out the oppressed shareholders whilst at the same time having the benefit of 100% control of Skybow. The risk that between the date of judgment and settlement of the sale of the plaintiffs' shares to the defendants the defendants might conduct the affairs of Skybow so as to diminish its assets and value may be averted by such protective injunctions or other orders as may be necessary and appropriate.

If the defendants are not able to buy out plaintiffs

In the course of the hearing counsel for the defendants submitted that the risk that the defendants may be unable to buy out the plaintiffs' shares should be addressed by the court ordering that if the defendants fail to buy the plaintiffs' shares in accordance with the court order then the plaintiffs should buy out the defendants' shares. That course was taken by Mansfield J in Territory Realty Pty Ltd v Garraway [2009] FCA 292. Mansfield J, after finding that the conduct of the respondents was oppressive, found that the least intrusive and most appropriate relief, given the relationship between the shareholders and the fact that there were only three of them, was for one faction to buy out the other, giving the majority the first opportunity to purchase the interest of the minority.
The appropriate remedy in this case must avoid further oppression or unfair conduct. The least intrusive and most appropriate relief is that one faction buy out the other. That is so for the following reasons. The company should not be wound up because it would be difficult to realise its principal asset, its interest in the Wandina Syndicate, for its full value. It is not feasible for the company to continue with its present shareholding because of the complete breakdown in the relationship between Mr Humfrey and Mr Patterson, as a result of which the company has been dysfunctional since 2012, and because of Mr Humfrey's past and continuing oppressive conduct. There are only two shareholders, or groups of shareholders. For the reasons I have given it is appropriate that the defendants have the first opportunity to buy out the plaintiffs' shares.

Date of valuation of shares

There is no firm rule as to the date at which valuation of the shares must occur. In this case it is appropriate that the shares be valued at the date of the court's order. There is no evidence that there has been any running down of the company's business or assets since the commencement of the proceedings.

