Sapphire Holdings Group Ltd v Medina
[2023] VSC 714
•4 December 2023
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S ECI 2021 04419
| SAPPHIRE HOLDING GROUP LTD (ACN 106 048 579) & ORS (according to the Schedule) | Plaintiffs |
| v | |
| ERNEST STEVEN MEDINA | Defendant |
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JUDGE: | M Osborne J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 23 October – 26 October 2023, 2 November 2023 |
DATE OF JUDGMENT: | 4 December 2023 |
CASE MAY BE CITED AS: | Sapphire Holdings Group Ltd v Medina |
MEDIUM NEUTRAL CITATION: | [2023] VSC 714 |
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DIRECTOR’S AND OFFICER’S DUTIES – Section 180(1) of the Corporations Act 2001 (Cth) – Common law duty of care - Whether defendant director has exercised reasonable care and diligence in all the circumstances existing at the relevant time – Objective test to be applied - Whether defendant director owed a duty to plaintiff company in executing contracts of sale on its behalf – Content of duty – Whether it was reasonably foreseeable that the impugned conduct would harm the interests of the plaintiff company, shareholders or creditors - Whether plaintiff company has proved the conduct that would been taken by a reasonable person – Whether the director was acting in the capacity of parent or subsidiary company – Australian Securities and Investments Commission v Maxwell (2002) 59 ACSR 373.
CAUSATION – Whether any breach by defendant director caused the loss claimed by plaintiff company - No transaction case – Independent and supervening event.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | D F McAloon | B2B Lawyers |
| For the Defendant | J P Tomlinson | SBA Law |
HIS HONOUR:
Introduction
On 25 November 2015, the second plaintiff, Carrington Property (Aged Care) Pty Ltd (‘Carrington’), entered into two contracts of sale to purchase land at Springvale Road, Donvale (the ‘Donvale properties’), from Pebble Development Pty Ltd (‘Pebble Development’) and Pebble International (Holding) Pty Ltd (‘Pebble International’) for a combined price of $7.2 million. The first contract with Pebble Development was for the land at 281-283 Springvale Road and was for a price of $4.5 million; the second was with Pebble International for the land at 285 Springvale Road and provided for a price of $2.7 million. For ease of understanding, it is convenient to refer to the separate Pebble entities without differentiation as ‘Pebble’ except where it is material to differentiate.
Settlement of the contracts occurred on 6 November 2017. Prior to settlement, Carrington nominated a related entity,[1] the first plaintiff, Sapphire Holdings Group Ltd (‘SHG’), to take the transfer pursuant to the nomination clauses contained in the contracts of sale.
[1]See below [79].
On 31 October 2019, SHG sold 285 Springvale Road for $585,000. On 10 April 2020, SHG sold 281-283 Springvale Road for $1,930,000. Thus, the Donvale properties were acquired for $7.2 million and sold a reasonably short time later for only $2.515 million.
SHG now seeks compensation pursuant to s 1317H of the Corporations Act 2001 (Cth) (the ‘Corporations Act’) in the amount of $5,315,621.73,[2] alternatively common law damages from the defendant, its former managing director, Ernest Medina, for alleged breaches of his statutory and common law obligations to act with due care, skill and diligence in causing Carrington to enter into the contracts of sale. Two key complaints are articulated; first that Mr Medina signed the contracts of sale on Carrington’s behalf without first obtaining a valuation from a qualified valuer and secondly, that he signed the contracts of sale without obtaining specific authorisation from the board of directors of SHG (‘Board').
[2]In broad terms comprising the loss on the transaction after taking account of certain holding costs and transaction costs.
The gist of the claim is that had Mr Medina obtained a valuation, it would have revealed that the market value of the properties was in the order of $2.92 million,[3] and that Pebble had acquired 281-283 Springvale Road for $2,100,000 in April 2014, and 285 Springvale Road for $780,000 in September 2014, in which case Carrington would not have acquired the Donvale properties at all.
[3]The valuer who gave evidence on the plaintiffs’ behalf, Chris Holroyd of JACX Property, assessed the market value of 281-283 Springvale Road as at 25 November 2015 at $2,350,000 and 285 Springvale Road as 25 November 2025 at $570,000.
The secondary element of the breach alleged; namely that Mr Medina did not obtain express authorisation from the Board before signing the contracts, needs to be considered separately from the failure to obtain a valuation and suffers from a number of difficulties. In the end it was only faintly, if at all pressed.
So stated, the claim appears straightforward. There are, however, some complications. The contracts to purchase the Donvale properties were entered into on 25 November 2015, about eight years ago. Prior to the entry into the contracts, on 27 August 2015, the Board resolved to sign a Heads of Agreement with Pebble (the ‘Final HOA’) which among other things provided for the purchase of the Donvale properties for $7.2 million. The directors who approved that resolution included Mr Medina as well as the chairman, Anthony Battle, the finance director, Colin Edmondstone, and an executive director, Carol Allen, each of whom had, to varying extent, been involved in, or at least aware of, the negotiations as to the terms of the Final HOA. Mr Battle and Mr Edmondstone were SHG’s primary witnesses at trial. The passage of time effected the accuracy and reliability of the recollection of the participants in the relevant events, and the written record evidencing such events appears incomplete.
This proceeding was commenced on 24 November 2021; insofar as any want of due care, skill and diligence on the part of Mr Medina occurred prior to 25 November 2015, and in particular insofar as it preceded the signing of the Final HOA, s 1317K of the Corporations Act operates as a bar to any such claim for compensation arising from any statutory breach of duty given that the proceeding was commenced only on 24 November 2021.
As adverted to above, the primary witnesses called by the plaintiffs in this proceeding, Mr Battle and Mr Edmondstone, were involved in the relevant events although the extent of what they knew and its significance is disputed. The documentary evidence also reveals that the executive director, Ms Allen, also the managing director of Sapphire International Pty Ltd (‘Sapphire International’), was likewise involved in the transaction at least insofar as it led up to the entering into of the Final HOA. Whilst the plaintiffs served witness statements on Ms Allen’s behalf, she did not give evidence at trial as she was overseas on vacation.
The passage of time, the associated limitation complication and the involvement of those board members who gave evidence on the plaintiffs behalf in the transaction at least leading up to the signing of the Final HOA, may well have influenced the way in which the plaintiffs bring the claim and the evidence given by Mr Edmondstone and Mr Battle. At the very least, in combination they have the effect that the picture as to what occurred is not as clear as it otherwise might be.
Whilst Carrington and the third plaintiff, Sapphire Care Pty Ltd (‘Sapphire Care’), were co-plaintiffs with SHG, in the plaintiffs’ closing submission, they confirmed that the claim was pressed only by SHG which alleges that Mr Medina’s conduct in causing Carrington to enter into the contracts of sale was in breach of a duty owed by him to SHG. Relevantly, the loss suffered, which forms the foundation of the claim for compensation, was suffered by SHG, not Carrington.
The pleaded claims and Mr Medina’s responsive defence
During the course of the various interlocutory hearings which preceded the trial and at trial, Mr Medina was at pains to make clear that he intended holding the plaintiffs to the pleaded case. So much was accepted by the plaintiffs without demur.
Against that background, it is convenient to set out the critical parts of the plaintiffs’ pleading which is contained in paragraphs 26-28 of the amended statement of claim dated 6 May 2022:
26. Medina caused
ing:(a)Carrington to enter into the 285 Springvale Road Contract of Sale and the 281-283 Springvale Road Contract of Sale;
PARTICULARS
The plaintiffs refer to paragraphs 8 and 11 above.
(b)Sapphire Care to provide
thefunds totalling $7,256,236.29 from its cash reserves that were utilized by Carrington and Sapphire to make payments to Pebble Development Pty Ltd in connection with the 281-283 Springvale Road Contract of Sale and the 285 Springvale Road Contract of Sale (Sapphire Care Funding); andPARTICULARS
Particulars of the funds comprising the Sapphire Care Funding and the means by which they were provided are set out above at paragraphs 14(a), 14(b), 17, 18 and 22 and the particulars subjoined to those paragraphs. That Medina caused the Sapphire Care Funding to be provided can be inferred from that fact that he was, at all material times, the Managing Director of Sapphire, a director of each of Sapphire, Carrington and Sapphire Care and executed each of the 281-283 Springvale Road Contract of Sale, the 285 Springvale Road Contract of Sale, the 281-283 Nomination Form and the 285 Nomination Form.
(c)Sapphire and Carrington to execute the 281-283 Nomination Form and the 285 Nomination Form
PARTICULARS
The plaintiffs refer to the particulars subjoined to paragraphs 15 and 16 above.
occurredin circumstances where:(d)Medina failed to take steps to ensure that Carrington, Sapphire Care or Sapphire had ascertained the market value of 281-283 Springvale Road
had not been ascertainedby means of obtaining a valuation from an appropriately qualified valuer;(e)Medina failed to take steps to ensure that Carrington, Sapphire Care or Sapphire had ascertained the market value of 285 Springvale Road
had not been ascertainedby means of obtaining a valuation from an appropriately qualified valuer(f)Medina failed to take steps to ensure that Carrington, Sapphire Care or Sapphire had ascertained whether the 281-283 Springvale Road Sale Price reflected
materially exceededthe market value of 281-283 Springvale Road as at 25 November 2015;(g)Medina failed to take steps to ensure that Carrington, Sapphire Care or Sapphire had ascertained whether the 285 Springvale Road Sale Price reflected
materially exceededthe market value of 285 Springvale Road as at 25 November 2015;(h)Medina acted without the authorization or approval of other directors of Carrington and Sapphire where neither the directors of Carrington, nor the directors of Sapphire, approved the entry into the 281-283 Springvale Road Contract of Sale or authorized Medina to cause Carrington to enter the 281-283 Springvale Road Contract of Sale;
and(i)Medina acted without the authorization or approval of other directors of Carrington and Sapphire where neither the directors of Carrington, nor the directors of Sapphire, approved the entry into the 285 Springvale Road Contract of Sale or authorized Medina to cause Carrington to enter the 285 Springvale Road Contract of Sale; and
(j)Medina failed to take steps to ensure that the terms upon which the Sapphire Care Funding was provided were agreed and/or recorded.
27.By reason of his conduct in connection with the purchase of 281-283 Springvale Road and 285 Springvale Road
, including but not limited to the mattersreferred to in paragraph 26 above, Medina contravened his duty of care and diligence to Sapphire, in that he failed at all times to exercise his duties with the degree of care and diligence that a reasonable person would exercise if he or she:(a)was a director of a corporation in Sapphire’s circumstances; and
(b)occupied the office held by, and the same responsibilities within Sapphire as, Medina.
28.By reason of Medina’s breaches of duty set out in paragraph 27 above, Sapphire has suffered loss and damage and is entitled to damages, including pursuant to s 1317H(1) of the Corporations Act.
PARTICULARS
Sapphire acquired
, via its subsidiaries(including by the usefunds fromof the Sapphire Care Funding’s cash reserves), an interest in 281-283 Springvale Road, the market value of which was less than the 281-283 Springvale Road Sale Price.Sapphire acquired
, via its subsidiaries(including by the usefunds fromof the Sapphire Care Funding’s cash reserves), an interest in 285 Springvale Road, the market value of which was less than the 285 Springvale Road Sale Price.On the assumption that Sapphire is obliged to repay the Sapphire Care Funding to Sapphire Care,
Tthe loss and damage comprises:•the difference between the 281-283 Springvale Road Sale Price and the market value of 281-283 Springvale Road as at the date of the 281-283 Springvale Road Contract of Sale (being $2,150,000.00);
• the difference between the 285 Springvale Road Sale Price and the market value of 285 Springvale Road as at the date of the 285 Springvale Road Contract of Sale (being $2,130,000.00);
•costs incurred in connection with the acquisition, holding and sale of 281-283 Springvale Road, including agent’s commission, marketing expenses, finance costs and stamp duty; and
• costs incurred in connection with the acquisition, holding and sale of 285 Springvale Road, including agent’s commission, marketing expenses, finance costs and stamp duty;
and/orless• the amounts recovered by Sapphire upon the sale of 281-283 Springvale Road and 285 Springvale Road (totalling $2,515,000.00).
