Supercar International Holdings Ltd v Sommers - [2011] NSWSC 336

Supreme Court

New South Wales

Medium Neutral Citation: Supercar International Holdings Limited v Sommers; Tinkler Group Holdings Pty Limited v Sommers [2011] NSWSC 336
Hearing dates: 22-25 June 2010
Decision date: 27 April 2011
Jurisdiction: Equity Division
Before: White J
Decision:
Stand the proceedings over to a convenient date for the purpose of making final orders and to hear argument on costs.

Catchwords:
CORPORATIONS - share purchase agreement - whether director and company entered into agreement for purchase of director's shares in subsidiary companies of which he was sole director - whether share purchase agreement binding - plaintiffs failed to establish basis on which share purchase agreement impugned - share purchase agreement binding on company

CORPORATIONS - contract for service between director and company - whether contract for service binding - where director signed contract for himself and company - terms of contract not considered or approved by directors of company - number of terms of contract contrary to interests of company - directors had agreed to pay director a salary but had not agreed to engage director as a consultant to be paid a fee for services - contract of services not binding on company - director entitled to remuneration paid by company in accordance with company's constitution

CORPORATIONS - contract for service between sole director of company and company - whether contract for service binding - where sole director signed contract for himself and company - clear conflict between as a director and duty to company in entering into contract - number of terms of contract contrary to interests of company and could not be justified as reasonable accommodation of both parties - director breached duties as director of company in entering into contract for service - contract not binding on company - contract avoided by service of statement of claim - director entitled to remuneration as resolved by company in accordance with s 202A of the Corporations Act 2001 (Cth)

CORPORATIONS - raising capital - whether director engaged in misleading and deceptive conduct that induced investment in company - where some representations made in offer document and warranties contained in subscription deed - falsity of numerous representations not established by the plaintiff - misleading and deceptive conduct established in one of the respects alleged -- no evidence of reliance on representations - claim that plaintiff induced to invest in company by misrepresentation or misleading and deceptive conduct rejected - claim for damages under s 68 of the Fair Trading Act 1987 and s 729 of the Corporations Act 2001 (Cth) rejected

CONTRACTS - subscription deed - whether director breached warranties in subscription deed - most breaches of warranties not established - where breach of warranty established not demonstrated that any loss suffered as a result of that breach - entitled to nominal damages for breach of warranty

CORPORATIONS - misappropriation of company funds director entitled to receive money as payment of debts owed to him - directors must have expected that he would cause company to pay money he was owed - not liable to make restitution of money received as money reduced debt owed to him
CORPORATIONS - oppression - numerous instances of oppression by directors of companies - remedies - whether discretion to order compulsory purchase of shares or to order winding up should be exercised - order to wind up solvent company only as a last resort -not possible to say whether company solvent -no evidence as to value of shares and valuation of shares would be fraught with difficulty, expense and delay - where both parties acted oppressively to each other - appropriate remedy is that company be wound up
Legislation Cited: Fair Trading Act 1987
Corporations Act 2001 (Cth)
Civil Procedure Act 2005
Cases Cited: Re George Newman & Co [1895] 1 Ch 674
Category: Principal judgment
Parties: Supercar International Holdings Limited (Plaintiff 2009/290294)
Tinkler Group Holdings Pty Limited (Plaintiff 2009/291674)
Timothy Sommers (Defendant)
Representation: Counsel:
D Allen (Plaintiffs)
D Currie (Defendants)
Solicitors:
Catalyst Legal (Plaintiffs)
Clamenz Corporate Lawyers (Defendants)

File Number(s): 2009/290294; 2009/291674

Judgment

HIS HONOUR : These proceedings were heard together. They concern the affairs of three companies, namely Supercar International Holdings Limited ("SIH"), TSCCF Pty Ltd ("TSCCF"), and The Supercar Club Pty Ltd ("TSC"). Those companies are the plaintiffs in proceedings 2009/290294 ("the Supercar proceedings"). The defendants are Mr Timothy Sommers and his wife Mrs Sue Sommers. Mr Sommers was the founder of each company and at one time, the sole shareholder of each company. He currently holds approximately 49 per cent of the shares in SIH. At all material times he was the sole director of TSCCF and TSC. He was the managing director of SIH up to 18 September 2009.

In the Supercar proceedings the plaintiffs claim that between 7 January 2009 and 25 August 2009 Mr Sommers misappropriated $458,820.60 belonging to SIH. SIH claims that part of the moneys allegedly misappropriated by Mr Sommers were applied in making mortgage repayments on a property owned by Mr and Mrs Sommers in Seaforth and claims that that property is charged with repayment of moneys allegedly taken in breach of Mr Sommers' fiduciary duty. TSCCF claims that Mr or Mrs Sommers, or both, were in possession of a number of motor vehicles and motorcycles belonging to TSCCF which they have refused to deliver up.

There is no dispute that Mr Sommers received most of the payments that SIH impugns. He contends that he was entitled to the moneys by reason of a number of agreements he entered into with the plaintiffs.

Mr Sommers says that an agreement was reached on 22 April 2008 that SIH acquire his shares in TSCCF and TSC that SIH did not already beneficially own for $800,000 and the issue of shares in SIH ("the share purchase agreement"). The cash component was payable by 1 July 2008 but only $300,000 was paid. Mr Sommers says that on 5 December 2008 it was agreed between him and the other directors of SIH that the purchase price would be increased to $900,000. He contends that he was owed $600,000 by SIH as the balance of the purchase price that SIH was liable to pay to him under the share purchase agreement.

Mr Sommers also contends that he entered into service contracts with each of SIH, TSCCF and TSC; the first being dated 22 April 2008 and the others dated 30 June 2008. He claims that under the SIH service agreement, he was entitled to remuneration from SIH of $150,000 plus GST and was also entitled to a payment of $150,000 plus GST upon termination of that contract. He claims that under the service agreement with TSC he was entitled to remuneration of $150,000 plus GST per annum, an annual bonus, and a further payment of $150,000 plus GST on the termination of that agreement. He claims that under the service agreement with TSCCF he was entitled to be paid a fee of $5,000 for each personal guarantee given by him in respect of motor vehicle leases entered into by that company and is entitled to a further sum of $150,000 plus GST on the termination of the service agreement with TSCCF. He sues for moneys he claims are owing under those agreements.

Mr Sommers contends that under his service contracts he was entitled to possession and use of the motor vehicles and claims that they had been returned to TSCCF, or purchased from TSCCF, by the time proceedings were commenced.

SIH, TSCCF and TSC deny the existence of the share purchase agreement relied on by Mr Sommers and deny the existence of the service contracts. They say that documents purporting to record the service contracts (which were signed by Mr Sommers for each of the plaintiffs) are shams. Alternatively, they contend that if the contracts were entered into they were entered into by Mr Sommers in breach of his fiduciary duty to the plaintiffs, are liable to be avoided, and have been avoided. They seek declarations to that effect.

The parties to the second proceeding 2009/291674 ("the Tinkler Group proceedings") are Tinkler Group Holdings Pty Ltd ("Tinkler Group") and Mr Sommers. On 22 December 2008 Tinkler Group acquired a 49 per cent shareholding in SIH for which it paid $2,115,427. Of this sum $652,475 was used to acquire the interests of minority shareholders in SIH. After the acquisition both Tinkler Group and Mr Sommers had, or approximately had, a 49 per cent shareholding. Tinkler Group alleges that it was induced to enter into the transaction as a result of misrepresentations by Mr Sommers. It contends that Mr Sommers represented that SIH was trading at a profit, that the capital sought from Tinkler Group would be used to expand the business of SIH, that the accounts of SIH showed its true financial position, that SIH owned 100 per cent of the shares in TSCCF and TSC (as well as two other companies called Lakeside Management Pty Limited and A1 Jet Club Limited), that SIH owned certain cars, and that Mr Sommers was not involved in any litigation concerning the business of SIH. Tinkler Group also alleges that Mr Sommers failed to disclose that he had agreements with SIH, TSCCF and TSC by which Mr Sommers considered that he was entitled to a combined remuneration of $300,000 per annum and a payment on termination of $150,000 in respect of each company. Tinkler Group alleges that it suffered damage, being the whole of its investment, by reason of Mr Sommers' misrepresentations and non-disclosure and claims damages under s 68 of the Fair Trading Act 1987 and s 729 of the Corporations Act 2001 (Cth).

On 22 December 2008 Tinkler Group, Mr Sommers and SIH entered into a deed called a subscription deed. Tinkler Group alleges that the subscription deed contains warranties given by Mr Sommers, as well as SIH, that SIH was trading at a profit, that the capital raised would be used to expand the business of SIH, that the accounts of SIH showed its true financial position, that SIH owned 100 per cent of the shares in, amongst other companies, TSCCF and TSC, that SIH owned the cars in question, that Mr Sommers was not involved in any litigation concerning the business of SIH, that any agreement binding on SIH was not an agreement with Mr Sommers, and that any agreement binding on SIH was capable of termination without the payment of damages or compensation. Tinkler Group claims damages for breach of warranty.

Tinkler Group also claims that the warranties that any agreement binding on SIH was not with Mr Sommers, and that any agreement binding on SIH was capable of termination without the payment of damages or compensation, create an estoppel by convention precluding Mr Sommers from seeking to enforce a service contract with SIH, or any share purchase agreement with SIH. Tinkler Group also claims that the representations give rise to an estoppel precluding Mr Sommers from asserting that he is owed money by SIH, TSCCF or TSC.

Tinkler Group, Mr Sommers and SIH also entered into an agreement called a shareholders' agreement. Tinkler Group alleges that in breach of a term of the shareholders' agreement, Mr Sommers did nothing to develop the business operated by SIH. It also contends that Mr Sommers breached a term of the shareholders' agreement that he act in good faith by taking money to which he was not entitled and taking possession of motor vehicles and motorcycles, and also by causing SIH to enter into a lease for the occupation of a property at Yarramalong which was a holiday home used exclusively by Mr Sommers. Mr Sommers breached a term of the shareholders' agreement that he act in good faith.

Tinkler Group also contends that from 22 December 2008 Mr Sommers failed to ensure that s 286 of the Corporations Act (which imposes an obligation on companies to keep financial records) was complied with. It alleges that if proper books and records had been kept they would have revealed that SIH was not trading at a profit and that Mr Sommers had been taking money from SIH.

Tinkler Group alleges that Mr Sommers conducted the affairs of SIH in a way that was contrary to the interests of the members of SIH, other than Mr Sommers, and was oppressive, unfairly prejudicial and unfairly discriminatory within the meaning of s 232(d) and (e) of the Corporations Act 2001 (Cth). It seeks relief under s 233 of the Corporations Act by way of an order that SIH be wound up, or alternatively an order that Mr Sommers sell his shares in SIH to Tinkler Group for $1. Alternatively, it seeks an order for the winding-up of SIH on the just and equitable ground. (This ground was not pleaded but was relied on in final submissions without objection.)

Mr Sommers alleges that Tinkler Group breached the shareholders' agreement. By his cross-claim he also joins Mr Nathan Tinkler, Mr Peter Dempsey and Mr Thomas Todd, who were also appointed directors of SIH. He claims that they and Tinkler Group have conducted the affairs of SIH oppressively and in a way that is unfairly discriminatory of him.

Mr Sommers alleges that it was a term of the shareholders' agreement that Tinkler Group make available to SIH $1,000,000 as working capital, of which at least $500,000 was to be provided by 1 July 2009. He alleges that Tinkler Group failed to provide the working capital. He alleges that Mr Tinkler, Tinkler Group and Mr Todd thereby starved SIH of funds, which was oppressive both to SIH and Mr Sommers as shareholder.

The shareholders' agreement contained a term that Mr Sommers and Tinkler Group could nominate two directors, and each had a right to remove a director nominated by him. Mr Dempsey was Mr Sommers' nominee and Mr Todd, Tinkler Group's. Mr Sommers says that the necessary implication was that if one shareholder purportedly removed his or its nominee as a director, the other shareholder was obliged to exercise its rights as shareholder to join in the removal of the nominee. Mr Tinkler called a board meeting for 26 August 2009 to remove Mr Sommers as managing director of SIH. The directors' meeting was attended by Mr Tinkler, Mr Dempsey and Mr Todd. Mr Sommers complains that on or about 25 August 2009 he had sought to exercise his right to remove Mr Dempsey as a director, but Tinkler Group failed to give effect to that removal. He complains that from 26 August 2009 he was removed from management of the companies and purportedly " stood down " as a director. He alleges that he was denied access to the books and records of the companies and to the business premises. He complains that Tinkler Group and the other directors acted oppressively in calling a meeting of shareholders for 21 October 2009 for his removal as a director.

