Senatore v Andriolo
[2022] ACTSC 285
•14 October 2022
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Senatore v Andriolo |
Citation: | [2022] ACTSC 285 |
Hearing Dates: | 25-29 July 2022 |
DecisionDate: | 14 October 2022 |
Before: | Crowe AJ |
Decision: | Judgment for the defendants. The plaintiffs pay the defendants costs as agreed or, in default of agreement, assessed. Liberty to relist in relation to costs within 7 days. |
Catchwords: | CORPORATIONS – MANAGEMENT AND ADMINISTRATION –DIRECTORS – where company entered into put and call option in favour of entity in which company director was shareholder – where entity exercising option purchased company land for sum alleged to be significantly below market value – where company cultural institution suffering significant losses – whether director breached statutory or fiduciary duties to company – no breach of duties established – judgment for defendants |
Legislation Cited: | Corporations Act 2001 (Cth) ss 79, 180, 181, 182, 185, 191, 232, 1317H Court Procedures Rules 2006 (ACT) rr 407, 503 Planning and Development Act 2007 (ACT) ss 165, 262, 263, 265 |
Cases Cited: | Anglo Australian Resources NL v Bloom Financial Advice Pty Ltd (No 2) [2019] WASC 480 ASIC v Adler [2002] NSWSC 171; 41 ACSR 72 United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2018] VSC 347, 128 ACSR 324 |
Parties: | Ezio Senatore in his capacity as Liquidator of Italo-Australian Club (ACT) Ltd (In Liq) ( First Plaintiff) Italo-Australian Club (ACT) Ltd (In Liq) (Second Plaintiff) Roberto Andriolo (First Defendant) Joseph Cardone (Second Defendant) Italo Financing Pty Ltd (Third Defendant) |
Representation: | Counsel M A Karam and L Cavell ( Plaintiffs) D Robens ( First Defendant) B Katekar SC and S Hoare (Second and Third Defendants) |
| Solicitors McInnes Wilson Lawyers ( Plaintiffs) Meyer Vandenberg Law ( First Defendant) Bradley Allen Love Lawyers (Second and Third Defendants) | |
File Number(s): | SC 461 of 2019 |
CROWE AJ
The Italo-Australian Club
The following account, up to the liquidation of Italo-Australian Club (ACT) Ltd, is taken from the contents of the documents comprising Exhibit “1” in the proceedings. It is, for the most part, not controversial as between the parties.
The issues in this case arise from the gradual demise of the Italo-Australian Club. The club was formed in the 1950s and 1960s by recent migrants to the Canberra district from various parts of Italy. The entity constituting the club was initially an incorporated association – the Italo-Australian Club Incorporated. That body was granted a Crown Lease over Block 9 Section 19 Forrest in 1968. That property is at the corner of Dominion Circuit and Franklin Street. It has a site area of just under 5,500 square metres. I will refer to it by its street address which is 78 Franklin Street Forrest.
The purposes clause of the Crown Lease relevantly restricted the use of the land to “… a Club conducted in accordance with the Memorandum of Articles of the lessee for the time being in force but not for the purpose of letting any building or part of a building on the said land for any trading or commercial purpose…”.
The club grew and prospered through to the 1980s (although it suffered some temporary financial headwinds early in that decade). In the late 1980s significant building works were carried out to expand the club premises. However, thereafter the club suffered increasing financial problems. It was, by the early 1990s, struggling to meet the loan obligations it had incurred to fund the expansion. Ultimately, in 1997 the Commonwealth Bank of Australia (which held a mortgage over the Crown Lease) withdrew support from the club and required repayment of the mortgage debt.
This led to the restructuring of the club and its financing. Itaco Limited (“Itaco”) was set up by the supporters of the club for the purpose of providing finance. Itaco raised funds from those supporters to pay out the CBA. Itaco took a first mortgage over the club property to secure the money which it had loaned to the club, at that stage $1.3M. The restructuring of the Club organisation took some years. Eventually, in 2003 a company limited by guarantee, Italo-Australian Club (ACT) Ltd, was incorporated. It took over the running of the Club, and its assets. In 2005, it replaced the incorporated association as the registered proprietor of the property at 78 Franklin Street. To avoid confusion I will refer to that corporation hereafter as “the Club”.
The Club Constitution contained the objects of the company which were as follows:
(a)to assist in the settlement and integration into the Australian community of migrants in Australia particularly in the ACT and in particular the settlement and integration of Italian migrants;
(b)to develop and improve a community centre for Members of the Company and to construct a clubhouse on Block 1, Section 19 at Forrest or on any other land belonging to the Company;
(c)to provide recreation or amusement for Members of the Company;
(d)to promote or encourage literature, science or arts amongst Members of the Company;
(e)to collaborate with persons, clubs or associations and embassies, particularly the Italian Embassy, to further the objects and activities of the Company and its Members; and
(f)to assist, promote, and encourage the expression of Italian culture, folklore, arts and crafts in Australia and particularly in the ACT.
(The reference to “Block 1 Section 19” was a typographical error. There is no issue that it should have referred to “Block 9 Section 19”.)
Clause 3 dealt with the income and property of the Club. It provided:
3. Income and Property of Company
3.1 The income and property of the Company will only be applied towards the promotion of the objects of the Company set out in clause 2.
3.2No income or property will be paid or transferred directly or indirectly to any Member of the Company except for payments to a Member:
(a)in return for any services rendered or goods supplied in the ordinary and usual course of business to the Company and which is at arms length; or
(b)of interest at a rate not exceeding current bank overdraft rates of interest for moneys lent.
Pursuant to the constitution “Ordinary” voting members were defined as adults who, among other things, were also members of Itaco. (Foundation, Life and Pensioner members were also entitled to vote. Associate members, that is, persons who were not members of Itaco, were not entitled to vote.)
At the same time this restructuring was occurring another incorporated association was formed by members of the Italian community in Canberra. This was the Council of Italo-Australian Organisations Incorporated (“CIAO”). The objects of CIAO were broadly aligned with those of the Club. Indeed, the rules of CIAO required that a majority of its managing committee be voting members of the Club. CIAO was granted a Crown Lease over Block 12 Section 19 Forrest, which was adjacent to 78 Franklin Street. I will refer to the CIAO land by its street address of 80 Franklin Street.
Deterioration of the Club’s Financial Position – 2003-2012
Unfortunately, notwithstanding the restructuring of the Club organisation, and the support from Itaco, the Club was not successful in overcoming its financial difficulties. By 2006 the Club needed another injection of funds. In a meeting notice given to Itaco shareholders in that year the board of Itaco advised that the Club needed an injection of funds in the amount of around $750,000. It was said that no financial institution would lend money to the Club. The only alternatives were said to be the sale of the Club, or that Itaco purchase the Club property at 78 Franklin Street and lease it back to the Club. The meeting to discuss these proposals was set for 21 August 2006.
In the lead up to that meeting a local solicitor wrote to the board of the Club on behalf of an un-named client offering to purchase the Club property for $2M, on the basis that it would be leased back to the Club at a market rent. By letter sent a few days later, the anonymous client increased the offer to $2.5M, and offered the inducement of a 6 month rent free period. Also, in 2005 and 2006 valuation reports were obtained by the Club in respect of 78 Franklin Street. Colliers International assessed the market value assuming the highest and best use of the land and ignoring ‘Town Planning” constraints, at $3.9M. CBRE Valuations (CBRE) assessed the value of the property at $2.26M, based on the assumption that it could be rented for club purposes for $250,000 per annum. This was capitalised at 11 per cent. I will return to these in discussing the issue of valuations below.
In early 2007 Itaco borrowed $750,000 from the St George Bank to assist the Club in meeting its financial obligations. That loan was guaranteed by 14 of the Club supporters each to a limit of $55,000. (One of those supporters was Roberto Andriolo.) It was also secured by a first registered mortgage over 78 Franklin Street given by the Club. (Itaco ceded priority to the bank mortgage over its own mortgage.)
In late 2008 a “focus group” of Club supporters (who were also shareholders of Itaco) was formed to develop a business plan for the Club with a view to improving its financial and operational performance in the future. Relevantly, Mr Andriolo was a member of that group, as were Mr D Capezio, Mr C Ciuffetelli and Mr A Damiano.
The focus group, with the assistance of a consultant, Mr B Leonard, formulated a detailed plan covering the period from 2009/2010 to 2013/2014. That plan was presented to the boards of Itaco and the Club in March 2009.
The “Overall Summary” at the commencement of the business plan notes that the auditor of the Club accounts for 2005/6 had issued an adverse opinion as to the Club’s ongoing viability. The Club had then failed to ensure audited accounts for the two following years. This had put the Club in breach of the St George Bank loan conditions, raising the risk that the bank might seek repayment of the loan. The plan stated:
At 30 June 2006 Itaco Ltd had lent the Club almost $1.5 million; and since July 2007 some Directors and other Members have guaranteed a loan from St George Bank for $750,000 in the name of Itaco, to further finance operations of the Club.
In late 2008 the Club’s financial situation was particularly serious, with the Club, and Itaco Limited, bordering on being broke.
·The club’s official financial statements were last produced for the year 2005/06, with the auditor including an Adverse Opinion that “it is highly probable that the Italo-AUSTRALIAN Club (ACT) Limited will [sic – it appears from the context that the word “not” was omitted by error”] be able to continue as a going concern”.
(Footnote omitted) (Emphasis in original)
Among the possible steps which might be taken to improve the Club’s operations the plan noted the possible sale and/or sub-leasing of part of the Club land. Reference was also made to the possibility of a “land swap” enabling the use of newer, smaller Club premises.
The business plan was discussed at a meeting of Itaco shareholders on 31 March 2009. At that time it was decided to proceed to raise $1.4M to pay out the St George Bank loan, pay other creditors, replace poker machines and make some minor refurbishments to the Club premises. A notice to shareholders of Itaco issued just after this meeting, after reporting the above, stated:
If we are not able to raise a minimum amount in the order of $850,000, the Club will close. If the club closes the liquidator will dispose of the assets and if there is any surplus, it will be returned to Itaco shareholders. We do not believe this would yield any significant return to Itaco shareholders and a community asset with its associated history and heritage will be lost.
Unfortunately, the pledges from Itaco shareholders had a total value of only $140,000. A notice to the boards of both the Club and Itaco dated 11 May 2009 advising that fact continued:
A group of likeminded Italo Australian Club Members, (Listed below) most of which are Itaco Shareholders, wanting to secure the clubs [sic] future have pledged $1,250,000.00 of which they are prepared to invest into the club, based on the following conditions.
·The group will pay out the St George Loan and thereby hold First mortgage.
·Group members are to hold majority of board positions
·The Group will pay out unsecured creditors, allowing the club to operate.
·The group commits to maintaining the club open (It is for this sole reason the group is being formed) however if it is unsuccessful at securing its future it reserves the right to sell the club to recover its investment with any balance remaining going through [sic] the club and Itaco shareholders.
·Interest is to be paid to the group, accruing from when the money is raised. The interest rate will be based on the RBA Advertised Rate +1.5%. The group is prepared to postpone payment of the due interest for up to 2 years.
·It is the intention of the group to run the club profitably, until the groups [sic] principal and interest are repaid in full, at which time the club will be handed back to Itaco, becoming First Mortgage holders with the intention that principal and interest be returned to Itaco Shareholders, and the club is ultimately left debt free.
·The group recognises the importance of Itaco Limited. And that maintaining its current investment is critical to securing the clubs [sic] future, the group through the club commits to paying Itaco $15,000.00 PA to cover its operational costs, while it is running the club. However Itaco must waive its right to call in its loan to the club until the interest and principal due to the group is paid in full and the club handed back to Itaco.
Additional Condition
·The term of the loan is for seven (7) years.
The “group” consisted of 24 Club members including Mr Andriolo, Mr Capezio, Mr J Cardone, Mr Ciufetelli and Mr Damiano.