Alternatively, if Sapphire Care is not obliged to repay the Sapphire Care Funding to Sapphire Care, the loss and damage comprises the diminution in the value of Sapphire’s interest in Sapphire Care
attributable to the above, where Sapphire Care advanced the Sapphire Care Fundingfunds from its cash reserves totaling $7,256,236.29 to Carrington and Sapphire to enable payment of amounts payable under the terms of the 281-283 Springvale Road Contract of Sale and the 285 Springvale Road Contract of Salebut Sapphire Care received no corresponding benefit (whether via an interest in 281-283 Springvale Road or 285 Springvale Road or otherwise).
The critical plea in response is contained in paragraph 26.5 of the amended defence dated 13 July 2022, with the relevant subparagraph reading as follows:
26.5 Alternatively:
26.5.1.as to the allegations contained in paragraphs 26(d) and (e), he denies that the Alleged Duty,
a). generally at law, in equity, or under statute; or
b). specifically, in the circumstances surrounding the purchase of the Donvale Properties (as set out in the particulars to paragraph 8 herein),
imposed an obligation on a director (or specifically, the defendant, prior to 25 November 2015) to obtain a valuation of a property from an “appropriately qualified valuer” before causing a company to purchase such property;
26.5.2.as to the allegations contained in paragraphs 26(f), (g), (h), (i) and (j), he denies those allegations and refers to and relies upon the matters set out in the particulars to paragraph 8 herein.
In order to properly understand the nature of the defence then, it is necessary to set out the entirety of the particulars to paragraph 8 which read as follows:
Particulars
So far as the defendant can say prior to completion of interlocutory processes, including discovery, the purchase of the 281-283 Springvale Road, Donvale, property (together with the property located at 285 Springvale Road, Donvale (referred to in paragraph 11 of the ASOC) – collectively, the Donvale Properties) occurred in the following circumstances:
Negotiation and entry into the contracts of sale
A. The vendor of the Donvale Properties (Pebble) was a member of a group of related companies (Pebble Group) which had interests in aged care businesses in Australia and in China.
B.In late 2014 through early to mid 2015 (prior to execution of the contracts of sale for the Donvale Properties), Sapphire (including through its subsidiary, Sapphire International) and the Pebble Group conducted negotiations to establish a joint business relationship as to conducting and developing mutually beneficial opportunities in nursing home and aged care businesses in Australia and in China.
C. The negotiations referred to above resulted, inter alia, in Sapphire, Pebble and other member of the Pebble Group entering into a written Heads of Agreement, dated 27 August 2015 (Pebble HOA).
D. The Pebble HOA contains a clause 5, “Donvale Land Development”, which sets out, inter alia, that:
a. Pebble was the owner of the Donvale Properties;
b.the land making up the Donvale Properties was collectively valued by the parties at $7.2 million;
c. Sapphire, through its subsidiary, Sapphire Care, proposed to purchase the Donvale Properties (as one collective transaction) for a total consideration of $7.2 million, and work with Pebble to develop the land into a 120-bed facility for the provision of aged care and nursing home services; and
d. it was anticipated by the parties that it would take at least three years to develop the Donvale Properties into an operational 120-bed aged care facility (although the Pebble HOA did not purport to make the obtaining of bed licences to operate an approved aged care facility a condition of the sale and purchase of the Donvale Properties).
E. As to the Donvale Properties and their value as at November 2015, the defendant considered the valuation of $7.2 million to be within a reasonable range, having regard to his experience in aged care property purchases for the Sapphire Group over a 10 year prior period and his awareness (at the time) that:
a. the Donvale Properties comprised a large land allotment of approximately 7,200sqm and 1,140sqm, totalling around 8,340 sqm;
b.the Donvale Properties were situated on Springvale Road (near Mitcham Road intersection) Donvale, on sloping ground providing the potential to develop a three-level aged care home (plus underground parking);
c.Pebble had obtained interim development and architectural plans in July 2014 in relation to the Donvale Properties, which plans indicated a viable development opportunity and which had been provided to the Sapphire Group prior to 25 November 2015;
d.aged care operators typically paid a premium for large land allotments (of greater than 5,000sqm), to enable the construction of larger residential aged care facilities;
e. the Donvale Properties were relatively close to the Melbourne CBD with good road and public transport access and proximity to major hospitals and the Doncaster shopping centre;
f. The average pricing of land in Donvale was around $600-$1,000 per square metre, based on sales in 2014/2015, and the proposed consideration (of $7.2 million) represented an approximate price of $860/sqm;
g.the settlement of the Donvale Properties proposed by the Pebble HOA was of a deferred two-year period and with access being granted to the Sapphire Group to the properties prior to the settlement for the purpose of applying for aged care bed licenses and for project planning; and
h.the proposed purchaser from the Sapphire Group, as named in the Pebble HOA, was Sapphire Care, which entity was authorised to operate an aged care facility as an “Approved Provider”.
F.The negotiations concerning the relationship between Sapphire and the Pebble Group (including as concerned the purchase of the Donvale Properties, as recorded in the Pebble HOA) were conducted from early 2015 on behalf of Sapphire (and Sapphire International) by, inter alia:
a.Carol Allen (who, in addition to being a director of each of the plaintiffs as alleged above, was also a director of and the Chief Executive Officer of Sapphire International),
b.Anthony Battle,
c.Sapphire’s Chief Financial Officer, John Rutledge; and
d.the defendant (save for the periods described below).
G.The defendant, along with Carol Allen, Tony Battle and John Rutledge, was involved in the negotiations with the Pebble Group regarding the Donvale Properties and the Pebble HOA. However, the defendant, when he was on long-service leave and overseas, was only intermittently, or not actively involved at all in negotiations, for the following periods:
a. 14 - 29 February 2015;
b. 12 – 20 March 2015;
c. 29 March – 23 May 2015;
d. 29 May – 27 June 2015;
e. 8 July – 18 August 2015; and.
f.in the period 28 September – 4 October 2015 (when the defendant was overseas for business conducted on behalf of another Sapphire related entity).
H.Prior to 25 November 2015, members of the board of Sapphire (who were also the majority voting bloc of Carrington and Sapphire Care) had approved or authorised the purchase by the Sapphire Group of the Donvale Properties for a total consideration of $7.2 million, which approval or authorisation may be inferred by reason of the following:
a.at all material times, written board reports, board updates, contracts concerning Sapphire Group entities and other important documents to be considered by the board of Sapphire, were routinely uploaded by Rutledge (or other employees) to an on-line “cloud” service (the Online Directory), to which all directors of Sapphire, Sapphire Care and Carrington (through its parent, Sapphire Care) had access;
b. in the period February to December 2015, Carol Allen provided regular Sapphire International reports, detailing the progress of the negotiations with the Pebble Group (including as concerned the Donvale Properties), which reports were contemporaneously uploaded to the Online Directory and also provided to Sapphire board members by email;
c. a draft of the Pebble HOA, in the form as executed on 27 August 2015, was provided to Sapphire board members prior to the 27 August 2015 meeting (by email and by uploading of the draft to the Online Directory);
d.on 27 August 2015, the then board of Sapphire (being Carol Allen, Colin Edmondstone, Anthony Battle and the defendant - collectively also a majority voting bloc of the boards of Carrington and Sapphire Care) unanimously approved Sapphire’s entry into the Pebble HOA;
e.on or about 22 October 2015, the defendant sent an email to solicitors acting for the Sapphire Group (Terry Fraser of Fraser Barrett Baird lawyers), copied to Sapphire’s CFO, Rutledge, attaching the draft contracts of sale for the Donvale Properties and requesting Fraser to review the contracts and provide advice as to whether the Sapphire Group should sign and pay the deposit sums;
f.Carol Allen, by her board report for Sapphire International for the month of October 2015 (provided to all board members of Sapphire through email and the Online Directory), noted that the contracts for the sale and purchase of the Donvale Properties were with Sapphire Group’s lawyers “and will be signed when the contract has been finalised”;
g.the minutes of a 10 November 2015 board meeting of Sapphire noted that the defendant and Anthony Battle were continuing to discuss the contracts of sale for the Donvale Properties;
h.on or before 25 November 2015, Rutledge uploaded to the Online Directory a written memorandum addressed to the board of Sapphire Care, concerning the purchase of the Donvale Properties for a total consideration of $7.2 million, describing an agreed variation in how the Pebble HOA directed consideration was to be paid and dates for settlement (but not as to amount);
i.as at the time the contracts of sale for the Donvale Properties were entered into, Danielle Murray was the then only non-common director of the plaintiffs (as Ms Murray was then only a director of Carrington and Sapphire Care, together with all of the members of the Sapphire board, for the periods alleged in paragraphs 1, 2 and 3 herein).
j.Prior to execution of the contracts of sale for the Donvale Properties, Danielle Murray had notice, or should have been aware, of the intention of the Sapphire Group to purchase the Donvale Properties, including by reason of the following:
i.in September 2015, Danielle Murray was a shareholder of Sapphire Care and on or about 21 September 2015, Ms Murray (among others) was sent an email to shareholders of Sapphire Care, from the defendant, in which the defendant informed such shareholders that the contracts of sale for the Donvale Properties were being finalised;
ii.in or about October 2015, Danielle Murray was a shareholder of Sapphire Care and was sent a communication dated October 2015, titled “Sapphire Holdings Group Investment Overview October 2015” and which stated (at page 17), inter alia as concerns Sapphire Care’s interest in the Donvale Properties, “Donvale – new 120 bed aged care residence. Sapphire Care is in the process of acquiring a 10,000 sqm land parcel in inner Melbourne with planning permit for a 120 bed aged care residence. The development will have a Chinese specific wing to cater for the large Chinese community living within a 10km radius of the site. The planning process will commence in November 2015.”
iii.Danielle Murray had access to the 25 November 2015 memorandum, uploaded by Rutledge to the Online Directory, referred to above;
iv.further particulars of Ms Murray’s awareness of the purchase of the Donvale Properties may be provided upon completion of interlocutory processes including discovery.
k.At all times prior to entering into the contracts of sale for the Donvale Properties:
i.no (then) director of Sapphire objected to Sapphire entering into the Pebble HOA;
ii.no (then) director of any of the plaintiffs, moved or supported any motion to prevent the purchase of the Donvale Properties; and
iii.no (then) director of any of the plaintiffs otherwise acted to prevent (or attempt to prevent) the purchase and settlement of the Donvale Properties by members of the Sapphire Group (as alleged in the ASOC);
l.It was not the common practice of the Sapphire Group, prior to purchasing property, to first obtain valuations from qualified independent property valuers in relation to proposed purchases of property to be used in the Sapphire Group’s aged care and nursing home business (unless required to do so by financiers funding the purchase – which was not the case for the Donvale Properties);
m.further particulars may be provided upon completion of interlocutory processes including discovery.