Mr Sommers also complains that the institution of proceedings by SIH against him and the obtaining of asset preservation orders ex parte , was part of the conduct of the affairs of SIH that was oppressive to him. He complains that the plaintiffs breached various orders that were part of a regime established when injunctive relief was obtained against him, including orders requiring payment of remuneration and provision of information. He alleges that funds of SIH were used to bring proceedings against him despite the real dispute being between him and Mr Tinkler as shareholders.

Mr Sommers also alleges that Mr Tinkler, Mr Dempsey and Mr Todd have acted oppressively towards him by increasing his liability under personal guarantees without his consent.

Mr Sommers seeks an order that Mr Tinkler and Tinkler Group purchase his shares in the plaintiffs at a price determined by the court. Mr Sommers only holds shares in SIH. His shares in TSCCF and TSC have been transferred to SIH, although he claims to be still owed part of the purchase money for the shares. Mr Sommers also seeks an order pursuant to s 233(1)(j) of the Corporations Act requiring Mr Tinkler, Tinkler Group, Mr Dempsey and Mr Todd to pay amounts he claims are owing by SIH, TSCCF and TSC under the share purchase agreement and the three service contracts. He also seeks an order under that provision that Mr Tinkler, Tinkler Group, Mr Dempsey, Mr Todd, SIH, TSCCF and TSC indemnify him against any personal guarantee securing the obligations of any of SIH, TSCCF or TSC.

A cross-claim was also brought by Mrs Sommers against TSC for $3,000 alleged to be owed by TSC to her for services provided by her and for reimbursement of business related expenses incurred for the benefit of TSC by her on her personal credit card. Mrs Sommers swore an affidavit in the proceedings but it was not read. She is currently residing in the United States and did not return for the hearing. Her cross-claim was not pursued.

The principal issues are:

a. whether Mr Sommers and SIH entered into an agreement on or about 22 April 2008 for the purchase of Mr Sommers' shares (or the balance of his shares) in TSCCF and TSC for consideration that included cash of $800,000;

b. if so, whether that agreement was binding on SIH;

c. whether the agreement was varied on or about 5 December 2008 by increasing the cash component of the purchase price by $100,000;

d. whether SIH agreed to pay Mr Sommers a salary of $150,000 per annum;

e. whether the service contracts purportedly entered into between Mr Sommers and SIH, TSCCF and TSC are binding;

f. whether Mr Sommers was entitled to the salary with which his loan account with TSC was credited;

g. whether Mr Sommers engaged in misleading and deceptive conduct that induced Tinkler Group to invest in SIH;

h. whether Mr Sommers breached warranties in the subscription deed;

i. whether Mr Sommers misappropriated $458,820.60 of SIH's money;

j. whether Mr and Mrs Sommers are liable to TSCCF in conversion or detinue for the use or detention of motor vehicles and motor bikes;

k. whether Mr Sommers conducted the affairs of SIH oppressively;

l. whether the other directors of SIH and Tinkler Group conducted the affairs of SIH oppressively;

m. whether Tinkler Group should be ordered to purchase or Mr Sommers should be ordered to sell his shares in SIH, and if so, at what price;

n. whether TSC, TSCCF and SIH should be ordered to pay moneys allegedly owing under the service contracts and the share purchase agreement;

o. whether Tinkler Group or Messrs Tinkler, Todd and Dempsey, should be ordered to indemnify Mr Sommers against liabilities under guarantees given by him which arose after he was excluded from management of SIH and its subsidiaries;

p. whether Tinkler Group or Messrs Tinkler, Todd and Dempsey should be ordered to pay any moneys payable by SIH, TSC or TSCCF to Mr Sommers that those companies do not pay;

q. whether SIH should be wound up; and

r. what orders should be made.

I have concluded that:

a. Mr Sommers and SIH entered into the share purchase agreement on or about 22 April 2008 for the acquisition by SIH of the remaining 75 per cent of the shares in TSCCF and TSC that SIH did not beneficially own;

b. the agreement was binding on SIH;

c. the agreement was not varied. As at 22 December 2008 SIH owed Mr Sommers $500,000 for the balance of the purchase price of the shares in the subsidiaries;

d. SIH agreed to pay Mr Sommers' salary of $150,000 per annum;

e. the service contract purportedly entered into between SIH and Mr Sommers, and the service contracts entered into between TSC and TSCCF and Mr Sommers are not enforceable by Mr Sommers;

f. Mr Sommers was entitled to the salary credited to his loan account with TSC whilst he was employed;

g. whilst Mr Sommers engaged in misleading and deceptive conduct in one of the respects alleged, that conduct is not shown to have induced Tinkler Group to make its investment;

h. Mr Sommers, as well as SIH, gave the warranties in the shareholders' agreement. Most of the alleged breaches of warranty are not established. Tinkler Group is entitled to only nominal damages for breach of warranty;

i. although Mr Sommers did not have board approval for the payments alleged to be misappropriations, he was contractually entitled to the moneys he caused to be paid to himself;

j. Mr Sommers is liable to TSCCF for damages for conversion of two Audi motor vehicles and Mrs Sommers is liable for damages in detinue for the detention of those vehicles. Mr and Mrs Sommers are liable for damages in detinue for detention of the motorbikes;

k. Mr Sommers engaged in oppressive conduct in three of the respects claimed by Tinkler Group;

l. Messrs Tinkler, Todd and Dempsey and Tinkler Group also engaged in oppressive conduct;

m. an order for the compulsory sale or purchase of Mr Sommers' shares is not appropriate;

n. SIH is liable to pay $218,500 plus interest to Mr Sommers, being the balance of the price for the purchase of the shares in TSCCF and TSC. Mr Sommers is not entitled to payment of further moneys under the service contracts;

o. Tinkler Group and Messrs Tinkler, Todd and Dempsey should not be required to indemnify Mr Sommers in respect of his liabilities as guarantor;

p. Tinkler Group and Messrs Tinkler, Todd and Dempsey should not be required to pay the balance of the debt owing by SIH to Mr Sommers for the purchase of Mr Sommers' shares in the subsidiaries;

q. SIH should be wound up;

r. there should be declarations as to Mr Sommers' entitlements under the share purchase agreement, and his entitlement to salary from SIH and TSC up to the time his employment ceased. There should be declarations as to the unenforceability of the service contracts. The claims of SIH should be otherwise dismissed. TSCCF is entitled to judgment against Mr and Mrs Sommers for damages for conversion and detention of the motor vehicles and motorbikes and interest. There should be judgment for Mr Sommers against SIH for $218,500 and interest. Tinkler Group is entitled to nominal damages only against Mr Sommers. SIH should be wound up. The claims of Tinkler Group and Mr Sommers for relief under s 233 of the Corporations Act should be otherwise dismissed. The cross-claim of Mrs Sommers should be dismissed.

My reasons follow:

Credibility of Witnesses

Very few witnesses were called. Except in the case of Mr Sommers, their evidence was brief.

Mr Tinkler did not give evidence. He was the sole director of Tinkler Group. His failure to give evidence was not explained.

Mr Todd swore an affidavit but was not available for cross-examination. The explanation of his unavailability was unsatisfactory. I refused leave to the plaintiffs in the Supercar proceedings and to Tinkler Group to read his affidavit.

Mr Stuart Hackett was a director of SIH until Tinkler Group acquired its shares. Neither party called Mr Hackett. He was in neither party's camp.

Mr Dempsey gave evidence for the plaintiffs in the Supercar proceedings and for Tinkler Group. I did not consider his evidence to be reliable. In the course of the reasons that follow I explain why certain parts of Mr Dempsey's evidence are contrary to facts otherwise established or to other evidence of his. Moreover, I am satisfied on the evidence of Mr Cook that (contrary to his denial) Mr Dempsey was guilty of an attempt to humiliate Mrs Sommers in the eyes of her friends by concocting a false email. That was only explicable by a subservience to, or bias in favour of, Mr Tinkler, or an animus against Mr Sommers.

Nor was Mr Sommers a reliable witness. His evidence concerning proceedings brought by P1 International Limited referred to below, sufficiently demonstrates this. He saw everything through the prism of self-interest.

Therefore, to the extent possible, I have endeavoured to resolve the somewhat complex issues having regard to objective probabilities and contemporaneous documents. Issues arise as to the authenticity of some of the documents relied on. To some extent I have accepted Mr Sommers' evidence as to the creation of documents. Whilst I have serious reservations about his credibility, I do not on that account reject all his evidence. If it is necessary to decide between the credibility of Mr Dempsey and Mr Sommers without the assistance of contemporaneous documents of undisputed authenticity, or objective probabilities, I prefer Mr Sommers' evidence.

The plaintiffs also called Mr Richard Glenn who became SIH's financial controller in 2009 and Mr Troy Palmer, an accountant with Tinkler Group. Their evidence was not seriously challenged and I accept it.

The Supercar Club

The business of the three plaintiffs in the Supercar proceedings concerned a club known as the "Supercar Club" to which car enthusiasts could subscribe for membership. Members were entitled to the use of luxury and high performance motor vehicles. Mr Sommers was the founder of the Supercar Club. He was aware of a similar club that had been operated in the United Kingdom by a company called P1 International Limited.

The Supercar Club was launched in Australia in November or December 2006. At that time only TSCCF (then known as P1 Sydney Fleet Pty Limited) and TSC (then known as P1 APAC Pty Limited) had been registered. Mr Sommers was the initial shareholder and sole director of both companies. Mr Sommers deposed that the business was structured so that TSCCF was to "own" the cars and TSC was to "own" the members.

Litigation with P1 International Limited

Although the evidence is not clear, it seems that Mr Sommers initially promoted the Supercar Club business through another company called P1 Australia Pty Limited or perhaps P1 International Pty Limited. Mr Sommers deposed that in May 2007 he ceased promoting the Australian company bearing the name P1 International Pty Limited and ceased further procurement of vehicles through that company. Instead, he commenced promoting the Supercar Club businesses through the companies then known as P1 Sydney Fleet Pty Ltd (TSCCF) and P1 APAC Pty Ltd (TSC). He deposed that in April 2007 P1 International Limited, a UK company, (in connection with whose business he had had an informal "partnership"), commenced proceedings in the Federal Court of Australia against him. He deposed that in March 2008 P1 International Ltd discontinued the proceedings and that as part of the settlement agreement reached, SIH and its subsidiaries did not incur any ongoing liabilities.

In fact it appears that by an amended statement of claim filed on 12 November 2007 Mr Sommers, P1 APAC Pty Ltd (TSC) and P1 Sydney Fleet Pty Ltd (TSCCF) were joined as defendants. The UK company, P1 International Ltd, alleged that those defendants had established and carried on a competing business using the assets and employees of P1 Australia Pty Limited. P1 International Ltd claimed that it was entitled to 75 per cent of the shares in P1 Australia Pty Ltd. On 12 September 2008 judgment was entered by consent in the Federal Court in favour of P1 International Ltd against all of the defendants in the sum of $562,500. Mr Sommers did not disclose that litigation, or the way in which it was concluded, in his discussions with Tinkler Group in late 2008 when the Tinkler Group was considering its investment in SIH. He deposed that his reason for not doing so was that he did not think it was relevant as:

" a. SIH or its subsidiaries had no ongoing liabilities related to the proceedings by that point in time;

b. The agreement had a term in it not to be disclosed; and

c. The proceedings had been discontinued. "

In cross-examination Mr Sommers said that the moneys owing to P1 International Ltd had been paid. There was no evidence as to when, by whom, or how the judgment was satisfied. But there is no evidence that P1 International Ltd took any steps to enforce its judgment against TSC and TSCCF. This corroborates Mr Sommers' evidence that the proceedings were resolved. However, it does not explain his description of the proceedings in his affidavit. The proceedings were not discontinued, they were concluded by a consent judgment.

No-one from Tinkler Group gave evidence as to whether it would have taken a different course had Mr Sommers disclosed the litigation and the consent judgment.