It appears that a slide presentation was subsequently made to a special general meeting (SGM) of Itaco shareholders held on 30 June 2009. The presentation was headed “Proposed Alternative Financing for (the Club).” Under “Background” the following paragraph appeared:
This Proposal seeks to provide interested and largely Itaco Ltd shareholders an opportunity to provide FINANCE to the Italo Australian Club in lieu of other Commercial Lenders whose terms may prove to be inconsistent with the aim of keeping the Italo Australian Club a going concern.
(Capitalisation in original)
According to the presentation the debt owed by the Club at that time consisted of $750,000 in respect of the St George Bank loan and a further $1.5M which had been advanced by Itaco. Under the new proposal, a new company, Italo Financing Ltd (“Financing”) would, on the security of a first registered mortgage, loan the Club a further $1.5M-$2.0M to pay out the St George Bank loan and provide the additional funds referred to in the 11 May 2009 notice. Itaco would have a second mortgage securing debt of $1.715M.
The presentation set out a summary of proposed terms, which included that the funding through Financing would be managed via a unit trust. At that stage it was proposed that unit holders would be paid interest on an annual basis, although such payments would be reviewed by Financing directors based upon the Club’s capacity to pay.
The minutes of the 30 June 2009 meeting are not in evidence before me. However I infer that a decision to proceed with the proposal was made at that time because on 15 July 2009 Financing was incorporated. On 31 August 2009 a SGM of Itaco shareholders was called to consider the variation of mortgage priorities discussed in the proposal.
In January 2010 the Club, Itaco and Financing entered into a series of deeds to put the financing proposal into effect. Pursuant to those documents Itaco issued convertible notes to persons willing to loan funds to the Club to discharge the St George Bank loan, and other debts owed by the club at that time. Financing was the trustee of the funds raised from the issuing of the convertible notes. The loan debt was secured, through Itaco, by a first mortgage over 78 Franklin Street. It appears that funds were raised by this process to discharge the St George Bank loan and to provide the Club with some further funds. Certainly the discharge of the bank’s mortgage was registered in February 2010.
No sooner had this recovery project commenced that a further difficulty arose. The Australian Taxation Office (“ATO”) issued a notice claiming over $370,000. The Club held a number of board meetings in response to this new demand. (Mr Andriolo was appointed as a director of the Club as from 22 February 2010.) It appeared that while the Club could pay its ordinary trading debts it did not have the funds necessary to pay the ATO. In that context the directors sought advice from accountants, including Mr Senatore, as to the possibility of placing the Club into administration. After taking that advice the directors decided to try and raise further funds to pay the ATO debt. Mr Senatore was tasked with negotiating a repayment schedule accordingly. By that time the ATO had commenced proceedings to wind up the Club.
As at 30 June 2010 the accounts of the Club recorded that Itaco had loaned the Club over $2.6M. In July 2010 a further 4,050 convertible notes were issued by Itaco, raising a further $405,000 (including $60,000 from Mr Andriolo). It appears that these funds were then lent to the Club to clear the ATO debt. Further smaller amounts were raised during the 2010/11 financial year by the issuing of another 1550 convertible notes. According to Itaco’s accounts for that year by 30 June 2011 a little over $1.9M had been raised by the issuing of convertible notes. These notes carried an interest rate of 5.21% and a maturity date (for all except $107,000) of 27 January 2017.
Towards the end of 2010 the Club arranged for an asbestos assessment to be undertaken of the Club premises. That found that there was asbestos present in the soffit sheeting and internal edge of the fascia of the awning extending over the outside smoking area of the building.
The 2010/11 accounts of the Club pain a grim picture. It is sufficient to quote the following from the independent auditor’s report:
The financial report for the year ended 30 June 2011 discloses an operating loss of $354,814 (2010: $538,692) and a deficiency in equity of $1,814,263 as at the [sic] 30 June 2011. Note 1(a) discusses a number of matters that may affect the ability of the entity to continue as a going concern. In that note, the Board of Directors express significant uncertainty regarding the company’s ability to continue as a going concern. Notwithstanding this, the going concern basis has been used in the preparation of the financial report. In our opinion however, the club is trading while insolvent and it is highly improbable that the Italo-Australian Club (ACT) Limited will be able to continue as a going concern and therefore we believe that the going concern basis should not be used.
Had the going concern basis not been used, adjustments would have been made relating to the recoverability and classification of recorded asset amounts, and to the amounts and classification of liabilities, to reflect the fact that the Italo-Australian Club (ACT) Limited may be required to realise its assets and extinguish its liabilities other than in the normal course of business, and at amounts different from those stated in the financial report.
In January 2012 the ACT Gaming and Racing Commission (“GRAC”) issued a notice to the Club indicating that the latter was in breach of its obligations pursuant to its poker machine licence. This could put the licence in jeopardy. This led to a meeting of the Itaco board on 10 January. There was discussion at that meeting of the potential for the Club to cease trading in full or part by the end of that month. Mr Capezio raised the possibility of removing the limitations on the use to which the Club land might be put, and varying that use to allow for serviced apartments. There was also discussion about the convertible noteholders providing further funds to assist the Club. A meeting of noteholders was planned for the end of the month.
On 11 January 2012 the board of the Club met. By that time, Mr J Memmolo (who was a lawyer) was a director of the Club. He chaired the meeting. The minutes of the meeting record that:
J. Memmolo reports that last night he attended Itaco’s meeting where it resolved that the members would meet any Club shortfall at least until 30 June 2012. More importantly, it was also decided to convene a meeting for the 31st of January 2012 for there to consider raising funds to pay out all third party liabilities and apply to deconcessionalise the Club’s Crown Lease. These decisions are not only of great comfort to the Board but also gives it a greater opportunity to focus on to [sic] improving the Club’s trading while freeing it from consistent worries about debt.
The minutes record that it was planned for the Club’s Secretary/Manager to meet with a representative of the Commission, and that after that meeting Mr Memmolo would draft a response to the Commission notice.
On 12 January 2012 Mr Memmolo emailed Mr Capezio (and others, including Mr Andriolo) in the following terms:
Subject: RE: Meeting 10/01/2012
It was stressed that because of the change in legislation the Club’s assets are worthless without deconcessionalising the lease and that all contributors be they shareholders of Itaco or noteholders Italo Finance would lose all their contributions. It was also mentioned that before the change in legislation the Club had received offers in excess of $2M for its assets. Deconcessionalisation should restore, at the very least, equivalent value.
[Joseph Cardone] reiterated that what has to be understood is that Itaco effectively assigned its security and interest over the Club’s assets to Italo Finance, in other words, Italo Finance is effectively in control of the Club’s destiny.
It was crystal clear that no further funds would be forthcoming unless those contributors were the recipients of some sort of security. [Joseph Cardone] confirmed that Italo Finance fund raising was restricted to $2M, and, if additional security was to be provided, it could only be done by way of grant of priorities or establish [sic] a vehicle consisting of all noteholders, being assigned the Club’s assets.
Only a handful seem to be prepared to ‘fork out more monies’ and that the monies raised are to be used to pay out the creditors and for the deconcessionalisation.
It appears that the reference to the “change in legislation” is a reference to the Gaming Machine (Club Governance) Amendment Act 2011 (ACT). That Act introduced new provisions into the Gaming Machine Act 2004 (ACT), namely s 21(1)(f) and (g). The purpose of those additions was stated in the Explanatory Memorandum of the Gaming Machine (Club Governance) Amendment Bill 2011 (ACT) in the following terms (at clause 5 under “Specific Provisions”):
Section 21 prescribes a number of requirements for a corporation to be considered an ‘eligible person’ and therefore eligible to hold a gaming machine licence. If a corporation is granted a licence by the Commission and then ceases to be an eligible person under section 21, the Commission may then take disciplinary action under part 4 of the Gaming Machine Act 2004 including possible suspension or cancellation of the licence.
New section 21(1)(f)
Clause 5 inserts new section 21(1)(f) to the prescribed requirements for a corporation to be considered an eligible person. It requires that in order to be considered an eligible person a corporation must not be, in the opinion of an auditor, not able to pay off its debts as and when they become due and payable. This amendment provides for the Commission to refuse a licence when the corporation applying is, in the opinion of an auditor, not able to pay all of its debts as and when they become due and payable. Where an existing licensee is in the opinion of an auditor in this position, the Commission may take disciplinary action which may include the suspension or cancellation of the licence.
A corporation that is not able to pay its debts when they become due and payable is not suitable to be a gaming machine licensee due to the high risk that winnings, especially large ones, will not be honoured. It also increases the risk of other unethical or unlawful conduct such as unreasonably encouraging gambling activity, providing credit to gamblers or allowing underage or excluded persons to gamble. Additionally, the directors of a corporation that continued to trade while insolvent may be in breach of section 588G of the Corporations Act 2001 (Cth) and this would be indicative of a significant breakdown in the corporation’s governance arrangements. In light of these risks it is appropriate for a corporation that is not able to pay its debts when they become due and payable, whether it is already licensed or a licence applicant, to be considered ineligible to be a gaming machine licensee.
New section 21(1)(g)
This amendment follows from new section 21(1)(f) and adds to the prescribed requirements for a corporation to be considered an eligible person. It requires that in order to be considered an eligible person a corporation must not be the subject of an auditor’s adverse opinion or disclaimer of opinion, within the meaning of Auditing Standards ASA 705.
In relation to an adverse opinion, the Auditing Standards ASA 705 states that:
The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial report.
In relation to a disclaimer of opinion, the Auditing Standards ASA 705 states that:
The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial report of undetected misstatements, if any, could be both material and pervasive.
The auditor shall disclaim an opinion when, in extremely rare circumstances involving multiple uncertainties, the auditor concludes that, notwithstanding having obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not possible to form an opinion on the financial report due to the potential interaction of the uncertainties and their possible cumulative effect on the financial report.
Therefore, an adverse or disclaimer of opinion indicates that material and pervasive misstatements exist in the corporation’s financial reports or that insufficient audit evidence or multiple uncertainties prevent the auditor from forming an opinion. In both these circumstances significant risks exist where the corporation seeks to be, or already is, a gaming machine licensee. These circumstances are indicative of serious financial and governance issues within an organisation. The risks and concerns of unethical or unlawful conduct are outlined in the comments above in relation to new section 21(1)(f).
As a prescribed requirement for a corporation to be an eligible person, this new paragraph therefore provides for the Commission to consider current audit opinions when assessing whether a corporation or current licensee is an eligible person. This enables the Commission to either refuse to issue a licence or take disciplinary action (such as a suspension or cancellation) when these circumstances apply to an organisation.
(Citations omitted)
On 31 January 2012 a meeting of the convertible noteholders was held. It was chaired by Mr Cardone. The business of the meeting was described thus:
To discuss and put to Noteholders Special General Resolution requiring amendment of Deed of Priority between Itaco Ltd and Italo Financing Pty Ltd and Italo Australian Club Ltd (Club) to allow variation of Mortgage and Fixed and Floating Charge between these respective parties, allowing for additional funds to the Club to repay statutory debts of the Club and make provisions for costs of planned application to deconcessionalise Club lease.
The resolution was carried.
On 9 March 2012 the Club was served with a notice by the GRAC threatening to cancel the Club’s poker machines licence from 10 April 2012. (I infer from the nature of the ACAT proceedings that the Club then commenced proceedings in the Tribunal and sought a stay of the cancellation decision pending the outcome of those proceedings.) The GRAC notice led to a meeting of the Club on 28 March 2012. The minutes indicate that Mr Ciuffetelli chaired the meeting (although he was not a director of the Club at that stage). Mr Andriolo was present, as was Mr Cardone. The minutes record the following in relation to the financing of the Club (where “JCA” refers to Mr Cardone, “JM” to Mr Memmolo and “CC” to Mr Ciuffetelli):
4 CAPITAL STRUCTURE – ITACO LIMITED AND THE CLUB
4.1JCA presented the capital debt structures associated with Itaco and the Club at 30 June 2011. In broad terms, the Club debt is negative $1.85m equity and Itaco negative $0.41m equity. Allowing for losses from July 2021 to March 2012 the Club’s negative equity would be approaching $2.0m. It was noted that the Itaco had provided for a doubtful debt for their loans in their 30 June 2011 accounts.
