Tomanovic v Global Mortgage Equity Corporation Pty Ltd
[2011] NSWCA 104
•04 May 2011
Court of Appeal
New South Wales
Case Title: Tomanovic v Global Mortgage Equity Corporation Pty Ltd Medium Neutral Citation: [2011] NSWCA 104 Hearing Date(s): 6 & 7 September 2010 Decision Date: 04 May 2011 Jurisdiction: Before: Campbell JA at [1], Macfarlan JA at [314], Young JA at [315]
Decision: 1. The parties are to confer promptly about the orders that are appropriate to give effect to these reasons for judgment.
2. If within 21 days of the date of delivery of these reasons for judgment the parties have agreed upon the orders that are appropriate, a minute of the orders signed on behalf of each party be provided to the Associate to Campbell JA.
3. If within 21 days of the date of delivery of these reasons for judgment the parties have not agreed upon the orders that are appropriate, within 24 days of the date of delivery of these reasons for judgment each party is to file in the registry and provide to the Associate of each judge comprising the bench for the hearing of this appeal, a draft of the orders that in the submission of that party are appropriate, together with written submissions in support of the making of those orders.
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]Catchwords: CORPORATIONS - oppression - ss 232, 233 Corporations Act 2001 (Cth) - agreement in principle for separation of interests in business enterprise carried out in some respects but not others - oppression possible even if no breach of contract nor estoppel - oppression possible even if conduct is carried out in good faith - keeping the value of minority shareholding locked up can be oppression - reasonable offer to buy out the minority shareholding does not necessitate a conclusion of no oppression - whether court has power to grant relief concerning assets that corporate trustee held on trust - 'legitimate expectation' not appropriate and unhelpful in context of oppression remedy - appropriate remedy for oppression - principles for deciding time as at which value of share to be decided for compulsory buy-out order - CORPORATIONS - winding up - by court - s 461(f), (k) - compulsory buyout order preferable where serious commercial detriment arise from winding up of companies and where both parties submit compulsory buyout preferable
Legislation Cited: Companies Act 1961
Companies Act 1961 (Vic)
Contracts Review Act 1980
Corporations Act 2001 (Cth)
Trade Practices Act 1974 (Cth)Cases Cited: Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27
Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270
Beneficial Finance Corporation Limited v Karavas (1991) 23 NSWLR 256
Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95; (2008) 66 ACSR 359
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304
Certain Lloyds Underwriters v Giannopoulos [2009] NSWCA 56
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672
House v R (1936) 56 CLR 499
Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 10 ACSR 606
Lucy v Lomas [2002] NSWSC 448
M Dalley & Co Pty Ltd v Simms (1968) 120 CLR 603
McEwen v Combined Coast Cranes Pty Ltd [2002] NSWSC 1227; (2002) 44 ACSR 244
McMillan v Toledo Enterprises International Pty Ltd (1995) 18 ACSR 603
Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692
Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342; (2009) 71 ACSR 343
O'Neill v Phillips [1999] 1 WLR 1092
Owners of the Ship "Shin Kobe Maru" v Empire Shipping Co Inc (1994) 181 CLR 404
Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41
Re a Company [1986] BCLC 362
Re Astec (BSR) Plc [1998] 2 BCLC 556
Re Bountiful Pty Ltd (1994) 12 ACLC 902
Re Polyresins Pty Ltd [1999] 1 Qd R 599
Re Posgate & Denby (Agencies) Ltd [1987] BCLC 8
Re Saul D Harrison & Sons Plc [1995] 1 BCLC 14
Re Suburban Hotel Co (1867) 2 Ch App 737
Surf Road Nominees Pty Ltd v James [2004] NSWSC 61
The Commonwealth v SCI Operations [1998] HCA 20; (1998) 192 CLR 285
Thomas v HW Thomas Ltd [1984] 1 NZLR 686
Tomanovic v Argyle HQ Pty Ltd; Tomanovic v Global Mortgage Equity Corporation Pty Ltd; Sayer v Tomanovic [2010] NSWSC 152
Trust Company Ltd v Noosa Venture 1 Pty Ltd [2010] NSWSC 1334
Vigliaroni v CPS Investment Holdings Pty Ltd [2009] VSC 428
Warren v Coombes (1979) 142 CLR 531
Wayde v NSW Rugby League Ltd [1985] HCA 68; 180 CLR 459Texts Cited: Ford's Principles of Corporations Law, 13th edition (2007)
Category: Principal judgment Parties: In all proceedings
Zoltan Tomanovic (First Appellant)
Australian Financial Services Corporation Pty Limited (Second Appellant)
In 76372 of 2010
Global Mortgage Equity Corporation Pty Limited (First Respondent)
One Australia Pty Limited (Second Respondent)
In 76370 of 2010
Argyle HQ Pty Limited (First Respondent)
Kenneth James Sayer (Second Respondent)
In 297497 of 2009
Kenneth James Sayer (First Respondent)
Ken Sayer Investments Pty Limited (Second Respondent)
Mortgage House of Australia Pty Limited (Third Respondent)Representation - Counsel: Counsel:
WG Muddle SC; P Newton (Appellants)
DJ Higgs SC; H Stowe (Respondents)- Solicitors: Solicitors:
ERA Legal (Appellants)
Brown Wright Stein Lawyers (Respondents)File number(s): 76372 of 2010; 76370 of 2010 and 297497 of 2009 Decision Under Appeal - Court / Tribunal: - Before: Austin J - Date of Decision: 05 March 2010 - Citation: Tomanovic v Argyle HQ Pty Ltd; Tomanovic v Global Mortgage Equity Corporation Pty Ltd; Sayer v Tomanovic [2010] NSWSC 152 - Court File Number(s) 2008/282201; 2008/282203; 2009/297497 Publication Restriction:
HEADNOTE
HEADNOTE
(This headnote does not form part of the Court's judgment)
Mr Zoltan Tomanovic and Mr Ken Sayer operated a business enterprise in a loose partnership arrangement. The arrangement involved various companies and trusts. Some of these entities were effectively controlled by Mr Tomanovic alone, some were effectively controlled by Mr Sayer alone, and some were jointly owned.
The entire business enterprise was divided into finance and non-finance sides. The finance side included a retail business, which involved the sale of home loan products to customers; a wholesale business, which involved lending funds to a small mortgage manager; and a third party business, which involved the payment of commissions to mortgage brokers who referred loans to the retail business. The non-finance side included the ownership of two properties located in Parramatta and a business providing investment advice to customers. In 2004 a group of companies bearing the name "Multiown" was established to take over the running of the non-finance side of the business.
No dividends were paid during the relevant period by any of the companies through which the partnership arrangement was implemented.
In anticipation of an arrangement by which Macquarie Bank would acquire a 10% shareholding in the various companies in the finance group, Mr Tomanovic resigned as a director of the relevant companies, leaving Mr Sayer as the sole director.
From late 2004 Mr Tomanovic and Mr Sayer had agreed in principle to separate their interests. Negotiations commenced for the Sayer interests to buy out the Tomanovic interests in the finance group companies. However, by 2008 they had still not agreed on all aspects of a basis for separating their interests. Over the course of the negotiations, the parties had executed a number of written documents.
On 22 December 2004 Mr Tomanovic and Mr Sayer signed a brief handwritten document entitled "Heads of Agreement". This was followed by a document which came to be referred to as the "First Heads of Agreement", executed by Mr Tomanovic and Mr Sayer on 31 March 2005. The "First Heads of Agreement" made provision for the Tomanovic interests to attain sole ownership of the Multiown enterprises and for the Sayer interests to acquire the rest of the business enterprises. The document contemplated a purchase price of $6 million payable by the Sayer interests to the Tomanovic interests, along with an indemnity against tax liabilities arising from the sale and mutual releases from and indemnities against any liability arising under guarantees.
Following these documents, the Tomanovic interests ceased receiving the weekly payments that they had thitherto received from the finance side of the business. Instead, the Tomanovic interests received payments by way of loan. These loans were to convert to payments of the purchase price upon the execution of formal documents. Between 23 December 2004 and 27 November 2006 the Sayer interests had caused payments totalling $1,341,750 to be paid to the Tomanovic interests.
On 24 November 2006 Mr Tomanovic and Mr Sayer executed the Second Heads of Agreement. The Second Heads of Agreement was less favourable to the Tomanovic interests in several respects. The consideration was reduced from $6 million to $5 million, of which $2 million was deferred. Unlike the First Heads of Agreement, the Second Heads of Agreement provided no indemnity against tax liability for the Tomanovic interests and no releases or indemnities concerning guarantees.
In April 2007 the Sayer interests' representatives provided to the Tomanovic interests a draft share sale agreement, of a kind that would implement the Second Heads of Agreement. The negotiations continued inconclusively until mid-March 2008, with both parties providing proposals and draft documentation.
On 11 November 2008 Macquarie Bank sold its 10% shareholding in the financial group to the Sayer interests. The purchase was effected by a loan made by St George to a jointly owned company which in turn lent part of the purchase price to the Sayer interests.
The relationship between the parties deteriorated and on 16 December 2008 the Sayer interests served a Notice of Demand on the Tomanovic interests demanding repayment of the loan payments. The Sayer interests subsequently began proceedings in the Common Law Division of the Supreme Court. The Tomanovic interests brought a cross-claim seeking judgment for sums of money alleged to be payable in accordance with the First and Second Heads of Agreement, or seeking specific performance of those documents. The trial judge found that none of the written documents produced by the parties in the course of their attempts to negotiate a separation of interests were contractually binding. The trial judge also rejected a claim that the Sayer interests were estopped from denying that the documents were binding. These findings were not challenged on appeal.
As a result of the failure of the parties to finalise a separation agreement, there were two companies which were still jointly owned by the Sayer and Tomanovic interests. The Tomanovic interests commenced proceedings in the Equity Division seeking an order that the Sayer interests buy out the Tomanovic interests under the statutory oppression remedy or alternatively an order for winding up. The trial judge found that there was no basis for the invocation of the oppression remedy to impose a compulsory buy-out on the Sayer interests. The trial judge held that if the Sayer interests were neither contractually bound to acquire Mr Tomanovic's interests, nor estopped from denying they were so bound, there could be no basis for the Court to find any unfairness arising out of the failure to consummate the separation of interests. The trial judge found that the failure to consummate the separation of interests did not constitute oppression and that Sayer interests generally acted in good faith in relation to the negotiations of the separation of interests.