Nomination of Sapphire as purchaser
I.So far as the defendant can say prior to completion of interlocutory processes including discovery,
duringfrom early to mid 2017, in the course of the negotiations concerning the SCBC Merger, Sapphire (acting pursuant to the deliberations of its fully informed board of directors) and Blue Cross (as the proposed parties to the SCBC Merger) agreed that it would be a condition of the SCBC Merger that the Donvale Properties were to be excluded from the assets of Sapphire Care (which was the only Sapphire Group entity who could operate an aged care business on the Donvale Properties as an Approved Provider) and that Sapphire would be nominated as purchaser of the Donvale Properties and accordingly:a.on or about 2 August 2017, the defendant, together with Carol Allen executed the nomination forms as alleged in paragraphs 15 and 16 herein;
b.on or about 24 August 2017 the board of Sapphire approved the release of an Explanatory Memorandum concerning the SCBC Merger to shareholders of Sapphire and which EM stated at section 4.1.2, “The Merger agreement provides for land to be purchased by Sapphire Care Pty Ltd (via a subsidiary company) to be transferred to [Sapphire] prior to the Merger at the original consideration of $7.2 million [Sapphire] will assess the options for this land after the transfer;
c.on 15 September 2017 the SCBC Merger was approved by Sapphire shareholders; and
d.it was a term of the SCBC Merger Agreement that Sapphire was to cause Carrington to nominate Sapphire as the purchaser of the Donvale Properties, not Sapphire Care (albeit that, as a result, Sapphire could not realise the inherent value in the Donvale Properties as a site for developing and operating an aged care facility, which disadvantage was outweighed by the greater significant financial and operational benefit to be conferred on the Sapphire Group by the SCBC Merger).
J. At all times prior to and as at the date Sapphire was nominated as purchaser of the Donvale Properties (on 2 August 2017):
a.no (then) director of Sapphire, or other plaintiff, objected to Sapphire being nominated as purchaser of the Donvale Properties;
b.no (then) director of any of the plaintiffs, moved or supported any motion to prevent the nomination of Sapphire as purchaser of the Donvale Properties; and
c.no (then) director of any of the plaintiffs otherwise acted to prevent (or attempt to prevent) the nomination of Sapphire as purchaser of the Donvale Properties;
J.K. On or about 6 November 2017, the purchase of the Donvale Properties was settled with Sapphire named as the purchaser.L. On or about 7 December 2017, Sapphire was registered on title as proprietor of the Donvale Properties.
Payment of purchase sums for the Donvale Properties
M.As to payments made by the plaintiffs in relation to purchasing the Donvale Properties, the defendant refers to paragraph 14 herein (and the particulars to that paragraph) and says additionally, that at all times prior to and as at the dates of the payments alleged (namely 25 November (per paragraph 14(a) of the ASOC), 9 September 2016 (per paragraph 14(b) of the ASOC), 7 September 2017 (per paragraph 17 of the ASOC), and 6 November 2017 (per paragraphs 18 and 22 of the ASOC)):
a.no (then) director of any of the plaintiffs, moved or supported any motion to prevent payments being made in relation to the purchase of the Donvale Properties; and
b.no (then) director of any of the plaintiffs otherwise acted to prevent (or attempt to prevent) the making of payments in relation to the purchase of the Donvale Properties.
K.
There are a number of layers to the defence; whether Mr Medina owed a duty to SHG when he executed the contracts of sale in Carrington’s name and whether SHG’s acceptance of Carrington’s nomination of SHG as purchaser, in the context of a subsequent corporate restructure and merger, severs any causative link between any breach and the loss suffered by SHG. At its core however is a denial that the content of the duty (whether owed to Carrington, Sapphire Care or SHG) in the particular circumstances required Mr Medina to obtain a valuation or express Board authorisation prior to the causing Carrington to sign the contracts of sale.
In order to identify the particular circumstances which inform the content of the duty, it is necessary to set out the factual narrative in more detail and to refer to the evidence given (and not given) at trial.
The factual narrative in more detail
SHG was incorporated on 25 August 2003. At all material times , its directors included Mr Medina, Mr Battle, Mr Edmondstone and Ms Allen. SHG was an unlisted public company having approximately 200 individual shareholders including, relevantly, interests associated with Mr Battle, Mr Edmondstone, Ms Allen and Mr Medina. SHG owned 20,325,000 shares in Sapphire Care, with the remaining two shares owned by Mr Battle. In addition, SHG had a substantial (42.5%) interest in the aged care provider, Blue Cross Group, as well as a substantial shareholding in the workplace management company Emprevo Pty Ltd.
Sapphire Care, which was incorporated on 4 August 2011, was an approved provider of aged care services within the meaning of the Aged Care Act 1997 (Cth) (the ‘Aged Care Act’) and held the necessary regulatory licences and approvals enabling it to operate nursing homes and aged care businesses and along with the Blue Cross Group operated various aged care facilities. Carrington, also incorporated on 4 August 2011, was a wholly owned subsidiary of Sapphire Care and acted solely as the registered proprietor of the properties in which Sapphire Care operated the nursing home and aged care businesses.
In addition to being directors of SHG, Mr Medina, Mr Edmondstone, Mr Battle and Ms Allen were at all relevant times also directors of Sapphire Care and Carrington. Reference in these reasons to Sapphire should be taken to refer to either or both of SHG or Sapphire Care as in many cases the communications sent by or on their behalf did not differentiate between the two.
On 29 October 2014, Mr Medina was approached by Pebble in relation to a prospective new aged care facility that Pebble was looking at developing in Melbourne. The proposed site was located at 281-283 Springvale Road, Donvale. Pebble advised that it had also acquired the land next door at 285 Springvale Road, Donvale. Pebble was looking for a joint venture partner who had the necessary approvals and licences to operate an aged care facility.
On 15 December 2014, Mr Medina responded to Pebble’s outreach by expressing interest in pursuing a relationship with Pebble further with a view to establishing a long term relationship with Pebble’s Chinese clients. Mr Medina advised that he would consider the Donvale project which would require analysis on location, demand and price.
On 2 March 2015, Pebble made a formal presentation to Mr Medina and Ms Allen providing them with a written presentation which provided information as to Pebble’s activities and expertise. In the presentation document, Pebble referred to its expertise as a multinational development company with offices in Australia and mainland China. It also referred to the establishment of Pebble Development, which it described as a specialised property development company specialising in unit development and quality apartments. The presentation identified various milestones and activities including the completion of six residential developments, as well as the establishment of a sales office in Beijing in 2012 and a focus since 2014 on aged care development and establishing new sales and investor relations with China. The list of development projects referred to six completed developments along with a further seven which were either under construction or in the planning stage or, in the case of the project at 281-285 Springvale Road, Donvale, a contemplated 120 unit aged care facility.
The Donvale project was noted as being permitted subject to obtaining a planning permit and consisted of four land titles in respect of a total site area of 8,300 square metres. The proposed project contemplated a 120-140 unit facility with the information memorandum noting that Pebble was proposing to build a facility of that size and was currently seeking a joint venture partner with an aged care provider, whilst at the same time conducting fundraising activities in China for that project. The fundraising activities in China were then set out and described in general terms.
Following Pebble’s presentation, on 3 March 2015, Mr Medina responded to Pebble by email, copied to Ms Allen and to SHG’s chief financial officer, John Rutledge. In his email, Mr Medina referred to Sapphire’s desire to cement a relationship or partnership with a small group of Chinese partners and then proceed with a venture into China. In his email, he foreshadowed the injection by Sapphire of at least one existing aged care facility into the venture which could become a demonstration facility providing education and pilot for a Chinese program, as well as Pebble vending in the Donvale properties which would have a dedicated Chinese training academy. It is plain from Mr Medina’s email that any transaction in respect of the Donvale properties was to form part of a wider arrangement which would, among other things, contemplate a joint venture between Pebble and Sapphire including expanding into China. Mr Medina advised that Ms Allen would work with him on the venture and that they would provide a short document or Heads of Agreement (‘HOA’) for the managing director of Pebble, Tony Ammendola’s review the next week.
As part of the board papers for an impending meeting of the Board, Ms Allen prepared a report headed ‘Sapphire International’ dated 23 March 2015. In her report, she set out her activities in January to March 2015 which were stated as focussing on establishing a relationship with the Pebble and investigating joint venture opportunities in China and Australia. The part of the report in the section headed ‘Key Chinese Opportunities’ included various Chinese venture options ranging from a large scale venture to small scale, elements of which included undertaking capital raising from Chinese institutional investors which would be used for a variety of purposes including the acquisition of the Donvale properties, and the construction of a Chinese-specific aged care facility on that land with an adjoining training academy.
On 19 March 2015, Mr Ammendola emailed Ms Allen, copied to Mr Medina amongst others, enclosing concept plans prepared by De Nova for an aged care facility in respect of 281 - 283 Springvale Road, Donvale.
On 27 March 2015, Sapphire International was incorporated as a wholly owned subsidiary of SHG.
In March 2015, Mr Medina resigned as the managing director of Sapphire Care (being replaced by Fabio Maya) in order to ‘maintain a broader Managing Director role in respect of the Sapphire Group’, which role he performed until 1 October 2019.
According to a shareholder announcement prepared by Mr Medina in May 2015, it was resolved that Mr Medina would ‘relinquish his current role as Executive Managing Director of Sapphire Care on 1st July 2015 to focus upon identifying, evaluating and delivering new opportunities for both Sapphire Holdings Group and Sapphire Care’.
On 21 May 2015, Pebble provided Sapphire with a draft HOA (‘HOA v01’). The purpose of the HOA was described as a wish on the part of Sapphire Care and Pebble to explore a joint business relationship in the provision of aged care services to Chinese background residents in Australia, and through combining skills and experience, establishing a strong foothold for similar services to the Chinese market. The HOA v01 then set out three key areas of activity, the Donvale business, capital raising and the establishment of Sapphire International in China. In broad terms, the proposal in relation to the Donvale business involved a merger of Pebble’s Donvale site and Chinese knowhow for an agreed valuation with Sapphire Care’s aged care knowhow and cash injection, and a 50/50 joint venture to develop the project. This would include the establishment of an aged care facility and a separate training facility for local staff and overseas staff training. The capital raising component of the HOA v01 contemplated Pebble carrying out capital raising services in China for Sapphire Care in return for a fee of 7% of the total amount raised (5% in the form of equity in Sapphire Care and a further 2% in cash to cover expenses such as research and the like). It further contemplated Pebble being allocated shareholding in any joint venture established between Sapphire Care and a Chinese investing party, or in SHG in the event that SHG reabsorbed Sapphire Care. In relation to the Sapphire International China company setup, HOA v01 contemplated that Pebble would set up a China based wholly owned foreign enterprise in conjunction with Sapphire Care. The foreign enterprise would operate as the exclusive representative of SHG and Sapphire Care in China and Pebble would receive options for 25% of the equity in the China company.
A copy of the HOA v01 was provided to, among others, Mr Battle, who conveyed a number of concerns principally focused on the need to ensure that any arrangements with Pebble would be on a non-exclusive basis. Mr Battle’s response made no reference to that which was described as the ‘Donvale business’.
On 31 May 2015, Mr Medina forwarded a further draft of the HOA(‘HOA v02’) to Ms Allen and Mr Battle, copied to Mr Rutledge. As Mr Medina’s covering email noted, it was markedly different to that proposed by Pebble and allowed Sapphire to pursue the structure across any investor group, not limited to Pebble. In the HOA v02, the purpose was described as a wish by Sapphire Care and Pebble to explore a joint business relationship that would deliver the capital to provide aged care services to Chinese background residents in Australia and to establish a foothold for similar services in China. In section 2, it set out the Sapphire Care structure advising that Sapphire Care was seeking to raise up to $50 million from a small group of strategic Asian investors in order to pursue various opportunities. Section 3 headed ‘Sapphire Care Capital Raising Proposal’ contemplated the provision of capital raising services by Pebble International to Sapphire Care in return for the payment of a fee referable to the amount of capital raised or equivalent entitlement in shares in Sapphire Care in terms similar to those set out in HOA v01. Section 4 noted that Sapphire Care was considering establishing a new entity in Hong Kong named Sapphire Care International (China) (‘SCIC’) and that SHG was prepared to pursue the relationship with Pebble based on referrals from Chinese clients. This would be on the same terms as those set out in section 3 whereby Pebble would be given the option to acquire shares in SCIC and receive a fee in respect of capital raised for SCIC.