4.2JCA recommended that Itaco write off its loans (approx.. $1.6m) resulting it [sic] the Club’s negative equity improving by an equivalent amount. This would leave an equity deficiency in the Club of approx. $0.4m. JCA suggested that up to $0.5m would be required to underpin solvency of the club moving forward and this aligned with the action required to appease ACAT.
4.3JCA advised that the current round of funding underway in which approx. $270k had been pledged (on the basis that funds would be secured with priority), would now need to be in the form of a donation in order to be debt neutral and protect the Club’s demonstrated solvency.
4.4JM expressed a view which was supported by those present that any restructuring of the shareholding in Itaco should appropriately recognise the Italo Financing Noteholders with the issue of preference shares or similar mechanism.
4.5CC sought views around the table on the approach of:
·Writing off Itaco’s total debt;
·Collecting $0.4m-0.5m as a donation to the Club; and
·Restructuring of the shareholding in Itaco to appropriately recognise the Italo Financing Noteholders with the issue of preference shares or similar mechanism;
and it was UNANIMOUSLY RESOLVED to proceed with immediately consulting the Boards of Itaco and Italo Financing to facilitate this course as it was the only viable option to underpin the Club’s solvency.
(Capitalisation in original) (Emphasis in original)
On 10 April 2012 Mr Capezio, as a director and secretary of Itaco issued notice of a SGM of the shareholders in that company planned for 26 April 2012. The purpose of the meeting was stated to be the consideration of a resolution to forgive approximately $1.4M of debt owed by the Club pursuant to the original Itaco loan. The note explained that because the loan was treated as a commercial loan in the Club accounts the GRAC regarded the Club as insolvent. On that basis the Commission was seeking to terminate the Club’s poker machine licences. The notice recorded that once the insolvency issue was resolved the Club would establish a new board to manage the Club’s operations, “to fully satisfy [GRAC’s] requirements”. It was then stated:
With a new Board in place the Directors of the Club believe that the Club will be in a position to implement a number of key strategies for the future in joint venture with Itaco. These include:
a) Apply to deconcessionalise the Crown lease so the Club is able to enjoy complete ownership in the site of the Club;
b) Promote the Club as an attractive community facility to accommodate a range of hospitality and entertainment functions for the members and the wider community;
c) Implement changes in the Club’s management and operations to improve and strengthen the Club’s trading position;
d) In the longer term develop plans to allow future redevelopment and improved facilities which will reposition the Club’s assets and hopefully maximise the value of Itaco’s shares and contributions.
The reference to deconcessionalising the Crown Lease is a reference to the removal of the statutory restriction on the lessee of such a lease from dealing with it without the written consent of the Planning and Land Authority (ACTPLA); see s 165 of the Planning and Development Act 2007 (“PDA”).
The notice advised that the directors of Itaco and the Club had been working together to investigate redevelopment options together with the neighbouring “Cultural Centre” conducted by CIAO. The estimated cost of deconcessionalisation was $110,000. It was said that it could take 6-12 months. The notice advised:
Please note, should this resolution not be passed, the Directors of Itaco Ltd will have no choice but to seek a remedy to the Club’s insolvency, which may include placing [sic] Club into Administration or Liquidation should there be a shortfall in recoverable assets.
If this Resolution is passed, then you will continue to retain your shares in Itaco Ltd but with a value tied to any future deconcessionalisation of the Club Lease.
On 16 April 2012 Mr Ciuffetelli signed a statement for use in the ACAT proceedings. In that statement he explained that he was the General Manager and Senior Consultant of “an integrated property strategy and project services firm” in the ACT. He was part of a group who had come together to assist the Club in relation to the difficulties it was then facing.
Mr Ciuffetelli summarised the history of the Club, broadly in the terms described above. He said that the Club had succumbed to what he described as a “triad” of pressures. He described them as:
a.ACT government policy settings (no smoking regulations, tightening of gaming rules and higher poker machine taxes);
b.changing demographic of Club users and loss of relevance to the community; and
c.further ill-conceived capital expenditure and poor, unfocused management.
He noted that the Club was home to 12 regional Italian Associations. Those associations formed part of CIAO which operated the Cultural Centre adjacent to the Club premises. Mr Ciuffetelli described the strategy for saving the Club in the following terms:
a.implement a capital management strategy for Itaco Limited to give it and the Club assured solvency moving forward;
b.arrest and turnaround the Club’s significant operational losses by providing products and services that capture a differentiated Italian experience for patrons;
c.deconcessionalise the vast majority of [sic] existing Club lease;
d.seek approval of an ACTPLA Development Approval that consolidates a small portion of the existing lease (for construction of a small Club) with the existing Cultural Centre site whilst opening up opportunities to develop the balance of the site to support the Italian heritage/cultural precinct; and
e.seek funding and delivery strategies that make the vision a reality.
It was then explained, consistently with the 10 April 2012 notice, that the estimated costs involved in applying to deconcessionalise the Club Crown Lease would be $110,000 with the amount required to pay to the ACT to remove the restriction on dealings being a further $500,000-$1M (this further amount was envisioned to be paid on the back of business investments “given the commercial value that will be ascribed to the block at this point”). Mr Ciuffetelli advised of the planned meeting for 26 April 2012 and the plan for the Itaco debt to be forgiven.
On 26 April 2012 the Itaco shareholders resolved to forgive the debt owed by the Club of $1.42M. Around this time ACAT stayed the GRAC application pending developments. One of the conditions of the stay was that the Club hold $50,000 for payment of poker machine winnings as they arise. That sum was provided by way of a bank guarantee by Mr Andriolo.
A meeting of the Club was held on 16 May 2012. It was again chaired by Mr Ciuffetelli. Mr Capezio reported to the meeting that he had been in contact with the owners of contiguous blocks to investigate the rezoning of Section 19 to CZ5, with the stipulation that it include the use of “Club and ‘licensed’ premises”. At the next meeting on 23 May 2012 a sub-committee comprising of Messrs Ciuffetelli, Damiano, Capezio and Cardone was formed to represent the Board of the Club in relation to (amongst other matters) the ACAT proceedings and the “redevelopment process and associated activities”.
ACAT continued the stay on the GRAC application until August. However, this was conditional on the Club providing satisfactory accounts. The Club continued to struggle with debts, included those owed to the ATO. In July Messrs Andriolo and Ciuffetelli met with ACTPLA to discuss the possibility of rezoning Section 19 Forrest.
On 31 July 2012 a meeting of the Itaco convertible noteholders was held, in the context of the above. One of the items of business considered was the making of an offer to acquire the Club’s concessional Crown Lease. Another item was stated in the following terms:
3. To consider functional insolvency of Itaco Ltd and proposed Deed of Arrangement between Itaco and Itaco Financing Pty Ltd forgiving Itaco debt owed to Italo in consideration of transfer of mortgage (but not Concessional Lease) from Club to Italo Financing.
During August 2012 it became clear that the financial position of Itaco was also becoming a matter of concern. On 21 August 2012 Mr Cardone, and another director of Financing wrote to Itaco requesting that it remedy a deficiency in the latter’s balance sheet. The letter also advised that due to the GRAC action against the Club the Club was potentially in breach of the conditions of the fixed and floating charge (over the Club) which secured the convertible notes issued by Itaco. Also, Itaco was potentially in default under the terms of the Convertible Note Trust Deed. Notwithstanding these issues, Financing, as trustee of the Convertible Note Trust waived the sum of interest due in October 2012 (which amounted to $80,000).
On 24 August 2012 ACAT set aside GRAC’s decision to cancel the Club’s poker machine licence.
At a meeting of the Board of the Club on 29 August 2012 (at which Mr Andriolo was present) the following report was given by Mr Cardone under the heading “Italo Corporate Restructuring/Constitution” (where “JC” refers to Mr Cardone):
8.1JC advised that he had met with John Bradley, Bradley Allen, to receive advice on appropriate structures to support the Italo, Itaco and Club collaboration/operation.
8.2JC tabled and briefly discussed a draft proposed capital structure for Italo Financing Pty Ltd (attached to these minutes) involving a debt to equity swap.
8.3 JC advised that a joint venture arrangement may be suitable but that he would review further and report back to the Board.
8.4JC raised the possibility of adjourning the Itaco SGM on 13 September 2012 to ensure that the most suitable corporate structure could be investigated and put in place.
8.5JC also advised that a new Club Constitution was required and that he would engage Bradley Allen to revise the document so that it could be put to the Club AGM at the end of September.
The day after the meeting Mr Capezio emailed Mr Cardone with some further thoughts. He said:
Thinking the JV more last night!
Itaco swaps its mortgage on the club’s assets for full release of it’s [sic] obligations in consideration for and [sic] a subordinated share valued at approx.. $410K in the JV with no voting rights and no obligation to commit further funds but without any guarantee for repayment or dividends. All associated expenses including required financial reporting costs shall be borne by Italo. One day if and when the new club is redeveloped the Itaco shareholder’s [sic] will be recognised as a minority owner (joint tenant).
The primary JV partners will hold full rights on the land to be subdivided.
On 13 September 2012 a SGM of Itaco shareholders was held. Mr Capezio (referred in the minutes of the meeting as “DC”) chaired the meeting. Mr Cardone was present on behalf of Financing. Mr Andriolo was not present.
Mr Capezio commenced by explaining that Itaco’s balance sheet indicated an equity shortfall of $410,000. It had no assets. He said that “Itaco is not in a strong position because the Club is not in a strong position.” The minute record Mr Capezio advising the meeting as follows:
DC refers to the letters sent to all Itaco shareholders, which further explained the overall situation, where the advice from board members of the Club, Italo and Itaco is that the Club needs further funding for working capital and a capital upgrade.
However Itaco is not in a position to provide further funding to assist the club. Italo Financing has the capacity to provide further funding if the required security arrangements are in place i.e. Italo Financing must hold the mortgage on the property.
The general consensus is that the Club and building has reached a redundancy point, where a capital upgrade and deconsessionalisation [sic] of the lease will be required to secure the club in some form. The reason being here is that the land does not really belong to the Club because the crown lease is concessional. Therefore to secure the Club for future generations, a re-zoning and redevelopment proposal will be necessary to provide a Club house and further development options for the future.
Mr Cardone also addressed the meeting. The minute records (“JC” being Mr Cardone):
JC addresses the Itaco Shareholders by stating that this proposed joint venture arrangement is designed to keep Itaco involved, without further financial contribution.
In affect [sic] given the state of Itaco’s financial position, the proposed JV is designed to convert “no value into some value” by swapping the debt into equity, with the assistance of the Waldren family application. However to achieve this, the mortgage needs to transfer to Italo Financing. This will allow Italo Financing to raise the necessary funds to purchase the site off the Government. This process is required to see the value and convert the debt into an asset.
In recommending the joint venture proposal Mr Capezio described the alternative outcome as follows (“DC” being Mr Capezio):
DC states this joint venture provides an opportunity for Itaco to convert the debt into an asset/equity. The other fact we need to consider here is that the Club owes money to Itaco and Itaco owes money to Italo Financing, (which has already put Itaco on notice for over $2m). So if Italo Financing calls in the debt, there will be a total collapse. Therefore Itaco’s position is not viable without the joint venture.
A diagram of the proposed joint venture was presented to the meeting. It indicated that a new company (Renaissance Pty Ltd) would hold the redevelopment interests for the Club, Itaco and Financing in the following shares: 35%, 30% and 35%.
Eventually after what appears to have been a robust meeting the following resolution was passed by a large majority:
That Itaco Ltd (Itaco) enters in to [sic] an agreement with Italo Financing Pty Ltd as Trustee for the Itaco Convertible Note Trust (Italo Financing) to allow the transfer of the mortgage security from Itaco to Italo Financing and in exchange Italo Financing will release Itaco from all it’s [sic] current obligations under he [sic] Convertible Note Trust Deed.