First Capital Raising

Mr Sommers initially worked with Mr Dempsey who assisted with generating membership and marketing for the Supercar Club. In mid 2007 Mr Sommers saw the need to raise finance to procure the acquisition of additional cars for the Club. He approached Mr Hackett of Hackett Consulting for advice on a capital-raising. On the basis of that advice, SIH was formed as a public company with a view to shares being issued to attract capital. The intention was that SIH would acquire a portion of the shares in TSCCF and TSC. Shares in SIH were initially issued to Mr Sommers (96 per cent), Mr Dempsey (two per cent) and Mr Hackett (two per cent). Mr Sommers, Mr Dempsey and Mr Hackett were appointed as directors of SIH, which was incorporated on 6 November 2007. Mr Sommers was the managing director and company secretary.

Mr Sommers deposed that in late December 2007 SIH completed its first capital raising. He deposed that at that time, SIH owned 25 per cent of the shares of TSC and 25 percent of the shares in TSCCF. The share registers of TSC and TSCCF were not tendered. The returns lodged with ASIC did not show the issue of shares to SIH at that time. However, later transactions proceeded on the basis that SIH had acquired the beneficial ownership of 25 per cent of the shares in TSCCF and TSC.

Mr Sommers deposed that the first capital raising was to existing Supercar Club members who subscribed $765,000 to acquire shares in SIH. 7,650,000 shares were issued. Mr Sommers deposed that the subscribing shareholders were issued shares in SIH at ten cents per share and that this valued his equity in SIH at over $4 million. I infer that at this time the minority shareholders in SIH (including Mr Dempsey and Mr Hackett) held about 19.5 per cent of the issued shares of SIH.

Was a share purchase agreement entered into to acquire the remaining 75 per cent of the shares in TSC and TSCCF?

Mr Sommers deposed that plans were made for a second capital raising for SIH. On 28 March 2008 he put forward a proposal to the board of SIH for the sale of the remaining shares he held beneficially in TSCCF and TSC (being 75 per cent of the shares in those companies) for $800,000, and the issue of a further 3.2 million shares in SIH. By this time the Supercar Club had around 100 members. Mr Sommers deposed that he discussed this proposal with Mr Hackett who agreed with it after being shown management accounts for SIH. I accept that evidence. On 27 March 2008 Mr Sommers sent an email to Mr Hackett stating:

" Stuart,

Just so that we are on the same page, I am acquiring the whole of the Supercar Club on the following terms:

$800,000 in cash and $3.2 million in shares at 10 cents.

Timelines:

$300,000 in cash up front

$500,000 in cash on the 1st July

Shares on the 1st July

Call me to discuss if you have any queries. "

The reference to Mr Sommers' acquiring the whole of the Supercar Club was mistaken. The proposal was that SIH would acquire the whole of the shares in TSCCF and TSC.

On 28 March 2008 Mr Hackett pointed this out. He wrote to Mr Sommers saying:

" Your proposal seems OK to me. I assume that when you say that you are acquiring the Australian club you mean the holdings [sic] is acquiring it from you at the price.

Although a formality, we, the Board, will need to see the latest accounts to confirm that your calculation (valuation) is reasonable. We (probably me) need to be able to defend the amount involved if questioned. "

Mr Hackett then set out matters which needed to be put in place for a further capital raising.

The plaintiffs in the Supercar proceedings seek a declaration that at all times Mr Sommers held his shares in TSCCF and TSC on trust for SIH. They plead that as at 6 November 2007 (the date of SIH's registration) it was the intention of SIH and Mr Sommers that SIH would own the business of the Club and all of the assets used in the business, even if private companies were used to operate certain aspects of the business, and that any legal title to shares held by Mr Sommers would be transferred to SIH or held on trust for SIH. Accordingly, they contend that SIH beneficially owned all of the issued shares in TSCCF and TSC from 6 November 2007.

The only evidence to support that contention is an affidavit of Mr Dempsey. He deposed that in 2007 Mr Sommers said to him words to the effect:

" We will set up a public company, Supercar International Holdings, which will own all the shares in the companies that run the Club and own the cars. We will raise capital by issuing shares in the public company. "

He deposed that at no time before August 2008 did Mr Sommers ever say words to the effect that he owned the shares in TSCCF and TSC and that SIH would have to buy them from him.

I do not accept Mr Dempsey's evidence. Even if the evidence were accepted it would not establish that as from 6 November 2007 Mr Sommers held his shares in TSCCF and TSC on trust for SIH. The offer document for the first round capital-raising in November 2007 (CB2/577) stated that SIH was formed to acquire majority and minority shareholdings in a number of existing and proposed Supercar Clubs in selected countries. It stated that a 25 per cent share in the existing P1 Supercar Club would be included from 1 July 2008. The offer document proposed that new clubs would be formed which would be wholly owned by SIH. That is to say, the offer document for the first capital raising issued on or about 12 November 2007 stated that SIH would acquire from 1 July 2008 a 25 per cent share in the existing Supercar Club. This was consistent with SIH's being entitled to become registered as a 25 per cent shareholder in TSCCF and TSC. It is inconsistent with Mr Sommers or the other directors of SIH intending that Mr Sommers hold his shares in TSCCF and TSC on trust for SIH from the latter's incorporation.

The email correspondence between Mr Sommers and Mr Hackett of 27 and 28 March 2008 referred to above is also inconsistent with their having such an intention.

Mr Sommers deposed that on 22 April 2008 the board of SIH approved the purchase by SIH of Mr Sommers' shares in TSCCF and TSC. Unsigned minutes of a directors' meeting of SIH, reported as having been held on 22 April 2008 and attended by Mr Sommers, Mr Dempsey and Mr Hackett, were tendered. The plaintiffs challenge the authenticity of the minutes. The minutes purportedly record various items of business. Item 7 stated:

" 7. Round 2 capital raising program

- purchase of the balance of the Australian club and sales mechanism

After considering the likely future profits and the financial situation of the existing Australian SuperCar Club, the Board agreed to accept the Chairman's offer to sell 100% of the two companies involved (including the 25% to be purchased for $25 as previously agreed) for a total of $800,000 in cash (payable in installments [sic] ) and 3.2 million shares (worth $320,000 at the price achieved in the Round 1 capital raising). "

Mr Sommers deposed that he abstained from voting on this item of business, but the minutes do not record that abstention.

Mr Dempsey deposed that he had not seen the purported minutes before the commencement of the proceedings and did not recall being at any meeting when such a purchase was discussed. Whilst adhering to his evidence that he had not seen the document before the proceedings were commenced, he did not adhere to his evidence that he did not recall being at any meeting when the purchase of the balance of Mr Sommers' shares in TSCCF and TSC was discussed. In cross-examination Mr Dempsey gave evidence that there was a meeting of directors held on 22 April 2008. He said that at that meeting Mr Hackett advised Mr Sommers that to maximise the saleability of SIH, he would need to roll 100 per cent of Supercar Club into the ownership of SIH. He did not recall what was said about what payments would be made or what shares would be allocated to Mr Sommers, but said he would certainly have expected those matters to have been discussed. This evidence was contrary to his affidavit.

It appeared that notwithstanding Mr Sommers' having been purportedly stood down as a director of SIH in August 2009 and his having resigned as a director in February 2010, he retained possession of the companies' statutory records, or at least the register and minute books. Mr Sommers did not produce signed minutes from the minute book.

The minutes produced were an attachment to an email sent by Mr Hackett to Mr Mark Copsey, on 10 November 2008 (CB5/1098). Mr Copsey was SIH's auditor. This was a serious communication. Mr Hackett wrote to Mr Copsey as follows:

" Mark,

As discussed please find a copy of the minutes of the SIH Board meeting held on 22 April 2008.

Item 7 contains detail of the acquisition of 25% of the 'Australian Club' for $25 which was meant to be actioned in 2007/8 as promised in the Round 1 capital raising Offer Document and the acquisition of the balance of the club for $800,000 plus 3,200,000 shares which was meant to be actioned in 2008/9. "

It was put to Mr Sommers in cross-examination that the purported minutes of the meeting of 22 April 2008 and a circular resolution referred to below were created later in 2008 for the purpose of his trying to make a claim to the Tinkler Group that he was owed $600,000. Mr Sommers rejected that contention. I do not accept it. It would be a serious finding to say that Mr Hackett concocted a document in November 2008 described as minutes of the meeting 22 April 2008, that recorded resolutions not in fact passed. There is not a sufficient basis for such a finding. It was open to either party to call Mr Hackett. I accept the authenticity of the document he attached to his email.

Subsequent documents refer to an agreement for the purchase of Mr Sommers' shares by SIH. At least one of these documents, or a draft of it, was read by Mr Dempsey who raised no objection to it.

Mr Dempsey admitted to having read and having been asked to comment on an offer document dated 21 October 2008. This document stated that it was an offer for the issue of shares in SIH through which SIH intended to raise $2 million. The document was prepared in the context of the solicitation of funds from Tinkler Group. The document stated that the proposed allocation of the funds to be raised included payment of $600,000 for " Share Transaction Completion ". Mr Dempsey said in cross-examination that his opinion was never sought on financial matters that went into the offer documents, he had no knowledge of the financial position of the business at the time, and did not know what that item referred to. I do not accept that evidence.

Mr Dempsey raised no query as to why SIH would need $600,000 to complete a share transaction. Even if he did not focus on the precise figure involved, his lack of comment indicates that he was aware that SIH owed a substantial amount to Mr Sommers to complete the share transaction.

In fact, even on Mr Sommers' case the amount owed as at 21 October 2008 was not $600,000 but $500,000. I infer that Mr Sommers proposed to increase the consideration payable to him. For the reasons below, that attempt was not successful. But I do not conclude that no money was owing because Mr Sommers planned to bring about an increase in the amount owed.

Documents lodged on behalf of Mr Sommers with ASIC showing changes to company details are not consistent with the minutes of 22 April 2008. Nor are they consistent with any other evidence in the case. It appears from the ASIC historical company extracts that there are 100 issued shares in TSC and TSCCF. On 14 September 2007 a document was lodged recording the transfer by Mr Sommers of 100 shares in TSC (then called P1 APAC Pty Limited) from himself to Catalina Holdings on 18 August 2007. Catalina Holdings was a company with an address in Vanuatu. It may be inferred that by this time litigation by P1 International Ltd had been commenced or was threatened. I will assume legal title to the shares was transferred to the Vanuatu company, although this is not clear as the share register was not tendered. Whatever Mr Sommers' motivation in transferring legal title to the shares to the Vanuatu company, he retained the power to dispose of them.

On 15 December 2008 a firm called AR Taxation Solutions lodged a change to company details recording that on 1 July 2008 Catalina Holdings transferred its shares in TSC to SIH for a consideration of $1,000 said to have been paid. At the same time AR Taxation Solutions lodged a notice of change to company details for TSCCF recording the transfer of 100 shares held by Mr Sommers in TSCCF to SIH as at 1 July 2008 for consideration of $1,000 said to have been paid. Mr Sommers denied that these notices accurately recorded the sale of shares to SIH. He had no explanation as to how the notices came to be lodged. That reflects adversely on his credit. It does not mean that I should accept the purported notices of share transfers as being accurate. I do not.

There was no other evidence of any agreement between Mr Sommers and SIH, or of any agreement between SIH and Catalina Holdings, for SIH to purchase the shares of Mr Sommers or Catalina Holdings for $1,000. The evidence is to the contrary. Indeed $300,000 of the $800,000 cash component of the purchase price for the shares was paid to Mr Sommers. There was no clear evidence as to when that sum was paid. Mr Sommers in cross-examination said that it was paid many, many months before December 2008. It is clear from his affidavit that the sum of $300,000 was paid before 30 June 2008. The balance sheet of SIH at 30 June 2008 includes as a non-current asset what was described as " Financial Assets - Other Investments " of $300,000. In cross-examination Mr Sommers also said that the sum of $300,000 was paid maybe a year before December 2008, but he gave no evidence of any transaction which would have justified such a payment before 22 April 2008. It appears from his email of 27 March 2008 that the moneys had not in fact been paid prior to 27 March 2008.

I do not accept that the return lodged with ASIC describing the share transfers from Catalina Holdings to SIH for a price of $1,000 accurately reflects any transaction.

