Re Renex Founder Hold Co Pty Ltd
[2024] VSC 244
•17 May 2024
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2021 02995
IN THE MATTER of RENEX FOUNDER HOLD CO PTY LTD (ACN 609 623 887)
BETWEEN:
| CREATE ENVIRONMENT PTY LTD (ACN 604 342 154) | Plaintiff |
| v | |
| RENEX FOUNDER HOLD CO PTY LTD (ACN 609 623 887) and MSA RENEX CORP PTY LTD (ACN 133 138 593) (according to attached Schedule) | Defendants |
---
JUDGE: | Matthews J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 13-16, 20-22, 24 November 2023 |
DATE OF JUDGMENT: | 17 May 2024 |
CASE MAY BE CITED AS: | Re Renex Founder Hold Co Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2024] VSC 244 |
---
CORPORATIONS – Oppression proceeding – Twelve instances of oppression alleged by plaintiff, seven of which were made out – Four of five alleged breaches of director’s duties constitute oppressive conduct – Two instances of oppression alleged by second defendant, none of which were made out – Corporations Act 2001 (Cth) ss 232, 233.
PRACTICE AND PROCEDURE – Pleadings – Whether required to plead matters going to valuation of the company’s business in an oppression proceeding – Whether required to plead matters relied upon to give rise to adjustments in value to remedy the effects of oppression – Wain & Ors v Drapac & Ors (No 2) [2013] VSC 381 considered.
CORPORATIONS – Oppression proceeding – Relief – Company with two equal shareholders, each wanting to buy the other out - Slea Pty Ltd v Connective Services Pty Ltd (No 9) [2022] VSC 136, [518] – Millsave Holdings Pty Ltd v Connective Group Pty Ltd [2023] VSCA 326.
CORPORATIONS – Oppression proceeding – Valuation of shares in the face of competing expert reports – Court determines fair value and is not constrained by traditional valuation methods – Relevance of open offers made by the parties to determining value – Adjustments to remediate effects of oppression – Wain & Ors v Drapac & Ors (No 2) [2013] VSC 381 – Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd (2004) 207 ALR 136 – Re SRW Nominees Pty Ltd (No 2) [2020] VSC 323.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr CR Northrop with Ms AR Singh | KHQ Lawyers |
| For the Second Defendant | Mr JP Slattery KC with Ms C Jones | Clayton Utz |
TABLE OF CONTENTS
A.. Introduction.................................................................................................................................. 1
B.. Factual background..................................................................................................................... 2
B.1... History of the Renex business and corporate structure................................................. 2
B.2... The current Renex business............................................................................................... 6
B.3... The properties at Laverton, Victoria................................................................................. 7
B.4... Disputes between Angelodemou and Create/Pulitano................................................ 8
B.5... Relevant procedural history............................................................................................. 12
C.. Pleadings...................................................................................................................................... 12
D.. Evidence and witnesses............................................................................................................ 17
D.1... Lay evidence....................................................................................................................... 17
D.2... Expert evidence.................................................................................................................. 25
E... Relevant legal principles.......................................................................................................... 26
E.1... Oppression claims............................................................................................................. 26
E.1.1... Legislative provisions........................................................................................... 26
E.1.2... Key applicable principles – s 232 of the Act...................................................... 27
E.2... Just and equitable winding up........................................................................................ 31
E.2.1... Legislative provisions........................................................................................... 31
E2.2.... Key applicable principles..................................................................................... 32
F... Identification of the key issues regarding the claims pursuant to s 232 of the Act...... 33
G.. Enlivening the Court’s jurisdiction under s 233 of the Act............................................... 34
H.. Meaning of the ‘affairs of the company’ in this case.......................................................... 34
H.1.. Relevant principles............................................................................................................ 35
H.2.. Create’s submissions......................................................................................................... 38
H.3.. MSA’s submissions........................................................................................................... 40
H.4.. Consideration..................................................................................................................... 42
I.... Use of alleged breaches of director’s duties in this case.................................................... 47
I.1.... The pleadings..................................................................................................................... 47
I.2.... Create’s submissions......................................................................................................... 49
I.3.... MSA’s submissions........................................................................................................... 52
I.4.... Consideration..................................................................................................................... 52
J.... Create’s allegations regarding refusal to provide information and diversion of opportunity concerning the Laverton Properties........................................................................................ 53
J.1.... Evidence.............................................................................................................................. 53
J.2.... The pleadings..................................................................................................................... 60
J.3.... Create’s submissions......................................................................................................... 61
J.4.... MSA’s submissions........................................................................................................... 62
J.4.1.... Request for information........................................................................................ 62
J.4.2.... Diversion of opportunity...................................................................................... 64
J.5.... Consideration..................................................................................................................... 66
J.5.1.... Diversion of opportunity...................................................................................... 66
J.5.2.... Failure to provide information............................................................................ 71
K.. Create’s allegations regarding the removal of Pulitano as a director of Founder......... 76
K.1... Evidence.............................................................................................................................. 76
K.2... The pleadings..................................................................................................................... 79
K.3... Create’s submissions......................................................................................................... 80
K.4... MSA’s submissions........................................................................................................... 81
K.5... Consideration..................................................................................................................... 82
L... Create’s allegations regarding the purported valuation of Create’s share in Founder by Value ADE............................................................................................................................................... 84
L.1... Evidence.............................................................................................................................. 84
L.2... The pleadings..................................................................................................................... 85
L.3... Create’s submissions......................................................................................................... 87
L.4... MSA’s submissions........................................................................................................... 91
L.5... Consideration..................................................................................................................... 91
M. Create’s allegations regarding failure of Land Co to exercise its rights against Angelodemou and Land Holdings.................................................................................................................... 94
M.1.. Evidence.............................................................................................................................. 94
M.2.. The pleadings..................................................................................................................... 95
M.3.. Create’s submissions......................................................................................................... 96
M.4.. MSA’s submissions........................................................................................................... 97
M.5.. Consideration..................................................................................................................... 97
N.. Create’s allegations regarding Angelodemou’s use of the Laverton Properties for his personal benefit......................................................................................................................................... 100
N.1.. Evidence............................................................................................................................ 100
N.2.. The pleadings................................................................................................................... 100
N.3.. Create’s submissions....................................................................................................... 101
N.4.. MSA’s submissions......................................................................................................... 103
N.5.. Consideration................................................................................................................... 105
O.. Create’s allegations regarding failure to pay certain debts of Op Co and failure to provide information to Create.............................................................................................................. 108
O.1.. Evidence............................................................................................................................ 108
O.2.. The pleadings................................................................................................................... 111
O.3.. Create’s submissions....................................................................................................... 112
O.4.. MSA’s submissions......................................................................................................... 114
O.5.. Consideration................................................................................................................... 115
P... Create’s allegations regarding MSA’s refusal to pay the 2015 Share Sale Debt.......... 117
P.1... The pleadings................................................................................................................... 117
P.2... Create’s submissions....................................................................................................... 117
P.3... MSA’s submissions......................................................................................................... 118
P.4... Consideration................................................................................................................... 119
Q.. Create’s allegations regarding MSA’s reliance on the Hold Co SHA in its Defence and Counterclaim, in a manner which is against the interests of Founder.......................... 119
Q.1.. The pleadings................................................................................................................... 119
Q.2.. Create’s submissions....................................................................................................... 120
Q.3.. MSA’s submissions......................................................................................................... 121
Q.4.. Consideration................................................................................................................... 122
R.. Create’s allegations regarding failure by the Renex Group of Companies to prepare financial projections for use by the companies or to assist in the preparation of the Rundell Report...................................................................................................................................................... 123
R.1... The pleadings................................................................................................................... 123
R.2... Create’s submissions....................................................................................................... 125
R.3... MSA’s submissions......................................................................................................... 127
R.4... Consideration................................................................................................................... 128
S... Create’s allegations regarding failure to disclose to Create the EPA’s involvement in the affairs of Op Co..................................................................................................................................... 129
S.1.... The pleadings................................................................................................................... 129
S.2.... Create’s submissions....................................................................................................... 132
S.3.... MSA’s submissions......................................................................................................... 133
S.4.... Consideration................................................................................................................... 134
T.. Create’s allegations regarding payment by Op Co of certain legal fees other than for the benefit of the Renex Group of Companies....................................................................................... 136
T.1... The pleadings................................................................................................................... 136
T.2... Evidence............................................................................................................................ 138
T.3... Create’s submissions....................................................................................................... 141
T.4... MSA’s submissions......................................................................................................... 142
T.4.1... MSA’s written closing submissions.................................................................. 142
T.4.2... MSA’s oral closing submissions........................................................................ 145
T.5... Consideration................................................................................................................... 145
T.5.1... Was the payment of legal costs by Op Co in respect of the s 237 Proceeding authorised by the Constitutions and/or the Indemnity Deeds?...................................... 146
T.5.2... Was the payment of legal costs by Op Co which were not authorised by the Indemnity Deeds conduct in the affairs of Founder?........................................................ 148
T.5.3... If so, was that conduct oppressive to Create or contrary to the interests of the members of Founder as a whole?...................................................................... 151
U.. Conclusion regarding Create’s allegations of oppression............................................... 152
V.. MSA’s counterclaim: alleged event of default or breach of Founder SHA by Create 154
V.1... The pleadings................................................................................................................... 154
V.2... MSA’s submissions......................................................................................................... 155
V.3... Create’s submissions....................................................................................................... 157
V.4... Consideration................................................................................................................... 161
V.4.1 . Alleged contravention of clause 2.4(c) of the Founder SHA......................... 161
V.4.2.. Alleged breach of clause 12.7 of the Founder SHA........................................ 163
V.4.3.. Alleged event of default under the Founder SHA......................................... 164
W. Whether Create can rely on certain ‘un-pleaded’ issues.................................................. 164
W.1.. Payments by Op Co to Renex Group Pty Ltd.............................................................. 165
W.1.1. How this issue came about................................................................................. 165
W.1.2. Evidence................................................................................................................ 167
W.1.3. Create’s submissions........................................................................................... 168
W.1.4. MSA’s submissions............................................................................................. 171
W.1.5. Consideration....................................................................................................... 173
W.2.. The R & D Refund........................................................................................................... 176
W.2.1. How this issue arose........................................................................................... 176
W.2.2. Create’s submissions........................................................................................... 177
W.2.3. MSA’s submissions............................................................................................. 178
W.2.4. Consideration....................................................................................................... 178
X.. The appropriate remedy – whether there should be a buyout or a winding up, or some other remedy........................................................................................................................................ 180
X.1... Relevant principles.......................................................................................................... 180
X.2... Consideration................................................................................................................... 181
Y.. If the appropriate remedy is a buyout, then which party should be the buyer........... 182
Y.1... Relevant principles.......................................................................................................... 182
Y.2... Create’s submissions....................................................................................................... 185
Y.3... MSA’s submissions......................................................................................................... 186
Y.3.1.. MSA’s submissions regarding the authorities................................................ 186
Y.3.2.. MSA’s submissions on why it should be ordered to buyout Create’s share 191
Y.4... Consideration................................................................................................................... 194
Z.. Previous agreements to purchase shares and open offers made by the parties in respect of one buying out the other................................................................................................................ 201
AA. If the appropriate remedy is a buyout, then determining valuation and the price to be paid...................................................................................................................................................... 202
AA.1Relevant principles regarding valuation matters....................................................... 202
AA.1.1General principles regarding purpose and valuation method................... 202
AA.1.2Relevant principles regarding the valuation date........................................ 203
AA.2Valuation evidence before the Court............................................................................ 205
AA.2.1Rundell Report................................................................................................... 205
AA.2.2The Wright Reports........................................................................................... 208
AA.2.3The Lee Reports................................................................................................. 210
AA.3Create’s submissions....................................................................................................... 215
AA.3.1.... Options for relief................................................................................ 215
AA.3.2.... State of valuation evidence.............................................................. 216
AA.3.3.... Relevance of the offers made between the parties........................ 220
AA.3.4.... Adjustments to be made................................................................... 221
AA.4MSA’s submissions......................................................................................................... 222
AA.4.1.... MSA’s preferred option.................................................................... 222
AA.4.2.... MSA’s submissions regarding the valuation evidence................ 223
AA.4.3.... Adjustments to account for effects of oppression......................... 227
AA.5Consideration................................................................................................................... 229
AA.5.1Approach to valuation/price in this case...................................................... 229
AA.5.2Adjustments to valuation due to oppression................................................ 234
AA.5.2.1. Legal costs........................................................................................... 234
AA.5.2.2. Other possible adjustments.............................................................. 235
AA.5.2.3. Conclusion regarding adjustments for the found oppression.... 237
AA.5.3 Assessment of the fair price to be paid by MSA for Create’s share in Founder 237
AA.5.4Buyout mechanism............................................................................................ 241
BB. Conclusion............................................................................................................................ 242
HER HONOUR:
A. Introduction
The plaintiff, Create Environment Pty Ltd (‘Create’) and the second defendant, MSA Renex Corp Pty Ltd (‘MSA’) each hold one of the two issued shares in the first defendant, Renex Founder Hold Co Pty Ltd (‘Founder’). One of Create’s directors, Domenic Pulitano (‘Pulitano’), and MSA’s sole director, Marinos Angelodemou (‘Angelodemou’), are the directors of Founder.