Pursuant to this resolution Itaco discharged one mortgage which it held over the Club property and transferred the other to Financing in early October 2012. On 26 October 2012 Mr Cardone wrote to the Convertible Notes noteholders advising of this. The letter continued:
As previously advised, the next steps now involve wind up of Convertible Note Trust. This will be by way of issuing Redeemable Preference shares in Italo Financing in exchange for the Convertible Notes held. In addition, Class A shares will be issued in Italo Financing to those Convertible Noteholders who chose to provide an unsecured undertaking to the Italo Australian Club (ACT) Ltd (Club) during May and August 2012.
The letter explained that the proposal would result in secured noteholders obtaining “G” class redeemable preference shares in Financing. Mr Cardone explained the rights granted under these shares as follows:
Your investment in Convertible Notes of Itaco Ltd (Itaco) was secured debt, providing first ranking repayment by Itaco but with an option, at your election, to convert to ordinary shares in Itaco. As Itaco’s balance sheet has recently been largely impaired, conversion to Itaco shares would have proved disadvantageous to you.
As a result, the G class Redeemable Preference share best represents the swap nature of the transaction between Itaco Convertible Note and Italo Financing Redeemable Preference share.
The G class Redeemable Preference share provides you with first rights to repayment of capital and a first charge against any profits distributable by Italo Financing on a non cumulative but preferential basis.
However, this class of Redeemable preference share provides no right to participate in the division of any surplus assets or profits of Italo Financing nor are you provided with any voting rights within Italo Financing. This approximates your rights which existed under the Convertible Note Trust executed with Itaco.
The redemption of your Redeemable Preference share is at the discretion of Italo Financing. No mandatory redemption date has been set per the terms of the Constitution of Italo Financing. The time frame for redeeming the shares will be discussed.
(Emphasis in original)
The proposal for the issuing of Class A and G shares in accordance with the proposal set out in Mr Cardone’s letter was accepted by a meeting of the board of Financing on 7 November 2012. The following day Mr Cardone wrote to the directors of the Club. He advised of the transfer of the mortgage security from Itaco to Financing. The letter continued:
You are advised that your obligation under the loan agreement of 27 January 2010 has now passed to Italo Financing Pty Ltd (Italo) with the relevant mortgage security and has been noted at the ACT Land Titles Office (LTO) on 24 October 2012.
You are further advised that following deliberations of the Board of Italo on 7 November 2012, concurrent with a debt for equity swap between Itaco and Italo, your loan obligation to Italo has been forgiven.
However, whilst your loan obligation is forgiven, the relevant mortgage security remains undischarged with the LTO pending further discussion with the Club regarding available avenues involving the crystallisation of a potential uplift in the land tenure of the Club beyond the current concessional lease.
The annual general meeting of the Club was held on 13 December 2012. Mr Andriolo chaired the meeting. Mr Ciuffetelli also addressed the members present. He noted that the Club had suffered losses in excess of $2.8M since 2003/4. He also referred to the rezoning proposal which was still under active consideration. He said:
CC noted that the Club, Cultural Centre and other stakeholders are addressing rezoning issues with Section 19 Forrest. CC referred to the Waldren family, as owners of Forrest Motor Inn and owners of contiguous land to the Club housing apartment blocks, joining with the Club in assessing potential rezoning of the section with ACTPLA as a means to understanding alternative uses for land tenure.
Mr Andriolo advised the members that he was the only remaining director at that time. He was willing to continue and Messrs Ciuffetelli and Damiano also nominated. They were duly appointed and became directors of the Club. (There were no other nominations.) Mr Ciuffetelli remained a director until 18 June 2015, and Mr Damiano until the Club went into liquidation in 2018.
Events in 2013
On 25 February 2013 Mr Capezio obtained from CBRE a preliminary estimate of the amount which would probably be payable to the ACT for deconcessionalising the Crown Lease for the Club property. Mr F Brodrick, for CBRE, gave an estimate of between $355,000 and $625,000.
Mr Cardone, as Chairman/Director of Financing, wrote to shareholders on 25 March 2013 referring to restructuring of debts between Itaco and the Club. The letter continued:
Since the Itaco Ltd Special General Meeting of November 2012, your Directors have been working with the new Board of the Club towards achieving a number of outcomes designed to:
· Maintain the Club’s 50 year legacy for all Italian-Australians in Canberra, Queanbeyan and surrounding region; and
· Crystallise a commercial outcome for shareholders.
Next steps
Your Directors have been conducting preliminary discussions with the Club involving a Joint Venture in which to:
1. Improve the Club’s land tenure;
2. Address the Club’s future commercial footing; and
3. Provide avenues for uplift in the Net Tangible Assets of the Company.
The Joint Venture document is currently being drafted and will be presented to shareholders on April 23, 2013 at the Club at 7:30 pm.
Following the meeting referred to in that letter Mr Cardone again wrote to shareholders on 14 May 2013. This letter attached an offer document and also acceptance forms in respect of the proposed rights issue in Financing. The context was explained thus:
This rights issue will provide equity to a Joint Venture with the Italo Australian Club (ACT) Ltd (the Club) in order to allow the Club to pursue the first steps in paying out the concessional lease amount to the ACT Government.
CBRE Valuers have recently indicated the amount of the concessional payment to be in the range of $400,000 to $600,000 approximately depending on the formula to be applied by the ACT Government Valuer.
Funds from this rights issue will allow the Club to formally engage CBRE and a qualified town planner to make an application to deconcessionalise the Crown Lease to the ACT Planning and Land Authority.
Your directors have formed the view that this rights issue is now necessary to move to the next steps in:
1. Improving the Club’s land tenure;
2. Address [sic] the Club’s future commercial footing; and
3. Provide [sic] avenues for uplift in the Net Tangible Assets of the Company.
On 13 June 2013 Mr Brodrick (for Knight Frank) provided a formal valuation of the Club site for deconcessionalisation purposes. He valued the site at $545,000.
In early July 2013 Mr Ciuffetelli attended Mr King, a solicitor at the firm of “Legitimate Solutions Legal” to obtain advice about a draft deed of put and call options and attached documents (a contract for sale and a sublease back from the buyer to the selling Club). Mr King was also provided with a copy of the Club Constitution. His letter of advice is dated 11 July 2013. In the letter, after noting that the option fee each way was $1.00, Mr King noted:
The Purchase Price ‘Means the cost of the Deconcessionalisation Process paid by the Buyer plus $10.00.
I can not [sic] comment on the commercial reality of the fees or price other than to say they can be described as nominal. It is a matter for the Club to consider if the expected benefits are of sufficient value.
In relation to the contract to be used if either option was exercised Mr King advised:
Special condition 44 details the Lease back. Critically there is no mention of the Relocation and Redevelopment provisions detailed in clause 38 of the Lease.
I suggest you ask the other lawyers to include the relevant parts of the Lease in the actual Contract.
As to the sublease he said:
I suggest you flesh out the terms of the agreement to cover issues such as fitout, standard of finish etc as this could cause some dispute in the future.
My preference is to have the information re the new premises included in the Contract rather than the Lease.
Under the heading “Constitution” Mr King advised:
You should carefully consider clause 3 re the income and property of the company. It seems a number of members of the Club are also shareholders or hold an interest in Italo Financing. See advice below concerning conflict of interest.
The reference to conflict of interest was followed up by the advice given under the heading “Directors”:
As you are aware Directors have a fiduciary duty to the Club. They must be wary of conflicts of interests [sic] such as having an interest in another entity that deals with the Club. Directors should carefully consider their obligation under the Corporations Act 2001 (Cth).
A Director with a conflict should not involve themselves [sic] in the decision.
Finally, Mr King addressed the power of the directors to enter the deed without the authorisation of a general meeting:
Legally it may be possible to argue that the Directors have the power to enter the Deed without the need to go to a general meeting of members. Internal Club communications and change management may suggest that if that is the legal position the preferred approach is to actually have a general meeting to ensure member support.
Given there are only three Directors the above is academic. The Constitution requires that if there is no quorum of five Directors then the matter should be referred to Voting members, presumably through a general meeting.
As the situation stands at the moment the matter has to be put to a general meeting.
On 25 July 2013 the board of the Club met at the Club. Mr Andriolo is recorded as being present together with Mr Ciuffetelli and Mr Damiano. The minutes record as follows:
The Club had received a draft Deed of Put and Call (DOC) [sic] from Italo Financing Pty Ltd in June 2014. CC advised that the draft DPC effectively gave Talo the Club lease in exchange for paying out the deconcessionalisation fee and granting a sublease to continue operation. The DPC also put an obligation on Italo to provide a new clubhouse in the vicinity of the current Club if the current Club site was [sic] redeveloped. CC advised that Directors had to consider the DPC very seriously as it may be the only viable option for the Club to continue in a sustainable form moving forward. CC advised that the Board had taken independent legal advice and make [sic] a decision in relation to executing the DPC in August 2014.
Having regard to the context it seems likely that the reference to “August 2014” should be to “August 2013”. In fact a further board meeting was held on 29 August 2013. The three directors were recorded as having been present. Relevantly, the minutes state:
Subsequent to detailed discussions and subsequent to legal advice the Board UNANIMOUSLY resolved to execute the Deed of Put and Call (DOC) [sic] issued by Italo Financing Pty Ltd. CC advised that it was the only viable option for the Club to continue in a sustainable form moving forward. CC was authorised to execute all relevant documentation on behalf of the Club.
(Emphasis and capitalisation in original)
On 5 August 2013 Mr Ciuffetelli provided Mr King with a draft notice of general meeting for the Club membership. That notice described the proposed business of the meeting as follows:
1.To adjust the minimum number of Directors required by Clause 27 of the Constitution from 9 to 3.
2.To adjust that a quorum of Directors required under Clause 34.6 of the Constitution be reduced from 5 to 2.
3.To declare, as required by Clause 37 of the Constitution, potential conflicts of interests that may arise in relation to Director’s [sic] responsibilities as the Club repositions itself for an affordable and sustainable future.
4.General Business.
The notice which was actually sent to members appears as part of Ex “11”. The items of business are the same as in the draft. However, the proposed motions relevant to each of items 1-3 are set out in the notice. A general meeting was attempted on 3 September 2013. It was adjourned to 10 September due to the lack of a quorum.
A set of the minutes of that meeting was contained in Exhibit “1”. However, during the course of the trial Mr Senatore (the liquidator of the Club) discovered another set of minutes. The latter were tendered and went into evidence as Ex “11”. For reasons which I explain below I have accepted Ex “11” to be the correct record of what transpired at the general meeting on 10 September 2013.
The minutes note that the meeting was chaired by Mr Ciuffetelli. There were 10 voting members in attendance and six written proxies had been received. Mr Ciuffetelli is recorded as having made a PowerPoint presentation dealing with the issues facing the Club. Those included “Financial position and outlook; Club strategy through 2014 and 2015; The proposed deconcessionalisation of the Crown Lease; [and] Redevelopment principles and programme.”
There were copies of PowerPoint pages for each of these headings attached to the minutes. That for the financial position contained dot points noting “No debt”. There was a reference to “Economic climate”, and the need for member patronage. The last point was “Pursue strategy”.
The strategy page contained a diagram setting out goals for each of the 2013, 2014 and 2015 financial years. For the 2014 year the goals included “Integrate Cultural Centre, Deconcessionalise Lease, Rezone Land, Section Masterplanning.” For the 2015 year they included “Territory Plan Variation, Redevelopment, Integrated Cultural Zone.”
The page headed “Deconcessionalisation” contained seven dot points. They were:
· Club has concessional lease
· Restrictions – can’t assign or sublet
· DA to vary lease to remove restrictions
· Social impact assessment required
· Minister – public interest
· If approved – payout lease value
· Club can deal with lease for best interests
The “Redevelopment Principle” page contained an architectural drawing of what appears to be a number of new buildings on the whole of Section 19.