Held (per Campbell JA, Macfarlan and Young JJA agreeing)
(1) General Principles in relation to Oppression :
The task of a court deciding whether there has been the type of commercial unfairness that generates a remedy under s 233 Corporations Act 2001 (Cth) ("Oppression") is to apply the text of the statute to the facts of the case. The words of the statute are not confined by reference to categories of situation derived from pre-existing case law or by judicial glosses: per Campbell JA (Macfarlan JA agreeing) at [177]-[178], [185], [232]-[234], per Young JA at [331]
It is possible for there to be Oppression even if no breach of contract is involved and even if there is no departure from a position to which a party is bound by an estoppel: per Campbell JA at [176], [178], per Young JA at [326] and per Macfarlan JA at [314]
It is possible for there to be the type of commercial unfairness that generates a remedy under section 233 Corporations Act2001 (Cth) even if part of the reason for its existence is the conduct of the party asserting Oppression: [255]
The terminology of 'legitimate expectation' is not appropriate and is unhelpful in connection with the oppression remedy: [166]-[171], [184]
Breakdown in personal relations can be one of several factors that lead together to a conclusion that Oppression is made out: [199]
Ordinarily it is difficult to say that there has been Oppression in a 50/50 company between two persons of equal strength of character: per Young JA at [321]
(2) Saleability of the Tomanovic Shares : That the Sayer interests seek to keep the value of the equity of the Tomanovic interests locked up in the companies is an important element of the commercial unfairness in the situation, in circumstances where:
the income that the Tomanovic interests used to receive on the basis that it was theirs to keep has stopped being paid;
there is no present prospect of the Tomanovic interests receiving income from their shareholding other than at the discretion of the Sayer interests, regardless of how the companies fare;
there is no real prospect of the Tomanovic interests selling to anyone else for a fair value;
resumption of the former basis on which the two men co-operated is no longer possible;
the Tomanovic interests have significantly prejudiced themselves by incurring, with the acquiescence of the Sayer interests and in the mutual expectation that a buyout would occur, a very significant debt that the Sayer interests are intent on recovering; and
the Sayer interests have been running the companies as though they were totally their own.
per Campbell JA at [205]-[206] (Young JA at [332]-[333] agreeing)
(3) Distribution of Dividends : The non-payment of dividends was an historical practice of the companies in the group. However there was an element of commercial unfairness in the situation because this historical practice occurred in a context where income was made available to both of the two men from the companies in other ways and there has been a departure from that historical practice. Further, there was an element of commercial unfairness because the value of the corporations at the time Mr Tomanovic ceased to be actively involved in them had arisen in part from the efforts of Mr Tomanovic: [207]
(4) Good Faith of the Sayer Negotiations : Conduct that is carried out in good faith can still constitute, or be part of, conduct that amounts to Oppression: per Campbell JA at [215]-[222], [256] (Young JA at [330] agreeing)
(5) The Role of a "Reasonable Offer" in Whether Oppression is established : The making of a reasonable offer to buy out the minority shareholding is merely one factor that, in some but not all types of situations in which Oppression is alleged, can be relevant to whether oppression is made out. The existence of a reasonable offer does not necessitate a conclusion that there was no oppression: [235]
It may not be necessary for the offer to be an offer in the sense that is relevant for contract formation before it could be capable of affecting a conclusion about whether oppression is made out: [242]
Whether an offer takes the form of an offer that was able to be accepted to constitute a binding contract, the period for which the offer was open and the reasonableness of the offer are all factors which are relevant to but not decisive of the issue of oppression: [255], [256]
In any case, the trial judge did not find that the April and September 2007 documents amounted to reasonable offers: [239]-[240]
(6) Winding Up Remedy : In circumstances where oppression is made out and where serious commercial detriment would arise from a winding up order, a compulsory buy-out order will be preferable to a winding up order on the just and equitable ground in s 461(1)(k) Corporations Act 2001: [291]-[292]
(7) The Court's Power to Order a Buy-out of the Interests of a Unit Trust : The question as to the court's power to grant relief concerning assets that a corporate trustee held on trust was not raised at trial or on appeal and the court was not in a position to decide the issue: [305]-[306]
TABLE OF CONTENTS
Para
Nature of the Appeal
2
PART A - THE FACTUAL BACKGROUND
10
Pre-Macquarie Relationships
10
The Macquarie Bank Restructure
19
The Buy-Out Negotiations to September 2007
27
The First Heads of Agreement
33
The Second Heads of Agreement
40
Attempts to Identify the Transaction Structure
48
The April 2007 Draft Documentation
52
The September 2007 Draft Documentation
68
The Proposed St George Borrowing
70
The Buyout Negotiations from October 2007
77
The November 2008 General Meeting Called
112
Macquarie Sells
114
The November 2008 General Meeting
124
The Lead-Up to the Litigation
126
The Reinstatement Offers
132
PART B - THE STATUTORY POWERS INVOKED
135
PART C - THE JUDGMENT BELOW CONCERNING OPPRESSION
141
Failure to Complete Separation of Interests
144
Diversion of Money and Assets (Appeal Ground 13)
148
Oppression Allegations Affecting Argyle HQ
155
Increase in St George Bank Facility - (Appeal Ground 11)
155
Drawdown of Facility by Argyle HQ to Purchase Macquarie Bank's Shares - (Appeal Ground 12)
159
“Oppressive Conduct Generally”
161
PART D - THE OPPRESSION GROUND OF APPEAL
166
“Legitimate Expectation”
166
Standard for Appellate Review
172
The Grounds of Appeal
173
Appeal Ground 2
174
Failure to Separate Interests
182
Breakdown in Personal Relations
196
Saleability of the Tomanovic Shares
200
Significance of No Distribution of Dividends?
207
Significance of Position as Director?
208
Reinstatement Offer
212
Good Faith of the Sayer Negotiations
217
Tomanovic Failure to Complete on April or September 2007 Terms
225
The Role of a “Reasonable Offer” in Whether Oppression is Established
226
Any Finding that the Documents are Reasonable Offers?
238
Not an “Offer” Because Not Contractual?
241
Not an Offer that was Reasonable?
244
Is the Argument Open?
246
Effect of the April and September 2007 Documents on Whether there is Oppression
255
Appeal Grounds 4, 5 and 6
260
Ground 6 - Inadequacy of Reasoning re Para [224]?
266
Grounds 11 and 12
269
Remaining Grounds of Appeal Re Oppression
278
Appeal Ground 3(b)
279
Appeal Grounds 10 and 14
281
Appeal Ground 13
286
PART E - THE WINDING UP REMEDY
288
PART F - REMEDY
295
Remedy for Oppression
295
Orders
309
Judgment
CAMPBELL JA :
Nature of the Appeal
Mr Zoltan Tomanovic and Mr Ken Sayer were in what the trial judge described as "a kind of business marriage from about 1999 to December 2004" . That "marriage" involved some complex legal relations between, or in, various companies and trusts, some of which were effectively controlled by Mr Tomanovic alone, some of which were effectively controlled by Mr Sayer alone, and some of which were jointly owned. For many purposes relevant to this appeal it is not necessary to distinguish the precise entities involved, so I shall refer to them collectively as "Tomanovic interests" or "Sayer interests" .
In late 2004 Mr Tomanovic and Mr Sayer agreed in principle to go their separate ways. By 2008 they had still not agreed on all aspects of a basis for separating their interests.
In anticipation of agreement being reached, the Sayer interests had caused payments totalling $1,341,750 to be paid to the Tomanovic interests. The last straw precipitating the proceedings from which this appeal is brought came on 16 December 2008, when the Sayer interests served a notice on the relevant Tomanovic interests demanding repayment of that money (the " Notice of Demand ").
The Tomanovic interests then began the two sets of proceedings in the Equity Division of the Supreme Court (" the Equity Proceedings ") from which this appeal is brought. One proceeding related to Global Mortgage Equity Corporation Pty Ltd (" GMEC "), one of the companies that was jointly owned by the Tomanovic and Sayer interests. The other proceedings related to Argyle HQ Pty Ltd (" Argyle HQ "), another of the companies jointly owned by Tomanovic and Sayer interests. In each proceeding, the Tomanovic interests sought, in relation to the company that was the subject of those proceedings, either an order that the Sayer interests buy out the Tomanovic interests at a fair value determined by the Court (either through a referral to an Associate Judge, or appointment of a referee), or an order for winding up.
In the orders appealed against, the primary judge ordered that each of the Equity Proceedings be dismissed with costs: Tomanovic v Argyle HQ Pty Ltd; Tomanovic v Global Mortgage Equity Corporation Pty Ltd; Sayer v Tomanovic [2010] NSWSC 152.
Following the Notice of Demand, the Sayer interests began proceedings in the Common Law Division of the Supreme Court, seeking repayment of the $1,341,750 ( " the Common Law Proceedings " ). Those proceedings were transferred to the Equity Division, and the primary judge heard the Common Law Proceedings at the same time as he heard the Equity Proceedings. He held that the Tomanovic interests were obliged to repay the $1,341,750, and entered judgment for that sum plus interest, a total of $1,765,004.64. No appeal is brought from the judgment in the Common Law Proceedings. However, that judgment has been stayed pending the determination of the appeal from the Equity Proceedings, and some of the circumstances in which the $1,341,750 came to be paid to the Tomanovic interests need to be taken into account in the present appeal.
In the course of attempting to establish a basis on which the separation of interests could occur, two documents (discussed in more detail below) known as the First Heads of Agreement and the Second Heads of Agreement had been executed. The Tomanovic interests filed a cross-claim in the Common Law Proceedings, contending that those documents were contractually binding, and seeking judgment for sums of money payable in accordance with their terms, or alternatively an order for specific performance of those documents. One basis on which the cross-claim contended that the documents were binding was that the Tomanovic interests were estopped from denying that the documents were binding. The judge dismissed that cross-claim. No appeal is brought from his decision in that respect.
I have concluded, contrary to the decision below, that there are circumstances that justify the making of compulsory buy-out orders. I agree with the judge that an order for winding up is not appropriate.
PART A - THE FACTUAL BACKGROUND
Pre-Macquarie Relationships
The judge found that Mr Tomanovic and Mr Sayer established "some form of commercial relationship in 1994", and that in 1999 they began a "loose partnership arrangement". Mr Tomanovic has at all relevant times controlled Australian Financial Services Corporation Pty Ltd (" AFSC "). Mr Sayer has at all relevant times controlled One Australia Pty Ltd (" One Australia "). These were the respective corporate vehicles that the men largely (though not exclusively) used to structure their loose partnership.
Mr Sayer had, prior to 1999, operated a business under the name "Mortgage House of Australia" . It was sometimes referred to as "MHA".
During the time relevant to the proceedings the business was divided into finance and non-finance sides. The finance side operated through several companies, of which Tomanovic interests and Sayer interests were shareholders, and Mr Tomanovic and Mr Sayer were both directors. The business of the finance side was explained by Mr Sayer, in evidence not contested by Mr Tomanovic, as including a retail business, and a wholesale and third party business. The retail business involved the sale of home loan products directly to customers. The wholesale business involved lending funds through the sale of home loan products to a small mortgage manager, which would re-brand that product with its own name and provide it to its own customers. The third party aspect of the business involved the payment of commissions to mortgage brokers who referred loans to the retail business.
It was agreed between the two men, from about 1999, that Mr Sayer would be "top boss and ultimate decision maker in control of the money side of business." On 28 July 2000, when Mr Sayer agreed to Mr Tomanovic becoming a director of the various companies, they both signed a letter that included:
"It must also be noted that Kenneth James Sayer, has the final say and decision making process of the Mortgage House of Australia group, however Zoltan Tomanovic will be consulted on every decision made."