This proceeding concerns a claim by Create that it has been oppressed as a shareholder of Founder. By originating motion dated 19 August 2021, as amended on 3 May 2022, Create seeks:
(a) a declaration pursuant to s 232 of the Corporations Act 2001 (Cth) (‘Act’) that the conduct of the affairs of Founder was: (a) contrary to the interests of its members as a whole; and/or (b) oppressive to, unfairly prejudicial to or unduly discriminatory against the plaintiff as a member;
(b) orders pursuant to s 233 of the Act: (a) for the purchase by Create of MSA’s share in Founder; (b) alternatively, that Founder be wound up; or (c) such other order as the Court sees fit; or
(c) alternatively, an order that Founder be wound up by the Court under the provisions of the Act on the grounds set out in paragraphs (e), (f) or (k) of sub‑s 461(1) of the Act.
By counterclaim, MSA seeks:
(a) declarations that Create has committed certain breaches and events of default under the shareholders agreement in respect of Founder entered into by MSA, Create and Angelodemou on 18 December 2018 (‘Founder SHA’) and that Pulitano must immediately resign as a director of Founder;
(b) a declaration that MSA may purchase, and Create must sell to MSA, Create’s share in Founder at the price determined by the Court, alternatively that Founder may buy-back Create’s share in Founder at the price determined by the Court, and that Angelodemou may, in the name of Create and on its behalf, do everything necessary or expedient to complete the sale or buy-back of Create’s share in Founder;
(c) alternatively, a declaration that Create’s conduct of Founder’s affairs is contrary to the interests of the members of Founder as a whole and/or is oppressive to, unfairly prejudicial to, and unfairly discriminatory against MSA; and
(d) an order pursuant to s 233 of the Act that MSA purchase Create’s share in Founder at the price determined by the Court.
Create is the second defendant by counterclaim, and Founder is the first defendant by counterclaim.
Founder did not play an active role in the proceeding: the real contest is between Create and MSA.
As will be seen, much of the factual matrix is not in dispute, however, whether a party’s conduct constitutes oppression or a breach of the Founder SHA is hotly disputed (save for one instance of oppression alleged by Create which is admitted by MSA). The other key matters in dispute are the appropriate remedy if oppression or breach is found, with each party wanting to buy the other out, and the price at which any buyout should be ordered.
B. Factual background
B.1 History of the Renex business and corporate structure
In around 2008, Angelodemou founded the business associated with the Renex Integrated Waste Treatment and Resource Recovery Facility (‘Waste Treatment Facility’) located in Dandenong South (‘Dandenong Site’), the business being to operate and commercialise the Waste Treatment Facility. The business was originally operated by Renex Holdings (Dandenong) 1 Pty Ltd, Renex Operations (Dandenong) Pty Ltd, Renex Technology Pty Ltd and Renex Land (Dandenong) Pty Ltd (together, ‘Old Renex Entities’). As at October 2015, entities controlled and owned by Angelodemou held about 47% of the shares in the Old Renex Entities.
Construction of the Waste Treatment Facility at the Dandenong Site commenced in 2012.
In around 2014, Pulitano was approached by Angelodemou about the possibility of Create investing in the Renex business.
In June 2015, Create and MSA entered into a share sale and option agreement in relation to the Old Renex Entities. Create advanced $1.498 million to MSA that year as a non-refundable option fee (‘2015 Share Sale Debt’). It is common ground that this share sale and option agreement was never fully implemented, as it was overtaken by the subsequent appointment of administrators to the Old Renex Entities.
By 9 October 2015, administrators were appointed to the Old Renex Entities and the companies were eventually wound up. At that time, the Waste Treatment Facility at the Dandenong Site was not yet operational. By the end of 2015, as part of the administration of the Old Renex Entities, a raft of agreements were entered into providing for (1) the sale of the assets of the Old Renex Entities, including the Dandenong Site and (2) the creation of new companies to purchase those assets, together with the funding and issuing of shares so as to carry on the Renex business.
The new entities which were formed for this purpose were as follows:
(a) Founder;
(b) Renex Hold Co Pty Ltd (‘Hold Co’);
(c) Renex Op Co Pty Ltd (‘Op Co’);
(d) Renex Land Co Pty Ltd (‘Land Co’); and
(e) Renex IP Co Pty Ltd (‘IP Co’).
Op Co, Land Co and IP Co are each wholly owned subsidiaries of Hold Co (together, Hold Co, Op Co, Land Co and IP Co are referred to as the ‘Renex Operating Entities’). The Renex Operating Entities and Founder are referred to as the ‘Renex Group of Companies’.
The assets of the Old Renex Entities were sold to Op Co pursuant to an asset share sale agreement with a purchase price of $11.63 million. The Dandenong Site was purchased by Land Co pursuant to a contract of sale with a purchase price of $6.37 million. The acquisition was funded through a senior debt facility of $18 million which Hold Co obtained from A.R.E.O. SARL, a company incorporated in Luxembourg (‘Areo’), with Areo acquiring 25% of the shares in Hold Co. The other 75% of the shares in Hold Co were owned by Founder. At that time, Angelodemou was Founder’s sole nominee director on the board of Hold Co (pursuant to the Founder SHA), and Mr Bing Hang Allan So (‘Mr So’) was Areo’s nominated director.
At the time of its incorporation and since then, Founder’s directors were Angelodemou and Pulitano. Create acquired its share in Founder for the price of $1.
Angelodemou has been the sole director of each of Op Co, Land Co and IP Co since their incorporation.
On or about 15 December 2015, the following documents were executed as part of the corporate restructure and change in ownership:
(a) the Founder SHA, which annexes the Founder constitution;
(b) a shareholders’ agreement in respect of Hold Co, between Hold Co’s then shareholders Founder and Areo (‘Hold Co SHA’), which annexes the Hold Co constitution;
(c) an investor loan agreement between Founder, Create and MSA, (‘Investor Loan Agreement’). Founder was the borrower under this agreement and Create and MSA each agreed to advance $5 million to Founder. Ultimately, Create advanced $5 million and MSA advanced $4.67 million pursuant to the Investor Loan Agreement; and
(d) a shareholder loan between Founder and Hold Co (‘Shareholder Loan Agreement’). The $9.67 million advanced by Create and MSA to Founder pursuant to the Investor Loan Agreement was on-lent by Founder to Hold Co pursuant to the Shareholder Loan Agreement for the purpose of funding the Renex business.
Hold Co’s business is the business of operating and commercialising the Waste Treatment Facility carried on by Hold Co and each of its subsidiaries. Founder’s business is to hold shares in Hold Co.
Mr Anish Chandy (‘Chandy’) is the chief financial officer of Hold Co and has been the company secretary of each of the Renex Operating Entities since 21 March 2016. He also controls a company called Artis Parra Pty Ltd (‘Artis Parra’). Artis Parra currently holds 4,480 ordinary fully paid shares in Hold Co: it acquired 1,120 shares on 20 April 2016 and a further 3,360 shares between 3 March 2017 and 13 September 2018. Artis Parra acquired its shares in Hold Co pursuant to the Renex senior management equity plan (‘Management Equity Plan’), which was implemented in April 2016. To accommodate the Management Equity Plan, a share split occurred on 11 April 2016 to increase the shares in Hold Co from 100 to 100,000 with Founder then holding 75,000 shares and Areo holding 25,000 shares. On 20 April 2016, resolutions were passed by the directors of Hold Co confirming that Hold Co had passed the Management Equity Plan and resolved to offer 1,1200 ordinary shares and a total of 3,360 shares with performance hurdles to Chandy. A resolution of the members of Hold Co was passed approving the issue of those shares.
On 13 September 2018, resolutions were passed by the shareholders of Hold Co and by the members of Founder, pursuant to which performance hurdles were waived and the performance shares were vested in Artis Parra.
On 14 September 2018, Areo ceased to be a shareholder in Hold Co and Mr So resigned as a director of Hold Co, following the repayment and discharge of the loan which Areo had advanced to Hold Co. Areo agreed to accept repayment of its senior debt facility for less than its face value and it agreed to transfer its shares in Hold Co to Founder for consideration of $1.
Since then:
(a) Founder has held 95.7% of the shares in Hold Co and Artis Parra has held 4.3% of the shares in Hold Co; and
(b) Angelodemou has been the sole director of Hold Co.
B.2 The current Renex business
The Renex business is a waste treatment operation that uses pyrolysis technology to remediate hazardous industrial waste and enable it to be re-used in commercial and industrial applications instead of being sent to landfill. The waste which is treated includes contaminated soil, bricks, rubble, concrete, steel, solid industrial waste, liquid waste, sludge, activated carbon, timber, drilling muds and wash waters. The business operates under a licence from the Environmental Protection Agency (‘EPA’) which allows it to treat contaminants including PFAS, hydrocarbons and metal contaminants.
The Dandenong Site comprises approximately four hectares including an enclosed building of approximately 11,000 square metres. It houses purpose-built plant and equipment including a pyrolysis rotary kiln through which waste is thermally treated and cleaned to remove contaminants.
The Renex business employs between 20 and 30 individuals at any one time. In addition to Angelodemou and Chandy, the senior employees of the Renex business are: Brad de Clase (‘de Clase’), the business development manager; Paul Nield (‘Nield’), the senior process engineer; and John Panayi (‘Panayi’), the facility manager.
Create has never been involved in the day-to-day operations and management of the Renex Business. The day-to-day operations of the Renex business have been left to Angelodemou.
The Renex business is currently underpinned by two finance facilities with Judo Bank which are secured (inter alia) by personal guarantees and indemnities given by Angelodemou. As at September 2022, the finance facilities with Judo Bank had an outstanding balance of approximately $9.6 million. Angelodemou has also given a personal guarantee and indemnity to secure the services of a landfill operator and supplier of the Renex business. In each instance, the personal guarantees given by Angelodemou were a condition of the provision of services or finance. Pulitano never provided any personal guarantees or indemnities for Founder or any of the Renex Operating Entities.