Section 5 was headed ‘Donvale Land and Development’ which was described as an independent opportunity from the capital raising outlined in the earlier sections. The HOA v02 recorded that Pebble and Sapphire Care would consider the best way to bring the project to a successful completion which would include either Pebble developing the property in its own right and providing for a put/call option between Pebble and Sapphire Care to be sold to Sapphire Care on an agreed independent valuation basis upon completion. Alternatively, a sale by Pebble of the undeveloped land to Sapphire Care on a mutually agreed value with the consideration paid in cash, Sapphire Care shares or a combination of the two.
On 5 June 2015, Pebble provided its response to the HOA v02 in a letter which commenced ‘Dear Carol and Ernest’. In the letter, Pebble advised that it wished to accept the option involving the sale of the undeveloped land to Sapphire Care and proposed a price of $7.2 million excluding GST to be payable as to 60% in cash and 40% in equity in Sapphire Care. In justification for the price sought, Pebble advised that it had already completed certain works to ensure a large-scale aged care facility could be developed on the site and be potentially viable. The following matters were then set out:
• Site surveying and site analysis by a qualified Land Surveyor
•Engaging architects for conceptual plans with a yield of 120 beds. These concept plans include work done by De Nova.
•Traffic engineering consultants appointed to advise on road widening plans.
•Initial discussions with the Manningham City Council for an application of a planning permit. This was met positively by Council.
•Arborist report stating there are no protected plants or trees which will affect the development of the site.
• The process of consolidation of the 4 titles into 1 title.
•Commissioned research indicating estimated bond value of $600,000 -$800,000 per bed and the demand of beds in the Manningham area. Indicating a current shortage and increased demand of residential aged care beds in the future.
Pebble also offered to provide its services during the planning, design and building process and reaffirmed its years of experience in real estate development and project management, as well as marketing assistance to enable the exploitation of the demographics in the area.
A third version (‘HOA v03’) was dated 9 July 2015 and was prepared by Sapphire after Sapphire had been notified of Pebble’s proposed price. Ms Allen had made amendments to the previous version and her changes included:
1. Pebble International
maywill sell the undeveloped land to Sapphire Careonat a mutually agreed value of $7.2 Million ( SHG is still waiting for a final valuation to agree on the final price) .The consideration may be in cash,It is agreed that a deferred settlement will occur which will consist of:...
A fourth version (‘HOA v04’) was sent by Ms Allen to Pebble and Mr Medina on 11 July 2015. The covering email read ‘[a]ttached is our final draft of the HOA Happy to discuss’. This version reflected changes made by Mr Medina on 10 July 2015 to Ms Allen’s HOA v03. Mr Medina’s changes reflected his earlier draft[4] of ‘may sell’ and ‘may purchase’. Mr Medina also deleted the words ‘SHG is still waiting for a final valuation to agree on the final price’ and instead had added in the words ‘subject to independent valuation confirmation and after allowing for the planning works already undertaken by Pebble’.
[4]HOA v02.
A fifth version (‘HOA v05’) was sent by Pebble to Ms Allen (copied to Mr Medina) on 15 July 2015. In this version Pebble’s mark ups showed changes made on 13 and 15 July 2015 which removed the references to the price being subject to independent valuation. Instead, the relevant part of HOA v05 read ‘[t]he following conditions for the land sale valued at $7.2 million are as follows:’ before setting out the timing of the various payments (in ways not materially different in any relevant way to that proposed in earlier drafts).
Ms Allen then circulated this version to Mr Battle and Mr Medina on 16 July 2015 at 9:33am informing them that she would be in the office that afternoon and available to discuss the draft with them.
Mr Battle responded with a further draft (‘HOA v06’) at 2:38pm advising that he had been through the ‘Pebbles draft Heads of Agreement’ and had no particular concerns given that there are so many ‘let out’ opportunities for SHG. Mr Battle’s email was sent to Ms Allen and Mr Medina and copied to Mr Rutledge. Mr Battle’s changes, largely related to those aspects of the HOA which did not concern the Donvale properties. For reasons that are unclear, Mr Battle’s changes were made not to the draft which had been sent to him by Ms Allen and reflected Pebble’s changes (HOA v05) which had deleted the reference to a valuation but to the earlier draft (HOA v04) which contained the reference to a valuation.
There is no evidence that Mr Medina responded to HOA v05. As such HOA v06 represents Mr Battle’s changes to HOA v04.
On 17 July 2015 Mr Medina went on leave to Cambodia. He did not return from leave until 12 August 2015 although he responded to emails from time to time.
On 5 August 2015, Mr Battle emailed Mr Medina, Mr Edmondstone, Danielle Murray[5] and Ms Allen, copied to Mr Rutledge, Mr Maya, and two other Sapphire executives (Peter Gunn and Toni Flynn). Mr Battle’s email noted that the last month or so had been ‘pretty frantic’ so he thought it prudent to set out a number of matters that required consideration or approval by the various boards in the next month or so. The list of such matters, said to have been prepared with the assistance of Mr Rutledge, Mr Maya, Ms Allen, Mr Gunn and Ms Flynn, listed a number of matters some noted as urgent by reference to the relevant Sapphire entity or group (eg, Group, SHG, Sapphire Care, Emprevo and Sapphire International). Each group or entity with the exception of Sapphire Care had a number of urgent matters listed. The non-urgent matters listed in respect of Sapphire Care were:
1. Prepare Cranbourne business case for Board consideration
2. Prepare Oakleigh business case for Board consideration
3. Prepare a business case for Donvale if Pebble HOA is approved
4. Obtain a valuation acceptable to the ANZ of the Donvale land[6]
[5]Danielle Murray was a director of Sapphire Care and Carrington but not SHG.
[6]Another 4 items were listed which are not relevant to the current dispute.
On 6 August 2015, Ms Allen emailed Mr Medina and Mr Edmondstone letting them know what she had been up over the last few weeks. Relevantly, in the case of Pebble, she wrote ‘[w]e have continued to have discussions with Tony A around the HOA, after discussion with Tony Battle and John there are a number of issues and statements that we believed needed more clarification and clarity. We are now nearing agreement on most matters’. Mr Medina responded the next morning noting that things sounded positive and otherwise reporting on his travels.
On 12 August 2015, Mr Medina returned from leave.
On 18 August 2015 at 3.20pm Ms Allen emailed Mr Medina with the ‘final ‘ HOA to which Mr Medina responded at 3:28pm stating that it could be forwarded to Tony (a reference to Tony Ammendola at Pebble not Mr (Tony) Battle). Accordingly, Ms Allen emailed Mr Battle and Pebble (copied to Mr Medina) attaching a seventh version (‘HOA v07’), which in respect of the matters relevant to this dispute reflected Pebble’s HOA v05, save for the changes made by Mr Battle to those parts which did not affect Donvale. Her covering email read:
…as discussed Ernest has made some minor changes most of them discussed with you last week
We are now happy to sign and move forward
On 27 August 2015, the Board resolved to approve the Final HOA which was signed by Mr Medina that day in the name of SHG. That part of the Final HOA relevant to the Donvale properties read:
5. Donvale Land and Development
Pebble Development owns a large, vacant land site on 281-283 Springvale Rd, Donvale (7,200sqm approx.) and 285 Springvale Rd, Donvale (1,100sqm approx.). The land can accommodate a 120 bed aged care residence. However, the project still requires comprehensive planning, design and development phases. In addition, aged care bed licences will need to be obtained either through the Commonwealth Aged Care Approval Round (“ACAR”) or through the purchase of bed licences if these become available in the marketplace. Assuming all permits and bed licences can be obtained it would take at least three years for the site to be turned into an operational aged care residence.
This opportunity remains independent to the capital fund raising from Chinese investors to SHG. Both parties also acknowledge that the Donvale property may be developed and funded through different structure from that proposed by Sapphire Care.
Pebble Development and Sapphire Care will consider the best way to bring this project to a successful completion as an aged care residence. The land sale is valued at $7.2 million and the settlement terms are as follows:
•Sapphire Care will pay a Deposit of $720,000 to Pebble Development to initiate the land sale upon the signing of the Contract for 281-283 Springvale Rd, Donvale for the consideration value of the land of $4.5 million.
•Additionally Pebble Development or related entity will execute, on 9th September 2016, the land sale contract for 285 Springvale Rd, Donvale for the consideration of $2.7 Million.
•$1.5 million will be paid to Pebble Development or related entity within 12 months of the Deposit.
•A further $1.38million will be paid to Pebble Development or related entity within 24 months of the Deposit. This will be for the full Settlement of the land transactions and give Sapphire Care title over 281-283 Springvale Road Donvale and 285 Springvale Road Donvale.
•Settlement for 285 Springvale Rd, Donvale will take place at the same time as the settlement for 281-283 Springvale Rd, Donvale to enable the exchange of both Titles to Sapphire Care.
•Upon Settlement, Pebble Development or related entity will receive SHG shares to the value of $3.6million, the valuation of SHG when Pebble Development or related entity exercise the conversion will be no more than $160 million and subject to the Valuation from a qualified Independent Valuer.
•In the case where Pebble Development or related entity does not accept the SHG Valuation provided by SHG, Pebble reserves the right to convert 50% of $3.6million into cash, paid by SHG to Pebble Development or related entity upon settlement and the balance in SHG shares.
•Both parties reserve the right to initiate full settlement at an earlier date upon consultation with the other party.
It is acknowledged that Pebble International can contribute to the success of the project through:
• Raising awareness in Chinese communities
• Gaining support from local Chinese media and residents
• Marketing to local Chinese residents
• Marketing in China for short stay visitors
• Gaining support from Chinese authorities
• Real Estate development management services
• Assistance with project management of the building of the aged care centre
It is acknowledged that Sapphire Care would apply for the bed licenses as an existing Approved Provider under the Aged Care Act (1997).
The terms of the Heads of Agreement will terminate in 24 months; or in the event of a conclusion of a commercial agreement between two parties to replace the HOA; or in the event that if either Sapphire or Pebble fail to meet the requirements or agreement in the HOA.
This Heads of Agreement is dated 27 August 2015
Signed by
Pebble International Sapphire Holdings Group Ltd
Pebble Development
On 21 September 2015, Mr Medina emailed SHG’s shareholders (which relevantly included Ms Allen, John Murray,[7] Mr Battle and Mr Edmondstone, providing an update of events which had occurred since the presentation to shareholders in July 2015. Under the subheading ‘Sapphire Care’, Mr Medina advised that the finalisation of contracts for the following acquisitions were well underway and listed four items together with a fifth new opportunity which was being pursued. One of the matters listed was the acquisition of the Donvale properties which was described in the following terms: ‘Donvale land acquisition contract is being finalised (for 120 bed new development)’.
[7]John Murray joined the board of SHG on 16 November 2016. He is married to the Sapphire Care and Carrington director, Danielle Murray.
As noted in the Final HOA, Sapphire Care as an existing approved provider under the Aged Care Act was to make application for the bed licences necessary to operate an aged care facility on the Donvale properties.
In support of Sapphire Care’s application for an allocation of bed licences in the Commonwealth aged care approvals round for 2015 (‘ACAR’), Sapphire Care obtained a letter of support from Australia and New Zealand Banking Group Ltd (‘ANZ’) in which ANZ, as Sapphire Care’s primary banker, stated that it was aware of Sapphire Care’s application in the current ACAR round for bed licences for six facilities including a facility in Donvale where Sapphire Care was applying for 120 places. The ANZ letter advised that the bank had been in discussion with Sapphire Care regarding the above projects and based on preliminary information believed that each was feasible and that the bank would in due course be pleased to consider a funding application for each development.
In anticipation of the meeting of the Board scheduled to take place on 5 October 2015, on 30 September 2015 Ms Allen emailed Mr Battle, Mr Medina, Mr Edmondstone and Mr Rutledge with the Sapphire International board report for September 2015. Included in that report was reference to her meeting with Pebble on 30 September 2015 where she discussed the signing of the s 32 statement (relating to the Donvale properties) which she assured Pebble would be signed by Mr Medina once he returned from leave. Her report noted that Pebble was anxious to get the agreement signed and expressed some concern that Mr Medina had advised Mr Ammendola that Pebble would no longer be given a 5% share of SCIC which was their understanding of the agreement. Ms Allen conveyed that it was also her understanding that this had been agreed.