The directors' report for the financial statements of SIH for the year ended 30 June 2008 was signed by Mr Dempsey and Mr Sommers. The report referred to note 14 of the financial statements in respect of significant subsequent events. Note 14 was headed " Events After the Balance Sheet Date ". It stated that SIH had entered into an agreement with Mr Sommers to acquire the balance of TSC for a combination of cash and equity in SIH and that SIH had entered into an agreement with Mr Sommers to acquire 100 per cent of TSCCF for a combination of cash and equity in SIH.

It is not clear why it was stated that the entry into those agreements were post balance sheet events. Mr Sommers was not cross-examined about this apparent discrepancy. It might be explained by the fact that the share acquisition was only to be given effect to on 1 July 2008. It is clear from the document that the directors were stating that an agreement had been made with Mr Sommers for the acquisition of all his shares in TSCCF and TSC for a combination of shares and cash. Mr Dempsey said that he was not present when there were any such discussions. In cross-examination Mr Dempsey said that he signed the directors' report for the financial statement of SIH as a single page document when the report was incomplete. He said that Mr Sommers told him to sign the single page and that he was put under pressure to sign it. I do not accept that evidence. Mr Dempsey did not explain why he was prepared to verify the financial statements as being a true report if he had not seen the document.

Notwithstanding the possible anomaly of the share acquisition being described as a post balance sheet date event on the whole the financial statements corroborate Mr Sommers' evidence and contradict Mr Dempsey's evidence.

One of the terms of the agreement was that Mr Sommers be issued with 3.2 million shares in SIH. Mr Sommers pleaded that those shares were issued to him on or just after 22 April 2008. There was corroborative evidence that the further 3.2 million shares in SIH were issued to Mr Sommers (6/1354). This is consistent with the alleged agreement having been made. No other explanation was suggested for the issue of those shares.

I conclude that on or about 22 April 2008 the directors of SIH did pass the resolution referred to in the minutes of that date.

In the absence of corroboration I am not satisfied that Mr Sommers abstained from voting on the resolution that the company accept Mr Sommers' offer as recorded at item 7 of the minutes of 22 April 2008. Had he abstained, I would have expected that abstention to be recorded in the minutes. It is in any event clear that Mr Sommers did not absent himself from the board meeting when that item was discussed. Section 195(1) of the Corporations Act provides:

" 195 Restrictions on voting-directors of public companies only

Restrictions on voting and being present

(1) A director of a public company who has a material personal interest in a matter that is being considered at a directors' meeting must not:

(a) be present while the matter is being considered at the meeting; or

(b) vote on the matter. "

Neither of the exceptions in subss 195(2) or (3) applied. Nor was Mr Sommers' interest a matter that did not require disclosure under s 191. However, Mr Sommers' failure to absent himself when the matter was discussed and to abstain from voting did not affect the validity of the board's resolution (s 195(5)).

I conclude that the resolution was an effective acceptance of Mr Sommers' offer to sell his (or Catalina Holdings') shares in the subsidiaries to SIH for $800,000 in cash payable to him and the issue to him of 3.2 million shares. It is a separate question whether the contract so entered into was binding on SIH.

The plaintiffs in the Supercar proceedings pleaded that Mr Sommers purported to execute on behalf of himself and SIH a share purchase agreement which he dated as being executed on 23 April 2008. No such document was put into evidence. Mr Sommers pleaded that the share purchase agreement was partly oral and partly in writing, the oral part being the discussion between Mr Sommers, Mr Dempsey and Mr Hackett on 22 April 2008 and in the days leading up to that date, and the written part being the minute of meeting of directors of SIH. I have found that an agreement was made as claimed by Mr Sommers.

Mr Sommers pleaded that on 22 April 2008 he transferred all of his shares in TSC and TSCCF to SIH. No such transfer was effected on 22 April 2008. The share register was not put into evidence. The notices lodged with ASIC recording the transfer of shares from Mr Sommers or Catalina Holdings to SIH as being effective as at 1 July 2008 were not lodged until 15 December 2008. However, Mr Sommers is not disentitled from enforcing the share purchase agreement because the shares were not transferred on the date of the agreement.

Was the share purchase agreement varied?

Mr Sommers alleged that the share purchase agreement was varied on 5 December 2008 by discussions between Mr Sommers, Mr Dempsey and Mr Hackett on that day, and in the days leading up to that day, where the purchase price was increased to $900,000. Part of the alleged variation is said to be contained in a minute of a meeting of directors of SIH. There is no such minute. Rather, Mr Sommers deposed that in August 2008 he complained to Mr Hackett and to Mr Dempsey about the delay in paying the second tranche of moneys of $500,000 which was supposed to have been paid by 1 July 2008. He did not give evidence of Mr Hackett's or Mr Dempsey's then agreeing to vary the terms of the share purchase agreement. Instead he deposed that on 5 December 2008 a resolution was passed by SIH to increase the cash component of the share purchase by $100,000 and that a circular resolution was prepared by Mr Hackett, which he says was adopted by Mr Hackett and Mr Dempsey with him abstaining. Mr Sommers produced a document said to be a true copy of minutes containing the resolution. The document provided as follows:

" Supercar International Holdings Ltd

Circular Resolution - 5 December 2008

Resolution:

Due to delays in paying Tim Sommers for the purchase of the companies that comprise the Supercar Club which was due on 1 July 2008, it is proposed to increase the cash element from $800,000 to $900,000.

As the beneficiary of this resolution, Tim Sommers will not participate in voting on this resolution.

Minutes of the Circular Resolution dated 5 December 2008

Recipients: Stuart Hackett - Director

Peter Dempsey - Director

Gerard Farley - Director

All directors received and approved the Circular Resolution by return email. "

The circular resolution was not signed. Article 13.25 of SIH's constitution provided that a resolution in writing signed by all directors would be as valid as if the resolution had been passed at a duly convened directors' meeting. There was no corporate act by the directors of SIH which bound SIH to a variation of the share purchase agreement, even if it were established that each of the directors had agreed to the variation. There was no meeting of directors at which the resolution was passed. As the circular resolution was unsigned, it was not an effective resolution in accordance with article 13.25.

In any event, I am not satisfied that each of the directors did agree to the variation which Mr Sommers reduced to the circular resolution. It would not have been in SIH's interest to do so. No evidence was adduced from Mr Hackett. Mr Dempsey denied being a party to any such agreement. Even if Messrs Hackett and Dempsey did so informally, there was no act on their part to bind SIH to such an agreement.

Accordingly, I conclude that whilst the share purchase agreement was made on or about 22 April 2008 as Mr Sommers deposed to, there was no agreement binding on SIH to increase the purchase price from $800,000 to $900,000.

Has the share purchase agreement been avoided?

The plaintiffs in the Supercar proceedings alleged that if SIH entered into the share purchase agreement, Mr Sommers breached his duty as a director in causing it to do so. One ground for that contention was that, according to the plaintiffs, SIH was the beneficial owner of the shares in TSCCF and TSC from 6 November 2007. I have rejected that contention above.

The other ground for impugning the share purchase agreement was that, according to the plaintiffs, when that agreement was made, the shares were of nominal value because the business of TSC had little or negligible value and TSCCF's assets consisted only of motor vehicles which were encumbered by way of chattel mortgages or were subject to leases such that there was little or no equity in the vehicles. In other words, the plaintiffs alleged in substance that the shares had no real value and were certainly worth much less than the consideration provided for in the share purchase agreement, such that it was a breach by Mr Sommers of his duty as a director of SIH to sell the shares to the company. Although this was not specifically alleged, it would follow that the plaintiffs also allege that it was a breach of duty by Mr Hackett and Mr Dempsey for them to have agreed to the sale.

The plaintiffs did not make good their assertion that the shares had only nominal value and that the business and assets of TSCCF and TSC had no substantial value. The balance sheet of TSCCF as at 30 June 2008 showed an excess of liabilities over assets of $357. However, the balance sheet of TSC as at 30 June 2008 showed an excess of assets over liabilities of $711,783. Moreover SIH's balance sheet showed it had net assets of $476,045. According to the balance sheet, SIH was not a mere holding company. It had total assets of $519,820. These did not include shares in TSC and TSCCF except insofar as one of its assets included $300,000 described as " financial assets " referred to at para [56] above.

Moreover later in 2008 Tinkler Group Holdings Pty Limited, after carrying out a review of the business and financial position of SIH, TSCCF and TSC was prepared to pay $2,155,427 to acquire a 49 per cent interest in the holding company. Unless it was misled, a question with which I deal below, it would plainly be absurd to say that the shares of the subsidiaries had no real value.

The plaintiffs have not established that the shares had no, or only nominal, value, or that the price agreed to be paid to Mr Sommers for the shares was substantially in excess of their true value at the time the share purchase agreement was made. For these reasons I reject the challenge to the enforceability of the share purchase agreement.

The plaintiffs did not challenge the share purchase agreement on the ground that it was liable to be set aside because of a conflict between Mr Sommers' interest in the transaction and his duty to SIH, and SIH did not give its fully informed consent to the transaction.

It follows that the plaintiffs are not entitled to the declaration sought that at all times Mr Sommers held the shares in TSCCF and TSC on trust for SIH. Nor are they entitled to the declaration sought that the agreement between SIH and Mr Sommers for the purchase of shares in TSCCF and TSC was void or has been rescinded. Although not specifically sought, it is appropriate to declare that the share purchase agreement was made between SIH and Mr Sommers, was not varied to increase the cash component of the purchase price from $800,000 to $900,000, and is binding on SIH.

The service contracts

At the meeting of directors held on 22 April 2008 it was resolved that:

" The Board confirm that the Chairman, in his role as Managing Director, will be paid a salary of $150,000 commencing immediately ."

Mr Sommers deposed that at about this time he proposed to Mr Hackett that he enter into written agreements with SIH and the subsidiaries to formalise his employment. He said that Mr Hackett agreed that he should do so. Mr Sommers deposed that on 22 April 2008 and 30 June 2008 service agreements were entered into between himself, SIH, TSCCF and TSC.

Purported service contract with SIH

Mr Sommers produced a copy of a document headed " Contract of Services " which he signed for himself and for SIH dated 22 April 2008. It provided that Mr Sommers would be chief executive officer of SIH and that he would receive remuneration of $150,000 plus GST per annum. The agreement provided for Mr Sommers to be a contractor and not an employee. It was a term of the agreement that if the remuneration were not paid, the funds would be credited to Mr Sommers' loan account and would attract interest at the rate of ten per cent per annum. There was a further term that Mr Sommers would be provided with vehicles for his use and that he could choose any vehicle from groups 1 or 2 of the Car Club's Fleet for his full or part-time use, and could claim all business related expenses. The document contained a term that it was in Mr Sommers' sole decision as to what would be and what would not be a business expense. Other provisions of the document signed by Mr Sommers and purportedly signed by him for the company included a term that if the agreement were terminated by either Mr Sommers or SIH, SIH would be required to pay $150,000 plus GST irrespective of the reason for the termination of the contract, or which party terminated it (clause 9.1). It was another term of the document that all intellectual property created by Mr Sommers within " the scope of your contract " would be owned by Mr Sommers and would be available to SIH only upon paying a fee to be agreed. This purportedly included intellectual property created using the facilities or resources of the company.

This purported contract was not considered by the directors of SIH. They did not approve its terms. It was not authorised by the resolution of 22 April 2008. A number of the terms inserted were plainly contrary to the interests of SIH including the purported requirement to pay $150,000 plus GST on termination of the agreement, irrespective of the reason for termination and irrespective of which party terminated the agreement. The term that all intellectual property created by Mr Sommers would belong to him was also contrary to the interests of the company, as was the term that he would be entitled to choose any vehicle for his own use and it would be in his sole discretion to decide what was or was not a business expense to which he was entitled to claim from the company. It is unnecessary to pursue these questions. Even the provision that Mr Sommers would be a consultant and would be paid $150,000 plus GST had not been agreed to by the board of SIH. Whilst the directors had agreed to pay Mr Sommers a salary of $150,000, they had not agreed to engage him as a consultant to be paid a fee for services. The purported contract of services was not binding on SIH and a declaration will be made accordingly.

Service contracts with TSCCF and TSC

In his main affidavit Mr Sommers deposed that on 22 April 2008 he also entered into service agreements with TSCCF and TSC. He signed contracts purportedly on behalf of TSCCF and TSC as well as on his own behalf called " Contract of Services ". These were dated 30 June 2008, not 22 April 2008. He corrected the date in a later affidavit. At all material times Mr Sommers was the sole director of TSC and TSCCF.