B.3 The properties at Laverton, Victoria
In 2018, Angelodemou decided that it would be necessary to acquire and establish a second waste treatment facility in the west of Melbourne, where the majority of contaminated soil and hazardous waste is generated. This was considered to be for the benefit of the Renex business in remaining competitive, better servicing its existing customers, and attracting a larger customer base. The decision was supported by Pulitano at that time. In about July 2018, Angelodemou identified adjacent parcels of land at 157-167 and 169-179 Dohertys Road, Laverton (‘Laverton Properties’) as a suitable site for the second facility. On 11 September 2018, Land Co entered into contracts to purchase the Laverton Properties for a total purchase price of $17 million, with settlement due on 10 September 2020.
In August 2020, the Renex Group of Companies procured an offer from Judo Bank to provide a facility in the amount of $10.2 million, which left a shortfall of approximately $6.1 million in respect of the purchase of the Laverton Properties. The settlement of the contracts was extended to 16 November 2020.
The circumstances surrounding the lead-up to the completion of the purchase of the Laverton Properties are in dispute and will be ventilated later in these reasons, however, it is sufficient at this point to note that by late 2020, the relationship between Angelodemou and Pulitano broke down over the planned acquisition by the Renex Group of Companies of the Laverton Properties. By that time Pulitano’s position on the Laverton Properties had changed. Angelodemou wanted to use the Laverton Properties to develop a second waste treatment facility and expand the Renex business, as originally intended, while Pulitano’s position was that the Laverton Properties should be on-sold to generate profit.
B.4 Disputes between Angelodemou and Create/Pulitano
The breakdown in the relationship between Angelodemou and Pulitano led to a number of disputes between them and/or their entities. Most of the disputes also involved one or more of the companies which made up the Renex Group of Companies.
On 27 October 2020, Angelodemou caused Land Co to nominate a separate company, Renex Land Holdings Pty Ltd (‘Land Holdings’), as the purchaser of the Laverton Properties. Land Holdings is a company solely controlled and owned by Angelodemou and, somewhat paradoxically given its name, is not part of the Renex Group of Companies. Land Holdings was the trustee of the Renex Property Holdings Trust, the beneficiaries of which were Angelodemou and members of his family.
Around this time, in October and November 2020, Pulitano sought information from Angelodemou regarding the completion of the purchase of the Laverton Properties.
On 13 November 2020, Create commenced a proceeding in this court against Land Co so as to gain access to the books and records of Land Co (‘s 247A Proceeding’). Later that day, orders were made by Justice Lyons for the provision of the nomination form, the contract of sale, and any term sheets or offers in respect of the Laverton Properties.
On 16 November 2020, orders were made by Justice Almond joining Angelodemou to the s 247A Proceeding as the second defendant and Land Holdings as the third defendant. An interlocutory injunction was granted against Angelodemou and Land Holdings, restraining them from completing the purchase of the Laverton Properties until 4:00pm on 23 November 2020 or further order.
On 20 November 2020, Angelodemou, Land Co and Land Holdings provided undertakings that, inter alia, they would give Create access to their books and records relevant to the purchase of the Laverton Properties and would not on-sell, further encumber or otherwise deal with the Laverton Property without giving at least 30 days’ prior notice to Create for the period ending six months from the settlement of the purchase of the Laverton Properties (‘s 247A Undertakings').
As a consequence of the s 247A Undertakings, the purchase of the Laverton Properties by Land Holdings was completed on 23 November 2020 and the titles were transferred to Land Holdings. The s 247A Proceeding was subsequently dismissed.
On 4 January 2021, Create issued a statutory demand to MSA alleging that MSA was indebted to Create for $1.5 million in respect of the 2015 Share Sale Debt. On 20 January 2021, MSA commenced a proceeding under s 459G of the Act to set aside the statutory demand (‘s 459G Proceeding’).
On 5 February 2021, Angelodemou unilaterally purported to pass a resolution of the Founder board removing Pulitano as a director of Founder in circumstances where the removal is said by Create not to be authorised by the Founder SHA. The same day, Angelodemou authorised the lodgement of a Form 484 with the Australian Securities and Investments Commission (‘ASIC’) recording the removal of Pulitano as a director of Founder. The following day, Create requested that Angelodemou withdraw the Form 484.
On 8 February 2021, Angelodemou engaged Value ADE Pty Ltd (‘Value ADE’) to conduct a valuation of Create’s share in Founder. Later that month, Value ADE provided that valuation in the amount of $3.2 million (‘February 2021 Valuation’).
On 8 February 2021, Create commenced a proceeding in this court under s 237 of the Act seeking leave to issue proceedings on behalf of Land Co for it to pursue relief against Land Holdings and Angelodemou for breaches of duty in respect of the transactions concerning the Laverton Properties (‘s 237 Proceeding’).
On 12 February 2021, Create commenced a proceeding in this court under s 1322 of the Act against Founder and Angelodemou to rectify the ASIC register and reinstate Pulitano as a director of Founder (‘s 1322 Proceeding’). On 24 February 2021, orders were made by consent in the s 1322 Proceeding to reinstate Pulitano as a director of Founder.
On 13 April 2021, judgment was handed down in the s 459G Proceeding and MSA’s application to set aside Create’s statutory demand was dismissed. MSA subsequently sought leave to appeal this decision but was ultimately unsuccessful; the Court of Appeal dismissed it on 24 June 2021.
On 26 May 2021, Justice Delany published reasons in the s 237 Proceeding, stating that unless Angelodemou gave certain undertakings, Create would have leave to commence a proceeding in the name of Land Co.
On 10 June 2021, Angelodemou and Land Co provided undertakings (‘s 237 Undertakings’) that:
(a) Angelodemou would procure Land Holdings to sell the Laverton Properties in accordance with the orders made on 10 June 2021; and
(b) Angelodemou would provide a full accounting to Create in relation to the proceeds of sale of the land within 14 days of the settlement of such sale; and
(c) no tax will be paid or deducted from the proceeds of sale of the land at settlement directly or indirectly that relates to or is attributable to the beneficial interest of any person in the Renex Property Holdings Trust.
Upon the s 237 Undertakings being proffered to the Court, orders were made by Delany J on 10 June 2021 for the sale of the Laverton Properties (which sale was not to be to a related entity of Angelodemou or Land Holdings), and Angelodemou was ordered to pay Create’s costs of the proceeding to date.
On the very next day, 11 June 2021, Angelodemou’s request for a loan of $3.75 million from Secured Lending 1 Pty Ltd (‘Secured Lending’) to Land Holdings was approved by Secured Lending (‘Secured Lending Loan’), with the Laverton Properties (inter alia) used as security for the Secured Lending Loan. On 15 June 2021, Secured Lending lodged a caveat over the Laverton Properties in respect of its secured interest.
On 17 June 2021, orders were made by Delany J by consent in the s 237 Proceeding in regard to the Laverton Properties, which included orders that Angelodemou not procure or allow Land Holdings to encumber the Laverton Properties further without Create’s consent or a court order, that he produce documents regarding the Secured Lending Loan and Secured Lending’s caveat, and that he provide an accounting of the proceeds of the Secured Lending Loan.[1]
[1]It is noted that while the orders stated that it was made on 17 May 2021, it was submitted and I accept that the date was erroneously recorded.
On 9 July 2021, Delany J made orders in the s 237 Proceeding permitting the sale of the Laverton Properties. Angelodemou was required to undertake that he pay the amount of $3,750,000, representing the funds to be repaid for the Secured Lending Loan, to Land Co within three months of settlement.
On or about 15 July 2021, the sale of the Laverton Properties was completed for $35 million of which the net proceeds of $12,510,577.44 were paid to Land Co. On or about 14 September 2021, Angelodemou caused Renex Group Pty Ltd (‘RG’, a company of which MSA was the sole shareholder and Angelodemou its sole director, which was not part of the Renex Group of Companies) to pay $3.75 million to Land Co. It is common ground that the sale of the Laverton Properties resulted in a windfall profit to Land Co of $16,260,577.44.
On 3 August 2021, orders were made by Delany J dismissing the s 1322 Proceeding, and requiring Angelodemou to pay Create’s costs up to and including 24 February 2021 on an indemnity basis and thereafter on a standard basis.
B.5 Relevant procedural history
As already noted, this proceeding was commenced on 19 August 2021. On 11 October 2021, orders were made by Delany J in this proceeding appointing an independent valuer to provide an expert report as to the value of the shares in Founder (‘Court-Ordered Valuation’). Those orders included detailed orders as to the process to be used for the Court-Ordered Valuation. Pursuant to those orders, John Rundell was appointed to conduct the Court-Ordered Valuation, which report was subsequently provided on 7 March 2022 (‘Rundell Report’).
On 29 October 2021, orders were made by Delany J dismissing the s 237 Proceeding.
As part of the preparation for trial, the parties were directed to prepare a joint list of issues. The list of issues was helpful in identifying most of the issues, but unfortunately it did not address all issues.
C. Pleadings
The pleadings current at the time of trial are as follows:
(a) Create’s amended originating process filed on 3 May 2022 (‘AOP’);
(b) Create’s further amended points of claim filed on 18 October 2023 (‘POC’);
(c) MSA’s points of defence to the POC and counterclaim, filed on 25 October 2023 (‘D & CC’); and
(d) Create’s further amended points of Reply and amended defence to counterclaim filed 25 October 2023 (‘R & D to CC’).
Set out below is a summary of the key aspects of the pleadings. Where it is necessary to go into further detail, I do so later when considering each of the claims.
Create pleads 12 acts of alleged oppressive conduct by MSA. Seven of these claims relate (in some ways) to the Laverton Properties and are alleged to be the:
(a) diversion of opportunity and refusal to provide information (which gave rise to the s 247A Proceeding);[2]
[2]This is treated as two allegations.
(b) removal of Pulitano as a director of Founder (which gave rise to the s 1322 Proceeding);
(c) purported valuation of Create’s shares in Founder by Value ADE;
(d) use of the Laverton Properties by Angelodemou for his personal benefit;
(e) failure of Land Co to exercise its rights against Angelodemou and Land Holdings (which gave rise to the s 237 Proceeding); and
(f) failure to pay certain debts of Op Co and failure to provide information to Create.
The other five acts of oppressive conduct pleaded by Create are the alleged:
(a) refusal by MSA to pay the 2015 Share Sale Debt (which gave rise to the s 459G Proceeding);
(b) reliance by MSA on the Hold Co SHA in its D & CC, in a manner which is against the interests of Founder;
(c) failure by the Renex Group of Companies to prepare financial projections for use by the companies or to assist in the preparation of the Rundell Report;
(d) failure to disclose to Create the EPA’s involvement in the affairs of Op Co;
(e) payment by Op Co of certain legal fees incurred by or on behalf of Angelodemou, companies controlled by him which are not part of the Renex Group of Companies, Chandy, and Artis Parra (‘Impugned Legal Fee Payments’).
On the first day of trial, Create stated that it no longer relied on the failure to pay the 2015 Share Sale Debt and the s 459G Proceeding as an act of oppression, as it accepts that it is not conduct in the affairs of Founder. However, Create stated that it still relies on this conduct as giving ‘colour to all of the other conduct’.
MSA now admits that one of the pleaded acts of oppression, being the removal of Pulitano as a director of Founder on 5 February 2021, does constitute oppressive conduct against Create. MSA also now admits that some of the Impugned Legal Fee Payments ought not to have been paid by Op Co. However, MSA does not concede that these payments amount to oppressive conduct. Apart from the removal of Pulitano as a director of Founder, MSA denies that the conduct complained of by Create constitute acts of oppression.