Mr Sayer gave evidence, that was not disputed by Mr Tomanovic, as follows:
"Zoltan and I regularly had informal discussions in relation to both the MHA Retail Business and the MHA Mortgage Management System Business. These discussions took place in the stairwell, in my office or upstairs in Zoltan's office, and occurred roughly every 2 weeks or so, and lasted for about 20 to 30 minutes. As to these meetings:
(a) It was my practice to advise Zoltan of developments that had occurred in the MHA Finance Business including:
(i) the changes to the finance products the MHA Finance Business were offering customers;
(ii) the new services the MHA Finance Business could provide to customers;
(iii) any developments in the advantages offered by the funding institutions to the MHA Finance Business;
(iv) openings of new MHA Branches;
(v) growth of the MHA Finance Business;
(vi) profitability;
(vii) competition in the market place
(vii) marketing initiatives; and
(ix) cashflow, and the deficit in cash position, and the need for funding.
...
(c) it was not my general practice to seek the agreement of Zoltan (or advise him in advance) of proposals for future action in relation to the MHA Finance Business. Rather, it was my practice to inform him of developments which had already occurred in that business. I can not presently recall any exceptions to that general practice;"
The non-finance side of the business involved the provision of mortgage management systems to customers. This involved providing investment advice to customers in order to encourage property investment, minimise mortgages and increase the investment portfolio of its clients. Another aspect of the non-finance side of the business was the ownership of two properties located in Argyle Street, Parramatta. Apart from activities of the retail part of the finance business that were conducted through branches, the activities of both the finance side and the non-finance side of the business were carried out from those buildings. The buildings were owned by Argyle HQ (though under a name different to its present one), which held them as trustee of the 9 Argyle Street Unit Trust. Apart from the issue of one B class share to Tomanovic interests in October 2003, the shares in Argyle HQ have at all relevant times been held as to 50% by Tomanovic interests, and 50% by Sayer interests. Mr Tomanovic and Mr Sayer were the sole directors prior to 20 January 2005. The unit holders in the unit trust have at all times been AFSC and One Australia on a 50:50 basis. The case both at first instance and on appeal has proceeded as though Argyle HQ was a company of real value, not a company all of whose assets were held on trust.
Mr Sayer gave evidence, that Mr Tomanovic accepted was "substantially correct" :
"The bulk of our discussions in these regular informal meetings addressed the operations of the MHA Mortgage Management System Business. As to this:
(a) it was the practice of Zoltan to inform me about both the state of the business, of the MHA Mortgage Management System Business, and proposals and prospects for future growth;
(b) it was not Zoltan's practice to seek my agreement or consent in relation to those proposals;
(c) it was my practice from time to time to emphasise the need for growth in the MHA Mortgage Management System Business. However, it was not my practice to make specific proposals in relation to the growth or operations of the MHA Mortgage Management System Business. I understood that Zoltan had effective management autonomy in relation to the MHA Mortgage Management System Business."
In the nomenclature used in Mr Sayer's affidavit the Mortgage Management System Business did not include the business of owning the properties in Argyle Street.
No dividends were paid by any of the companies through which the partnership arrangement was implemented from the time the partnership began to the date of the trial before the primary judge. Mr Sayer said that paying dividends "wasn't our procedure. Intercompany loans was the going thing." As well, each man received what was in effect a salary. There was no finding about whether there were any distributions from the trust, and the evidence did not address that topic.
The Macquarie Bank Restructure
Negotiations had been underway from at least November 2002 for Macquarie Bank, or a company associated with it, to acquire 10% of the shares in the finance group for a single payment of $2 m. A list of terms proposed by Macquarie in November 2002 included that a new group holding company be established with 100% ownership of the group, and that Mr Sayer be the sole director of that company.
By May 2003 negotiations were well advanced for Macquarie Bank to acquire that interest.
The records of the companies had indicated that Sayer interests held 75% of shares in companies in the finance group, while Tomanovic interests held 25%. Grant Thornton is an accounting firm instructed by the Sayer interests at all relevant times, and which also provided services to companies in the MHA Group. The minutes of a meeting held at the offices of Mortgage House on 4 June 2003, attended by both Mr Sayer and Mr Tomanovic, record the manner in which that shareholding was to alter prior to the entry of the Macquarie group company:
1. Beneficial Interests in FG
ZT and KS have an equal, ie 50/50 beneficial interest in the FG that MSL is purchasing a 10% interest in
This interest in these FG companies has always been 50/50
This interest is not formally documented, but was & is agreed by both ZT and KS in a 'handshake' agreement
Therefore when MSL purchase their 10% interest in the FG, the remainder 90% interest will be beneficially owned 45% by KS and 45% by ZT, whatever the legal ownership may be. For example 90% may be owned by One Australia, but that is then equally owned beneficially by KS and ZT
ZT would therefore get 50% of the capital value of the FG business over time
2. Legal / Shareholding Interest in FG
Was 75 to KS/ 25 to ZT
Then when it was realised that the equity interest was worth more with the growth of the FG, and was not offset equally by wages paid, it was decided to change the shareholding in MHA to 50/50 (but KS gets a higher salary for his role managing the FG)
MT to check with Gabriel Abdallah, KS's accountant, that he has now recorded the legal ownership as 50/50 with ASIC. (But first we will receive correspondence sent jointly by KS & ZT stating their agreed decisions on the issues discussed in this meeting, to be sent within a day)
3. Non-Finance Group (NFG)
The interests of ZT and KS in the NFG will not change with the MSL investment in the FG
The beneficial interests in this group are equally shared, 50/50, by both KS and ZT
ZT expects in future to have reduced interest in the FG, but to retain 50% interest
ZT is starting a new company in the NFG, that MSL is aware of
A new company, GMEC, was incorporated in June 2003 (though under a different name to its present one), and became the holding company of existing companies in the finance group. Mr Tomanovic was a director of it for only a matter of days.
In anticipation of the arrangement with Macquarie Bank proceeding, Mr Tomanovic resigned as a director of the various companies in the finance group (including GMEC) on 27 June 2003.
On 2 July 2003 a Subscription and Participation Agreement (" SPA ") was entered into between GMEC, One Australia, AFSC and Macquarie Bank. Under it, Macquarie Bank agreed to subscribe for shares in GMEC, that would after issue of those shares amount to 10% of the issued capital, for $2 m. The effect of the share issue was warranted to be that, after the issue, 45% of the issued capital would be held by One Australia, 45% would be held by AFSC, and 10% would be held by Macquarie. One clause of the agreement required GMEC to ensure that Mr Sayer was the sole director, and the sole secretary. Another clause provided that no matters needed to be referred to the shareholders for approval. No party to the agreement could carry out any of the actions on a long list, without the prior written consent of Macquarie Bank. One of the items on that list was "the appointment or removal of any director" of GMEC.
There was a provision prohibiting any party to the agreement from disposing of any equity security in the company without the prior written consent of each other shareholder (which could not be unreasonably withheld), and pre-emptive rights for any shareholder to acquire the shares of another shareholder who wished to sell.
The agreement required GMEC and Mr Sayer to enter into a service agreement under which Mr Sayer was to be employed as Chief Executive Officer on a salary of $500,000 per annum.
The Buy-Out Negotiations to September 2007
In around 2004 a group of companies each bearing a name that included "Multiown" was established, in part to take over the running of the non-finance side of the business. At least some of those companies carried out their operations through being trustee of a unit trust. Those companies and trusts were to provide specialised mortgage strategies, loans and investments to clients. I will refer to the operations of these companies and trusts collectively as "the Multiown business" . It was initially established as an equal partnership between Mr Tomanovic, Mr Sayer and a Mr Gabriel Baca. The Multiown business operated from a floor of the Argyle Street building on a basis that did not involve the payment of any rent or any payment for telephone, internet, cleaning or electricity. As well, the Multiown business used for the purpose of its own operation the database of clients that had been set up and maintained by the MHA business. Mr Tomanovic or one of the entities in which he was interested from time to time wrote loans through MHA, on each of which a commission was paid. The Multiown business continued to occupy the Argyle Street premises on that basis for much, and perhaps all, of the time until proceedings were instituted.
From around mid-2004 negotiations commenced for the Sayer interests to buy out the Tomanovic interests in various of the group companies. On 22 December 2004 Mr Sayer and Mr Tomanovic met at Kirribilli. They both signed a brief handwritten document entitled "Heads of Agreement" . Its text was:
"MH Group Bus sold to Ken Sayer.
Date after the holiday Zoltan in Europe before Ken going to USA 04 subject to contract for total of $6 mil net of taxes price to be determined about"
Also on 22 December 2004 Mr Sayer sent an email to Mr Noel Dona (copying in Mr Tomanovic) saying:
"Zoltan & I have come to agreement.
Business is sold as at a day or two before I left for the US this year. (Agreement Signed)
All drawings since that date, to be netted out of his 6 mil.
Can u arrange for transfer of AFS shares, resignation of directorship & POA for AFS."
In that email "AFS" refers to AFSC, and "POA" is an abbreviation for power of attorney.
Prior to that time the Tomanovic interests had received payments of $3602.50 per week from the Mortgage House Group. After 22 December 2004 they did not receive any more such regular payments. However, the first of the payments that ultimately made up the $1,341,750 that was the subject of the Common Law Proceedings was made on 23 December 2004. Mr Derek Angel, who had responsibility for the accounts of the finance side of the business, wrote to Mr Tomanovic on 23 December 2004:
"I have been advised by Ken Sayer that an agreement has been reached by the two of you with a signed acknowledgement to be delivered to me in due course.
Ken has advised that the sum of $6,000,000 (Sixmilliondollars) is the agreed amount.
All future payments to you will be deducted from this amount.
Deductions will also be made from this amount in due course which represents payments made to you from the agreed date of sale.
To ensure you are up to date with the reducing indebtedness of Ken to you, I will supply a monthly update of the current balance outstanding and amounts paid in that month.
To initiate the process, I understand you require the amount of $150,000 to be paid today. In regard to this transaction the balance owing will be as follows:
$6,000,000
Less amount paid
$150,000
Total outstanding
$5,850,000
The amount of $150,000 was duly paid on 23 December 2004.
On 20 January 2005 Mr Tomanovic tendered his resignation as a director of the four companies, other than the Multiown companies, through which the non-finance side of the business was conducted. One of the companies from which he then resigned as director was Argyle HQ. Since 20 December 2005 Mr Sayer has been the sole director of Argyle HQ, except for the period from 9 June 2005 to 5 October 2006, when Derek Angel was an additional director. Bearing in mind that Mr Tomanovic had already resigned as a director of the various companies in the finance group on 27 June 2003, the January 2005 resignations had the effect that, of the companies that carried on the finance and non-finance sides of the business, he remained a director of only the Multiown companies.