The contract of services dated 30 June 2008 left it open as to whether Mr Sommers would be an employee or contractor. It provided for him to be paid remuneration of $150,000 per annum " plus GST if taken as contract ". The agreement provided that in addition to the base salary of $150,000 Mr Sommers would receive a bonus of 50 per cent being $75,000 (plus GST if applicable), or 7.5 per cent of the net annual profits, whichever was the greater. It provided that he would have perpetual membership of the Supercar Club with unlimited points, unlimited kilometres, and unlimited nominated drivers, and that this membership would be maintained for ten years after termination of the contract. The document included a term that the agreement could be terminated by either Mr Sommers or the company and that TSC would pay Mr Sommers $150,000 plus GST as a one-off payment upon termination of the contract, irrespective of which party terminated the contract and irrespective of the reason for termination. The contract included a term that all intellectual property created by the company would be owned by Mr Sommers and would be licensed by him to the company. Another term provided that all intellectual property created by Mr Sommers within the scope of the contract would be made available to the company at an agreed fee, but would remain owned by Mr Sommers.

In cross-examination Mr Sommers said that as at 30 June 2008 it was his intention only to take funds from TSC as he needed them. He accepted that clause 5.3 providing for his perpetual membership of the Supercar Club with unlimited points, unlimited kilometres and unlimited nominated drivers, was a provision he inserted that was not in the interests of TSC. He said that if he were to write the contract today, he would not include that clause. He agreed that the term dealing with intellectual property was not in the interests of TSC.

Mr Sommers did not accept that the provision for payment of $150,000 on termination of the contract was contrary to the interests of TSC. He said that he thought that amount was fair for a CEO whose services were terminated (T143).

Mr Sommers also signed a services contract for himself and TSCCF. Under that agreement Mr Sommers was not entitled to remuneration. The contract included a term that TSCCF would pay Mr Sommers $5,000 for each guarantee that he issued of the company's liabilities (clause 5.2). It also included a term that Mr Sommers could purchase motor vehicles from the company annually at a preferential rate of either written down book value or a 30 per cent discount on the wholesale value of the motor vehicle (clause 5.3). This applied to motor vehicles within groups 1, 2 or 3 of the Car Club's fleet. The contract also included a term that TSCCF would be required to pay Mr Sommers $150,000 plus GST as a one-off payment upon termination of the contract, irrespective of the reason for termination and irrespective of which party terminated the contract.

Even if Mr Sommers did not sign the contracts with TSC and TSCCF on 30 June 2008 he undoubtedly did sign each contract when he was the sole director of TSC and TSCCF. If the contracts were signed later, they nonetheless operate from 30 June 2008. As Mr Sommers was the sole director of TSC and TSCCF and as he procured those companies to enter into agreements with himself, it cannot be said that no contracts were entered into. The contracts were not shams. Mr Sommers intended them to operate in accordance with their terms.

The existence of the contracts is one thing, their enforceability is another. At the times the contracts were entered into either Catalina Holdings or Mr Sommers was the sole shareholder of TSC and TSCCF. Mr Sommers had contracted to sell the shares to SIH and he already held 25 per cent of the shares in TSC and TSCCF on trust for SIH. There was a clear conflict between his interest as a director of TSC and TSCCF and his duty to these companies in entering into the contracts for services. There was no consent given to the service contracts by TSC or TSCCF through a board consisting of persons other than Mr Sommers, or by shareholders of the companies, acting in the interests of the companies or the beneficial owners of the shares.

This was not the ground upon which the contracts were impugned in the plaintiffs' statement of claim. The plaintiffs rather alleged that the service contracts were created by Mr Sommers in order to take money from TSC and TSCCF to which he was not entitled. They pleaded that the companies could not afford the level of remuneration provided for in the service contracts and that Mr Sommers' position did not warrant the level of remuneration provided for in the service contracts. The plaintiffs pleaded that it was in those circumstances that Mr Sommers breached his duty as a director in entering into the service contracts. They also alleged that the contracts were entered into as a means of diverting profit to himself, which ought to have been distributed as dividends to other shareholders.

These grounds are not established. On 20 July 2009 Mr Tinkler asked Mr Glenn to prepare a contract for Mr Sommers with a total package salary value of $300,000 per annum to be paid from the time Tinkler Group invested in the business if his salary had not been to that level at that point. This indicated both that remuneration of $300,000 was reasonable for the work Mr Sommers was doing, and that as at July 2009 Mr Tinkler considered that the business could afford the payment.

The case argued at trial as to the invalidity of the service contracts was wider than that pleaded. It was within the case argued by the plaintiffs that the service contracts were not binding on TSCCF and TSC because they included terms, including termination provisions, which provided a benefit to Mr Sommers to the detriment of the companies.

In my view Mr Sommers did not act in accordance with his duty as the sole director of TSC and TSCCF in entering into the service contracts with those companies. The termination provision in those contracts could not be justified as a reasonable accommodation of the interests of both parties. To require payment of $150,000 plus GST by each company on termination of the contract, even if the contract were terminated by Mr Sommers because it no longer suited him, or even if the contracts were terminated by the companies for serious misconduct, was unfair to the companies. The insertion of those provisions was an abuse by Mr Sommers of his powers as the sole director. He acknowledged that other terms of the contracts were also contrary to the interests of the companies; as they plainly were. Clause 8.3 of each contract provided that intellectual property created by Mr Sommers in performing his contracts was owned by him, not TSC or TSCCF, and was to be available to the companies for a fee to be agreed. Further clause 5.3 of the TSC services contract provided that Mr Sommers would have perpetual membership of the Supercar Club with unlimited points, unlimited kilometres and unlimited drivers. (In self-contradiction it also said that the membership would be maintained for 10 years after termination of the contract.) Those provisions were not challenged in the plaintiffs' statement of claim, but were within the case argued at trial. In my view, Mr Sommers did not act in accordance with his duties as a director of TSC and TSCCF in entering into the service contracts. Neither contract is binding on those companies. I will make declarations accordingly.

The services contracts with SIH, TSC and TSCCF were avoided no later than by the service of the statement of claim.

That is not to say that Mr Sommers was not entitled to be paid by TSC. His loan account with TSC was credited each month with an amount of $9,939. He described this as an amount credited in error because the company withheld PAYG tax on the sum of $13,750 which would otherwise, according to Mr Sommers, have been payable. There was no error. I do not find that Mr Sommers was not entitled to the amounts with which he was credited. But he is not entitled to the additional payments and benefits provided for in the service contracts. That is so even though individual terms, considered on their own, may have been justifiable. Thus, Mr Sommers seeks to enforce clause 5.2 of the TSCCF contract to receive $132,000 for having given 24 personal guarantees. Considered on its own, such a provision is one that could be reasonable in the interests of TSCCF. However, as the service contract was liable to be avoided, as it was entered into by Mr Sommers in breach of his duty as a director, and was avoided, the whole of the contract is unenforceable.

Although I have found that the service agreement purportedly entered into between Mr Sommers and SIH is not binding on SIH, I do not find that Mr Sommers was not entitled to the remuneration paid to him by SIH. The directors of SIH resolved that he be paid $150,000 per annum. Mr Sommers deposed (affidavit of 2 October 2009, annexure TS4-1) that he received fees from SIH between 22 July 2008 and 4 August 2009 totalling $184,000. Insofar as this was payment of salary, he was entitled to it. I deal with this question further when considering below the plaintiffs' claim that Mr Sommers misappropriated $458,820.60 of money belonging to SIH between 7 January and 25 August 2009. Some of the payments claimed by the plaintiffs to be misappropriations were treated by Mr Sommers as payments of fees due to him.

The plaintiffs argued that Mr Sommers was not entitled to remuneration from any of the plaintiff companies because there was no resolution by any of the plaintiff companies that he be paid remuneration. Counsel relied upon s 202A(1) of the Corporations Act . It provides:

" 202A Remuneration of directors (replaceable rule-see section 135)

(1) The directors of a company are to be paid the remuneration that the company determines by resolution.

Note: Chapter 2E makes special provision for the payment of remuneration to the directors of public companies.

(2) The company may also pay the directors' travelling and other expenses that they properly incur:

(a) in attending directors' meetings or any meetings of committees of directors; and

(b) in attending any general meetings of the company; and

(c) in connection with the company's business ."

Section 202A is a replaceable rule. Section 135 provides:

" 135 Replaceable rules

Companies to which replaceable rules apply

(1) A section or subsection (except subsection 129(1), this section and sections 140 and 141) whose heading contains the words:

(a) replaceable rule -applies as a replaceable rule to:

(i) each company that is or was registered after 1 July 1998; and

(ii) any company registered before 1 July 1998 that repeals or repealed its constitution after that day; and

(b) replaceable rule for proprietary companies and mandatory rule for public companies-applies:

(i) as a replaceable rule to any proprietary company that is or was registered after 1 July 1998; and

(ii) as a replaceable rule to any company that is or [was] registered after 1 July 1998 and that changes or changed to a proprietary company (but only while it is a proprietary company); and

(iii) as a replaceable rule to any proprietary company that is or was registered before 1 July 1998 that repeals or repealed its constitution after that day; and

(iv) as an ordinary provision of this Act to any public company whenever registered.

The section or subsection does not apply to a proprietary company while the same person is both its sole director and sole shareholder.

Note 1: See sections 198E, 201F and 202C for the special provisions that apply to a proprietary company while the same person is both its sole director and sole shareholder.

Note 2: A company may include in its constitution (by reference or otherwise) a replaceable rule that does not otherwise apply to it.

Company's constitution can displace or modify replaceable rules

(2) A provision of a section or subsection that applies to a company as a replaceable rule can be displaced or modified by the company's constitution. "

Mr Allen for the plaintiffs submitted that there was no evidence that SIH's constitution had been adopted in the manner contemplated by s 136(1) of the Corporations Act , that is, by being adopted on registration by the persons who consented to becoming members agreeing in writing to the terms of the constitution before the application for registration was lodged, or by the passing of a special resolution.

I do not agree. Mr Dempsey deposed that the document described as the constitution of SIH was its constitution. Moreover, the ASIC company extract for SIH specifies that the company was bound by a constitution, which would only be the case if s 136 had been complied with. It appears from the same company extract that the constitution was lodged on 6 November 2007 together with the application for registration. The company extract is prima facie evidence of the truth of the facts stated ( Corporations Act , s 1274B). In the absence of evidence to the contrary I infer that the constitution was adopted and that SIH is bound by the constitution as stated in the ASIC company extract.

Clause 11.15 of SIH's constitution provides that the directors would be paid as remuneration for their services a sum not exceeding such sum as might be determined by the directors prior to the first annual general meeting of the company, and that that remuneration would not be increased, except pursuant to a resolution passed at a general meeting of the company where notice of a suggested increase was given. The resolution of 22 April 2008 was passed before the first annual general meeting of the company. As the constitution was adopted, s 202A did not apply. It was a replaceable rule. Therefore, s 202A does not preclude Mr Sommers from receiving the remuneration approved by the board of SIH.

In any event, special provision is made for the payment of remuneration of directors of public companies in Chapter 2E. The effect of s 211 is that member approval is not needed for the payment of reasonable remuneration to an officer of a public company (s 211(1)(b)). The remuneration approved for Mr Sommers was reasonable given the circumstances of SIH and the responsibilities involved in his office.

Different considerations apply to the remuneration credited to Mr Sommers' loan account with TSC. There is no evidence that TSC adopted a constitution.

TSC pleaded that Mr Sommers created the service contract between himself and TSC which provided, inter alia , for him to receive annual remuneration of $150,000 in order to take money to which he was not entitled. The relief sought by TSC included equitable compensation in the amount paid to Mr Sommers under the service contract by reason of a breach of fiduciary duty, or damages pursuant to s 1317H in the amount paid to Mr Sommers under the service contract by reason of his procuring the payments in breach of his statutory duties as a director under ss 181 and 182 of the Corporations Act .

TSC did not plead that Mr Sommers was not entitled to remuneration because there was no resolution under s 202A or s 202C that he be paid remuneration. However, in opening Mr Allan for TSC submitted that there was no evidence of any resolution passed by TSC for payment of remuneration (T14-15). The case was opened and fought on the basis that TSC alleged that Mr Sommers had no power to remunerate himself from TSC, but if he did have that power, he abused it.