Create also pleads that Angelodemou owes fiduciary duties and statutory obligations to each company in the Renex Group of Companies in his capacity as a director of each of those entities, and that he has breached those duties and obligations by the alleged acts referred to at paragraphs 57(a) to 57(d) above. MSA denies that Angelodemou breached his directors’ duties to the Renex Group of Companies.
MSA brings a counterclaim against Create, alleging that Create has committed two separate events of default under the Founder SHA. These are alleged to be:
(a) Create’s commencement of this proceeding in August 2021 in which it sought orders that Founder be wound up, alleged to be a breach of Create’s obligation under the Founder SHA to use all reasonable endeavours to procure that Founder carries on the business of holding shares in Hold Co and to procure that Founder not take any steps to dissolve or wind up Founder without the approval of all shareholders;
(b) Create’s discussions, via Pulitano and his brother Alexander (‘Alexander Pulitano’), who is also a director of Create, with some customers, potential customers and competitors of the Renex business about business opportunities on the condition that Angelodemou and/or MSA are not involved in the business.
MSA’s allegations concerning Create’s conduct are said to be both breaches of the Founder SHA and to be conduct in the affairs of Founder by Create that is oppressive.
Create denies that it has committed events of default under the Founder SHA, as alleged by MSA.
During closing submissions, MSA stated that in light of the evidence which emerged during cross-examination of Pulitano, it no longer pressed the allegation described in paragraph 62(b) above. Accordingly, these reasons do not address that allegation.
MSA also alleges that by commencing this proceeding in August 2021 and seeking the winding up of Founder, Create caused Founder to commit an event of default under the Hold Co SHA, giving rise to Artis Parra having a right to purchase Founder’s shares in Hold Co and if it does not so purchase them, Hold Co must buy-back Founder’s shares in Hold Co. Alternatively, if Create purchases MSA’s share in Founder (whether as a result of a court order in this proceeding or otherwise) without the written consent of Artis Parra (to which it does not consent), a change of control will have occurred in respect of Founder that will be an event of default under the Hold Co SHA.
As set out above, the primary relief sought by Create and MSA in the current pleadings is that one buy the other’s shares in Founder. Each party wants to be the purchaser and neither wants to be the seller. Alternatively, Create seeks an order that Founder be wound up. MSA’s alternative relief to it purchasing Create’s share in Founder is that Create’s share be bought-back by Founder.
By the time of its written closing submissions, the relief sought by Create was an order that:
(a) it purchase MSA’s share in Founder for $14 million;
(b) alternatively, it purchase MSA’s share in Founder for the current value as assessed by a valuation to be conducted by an independent valuer; or
(c) alternatively, the parties have 21 days in which to negotiate the sale and purchase of MSA’s share and, failing agreement, Founder be wound up.
By the time of its written closing submissions, the relief sought by MSA was:
(a) an order that it purchase Create’s share in Founder pursuant to s 233 of the Act, alternatively under the Founder SHA; and
(b) the price to be paid by MSA for Create’s share in Founder should be within the range of $610,421 to $789,859, subject to any adjustments determined by the Court as necessary to remove the effects of pleaded and proven oppression, along with repayment of Create’s investor loan to Founder.
This was further refined by MSA during its oral closing address, where it submitted that the relief should be:
(a) an order that MSA buy Create’s share in Founder within a certain period of time;
(b) if MSA does not do so, Create buy MSA’s share in Founder within a certain period of time; and
(c) if Create does not do so, then the proceeding should come back before the Court for further orders.
D. Evidence and witnesses
D.1 Lay evidence
Create called two lay witnesses in support of its case: Pulitano and Alexander Pulitano. Both had filed affidavits; Pulitano was cross-examined; and Alexander Pulitano was not cross-examined. The lay witness affidavits relied upon by Create were:
(a) Six affidavits affirmed by Pulitano, dated:
(i) 18 August 2021 (‘First Pulitano Affidavit’);
(ii) 14 September 2022 (‘Second Pulitano Affidavit’);
(iii) 24 November 2022 (‘Third Pulitano Affidavit’);
(iv) 20 December 2022 (‘Fourth Pulitano Affidavit’);
(v) 5 October 2023 (‘Fifth Pulitano Affidavit’); and
(vi) 30 October 2023 (‘Sixth Pulitano Affidavit’).
(b) An affidavit of Alexander Pulitano affirmed 5 October 2023 (‘Alexander Pulitano Affidavit’).
MSA called seven lay witnesses: Angelodemou; Chandy; de Clase, Nield and Panayi, described as the senior employees of the Renex business, who are employed by Op Co and respectively are the business development manager, the head of technology and senior process engineer, and the facility manager/process engineer; and Paul Morey (‘Morey’), a manager of projects employed by Lycopodium Process Industries Pty Ltd (‘Lycopodium’). All of these witnesses provided affidavits and were cross-examined. The lay witness affidavits relied on by MSA were:
(a) Six affidavits of Angelodemou, sworn:
(vii) 6 October 2022 (‘Third Angelodemou Affidavit’);
(viii) 3 November 2022 (‘Fifth Angelodemou Affidavit’);
(ix)13 December 2022 (‘Eighth Angelodemou Affidavit’);
(x) 3 February 2023 (‘Ninth Angelodemou Affidavit’);
(xi)24 October 2023 (‘Eleventh Angelodemou Affidavit’); and
(xii) 3 November 2023 (‘Twelfth Angelodemou Affidavit’).
(b) Three affidavits of Chandy, sworn:
(i) 6 October 2022 (‘First Chandy Affidavit’);
(ii) 3 November 2022 (‘Second Chandy Affidavit’); and
(iii) 1 February 2023 (‘Third Chandy Affidavit’).
(c) Affidavit of Bradley de Clase affirmed 3 February 2023 (‘de Clase Affidavit’).
(d) Affidavits of John Panayi sworn 3 February 2023 and 10 November 2023 (respectively, ‘First Panayi Affidavit’ and ‘Second Panayi Affidavit’).
(e) Affidavit of Paul Nield affirmed 3 February 2023 (‘Nield Affidavit’).
(f) Affidavit of Paul Morey sworn 24 October 2023 (‘Morey Affidavit’).
I will have more to say in the course of this judgment about my assessment of the evidence in the context of the particular claims under discussion. At this point, I make some high level observations about the lay witnesses.
On a number of occasions during cross-examination, Pulitano gave answers which were inconsistent with contemporaneous documents or his affidavits, only conceding as such when he was taken to those documents or affidavits. The following examples, and these are but a few, illustrate Pulitano’s tendency to overstate matters in his affidavits, deliberately giving certain impressions in them which were not borne out by the facts:
(a) First, in paragraph 62 of the Second Pulitano Affidavit, Pulitano sets out a number of items which he says he has not received from Angelodemou (such as monthly CFO reports, financial reports, CEO reports). Initially he stood by this contention when cross-examined. He was subsequently taken to examples of each of these items which he had received and which contradicted what was in his affidavit. Eventually, Pulitano conceded that his affidavit was incorrect in a number of respects. At paragraph 62(h) of the Second Pulitano Affidavit, he deposes that “As far as I am aware, there has been no financial statements prepared for [Founder] and no accountant is appointed for the entity, and no tax returns have been lodged”. He was asked if he contended that these things should have occurred, to which he responded “I’m not saying they should’ve been, I’m just saying … there aren’t any.” He says he wasn’t complaining about it by including it in his affidavit, he was just “stating a fact”. That may well be, but it reads as a complaint that something hadn’t been done which he thought should have been done, thus creating a misleading impression by his evidence. At paragraph 62(o) of the Second Pulitano Affidavit, Pulitano deposes that he had not received any opportunity as a shareholder of Create to acquire a legal or beneficial interest in any shares when other shareholders had left Hold Co. He agreed that Areo was the only such shareholder who had exited. He cavilled with the proposition that Create never had any entitlement to acquire any of Areo’s shares in Hold Co, saying that Founder had an opportunity to do so and Create is a part of Founder. This culminated in me asking Pulitano what was the point of him telling the Court this in the Second Pulitano Affidavit, to which he responded:
Throughout the um, I guess there’s been a long period of time from where this started to where it is today, and I guess it's through multiple affidavits in terms of lots of stuff has been (indistinct) out in terms of the flavour of the things that were happening. But ultimately, in - lots of the things we were trying to do was just explain I guess where we came from and what our position was in terms of wholly, not just a legal position, but the - like the - the ah, the - the understanding between the two parties, my version of the understanding. So there’s lots of bits in this – in both affidavits – on both sides’ affidavits that ultimately, ah, um, are there for context and other bits and pieces.
With respect, this is nothing more than self-serving ‘word salad’.
(b) Second, Pulitano has repeatedly contended that after Areo exited it was harder for Create to get financial information from Angelodemou and Chandy. During cross-examination, he was asked about information his brother Alexander Pulitano had requested from Chandy in May 2019, where in an email he requested copies of the financial statements for FYE 2018 and FYE 2017. Chandy provided those via return email the same day. This exchange ensued:
Mr Slattery: But you can see the date on which the request was made, this was after AREO Sarl had left the business, wasn’t it?
Pulitano: Correct.
Mr Slattery: So, even after AREO Sarl left the business, based - and I accept that this email didn’t go to you, it went to your brother, there wasn’t any problem getting information from Mr Chandy at this point, was there?
Pulitano: The – the dates are very specific here.
….
Mr Slattery: 16 May 2019?
Pulitano: Yeah. We were not given up to date accounts that day, no, we were given accounts from months prior when AREO Sarl were still there, so that is my answer.
Her Honour: Mr Pulitano, is that seriously your answer?
Pulitano: I – I’m - I apologise, Your Honour. I just I’m – I’m frustrated at the questioning because - - -
Her Honour: Well, your answer was we weren’t given up to date information at that date, but - - - ?
Pulitano: Yep.
Her Honour: - - - have a look at the request?
Pulitano: Yeah, okay. Well, yes.
Her Honour: What’s being requested by your brother in this email?
Pulitano: Is this information, I agree with that.
Her Honour: It’s the information for financial year - - - ?
Pulitano: Yeah, correct.
Her Honour: - - - 2018 and the previous year, it’s not asking for up to date, is it?
Pulitano: It isn’t, no, but it also wasn’t a request by me, I apologise.
(c) Third, Pulitano said that he had only recently learned, since the breakdown of the relationship in late 2020 over the Laverton Properties, that MSA had not put in the full $5 million under the Investor Loan Agreement but the lesser amount of $4.675 million. Pressed, he said that he couldn’t recall knowing this earlier than that, but when confronted with documents from January 2018 which contained this information, he had to concede that he had been given information showing this, and that he never raised any complaint about it at the time.
(d) Fourth, Pulitano demonstrated on a number of occasions in the course of cross-examination a tendency to downplay Angelodemou’s founding of the Renex business and his ongoing role in it, to an extent which appeared somewhat churlish at times and not supported by actual evidence. For example, he denied that Angelodemou was a ‘key man’ in the management of the business and denied that this was the reason for obtaining ‘key man’ insurance in respect of Angelodemou and a put option in the Founder SHA whereby Create could, if Angelodemou ceased to be involved in the day-to-day management of the Renex Group of Companies, require MSA to purchase its share in Founder. Questioned on this a few times in a way which forced him to give a direct answer, he had to concede that he understood in December 2015 when entering into the suite of agreements that Angelodemou was important to the value of the Renex business.
While Pulitano did not appear untruthful, the manner in which he gave his evidence, and his tendency to present matters in an exaggerated and self-serving way, served to reduce his credibility and I consider that his evidence must be approached with some caution. That said, his evidence did not really detract from the main elements of Create’s case.