The First Heads of Agreement
Between December 2004 and the end of March 2005 solicitors for the Sayer interests had prepared several drafts of a heads of agreement document relating to the proposed separation of interests. Mr Ken Gunderson-Briggs, of Grant Thornton, accountants, was also acting for the Sayer interests from that time onwards concerning the proposed separation of interests. On 31 March 2005 Mr Tomanovic and Mr Sayer executed a document entitled "Heads of Agreement" , that later came to be referred to as the "First Heads of Agreement" . Its text filled 7 closely typed pages. It commenced by saying:
"Except paragraphs 8 and 9, this document is not intended to be a binding contract or give rise to legal rights and obligations (except as set out in the document). The document has been prepared in order to provide instructions to lawyers, accountants and other advisers in relation to the preparation of formal documents ..."
Clause 8 was a confidentiality agreement. Clause 9 contained an agreement by Mr Tomanovic to give to the Sayer interests any authority needed to deal with the rights of the Tomanovic interests in the enterprises that the Sayer interests were to acquire.
The First Heads of Agreement contemplated that formal documents would be entered into by 30 June 2005. It also contemplated that payments might be made to the Tomanovic interests,
"... in anticipation of execution of formal documents and that these payments are by way of loans which shall:
a. convert to payments of the Payment Sum upon execution of formal documents; or
b. become immediately due and payable as a debt owing by ZT and other Zoltan Entities to Remaining Enterprises, in the event that formal documents are not executed by 30 June 2005 or such later date as KJS and ZT may agree to in writing."
The balance of the document made provision for the Tomanovic interests to attain sole ownership of all the Multiown enterprises, and for the Sayer interests to acquire the rest of the business enterprises. It contemplated that the payment price would be $6m payable by the Sayer interests to the Tomanovic interests, plus an amount equal to the amount of any tax liability that the Tomanovic interests might incur as a result of receiving that $6 m. As well, Mr Tomanovic would procure a release from any guarantees that Mr Sayer had given concerning Multiown companies, or indemnify him against any liability under such a guarantee, and Mr Sayer would likewise procure a release for Mr Tomanovic from any guarantees he had given concerning the rest of the business enterprises, or indemnify him against any liability under such guarantees.
Thereafter, various payments were made by a company in the finance side of the business to Mr Tomanovic, under cover of a standard form letter that stated, inter alia:
"I have been advised that the Heads of Agreement has been entered into with a signed acknowledgement to be delivered to me in due course.
I understand that the payment sum under the Heads of Agreement is six million dollars ($6,000,000) ("Payment Sum").
In accordance with clause 9(c) of the Heads of Agreement, all payments to you and your related entities are payments by way of loan which shall:
a. convert to payments of the Payment Sum upon execution of formal documents;
or
b. become immediately due and payable as a debt owing by you and your related entities in accordance with clause 9(c)b. of the Heads of Agreement, in the event that formal documents are not executed by 30 June 2005, or such later date as you and Ken Sayers may agree to in writing.
Following execution of formal documents:
a all payments to you and your related entities will be deducted from the Payment Sum; and
b deductions will also be made from Payment Sum in due course which represent payments to you and your related entities."
On 23 June 2005 Mr Sayer and Mr Tomanovic signed a "Memorandum of Agreement" under which they agreed to extend the date for execution of the formal documents to 31 August 2005.
31 August 2005 passed without the formal documents being entered, and without any agreement extending the time for entry of formal documents. However, payments continued to be made by a company in the finance group to Mr Tomanovic, under cover of exactly the same standard form letter as had been used from the time the First Heads of Agreement was executed. The last of those payments was made on 27 November 2006.
On 6 November 2006, at a meeting at the offices of Grant Thornton, Mr Tomanovic and Mr Sayer signed a document entitled "Memorandum of Understanding" that Mr Gunderson-Briggs handwrote at that meeting. It was common ground that Mr Gunderson-Briggs described it as "an agreement to agree" and that he said it would need to be put into a proper Heads of Agreement form in due course. Mr Tomanovic expressed a wish to have it done as soon as possible, and stated his opinion that it should be done by Christmas. Mr Gunderson-Briggs agreed it should be done as soon as possible, but warned that there were a lot of things to do.
The Second Heads of Agreement
On 24 November 2006 Mr Tomanovic and Mr Sayer executed the Second Heads of Agreement. Apart from attestation clauses, its text was a single page. It stated:
"This document is not intended to be a binding contract or give rise to legal rights and obligations (except as set out in the document). The document has been prepared in order to provide instructions to lawyers, accountants and other advisers in relation to the preparation of formal documents to give effect to the transactions contemplated by this heads of agreement ('formal documents').
After identifying the parties, it said:
"(a) KJS and entities associated with KJS (collectively "Ken Entities") will purchase the assets which Ken Entities on the one hand and ZT and persons and entities associated with ZT including AFSC (collectively "Zoltan Entities") on the other hand own, for the price of $5,000,000.00 (the "Price").
(b) The Price will be paid as follows:
(i) forgiving the loan to Zoltan Entities which is presently outstanding and owing in the amounts of $1,245,750.00;
(ii) payment of $100,000.00 on execution of this Heads of Agreement;
(iii) payment of $1,404,250.00 on completion of the sale under the formal documents;
(iv) payment of $1,000,000.00 on the first anniversary of completion of the sale under the formal documents; and
(v) payment of $1,000,000.00 on the second anniversary of completion of the sale under the formal documents.
(vi) payment of $250,000.00 on achievement of the 20 sales per month performance hurdle.
(c) For the avoidance of doubt the sale will exclude any of the Multiown Enterprises."
The "loan" referred to in (b) (i) was the total of the amounts of periodical payments that by then had been paid to the Tomanovic interests.
When para (b)(vi) referred to "sales" it was referring to occasions when the Tomanovic interests referred customers to the Sayer interests for obtaining finance.
The value flowing to the Tomanovic interests under this document was considerably less than under the First Heads of Agreement, in several respects. First, the consideration of $5m payable under this document was less than the $6m under the earlier document. Second, the First Heads of Agreement included an indemnity against tax on that $6 m, but there was no corresponding provision in the Second Heads of Agreement. The value of the indemnity concerning tax could have been considerable (see [48] below). Third, the consideration was payable on less advantageous terms, because of the deferral of payment of $2m under (b) (iv) and (v). Further, the payment of $250,000 of it was dependent on a condition, under (b) (vi). Unlike the First Heads of Agreement, the Second Heads of Agreement made no provision for each side to procure releases for the other from any guarantees, or to provide indemnities concerning any guarantees. The document did not say expressly that the Sayer interests would transfer their interests in the Multiown companies to the Tomanovic interests, but that seems to have been what the parties contemplated.
The amount of $100,000 contemplated by clause (ii) was duly paid to Mr Tomanovic on 27 November 2006. It was the last of the payments that made up the amount sued for in the Common Law Proceedings.
Thereafter, Mr Mark Sellars assisted Mr Gunderson-Briggs in acting for the Sayer interests. Mr Geoff Ryan, Mr Tomanovic's accountant, was also involved in seeking to advance the transaction.
Both sides seem to have expected settlement in a matter of weeks. Mr Sellars emailed Mr Angel on 24 November 2006 saying, "we are aiming to have formal documentation executed by 8 December. This will allow sufficient time for the various transfers and payments to be made prior to Christmas/New Year's break" . On 21 December 2006 Mr Tomanovic emailed Mr Gunderson-Briggs and Mr Sellars, saying "looks like we are not achieving as originally planned and agreed before Xmas finalisation of the final docs, as I have not seen any from your solicitors."
Attempts to Identify the Transaction Structure
On 8 December 2006 Mr Sellars emailed Mr Ryan, identifying the various entities in which the Sayer interests were proposing to acquire the rights of the Tomanovic interests. He continued:
"The consideration payable will be $5,000,000 the payment schedule of which is 'loosely' detailed in the attached copy of the heads of agreement. I say loosely because we are prepared to be flexible on what the components of the end transaction are going to be (I note there is no flexibility on the payment dates)
While our preference would be to simply purchase the direct interests in each of the above entities we note this could leave Zoltan in a position where he could conceivably loose [sic] 46.5% of the proceeds in tax. We are therefore open to suggestions as to how the transaction could be structured to achieve the best outcome for Zoltan.
As we discussed Grant Thornton had not performed any detailed analysis of how tax leakage could be minimised as we have not been instructed to do so by our client.
...
As a potential starting position for Zoltan we would be prepared to structure the transaction along the follows [sic] lines:
- Zoltan has currently been loaned $1,345,750 under loan agreement from Global Mortgage Equity Corporation Pty Limited. We would be prepared to forgive this amount. While we are not privy to Zoltan's affairs should he only have CGT assets representing his current or future principle place of residence the debt forgiveness could occur without causing any current or future tax liabilities for Zoltan.
- A consultancy agreement under which Zoltan (or an entities of his choice) would receive the $250,000 upon attaining that performance objective
- A sale and purchase agreement where the shares in AFS and Mortgage House Corporation P/L are purchased for $3,404,250 to allow Zoltan to access the 50% general CGT discount
- 3 distinctly separate agreements documenting each of the above
- Pay a portion of the amounts due into superannuation on Zoltan's behalf
If you could review Zoltan's position and in due course advise your preferred structure it would be appreciated."
Thus, the commercial objective was that the Sayer interests would acquire control of all the assets that had previously been conducted through the partnership, other than the Multiown shares of the Sayer interests. However, one element of the structure that had not been decided at that stage was the precise assets that were to be sold to achieve this objective. In particular, it had not been decided whether the assets sold should be the Tomanovic's shares in AFSC, or whether AFSC should sell the shares it owned in the commercial entities of which Mr Sayer wished to obtain control. However, the request that Mr Ryan "advise your preferred structure" also went to matters other than that, which were far from inconsequential detail.
Numerous emails passed between people on the two sides of the proposed transaction over the succeeding months, in which those on the Sellars side of the transaction made no fewer than eight written requests to be told the Tomanovic's proposal concerning the structure. The Tomanovic side of the transaction never provided a definitive answer to those requests. The closest to an answer concerning the assets to be sold came in an email from Mr Tomanovic to Mr Sellars of 22 February 2007:
"It is almost obvious that ultimately the only item with the discounted CGT ramification which can be sold is AGS corp p/l - 100 shares. That is where all my holdings are ultimately funnelled into anyway. Geoff would ultimately have the final say in that though, as it is the area of his expertise."
However, by the end of March 2007, and after two more written requests for a proposal on the structure, there was no indication that Mr Ryan had had his "final say" , and no decision on the structure was communicated from the Tomanovic side. Notwithstanding that, from 25 January 2007 to 15 March 2007 there was a stream of emails from Mr Tomanovic to the Sayers' side, complaining that he had not been paid the purchase price.
The April 2007 Draft Documentation
On 27 March 2007 Mr Sellars emailed Mr Tomanovic, saying:
"As we had not heard from you to [sic] by 16 March we proceeded to have the various documentation for the sale of your AFSC shares drafted.