Subject to contrary statutory provision, a director is not entitled to be paid for his or her services unless remuneration is provided for in the company's constitution or the shareholders so resolve at a duly convened meeting ( Re George Newman & Co [1895] 1 Ch 674 at 686).

As there is no evidence that TSC adopted a constitution, the effect of s 202A is that Mr Sommers would only be entitled to remuneration if the company so determined by resolution. The making of a resolution is a formal act. Where the company has only one member, as is the case with TSC, the company may pass a resolution by the member's recording it and signing the record (s 249B(1)).

Mr Sommers produced two documents relevant to this issue. Both were headed " Minutes of Meeting of Members [sic]". The first document purportedly recorded a meeting of members (sic) of TSC held on 22 March 2007 at which it was resolved that Mr Sommers be compensated as CEO with a base salary of $200,000, and an annual bonus of $100,000, fifty per cent of profits and other benefits and that he also be compensated for taking the role of operations manager with a base salary of $144,000 plus three per cent CPI, 7.5 per cent of profits and other benefits. The second document purportedly records a meeting of members (sic) of TSC held on 27 June 2008 at Pyrmont in Sydney. It states:

" It was resolved that Tim Sommers [sic] compensation be reduced in accordance with the new contract or services agreement ."

Both documents were signed by Mr Sommers and dated by him on 22 March 2007 and 27 June 2008 respectively.

If the documents are genuine, they satisfy the requirements of s 202A that the company determine by resolution Mr Sommers' remuneration. Prima facie Catalina Holdings was the sole shareholder of TSC on 27 June 2008. Mr Sommers controlled Catalina Holdings and was able to act on its behalf. The contrary was not suggested.

Counsel for TSC disputed the authenticity of the documents. The documents were only produced by Mr Sommers on the second day of the hearing. On 9 September 2009 Rein J had ordered that Mr Sommers give " verified discovery of the books and records of the plaintiffs by 23 September 2009 ". The documents were not discovered. Mr Sommers said that he prepared the documents on the dates they bear, signed them and placed them in the corporate register. He said the corporate registers for SIH, TSC and TSCCF were in counsel's chambers, and that he had not been aware that he had been required to give discovery of them.

Although the failure to give discovery is a ground for suspecting the authenticity of the documents, and although Mr Sommers was not a generally reliable witness, I do not consider that he would have fabricated evidence to support his claim. I accept his evidence that he prepared and signed the minutes on the dates they bear.

It follows that Mr Sommers had the power to make the service contract on behalf of TSC. For the reasons I have given, by including onerous terms in the contract he breached his duty as a director and the agreement was liable to be rescinded. TSC would be entitled to equitable compensation for breach of Mr Sommers' fiduciary duty or damages for breach of his statutory duty if it suffered loss as a result of the breach. Loss is not demonstrated merely by showing that Mr Sommers' loan account was credited with his salary. The amounts with which he was credited were reasonable remuneration and such as would have been properly payable to him or to someone else in Mr Sommers' position. Therefore, Mr Sommers is not required to repay the amounts credited to his loan account.

Even if the position had been otherwise, it would not have followed that the appropriate remedy was an award of equitable compensation or damages. The salary from TSC was not paid to Mr Sommers, but credited to his loan account from which drawings were paid from time to time. There was no accounting to endeavour to show how much of the drawings were attributable to the crediting of salary. The appropriate remedy would have been to reverse the credits, which may or may not have resulted in a balance on the loan account payable by Mr Sommers to TSC. In light of my conclusion that TSC has not established an entitlement to equitable compensation or damages, it is unnecessary to pursue this question further.

Claim by Tinkler Group: misrepresentations inducing subscription for shares

Tinkler Group Holdings pleaded that it was induced to pay $2,115,427 for a 49 per cent shareholding in SIH by the following conduct of Mr Sommers:

" 3. On or about the 21 st October 2008, Supercar sought to raise capital through a share issue.

4. In raising the capital Sommers engaged in the following conduct:

I. Represented that Supercar was trading at a profit;

II. Represented that capital was required to expand the business of Supercar;

III. Represented that the accounts of Supercar showed the true financial position of Supercar;

IV. Represented that Supercar owned 100% of the shares in The Supercar Club Pty Ltd, TSCCF Pty Ltd, Lakeside Management Pty Ltd and A1 Jet Club Pty Ltd;

V. Represented that Supercar owned the cars set out in annexure 'A' hereto;

VI. Represented that Sommers was not involved in any litigation concerning the business of Supercar;

VII. Failed to disclose that Sommers considered that he had agreements with Supercar, TSCCF Pty Ltd and the Supercar Club Pty Ltd by which he considered that he was entitled to a combined remuneration of $300,000 per annum and a termination fee of $150,000 in respect of each company.

VIII. Gave to the Tinkler Group a Deed to be executed by Sommers and the Tinkler Group which contained a number of warranties to be given by Sommers, which are set out in paragraph 8 below.

5. The conduct was made in trade and commerce within the meaning of section 42 of the Fair Trading Act 1987 and were made by way of representations made in a disclosure document dated 21 st of October 2008, being a disclosure statement within the meaning of section 9 of the Corporations Act 2001.

6. On 22 December 2008 Tinkler Group relied on the conduct of Sommers in deciding to pay $2,115,427 for a 49% shareholding in Supercar. "

Tinkler Group claims damages for loss suffered, being the whole of the investment, as a result of the misleading or deceptive conduct of Mr Sommers under s 68 of the Fair Trading Act and s 729 of the Corporations Act .

No-one gave evidence for Tinkler Group that Mr Sommers made any of the alleged representations to that person orally. Nor did anyone from Tinkler Group give evidence that they had seen any such representations in documents provided by Mr Sommers and relied upon such statements. Some of the representations are said to have been made in warranties contained in the subscription deed of 22 December 2008. In determining whether such warranties conveyed the alleged representations and in determining whether Tinkler Group has established that it relied upon such representations, even in the absence of any specific evidence of reliance, it is necessary to consider other documents provided to Tinkler Group.

Mr Nathan Tinkler became a member of the Supercar Club in August 2008. Membership was taken out for Mr Tinkler by a Mr Corey Baldock who was employed by Tinkler Group. Mr Sommers deposed that from May 2008 the business of the Supercar Club was feeling the pressure of the global financial crisis and from August 2008 the directors of SIH were considering how to raise further capital. Some members had been lost as a result of downturns in the stock market and property market. He deposed that the Supercar Club was suffering financial distress due to a downturn in membership, from the fact that new memberships were being signed up on payment plans rather than upfront one-off payments, and by increased borrowing costs and fuel prices.

By 9 September 2009 companies associated with Tinkler Group had advanced moneys to SIH or its subsidiaries or paid moneys on their behalf totalling $577,259.74 (not including the payment of $306,006 in respect of the disputed Porsche vehicle). Thus although there was delay in the provision of a credit facility, funds of in excess of $500,000 were provided by September 2009.

It was contended for Mr Sommers that Mr Tinkler had a duty to SIH to demand the funds from Tinkler Group for the benefit of SIH, and that his omission to do so was conduct falling within s 232(a) or (b) of the Corporations Act . I accept that Mr Tinkler's acts or omissions as a director of SIH can fall within those paragraphs and I accept that his omission to demand on behalf of SIH that Tinkler Group establish a credit facility of $500,000 for SIH's benefit by 1 June 2009 was contrary to the interests of the members of SIH as a whole. However, that omission was substantially rectified by September 2009 through the provision of funds for the benefit of SIH and its subsidiaries and would not by itself warrant the making of an order under s 233.

Mr Sommers also complained about the holding of the directors' meeting of SIH on 26 August 2009 after he had purportedly removed Mr Dempsey as a director. Clause 3.3 of the shareholders agreement provided relevantly:

" 3.3 Appointment and removal of directors

Directors will be appointed and removed as follows:

(a) (initial board appointments): the Board will initially comprise 4 persons nominated in writing by the Shareholders as follows, namely:

(i) 2 persons nominated by Tim Sommers; and

(ii) 2 persons nominated by TG.

With 1 person appointed to act as the chairperson in accordance with clause 3.4;

...

(c) (removal of directors) : a person will be automatically removed as a Director without the need for any other action by the Company or the Director:

(i) if the Shareholder that nominated the person as a Director gives written notice to the Company that the person ceases to be a Director.

(d) (replacement of nominee directors) : if a Shareholder that nominated a person as a Director gives written notice to the Company that the person ceases to be a Director under clause 3.3(c)(i), the Shareholder may (without the need for any other actions by the Company or the Directors) appoint another person as a Director to replace the person who has ceased to be a Director. "

Clause 3.8 provided that subject to clause 3.3 the quorum for a board meeting was three directors.

The constitution of SIH did not reflect clause 3.3(c) of the shareholders agreement. Clause 11.13 of the constitution provided that directors could be removed by resolution of the Company in general meeting. SIH was a public company. Although it could have converted to a proprietary company, it had not done so. Pursuant to s 203D of the Corporations Act Mr Dempsey could have been removed as a director by a resolution of SIH, but as he was appointed to represent the interests of particular shareholders, namely Mr Sommers, a resolution to remove him as director would not take effect until a replacement was appointed. Notwithstanding clause 3.3(c) of the shareholders agreement, Mr Sommers' purported removal of Mr Dempsey as a director was ineffective.

Mr Sommers did not attend the directors' meeting on 26 August 2009. He contended that because Mr Dempsey had been removed as a director, there was no quorum.

Mr Tinkler had convened the meeting to consider proposed resolutions that:

" (i) ... Mr Sommers be stood down from his position as Managing Director of the Company without pay (and to not have any active involvement in the affairs of the Company or contact with employees, creditors, or members) for the period of time it takes to enable a Statutory Audit of the Companies [sic] affairs to be undertaken to identify any compliance issues and fully understand the financial position of SCC;

(ii) Mr Sommers to return all company assets in his possession including motor vehicles

(iii) Peter Dempsey to be appointed as Managing Director

[(iv)] The directors authorise Troy Palmer to approach the Australian Taxation Office to obtain any information that may be required to enable the present taxation position of the Company to be ascertained; and

[(v)] The directors authorise Troy Palmer to approach the CBA to obtain copies of bank statements for the period commencing 1/1/2006 to date. "

Resolutions (ii)-(v) were passed unanimously by Messrs Tinkler, Todd and Dempsey. Two resolutions of which notice had not been given were also passed, but no point has been taken about that. The first resolution was passed in an amended form, namely:

"(i) That Mr Sommers be stood down from his position as Director of the Company (and to not have any active involvement in the affairs of the Company) for the period of time it takes to enable a Statutory Audit of the Companies [sic] affairs to be undertaken to identify any compliance issues and understand the complete financial standing of the Group."

On 26 August 2009 Mr Tinkler advised management that: " Tim Sommers has been stood down as director of the Supercar Club, effective immediately. This removes any authority from Tim to act on behalf of the company including contact with employees, members or creditors. " He announced that Mr Dempsey had been appointed managing director. Whilst the board had power to decide who from time to time should be the managing director of SIH, it had no power to " stand down " Mr Sommers as a director of SIH.

As the sole shareholder of TSC and TSCCF, SIH could have resolved to remove Mr Sommers as a director of TSC and TSCCF, but that was not the resolution proposed for the directors' meeting of SIH, nor passed. Nonetheless, from 26 August 2009 Mr Sommers was excluded from acting as a director of SIH or its subsidiaries.

Mr Tinkler was motivated to take these steps by his falling out with Mr Sommers and his concern that Mr Sommers had misappropriated the funds Tinkler Group subscribed. On 4 August 2009 Mr Tinkler had proposed calling a board meeting for 4 September. He then complained that Mr and Mrs Sommers had not provided accurate financial information and that he proposed that an independent auditor be appointed to address the question of where the subscription funds had gone. On the same day he complained that Mrs Sommers refused to provide financial accounts and that employees were facing angry creditors. He pressed Mr Sommers to provide bank statements. Mr Tinkler accused Mr Sommers of not paying wages due to employees and said that he had had to pay $20,000 to employees in the previous week. Mr Sommers' response was to say that Mr Glenn had had full access to all the MYOB files and had full bank statements for SIH up to 1 July 2009, for TSC to 24 July 2009, and for TSCCF to 31 July 2009, and that he should be quite capable of providing accurate trading statements and cashflow projections. Mr Sommers denied any misappropriation of funds. On 5 August 2009 Mr Tinkler sent a text message to Mr Sommers saying that he only wanted to hear " how I get my millions back ".