The minutes record that Mr Ciuffetelli explained the steps required in the deconcessionalisation process. The minutes then records:
Subsequent to the presentation, CC summarised by making the following key points:
· The Club’s trading and financial position was very challenging and although its operations had been stabilised over the last 12 months significant risks remain;
· All key revenue streams were down significantly and the outlook was not showing signs of improvement;
· Although the Club has no debt, obligations to creditors (power and utilities especially) were rising and needed to be monitored;
· The Club’s strategy of redeveloping its current site was the only viable option for the community to maintain a presence and preserve its heritage;
· Everything that was required to be done to achieve this objective should be carried out and the authorities needed to do this had to be secured from the General meeting.
The minutes set out the following discussion of the options deed proposal:
CC advised the meeting that a Deed of Put and Call (DPC) between Italo Financing Pty Limited (Italo) and the Club had been prepared and carefully reviewed by the Board over the past months given the gravity of the Club’s financial position and debt structures with Italo. CC advised that in essence, the DPC allowed for the costs associated with deconcessionalising the Club’s lease to be settled by Italo on the basis that the Club’s crown lease is transferred to Italo and the Club is issued a 10 year sub-lease for its continuing operation, rent free. CC advised the meeting that proposed DPC had been reviewed by the Club’s independent legal advisors and advice taken on its content. CC recommended to the members that the DPC be executed on behalf of the Club as it was the only available means to continuing the Club’s legacy; otherwise the Club would have to close. Subsequent to discussion, the meeting resolved that there being no other viable options available to the Club that the DPC should be executed, with the Club’s Crown Lease being transferred to Italo, ensuring the survival and continuing presence of the Club in the Canberra Community. D. Capezio requested that this course of action be authorised in a formal motion and this was seconded by F. Pellegrino.
Mr Ciuffetelli then discussed the need to regularise the number of directors in the Constitution to reflect the reality that the Club only had three directors.
In relation to the issue of a potential conflict of duty and interest the minutes record the following:
CC advised that a key issue with the Club strategy was the relationship between the Club and its financing vehicle. It was especially relevant to the Gaming Machine Act 2004 where issues of material financial interests by the Club directors are clearly dealt with. CC declared that he, Angelo Damiano (AD) and Robert Andriolo (RA) were voting members of the financing vehicle having contributed capital necessary to preserve the operations of the Club since 2009, funding that if was not [sic] forthcoming, the Club would have long since been closed.
CC, AD and RA declared their voting shares in the financing vehicle to be:
· CC 0.8%
· AD 1.4%
· BA [sic] 11.23%
With this declaration, and subsequent legal advice, CC made the assertion that the shares of CC and AD were immaterial but that the share of RA was material which meant that RA would need to reconsider his position on the Board of the Club. CC noted that the resolution to be put to the General Meeting catered for a Board member’s material interests, having been declared, to abstain from voting enabling the authority for the Club Board to make binding decisions.
Also attached to the minutes were copies of the notice of general meeting (proposed for 3 September 2013) and a covering letter dated 9 August 2013. Each of these was signed by Mr Ciuffetelli. The covering letter contained the following:
Whilst the Club has been operating over the last 2-3 years necessarily financing mechanisms have been put in place to assist with re-casting its future. Key decisions need to be made now to progress the program of reposition the Club and generating value for Club members and this General Meeting centres on the authorities necessary to proceed on this important path.
I will discuss all the relevant issues at the General Meeting so please make every effort to attend.
The minutes record that in addition to the motions 1-3 an additional motion was put to the meeting. That was in the following terms:
That the Board execute the proposed Deed of Put and Call with Italo Financing Pty Limited to ensure the continuing survival of the Club.
According to the minutes that additional motion was passed by 14 votes to two. Each of motions 1-3 was passed by the same majority. It is apparent the two “against” votes in each motion were attributed to Mr L Costa and a company operating from his address. In fact, the six proxy forms contained specific references only to motions 1-3, and only motions 1 and 2 are marked with “against” (motion 3 is marked with “abstain”).
On 13 September 2013 Messrs Ciuffetelli and Damiano signed the options Deed for the Club. Mr Cardone and Ms Barbitano signed the Deed for Financing.
Shortly after the Deed was executed Ms C Middleton of ACT Planners wrote to Mr Capezio care of the Club with a fee proposal for assisting with the deconcessionalisation. She pointed out that the application required a social impact assessment.
On 26 September 2013 a further board meeting of the Club was held at the Club. All three directors were recorded as being present. The following was minuted (with “CC” referring to Mr Ciuffetelli):
CC advised that the Deed of Put and Call as issued by Italo Financing Pty Ltd was executed on 3 September 2014 [sic – it is reasonably clear this should be a reference to 13 September 2013] in accordance with the resolution of the full Board at its August meeting.
At about the same time Mr Ciuffetelli issued a written invitation to the lessees and occupants of premises adjacent to the Club premises and the CIAO cultural centre to attend at the club on 15 October 2013 to meet with Ms Middleton to discuss the proposal for the deconcessionalising of both 78 and 80 Franklin Street.
In November 2013 ACT Planners produced a social impact assessment of the deconcessionalisation of 78 and 80 Franklin Street. The assessment was in favour of the proposal. The last paragraph of the Executive Summary noted:
A future objective of the proponents is to seek development approval to consolidate and re-subdivide Blocks 9 and 12 in order to provide an integrated club and community activity centre in a contemporary form, thereby assisting the viability of both facilities and reinforcing the existence of a cultural precinct at Section 19 Forrest. The removal of the concessional status of both leases is the first step towards this outcome.
On 20 November 2013 the Club and CIAO applied to ACTPLA for the variation of their Crown Leases to remove their concessional status.
The Club AGM was held on 19 December 2013. (The minutes note that the meeting was originally planned for 12 December, however there were insufficient members present for a quorum). On this occasion there were 15 members present. Two proxies were recorded. The three directors were present. Each renominated and were duly appointed to continue as directors for the following year. There were no other nominations.
The AGM minutes refer to the minutes of the 10 September 2013 meeting which were approved without comment. Mr Ciuffetelli reported as follows in relation to the Club’s financial position:
CC advised that although the operations had been stabilised the Club confronted many challenges with reduced revenues and increasing costs. CC advised that the Club’s operating result in 2012/13 was an accrual loss on $98.2k but that this included $187k in donations to supplement operational activity.
…
CC advised that incurring operational losses was neither desirable nor sustainable however the Club needed to continue operations to give it strategic flexibility with its repositioning redevelopment plans.
Events in 2014-2015
On 28 February 2014 Mr Ciuffetelli, as President of the Club, wrote to CIAO requesting a general meeting of that body pursuant to its Constitution. At about the same time it transpired that CIAO was in arrears in land rent payments in the sum of over $23,000. ACTPLA advice indicated that any deconcessionalisation in favour of CIAO’s land would be conditional upon payment of those arrears.
The general meeting of CIAO requisitioned by Mr Ciuffetelli took place at the Club premises on 16 April 2014. The minutes record that Mr Ciuffetelli chaired the meeting and that he advised as to the background of his requisition as follows:
CC advised that he had unsuccessfully attempted to engage with the purported CIAO Board for in excess of 2 years forcing the member requisition of the General Meeting. CC questioned the failure of the purported directors [sic] administration of CIAO over many years. This included uncompliance [sic] with statutory reporting requirements and the inability to convene properly constituted meetings of CIAO to engage with the community.
The minutes record some disputation of the validity of the meeting by Messrs Barilaro and Gumina, however after some discussion it was agreed to form a working group to address the problems with CIAO’s governance and finances. The working group included (on behalf of CIAO) Messrs Barilaro, Gumina and Andriolo. Messrs Cardone and Capezio were also involved as well as two others. The meeting was adjourned to 17 June 2014 for the working group to present its findings.
It appears that despite the plan for a working group Messrs Barilaro and Gumina sought legal advice as to the redrafting of CIAO’s constitution. This is reflected in the minutes of a meeting on 17 June 2014, said to be the continuation of the 16 April general meeting. These minutes record that a resolution was passed to set up an interim management committee of CIAO consisting of Messrs Damiano and Cardone and three representatives of affiliated associations. Two persons from the “current purported board” were also to be nominated.
The minutes noted that the persons who claimed to be board members of CIAO were planning for their own general meeting to be held in August 2014.
On 11 July 2014 a memorandum of understanding (MOU) was entered into by the Club, CIAO and Financing. Mr Ciuffetelli signed it for the Club, Mr Damiano for CIAO and Mr Cardone for Financing. This document set out the following “agreements”:
1.That CIAO will provide CIAO land being Block 12 of Section 19 of the Division of Forrest in the ACT for the purposes of the assessment and development approval being granted for the reconstitution of a new integrated Club House and Cultural Centre.
2.That Italo will arrange to advance funds to pay the outstanding Land Rent as determined and advised by ACT Planning and Land Authority in respect of CIAO Land Rent under Crown Lease granted to CIAO on 14 April 2000.
3.That Italo will arrange to pay residual deconcessionalisation amount (if any) as determined by relevant body due in respect of CIAO concessional Crown Lease.
4.That CIAO, in return for Italo arranging the funding of statutory and deconcessionalisation amounts due and payable, provide Club with Appropriate Sub Lease to conduct operations as a Club, subject to Crown Lease amendment and regulatory approval.
5.That CIAO consent to a right of lien and the quantum of funds advanced under clauses 2 and 3 to reflect in the circumstances, an indebtness [sic] of CIAO to Italo and that which is actionable by and repayable on demand to Italo, should this Memorandum of Understanding not proceed to a legally enforceable agreement.
6.That Club and CIAO agree to enter into principled negotiations to amended CIAO Constitution being drafted and have a proposed Constitution presented to lawfully convened Annual General Meeting (AGM) of CIAO Membership which will, inter alia, address the Club relinquishing its current voting veto and minimum representation and changes to voting member definition. This AGM be conducted no later than six months after signing of this Memorandum of Understanding.
The MOU further stated:
That this Memorandum of Understanding, whilst not legally enforceable, does establish terms and conditions which can be construed as conditions precedent and otherwise represent reasonable instructions to each parties’ [sic] legal representatives for the purposes of documenting a legally enforceable agreement.
On 16 July 2014 notices of decision were issued by ACTPLA approving the applications for deconcessionalisation. The approval of CIAO’s application was, however, conditional upon payment of outstanding land rent and compliance with other regulatory requirements under the Crown Lease.
The plan for a further general meeting of CIAO progressed. Mr F Barilaro sent an email to interested persons on 14 August 2014 reminding them of the meeting to be held on 17 August. The position of the alternative board of CIAO was stated in the following terms:
This board has never objected to establish [sic] a smaller Italo Australian Club in the land of the Ciao- We never objected in working together with the Club or to make the Centre self sustainable.
However we DO OBJECT to amalgamate [sic] the Club with the Cultural Centre for the simple reason that the Cultural Centre expenses are relatively easy to finance.
A trading Italo Australian Club can incur in much higher expenses that will take a lot of resources away from people; risking to loose [sic] both Club and Cultural Centre.
(As a lot of you have experienced with Itaco and Italo Finance).
(Capitalisation in original)
On 23 September 2014 ACTPLA notified the Club that the amount to be paid for deconcessionalisation of its Crown Lease was $545,000. In response to this Mr Cardone for Financing called a shareholders’ meeting with a view to raising the necessary funds. It was proposed that in return for the money each contributor would receive paid up class B shares. This exercise was successful and the necessary funds were raised by 26 November 2014. In his email message of confirmation directed to Messrs Ciuffetelli, Damiano and Capezio (with a copy to Ms Barbatano) Mr Cardone recorded the following comments:
4.Funding support beyond 30 June 2015 highly doubtful. They [sic] key contributors have reached their limit and now family/spousal pressure is very high to call it a day of underwriting the club.
…
6.Begin to explore integration of new Club house with Cultural Centre (CC). May be that an extension/refit/reconfig of Cultural Centre is all that is possible. No grand Club plans re size of Club house is in prospect because land tenure of CC site will not support significant commercial risk capital for a community asset. Land tenure of CC site to be allow purpose clause to include Club. Much work and lobbying of ACT Govt required here.