Create submits that Angelodemou was not a credible or believable witness, saying that he:
(a) actively misled Pulitano in October 2020 regarding the Laverton Properties;
(b) purported to exercise contractual rights which did not exist;
(c) diverted the benefit of the Laverton Properties away from the Renex Group of Companies and into his own family trust;
(d) signed affidavits which suggested he had witnessed things he did not;
(e) obfuscated in answering questions during his evidence; and
(f) made fine distinctions between legal and beneficial ownership of the Laverton Properties.
I accept these criticisms of Angelodemou as a witness.
Angelodemou’s understanding of documents, in particular their legal effect, was frequently shown to be wrong. Angelodemou gave evidence that he had a law degree and had commenced but not completed his articles of clerkship, but had never been admitted as a lawyer or practised as one. One might expect that he would have a better understanding of legal documents than he seemed to display. Given that he has a law degree, his repeated mistakes about legal documents was quite surprising. In light of the many instances in which he was wrong on such matters, any time his evidence was that he was permitted to do something has to be checked. In addition, it presents a credit issue: was his understanding of such matters really what he thought, or did it simply suit him to adopt erroneous understandings as a means of justifying his conduct? I think the latter is far more likely.
Angelodemou frequently took quite a bit of time before answering questions, however I did not think he was obfuscating in this regard or had any nefarious purpose in answering this way. It did not come across as taking time to make up answers; rather, since he took time with almost all his answers, even to some quite innocuous questions, I formed the impression that he was thinking carefully about the question and his answer.
Some of Angelodemou’s evidence was so implausible that it affected his credibility and was ultimately unhelpful to MSA’s case. Examples of this were his insistence that the Renex Group of Companies was going to get the benefit of the Laverton Properties even though he nominated Land Holdings as the purchaser (which held the land on trust for his own trust), thus putting legal and beneficial ownership outside the Renex Group of Companies; the circumstances of the Secured Lending Loan; and using the Laverton Properties as security for that loan which was for his own personal benefit.[3] His attempted justifications for withholding information from Create, including resisting subpoenas issued in this proceeding to the Renex Operating Entities, were self-serving nonsense. For example, his excuse for causing Op Co to resist a subpoena seeking invoices for legal costs paid by it (which ultimately led to Create amending its claim to include the Impugned Legal Fee Payments as an act of oppression) included that he thought certain matters should be kept confidential and he was worried that Op Co could be unreasonably criticised for engaging legal advisers and spending money on certain matters.
[3]These are all discussed in much more detail later in these reasons.
I will deal with other aspects of Create’s submission about Angelodemou in due course, but overall his evidence must be approached with extreme care and caution.
Chandy appeared to me to give his evidence truthfully, however he did seem to be trying to put the best light on things. There were some aspects of his evidence which were confusing and seemed incorrect: the licence fees for use of intellectual property and how these were treated in the accounts being a prime example; and the accounting treatment of employee bonuses being another.
It seemed to be generally accepted by the parties that whoever’s share was purchased would no longer be involved in the Renex Group of Companies or the Renex business.
In their affidavits, de Clase, Panayi and Nield all gave evidence as to their own importance to the conduct of the Renex business, as to Angelodemou being indispensable to it, and as to them either leaving or being likely to leave if Angelodemou was no longer running the Renex business. This evidence all seemed directed to MSA’s resistance to Create buying its share in Founder. My impression of this affidavit evidence was that it was overstated and was at times incredulous. This impression in respect of de Clase’s and Panayi’s affidavits was reinforced by their oral evidence. Panayi’s evidence about definitely and immediately leaving the Renex business if Angelodemou left for any reason (that is, not just if Pulitano took over) was preposterous. He denied a friendship with Angelodemou outside of work but was supposedly so loyal he would automatically leave his employment, which was not credible. De Clase’s oral evidence was even more emphatic than his affidavit evidence: according to him, he would leave if Angelodemou left, he himself was completely indispensable to the Renex business, and all his customers would follow him if he went to a competitor.[4] On the other hand, Nield came across as straightforward and honest, and did not present as giving evidence as part of an Angelodemou cheer squad, which is the impression de Clase and Panayi had made.
[4]Indeed, de Clase’s evidence can generally be classed as emphatic, for example insisting that something was “a fact” when it was clearly an opinion.
Morey gave evidence about Lycopodium’s historic involvement in the Renex business (both before and after the restructure of late 2015), by conducting feasibility and costs studies for the engineering, procurement and construction of the Waste Treatment Facility, assisting with the coordination and introduction of technology with the utilities and building works at the facility, assisting with the commissioning of the facility once it had been constructed, some technical support on about four occasions, and designing kiln support. Lycopodium’s last assistance to the Renex business was in about June 2018. It made a pitch to do some plant improvements at the Waste Treatment Facility in 2023, however it was not awarded the job. Morey also gave evidence about its lack of operational expertise in the day-to-day running of a facility once it is operational. Morey was a straightforward and honest witness.
D.2 Expert evidence
As noted above, on 11 October 2021, the Court made orders for the Court-Ordered Valuation, which resulted in the Rundell Report. Each party subsequently retained experts, both of whom provided two reports each:
(a) Create retained Dennis Lee, who provided reports dated 5 October 2022 (‘First Lee Report’) and 10 May 2022 (‘Second Lee Report’). Lee is a certified forensic accounting specialist at PKF Melbourne Advisory Pty Ltd.
(b) MSA retained Dawna Wright, who provided reports dated 14 December 2022 (‘First Wright Report’) and 24 January 2023 (‘Second Wright Report’). Wright is a qualified chartered and forensic accountant at FTI Consulting.
At trial, neither party relied upon the Rundell Report or called Rundell as a witness. However, the Rundell Report was in evidence. I will have more to say about this later.
Lee and Wright were both called as witnesses and were cross-examined. They each conducted themselves in a professional manner, doing their best to answer questions and to assist the Court.
Lee answered questions truthfully and carefully, readily making concessions where appropriate.
Wright’s approach was straightforward, honest and knowledgeable. She took care to stay within her areas of expertise but if went outside those areas, readily acknowledged as much. Wright explained things clearly, in particular the issue of depreciation and amortisation, and how to treat the intellectual property payments and licence fees.
E. Relevant legal principles
E.1 Oppression claims
E.1.1 Legislative provisions
The Court may make an order under s 233 of the Act if it is satisfied that s 232 has been established. The order can be made on the application of, relevantly, a member of the company.[5]
[5]Section 234 of the Act sets out who can apply for an order under s 233 in relation to a company.
The Court’s jurisdiction is enlivened if s 232 is met. That section relevantly provides:
The Court may make an order under section 233 if:
(a) the conduct of a company’s affairs; or
(b) an actual or proposed act or omission on behalf of a company; or
(c)a resolution, or a proposed resolution, of members or a class of members of a company;
is either:
(d)contrary to the interests of the members as a whole; or
(e)oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.
Once the Court’s jurisdiction is enlivened under s 232, pursuant to s 233(1) the Court may make any order it considers appropriate in relation to the company, including (relevantly) an order:
(a) that the company be wound up;
…
(d) for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law;
(e)for the purchase of shares with an appropriate reduction of the company’s share capital;
…
(h)appointing a receiver or a receiver and manager of any or all of the company’s property;
(i)restraining a person from engaging in specified conduct or from doing a specified act;
(j) requiring a person to do a specified act.
E.1.2 Key applicable principles – s 232 of the Act
There have been many cases which have stated the key principles applicable to s 232 of the Act. A convenient summary of these principles is contained in Re SRW Nominees Pty Ltd,[6] where Robson J stated as follows:[7]
[6][2019] VSC 547 (‘Re SRW Nominees’).
[7]Re SRW Nominees, [33]-[44], citations omitted. These passages were cited by Robson J in Slea Pty Ltd v Connective Services Pty Ltd (No 9) [2022] VSC 136, [518] (the ‘Connective Trial Judgment’). Although the Connective Trial Judgment was appealed and aspects of Robson J’s judgment reversed, his Honour’s statement of the principles was not disputed on appeal and was not the subject of any criticism by the Court of Appeal: Millsave Holdings Pty Ltd v Connective Group Pty Ltd [2023] VSCA 326 (the ‘Connective Appeal Judgment’). Robson J’s summary in Re SRW Nominees has been adopted in other cases: see, for example, Re Skytraders Pty Ltd [2022] VSC 416, [29] (‘Re Skytraders’).
Oppressive conduct
Turning to the case law, for there to be oppressive conduct for the purposes of s 232(e) of the Corporations Act, there must be commercial unfairness to a member or members of the company.
The phrase ‘oppressive to, unfairly prejudicial to, or unfairly discriminatory against’ is a compound expression. The words should be ‘considered merely as different aspects of the essential criterion, namely commercial unfairness’.
In Re Companies (Western Australia) Code, Murray J of the Supreme Court of Western Australia said the concept of ‘unfairness’ takes many forms and may include:
the harm suffered as a result of the conduct of management, the prejudice caused, the lack of reasonable commercial justification for the course taken, or simply in the decision making processes within the company.
In Re Ledir Enterprises Pty Ltd, Black J of the Supreme Court of New South Wales noted that s 232(e) is concerned with conduct that involves ‘commercial unfairness’ or ‘a departure from the standards of fair dealing, or where a decision has been made so as to impose a disadvantage, disability or burden on the plaintiff that, according to ordinary standards of reasonableness and fair dealing, is unfair’.
The test for commercial unfairness has an objective standard. It requires an assessment of whether objectively, in the eyes of a commercial bystander, there has been unfairness. As Brennan J stated in Wayde v New South Wales Rugby League Ltd:
The court must determine whether reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other, would have decided that it was unfair to make that decision.
Evidence of conduct having been engaged in deliberately, knowing it to be unfair or not in good faith is persuasive, but not necessary. As Sackar J of the Supreme Court of New South Wales stated: ‘although proof of some improper purpose or ulterior motive may well make the finding of oppression irresistible, the absence of such motivation will not and cannot in and of itself defeat [sic] charge of oppression’.
If the directors or a majority membership conduct the affairs of a company such that they advance their own interests or the interests of others of their choice, to the detriment of a minority shareholder, that conduct will ordinarily fall within the ambit of the oppression section.
Therefore the court is required to determine whether, on the balance of probabilities, an objective commercial bystander would be satisfied that the affairs of the company were being conducted unfairly. This inquiry is not assessed in a vacuum: the context is relevant to assess the fairness of the conduct.
Contrary to the interests of the members as a whole
Subsection (d) of s 232 of the Corporations Act empowers the court to make an order under s 233 if the conduct of the companies’ affairs is ‘contrary to the interests of the members as a whole’.
In Turnbull v National Roads and Motorists’ Association Ltd, Campbell J of the Supreme Court of New South Wales opined that subsections (d) and (e) are distinct grounds of relief. Although Australian judgments have differed in their approach, Campbell J’s approach has been widely adopted and is the preferred view. I adopt this view.
There has been comparatively little judicial consideration of the phrase in s 232(d). In Sandy v Yindjibarndi Aboriginal Corporation RNTBC (No 4), Pritchard J of the Supreme Court of Western Australia said:
Conduct by a board of directors will be contrary to the interests of the members as a whole if no board, acting reasonably, could have engaged in that conduct. It is not necessary to show bad faith on the part of the directors. In other words, conduct may be contrary to the interests of the members as a whole even though the board of directors does not act in bad faith.