The lawyers drafting the documents have subsequently informed us that there is a fixed and floating charge over all the assets of AFSC that has been in place since 1999, which has never been disclosed to us! Prior to being able to complete on the transaction this charge will need to be removed from the company/over the assets. Your urgent comments on how this can be sorted would be appreciated. In the absense [sic] of any plan one pre condition of any settlement will be that the charge is removed."
On 4 April 2007 Mr Sellars emailed Mr Tomanovic again, saying:
"In absence of a response to my email last week concerning the charge over the assets of AFSC I have instructed the lawyers to prepare a draft share sale agreement on the basis that settlement cannot occur until the charge has been removed.
The draft share sale agreement is attached to this email.
Could you please review in conjunction with your lawyers as a matter of urgency and come back to me with any comments you may have. This is the main document which encompasses a significant proportion of the documentation."
The body of a draft share sale agreement, of a kind that would implement the Second Heads of Agreement by selling to the Sayer interests the whole issued capital of AFSC, was attached. The draft agreement provided that a condition of completion was that the Tomanovic side deliver an executed release of the charge. Another condition of completion was that the Tomanovic side deliver to the Sayer interests documents described as the Debt Forgiveness Deed, the Loan Creation Agreement, and the MHC Agreement. Drafts of those documents were provided to Mr Tomanovic the next day. The draft agreement split the purchase price of $5m into several different components. It did not include any element of indemnity against tax liabilities arising from the sale, or one side procuring releases from the other from guarantees or providing indemnities concerning guarantees. It included extensive warranties concerning the affairs of AFSC. There was no provision for some matters of apparent commercial importance that had been included in the First Heads of Agreement but on which the Second Heads of Agreement was silent. These included provisions concerning the basis upon which rental of space, information technology and other services were to be made available to the Tomanovic interests in the future, and for the ongoing Tomanovic interests to continue to obtain loans for their clients from the Sayer interests.
On 19 April 2007 Mr Sellars sent to Mr Tomanovic a draft of the documentation required to remove the charge. No comments on the draft documentation were received from the Tomanovic side, notwithstanding requests that comments be provided.
On 21 May 2007 Mr Roger Williams, a solicitor by then instructed to act for the Tomanovic interests, wrote to Mr Sayer's solicitor saying that he had been furnished with the draft documentation, and was investigating the:
"... rather long and complex history of this matter ... and will then seek proper instructions from my clients to enable me to respond to your draft documents, if possible within the next 2 weeks ....
There may be additional documents to submit to you covering aspects not included in your drafts. At this stage I do not have enough information to be specific, but it may be that a proper service agreement is necessary to record the basis upon which Mr Tomanovic will continue to service Mortgage House customers via Multiown, as was originally contemplated in para 7 of the first heads of agreement."
On 8 June 2007 Mr Sellars emailed Mr Tomanovic, saying they were happy to include a servicing agreement in the sale agreement as long as it did not delay completion, which they wanted to occur prior to 30 June 2007. Again, he requested comments on the legal documentation already provided.
On 9 June 2007 Mr Tomanovic emailed saying that the "... servicing agreement must state on what basis and money splits we are operating" (but did not say what he wanted so far as those matters were concerned), and said he had appointed a new legal firm in the place of Mr Williams. Mr James Tuite thereafter acted as solicitor for the Tomanovic interests.
Mr Sellars summarised the then current position to his assistant, Lauren Evans, on 26 June 2007:
"In summary. Mr Tomanovic wants an agreement covering
- Commission to be received by him or his nominated entity for writing loans through MHA
- Agreement on rent/electricity/Phone expenses of Zoltan or his entities at Argyle Street
- Agreement on commissions from Zoltan's property activities.
Zoltan's proposed terms are:
- Wants there to be a minimum of paper work required
- Zoltan to receive an upfront on loan written through MHA (1% on loans written through funding program, 80% on other)
- All trails to MHA
- Zoltan pays no rent, electricity, phone etc
- Zoltan retains 100% of property deal income (does not want to have to disclose commissions being paid to MHA)"
Late in June 2007 Mr Sayer provided documents tendering his resignation as a director of the various Multiown companies, and transfers of his shares in the Multiown companies. Though the evidence is not altogether clear, it appears that Mr Sayer has also relinquished any interest he had in units of the unit trusts operated by Multiown companies.
Mr Tuite wrote to Mr Sayer's solicitors on 23 July 2007, requesting amendments to the various transaction documents that had been sent in early April. One of the changes requested was payment of interest on the various amounts of the proposed purchase price that had not already been received by the Tomanovic side, for a period from 6 November 2006 to the date of payment. Another change was the insertion of provision for the dates on which those instalments of purchase price that were not payable on completion were to fall due to be earlier than the draft had proposed. Another change was the insertion of provisions that limited reliance on vendor warranties to the extent that circumstances concerning the vendor warranties could not reasonably have been ascertained during the purchaser's period of due diligence, and in any event limiting the total liability under all warranties to $20,000.00, and concerning only breaches that would not have occurred except as a consequence of some fraudulent act by the vendors. Other amendments of potential commercial significance were also proposed.
On 9 August 2007 Mr Sellars emailed Mr Tomanovic, identifying six topics in relation to which Mr Sellars contended the requested changes conflicted with the Second Heads of Agreement. He agreed to a proposal for the draft documentation to include a servicing agreement, but rejected the other proposed changes.
After various further communications whose detail need not be recounted, Mr Sellars sent an email to Mr Tomanovic on 23 August 2007:
"We met with our lawyers earlier in the week. Given the extent of your proposed mark-up's, many we simply do not and will not agree with, the lawyers have been drafting a detailed response to yourself and your lawyers for my review. I expect to receive this PM tomorrow.
The objective is to get the response issued early next week and then have Jenny Evans organise a meeting between KJS/KGB and yourself to discuss, hopefully late next week."
Mr Tomanovic replied to Mr Sellars the same day:
"I'm flying overseas next Tuesday (coming back first week in October).
The KGB/KJS meeting will need to be with my lawyers to sort things out and I have already instructed them to do so, with the focus on finalizing it asap.
So my absence does not need to delay things and it should speed up the process and finally to bring this to the end some 3 years after the start.!!!! ..."
Mr Sellars immediately replied, enquiring whether Mr Tomanovic's lawyers "have been instructed to finalise the documents in accordance with the agreement Ken Sayer and yourself reached [sic] in November 2006".
The next day, an email from the Sellars to Mr Tomanovic elaborated:
"If you have not instructed your lawyers to complete in accordance with the Agreement Ken Sayer and yourself reached there is no point in us or Ken Sayer meeting with them in your absence. We will need to wait until your return to finalise.
Ken Sayer has also instructed us to inform you that unless finalisation, in accordance with what has been agreed, occurs in a timely manner he will have no other option but to review the arrangement with the monies loaned to you, ie look for repayment of the $1,341,750 and the business arrangements with your entities including charges for rent/utilities and payments for access/restriction of access to the MHA client database."
Later in the day, after Mr Tomanovic had not answered Mr Sellars' question, but had accused him of "blackmail or threats" , Mr Sellars replied:
"Zoltan I am surprised by your 'blackmail or threats' comments below. How you have come to this conclusion is beyond me. Given that your actions clearly show you do not want to honour the agreement Ken and yourself reached there should be no reasonable expectation on your part that the benefit of the loan and business arrangements KJS has given you (on the basis a deal would be done by now) should/would continue.
Ken loaned you about $1.4m and agreed to business arrangements on the basis you were selling to him as agreed last November. To date your actions (or inaction) since January have contradicted everything you have said on the issue of wanting a speedy settlement in accordance with what was agreed. Your proposed changes to the Agreements finally showed why. You have attempted to change the agreement you shook on and signed to 'get a better deal for yourself'. You are now hiding behind your lawyers to try to achieve this.
It is simple, if you instruct your lawyers the documents are the [sic] reflect what was agreed by Ken and yourself in the memorandum of understanding we can finalise with them in your absence.
As I previously advised we will respond to your lawyers next week. Their response to our letter will dictate whether we meet with them or await your return."
The September 2007 Draft Documentation
On 24 September 2007 Mr Sayer's solicitors wrote to Mr Tuite, enclosing a redrafted set of documents to give effect to the Second Heads of Agreement, together with those of the changes requested by Mr Tuite that the Sayer interests had agreed to. The various changes requested by Mr Tuite were listed seriatim, with a statement in relation to each as to whether it was agreed, not agreed, or in what precise manner it was responded to. The letter stated:
"As a general overview, many of the amendments you have requested seek to significantly alter the commercial arrangement our respective clients have come to in respect of the AFSC Agreement. As a result, many of these requested amendments are not agreed."
The letter concluded:
"Should you have any queries or comments please contact Stephanie Redmond or Simon Griesz of our office.
We await your reply."
The Proposed St George Borrowing
On 5 October 2007 Mr Adam Field, of Grant Thornton, received a copy of the terms on which St George Bank was prepared to make some financial accommodation available to Argyle HQ. Mr Field forwarded it to Mr Sellars, with a covering email that said:
"Another hurdle for us is that Zoltan's & his company, are g'tors to this facility. What's do you think is prospect of him agreeing to this without an argument.
All the more reason we need to revisit the Zoltan strategy & prepare an update of current situation for him. Can you pls draft some bullet points on the issues we should be rasing [sic] and the things that GMEC needs him to do to assist it given its current position, including loan account repayments etc."
Mr Sellars replied to Mr Field on 5 October 2007:
"Seems like there are a few hurdles to overcome with St George, however that said it is promising to see that additional facilities are available.
In respect of Zoltan, in absence of KJS being able to come up with money to fund the present agreement with Zoltan that deal is dead. In any event Zoltan appeared to be hanging out for a better deal and did not want to execute any documentation which reflected what was agreed about a year ago.
Generally Zoltan will not do anything unless he sees a benefit in it for himself. If Zoltan could be shown there was a benefit in him agreeing to sign the St George docs then he would be very willingly [sic] to do so.
This leaves us with three positions we can take. The first two, while achieving either a short term or long term objective for KJS, are in conflict when looked at in isolation. They are:
1. Demand repayment of the ~$1.4m already advanced to Zoltan and demand Zoltan and his entities pay for all facilities and utilise they currently use at MHA. ie rent, electricity, phone & fees for access to MHA's database.
2. Push for closure of the deal on the basis Zoltan will get to keep the $1.4m he currently has plus a profit share from the sale of Argyle Street while Ken will use his best endeavours to remove all personal guarantees Zoltan has previously provided and if he is unable to do that will indemnify Zoltan for any loss in the event those personal guarantees are called upon.
...
The third position is a mix of point 1 & 2. We renegotiate the deal with Zoltan and get him to tip some money back into the group while getting his agreement to sell the shares in GMEC. If presented to Zoltan correctly this would provide KJS with the best chance of Zoltan tipping some money back into the group while agreeing to a sale of his GMEC shares.
Once Zoltan understands the full picture and the potential exposure he has, especially if he is being required to tip some money back in to save his personal guarantees from being called upon my feeling is that he will want to untangle himself as quickly as possible. We need a plan to do this which while achieving the immediate and long term objectives of KJS is also fair for Zoltan given the 'current GMEC sale' deal and his potential downside."