7.If no further Directors come forward at Club AGM in Dec and/or by 30 June 2015, then prima facie, community does not want Club. May be they just want somewhere to meet along lines of point 6 above.
8.Point 7 needs to be communicated to Itaco and Club members. That is, funds otherwise set aside for new Club which are in excess of requirements described at point 7, Itaco may receive most and maybe all of circa $1.4m contributed. Itaco members can then choose their money back or support a larger Club house. In reality, putting them back to original intend of fund raising in 1997.
At about the same time as Mr Cardone’s email Mr Ciuffetelli sent out a notice of the Club AGM planned for 16 December 2014. This was accompanied by a letter in which he emphasised the financial difficulties facing the Club in its current premises. He advised that he was willing to continue as President until 30 June 2015, and sought “capable and effective leaders” to come forward to assist the Club in the future.
On 8 December 2014 Messrs Cardone and Capezio attended the ACTPLA offices to pay the sum required for the deconcessionalisation of the Club lease. They were then advised that there were extension of time charges owing in respect of the CIAO Crown Lease since 2004. The amount required to meet the conditions of the deconcessionalisation approval in respect of that lease was far higher than had been anticipated. In his email to Messrs Ciuffetelli and Damiano reporting that development Mr Cardone noted that the “decon pay out of CIAO” was “out of the question” at that stage.
The Club AGM was held on 23 December 2014 (after again being adjourned due a lack of quorum). The directors present were Messrs Ciuffetelli and Damiano. (The ASIC records indicate that Mr Andriolo ceased to be a director on 22 December 2014, and that M D Giorgio commenced as a director on that date.) The minutes of the meeting record Mr Ciuffetelli’s lengthy report as to the Club’s finances. In the course of that:
CC noted that without the support of the members the Club would be unable to continue. CC also noted that the time was approaching to change the Club’s format and clearly advised that changes would have to be made in Calendar 2015.
The minutes also record comments made by the Club’s auditor, Mr R DiBartolo:
Finally, RDB confirmed to members that the repositioning strategy embarked upon by the Club Bord was the only viable action to protect the interests of members and the community given the declining financial position of the Club over the last 10 years. RDB supported the Deed of Put and Call approach taken by the Club to secure its future and RDB commended the Club Board on achieving the deconcessionalisation milestone whilst continuing to trade in a compliant manner albeit in the face of significant challenges in terms of declining revenues and increasing operational costs.
There were no new nominations for board membership. Curiously, the minutes record the reappointment of Mr Andriolo, together with Messrs Ciuffetelli and Damiano.
The minutes conclude with the following:
General discussion was held on the future of the club. CC noted that it was clear that the members no longer wanted the Club in its current form and confirmed this view by not supporting it. Therefore, this was a tacit signal that the Club format would change in the coming months and there were a number of possibilities over the longer term including a smaller club on the CIAO land next door. He stressed that constructive consultation must commence immediately with the CIAO committee to establish a long term future of an Italian precinct in Canberra at the corner of National Circuit and Franklin Street Forrest.
Lastly, CC made it very clear that if and when the club was unable to sustain itself in a way that underpinned its solvency then the Club would cease to operate.
After the payment of the deconcessionalisation amount, and stamp duty (based on the site value of $545,000) the old Crown Lease was surrendered and a new one issued. It was a market value lease. The purposes clause specified that the premises could only be used as a club. In that context Financing exercised its call option. On 30 March 2015 a contract of sale was exchanged between Financing and the Club. The purchase price was stated to be $643,026. Pursuant to special condition 44 of the contract Financing was required to provide the Club with a sublease of the premises in accordance with that forming part of the contract. Under that sublease the Club was entitled to possession of the premises for a period of 10 years from 1 April 2015 at a rental of $1 per year.
However, clause 38 of the sublease provided as follows:
38. RELOCATION AND REDEVELOPMENT
(1)The Landlord agrees that it will build or arrange to be built at no cost to the Tenant a New Premises for the purposes of running a licenced club (“The New Premises”). The New Premises will have the following characteristics:
(a) have a total GFA of not less than 1500m2;
(b) have a foot print of not less than 750m2;
(c)provide carparking required to the reasonable satisfaction of the Tenant and relevant Authorities; and
(d)be fit for the purpose of holding a licenced Club.
(2)The Tenant acknowledges and the Landlord agrees that the New Premises does not have to be constructed on the Land and could be constructed on an adjacent site or any other place within the near vicinity;
(a)mutually agreeable between the parties; and
(b)on the condition that the Tenant will be given good title or rights of occupation to enable it to operate into the New Premises into the future.
The different circumstances and roles in which a director may act, as the authorities above demonstrate, indicate that the relevant analysis is context-specific. That is also reflected in the following observations of Hayne and Crennan JJ in Howard:
[60]… it is necessary to recognise, and give due weight to the fact, that different minds may reach different conclusions as to presence or absence of a real possibility of conflict between duty and interest or duty and duty. That is, the doctrine cannot 'be inexorably applied and without regard to the particular circumstances of the situation' [Phelan v Middle States Oil Corporation (1955) 220 F (2d) 593 at 602 per Judge Learned Hand, cited by Mason J in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 104 and the majority in Pilmer v Duke Group Ltd (In liq) (2001) 207 CLR 165 at 199 [79]].
[61]It follows that the working out of the application of the rule to company directors is not achieved by the bare repetition of its terms. Much closer attention must be given to the duties, interests and alleged manner of conflict than is given by simply observing that directors owe fiduciary duties. It is necessary to identify the duties or interests which are said to conflict or present a real possibility of conflict.
The principles summarised in Hylepin are of particular importance here. The relationship between the Club and Financing was, in many ways, quite unusual. It was quite removed from the ordinary commercial relationship between two corporations. The Club was, as its objects indicate, in reality an association of persons who, initially at least, had a particular connection with Italy and its culture. In practical terms the operation of the Club was directed at providing a clubhouse where members could socialise and where the other objects set out in clause 2.1 of the Constitution could be pursued. The financial assistance provided by the core of Club supporters over the years went far beyond what might have been expected if the Club was a purely commercial entity.
Similarly, the financial support from Financing (including the forgiveness of debts) was plainly not the conduct which would be expected of an ordinary commercial enterprise. Indeed, Financing only existed as a vehicle designed to keep the Club afloat because it had become clear that the Club would not be able to obtain loan moneys from ordinary commercial enterprises.
The essentially uncommercial nature of the relationship between the Club and Financing explains the somewhat vague and uncertain terms of the proposed redevelopment plan underlying the options deed proposal. It is, for example, very difficult to see that two commercial entities would proceed to enter a significant contractual relationship on the basis of clause 38 of the sublease. It is apparent that those behind the options deed proposal, on both sides, assumed that all involved would act in a way to advance the object of keeping the Club going in one form or another. I do not accept the suggestion by the plaintiffs that those behind Financing had in mind in or prior to 2013 a plan to take advantage of the Club for their own benefit.
It seems to me that in the circumstances in which both the Club and Financing found themselves by 2013 led to a situation where, of necessity, the options deed proposal, with all of its uncertainties, was probably the only means of salvaging the Club. In that sense there was an identity of interests between the two corporations.
Against that background, I conclude that while there was a potential for a conflict of duty and interest arising from Mr Andriolo’s office as a director of the Club that potential was, in the circumstances of his vote on 29 August 2013, so remote that the fiduciary proscription against him acting in a position of conflicting duty and interest did not arise.
That is not to say that the duty would not have been engaged in the future dealings between the Club and Financing, particularly once the relationship between those parties started to deteriorate. However, the claim before the Court focusses upon the 29 August 2013 vote, and it is the circumstances relevant to that time which must be considered, without taking into account the events which subsequently unfolded. Those events, in my view, were simply not foreseeable in August 2013.
I accept the argument of the defendants that it was probable that Mr Andriolo saw it being in the interests of the Club to enter into the options deed proposal having regard to the potential benefits contained in clause 38 of the sublease. I have found that it is likely that Mr Andriolo was aware of some indeterminate possibility of some personal benefit through his shareholding in Financing. However, I reject the submission that this latter potential was the motivating consideration for Mr Andriolo in his support of the option deeds proposal. Such a conclusion in my view is completely at odds with his conduct over many years in personally and financially supporting the Club. It is far more likely, having regard to the circumstances in which the “Renaissance” plan came into being that Mr Andriolo saw the entry into the options deed as the only realistic means of salvaging the Club.
My conclusions in the above paragraph also answer the question of the substantial purpose of the vote in favour of the proposal. Having regard to the surrounding circumstances leading up to the vote on 29 August 2013 I am of the firm view, contrary to the submission of the plaintiffs, that the substantial or primary purpose of Mr Andriolo’s support of the proposal was the continued operation of the Club. In objective terms, in all of the circumstances, the decision to provide that support through the options deed proposal was entirely reasonable at that time.
Conclusion in relation to s 181
I conclude that in voting in favour of the execution of the options deed Mr Andriolo did not breach the duties he owed to the Club under s 181 CA.
Contravention of s 182 of the CA
Section 182(1) provides:
Use of position—directors, other officers and employees
(1)A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a)gain an advantage for themselves or someone else; or
(b)cause detriment to the corporation.
Note: This subsection is a civil penalty provision (see section 1317E).
The applicable principles were, again, usefully summarised by Elliott J in United Petroleum at [644] to [646] (citations omitted):
Section 182 requires a director not to have a proscribed purpose: to gain an advantage or to cause a detriment. It is not necessary that an advantage has in fact been gained by the director or other person or that detriment has in fact been caused to the corporation. Further, in ascertaining whether a director had 1 or other of the proscribed purposes in mind when she or he made use of her or his position, it is relevant to consider the particular duties and responsibilities of the director and her or his appreciation of the circumstances at the relevant time.
The test is whether the conduct would breach the standards of conduct that would be expected of a person in the director’s position by a reasonable person with knowledge of the duties, powers and authority of her or his position as director, and of the circumstances of the case, including the commercial context. A director’s appreciation of the relevant circumstances might be relevant to analysis of the propriety of the use the director made of her or his position in acting as she or he did.
In this court, it has been held that impropriety requires “behaviour [that] breached the norm of conduct thought necessary for the proper conduct of commercial life so that people will have confidence that the running of the marketplace is in safe hands”.
The plaintiffs also refer to the proposition stated by Santow J in ASIC v Adler [2002] NSWSC 171; 41 ACSR 72 at [458] that:
Where a director acts in relation to a transaction in which he or a party to whom the director owes a fiduciary duty stands to gain a benefit without making adequate disclosure of his interest, that director acts “improperly” within the meaning of s182(1)…
The plaintiffs’ submissions
The plaintiffs’ submission in relation to the alleged contravention of s 182 were essentially rolled up with the submissions in relation to s 181. In particular the plaintiffs argued that Mr Andriolo’s vote resulted in him receiving an “unreasonable benefit” which was enough to establish a breach of paragraph 182(1)(a).
Conclusion as to s 182
For the reasons given above in relation to ss 180 and 181 I am not persuaded that Mr Andriolo contravened the section. In particular I do not see his vote as having been made improperly. Nor do I accept that he voted the way he did to obtain an advantage for himself. Moreover, it seems to me that a reasonable person in Mr Andriolo’s position would, in all of the circumstances, have voted in favour of the execution of the options deed.
The vote at the 29 August 2013 meeting was taken at a time when the directors (including Mr Andriolo) must have known that there was shortly to be a general meeting of the Club at which their interests in Financing would be disclosed and, if the proposed motion number 3 was carried, formally noted by a resolution of the members. In Mr Andriolo’s case, the general meeting was specifically informed of his interest in Financing. The statement by Mr Ciuffetelli to the general meeting about the resolution catering for a board members abstention from voting after declaring material interests appears to be a reference to motion 2. In any event, it is apparent (as discussed below in relation to causation) that Messrs Ciuffetelli and Damiano proceeded to execute the options deed pursuant to the resolutions at the general meeting. I infer that Mr Andriolo’s absence from the process reflected his consciousness of the need to distance himself having regard to his interest in Financing.