The board report provided to the directors of SHG in anticipation of the 7 October 2015 board meeting noted that approval was being sought from the Board to increase the company’s term loan with ANZ by $5 million to $75 million from the previously approved $70 million loan. The report advised that the additional funds may be applied for recent acquisition finance and working capital purposes. Notably, the Final HOA required the payment of a deposit of $720,000 upon the signing of contracts.
The minutes of the meeting of directors of Sapphire Care held 9 October 2015 include as an annexure a list of matters arising. Included in those matters is a reference to business cases which the board required to be prepared for the purchase of the Donvale properties (it being noted the draft contracts had been received), the purchase of land at Cranbourne (known as Blue Hills Rise) and for Hoppers Crossing.
The timeframe in which those matters were to occur is expressed to be October 2015 with the person responsible nominated as Mr Maya (save for Hoppers Crossing where the person responsible was Mr Medina).
On 14 October 2015, Mr Medina emailed SHG’s shareholders attaching the Sapphire Group investment overview. Mr Medina’s covering email informed shareholders that the overview provided comprehensive information on Sapphire and its new opportunities as it commenced a new chapter in its growth cycle. The enclosed group investment overview included reference to Donvale advising that ‘[a] further property in Donvale for 120 bed development is also under contract and due to be settled in October 2015’.
On or about 20 October 2015, Sapphire Care prepared an ACAR application for 120 bed licences for Donvale. The application, among other things, included a section which set out the anticipated sources of funds for the capital works necessary to build the facility which contemplated borrowings from external sources of $27,180,000 together with $2 million funded from reserves. In the event that the application for 120 places was successful, the allocation of that number of bed licences would result in the provision of funding of $29,180,000 which, on such analysis, ensured that Sapphire Care would not suffer an operating cashflow shortfall over the acquisition period. Among other things, the application stated that Sapphire Care had developed a business and project plan to manage the development from start to finish and that draft preliminary plans for the construction of a 120 bed aged care facility had been completed. It was proposed that 60 of the places (50%) would be prioritised in favour of Cantonese and Mandarin residents.
On 21 October 2015, Mr Medina emailed Mr Ammendola, copied to, among others, Ms Allen and Mr Battle, informing him that he was seeking to have the contract for 281 – 283 Springvale Road, Donvale ‘signed for settlement’ by the end of the month.
On 22 October 2015, Mr Ammendola emailed Mr Medina, copied to, among others, Ms Allen, advising that as a result of the continual time delay with the signing of the contract, Pebble advised that it was considering its position under the Final HOA and was negotiating with other parties. Mr Medina responded quickly, the same day, apologising for the delay and explaining that their intentions were as stated in the Final HOA and committing to signing the contract by the end of the week. Mr Ammendola responded by an email sent to Mr Medina, copied to Mr Battle, Ms Allen and a representative of Pebble, which, among other things, attached a copy of the contract of sale for 281 – 283 Springvale Road, Donvale which Mr Medina forwarded on to Sapphire’s solicitor, Terry Fraser, copied to Mr Rutledge. In his covering email, Mr Medina set out in broad terms the terms of sale as described in the Final HOA which he described as ‘a great deal for Sapphire as we have applied for bed licences already’. Mr Medina informed Mr Fraser that the vendor was anxious to do a better deal with another major operator if Sapphire did not move quickly and wanted Sapphire to sign by the end of the following week and pay the deposit of $720,000.
Upon Mr Fraser’s review of the contracts of sale he, among other things, ascertained that 285 Springvale Road, Donvale was owned by a third party. Mr Medina was aware of this and informed Mr Fraser accordingly, advising that his understanding was that Pebble had an option to purchase the land and intended to settle on the land at the same time as Sapphire intended to settle on the purchase of 281-283 Springvale Road, Donvale and to extend the option accordingly.
On 29 October 2015, Mr Medina emailed Mr Ammendola, copied to Mr Rutledge, informing him that Sapphire was undertaking its legal due diligence and that there were still a few things to tidy up and including an understanding of the position with respect to the land at 285 Springvale Road, Donvale. In his email he advised that Sapphire would not be able to sign the contract the next day but, as earlier discussed, would be prepared to pay $350,000 into Pebble’s solicitor’s trust account in order to show that they were intent to moving forward and anticipated being able to sign the contract the following week.
On 5 November 2015, Ms Allen emailed the Board a copy of Sapphire International’s November 2015 board report. In her report, she advised that she had been away for the month of October 2015 and Mr Medina had been in touch with Pebble in relation to the signing of the contract for Donvale which was presently with Mr Fraser and would be signed once the contract had been finalised.
The minutes of Board meeting held 10 November 2015 include as an annexure a list of matters arising. Under the subheading ‘Hsin Chong Group’, which is listed as an ongoing matter and recorded as the responsibility of Ms Allen, there is reference to the Donvale contract. The relevant item records Mr Medina advising the board that he was having discussions with Tony (presumably Mr Ammendola) in relation to the draft contract and that there had been a number of issues raised by Mr Fraser which were not significant. The minutes of the Sapphire Care board meeting held immediately after the conclusion of the Board meeting include as a list of the matters arising the item ‘Business Cases’, recorded as the responsibility of Mr Maya (save for Hopper’s Crossing which was the responsibility of Mr Medina), and reaffirmed the requirement of the board for business cases to be prepared for the purchase of the land at Donvale, it being noted that draft contracts had been received. The stipulated action or timeframe was November 2015.
On 17 November 2015, Mr Fraser emailed the solicitor acting for Pebble in relation to the sale of the Donvale properties, acknowledging receipt of a draft special condition 10 for each contract, the terms of which provided a choice for the vendor to either take cash or shares as part of the purchase consideration. In an email sent later that day by Mr Rutledge to Mr Fraser, copied to Mr Medina, Mr Edmondstone and another, Mr Rutledge noted that special condition 10 as drafted now provided for a choice on the part of the vendor but advised that Mr Medina intended contacting Mr Ammendola with a view to removing the choice and offering cash only.
As foreshadowed in Mr Rutledge’s email, on 19 November 2015, Mr Medina emailed Mr Ammendola, among other things, advising that Sapphire was agreeable to having a greater cash component to ensure that the contract was finalised. Following a meeting apparently held between Mr Rutledge and Mr Ammendola (and possibly Mr Medina) on 20 November 2015, Mr Rutledge emailed Mr Ammendola, copied to Mr Medina, among other things, noting that settlement in respect of both parcels of land would be effected by cash only with shares no longer being offered as part of the final settlement. In relation to 281-283 Springvale Road, Mr Rutledge advised that on 9 September 2017 the sum of $2,279,000 would be paid in final settlement, whilst in the case of 285 Springvale Road, a deposit of $270,000 would be paid on signing with payment of $2,430,000 being payable at settlement on 9 September 2017. Mr Rutledge reiterated that Sapphire would need to be satisfied as to the position with respect to 285 Springvale Road and Pebble’s future right to settle the land as this was integral to the purchase of 281-283.
On 24 November 2015, Mr Rutledge exchanged emails with Mr Ammendola about the timing of the signing of the contracts and the payment of the deposit. In an email sent 24 November 2015, Mr Rutledge expressed a preference for the signing and payment to occur on Thursday 26 November 2015 as there was a scheduled Sapphire Care board meeting to be held on Wednesday 25 November 2015 at which time Mr Rutledge wanted the board to ratify the amount and timing of the consideration given that it had changed from that set out in the MOU.
The minutes of the board meeting of Sapphire Care held 25 November 2015 record that the meeting commenced at 4:15pm and concluded at 5:10pm. The reference to the board requiring a business case to be prepared for the purchase of the land at Donvale and draft contracts having been received remained in relevantly identical form to that appended to the earlier board minutes. The minutes do not record any discussion in relation to the changes to the manner in which the purchase consideration would be paid.
Mr Edmondstone, as was his practice, took handwritten notes at the board meeting. His notes advised that the meeting commenced at 4pm (not 4:15pm), but confirmed that the meeting closed at 5:10pm. They record, among other things, that Mr Rutledge was in attendance. Under a subheading ‘Property’ (which would appear to correspond to the item ‘Property Report’ in the minutes) is a reference to ‘EM clearer timeline → spend anything over 100K’. This corresponds with the minutes. There is then an arrow underneath which has a reference to ‘JR Donvale’. No reference to Donvale or anything that JR said or did not say in relation to Donvale appear in the typed minutes.
On 25 November 2015, Mr Rutledge prepared a memorandum addressed to the board of Sapphire Care headed ‘Donvale Land Acquisition’. In his memorandum, he advised that the total acquisition costs for the Donvale properties was $7.2 million comprising $4.5 million and $2.7 million for the respective properties. He then set out a table which compared the transaction as set out in the Final HOA (described as the MOU and the new arrangement). A relevant extract of the table appears below.
A Heads of Agreement was signed between Sapphire and Pebble International dated 27 August 2015.
This agreement provided for (in part) the acquisition of land at 281-283 Springvale Road and 285 Springvale Road, Donvale.
Total acquisition cost is $7.2m comprising $4.5m and $2.7m for the respective properties. The MOU provides for the consideration to be paid on terms including a combination of cash and shares.
Final contracts have been prepared for the purchase and while the total consideration is unchanged it has been agreed that payment would be in cash only with slightly altered instalment dates.
The following table demonstrates the differences:
New Arrangement
MOU Arrangement
281-283; 285 Springvale Road 281-283 Springvale Road 285 Springvale Road Total
Deposit 720,000 450,000 270,000 720,000 12 months from deposit 1,500,000 09-Sep-16 1,771,000 1,771,000 24 months from deposit 1,380,000 Settlement 9-Sep-17 2,279,000 2,430,000 4,709,000 Shares on Settlement 3,600,000 Total Consideration 7,200,000
4,500,000
2,700,000
7,200,000
In relation to the funding, Mr Rutledge’s memorandum advised that the purchase would be funded from a combination of available bond/RAD cashflow and/or available debt facility. He noted that the debt facility was being progressively paid down but an imminent refinancing would increase the total facility to $80 million of which $50 million would be available on a revolving basis. He advised that given the deferred nature of the transaction the expenditure could be appropriately planned and that on signing the total deposit would be paid. Mr Rutledge’s recommendation concluded with a recommendation that the revised consideration for the acquisition of 281-283 and 285 Springvale Road, Donvale be accepted and the contracts of sale are executed on that basis.
Metadata records that the memorandum was prepared at 5:31pm after the time at which the typed minutes and Mr Edmondstone’s handwritten notes suggest that the meeting had concluded.
On 25 November 2015, Mr Medina signed contracts of sale on behalf of Carrington for the purchase of 281-283 Springvale Road, Donvale and 285 Springvale Road, Donvale on terms to the effect set out in Mr Rutledge’s memorandum. The contracts were signed by the vendor on 27 November 2015.
Consistent with the contracts of sale, on or around 27 November 2015, Carrington paid deposits totalling $720,000 and subsequently on 9 September 2016 Carrington paid $1,771,000 pursuant to the contract for 281-283 Springvale Road and obtained possession of that property.
In Mr Medina’s December 2015 performance appraisal undertaken by the Board, his overall performance was assessed as ‘good’ although there is a reference under the sub-heading ‘mergers and acquisitions’ which falls under the heading growth and in respect of which Mr Medina’s performance as rated as ‘good’ to his general good performance in that area being ‘marred by impetuosity (eg Pebble experience)’. Mr Battle nevertheless accepted that the assessment produced a flawed product overall and a ‘ham-fisted’ document resulting in an apology to Mr Medina.