On 6 October 2007 Mr Sayer emailed Mr Gunderson-Briggs, under the heading "Zoltan & X", saying "... please stop all work & applicable fees on & for the above effective today".
A letter of offer from St George Bank, dated 11 October 2007 and addressed to Mr Sayer, stated the terms on which a facility of $5.749m would be available to Argyle HQ. It required execution by Mr Tomanovic and AFSC as guarantors. On 17 October 2007 Mr Sayer emailed Mr Tomanovic, under the heading "St George approval" , saying:
"Hi mate, can I have it this am? > very tight, hedging return of 300K due in November...."
An email from Mr Sayer to Mr Tomanovic on 21 November 2007 included "NB: Company starving for Cash NOW".
Another email from Mr Sayer to Mr Tomanovic, dated 22 October 2007, under the heading "St George facility" said:
"The goahead is very important for company survival & repayment of hedging deals...
Failure at this stage = we lose everything.
Can you sign please asap?"
Ultimately the facility agreement was entered with St George, on the basis of guarantees from the Sayer interests alone.
The Buyout Negotiations from October 2007
On Mr Sayer's own evidence, his attitude to the buyout proposal changed around October 2007:
"In or around October 2007, I was coming to the view that the price was no longer appropriate, in light of certain developments in the MHA Finance Business. These developments included the losses on the St Peters Development ... in 2006 and 2007, the MHA Finance Business not going as well in 2007, and subsequently the unfolding global financial crisis in 2008 which further reduced the value of the MHA Business. Zoltan seemed committed still to the retention of the sale price at $6 million."
The St Peter's development there referred to was a property development that had been carried out by a company in which Mr Sayer, Mr Tomanovic and Mr Noel Dona were equal shareholders. It is common ground that Mr Sayer had caused some funds from the MHA finance business to be applied towards the St Peter's development. Mr Sayer's change of attitude is consistent with his being unable to "come up with the money to fund the present agreement with Zoltan" , with the result that "that deal is dead" ([71] above), and with his withdrawal of instructions from his advisers in October 2007.
Mr Sayer was asked in cross-examination, with respect to the period September 2006 to October 2007:
"Q. In order to pay Mr Tomanovic at that time were you prepared to liquidate assets?
A. I don't think so."
On 24 October 2007 Mr Tuite replied to Mr Sayer's solicitors' letter of 24 September 2007:
"As you are aware, there has been protracted and costly negotiation in relation to this matter.
Given that paper negotiations have been unsuccessful, we propose an urgent conference take place between the parties. We consider that the relevant topics for discussion include:
1. Your client's financial capacity to continue to negotiate and to complete the separation of interests in the Multiown and Mortgage House Entities. We therefore consider that a new Heads of Agreement should be discussed and a preliminary draft agreement agreed upon at the conference;
2. The proposed sale of the 9-11 Argyle Street and 15-17 Argyle Street; and
3. The future of Global Mortgage Equity Corporation Pty Limited ("Global Mortgage Equity Corp"). We intend these discussions to be preliminary only. Pursuant to the 2003 Mortgage House of Australia Holdings Pty Ltd Macquarie Bank Equity Purchase Agreement, we consider that Macquarie Bank should be involved in the finalisation of any agreements relating to Global Mortgage Equity Corp.
Please confirm that your client is available to attend a conference this week."
The Sayer solicitors replied on 25 October 2007, saying:
"We are instructed to advise that Grant Thornton and our firm are no longer acting for MHA or Sayer on this matter and that all correspondence should be directed to Sayer."
On 13 November 2007 Mr Sayer wrote to AFSC, enclosing the audited accounts for the GMEC group of companies as at 30 June 2007:
"A review of the attached will confirm the need for new capital.
During the last 6 months it has been necessary for GMEC to borrow more than $3 million from my companies to meet its financial obligations as and when they fall due.
The 'Going Concern' note contained in the GMEC Group audited accounts confirm that without my continuing support the ongoing viability of the Group may come into question.
Given the above I have decided to convert up to $2 million of my recent loans to the company to equity - at a nominal price of 1c per share.
The price of the new shares being a function of the current net assets position of the Group confirmed by the audited accounts.
You are invited to subscribe on a similar basis up to you pro-rata entitlement. Any entitlement not taken up will be offered to the other shareholders via a second or third round.
If all shareholders contribute their full entitlement - $4.4 million will be raised. This additional capital will be sufficient to allow the Group to access opportunities that are expected to become available in the future.
Please find attached a subscription form. Please complete the attached at your earliest convenience - noting the number of shares you wish to subscribe.
Please attach a cheque made payable to GMEC Pty Ltd for the resultant subscription amount - and return to Charles King as soon as possible. The finalization date for this matter being 14 days time - (27 th November 2007)."
Mr Tuite wrote to Mr Sayer on 15 November 2007, referring to the 13 November 2007 letter, and continuing:
"We note your allegation that Global Mortgage Equity Corporation Pty Ltd ("GMEC") has 'borrowed more than $3 million from [your] companies'. We further note that you intend to 'convert up to $2 million of [your] recent loans to the company to equity.'
Please provide us with the following documents and information:
1. Copies of all loan agreements substantiating the allegation that GMEC has borrowed money from your companies;
2. Copies of all loan agreements substantiating the allegation that GMEC has borrowed money from you personally;
3. All documents evidencing the alleged debt owed to you and your companies;
4. Copies of all notices given to, and written consent received from, GMEC's shareholders prior to you forwarding your letter dated 13 November 2007 to our client; and
5. Copies of the consents obtained in respect of the loan the subject of your letter dated 13 November 2007 pursuant to clause 2.2 of Schedule 3 of the Mortgage House of Australia Holdings Pty Ltd Macquarie Bank Equity Purchase Agreement ('the 2003 Agreement').
We note your stated intention to convert $2 million of the $3 million debt allegedly owed to you and your companies into equity by the issuing a further 200 million shares
That proposed share subscription is in breach of clauses 2.2(c), 6.2, 7.1 [of] Schedule 3 of the 2003 Agreement.
If the proposed share subscription were to take place as described in your letter dated 13 November 2007, it would amount to a fraud on the minority shareholders.
Please confirm in writing prior to 1:00pm on Friday, 16 November 2007 that:
1. The proposal contained in your letter dated 13 November 2007 will not be proceeded with;
2. That no additional shares will be issued to any shareholder other than in accordance with the provisions of the 2003 Agreement; and
3. That GMEC will not issue shares as described in your letter dated 13 November 2007.
If we do not receive written confirmation from you prior to that time, we intend to take all such actions as they are permitted at law to prevent the shares being issued."
The "2003 Agreement" there referred to was the SPA. Clause 2.2(c) and (d) of it forbad any party from issuing or agreeing to issue any Equity Securities, or from certain (but not all) borrowings without the prior consent of Macquarie Bank. Clauses 6.2 and 7.1 set out a mandatory procedure for raising additional funding from shareholders.
Mr Sayer's personal assistant replied on 16 November 2007, saying that so many items were requested that it was absurd to expect delivery by 1:00pm. It continued:
"We advise that Mr Sayer and Mr Tomanovic met this morning, and are on a path towards final settlement. Mr Sayer would be pleased to meet with you and/or your client in order to finalise negotiations on this matter. To this end we propose a meeting at 3pm on Tuesday 20 th November in your Castlereagh Street offices."
On 15 November 2007 Mr Tuite wrote a second letter to Mr Sayer seeking his confirmation that an unsigned undated form purporting to record transfer of shares in GMEC from AFSC to One Australia had not been lodged with ASIC.
On 23 November 2007 Mr Tuite wrote again to Mr Sayer, referring to his letter of 15 November 2007, and again requesting confirmation that the transfer form had not been lodged with ASIC, and would not be lodged.
On 27 November 2007 Mr Sayer's personal assistant notified Mr Tuite that the fundraising would not proceed before Macquarie Bank had had an opportunity to respond.
On 27 November 2007 Mr Tuite wrote again to Mr Sayer:
"We refer to our letters dated 15 November 2007 and 23 November 2007 to which we have not received a response.
In your letter dated 13 November 2007 and addressed to 'The Directors, Australian Financial Services Pty Ltd' you state that the finalisation date for this matter is 27 November 2007.
We note your stated intention to convert $2 million of the $3 million debt allegedly owed to you and your companies into equity by the issuing a further 200,000 million shares would amount to a breach of clauses 2.2(c), 6.2 and 7.1 of the Mortgage House of Australia Holdings Pty Ltd Macquarie Bank Equity Purchase Agreement ('the 2003 Agreement') and may constitute a fraud on the minority shareholders.
If you do not confirm in writing that the proposed capital raising through share subscription will not go ahead by 12:00pm on 27 November 2007 , we are instructed to take all such actions as they are permitted at law to prevent the shares being issued."
On 29 November 2007, after Macquarie Bank had given its written consent, Mr Sayer wrote again to AFSC to confirm a capital raising by GMEC:
"The process to be followed in relation to this capital raising being:
GMEC invites MBL and Australian Financial Services Corporation Pty Limited (AFSC), to subscribe for shares in MHA in accordance with their shareholding percentage - ie 10% - MBL; 45% AFSC and 45% One Australia Pty Limited
The issue is to be for up to 444,444 million shares at 1c per share - to raise $4,444,440
The offer period being 20 working days and is therefore scheduled to close at 5pm - Thursday the 3 rd of January 2008.
In the event GMEC does not receive sufficient acceptances of the offered shares GMEC may then offer these shares via the process set out in the Share Purchase Agreement."
In the course of December 2007 each side made an offer to the other, on terms more favourable to itself than the terms of the Second Heads of Agreement. Neither was accepted.
Also in the course of December 2007 Mr Sayer raised the topic of regaining his interest in the Multiown companies. On 12 December 2007 he emailed Mr Tomanovic, under a heading referring to Multiown, saying:
"Since the MHA sale has fallen over & you're returning the 2.4 mil can we reinstate my shares?"
Mr Tomanovic's immediate response was not to answer the question directly, but to accuse Mr Sayer of inconsistency and not knowing what he wanted.
On 14 December 2007 Mr Tuite wrote to Mr Sayer, requesting again the documents he had requested on 15 November 2007:
"We refer to our letters dated 15 November 2007, 23 November 2007 and 27 November 2007.
We have not received the documents requested in those letters. Without the material requested in those letters as well as updated audited post June 2007 financial records, our client is unable to consider GMEC's proposal and will resist any attempt on GMEC's part to finalise the matter on 3 January 2008."
On 31 December 2007 Dibbs Abbott Stillman (" Dibbs "), the solicitor for Macquarie Bank, wrote to Mr Sayer seeking information concerning the proposed capital raising:
"... our client is concerned at the large value of inter-company loans where the cash assets of GMEC have apparently been used to fund the projects of companies controlled by you.
As a condition of our client accepting the share offer, our client will require that you arrange for the repayment of ALL inter-company loans currently owed to GMEC. Please provide to us detailed timeframes for repayment, or, in the event where you assert that a loan is not able to be repaid, please provide full details supporting your assertion that the loan is to be written off by GMEC.