Although they are separate grounds, there may be conduct which falls within both subsections (d) and (e). …
In the Connective Trial Judgment, Robson J went on to say that to that summary, ‘some further germane points of principle should be added’:[8]
Conduct of a company’s affairs may be oppressive pursuant to s 232, although the conduct is lawful and not in breach of any fiduciary or other duty.
In deciding whether there has been conduct which is oppressive, unfairly prejudicial or unfairly discriminatory, the court is required to undertake ‘an evaluative exercise in which potentially competing considerations are brought to account’. The conduct of a minority shareholder, for example, and whether they have baited the majority, is also relevant in assessing the gravity of any allegation of oppressive conduct.
Individual acts that do not meet the description laid down by s 232 might collectively meet that description, and there may be conduct which is relevantly part of the overall story but which does not independently justify a finding of oppression under the section.
In determining whether there is oppressive conduct in any particular case, an exposition of the case law by reference to common instances of oppression can be helpful but should not replace the ‘application of the statutory test directly to the fact of the case in issue’.
The statutory test and available relief contained in ss 232 and 233 ‘are to be read broadly. The imposition of judge-made limitations on their scope is to be approached with caution’.
The remedy is available in respect of conduct of both shareholders and directors. The test is whether, objectively, in the eyes of a commercial bystander, there has been unfairness. Where the conduct is that of a director, the bystander is taken to be a director.
[8]Connective Trial Judgment, [519(a)-(f)], citations omitted.
In respect of s 232(d) of the Act, Sifris J (as his Honour then was) in Peter Exton & Anor v Extons Pty Ltd & Ors,[9] stated that:
… the better view is that s 232(d) is separate and distinct from s 232(e) and that a breach may not necessarily involve commercial unfairness. The court is required to examine all of the relevant facts and circumstances in order to determine whether the conduct under scrutiny is in the best interests of the company as a whole, apart from its members. In this context breaches of duty (whether statutory or fiduciary) by directors and officers may well be conduct that is not in the best interests of the company as a whole. …[10]
[9][2017] VSC 14 (‘Exton v Extons Pty Ltd’).
[10]Exton v Extons Pty Ltd, [39].
In respect of s 232(e) of the Act, in the same case Sifris J summarised similar authorities to those referred to by Robson J, before concluding that:
… the critical issue is commercial unfairness, judged objectively. It usually results in some harm or prejudice by such conduct that is not reasonably or commercially justifiable. Of course all of the facts and circumstances and context needs to be examined in order to determine whether such conduct alleged is oppressive. Further, upon such examination conduct that may appear unfair may be fully justified. … Each case must depend on its own facts and circumstances. [11]
[11]Exton v Extons Pty Ltd, [48].
MSA’s closing submission conveniently summarised the key principles around pleading requirements in oppression cases, which I adopt:
(a) Where the affairs of a subsidiary are to be relied upon, ‘there ought to be pleaded some conduct of the holding company which gives rise to those affairs’.[12]
[12]Re Norvabron Pty Ltd (1986) 11 ACLR 33 (‘Re Norvabron Appeal’), see in particular at 36 (Macrossan J, with whom Andrews CJ and Carter J agreed).
(b) It is ‘necessary for each single allegation in an oppression case to be pleaded clearly in order to assess whether the totality may amount to oppression.’[13]
[13]See for example Shelton v NRMA (2004) 51 ACSR 278 at 285, [24] (‘Shelton’), (citing Weatherall v Satellite Receiving Systems (Australia) Pty Ltd (1999) 92 FCR 101).
In respect of Lee’s reports and evidence, MSA submits that:
(a) Wright’s evidence is also supported by Lee, insofar as he gives opinions as to the appropriate valuation standards and methodology to be adopted in valuing the shares in Founder;
(b) Lee agrees that equitable value is applicable to the valuation of Founder. Lee also agrees that the CFME Method is relevant to valuing the Renex Group of Companies and therefore Founder, and that the valuation should be on the premise of a going concern. Lee does not express opinions as to the appropriate EBITDA multiple or control premium; and
(c) Lee agrees with Wright that the investor loans are debt for valuation purposes if there is an agreed repayment date.
MSA submits that in its opening, Create submitted that Angelodemou, and Chandy at his direction, did not provide Rundell complete and frank information to assist him in the preparation of his expert valuation of the shares in Founder. MSA says that Create’s submission is not pleaded and therefore must be disregarded, and that further and in any event, Create’s submission is inconsistent with the evidence.
MSA points to the Court-Ordered Valuation, which provided for:
(a) the appointment of an independent business valuer to express an opinion as to the value of the shares in Founder as at 1 October 2021;
(b) Create and its advisors to inspect and take copies of the books and records of Founder and the Renex Operating Entities within the categories identified in the annexure to the order;[167]
[167]The 41 categories of books and records Create was authorised to inspect and copy are set out in Annexure A to the 11 October 2021 orders and include, amongst others, financial statements, management accounts, tax returns, BAS statements, cash flow statements, projections, loan agreements, bank statements, customer contracts.
(c) the parties to provide to the independent business valuer any documents they wish the valuer to see for the purposes of the valuation;
(d) the parties to make submissions to the independent business valuer; and
(e) the independent business valuer to have a right to inspect ‘all or any of the books’ of Founder and the Renex Operating Entities for the purpose of the valuation.
MSA says that both parties provided documents and written submissions to Rundell, and that in addition, Rundell:
(a) met with Chandy (in the presence of Create’s representative) at the Dandenong Site for the purpose of obtaining information to enable him to perform the valuation pursuant to orders of Button J made on 21 December 2021; and
(b) was given access to Renex’s accounting systems in Xero.
On the basis of the previous two paragraphs, MSA submits that Rundell was provided with the information necessary to prepare his report.
The Rundell Report was produced to the parties on 7 March 2022.
On 24 June 2022, orders were made (at the request of Create) for the filing of further expert evidence. MSA says that Create did not make any complaint to the Court at that time to the effect that ‘complete and frank’ information had not been provided to Rundell, and that Create did not seek orders for the production of further documents for the purposes of valuation.
Create then engaged Lee to prepare an expert report critiquing the Rundell Report. Lee was provided with the documents provided to Rundell. He was instructed to critique certain aspects of Rundell’s (and subsequently Wright’s) valuation, and was not instructed to provide an opinion as to value of shares in Founder.
MSA engaged Wright to prepare an expert report as to valuation. MSA says that she was also provided with the documents which had been provided to Rundell.
MSA submits that there is no evidence of any complaint by Rundell or Wright that they were not provided with ‘complete and frank information’ or insufficient information to value the shares in Founder.
MSA submits that Create has never sought orders compelling MSA to comply with the existing orders for production of documents for valuation nor did it ever seek orders for the production of further documents for the purposes of valuation.
MSA also submits that during cross-examination, Lee accepted that he could have prepared a valuation if he had been given a valuation date and if he had been instructed to prepare one. He also admitted that he had enough information to prepare a valuation.
MSA makes a number of submissions in respect of the appropriate valuation date, which it says is 1 October 2022. It refers to a number of the authorities I have set out above, before going on to submit that the following factors support a finding that a valuation date of 1 October 2021 is fair in all the circumstances:
(a) 1 October 2021 is a date close to the commencement of this proceeding (being 19 August 2021);
(b) 1 October 2021 is the date for valuation for the Court-Ordered Valuation;
(c) Wright and Rundell have expressed opinions as to the value of the shares in Founder as at 1 October 2021;
(d) the parties have been put to considerable expense in preparing valuation evidence using that valuation date (the Rundell Report alone costing the parties $213,000);
(e) there is no evidence before the Court on the question of value on a date other than 1 October 2021;
(f) Create has had ample time to prepare its case and put on any evidence and submissions it wishes to make on the question of valuation (and the date of valuation):
(xcvii) it instigated the Court-Ordered Valuation;
(xcviii) it instigated the orders made on 24 June 2022 for the filing of further expert evidence; and
(xcix) it filed two expert reports prepared by Lee;
(g) Create has made a forensic choice not to lead any evidence as to:
(i) valuation (save for evidence critiquing aspects of Rundell’s and Wright’s evidence);
(ii) a more appropriate valuation date; or
(iii) any prejudice it may suffer as a consequence of a valuation date of 1 October 2021.
Accordingly, any submissions Create makes against a valuation date of 1 October 2021 ought be rejected;
(h) the only instance of oppression which could reasonably be said to affect valuation, if proven to be conduct in the affairs of Founder, relates to the payment of legal fees; the overwhelming majority of those fees being incurred post-1 October 2021; and
(i) the party whose share is the subject of a compulsory buyout order can be compensated with interest from 1 October 2021.[168]
AA.4.3 Adjustments to account for effects of oppression
[168]Which MSA submits is an approach adopted in Dynasty v Coombs (1195) 59 FCR 122.
MSA submits that in determining the fair value of Create’s share in Founder, the Court should fix a price based on Wright’s valuation and, to the extent pleaded and proven oppressive conduct is found that impacts the value of that share, order that the valuation be adjusted to compensate for that oppression by redressing the wrong.
MSA submits that the value of shares is to be assessed by establishing what their value would have been but for the effects of oppressive conduct. It is common ground between the parties that in determining price, the Court should first determine the fair value of an oppressed shareholder’s share, and thereafter make any necessary adjustments to account for the effects of oppression. As Create states in its opening submissions, the price to be paid is to be determined having regard to the principle that Create be compensated for any wrongs perpetrated against it, taking into account any adjustments necessary to remove the effects of oppression.
MSA submits that the only alleged instance of oppression which requires an adjustment to value to remove the effects of oppression, if the Court is satisfied the conduct in question constitutes conduct in the affairs of Founder, is the payment by Op Co of legal fees.
In this respect, MSA submits that:
(a) the schedule of legal fees paid by Op Co and exhibited to the Eighth Angelodemou Affidavit comprises total legal fees of $1,405,874.74 (GST inclusive); of which $1,089,943,44 (GST inclusive) were incurred before the valuation date of 1 October 2021 and $315,931.30 (GST inclusive) were incurred after that date. These amounts include fees paid to JLL and Value ADE, which are not legal fees;
(b) the total legal fees paid by Op Co in respect of the s 237 Proceeding forming part of the legal fees the subject of the abovementioned schedule total $461,269.85 (GST inclusive). MSA maintains that the payment of these legal fees is justified pursuant to the Constitutions and Indemnity Deeds; and
(c) of the total legal fees paid in respect of the s 237 Proceeding, $447,872.44 (GST inclusive) were incurred before the valuation date of 1 October 2021, and $13,997.62 (GST inclusive) were incurred after that date.
MSA submits that in any case, Wright gave evidence that she has already adjusted the expenses of the Renex Group of Companies for legal fees that were not properly incurred. At paragraph 5.3.16 of the First Wright Report, Wright says she has analysed legal costs for the period from FY2019 to FY2021 and deducted those costs that she “consider[s] to be outside of the ordinary course of business of the Renex Operating Entity, being the costs associated with the AIG claim, borrowing costs, equity/shareholder issues and the property”. After these adjustments, she adopted maintainable legal fees of $260,000 per annum based on the average of the FY2019 to FY2021 adjusted legal costs.
MSA submits that no adjustment should be made for the Impugned Op Co RG Payments, for the reasons I have summarised earlier.
AA.5 Consideration
AA.5.1 Approach to valuation/price in this case
In this case, I have a joint independent expert report (being the Rundell Report) prepared pursuant to orders made by the Court, along with Wright’s valuation prepared on behalf of MSA. Those valuations, while both assessing the value as at 1 October 2021, are vastly different. I have a third set of reports, being the Lee Reports prepared on behalf of Create, which critique the other reports but which do not provide a valuation.