On 7 August 2009, Mr Sommers sent an email to Mr Todd, Mr Tinkler and Mr Dempsey enclosing what he called a " full CBA bank download to excel for the SIH accounts ". He said that the summary showed that he had drawn a total of $234,000 from SIH and that there was $471,000 still due to him as at 30 June 2009, together with contracted salary of $75,000 from three subsidiary companies, and unclaimed expenses of $11,000 so that the total amount due to him was $503,500. The Excel spreadsheet in fact showed payments from SIH to Mr Sommers of $50,000 on 7 January 2009, $12,500 as director's fees on 21 January 2009, two payments of $50,000 and $100,000 on 5 February 2009, $12,500 for director's fees on 23 February 2009, $15,000 on 7 April, $9,000 on 11 May, $5,000 on 22 May, $18,000 on 3 June, and $12,000 on 9 June 2009 (a total of $284,000). It also showed ten payments having been made from accounts of TSC and TSCCF between 23 January 2009 and 15 June 2009 totalling $53,500.

Mr Tinkler's response was:

" If this is true then what has all the carry on been about? Why withhold all information and create conflict? ... I sincerely hope that the numbers vindicate your story as I have had enough of the drama associated with this investment over the last few weeks and any type of investigation reflects poorly on us all. [O] ne thing that appears to be certain is that business is performing disgracefully and this is the only reason I can see for your actions ."

In these proceedings the plaintiffs allege that the above payments by SIH had been misappropriated by Mr Sommers. Mr Tinkler did not dispute the propriety of the payments when Mr Sommers disclosed them on 7 August 2009. Nor did he dispute Mr Sommers' claim, which I have found to be substantially justified, that he was owed further moneys for the share purchase.

It is not clear what prompted Mr Tinkler's notice of 25 August 2009 calling the meeting for directors the following day. Mr Sommers had served a notice pursuant to the shareholders agreement identifying a dispute to be referred to mediation pursuant to that agreement. The dispute of which he gave notice was that the Tinkler Group had not provided working capital as provided for by clause 13.17 of the shareholders agreement. Mr Sommers and Mr Todd discussed various issues on which there was conflict between Mr Sommers and Mr Tinkler. That was one of them. It was noted that there had been a complete breakdown in communication between the two of them. In email correspondence Mr Sommers noted that he had been informed by staff that Mr Tinkler had told them that Mr and Mrs Sommers had stolen $700,000 of funds and were not to be trusted. Mr Todd noted that if the statements were made and were found to be unfounded, then appropriate apologies would be given.

It is possible that between 12 August and 25 August accounting staff engaged by Mr Tinkler ascertained that on 14 August Mr Sommers had withdrawn a further $180,000. Mr Dempsey deposed that at the board meeting on 26 August each director said " I did not authorise Sommers paying himself $180,000 ", although the fifth resolution authorised Mr Palmer to approach the Commonwealth Bank to obtain bank statements after 1 January 2006, and Mr Dempsey also said that the bank statement showing the withdrawal of $180,000 was received on 27 August 2009. Nonetheless this appears to have been the catalyst for Mr Tinkler's giving notice on 25 August of the directors' meeting the following day.

The Supercar proceedings were commenced by summons on 28 August 2009. The relief sought was orders that Mr and Mrs Sommers deliver up the two Audi motor vehicles and books and records of the plaintiff, and a declaration that Mr Sommers held $180,000 on constructive trust for SIH. There was also a claim for equitable compensation and damages. At the same time an application was made to the duty judge ex parte for orders requiring delivery up of the motor vehicles and any books and records of the plaintiff and for a freezing order to restrain Mr Sommers from dealing with any of his assets up to an unencumbered value of $180,000. A freezing order was made up to 1 September 2009. Orders were also made requiring Mr and Mrs Sommers to swear an affidavit as to the whereabouts of the two motor vehicles and to deliver to the court the books and records of SIH. SIH's application was supported by an affidavit of Mr Dempsey sworn on 28 August 2009. Mr Dempsey deposed to the missing Audi motor vehicles and to the changing of the locks of the Mosman premises. He also deposed that on 27 August 2009 management had obtained access to an account of SIH with the Commonwealth Bank that showed that Mr Sommers had withdrawn $180,000 on 14 August 2009. He said that at the directors' meeting held on 26 August each of the directors said that he had not authorised Mr Sommers to pay himself $180,000. He made no disclosure of the fact that Mr Sommers had asserted on 7 August 2009 that he was still owed over $500,000 for fees and the balance of the price for the purchase of shares, nor that Mr Tinkler had not disputed that claim.

On 1 September 2009 orders were made by consent and without admissions to extend the freezing order and the time for the defendants to swear an affidavit in relation to the whereabouts of the two Audi motor vehicles. Orders were also made that Mr Sommers provide a copy of books and records to the plaintiff that were in his possession, custody or power by 3 September by delivering the same to the chambers of the plaintiff's counsel.

On 9 September 2009, further orders were made by consent including on extension of the freezing order. The orders included that the plaintiffs give Mr Sommers copy of the management accounts and bank statements on the first Monday of each month, and that he give verified discovery of the books and records of the plaintiffs by 23 September 2009. The parties agreed jointly to engage an expert to report on the financial position of the plaintiffs and as to any moneys paid by Mr Sommers to meet debts of the plaintiffs and as to any money of the plaintiffs transferred to Mr Sommers. (No report of the expert to be engaged was tendered.) The plaintiffs were also ordered to give Mr Sommers seven days' written notice of any intention to buy or sell any motor vehicle. The parties agreed to an order that the plaintiffs pay " the first defendant's service contract ".

The plaintiffs did not give Mr Sommers the management accounts and bank statements as they were ordered to do. Nor did the plaintiffs pay any moneys to Mr Sommers in respect of any of his service contracts. On 7 October 2009 Slattery J held that this last order was too uncertain to be enforceable. On 9 November 2009 Brereton J dissolved the freezing order.

In my view Mr Tinkler and Tinkler Group conducted the affairs of SIH in a way that was oppressive to and unfairly discriminatory of Mr Sommers. Notwithstanding that he had been the founder of the club and was a 49 per cent shareholder, he was excluded from management before Mr Tinkler had established whether he had misappropriated funds. In fact he had not. Whilst Mr and Mrs Sommers' delays in providing bank statements and financial information were a contributing cause of Mr Tinkler's pre-emptive action, another contributing cause was the falling out between them. That falling out was partly due to Mr Tinkler's having made unilateral decisions in the management of SIH. Another factor was Mr Sommers' having complained about Tinkler Group's not providing the working capital facility, and his invoking agreed procedures to attempt to resolve that dispute.

The purported resolution of the board of 26 August 2009 " standing down " Mr Sommers as a director was unauthorised. SIH then obtained ex parte injunctive relief against Mr Sommers without making full disclosure of material facts. All of the plaintiffs obtained a continuation of that relief on the basis that they would " pay the first defendant's service contract ". Although that order was found to be too vague to be enforceable, it was unfair for the plaintiffs to have obtained the extension of the orders binding Mr Sommers on the basis of their agreement to that term when, as I infer, they had no intention of paying anything.

However, the finding that Mr Tinkler and Tinkler Group engaged in oppressive conduct does not mean that Mr Sommers is entitled to an order for the compulsory purchase of his shares. Mr Tinkler's conduct is partly explained, although not excused, by Mr and Mrs Sommers' reluctance to provide full financial information and access to bank statements and accounts. In any event, it would not be just to require Tinkler Group to pay any substantial sum for Mr Sommers' shares. The apparent inability of any party to provide financial statements after 30 June 2008 also shows that a valuation of his shares would be fraught with difficulty, expense and delay.

Whilst Tinkler Group has not proved its allegations that SIH and its subsidiaries were not profitable as at 22 December 2008, it does appear that by August 2009 SIH and its subsidiaries were in financial difficulties. As at 30 September 2009 SIH had trade creditors with debts exceeding $220,000 of which $87,312 were more than 90 days overdue. Tinkler Group had had to inject funds so that the plaintiffs could pay their debts. These financial difficulties were not substantially due to oppressive conduct by Tinkler Group. It seems likely that Tinkler Group's investment of over $2,000,000 was substantially lost, although no financial statements after 30 June 2008 were in evidence. Whilst Tinkler Group has not proved its claim that it was induced to subscribe for and pay for shares by misleading conduct of Mr Sommers, it would not be just to compel it to purchase Mr Sommers' shares for any greater consideration than an amount Mr Sommers might obtain on a winding-up. That is because both Mr Sommers and Mr Tinkler bear equal responsibility for the performance of the Group after 22 December 2008 and up to 26 August 2009, and there is no evidence that Tinkler Group, or Messrs Tinkler, Todd and Dempsey did anything after 26 August 2009 that would depress the value of Mr Sommers' shareholding. Moreover, not only was there no evidence as to the value of the shares as at 26 August 2009, but there was no evidence as to what might be required to place a value on the shares at that date. The parties agreed to orders for the appointment of a joint expert to report on the financial position of SIH, but no report was tendered by either party. So far as the evidence reveals, there were no complete financial statements for the year ended 30 June 2009.

Counsel for Mr Sommers submitted that no expert valuation would be required to determine the price for a compulsory purchase, as there was sufficient evidence before the court to determine that value. Counsel submitted that the price could be based upon either the price paid by the Tinkler Group on 22 December 2008 to acquire a 49 per cent shareholding ($2,115,427) or an amount of $700,000 calculated by reference to a price of $300,000 discussed between Mr Sommers and Mr Tinkler in July 2009 as a price that might be paid for Mr Tinkler to purchase from Mr Sommers a further 21 per cent shareholding.

I do not accept that either basis would be appropriate for calculating a price to be paid for the compulsory purchase of Mr Sommers' shares. I have found that Tinkler Group is not entitled to recover damages in respect of its acquisition of the shares. It does not follow that I am satisfied that the price Tinkler Group paid to acquire a 49 per cent shareholding was a fair value for the shares. Moreover, Mr Sommers accepted that there had been a deterioration in the financial performance of the company after 22 December 2008. I do not think that a price paid at 22 December 2008, even if it reflected fair value for the shares at that date, would be an indicator of a fair value of the shares as at 26 August 2009 when Mr Sommers was excluded from management.

The second proposed basis for valuing Mr Sommers' shares related to discussions in July 2009. Mr Sommers deposed that on 22 July 2009 he had a conversation with Mr Tinkler to the following effect:

" Tinkler: 'Where is my $2.2 million? If this business needs $2 mil every six months, then I am fucking out.'

[Sommers]: 'Firstly Nathan, it's not $2.2 million! It's $1.4 million.'

'You bought the minority shareholders out with $700,000 or so. The rest is invested in the business and you owe another $500,000.

Tinkler: 'How much do you personally need?'

[Sommers]: '$300,000.'

Tinkler: 'You can have the $300,000, but I want 70% equity'

[Sommers]: 'OK Nathan, but as long as I get an option to buy the shares back at the same price.'

Tinkler: 'OK, I agree.'

..."

That proposal did not proceed. The price of $300,000 mentioned was not related to the value of the shares, but to Mr Sommers' asserted personal need for funds.

Mr Sommers arranged for an agreement to be prepared whereby he would transfer a 21 per cent shareholding to Tinkler Group with an option to buy them back on the basis that he would receive $300,000 from his loan account. He said that that way of structuring the transaction would have tax advantages. The transaction did not proceed. On 29 July 2009 Mr Todd advised Mr Sommers that he had spoken to Mr Tinkler and that Mr Tinkler " ... is saying that the agreement was that we needed to get a handle on the cash position of the club and forecast numbers/budget before the $300k happens " (7/1881). Clearly the sum of $300,000 is not a reliable indicator of the value of a 21 percent shareholding as at August 2009.

Further, whilst Tinkler Group and Mr Tinkler engaged in oppressive conduct in particular in purportedly having Mr Sommers " stood down " as a director on 26 August 2009, his position as managing director was lawfully terminated on 18 September 2009. On that day Mr Anthony Foate, the solicitor for SIH, sent Mr Sommers an email stating " Please note the directors yesterday terminated your agreement with the above company immediately ". The reference to the above company was to SIH. The reference to " your agreement " was correctly understood by Mr Sommers to be his services contract with SIH. SIH was entitled to terminate summarily Mr Sommers' employment as managing director because of his conversion of the two Audi motor vehicles and his continued detention of the four motorbikes.