Determining Purchase Price of defendants' shares

The plaintiffs submitted that the price for the buy back of their shares (Purchase Price) should be fixed by a registrar on the taking of an inquiry on the basis I have set out earlier in these reasons.
The court may at any stage of the proceedings direct any necessary enquiries to be made: O 45 r 2. The court may order that the enquiry be made by a registrar: O 45 r 11. The defendants agreed with the plaintiffs' proposal for an enquiry by a registrar to determine the Purchase Price, that the value of the shares should be assessed on a net asset value with no discount applying for the fact that the shares are held in a proprietary limited company and that an expert should be appointed to value the shares. However, Mr Williams said that the value should be fixed by the court informed by the expert's valuation, not fixed by the expert.
In my view the method proposed by the plaintiffs for determining the Purchase Price is appropriate with the qualification referred to by Mr Williams that the price is to be fixed by the court having received the expert's valuation. It is appropriate that the value of the shares should be assessed on a net asset value. Skybow is a closely held proprietary company. There is no market for its shares. There should be no discount for the fact that the plaintiffs hold only 50% of the shares.
The amount of the loan to Kenesta in Skybow's accounts should be taken into account at its full value with no discount applied as to its recoverability. The plaintiffs submit that the expert should assess the value of the shares after a number of adjustments have been made to the company's balance sheet. It is appropriate that adjustments be made. The shares should be valued on a basis that will place the oppressed party in the position as if there had been no oppression. What needs to be assessed is the value of the shares had it not been for the effect of the oppressive conduct: Rankine v Rankine (1995) 18 ACSR 725.
The first adjustment that should be made is in respect of loans outstanding from Kenesta to Skybow. The plaintiffs say that in relation to the loans by Skybow to Kenesta the expert should calculate the value of those loans applying a commercial interest rate that shall be at the overdraft rate charged by Bankwest on the Skybow overdraft account from time to time from the date such loan was incurred until the date of valuation. That is not appropriate. There were short periods where the combined balance of Skybow's bank accounts was negative but otherwise Skybow was not paying interest on any borrowings. There is no evidence about the interest rate that Skybow was paying on any occasions when its account went into overdraft. There is no evidence that Skybow missed out on any opportunity because of a lack of funds. There is no evidence of any detriment suffered by the plaintiffs because dividends were not paid to them. On the other hand, Skybow was kept out of funds to which it was entitled because of the unauthorised loans to Kenesta. If those loans had not been made then Skybow could have invested those funds or distributed them to its shareholders who could have invested them or otherwise benefited from them. The funds which Skybow held were deposited into a Gold cash management account with Bankwest. It is appropriate that in respect of the loans outstanding from Kenesta to Skybow the expert should calculate the value of those loans applying the interest rate paid by Bankwest on a Gold cash management account, or the equivalent account from time to time, from time to time from the date each loan was incurred until the date of valuation.
In respect to the amount showing in the ledgers of Skybow in respect of the Abrolhos venture, together with the amounts of $165,752 and $170,517 written off in 2011 and 2012 respectively as borrowing costs, a sum equivalent to 50% of the amount should be treated as if it were a loan to Kenesta. The expert should calculate the value of that loan together with interest calculated in the same manner as I have held that interest should be charged on the loans to Kenesta recorded in Skybow's accounts.
In respect of items shown in the accounts of Skybow in respect of the Back Beach development, including any amounts written off, any amount included in respect of management fees should be treated as if they were a loan to Kenesta. Any other management fees identified in these reasons for judgment as having been paid by Skybow shall be dealt with as if they were a loan to Kenesta except for the management fee of $90,909 paid on 6 July 2006 which was properly paid. There should be no adjustment in relation to that fee. Skybow's balance sheet should be adjusted to record those fees as a loan to Kenesta. However, interest should not be charged on those amounts. I have found that the management fees paid by Skybow to Kenesta were not authorised, did not relate to any particular services rendered and were not the result of an attempt to calculate the cost of any services provided. Nevertheless, Mr Humfrey and Kenesta did provide some management and administrative services to Skybow. In those circumstances it is appropriate that the management fees be treated as a loan to Kenesta but not that they bear interest.
In respect of each of the items I have discussed under the heading 'alleged unrelated expenses' and found to have been payments which were not authorised and were not for the purposes of Skybow, those expenses should be dealt with as if they were a loan to Kenesta. Skybow's balance sheet should be adjusted to record those payments as loans to Kenesta. The payments treated as loans should bear interest and the interest should be calculated in the same manner as the loans to Kenesta recorded in Skybow's accounts.
The expert should assess the value of the plaintiffs' shares without any discount for the risk that the loans may be irrecoverable, in whole or in part, or for any delay or expense in recovering the loans.

Settlement of the share buy back

Upon completion of the inquiry the registrar shall report to this court the Purchase Price thereby determined. The defendants should purchase the plaintiffs' shares within 28 days at the determined Purchase Price. If the defendants are not able or willing to purchase those shares at that price within that time then the plaintiffs will have the opportunity to purchase the defendants shares within 28 days. The amount of the loan owing by Kenesta to Skybow, including the amounts which I have found should be treated as if they were loans, together with interest, should be set off against the Purchase Price determined by the registrar. There should be liberty to the parties to apply at any time in the event that neither of the share transfer options to which I have referred is taken up. It will then be necessary to consider what further or different orders should be made to give effect to my findings and conclusions.

Orders

I direct the plaintiffs to provide a draft minute of proposed orders to the defendants within 14 days in anticipation that the parties will be able to agree the appropriate form of orders to give effect to these reasons for judgment within 21 days. In the event that the parties are unable to reach agreement I will direct that the plaintiffs and the defendants each file and serve the respective forms of orders which they propose within 21 days and I will then call the matter on for further submissions as to the appropriate form of orders. I would extend the timetable I have proposed if it is agreed by the parties.