Sapphire Care’s application for bed licences made in its 2015 ACAR was unsuccessful both with respect to the proposed Donvale facility and the proposed Blue Hills Rise facility. In the board report prepared in March 2016 prior to the Sapphire Care board meeting on 1 April 2016, the report notes that Sapphire Care was unsuccessful in the 2015 ACAR, that round being oversubscribed. The board report sets out an extract from the Department of Aged Care’s website which advised that, ‘competition for new aged care places was the strongest seen in recent ACARs. This high level of competition meant that otherwise suitable applications were not successful in obtaining new places, because other applicants in the region were more competitive’.
On 9 May 2016, the owners of Blue Cross wrote to Mr Medina and Mr Battle in relation to a proposed merger of the Blue Cross and Sapphire Care businesses. This letter apparently followed on from earlier approach from Mr Medina and Mr Battle communicated on 26 April 2016 in which Mr Medina and Mr Battle had apparently shifted their assessments as to the value of Blue Cross and Sapphire Care in a way which resulted in the owners of Blue Cross seeing genuine merit in progressing merger discussions.
Subsequently, the parties engaged in a series of communications in relation to a proposed merger of Blue Cross and Sapphire Care. In a letter sent to Mr Medina and Mr Battle by Macpherson Kelley, solicitors for Blue Cross, dated 29 September 2016, in relation to the proposed Heads of Agreement concerning the merger, Macpherson Kelley advised that Blue Cross’ position was that Donvale should be excluded from the transaction and thought would be given to an appropriate mechanism to do so. That requirement is contained in that part of the letter headed ‘Sapphire Business Decisions’ in which Macpherson Kelley had advised that at a ‘high level those all seemed to have a solid business rationale and would be supported by Blue Cross’ with the exception of Donvale.
In the result, in a Heads of Agreement entered into to give effect to the Blue Cross and Sapphire Care merger entered into in March 2017, the sale of the Donvale properties was carved out and expressed as a condition precedent to any merger. The mechanism by which the Donvale transaction was excluded from the settlement involved Sapphire Care[8] nominating SHG as the purchaser of the Donvale properties which would otherwise be settled or dealt with as SHG wished. SHG would indemnify Sapphire Care from any duty or loss associated with the nomination and reimburse or credit Sapphire Care the sum of $1.75 million for the nomination which was to be offset against any amounts owing to SHG by Blue Cross at completion.
[8]Given that Carrington not Sapphire Care was the contracting party, this appears to be a mistake but in any event it is of no moment.
The Explanatory Memorandum prepared for the shareholders of SHG in August 2017 informed shareholders that subject to SHG shareholder approval and the satisfaction of all other conditions precedent, Blue Cross would acquire 100% of Sapphire Care in return for issuing shares in Blue Cross to SHG together with cash consideration of $4 million (subject to completion adjustments). Further that following the merger SHG would hold a 50% interest in the merged Sapphire Care/Blue Cross entities. The conditions precedent included the transfer to SHG of the Donvale properties at the original consideration of $7.2 million.
As noted above, the contracts of sale were effected in the name of Carrington, a wholly owned subsidiary of Sapphire Care, and accordingly on 2 August 2017, nomination forms were signed by Mr Medina and Ms Allen on behalf of both the purchaser, Carrington, and the nominee SHG.
On 6 November 2017, SHG settled the purchase of 281-283 and 285 Springvale Road, Donvale.
The merger between Sapphire Care and Blue Cross was effected on 30 November 2017.
On 7 August 2017, Mr Murray emailed Mr Edmondstone, Mr Medina and Ms Allen. In his email, he observed that the decision to purchase the Donvale properties was contrary to a decision not to purchase the land said to have been made at a strategic planning session prior to Mr Medina meeting with Pebble and committing Sapphire to purchase the properties, and in circumstances where no formal business case was presented to or approved by the Sapphire Care board. Mr Murray also expressed uncertainty as to how a value of $7.2 million was struck and wondered whether any valuation had been obtained prior to the transaction. His email concluded by expressing concern as to the disparity in values between what the property now appeared to be worth and what had been paid and the lack of any formal board approval and business case.
On 1 February 2018, Ernst & Young carried out a valuation of the Donvale properties, that is 281-283 and 285 (as a combined holding), assessing the market value of the whole site as at 17 January 2018. The valuation was provided to ANZ for mortgage security purposes. Ernst & Young expressed the opinion that the market value of the Donvale properties as at 17 January 2018 was $5.84 million and that the highest and best use of the properties was as a low-density development incorporating residential or commercial (residential aged care or retirement) land uses. Ernst & Young advised that they had had discussions with council who were supportive of the grant of a permit permitting such use, although recent examples of the application for such permits have shown a negative view which have led to objections. The valuation therefore was conducted on the basis of the as is value, that is to say the underlying residential value with potential but without the issue of a permit. Ernst & Young advised that if a permit was issued, an uplift in the value of 20% was appropriate (ie, $7,008,000).
Ernst & Young further stated that they had been advised by SHG that they were seeking government aged care licences in the next government round which was expected to occur in early 2018.
In the result, no aged care bed licences were obtained for the Donvale properties.
On 27 May 2019, SHG entered into an exclusive sale authority with Barry Plant (Oakleigh) which conferred an exclusive authority on Barry Plant (Oakleigh) to market the Donvale properties for sale. The agent’s estimate of selling price expressed in the exclusive sale authority was between $4.7 and $5 million.
In the result, the attempt to procure a sale of the Donvale properties as a whole at that price was not successful and instead, by contract of sale entered into on 10 April 2020, SHG sold 281-283 Springvale Road for $1,930,000 and sold 285 Springvale Road for $585,000 pursuant to a contract of sale dated 31 October 2019.
Some observations on the witnesses and the comprehensiveness of the evidence generally
As stated above, the plaintiffs’ primary witnesses were Mr Edmondstone and Mr Battle. Mr Edmondstone was the finance director and chair of the audit committee of SHG for the financial year ending 2016 which is the relevant period in which the Final HOA and the Donvale properties sale contracts were signed. He remains as a director of SHG although he ceased to be a director of Sapphire Care and Carrington following the merger in November 2017. Mr Edmondstone was the representative of SHG responsible for overseeing the task of collating all documents that needed to be discovered on behalf of the plaintiffs in the proceeding.
Mr Battle was the chair of SHG, Carrington and Sapphire Care at the time of the signing of the Final HOA and the Donvale sale contracts and remained as a director until 2 October 2019 in the case of SHG, and 14 November 2019 in the case of Carrington and Sapphire Care.
Both Mr Edmondstone and Mr Battle had an imperfect memory of the relevant events which is unsurprising given the period of time which has elapsed. Notably, both were members of the Board who approved the entering into of the Final HOA. Further, both, and particularly Mr Battle, were involved in the drafting of the HOA in a manner that one would not ordinarily expect from a non-executive chairman. Further, Mr Edmondstone was copied in to emails which were suggestive of a closer involvement in the relevant events than might ordinarily be expected from a non-executive director.
The lapse of time since the relevant events understandably necessitated each of them seeking to refresh their memory by reference to contemporaneous documents. However, their closeness to the relevant events, and Mr Edmondstone’s role in collating the various documentation on behalf of the plaintiffs and in effect being the person giving instructions on behalf of the plaintiffs to its solicitors in this proceeding, has, in my view, compromised the reliability of the evidence that they have given in the proceeding. Each of them, in my view, endeavoured to give evidence in a way which sought to simultaneously advance the plaintiffs’ case thesis and at the same time play down the extent of their involvement in the relevant events.
Firstly, in the case of Mr Edmondstone; Mr Edmondstone was at pains to emphasise that the resolution of the Board authorising the execution of the Final HOA, which provided for the purchase of the Donvale properties for a price of $7.2 million, had an aspirational or conditional quality attached to it which required the completion of a business case before Mr Medina could execute contracts of sale for the Donvale properties on behalf of any Sapphire entity. Such a characterisation had the advantage of minimising the extent of any culpability on the part of Mr Edmondstone as a member of the Board who authorised the entering into of the Final HOA to purchase the Donvale properties at the price now the subject of complaint. The more problematic aspect of Mr Edmondstone’s evidence, however, was that it was based on a most imperfect and selective interpretation of the events which preceded the execution of the contracts by Carrington and did not in any event engage directly with the plaintiffs’ case thesis. That case thesis was not that the execution of the Donvale contracts first required the preparation of a business case, but rather that Mr Medina should have obtained a valuation before executing the contracts.
[100] In determining whether a director has exercised reasonable care and diligence, as s 180(1) expressly contemplates, the circumstances of the particular corporation concerned are relevant to the content of the duty. These circumstances include the type of company, the provisions of its constitution, the size and nature of the company’s business, the composition of the board, the director’s position and responsibilities within the company, the particular function the director is performing, the experience or skills of the particular director, the terms on which he or she has undertaken to act as a director, the manner in which responsibility for the business of the company is distributed between its directors and its employees, and the circumstances of the specific case …
[101] Directors are not required to exhibit a greater degree of skill in the performance of their duties than may reasonably be expected for persons of commensurate knowledge and experience, in the relevant circumstances … And while directors are required to take reasonable steps to place themselves in a position to guide and monitor the management of the company … they are entitled to rely upon others, at least except where they know, or by the exercise of ordinary care should know, facts that would deny reliance …
[102] The constitution of the corporation, and concomitantly the identity of those to whom the duty is owed, is of importance because the duties referred to in ss 180, 181 and 182 are not duties owed in the abstract, but duties owed to the corporation. As Clarke and Sheller JJA observed in Daniels [(formerly practising as Deloitte Haskins & Sells)] v Anderson [(1995) 37 NSWLR 438 at 504; 16 ACSR 607 at 665], the duties imposed by former s 232 (the predecessor of s 180) reflected the concept of negligence at general law, in that a director owes to the company a duty to take reasonable care in the performance of the office. In Vrisakis v [Australian Securities Commission] (1993) 9 WAR 395 at 449–50; 11 ACSR 162 at 211–13, Ipp J (as his Honour then was) (with the concurrence of Malcolm CJ) held that although the statutory duty of care and diligence would be contravened if a director had not exercised a reasonable degree of care and diligence in the exercise of his powers or the discharge of his duties, even if there was no actual damage, that could only be so if it was reasonably foreseeable that the relevant conduct might harm the interests of the company - which means the corporate entity itself, the shareholders, and, where the financial position of the company is precarious, the creditors of the company - and, moreover, that in determining whether the relevant duty had been breached, the foreseeable risk of harm must be balanced against the potential benefits which could reasonably be expected to accrue to the company from that conduct: see also Australian Securities and Investments Commission v Doyle (2001) 38 ACSR 606; [2001] WASC 187 at [102]. As His Honour explained:
Under s 229(2), however, there is no reference to damage suffered by the company, and an offence may notionally be committed under that section without any damage having been sustained. The question is merely whether the defendant director has exercised a reasonable degree of care and diligence in the exercise of his powers in the discharge of his duties. Nevertheless, a criminal offence will not have been committed if an omission to take care did not carry with it a foreseeable risk of harm to the company. No act of commission or omission is capable of constituting a failure to exercise care and diligence under s 229(2) unless at the time thereof it was reasonably foreseeable that harm to the interests of the company might be caused thereby. That is because the duty of a director to exercise a reasonable degree of care and diligence cannot be defined without reference to the nature and extent of the foreseeable risk of harm to the company that would otherwise arise.
Further, the mere fact that a director participates in conduct that carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that he has failed to exercise a reasonable degree of care and diligence in the discharge of his duties. The management and direction of companies involve taking decisions and embarking upon actions which may promise much, on the one hand, but which are, at the same time, fraught with risk on the other. That is inherent in the life of industry and commerce. The legislature undoubtedly did not intend by s 229(2) to dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity. Accordingly, the question whether a director has exercised a reasonable degree of care and diligence can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question.[13]
[12](2006) 59 ACSR 373 (‘Maxwell’).
[13]Ibid 397-398 [100]–[102].