A meeting of shareholders was convened to be held on 21 October 2009 for the purpose of removing Mr Sommers as a director. Palmer J granted an injunction until further order to restrain SIH from removing Mr Sommers as a director of TSCCF or TSC and restrained Tinkler Group from voting on the resolution to remove Mr Sommers as a director of SIH. Mr Sommers resigned as a director of SIH, TSC and TSCCF on 25 February 2010.

In the case of an apparently solvent company, a winding-up order under s 233 is a remedy of last resort. In the present case there was no up to date evidence of SIH's financial position and it was not possible to say whether it was apparently solvent or not. The fact that by September 2009 a substantial proportion of the debts due to creditors had been outstanding for over 90 days and suppliers were chasing bills, supports an inference that by that time SIH and its subsidiaries were not solvent. The subsidiaries were placed in administration.

In this case both parties acted oppressively towards the other. The appropriate order is that SIH be wound up. Even if there were no grounds for making that order under s 233, the company should be wound up on the just and equitable ground. I decline an order for the compulsory purchase or the compulsory sale of Mr Sommers' shares.

Mr Sommers' claim to be indemnified in respect of liabilities as guarantor

Mr Sommers complained to Mr Foate on 16 September 2009 that the Club had acquired a Ferrari California motor vehicle from Italia Motori in Sydney. He asked for details of the finance and confirmation that the vehicle would not be used without his authority. He deposed that the car was subject to his personal guarantee and its purchase increased his liability under the guarantee even after he had been locked out of the business. He contended that the vehicle had been acquired in breach of court orders that he be given seven days' notice of vehicle acquisitions.

However, the vehicle in question was the subject of a contract signed by Mr Sommers on 30 April 2009 (exhibit M). Mr Sommers said that that particular order had been cancelled, but I do not accept that evidence.

Mr Sommers deposed that he was concerned by a newsletter sent to members on 6 January 2010 that the Club had ordered a number of new vehicles. However, the evidence in relation to guarantees given by Mr Sommers was sparse. He did not tender the guarantees that he had given. There was no evidence that he was not in a position to cancel his guarantees in respect of future vehicle acquisitions, or had not done so. There was no evidence that after Mr Sommers was excluded from management, SIH and its subsidiaries caused the companies to enter into new financing arrangements that subjected Mr Sommers to additional liabilities. Mr Dempsey was asked whether the Supercar Club had bought any cars since 9 September 2009. He said that it had not to his knowledge (T81). He was not otherwise cross-examined to suggest that the directors had caused Mr Sommers to incur additional liabilities under his guarantees. Mr Sommers is not entitled to an order requiring Mr Tinkler, Tinkler Group, Mr Todd or Mr Dempsey to indemnify him in respect of his liability as a guarantor.

Claim for moneys owing

By his cross-claim Mr Sommers sought orders that SIH, TSC and TSCCF specifically perform the three service agreements dated 22 April 2008 (which is a mistake), and the purchase agreement dated 22 April 2008, by paying all amounts owing under those agreements. Alternatively, he sought damages. He also sought orders that if those companies failed to pay the amounts owing, that Mr Tinkler, Tinkler Group, Mr Todd and Mr Dempsey pay amounts owing under those agreements.

There is no basis for making those parties liable for the debts of SIH or TSC. There is no evidence that any inability of those companies to pay debts owed to Mr Sommers was caused by their conduct.

Mr Sommers did not seek judgment for the debt he claims was owing under his director's loan account with TSC.

It was submitted for Mr Sommers that if it is found that the contracts for services executed by Mr Sommers on behalf of each of the companies with himself were enforceable, then the evidence in his affidavit of 2 October 2009 as to the amounts owing establish the debt and amounts of damages that ought to be awarded.

I have found that those contracts are not enforceable. In his affidavit of 2 October 2009 Mr Sommers contended that he was owed $16,750 by SIH as director's fees. This was calculated as an amount due of $13,750 per month (being $12,500 plus GST) from 1 July 2008 to 18 September 2009. I have found that there was an agreement that Mr Sommers be paid a wage of $150,000 per year (the equivalent of $12,500 per month). Mr Sommers is not entitled to the additional payment of $1,250 per month. He is not owed any further sums by SIH for director's fees. Indeed he was overpaid $1,500.

For the reasons given above, Mr Sommers is not entitled to any termination payments under the contracts for services. Payments of salary from TSC were credited to his director's loan account. As noted above, Mr Sommers did not sue for the debt he says is owed to him under his director's loan account. TSC went into administration on 28 May 2010. It would be a matter for the administrator (or liquidator if the company is in creditor's voluntary liquidation) to adjudicate on a proof of debt for the loan account.

Although Mr Sommers claimed relief by way of specific performance of the share purchase agreement, in truth what he is seeking is judgment for the balance of the purchase price payable by SIH. He is entitled to that judgment. The payments Mr Sommers directed to himself from SIH's account were in payment of director's fees or reimbursement of expenses except for the payment of $100,000 on 6 February 2009, and $180,000 on 14 August 2009. He overpaid himself $1,500 for director's fees, and that overpayment should be credited against the outstanding balance of the purchase price. Mr Sommers is entitled to judgment for the balance of the purchase price of $218,500 together with interest. Interest should be payable at the rates prescribed for the purposes of s 101 of the Civil Procedure Act 2005 at the rates prescribed by r 36.7 of the Uniform Civil Procedure Rules 2005. The resolution of 22 April 2008 did not stipulate the date for completion of the share purchase agreement, but other evidence shows that completion was due on 1 July 2008 and the transfer of shares from Catalina Holdings to SIH is recorded as having been effected on that day. Interest should run from 1 July 2008. Interest should run only on the unpaid balance of the purchase price or $218,500, and not on the full sum of $500,000 up to the dates of partial payment, as Mr Sommers' cause of action was only for the debt of $218,500.

Payment of costs by SIH

As noted at para [17] above, part of Mr Sommers' pleaded case was that funds of SIH were used to litigate what he contends was a dispute between shareholders. No submissions were made about this matter. There was no evidence as to how much of the costs of the litigation was funded by SIH. Many of the claims were brought by or against SIH. To that extent there would be nothing improper in SIH's funds being used. There was no evidence that moneys of SIH were used to fund the claims of Tinkler Group.

Orders

Subject to any submissions counsel may have as to the appropriate form of orders to give effect to these reasons, I propose to make the following declarations and orders:

In proceeding 2009/290294:

1. Declare that on or about 22 April 2008 the first plaintiff and the first defendant made an agreement for the purchase by the first plaintiff of the shares it did not beneficially own in the second and third plaintiffs and that such agreement was not varied to increase the cash component of the purchase price from $800,000 to $900,000;

2. judgment for the first cross-claimant (first defendant) against the fifth cross-defendant (first plaintiff) in the sum of $218,500 plus interest pursuant to s 100 of the Civil Procedure Act at the rates prescribed by rule 36.7 of the Uniform Civil Procedure Rules for the purposes of s 101 of the Civil Procedure Act on the sum of $218,500 from 1 July 2008;

3. order that the first cross-claimant not execute the judgment to be entered pursuant to order 2 against the assets of the fifth cross-defendant without prior leave of the court;

4. declare that the purported contract of services between the first plaintiff and the first defendant dated 22 April 2008 is not binding on the first plaintiff;

5. declare that the first defendant was entitled to receive the payments made to him by the first plaintiff as salary as managing director of the first plaintiff that totalled $182,500;

6. declare that the first defendant is liable to indemnify the first plaintiff in respect of liability incurred by the first plaintiff under the lease enforced into on or about 3 July 2009 of the property at 1878 Yarramalong Road, Yarramalong;

7. declare that the purported contracts of services between the second and third plaintiffs, and the first defendant dated 30 June 2008 are not binding on the second and third plaintiffs;

8. declare that the first defendant is not liable to pay to the third plaintiff the amounts of salary credited to his loan account with the third plaintiff;

9. judgment for the second plaintiff against the first and second defendants in the sum of $189,000 together with interest,

(a) as against the first defendant, on the sum of $155,000 from 25 August 2009 and on the sum of $34,000 from the date of service of the statement of claim; and

(b) as against the second defendant on the sum of $155,000 from 1 September 2009 and on the sum of $34,000 from the date of service of the statement of claim.

10. order that the further amended statement of claim and the amended first cross-claim be otherwise dismissed and the second cross-claim be dismissed.

In proceeding 2009/291674

1. Order that Supercar International Holdings Ltd be added as second defendant;

2. order that the second defendant be wound up and that James Alexander Shaw of Shaw Gidley, Level 3, 2 Market Street, Sydney, be appointed as liquidator of the second defendant;

3. judgment for the plaintiff against the first defendant in the sum of $10;

4. order that the proceedings be otherwise dismissed.

I will stand the proceedings over to a convenient date for the purpose of making final orders and to hear argument on costs.

Decision last updated: 03 August 2011

Medium Neutral Citation:	Supercar International Holdings Limited v Sommers; Tinkler Group Holdings Pty Limited v Sommers [2011] NSWSC 336
Hearing dates:	22-25 June 2010
Decision date:	27 April 2011
Jurisdiction:	Equity Division
Before:	White J
Decision:	Stand the proceedings over to a convenient date for the purpose of making final orders and to hear argument on costs.
Catchwords:	CORPORATIONS - share purchase agreement - whether director and company entered into agreement for purchase of director's shares in subsidiary companies of which he was sole director - whether share purchase agreement binding - plaintiffs failed to establish basis on which share purchase agreement impugned - share purchase agreement binding on company CORPORATIONS - contract for service between director and company - whether contract for service binding - where director signed contract for himself and company - terms of contract not considered or approved by directors of company - number of terms of contract contrary to interests of company - directors had agreed to pay director a salary but had not agreed to engage director as a consultant to be paid a fee for services - contract of services not binding on company - director entitled to remuneration paid by company in accordance with company's constitution CORPORATIONS - contract for service between sole director of company and company - whether contract for service binding - where sole director signed contract for himself and company - clear conflict between as a director and duty to company in entering into contract - number of terms of contract contrary to interests of company and could not be justified as reasonable accommodation of both parties - director breached duties as director of company in entering into contract for service - contract not binding on company - contract avoided by service of statement of claim - director entitled to remuneration as resolved by company in accordance with s 202A of the Corporations Act 2001 (Cth) CORPORATIONS - raising capital - whether director engaged in misleading and deceptive conduct that induced investment in company - where some representations made in offer document and warranties contained in subscription deed - falsity of numerous representations not established by the plaintiff - misleading and deceptive conduct established in one of the respects alleged -- no evidence of reliance on representations - claim that plaintiff induced to invest in company by misrepresentation or misleading and deceptive conduct rejected - claim for damages under s 68 of the Fair Trading Act 1987 and s 729 of the Corporations Act 2001 (Cth) rejected CONTRACTS - subscription deed - whether director breached warranties in subscription deed - most breaches of warranties not established - where breach of warranty established not demonstrated that any loss suffered as a result of that breach - entitled to nominal damages for breach of warranty CORPORATIONS - misappropriation of company funds director entitled to receive money as payment of debts owed to him - directors must have expected that he would cause company to pay money he was owed - not liable to make restitution of money received as money reduced debt owed to him CORPORATIONS - oppression - numerous instances of oppression by directors of companies - remedies - whether discretion to order compulsory purchase of shares or to order winding up should be exercised - order to wind up solvent company only as a last resort -not possible to say whether company solvent -no evidence as to value of shares and valuation of shares would be fraught with difficulty, expense and delay - where both parties acted oppressively to each other - appropriate remedy is that company be wound up
Legislation Cited:	Fair Trading Act 1987 Corporations Act 2001 (Cth) Civil Procedure Act 2005
Cases Cited:	Re George Newman & Co [1895] 1 Ch 674
Category:	Principal judgment
Parties:	Supercar International Holdings Limited (Plaintiff 2009/290294) Tinkler Group Holdings Pty Limited (Plaintiff 2009/291674) Timothy Sommers (Defendant)
Representation:	Counsel: D Allen (Plaintiffs) D Currie (Defendants) Solicitors: Catalyst Legal (Plaintiffs) Clamenz Corporate Lawyers (Defendants)
File Number(s):	2009/290294; 2009/291674