In the circumstances of this case, my view is that the Court can take the Rundell Report into account. True it is that both parties have critiqued it and neither have relied upon it, but it is in evidence and given the history of this case, it is appropriate for the Court to have regard to it. This is because it was carried out pursuant to Court orders in this proceeding. Rundell was appointed as a joint independent expert. Both parties had input into the Rundell Report. For some time, MSA relied on it. Create obtained orders that it could get another report, and MSA then obtained its own report as well.
Some of the criticisms made by Lee and Wright of the Rundell Report are valid. In particular, the difficulty they both experienced in identifying with precision the valuation method applied by Rundell is understandable. However, I do not consider that their criticisms are such that I should disregard the Rundell Report.
I do not accept Create’s position that I should effectively start all over again in ordering a new independent joint valuation. Such would require me to ignore the previous court orders and the expense to the parties of obtaining the Rundell Report, along with the costs of the other expert reports they obtained. Create could have obtained its own valuation but elected not to do so. Its own expert said he could have valued the shares as at 1 October 2021 based on the information he had been given, which included all of the material that had been given to Rundell, had he been instructed to do so. Lee indicated that there would be some shortcomings in doing so, but did not cavil with the proposition that he could have valued the company if instructed to do so. In my view, if Create wanted to lead evidence of a different valuation it could have, but it clearly made a forensic decision not to do so. That is its choice, however it would be antithetical to the overarching purpose under the Civil Procedure Act 2010 (Vic) to start the expert valuation process all over again.
As for the valuation date, I consider it should be 1 October 2021. This is because both Rundell and Wright have based their opinions on that. If any other valuation date is chosen, and here Create urges that the valuation date be the date of the orders to be made by the Court, further evidence would be required. This is likely to be extensive and expensive. Again, it would not be in keeping with the overarching purpose to adopt another date.
Choosing 1 October 2021 as the valuation date in this context is not arbitrary. As set out in the authorities, there is no firm rule by which the valuation date is selected; rather, the “overriding requirement is one of fairness and justice to both parties in all the relevant circumstances of the case.”[169] 1 October 2021 is close enough to the date upon which this proceeding was commenced for it to be a reliable proxy for that date. The valuation date being taken to be the date of commencement of the proceeding is a very common approach, as set out above. In any event, the approach I have decided to take (set out below) means that the valuation date does not loom large in the analysis.
[169]Foody v Horewood, [37] (per Chernov JA).
Create suggested that adopting 1 October 2021 as the valuation date would result in a low watermark for value, since it says that the evidence is that the financial performance of the Renex Group of Companies has improved since then. I accept that this works in favour of a later valuation date, but for the reasons just expressed, I consider 1 October 2021 to be the better date for me to choose. In any event, the approach which I intend to adopt, as set out below, effectively takes the improved financial position of the Renex Group of Companies into account because it factors in the offers made by the parties, which were made by the parties with their knowledge of the more recent financial performance. An award of interest will also be made, thus compensating for some of the improvements in financial performance since then.
Wright’s methodology and reasoning appears sound. However, there are two related aspects of it which concern me.
First, Wright says that she has chosen equitable value as the basis, which has at its foundation the fact that the parties to the proposed transaction are known, so that their idiosyncrasies are taken into account, and this includes taking account of past offers between the parties. Wright says that equitable value goes beyond the market value approach by taking into account the respective interests of the parties, and therefore should take into account what price at which the parties were willing to transact to transfer the shares in Founder. In this regard, she says that it is irrelevant to an assessment of equitable value to consider whether the price of $18.5 million[170] was based on a formal valuation process or was an agreed value between the parties. By this point, Wright is effectively agreeing with Lee’s opinion as I have set out at paragraph 670(a) and (b) above.
[170]It is apparent from the way this is discussed in the First Wright Report that this is a reference to the First Offer, not to the 2019 Share Sale Agreement, as Wright refers to the Clayton Utz letter of 23 December 2020 as containing the offer. She also says that this offer should be treated as $10,718,330 on the basis that the letter states that the $18.5 million figure would be reduced by a portion of the net proceeds of sale of the Laverton Property if they were sold in a specified period, which they were.
Wright says she has taken the previous offers into account, and the First Wright Report refers to at least the First Offer.
However, I could not see anywhere in the First Wright Report where the previous offers were specifically taken into account, and when I asked about this, Wright said that it did not have any effect on the numbers. It is unclear to me how this could be the case. Obviously, I would not expect Wright’s valuation to take into account offers made after the date of her reports, but this does not explain her answer.
Second, the valuation at which Wright arrived is exceptionally low, compared to the February 2021 Valuation and Rundell’s valuation, to the previous agreement for $18.5 million plus the $5 million investor loan, and to the offers made by the parties from December 2020 onwards. Further, I consider that a number of the assumptions Wright made or was instructed to make were either insufficiently substantiated or incorrect, and that these had a distorting effect on her valuation. By way of example, I refer to:
(a) the ongoing costs of waste removal are based on figures for the previous year, which were abnormally high;
(b) the estimated wages of an executive to replace Angelodemou, which seemed too high;
(c) the improperly paid legal fees, which were not accounted for;
(d) the cost of remediating the Dandenong Site, which was assumed to be $10.55 million and which was the amount of the financial assurance Op Co was required to provide to the EPA for future remediation costs. There was no correlation between these two items established on the evidence;
(e) the accuracy of the financial statements, which was in doubt, due to matters such as bonuses and the Impugned Op Co RG Payments. While I have indicated that I will not take these specifically into account for the reasons already stated, there is a sufficient basis for me doubt the accuracy of the accounts due to these matters, in particular the Impugned Op Co RG Payments.
It seems to me that the parties, when formulating the 2019 Share Sale Agreement and their subsequent offers, did not focus merely on matters such as cash flow but took into account the value of the Dandenong Site, the plant and equipment, and the ongoing business, as well as the future potential of the Renex business.
In my view, to effectively ignore the 2019 Share Sale Agreement and the subsequent offers made by the parties and focus solely on the experts’ valuations is to ignore reality. This is particularly so in the case of the Wright Reports, since her valuation is so far divorced from the state of the offers. It is also inconsistent with the equitable value basis of the valuation for the offers to be ignored. Despite Wright saying they should be considered, I could not discern any aspect of her reports which actually took them into account when carrying out the actual valuation. Indeed, it seems to me on a close reading of all of the expert reports that Wright and Lee both say expressly that equitable value should be the valuation basis in this case, and although he doesn’t say so expressly, I think it likely that Rundell also favoured equitable value as the valuation basis.
However, I do not consider it reasonable to focus solely on the amounts of the offers. An offer to purchase can be based on more than a perception of the value: in other words, there is a distinction between price and value. True it is that value can be the price you are prepared to pay, but the valuation of companies is rather more involved than that. There can also be conditions attached to the offers which mean that one is not necessarily comparing like with like, such as the timing of payment(s). One also has to be cautious, in that there is sometimes more involved in the making of an offer; negotiation tactics often come into play.
The role of the Court is to arrive at a fair price to be paid for the shares, and it is not required to focus on traditional valuation concepts and methods. As set out above, the price to be paid may not reflect the actual or real worth of the shares as it is intended to be “compensatory in nature and is aimed at redressing the wrong done (the oppressive conduct)” and will usually take into account various adjustments to remove the effect of the oppression.[171]
[171]Wain v Drapac (No 2), [39]. See also KSG Investments, [279]-[280].
In light of the vastly different valuations before the Court, the criticisms of those valuations, and the fact that as the Rundell Report was not relied upon by either party he was not required for cross-examination, the Court is placed in a somewhat difficult position. I do not consider it appropriate to effectively start again insofar as obtaining an independent expert report is concerned, for the reasons already stated, and also because I have no confidence that it will not result in the same sort of back-and-forth disputation over valuation evidence as has already occurred.
Therefore, I have decided that the appropriate course for the Court to take is to determine a fair price for the shares by using the offers made by the parties as a starting point, informed by the expert valuations and the evidence that has emerged in the case. Despite the parties not relying on it and the criticisms they made of it, the Rundell Report will be afforded some weight, given that it is the product of the Court-Ordered Valuation and that both parties had input into it. The judicial task in arriving at a valuation is to be decided “not by a strict adherence to precise arithmetical calculations, but by a commonsense endeavour, after consideration of all the material before the Court, to fix a sum satisfactory to the mind of the Court as representing the value …”[172]
[172]Garraway v Territory Realty Pty Ltd [2019] FCAFC 9, [57], citing Commonwealth v Milledge (1953) 90 CLR 157 at 162.
AA.5.2 Adjustments to valuation due to oppression
In light of my earlier findings, and so as to ensure that the price to be paid for Create’s share sufficiently compensates it for the oppression which I have found in these proceedings, I consider the following adjustments ought to be made.
AA.5.2.1 Legal costs
I do not accept MSA’s submission that no adjustment needs to be made for the legal costs paid by Op Co of Angelodemou, Chandy and their related entities which are not part of the Renex Group Companies. MSA submits that no adjustment is necessary because Wright has already factored them into her valuation, as set out at paragraph 715 above. While Wright attempted to normalise the expenses by treating most of these legal costs as one-offs and then using a figure which she considered more closely aligned with the costs going forward in a normal situation as part of her calculation of CFME, she did not take into account the effect on the Renex Group of Companies’ financial position of the fact that these legal costs should not have been paid at all by Op Co. Since they should not have been paid by Op Co, an appropriate accounting treatment would have been to add these legal costs back in as a loan to Angelodemou and therefore as an asset of Op Co.
I do not accept MSA’s submissions that only the legal costs paid prior to 1 October 2021 should be included in the adjustment. While I have accepted that date as the valuation date, the Court’s approach in such matters is not rigid and I consider that cutting them off in this way would result in Create not being sufficiently compensated for the oppression.
In my view, the amount of $1,424,472 (rounded) for legal costs ought to be included in the adjustment, comprising:
(a) $1,364,700.70, being the fees invoiced by Clayton Utz and paid by Op Co;
(b) $24,399.04, being the fees invoiced by Marshalls Dent & Wilmoth and paid by Op Co; and
(c) $35,372.72, being the fees invoiced by Minter Ellison and paid by Op Co.
AA.5.2.2 Other possible adjustments
In light of the findings made above, it is appropriate to adjust the price to be paid for Create’s share in Founder to account for the $3,750 paid by Op Co to Value ADE as part payment for the February 2021 Valuation. Given that I have found it was oppressive to commission the February 2021 Valuation, Angelodemou ought not to have caused Op Co to make that payment.
During the course of Create’s closing submissions, counsel for Create submitted that additional costs incurred for the GCI Facility for the Laverton Properties due to GCI charging a higher rate of interest or default interest after Create threatened to take litigation against Land Co in respect of those properties ought to be included in the adjustment. Counsel submitted that GCI was not entitled to do that, and that this all arose due to the Laverton Properties being put in the name of Land Holdings instead of Land Co. Counsel acknowledged that he was not in a position to provide any amounts for these alleged increased costs. While I accept that these increased costs were connected with the oppressive conduct, there is no evidence as to their amount and therefore I will not make any adjustment to price based on those purported increased costs which have not been quantified.
There was some confusion during Create’s closing submissions as to the $40,000 establishment fee paid by Op Co in respect of one of the loans connected with the Laverton Properties. The evidence establishes that this fee was charged pursuant to the GCI Term Sheet in respect of the GCI Facility and was paid by Op Co on 22 October 2022. It was unclear to me whether Create’s submission is that this $40,000 fee should be included in the adjustments. However, I do not think it should be. The Renex Group of Companies ultimately received the benefit of the Laverton Properties upon their sale, and so it is not unreasonable that at the end of the day Op Co bore that cost. Therefore, I do not consider it necessary to adjust the price for Create’s share in Founder for this amount.