The test as to whether the duty of care has been satisfied or breached in any case is an objective one.[14] The assessment must be undertaken from the perspective of ‘the circumstances existing at the relevant time, without the benefit of hindsight, and with the distinction between negligence and mistakes or errors of judgment kept firmly in mind’.[15]
[14]Vrisakis v Australian Securities Commission (1993) 9 WAR 395, 422; Termite Resources NL (in liq) v Meadows (No 2) (2019) 370 ALR 191, 227 [181].
[15]Termite Resources NL (in liq) v Meadows (No 2) (2019) 370 ALR 191, 228 [184].
The duty does not impose a counsel of perfection and s 180(1) does not seek to punish the mere making of mistakes or errors of judgment:
Making mistakes does not by itself demonstrate lack of due care and diligence. … Directors and officers of corporations are expected to take calculated commercial risks. … The proper taking of risk in making business decisions is entirely consistent with exercising care and diligence.[16]
[16]Australian Securities and Investments Commission v Lindberg (2012) 91 ACSR 640, 654 [72] (Robson J).
Relevantly, in Australian Securities and Investments Commission v Drake (No 2) Edelman J, in summarising the principles relevant to establishing a contravention of s 180, held to the effect that to prove negligence a plaintiff must prove the action that would have been taken by a reasonable person.[17]
[17](2016) 340 ALR 75, 155 - 157 [394]–[401].
Context is critical in the evaluation of whether the relevant standard has been met and must take due account of both the corporation’s circumstances and the functions exercised by the director within the corporate structure. In that respect, care must be taken in taking account of statements as to the standard required made in other cases given the essentially fact specific nature of the relevant inquiry.[18]
[18]Boros v Pages Property Investments Pty Ltd (2021) 395 ALR 756, 762 [27].
In light of the above, I propose to undertake the necessary analysis by reference to the following:
(a) whether Mr Medina owed a duty to SHG in executing the Donvale contracts of sale;
(b) did the content of such duty require Mr Medina to:
(i) obtain a valuation of the Donvale properties prior to signing the contracts of sale;
(ii) obtain authorisation from the Board before signing the contracts of sale including in circumstances where the purchase consideration had changed from that set out in the Final HOA,
such that his failure to do so meant he breached the duty; and
(c) whether any breach by Mr Medina caused the loss the subject of the claim by SHG.
Analysis
Was a duty owed to SHG ?
In its closing written submissions, the plaintiffs framed the relevant inquiry as one where the relevant question is whether Mr Medina breached his duty ‘in connection with the acquisition of the Donvale [properties], in particular by failing to obtain a valuation’.
By framing the issue in this way, there is a risk in conflating Mr Medina’s recommendation to the Board that the Final HOA be signed which occurred prior to or at the Board meeting on 27 August 2015 and his subsequent action on 25 November 2015 in executing the Donvale contracts of sale.
The pleaded case focusses on the latter event; as set out above paragraph 26(a) pleads that the relevant conduct is in causing Carrington to enter into the contracts of sale.
As also noted above, any breach which occurred at the earlier time could not have founded the claim for the statutory breach; s 1317K of the Corporations Act operates as a statutory bar to the commencement of any proceeding for breach of an obligation imposed by the Act more than 6 years after the alleged breach.
If the plaintiffs’ case is confined in this way as it must be to Mr Medina’s conduct in causing Carrington to enter into the relevant contracts of sale, the question of whether Mr Medina owed a duty to SHG resolves itself comparatively easily.
Neither the plaintiffs’ submissions to the effect that the Sapphire Group acted collectively with generally overlapping directors and without any meetings being held at all by the Carrington or the defendant’s submission that Mr Medina’s conduct could not be such as to give rise to a duty owed to SHG because the imposition of such a duty would be contrary to the authorities which preclude a party claiming to recover reflective loss,[19] ultimately bear on the issue. The relevant inquiry is one which must focus on the capacity in which Mr Medina was acting when he undertook the impugned act. When Mr Medina signed the contracts of sale in Carrington’s name he was doing so in his capacity as an officer of Carrington, not as an officer of SHG.
[19]Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1, 62.
In BHP Billiton Finance Ltd v Commissioner of Taxation,[20] Gordon J (as she then was) in the context of overlapping corporate boards stated the following:[21]
The mere fact that corporate boards overlap is insufficient to defeat the presumption of separate existence: Walker v Wimborne (1976) 137 CLR 1, 3-4 (as to the fact that the companies had common directors) and 6-7; see also Seltzer v IC Optics Ltd, 339 FSupp2d 601, 610-611 (DNJ 2004), United States v Bestfoods, 118 SCt 1876, 1888 (1998) (“It is a well established principle [of corporate law] that directors and officers holding positions with a parent and its subsidiary can and do ‘change hats’ to represent the two corporations separately, despite their common ownership”); Leo v Kerr-McGee, Civ A No 93-1107 (JEI), 1996 WL 254054 (D NJ, 10 May 1996) at *6 (“A significant degree of overlap between directors and officers of a parent and its subsidiary does not establish an alter ego relationship”). In fact, there is a general presumption “that the directors are wearing their ‘subsidiary hats’ and not their ‘parent hats’ when acting for the subsidiary”, so dual office holding alone is not enough to establish liability: Bestfoods, 118 SCt at 1888 (quoting P Blumberg, Law of Corporate Groups: Procedural Problems in the Law of Parent and Subsidiary Corporations (1983) § 1.02.1, 12).
[20](2009) 72 ATR 746.
[21]Ibid 777 [100].
When Mr Medina executed the contracts of sale on behalf of Carrington as purchaser he was wearing the subsidiary or Carrington ‘hat’. In so doing, he did not owe any separate or additional duty to Carrington’s ultimate parent, SHG.[22]
[22]It will be recalled that Carrington was a wholly owned subsidiary of Sapphire Care and that Sapphire Care was a subsidiary of SHG.
For completion, I do accept that when Mr Medina recommended to the Board that they approve the entering into of the Final HOA, he made that recommendation in his capacity as managing director of the Sapphire Group which relevantly included SHG and Sapphire Care. The relevant resolution was passed at a meeting of the Board, and the Final HOA although executed in the name of Sapphire Care, affected various parts of the Sapphire Group including SHG, Sapphire International and although not named, Carrington as the prospective purchaser of the land. I also accept that it was foreseeable that at the time of executing the Final HOA that the purchaser of the Donvale properties would be Carrington and not SHG. However, I do not consider that this fact alone means that Mr Medina did not owe a duty to SHG when he recommended that the board approve entry of the Final HOA. The reflective loss principle prevents a shareholder in a company from suing a third party for a loss suffered by a company insofar as the shareholder’s loss is measured by the diminution in the value of his or her shareholding because such loss merely reflects the loss suffered by the company in respect of which the company has its own cause of action.[23]
[23]Johnson v Gore Wood & Co [2002] 2 AC 1, 62 (Millet LJ), quoted in Mercedes Holdings Pty Ltd v Waters (No 2) (2010) 186 FCR 450, 476 [110] (Perram J): ‘In such a case the shareholder’s loss, in so far as this measured by the diminution in value of his shareholding or the loss of dividends, merely reflects the loss suffered by the company in respect of which the company has its cause of action. If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved.’
Such analysis is not that which is required here. The relevant question is whether it was reasonably foreseeable that the conduct complained of ‘might harm the interests of the company which means the corporate entity itself, the shareholders, and where the financial position of the company is precarious, the creditors of the company’.[24] It is reasonably foreseeable that a decision by a parent company that its subsidiary enter into a transaction which might be loss making, might harm the interests of the parent. However, it is not necessary to give further consideration to this issue as the relevant impugned act is the entry into the contract by the subsidiary not the antecedent authorisation by the parent or any recommendation which preceded that authorisation.
[24]Maxwell (n 12) 397 – 398 [102].
The second key aspect of the plaintiffs’ case; namely the failure to obtain express authorisation as to the change in the terms of the sale results in the same conclusion. Although there was no board meeting held by Carrington, the fact that the authorisation could have or should have on the plaintiffs’ case been sought from those persons who occupied the board positions at Carrington, who also held positions at either SHG or Sapphire Care (or at least some of them) does not detract from the required focus on the capacity in which Mr Medina was acting when he ought to have done that which the plaintiffs say he should have done, which was as an officer of Carrington.
Did Mr Medina breach any duty?
Assuming that Mr Medina did owe a duty to SHG in executing the Donvale contracts of sale, contrary to my conclusion above, it is convenient to focus first on the plaintiffs’ primary argument which is that he breached that duty by failing to obtain a valuation. The plaintiffs’ submitted that a reasonable person in Mr Medina’s position would have done so, pointing in particular to Mr Medina’s executive role with particular responsibility for ‘evaluating’ new opportunities for SHG, that $7.2 million was the price proposed by Pebble, that Sapphire’s response to the nomination of that price was initially to make provision in the earlier drafts of the HOA for such a valuation to be obtained, that Mr Battle’s email of 5 August 2015 referred to the need to obtain a valuation acceptable to ANZ and that obtaining such a valuation was a simple and inexpensive step.
To the extent that the submission concentrates on the fact that the drafts of the HOA included reference to the obtaining of such a valuation, it is relevant that it was Mr Medina who first amended the draft of the HOA to provide for Sapphire to obtain a valuation. That requirement was deleted on 15 July 2015 by Pebble in its HOA v05 and Sapphire did not press for its re-insertion in HOA v07 sent by Ms Allen to Pebble on 18 August 2015. Given that Mr Medina was on leave from 17 July 2015 to 12 August 2025, the defendant submitted that it should be found that the decision to not press for its inclusion was made by Ms Allen and Mr Battle. This was not put to Mr Battle and in any event I do not accept that the evidence establishes that this was so. It is simply unclear on the evidence as to who made that decision and why. It may have been Ms Allen, Mr Battle, Mr Medina or any combination of the three. In the end however, the question of why the valuation requirement was not pressed for inclusion in the Final HOA is an interesting unknown but distracts from the relevant enquiry.
The relevant enquiry is not whether Mr Medina should have obtained a valuation prior to the execution for the Final HOA but rather whether he should have done so after the Final HOA had been executed and before signing the contracts of sale. Further, whilst I accept that the obtaining of a valuation might well be considered to be a relatively straightforward and inexpensive step, it is necessary once again to bear in mind that the relevant inquiry is one which focusses on Mr Medina’s conduct after the signing of the Final HOA. Mr Battle’s perception that it was necessary to obtain a valuation acceptable to ANZ is also a distraction; ANZ was not some form of joint venture partner; any valuation requirement arose in the context of ensuring that the bank would finance such acquisition which it was willing to do.[25] ANZ was supportive of the acquisition.[26]
[25]See above [83].
[26]See above [52].
In my view, the relevant circumstances against which the conduct of Mr Medina in signing the contracts on 25 November 2015 is to be assessed comprises not only his executive role and this associated responsibility (at least from 1 July 2015 onwards) for identifying, evaluating and delivering new opportunities for SHG and Sapphire Care, but the following:
(a) it was not the practice of Sapphire to obtain third party valuations prior to entering into Heads of Agreement or contracts of sale to acquire land including relevantly at or about that time in connection with the acquisition of the Blue Hills Rise property;
(b) there is no evidence that Mr Battle or any other board member made any enquiry of Mr Medina (or Ms Allen) of whether such valuation had been obtained either prior to entering into the Final HOA including because of and despite Mr Battle’s involvement in its drafting, or after it had been entered into;
(c) Sapphire Care had executed the Final HOA which provided for the subsequent entry into a contract of sale on terms which involved payment of the price of $7.2 million;
(d) post execution of the Final HOA, SHG shareholders had been informed on a number of occasions of the fact of the purchase and its imminent completion; and
(e) the plaintiffs do not point to any circumstance which arose after the execution of the Final HOA which in and of itself would have alerted Mr Medina to the need to obtain a valuation; importantly the price did not change and there is no reason why the change in terms of payment would have necessitated that which had not yet been done.