Further, our client is not prepared to allow the governance of GMEC to continue in its current form. On the information provided to our client, it is evident that the requirement for a substantial capital injection to GMEC has been created by its current management, in particular, the expenditure of GMEC capital to fund private ventures. These ventures appear to be unrelated to GMEC and have resulted in significant loss to GMEC. Our client considers this a very serious matter, and potentially a breach of your obligations to the company as its director.
Accordingly, our client requires the restructure of the current management of GMEC, including the addition of, at minimum, a further director of GMEC and a further signatory to the accounts of the company. Our client is prepared to meet with you to discuss the form of new management for the company.
Our client welcomes your comments on the above."
The letter stated that the bank considered itself to have "numerous bases upon which it is entitled to withdraw its consent to the share issue."
We were not pointed to, and my own reading of the submissions below has not found, any specific submission made to the judge about a basis on which he might conclude that the conduct as a whole amounted to Oppression, even if none of its individual components was so classified. In my view, even though the judge's reasons were brief relating to taking into account all the evidence, that fact did not have the consequence that he had failed to deal with the case that the parties presented to him.
Appeal Ground 13
Even if one accepts that Mr Sayer was taking cash deposits up to some time in 2004, without making appropriate accounting entries, there is no evidence of that practice occurring after 2004. Section 232 is cast in the present tense - the relevant verb is "is" . The practice of which complaint is made had ceased at least four years before the Equity Proceeding were begun. The judge's finding that what was involved was "relatively small amounts of cash" is not appealed against. There might be situations where misappropriation of a company's assets, that occurred long before proceedings were commenced, but which has not been remedied, leaves the company in an altered condition to such an extent that at the time the proceedings are brought the conduct of the company's affairs is Oppressive to one or more members. In Campbell v Backoffice Investments Pty Ltd in the High Court, Gummow, Hayne, Heydon and Kiefel JJ at [182] observed that "the current form of the oppression provisions in Pt 2F.1 was introduced with a view to making it clear that the Court may make orders even if the act, omission or conduct complained of has yet to occur, or has ceased". While the taking of the cash without appropriate accounting entries is undoubtedly irregular and improper, for it to be "oppressive to, unfairly prejudicial to, or unfairly discriminatory against" Mr Tomanovic, it would need to be an impropriety of which he was not an equal (or perhaps substantial) beneficiary. He has failed to satisfy the judge on that topic. I would not uphold ground 13.
The Respondents filed a Notice of Contention providing additional reasons why, in their submission, Mr Sayer's receipt of cash did not amount to or contribute to a finding of Oppression. In light of the conclusions to which I have come, it is unnecessary to consider those submissions.
PART E - THE WINDING UP REMEDY
In a summary of conclusions early in the judgment the primary judge said at [9]:
"(e) there is also no basis for winding up on the just and equitable grounds arising merely from the failure to consummate the separation of interests, and no basis for a finding that there is a justified lack of confidence in Mr Sayer's management of the business;
(f) another factor weighing against the making of a winding up order is that the relief would likely compromise the business as a going concern and cause a very substantial loss of shareholder value."
The primary judge's statement of legal principles, not challenged on this appeal, recognised that winding up is a remedy of last resort so far as the oppression ground for relief is concerned, and one which ought not be granted if some less drastic remedy for Oppression is available and appropriate.
The judge turned to consider the application of the principles concerning winding up on the just and equitable ground only after he had dealt with whether either of the Heads of Agreement were legally enforceable and he had dealt with the Oppression claim. The totality of the reasoning directed particularly to the application of principles concerning the just and equitable ground was:
"234 'Lack of trust' or 'breakdown' is not a ground of oppression. This allegation is presumably an invocation of the 'just and equitable' ground for winding up.
235 One only has to observe the serious and personal nature of the allegations that the Tomanovic interests have made against the Sayer interests, and (to a lesser extent) the Sayer interests have made against the Tomanovic interests, to realise that there has been and is a breakdown and lack of trust between the two shareholders in this corporate group. The difficulty has been manifest since late 2004 but seems to have escalated in the months after the Second Heads of Agreement failed to mature into a formal transaction.
236 But this is a case where one needs to be cautious about the conclusions to draw from the obvious breakdown in the shareholder relationship at a personal level. First, the breakdown in the relationship has apparently not prevented the business interests associated with Mr Sayer and Mr Tomanovic from co-operating. It appears that the MH group and Multi-own continue to refer work to each other. More importantly, the breakdown in the personal relationship does not appear to have had any significant effect on the business of the MH group in a managerial sense. Because Mr Sayer was already in managerial control of the business before difficulties occurred, he has been able to continue on in much the same fashion. There is no deadlock as Mr Sayer controls 55% of the company. It appears that the business has been operated successfully (subject to the vicissitudes of the credit market) for over 5 years since Mr Tomanovic withdrew from active participation.
237 I have reached the reasonably firm view that grounds for relief under Part 2F.1 have not been established. There remains the question whether the Court should make a winding up order on the just and equitable ground in s 461(1)(k). The possibility that I might do so was very much on my mind during the trial. But I have concluded upon review of all the evidence that the plaintiffs' case in the two equity proceedings is not factually strong. And having considered the submissions of the parties, I have decided that it would be unwise to order the winding up of the viable and now reasonably long-standing business, in circumstances where the breakdown in the shareholder relationship is not materially frustrating the commercially viable and sensible operations of the company."
For the purposes of the appeal, the Appellants do not contest the proposition that:
"The winding up GMEC (or other companies in the GMEC group) would cause or facilitate the extinguishment of the rights or practices which sustain the elements described in paragraph 474 of the affidavit of Ken Sayer sworn 7 August 2009."
In that paragraph of his affidavit, Mr Sayer had deposed:
"The conduct of the MHA Finance Business as a going concern (and the generation of sustainable income from that business) depends upon the following elements:
(a) The continued operation of the Macquarie Wholesale Funding Arrangements (referred to in paragraph 136 above), and the CBA Wholesale Funding Arrangements (referred to in paragraph 229 above). These provide the source of wholesale funds, which are essential for the conduct of on-lending to customers of the MHA Finance Business;
(b) Further, the currency of the Macquarie Wholesale Funding Arrangements is necessary for the continued right to earn trailing commission in relation to loans written pursuant to those arrangements;
(c) The existence of a working capital facility with the CBA presently in the amount of $7.9 million, which is necessary for supporting the costs of running the MHA Finance Business. The CBA Facility is secured by a series of fixed and floating charges over various entities which are relevant to the operation and conduct of the MHA Finance Business as follows:
(i) GMEC;
(ii) MHA;
(iii) MH Broker;
(iv) Paladin Wholesale;
(v) Mortgage Loan Company;
(vi) Direct Mortgage Solutions
...
(d) The maintenance of various regulatory approvals for the conduct of the MHA Finance Business, the most important of which is the Australian Financial Services Licence from the ASIC to Paladin Process ... This licence is required to permit and enable the management and operation of the CBA Wholesale Funding Arrangements;
(e) The maintenance of accreditation with lenders pursuant to mortgage origination deeds, relevant to the right to introduce customers to those lenders for the purpose of the lender providing a home loan. This is essential for aspects of the operation of 'mortgage broking' (as described in paragraph 9 to 12 above). Entities conducting the MHA Finance Business which have obtained accreditation include:
(i) MHA pursuant to the mortgage origination deed between MHA, Perpetual Trustees Company Limited ACN 000 001 007 in its capacity as trustee of Fidelity Mortgage Trusts and Resimac Limited ACN 002 997 935 ...
(ii) Array Home Loans Pty Limited (now known as Mortgage House Broker Services Pty Limited ACN 096 357 596) (' Array' ) pursuant to the mortgage origination deed between Array and St George Bank Limited ACN 055 513 070 dated 8 June 2001 ...
(iii) MHA pursuant to the broker agreement between MHA and Westpac Banking Corporation ACN 007 457 141 dated 29 March 2007 ...
(iv) MHA pursuant to the commercial origination agreement between Australia and New Zealand Banking Group Limited ACN 005 357 522 and MHA dated 25 July 2005 ...
(f) The right to use the 'Mortgage House' trademarks, in respect of which goodwill has developed in a manner which facilitates the generation of new business. As noted in paragraph 118 above, my company KSIPL, in its own right, owns the 'Mortgage House' trademark. There is presently no formal agreement with respect to the licence of the 'Mortgage House' trademark by my company KSIPL to the GMEC Group, which would mandate the continued licence of the mark into the future. In other words, the GMEC Group has no legal right to use the mark for any fixed term into the future. The advertising and marketing expense of the GMEC Group (based on the 'Mortgage House' trademark) was for the years ended:
(i) 30 June 2005 - $2,298,160.00;
(ii) 30 June 2006 - $2,080,164.00;
(iii) 30 June 2007 - $2,673,628.00; and
(iv) 30 June 2008 - $747,987.00
(g) The maintenance of a branch network, through which Mortgage House-branded financial products are sold. The branches are operated by independent businesses, which split the income generated from branch with the MHA Finance Business. The relationship with the branches is governed by branch agreements. A copy of an example of which is entitled 'Business Partner Agreement' between MHA, MH Broker Services, Brokerage House Pty Ltd ACN 726 209 054 and Lee Anthony McIntyre (as guarantor) ... The operators who conduct the branch business are at liberty to terminate the Business Partner Agreement on giving 60 days notice without cause."
Both sides in the appeal submit that, if the Court is faced with a choice between a compulsory buyout order and winding up on the just and equitable grounds, the compulsory buyout order would be preferable.
In circumstances where I have concluded that Oppression is made out, and (as appears below) that a compulsory buyout order should be made, there is no reason not to act on that submission. The serious commercial detriment to the companies in the group that the parties agree would arise from a winding up order would in any event make the Court unwilling to follow a course as destructive as ordering the winding up of companies, if any other alternative were available. I will not order the winding up of the companies.
PART F - REMEDY
Remedy for Oppression
The relief claimed by the Originating Process in each of the Equity Proceedings was an order that the shares of the Tomanovic Interests in GMEC and Argyle HQ be purchased by the Sayer Interests at their fair value, and that it be referred to an Associate Justice to determine that fair value taking into account the oppressive conduct. In my view, a buyout order is the preferable remedy.
However, no submissions were directed to the way in which it was contended that the value of the shares had been affected by the conduct alleged to amount to Oppression. Undertaking a valuation on a counterfactual basis - ie assuming that conduct that has in fact taken place has not taken place - is a difficult process, and gives rise to problems about what should be assumed to be the state of affairs that existed instead of that conduct. In those circumstances, the basis of valuation should be the actual value of the shares bought.
No submissions were made in the court below about the date as at which any such valuation should take place. On the appeal the Court sought submissions on that topic. Mr Muddle pointed out that the possible dates included the date of the start of the Oppression (which he contended was December 2004), and the date of filing of the initiating process, but left the fixing of a date for valuation entirely to the Court (including whether the question of the date for valuation should itself be left to an Associate Judge to determine). Mr Higgs proposed the date as at which the last accounts of the companies had been prepared.