I do not consider it appropriate to make an adjustment for the cost of the Rundell Report, as submitted by Create. There is no evidence before the Court that MSA’s share of it was paid by Op Co.
The Second Pulitano Affidavit contains evidence about the costs orders made in favour of Create and against Angelodemou, MSA and/or Land Co in respect of the s 247A Proceeding, the s 237 Proceeding and the s 1322 Proceeding. Pulitano deposes that the payment obligations arising from those orders have been met, but that Create did not recover all of its out-of-pocket expenses associated with these. There is no evidence as to the quantum of these out-of-pocket expenses. Had there been, I would have considered further adjustments to the share price so as to compensate Create for its out-of-pocket expenses, since these were incurred only by reason of the oppressive conduct. As it is, no adjustment will be made for these costs.
In light of my earlier findings, I do not consider it appropriate to make any adjustments to the price to be paid by MSA for Create’s share in Founder in respect of other items which have been mentioned, being:
(a) the R&D Refund;
(b) the Impugned Op Co RG Payments;
(c) the costs associated with the EPA matters; and
(d) bonuses/incentives paid to certain employees.
AA.5.2.3 Conclusion regarding adjustments for the found oppression
For the reasons set out in sections AA5.2.1 and AA5.2.2, the adjustments which should be made to remediate the effects of the oppression amount to $1,428,222, being the amount of $1,424,472 in respect of legal costs plus the amount of $3,750 for the Value ADE payment.
Since Angelodemou wrongfully caused Op Co to make these payments, it is necessary to adjust the price to be paid for Create’s share to remove the effect of the oppression. As Create and MSA are 50/50 shareholders in Founder, this means that half that amount should be included in the price to be paid by MSA for Create’ share. That comes to $714,111.
AA.5.3Assessment of the fair price to be paid by MSA for Create’s share in Founder
In my view, the fair price for MSA to pay for Create’s share in Founder is $11,364,111. This amount comprises:
(a) $3,806,280 for Create’s investor loan (including an adjustment to bring the loan’s value up to the date of judgment); plus
(b) $6,843,720 for Create’s share in Founder (based on the Sixth Offer); plus
(c) $714,111 for the adjustments for the effects of the oppression.
My reasons for arriving at this amount are as follows.
First, it is consistent with the offers made between the parties. At one point, both parties offered the other $10.5 million, with Create repeating its $10.5 million offer after MSA had met its earlier offer of that amount with an offer to purchase Create’s share at $10.5 million. I note that these offers are not equivalent, as Create’s offer to purchase takes into account what it considered at the time to be the effects of oppression, such that it would say that if the purchase was to be by MSA, then Create should be paid more than $10.5 million so as to take into account the effects of oppression.
Second, it is close to the mid-point of Rundell’s preferred valuation.
Third, it is consistent with an equitable value basis for valuation as it specifically takes the known position of the parties into account.
Fourth, I do not consider it appropriate to use Create’s offer of $14 million to buy MSA’s share. This Eighth Offer was expressed to be subject to there being “no material change to the affairs of the Renex Group [of Companies] from the position disclosed in the financial statements” for FYE June 2022, including any materially adverse transaction involving the group and its assets (including any transaction to or for the benefit of Angelodemou, his family, and his related entities). In addition, the Eighth Offer was subject to Create being provided with immediate access to the books and records of the Renex Group of Companies; access to employees to enable Create to provide assurances of continued employment if appropriate; and an undertaking that upon settlement of the share sale agreement, Angelodemou will immediately resign as director of all companies in the Renex Group of Companies. It is unclear what the effect of these conditions actually mean, since the letter does not express what is to happen if there has been a material change. There is no mechanism for this to be assessed.
I also do not consider it appropriate to use the offers of $23.5 million (the 2019 Share Sale Agreement and the First Offer) or of $4,425,513 (the Fourth Offer), all of which I consider to be outliers. There were also different conditions attached to them. For example, under the 2019 Share Sale Agreement, the payment was in tranches such that the entire amount would not have been received until 15 months later. Payment under the First Offer was also in tranches, this time over a two year period. Angelodemou’s attempts in cross-examination to walk away from the figures mentioned in his 19 February 2019 email (set out at paragraph 688 above) do him little credit. He was cross-examined on these:
Mr Northrop: Where do you get those figures from?
Angelodemou: They were just hypothetical figures.
Mr Northrop: Did you just make them up?
Angelodemou: Of course I made them up.
He later said that the numbers were accurate enough for the purposes of the hypothetical discussion he was having. Despite the unsatisfactory nature of Angelodemou’s evidence on this point, I have not taken those figures into account. Those figures were well prior to the 2019 Share Sale Agreement and appear to me to be fairly speculative.
Fifth, I accept the analysis in the First Wright Report and the Second Lee Report that the $5 million investor loan is debt, not equity, but I consider it better for the relationship between the parties to be brought completely and finally to an end. My concern is that if the loan component is left to be paid until 2028, then there is the potential for further disputation between the parties. Accordingly, the price to be paid ought to include an amount on account of Create’s investor loan. This is consistent with the parties’ more recent offers, which all included amounts for the investor loans.
As already mentioned, MSA’s position is that if the investor loan is to be paid before its due date of 14 September 2028, then the NPV of the face value of the loan should be calculated and that is the amount which should be paid. Create’s position was that its filing of the originating process in this proceeding by which it sought a winding up of Founder is an ‘insolvency event’ for the purposes of the Investor Loan Agreement, and an insolvency event is an event of default under that agreement such that the repayment obligation may be accelerated by Create while that default subsists. As I apprehend it, Create’s submission is that the full amount of its $5 million investor loan was therefore either repayable on 19 August 2021 (the date its originating process was filed) or when the Court makes a winding up order. Create submits that it should not be required to take a discount for early repayment when it says that the amount is already due.
Leaving aside the question of what would happen under the Investor Loan Agreement if a winding up order is actually made by the Court, I find it difficult to accept Create’s position in respect of its investor loan. It seems to me to be counter-intuitive that Create could create the insolvency event of filing an application that Founder be wound up, thus creating an event of default under the Investor Loan Agreement, which it could then itself rely upon to contend that repayment of its $5 million investor loan is accelerated.
In my view, the appropriate course in terms of providing for the investor loan in the amount to be paid by MSA to Create is to discount the amount of $5 million by virtue of the fact that it is going to be repaid before its due date. Wright’s NPV formula seems a reasonable approach in this regard.
The Sixth Offer of $10.5 million by MSA to purchase Create’s share included the amount of $3,656,280 for Create’s investor loan (based on the NPV as at 2 November 2023). It seems tolerably clear to me that when MSA made the Sixth Offer, it wished to ‘match’ Create’s Fifth Offer of $10.5 million and that MSA then worked out the NPV of Create’s investor loan as at the date of the Sixth Offer and deducted it from $10.5 million to arrive at the share value component of $6,843,720. Thus, there was no real ‘science’ around arriving at the figure of $6,843,720 for the share component. Nonetheless, it can be adopted for these purposes.
Therefore, the amount of $10.5 million needs to be increased so that it better reflects the value of the investor loan component, given the amount of time which has passed since the Sixth Offer was made. I am going to increase this to $10.65 million, to bring it up to around the time of this judgment, which I estimate is an additional $150,000, roughly calculated by reference to Wright’s formula.[173] This gives a figure of $3,806,280 for Create’s investor loan, as opposed to the investor loan component of $3,656,280 as expressed in the Sixth Offer.
[173]Based on 1 May 2024 as the relevant date.
That explains my conclusion that the amount to be paid by MSA to Create is $11,364,111.
If Create was to buy MSA’s share rather than the other way around, then the price would be $6,843,720 plus the NPV as at 1 May 2024 on MSA’s investor loan of $4,675,000, which I have not calculated, less the amount of $714,111 (being the adjustments for the effect of the oppression on Create).
AA.5.4 Buyout mechanism
I do not consider it appropriate to adopt Create’s suggestion of a silent auction along the lines of that used in Russell v Lee Holdings (see paragraph 673 above). My understanding is that this approach was followed with the agreement of the parties, which is not present here.
Since I have concluded that MSA should buy out Create, the matter that then arises is establishing a mechanism for that to occur and for contingent arrangements if MSA does not do so.
MSA’s position was that it should have first option to buy out Create, with Create to have the option to buy out MSA if MSA does not do so, and with the proceeding to come back to Court if neither of those eventuate.[174] Create’s position was that it should buy out MSA, but if it does not, then the parties should have a period of time to negotiate a sale failing which it would come back to Court. Precisely what the matter would come back to Court for, and on what basis, was not stated.
[174]This was the approach adopted in Patterson v Humfrey, [215].
I do not favour an approach which does not create certainty and finality. Hence, rather than having the matter come back to Court if the buyout does not occur, the appropriate course is to provide for a winding up of Founder as a last resort.
Hence the orders will provide that:
(a) MSA have first option to buy Create’s share in Founder for $11,364,111, payable within a specified period;
(b) if MSA does not purchase Create’s share in accordance with (a), then Create can buy MSA’s share in Founder for $6,843,720 plus the NPV as at 1 May 2024 on MSA’s investor loan of $4,675,000, payable within a specified period; and
(c) if Create does not purchase MSA’s share in accordance with (b) above, Founder be wound up.
I am prepared to hear from the parties, including with limited evidence if they elect to adduce it, as to the period required for the purchases referred to in (a) and (b) above.
BB. Conclusion
For the reasons set out above, I have concluded the following:
(a) The affairs of Founder include the conduct of the Renex business by the Renex Operating Entities.
(b) Allegations regarding breaches of directors’ duties and fiduciary obligations may amount to oppressive conduct and are relevant when considering whether there has been oppressive conduct.
(c) Of the 12 acts of oppression pleaded by Create, seven have been found to constitute conduct which is oppressive to Create (three of which also constituted conduct which was contrary to the interests of members as a whole).[175]
[175]A table summarising these findings is at paragraph 500 above.
(d) Of the five of these acts of oppression which were also pleaded by Create as involving a breach of duty by Angelodemou, four have been found to involve a breach of duty by him.
(e) The claims made in MSA’s counterclaim must fail.
(f) Create cannot rely on matters which it has not pleaded, in particular, the Impugned Op Co RG Payments and the R & D Refund.
(g) The appropriate remedy in this case is a buyout by one party of the other party’s shares in Founder.
(h) In the circumstances of this case, MSA should be ordered to buyout Create’s share in Founder.
(i) The price which MSA is to pay for Create’s share, inclusive of its investor loan and adjustments to remove the effects of the found oppression, is $11,364,111.
(j) The orders should provide for Create purchasing MSA’s share if MSA does not purchase Create’s share by a specified date, with Founder to be wound up if neither buyout eventuates by a specified date.
The proceeding will be listed so that I can hear from the parties as to the matters referred to in paragraph 767 above. I will also hear from the parties as to the appropriate form of orders, interest, and costs.
SCHEDULE OF PARTIES
| S ECI 2021 02995 | |
| BETWEEN: | |
| CREATE ENVIRONMENT PTY LTD (ACN 604 342 154) | Plaintiff / First Defendant by Counterclaim |
| and | |
| RENEX FOUNDER HOLD CO PTY LTD (ACN 609 623 887) | First Defendant / Second Defendant by Counterclaim |
| MSA RENEX CORP PTY LTD (ACN 133 138 593) | Second Defendant / Plaintiff by Counterclaim |
---
2
6
0