In my view, the plaintiffs have not established that a reasonable person in Mr Medina’s position, having signed the Final HOA, which among other things included the acquisition of the Donvale properties for $7.2 million in accordance with the Board’s approval, would have taken the additional step prior to signing the contracts of sale of obtaining a valuation.
Nor do I consider that the plaintiffs have established that a reasonable person in Mr Medina’s position would have obtained express authorisation from the Board as to the change in the payment terms.
The price of $7.2 million had not changed. The change went to the mechanics of how it was to be paid and simplified the payment mechanism. Further, the potentially complicating feature of a share issue to Pebble had been dropped from the transaction with payment of the purchase price now taking place in a more orthodox fashion with cash on an instalment basis and in circumstances where additional lending facilities had been obtained to facilitate such a purchase. Moreover, I am not satisfied that the change in payment terms was not in fact raised with the Board or the board of Sapphire Care; it hardly makes sense for Mr Rutledge to have prepared a memorandum for the attention of the Sapphire Care board immediately after the board meeting but the subject matter of that memorandum had never been discussed with the board. Mr Rutledge was present at the board meeting and Mr Edmondstone’s handwritten notes of the board meeting record Mr Rutledge discussing Donvale. Further, there is no evidence at all at any stage prior to the commencement of this proceeding, that any board member made any complaint about Mr Medina’s change to the payment terms in a manner unknown to them. The absence of any complaint is probative of the fact that disclosure was made.
Causation
If the plaintiffs are able to establish that a reasonable person in Mr Medina’s position would have obtained a valuation prior to signing the contracts of sale in Carrington’s name, the plaintiffs must also establish that had such a valuation been obtained, Carrington would not have executed the contracts of sale and accordingly the Donvale properties would not have been acquired. The plaintiffs argued that had a valuation been obtained, the valuation would have been one to the effect of that the subject of the retrospective valuation carried out by the valuer Mr Holroyd. Mr Holroyd prepared a valuation on 10 March 2022 opining that the market value of the property at 281-283 Springvale Road and that at 285 Springvale Road, as at 25 November 2015, was $2,350,000 (exclusive of GST) and $570,000 (exclusive of GST) respectively.
In undertaking his valuation, Mr Holroyd valued each of the companies separately in determining the market value and in so doing applying the definition of market value stipulated by the International Valuations Standards Council endorsed by the Australian Property Institute which is:
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably and without compulsion.
In addition to his assessment of market value as at 25 November 2015, Mr Holroyd also assessed the market value of 285 Springvale Road as at 31 October 2019 and 281-283 Springvale Road as at 20 April 2020. His assessment of market value for the property at 285 Springvale Road as at 31 October 2019 was $625,000 (exclusive of GST) suggesting that the value had risen by around 10% from its acquisition date to the sale date. His assessment as to the market value of 281-283 Springvale Road as at 20 April 2020 in contrast had reduced to $1,875,000 (exclusive of GST) which is suggestive of a fall in value in the order of 20%.
Whilst Mr Medina took no issue with Mr Holroyd’s retrospective opinion, he did highlight a number of relevant aspects of the task that Mr Holroyd was required to undertake. First, he drew attention to the fact that Mr Holroyd was asked to value each of the properties separately not as a combined allotment; secondly, he observed that Mr Holroyd was not asked to undertake an assessment of market value on the basis that the site as a whole was to be assessed on the highest and best use basis; and thirdly, he argued that it was artificial to assess the acquisition of the Donvale properties merely on the basis that Carrington was acquiring a large allotment of vacant land.
Further, Mr Medina drew attention to the fact that another valuation of the Donvale properties was undertaken in February 2018 for ANZ for mortgage security purposes by Ernst & Young. Ernst & Young provided ANZ with an assessment of market value of the combined site (that is 281-283 and 285 Springvale Road) as at 17 January 2018 which assessed the value of the Donvale properties as a whole at $5,840,000. Putting aside the difference in the relevant valuation date and the fact that Ernst & Young, unlike Mr Holroyd, valued the site as a whole, Ernst & Young noted that the highest and best use of the subject property was as a low density development incorporating residential or commercial land use such as a child care, residential aged care or retirement village facility. Further, in the mortgage recommendation which formed part of the valuation report, Ernst & Young after noting the highest and best use for the Donvale properties as that of an aged care facility or childcare centre, referred to discussions with council to the effect that council was supportive of aged care uses notwithstanding recent examples in the area had shown negative use which led to objections.
Notwithstanding that Ernst & Young noted that the highest and best use for the Donvale properties was an aged care facility or childcare centre, it nevertheless assessed the value on an as is basis with some potential. It therefore assessed the Donvale properties underlying residential value with potential in circumstances where no permit for use for aged care or for childcare facilities had been granted. Ernst & Young advised that in the event that such a permit was issued, it would justify an uplift in the valuation of 20%.[27]
[27]This would translate to a valuation of $7,008,000.
The relevant inquiry is not one which requires an assessment as to the market value of the Donvale properties as at 25 November 2015. The relevant inquiry is whether the plaintiffs have established that had a market valuation been obtained, on or about 25 November 2015, it would have resulted in the obtaining of an assessment to similar effect as that contained in Mr Holroyd’s valuation and that as a result a reasonable person in Mr Medina’s position would not have executed the contracts of sale in Carrington’s name.
I am not satisfied that that is necessarily so. First, it is reasonable to assume that the valuer would have been retained to undertake a value of the site as a whole not 281-283 Springvale Road, and 285 Springvale Road separately as Mr Holroyd did. Secondly, given that Ernst & Young valued the site as a whole as at February 2018 at a significantly higher value than Mr Holroyd did retrospectively as at 25 November 2015, I am not satisfied that such a large difference in the assessment of value can be explained by the different assessment dates. Whilst the plaintiffs are correct in pointing to the difference in dates, Mr Holroyd also assessed the value of 285 Springvale Road as at 31 October 2019 and 281-283 Springvale Road as at 20 April 2020. He concluded that the value of 285 Springvale Road had increased by around 10% from 25 November 2015 to 31 October 2019 whilst the value of 281-283 Springvale Road had fallen by 20% from 25 November 2015 to 20 April 2020. Notwithstanding that the value of one property had risen whilst the other had fallen, those falls or rises cannot explain such a disparity in value between that assessed by Ernst & Young in February 2018 and the retrospective valuation of the Mr Holroyd. To put it another way, if Ernst & Young had been retained in November 2015, there is no reason to consider that its valuation would have been materially different from that undertaken in February 2018. Certainly, the plaintiffs have not established on the balance of probabilities that had a valuer been retained in November 2015, the assessment would have been in the magnitude of that assessed by Mr Holroyd as opposed to one in the range of that assessed by Ernst & Young.
The plaintiffs’ case is a no transaction case. It must establish that had a person in Mr Medina’s position obtained a market valuation effectively from any reasonably competent valuer as at 25 November 2015, the value would have been of such a lower magnitude than the price, as was the case with Mr Holroyd’s valuation, that Carrington would simply not have proceeded with the transaction as contemplated by the Final HOA. The plaintiffs did not advance a case that the transaction would not have proceeded at all had the valuer assessed the value at say $5,840,000 as Ernst & Young did. Such an assessment would have had a markedly different causative effect. The potentially different causative outcomes do not need to be further speculated upon. It suffices to observe that the plaintiffs can only succeed if they establish that no transaction at all would have resulted in such circumstances which they have failed to do.
There is also merit in the submission that it is artificial to assess the purchase as simply a purchase of a block of land. It is clear that the transaction with Pebble which subsequently found its way into the contracts of sale was part of a wider transaction which not only included elements beyond the Donvale properties but in the case of the Donvale properties included the provision by Pebble of marketing, project management and real estate development services set out in the Final HOA, as well as the benefit of the plans that Pebble had prepared for the development including the traffic management investigations and the like. Further, as an approved aged care provider, Sapphire Care was able to potentially obtain government funding by the issuing of aged care bed licenses which could then have been used to establish a business on the land and to enable the erection of building and improvements on the land to be owned by Carrington, as was set out in the ACAR application. It is artificial for SHG in this proceeding to now retrospectively assess that which Carrington chose to acquire solely by reference to vacant land and in a manner which ignores the obvious fact that Sapphire intended to build an aged care facility on that land. The land was attractive for an approved aged care provider because the acquisition of the land enabled it to establish a business on the land, effectively funded by the issue of aged care beds from the Commonwealth (assuming that the application for the bed licences was successful).
Overall then I am not satisfied that SHG has established that had a valuation been sought by Mr Medina, that the transaction would not have proceeded.
The causation enquiry as to the alternative breach complaint, namely the failure to obtain express approval from the Board can be disposed of shortly. There was no evidence nor any case to the effect that had Board authorisation been sought that the Board would have acted differently to how it acted when approval was given to enter into the Final HOA. Nor was any case advanced to the effect that the change in payment terms of themselves caused loss to SHG.
There is an additional difficulty with the plaintiffs’ case even if it can establish that Mr Medina owed it a duty of care, that a reasonable person in Mr Medina’s position would have obtained a valuation, that the valuation so obtained would have been more consistent with the Mr Holroyd valuation and that as a consequence the transaction would not have proceeded.
While these elements would be sufficient to establish causation on a basic ‘but for’ basis, the loss which SHG now seeks to recover is a loss which is of a direct nature and which involves in effect the difference between what SHG paid for the Donvale properties and the net sales proceeds that SHG received when it sold the Donvale properties subsequently. Had SHG been the purchaser under the contracts of sale with Pebble and become the registered proprietor on settlement of those contracts of sale, such a claim would have been unremarkable.
The difficulty in the instant case is that SHG was neither the purchaser under the contract of sale nor the entity within the Sapphire Group in respect of which it might be reasonably anticipated would have become the registered proprietor when the Donvale contracts of sale were entered into.
The evidence established that with the exception of one property, Carrington was the particular vehicle in the Sapphire Group corporate structure which was the registered proprietor of the properties owned by companies in the group. The other property was owned by Sapphire Care as trustee of a trust not SHG. Consistent with this approach, it was Carrington that entered into the contract of sale. Any loss that was suffered therefore by reason of paying a greater amount than the property was worth or any loss that might have been realised upon resale would have been suffered by Carrington and not SHG.
The only reason why SHG suffered the loss was that SHG chose to accept a nomination from Carrington made in the context of the impending merger between Blue Cross and Sapphire occurring in March 2017 to take over the transaction which had been assessed by Blue Cross as a decision which lacked a solid business rationale and as such had to be excluded from the merger.
Thus, SHG by its own voluntary action took on the responsibility of settling the purchase under the contracts of sale.
In my view, this is an independent and supervening event, not reasonably anticipated at the time of any breach by Mr Medina which operated to break the chain of causation between any act or omission of Mr Medina and the loss now sought to be recovered by SHG.[28]
[28]See for example Alexander & Ors v Cambridge Credit Corporation Ltd & Anor (1987) 9 NSWLR 310, 361.
Conclusion
SHG’s claim fails. First, Mr Medina did not owe SHG a statutory or common law duty to take reasonable care when he executed the contract of sale on Carrington’s behalf; secondly, if he did owe such a duty of care, he did not breach it by either failing to obtain a valuation or by failing to obtain express authorisation from the Board prior to signing the contracts of sale; thirdly, even if Mr Medina did obtain a market valuation the plaintiffs have not established that in such an event Carrington would not have proceeded with the transaction; fourthly, and in any event SHG’s decision to accept the nomination proffered by Carrington in August 2017 constituted a supervening event which severed any causative link between any breach by Mr Medina and the loss now sought to be recovered by SHG.
In the circumstances, it is not necessary to either consider Mr Medina’s alternative reliance upon the business judgment rule in s 180(2) of the Corporations Act or his claim to be partially exonerated or relieved from liability pursuant to s 1318 of the Corporations Act.
The plaintiffs’ claim will be dismissed. I will hear the parties as to costs.
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