It follows that Mr Andriolo’s disclosure at the general meeting, and the resolutions passed at that meeting, were sufficient to bring the circumstances under s 191(2)(a)(iii) CA. That subparagraph provides:
(1)A director of a company who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest unless subsection (2) says otherwise.
…
(2)The director does not need to give notice of an interest under subsection (1) if:
(a) the interest:
…
(iii) relates to a contract the company is proposing to enter into that is subject to approval by the members and will not impose any obligation on the company if it is not approved by the members.
Causation
I will address this issue in case I am wrong in concluding that Mr Andriolo did not contravene any of ss 180-182 CA.
The plaintiffs’ submissions
The plaintiffs argued that the options deed was executed by Messrs Ciuffetelli and Damiano on 13 September 2013 on behalf of the Club as the result of the unanimous vote of the directors on 29 August 2013. It was said that Mr Andriolo’s vote was an “essential integer” in the chain of causation. I understand that to equate to the submission that but for his vote the deed would not have been executed.
The plaintiffs contended that it was immaterial that there might have been other causes, such as the general meeting on 10 September 2013. In relation to that meeting the plaintiffs argued that there are problems with the fourth resolution to the effect that the board should execute the options deed. Specific notice of a motion to that effect was not included in the general meeting notice. Nor was it referred to on the proxy forms. It was also significant that the minutes (referring to those at Ex “11”) made no reference at all to the fact that the directors had already resolved on 29 August 2013 to execute the deed.
In response to the proposition advanced by the defendants that the 29 August 2013 resolution was a nullity, having regard to the lack of a quorum at the board meeting, the plaintiffs relied on s 125(1) CA as having cured any defect in that meeting. That section provides:
If a company has a constitution, it may contain an express restriction on, or a prohibition of, the company’s exercise of any of its powers. The exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company’s constitution.
Reference was also made to the minutes of the directors meeting on 26 September 2013 (see [92] above).
Counsel for the plaintiffs submitted that the Court should take that minute to record the directors’ understanding of the authority on which they were acting on 13 September 2013. (The plaintiffs written submissions also noted a further reference to the execution of the deed in the Club GM minutes of 7 May 2015. On that occasion the minute records that the deed was executed “consistent with the agreement of members” at the 10 September 2013 meeting. No submission was made as to what, if anything, should be made of this record.)
The defendants’ submissions
The defendants pointed to clauses 27 and 34.6 of the Club Constitution as requiring a quorum of at least five directors for a valid meeting. Those provisions were still in force on 29 August 2013. Reference was also made to clause 37.4 which prohibited a director from voting if there was a conflict. In such circumstances that director’s vote was not to be counted. It was suggested that that provision excluded Mr Andriolo’s vote. (Although the second and third defendants argued that on close analysis clause 37.4 did not apply because the other directors must have been aware of his interest in Financing.)
As a result of these defects the resolution on 29 August 2013 was ineffective to authorise Messrs Ciuffetelli and Damiano to execute the options deed. The defendants relied on Anglo Australian Resources NL v Bloom Financial Advice Pty Ltd (No 2) [2019] WASC 480 at [28] and McCarthy v Wheeler & Wongan Hotels Pty Ltd [1998] VSC 67 at [35] in that regard.
The event which the defendants rely on as the cause of the execution of the deed was the decision of the SGM on 10 September 2013. In that regard the defendants rely on the minutes contained in Ex “11” rather than those in Ex “1”.
In response to the reliance on s 125 the defendants say that provision operates to protect third parties dealing with a company. It does not operate to remedy defects arising from failure to comply with the Constitution in relation to actions and decisions of directors within the company.
In relation to the 26 September 2013 minute, that should be read as merely recording Mr Ciuffetelli’s report to the board meeting at that time. It was not a formal position adopted by the board.
The Minutes of the SGM on 10 September 2013
Before dealing with the contending submissions of the parties on the issue of causation it is necessary to explain why I have accepted the minutes at Ex “11” as representing the more reliable record of what occurred at the meeting than the minutes contained in Ex “1”.
The provenance of the version of the minutes in Ex “1” was the subject of a statement of agreed facts which itself became Ex “14”. The agreed facts were as follows:
1. Mr Cardone attended the 10 September 2013 meeting.
2. He did not receive a copy of any minutes from the Club at or after the meeting.
3.The minutes he produced in his exhibit (at Ex 1, p 1321) were produced by the second plaintiff (before it was placed into liquidation) in the Magistrates Court proceeding in around 2017.
4.The version of the September 2013 minutes in the documents produced in the Magistrates Court proceeding was an attachment to the meeting minutes of 19 December 2013 (p 1451 of Exhibit 1).
On the other hand the documents which became Ex “11” came to light during the course of the hearing. Due to a question from the bench about the PowerPoint pages referred to in the Ex “1” minutes, Mr Senatore, on the evening of the second day of hearing, conducted a further search of the Club records in an attempt to find those pages. As the result of that search he located an electronic copy of the minutes which he had not seen before. It was those documents which the plaintiffs tendered on the third day of the hearing and which have become Ex “11”.
The Ex “11” documents consist of five pages of minutes, a copy of the undated notice of meeting (for 3 September 2013), what appears to be a covering letter for that notice dated 9 August 2013, a blank two page proxy form, 12 PowerPoint pages, a sheet headed “Information about Concessional Leases” and six completed and signed proxy forms (each of two pages).
The minutes in Ex “1” consist only of five pages of minutes. Those five pages do not contain a record of events at the meeting which are in the Ex “11” version, nor, curiously, does it contain a reference to the fourth resolution.
I am satisfied having regard to the full contents of Ex “11” that it is the correct and complete record of what occurred at the meeting. I have read the minutes of the 19 December 2013 AGM where the minutes of the 10 September 2013 SGM were adopted. It is not apparent from that document why the full minutes were not presented to that meeting (if indeed that was the case). No submission has been made to explain why an abbreviated record might have been produced to that AGM, or included in the documents produced in the hearing before Magistrate Fryar. I am not able to draw any inferences to provide such an explanation.
Consideration - causation
In addressing the issue of causation it is necessary in my view to analyse the sequence of events leading to the execution of the options deed from a common sense perspective having regards to the factual realities rather than legal technicalities.
In that context it is important to note that the options deed was the culmination of a lengthy process during 2012 and 2013 largely driven by Messrs Cardone, Ciuffetelli and Capezio. Once the 11 July 2013 legal advice from Mr King was obtained by Mr Ciuffetelli it is apparent that the latter was determined to proceed with the options deed proposal. He consulted with Mr King about the notice for a SGM in early August. The purpose of that meeting was to implement the changes to the Constitution recommended by Mr King, and to ensure that there was a disclosure to the membership of the directors’ interests in Financing.
There is an issue as to whether Mr Andriolo was overseas from 14 July to 8 August 2013. That was Ms Maguire’s memory. She believed that her recollection was corroborated by the travel records. Mr Andriolo’s counsel has referred me to the page for 14 July 2013 from Mr Andriolo’s diary. The entry reads: “Depart Canberra Airport 16.15 ? Qantas to Italy”.
I was also referred to a page from Mr Andriolo’s passport (Ex “1” p 219). So far as I can make it out there is a visa stamp dated 5 August 2013 and a Singapore immigration stamp dated 7 August 2013.
In the light of those documents I find that Mr Andriolo was overseas during the dates as recalled by Ms Maguire. It follows that the Club board minute of 25 July 2013 (see [73] above) was incorrect in recording Mr Andriolo’s presence at that meeting. I note that Mr Ciuffetelli is recorded as saying that the board should make a decision at its next meeting in relation to the options deed proposal (the reference to “Aug 2014” should clearly be to “Aug 2013”. This is somewhat curious having regard to the contents of the 11 July 2013 advice, which was also referred to in the minute.
Be that as it may, it is clear that by early August Mr Ciuffetelli proposed to proceed with the SGM as recommended by Mr King. Indeed, it is apparent from his covering letter of 9 August 2013 that he proposed discussing the options deed proposal in some detail at the SGM. Indeed, shortly after that date, on 12 August 2013 Mr Ciuffetelli provided a letter of authority to Mr Capezio in relation to the retainer of ACT Planners to assist with the deconcessionalisation process of 78 Franklin Street. (On 26 August 2013 Mr Ciuffetelli again wrote to Mr Capezio extending the authority to the deconcessionalisation of 80 Franklin Street.)
While it is true that the 29 August 2013 resolution by the directors was, as a matter of strict legal technicality, ineffective as an exercise of the directors’ power I do not accept that in assessing the practical causation of the execution of the options deed it should be regarded as causally irrelevant. As a matter of common sense, if there had been no other meeting or decision, the decision of the directors at that meeting would have been the direct cause of the execution of the deed. I do not see s 125 as material to that conclusion.
However, crucially, there was another meeting. I infer from the circumstances that the SGM called for 3 September, but held on 10 September 2013, was called for the purpose of complying with the advice of Mr King in his 11 July 2013 letter. It is clear that Mr Andriolo’s shareholding in Financing was disclosed at that meeting. It is also clear that Mr Ciuffetelli addressed those present as to the broad details of the options deed proposal, and that those present at the meeting were unanimously in favour of it.
I accept that there were defects in the notice of the meeting, and in the specific options given in the proxy forms. Both the notice and the forms should have referred to the motion for the execution of the options deed. However, I do not see those defects as undermining the importance of the general meeting in the sequence of events leading to the execution of the deed. In practical terms the direct cause of the execution was the resolution of the SGM that the directors should proceed to execute the deed. But for that resolution, in my view, Messrs Ciuffetelli and Damiano would not have proceeded to sign the options deed as they did on 13 September 2013.
I am not able to reach the same conclusion in relation to Mr Andriolo’s vote at the 29 August board meeting. Firstly, it seems to me that the younger generation of those financially supporting the club (Messrs Ciuffetelli, Cardone, Capezio and Damiano were all born in Canberra in the 1960s) were strongly in favour of proceeding with the options proposal. They had been involved in the development of the proposal over the preceding several years. Indeed, Messrs Ciuffetelli and Cardone were crucial in the proposal becoming a real option for the Club. I infer from the conduct and communications of these younger men that they were astute in business and property affairs. It is probable, therefore, that even if Mr Andriolo had not voted, or even voted against the proposal, at the 29 August 2013 board meeting the motion to execute the deed would still have passed. Secondly, having regard to the severe financial difficulties which still faced the Club, and the intent and determination of Messrs Ciuffetelli, Cardone, Capezio and Damiano, I find that it is probable that the general meeting would have proceeded to pass the motions placed before it on 10 September 2013, including motion 4, even if Mr Andriolo had opposed that course.
While it would have been preferable for the 29 August 2013 board decision to have been formally notified to the members at the SGM I do not see the lack of that disclosure as being causally relevant. It must have been plain to members that the directors (or a majority of them) supported the options deed proposal. In that context the notification of the board decision was something of a formality.
The minute of the board meeting on 26 September 2013 does not alter my analysis of causation. It represents, at best, Mr Ciuffetelli’s view, at that time, of the authority pursuant to which the options deed had been executed.
I reject the proposition relied on by the plaintiffs that Mr Andriolo’s vote at the 29 August 2013 meeting caused the Club to enter into the options deed.
Breach of Fiduciary Duties by Mr Andriolo
These duties are as pleaded by the plaintiffs in paragraph 23 of their Statement of Claim (see [143] above). As the plaintiffs point out, these duties apply in addition to those imposed by ss 180-182 (see s 185.) However, the content of the duties is “practically indistinguishable” from the duties imposed by, relevantly here, ss 181 and 182 CA; see per Meagher JA (Beazley P and Emmett JA agreeing) in Gerace v Auzhair Supplies Pty Ltd (in liq) [2014] NSWCA 181; 87 NSWLR 435 at [79].
My conclusions in relation to the alleged breaches of statutory duties apply equally to the alleged breaches of fiduciary duties.
Involvement of Mr Cardone and/or Financing in Mr Andriolo’s contravention of ss 180, 181 or 182 CA
As I have concluded that there was no such contravention this issue does not arise for determination.
Liability of Mr Cardone and/or Financing under either limb of Barnes v Addy
Similarly to the involvement issue under the CA, these causes of action both turn on a finding that Mr Andriolo had acted in breach of his fiduciary duties to the Club. Indeed, liability under the second limb would require a conclusion that in breaching his duties Mr Andriolo had engaged in a “fraudulent and dishonest design”. I have found that Mr Andriolo did not act in breach of his fiduciary obligations at all. It follows that no claim can arise against the second and third defendants under either limb of Barnes and Addy (1874) LR 9 CH App 244.
Relief available against each defendant
This question does not arise in the light of my findings.
Limitation Defence
It is not necessary for me to address this defence.
Conclusion
As a result of my conclusion that Mr Andriolo did not contravene his statutory duties, or act in breach of his fiduciary duties to the Club, the claim for relief against him must fail. It also follows from that conclusion that the claims for relief against Mr Cardone and Financing must fail.
Orders
The orders of the Court are:
(1) Judgement for the defendants.
(2) The plaintiffs pay the defendants costs as agreed or, in default of agreement, assessed.
(3) Should any party wish to seek a different costs order that party should, within 7 days of the date of this judgment, give written notice to the Registrar whereupon:
(a) Order 2 hereof shall be suspended; and,
(b) The matter will be relisted for submissions on costs.
| I certify that the preceding two hundred and ninety-eight [298] numbered paragraphs are a true copy of the Reasons for Judgment of his Honour Acting Justice Crowe Associate: Date: |
Annexure A
12.In answer to paragraph 12 of the Statement of Claim, Cardone and Italo Financing do not admit the paragraph, and say that:
a.prior to 1997, the Company had been trading at a substantial loss, and had continued to do so from that time up to and including 2012 at an average of about $250,000 per year;
b.in 1997, the Commonwealth Bank withdrew funding support for the Company and required repayment of its $1.3 million loan to the Company;
c.at about that time, Itaco Ltd (Itaco) was formed by the members of the Company to raise money to pay out the Commonwealth Bank, and thus enable the Company to continue in existence;
d.the money contributed by Itaco was made as a loan to the Company secured by a mortgage over the Land, even though the Land was worth substantially less than the amount of that loan;
e.by January 2010, the loan from Itaco had increased to approximately $1.6 million with interest, but that at that time the Company required a further injection of funds of approximately $2 million, for purposes including to pay out the loan of its then current lender, St George Bank, which itself had withdrawn financial support for the Company, and tax debts;
f.in July 2011, the Gaming Machine Act 2004 (ACT) was amended to require all licensees to lodge audited accounts, and that unless those accounts showed that the licensee was solvent the licensee would stand to lose its gaming machine licences;
g.by 8 August 2011, Italo Financing, as trustee for a convertible notes trust deed under which Itaco shareholders had contributed funds (including Andriolo as to $200,000 and Cardone $10,000), lent the Company about $2 million to pay out the St George loan and meet certain tax liabilities;
h.even after this $2 million injection, since it was recorded as a loan by the Company, the audited accounts for the Company for:
(A) the year ended 30 June 2011 still showed that it had liabilities greater than its assets of over 1.8million;
(B) the year ended 30 June 2012 still showed that it had liabilities great than its assets of over $288,000; and
(C) in each case that the Company was not solvent;
i.in April 2012, the ACT Gaming and Gracing Commission (the GRC) commenced proceedings in the ACT Civil and Administrative Tribunal (ACAT) to remove the Company’s entitlement to its gaming licences by reason of its insolvency as at 30 June 2011;
j.at that time, the only material asset of the Company other than the Land was its gaming machine licences, although at that time those licences could not be traded;
k.also at that time, Cardone understood, and it was the fact, that it was no longer possible for the Company to continue to run at a loss, and for the Company to continue to ask the members of the Company, through Itaco and Italo Financing, to continue to prop up the Company by new injections of funds to cover its chronic trading losses, and he so informed the directors of the Company;
l.in August 2012, in order to enable the Company’s auditor to express an opinion that the Company was solvent as at 30 June 2012, so that the ACAT proceedings could be resolved and the Company could maintain its gaming machine licences, an agreement was reached between the Company, Itaco and Italo Financing under which:
(A) Itaco forgave the debt owing to it by the Company arising from the $1.3 million lent to it in 1997 to pay out the Commonwealth Bank loan);
(B) Italo Financing made a gift of $300,000 to the Company, funded by capital contributions to Italo Financing by members of the Company, who were issued Class A shares in Italo Financing in return for their contributions;
m.as a result of the financial support provided to the Company by Italo Financing and Itaco under that agreement, the ACAT proceedings were able to be resolved and the GRC allowed the Company to keep its gaming machine licences;
n.in late 2012, despite that agreement having been reached and carried out, the auditor of the Company expressed the opinion that the Company’s accounts showed that it could not operate as a going concern as at 30 June 2012;
o.in about November 2012, in order to enable the Company’s auditor to express an opinion that the Company was solvent as at 30 June 2012, so as to prevent GRC commencing further ACAT proceedings on that basis to remove the Company’s gaming machine licences, a further agreement was reached between the Company, Itaco and Italo Financing under which:
i.the $2 million debt from the Company to Italo Financing arising from the injection of funds in August 2011 was forgiven;
ii.the Itaco shareholders who had contributed those funds as convertible notes were issued redeemable preference shares in Italo Financing instead;
p.at about the same time as this agreement was reached, the Company formed a “Project Control Group” of which Cardone was a member, in order to find a solution to the chronic and substantial losses being incurred by the Company for many years, in recognition of the fact that the ongoing operation of the Company in its then current configuration was no longer sustainable, but that a long term solution may be able to be found by the realisation of the Company’s “stranded assets”, being its gaming machine licences and the Land;
q.the building next door to the Land was owned by a separate Italian community organisation called the Council of Italo Australian Organisations (CIAO) (being Block 12 of Section 19 of the Division of Forrest (the CIAO Land)), under the Constitution of which at that time, four members of the CIAO Board of seven had to be members of the Company, such that the Company in effect controlled CIAO;
r.by no later than July 2013, a non-binding arrangement or understanding was reached between the Company, Italo Financing and CIAO (the 2013 Arrangement) on terms which included that:
i.the Company and CIAO would combine their premises into a single club house and cultural centre on the CIAO Land;
ii.this project would be funded by the Company entering into an arrangement with Italo Financing, whereby Italo Financing would pay for the deconcessionalisation of the Land, and, once it was deconcessionalised, Italo Financing would be assigned the Land, which it could then sell so as to unlock its “stranded” value;
iii.Italo Financing would build the new club house and cultural centre on the CIAO Land with the net proceeds from the sale of the Land;
s.Cardone and Italo Financing understood that the purpose of the 2013 Arrangement was that, once the Company and CIAO were combined and housed in a new and smaller premises, the operations of bother organisations would be structured so as to enable the Company to operate on a profitable or at least breakeven basis, so that the Company would not have to continue to rely on the financial support from its members to remain in existence;
t.Cardone and Italo Financing understood that the Company’s entry into of the 2013 Arrangement was in genuine and proper pursuit of the Company’s Objects;
u.Cardone and Italo Financing understood that, in order to achieve the purposes behind the 2013 Arrangement, and the Company’s Objects, the Company needed to keep all of its gaming machine licences, as that was a critical source of income;
v.the first defendant (Andriolo) was not involved in any of the discussions between the Company and Italo Financing under which the 2013 Arrangement was entered into, those discussions occurring between Cardone for Italo Financing and Messrs Ciuffetelli, Damiano and Capezio for the Company;
w.while the discussions relating to the 2013 Arrangement were occurring, Italo Financing continued to contribute money to the Company to enable it to meet liabilities that the Company was unable to pay itself, including:
i.about $94,000 in tax in November 2012;
ii.about $8,200 in tax in January 2013;
iii.$30,000 in working capital in June 2013;
iv.$40,000 in working capital in July 2013;
v.About $101,000 in tax in August 2013, after the Company received a creditor’s statutory demand from the Australian Taxation Office to pay that sum;
vi.About $26,000 in September 2013 to pay the entitlements of a former staff member of the Company;
x.the 2013 Arrangement was explained to the members of the Company at a general meeting of members on 23 April 2013;
y.the draft Deed of Put and Call Option was provided by Italo Financing to the Company in June 2013:
i.at which time Cardone advised Mr Ciuffetelli that the Company should obtain independent legal advice on it;
ii.Mr Ciuffetelli later told Cardone at the time that that advice had been obtained by the Company;
iii.That advice was in fact obtained (being the advice from Legitimate Solutions Legal dated 11 July 2013);
z.the Deed of Put and Call Option was explained to the members of the Company at a general meeting of members on 25 July 2013;
aa.on 29 August 2013, the directors of the Company comprising Messrs Andriolo, Damiano and Ciuffetelli held a meeting at which:
i.it was noted that Mr Ciuffetelli had transferred $11,000 of his own money into the Company’s account to enable the Company to meet its BAS liability for March and June 2013;
ii.it was resolved that:
Subsequent to detailed discussions and subsequent to legal advice to the Board UNANIMOUSLY resolved to execute the Deed of Put and Call Option (DOC) issued by Italo Financing Pty Ltd. [Mr Ciuffetelli] advised that it was the only viable option for the Club to continue in a sustainable form moving forward. [Mr Ciuffetelli] was authorised to execute all relevant documentation on behalf of the Club.
bb.after the Deed of Put and Call Option was entered into,Cardone [sic] discovered that CIAO was in arrears for land rent and that no compliance certificate had been issued in respect of its current building on the CIAO Land which was still subject to a concessional lease ; [sic]
cc.the 2013 Arrangement was then extended in that Italo Financing agreed with the Company and CIAO that it would also pay for the deconcessionalisation of the CIAO Land, and the arrears in land rent, so as to enable the new premises to be built on the CIAO Land with the net proceeds from the sale of the Land;
dd.the 2013 Arrangement was reflected in the terms of the Deed of Put and Call Option and in a Memorandum of Understanding between the Company, CIAO and Italo Financing dated 11 July 2014 (the 2014 MoU);
ee.at all times they understood, and it was the fact, that the Company’s purposes in entering into the 2013 Arrangement and the Deed of Put and Call Option were consistent with the Company’s Objects referred to in paragraph 2b above, and was the only avenue available to the Company at the time by which the Company’s Objects could hope to be achieved at that time and in the future;
ff.when Cardone attended a meeting at ACTPLA in December 2014 for the purposes of deconcessionalising the Land and the CIAO Land in accordance with the Deed of Put and Call Option and the 2014 MoU, he was informed that the CIAO Land could not be deconcessionalised until certain penalties were paid, and certain works were completed by CIAO so as to enable a certificate of compliance to be issued, preventing Italo Financing from deconcessionalising the CIAO Land at that time;
gg.after the Land was deconcessionalised, in March 2015 Italo Financing exercised its option under the Deed of Put and Call Option and acquired the Land;
hh.at a special general meeting of the members of the Company on 7 May 2015, 25 of the 27 members present voted in favour of relocating the club’s premises to the CIAO Land;
ii.on the basis of that resolution, Italo Financing proceeded to sell the Land with vacant possession under a contract of sale dated 28 August 2015;
jj.despite the Company having effective control over CIAO, at no stage did CIAO:
i.take the steps required to enable Italo Financing to deconcessionalise the CIAO Land;
ii.agree to Italo Financing building a new club on the CIAO Land,
having the effect of frustrating the intentions and hopes of Italo Financing in entering into the 2013 Arrangement, the Deed of Put and Call Option and the 2014 MoU, and preventing the successful pursuit of the Company’s Objects.
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