The High Court in Campbell v Backoffice Investments at [178] has made clear that the court has a wide discretion in fixing the date as at which the value of shares should be ascertained for the purpose of a buyout order. In my view it is preferable, on the facts of the present case, to fix a date that is comparatively recent. I recognise that this would have the effect that the Tomanovic interests received both the benefit and the disadvantage of the significant fluctuations that there have been in the mortgage business since 2004. However, no submission is put on their behalf as to why this is inappropriate. The Sayer Interests favour a more recent date of valuation (though it should be recognised that it is more a vote for a recent date than a reasoned submission) and it is often easier to conduct a valuation as at a comparatively recent date. For the want of any better reasoned suggestion, I would order the valuation to take place as at 30 June 2010.
A complication in the granting of relief arises from the fact that the Multiown business was part of the joint enterprise between the Sayer interests and the Tomanovic interests. The original intention to separate their business interests was carried through in part, by the transfer of the Sayer interests' shares in the Multiown companies to the Tomanovic interests, and also by in some fashion the Sayer interests ceasing to hold units in the Multiown trusts. The structure of both the First Heads of Agreement and the Second Heads of Agreement was that the joint interests should be separated by the Tomanovic interests receiving the rights of the Sayer interests in the Multiown business, plus a top-up payment. If there were to be a buyout order that required the Sayer interests to purchase the shares of the Tomanovic interests in GMEC and Argyle HQ for 45% and 50% respectively of the net worth of those companies, without taking into account that the Tomanovic interests have already received the value of the interest in Multiown business that the Sayer interests formerly had, that would not, in the circumstances of the present case, be an order for transfer at a fair value. The fair value must take into account the value of the whole of the consideration that the Tomanovic interests receive. When they have received part of the consideration already, the fair value that the court should order be paid upon transfer of the shares should be 45% and 50% of the value of the respective companies, less the value of the Sayer interest in the Multiown business that the Tomanovic interests have already received.
No attention was paid, at either the trial or on the argument of the appeal, to the way in which the available remedy for Oppression operated in relation to the units in the 9 Argyle Street Unit Trust. Even if the court were to make a buyout order concerning Argyle HQ, that would not have any effect on the beneficial ownership of the assets it held on trust - the beneficial ownership of those assets could be altered only if a buyout order were to be made concerning the units in the 9 Argyle Street Unit Trust. When the Trust has at all times been an important part of the overall commercial group, failure to deal with ownership of units in the Trust would result in any relief granted by the Court not totally resolving the commercial relations between the parties.
There is a question about whether the court would have power to make an order requiring buyout of the interests in the Trust. Various cases seem to lead to the conclusion that there is no such power: Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 10 ACSR 606; Re Bountiful Pty Ltd (1994) 12 ACLC 902; Re Polyresins Pty Ltd [1999] 1 Qd R 599; Surf Road Nominees Pty Ltd v James [2004] NSWSC 61; McEwen v Combined Coast Cranes Pty Ltd [2002] NSWSC 1227; ( 2002) 44 ACSR 244.
However, section 53 Corporations Act has a very wide definition of "affairs of a body corporate" , that extends to matters concerning trustees. It extends to "(a) ... business ... transactions and dealings (... as ... trustee), property (... held as ... trustee)."
In Vigliaroni v CPS Investment Holdings Pty Ltd [2009] VSC 428 Davies J at [63]-[69] was of the view that, by virtue of section 53, there was power to grant relief concerning assets that a corporate trustee held on trust.
Vigliaroni has since been questioned in Trust Company Ltd v Noosa Venture 1 Pty Ltd [2010] NSWSC 1334 at [104]-[105].
After judgment had been reserved, further submissions were invited from the parties on that topic. The Respondents' submissions in response to that invitation objected to the matter being raised at this stage, when it was not part of the case of the Appellants at either the trial or on appeal.
Once this objection is taken, it must be acceded to, as the Court is in no position to be satisfied that the availability of relief concerning the units in the Trust could not be affected by facts additional to those investigated at the trial. However, it is likely that it will still be necessary for some aspects of the dealings between the Trust and other corporate entities to be investigated as part of the process of valuing the shares in GMEC and Argyle HQ.
When a buyout order is to be made, it will be necessary to return the matter to the Equity Division to enable the necessary valuations to take place. I would not make an order requiring the valuations to be carried out by an Associate Judge, as the parties should have the opportunity of deciding whether it would be preferable for the valuations to be carried out by an expert, or on a reference, rather than by an Associate Judge.
It is appropriate for a stay of the judgment in the Common Law proceedings to be granted, prima facie until the determination of the valuation process and payment of any amount that the Sayer interests are required to pay to the Tomanovic interests following that process. However, liberty should be reserved to a judge of the Equity Division to vary or dissolve that stay.
Orders
At the hearing of the appeal submissions about the type of orders that would be appropriate were made only at a level of broad principle. Uninstructed by any detailed submissions from counsel, the type of orders that presently seem appropriate to give effect to these reasons for judgment are:
1. Appeal allowed.
2. Order Respondents to pay costs of the Appellants of the appeal.
3. Set aside the orders of the court below in each of matters 6278 of 2008 and 6280 of 2008 in the Equity Division of the Supreme Court.
4. In lieu thereof order:
a. That Kenneth James Sayer purchase free from encumbrances the shares owned by Zoltan Tomanovic in Argyle HQ Pty Limited (" Argyle HQ ") at a price of 50% of the net value of Argyle HQ as at 30 June 2010.
b. That One Australia Pty Limited purchase free from encumbrances the shares owned by Australian Financial Services Corporation Pty Limited in Global Mortgage Equity Corporation Pty Limited (" GMEC ") at a price equal to 45% of the net value of GMEC as at 30 June 2010, minus the value as at 30 June 2010 of the shares in [the relevant Multiown companies] and units in [the relevant Multiown trusts] that were formerly held by [identify the appropriate Sayer shareholder or unit holder].
c. [Costs of first instance proceedings].
5. Each of the matters 6278 of 2008 and 6280 of 2008 be remitted to the Equity Division for ascertainment, in accordance with directions of a judge of that Division, of the values referred to in 4(a) and (b).
6. Stay the judgment in matter 20107 of 2009 until the purchases referred to in 4(a) and (b) have occurred, or until further or other order of a judge of the Equity Division.
The parts of the draft orders in square brackets would need greater precision, arrived at either by agreement or following further submissions if agreement is not possible.
Aspects of those draft orders to which I should specifically draw attention are:
(a) The order for purchase of shares in Argyle HQ has the effect of treating the B share that the Sayer interests hold as being of no significant monetary value.
(b) The value of the rights concerning the Multiown business that the Tomanovic interests have acquired is deducted in its entirety from the purchase price payable for the GMEC shares. An alternative approach might be to require the value of the Multiown shares to be deducted from each of the price of the Argyle HQ and the GMEC shares, proportionately to their respective values.
(c) There is no provision, such as occurred in the First Heads of Agreement, for any procuring of releases concerning guarantees that a shareholder has given of debts of the company. It is not clear on the evidence whether any such guarantees remain on foot, or secure any substantial indebtedness. If there are ongoing guarantees, some modification of the draft might be appropriate.
The parties should have the opportunity to consider what are the appropriate orders, in light of the actual findings that have been made. To give that opportunity, the only orders I presently propose are the following directions:
1. The parties are to confer promptly about the orders that are appropriate to give effect to these reasons for judgment.
2. If within 21 days of the date of delivery of these reasons for judgment the parties have agreed upon the orders that are appropriate, a minute of the orders signed on behalf of each party be provided to the Associate to Campbell JA.
3. If within 21 days of the date of delivery of these reasons for judgment the parties have not agreed upon the orders that are appropriate, within 24 days of the date of delivery of these reasons for judgment each party is to file in the registry and provide to the Associate of each judge comprising the bench for the hearing of this appeal, a draft of the orders that in the submission of that party are appropriate, together with written submissions in support of the making of those orders.
Since writing to foregoing, I have had the opportunity to read the judgment of Young JA. I agree that it would be appropriate to include orders of the type that his Honour suggests.
MACFARLAN JA : I agree with the orders proposed by Campbell JA and with the reasons that his Honour gives. In particular I agree that, in the circumstances as fully described by his Honour, Mr Sayer acted in a manner that was commercially unfair, and that therefore satisfied the condition stated in s 232(e) of the Corporations Act , in not reinstating Mr Tomanovic to a management role. The principal of these circumstances were that the parties had decided to end their relationship but had not brought that termination to fruition, the trust that had previously existed between the parties had evaporated and Mr Tomanovic's interests were effectively unsaleable for a fair price.
YOUNG JA: This appeal, from a decision of Austin J, has caused me considerable concern.
I have read the very detailed judgment of Campbell JA. I am indebted to his Honour for his thorough summation of the facts, the contentions and many of the decided cases.
The decision to which his Honour has come is one which sounds commercially sensible with one possible exception. I have had, however, considerable misgivings as to whether it is a decision that is open to us on the materials of this case. Courts, when dealing with this sort of problem, must always watch out not to make a decision merely because it is commercially sensible in the case they are deciding (not that I am for a moment suggesting that this is Campbell JA's approach in this case). Each decision of this Court, especially the Court of Appeal, has a strong precedent value for other cases.
The facts and circumstances of this case are, as far as my researches go, fairly unique. My researches have not disclosed a case where the parties have virtually come to an agreement to go their own separate ways, they have then taken some actions to implement that decision, but have stopped short of making a binding agreement or in consummating their decision and then the person who did indicate that he would leave the enterprise, wants to come back in and is met with resistance by his former partner.
I agree with the view that neither the first nor the second decision of the parties, for Mr Tomanovic to be bought out for $6 million or $5 million, amounted to a binding contract. However, I also agree with what Campbell JA said at [191]:
"There was a mutual decision by the two men that they should separate their business interests, on the basis that Mr Tomanovic should receive a substantial net payment."
Then I believe it is necessary to see why that decision was not fully implemented. The principal reason seems to be that the parties did not take into account the taxation, particularly capital gains tax, implications in their decision. Having then been alerted to problems, they could not solve them. Secondly, it would seem that the financial crash and the reduced turnover of the business run by FG limited Mr Sayer's ability to pay Mr Tomanovic. Thirdly, so much time passed that the value of the business was reduced far below the $6 million or $5 million that it would have had in 2005 or 2006.
Thus we have the situation of a company which is a 50/50 company, that is, owned equally by two men. Then a decision is made that the two men will go their own way and each will operate part of the business that formerly was operated by the corporate entity in which they were virtually married. The company was a 50/50 held company and I observed in Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95; 66 ACSR 359 at 433 et seq, that there were conceptual difficulties in applying the oppression, etc principles in s 232 of the Corporations Act 2001 (Cth) to a 50/50 company unless there were at least individual strong arm tactics by the person who held the other 50%. It was not necessary to decide the point in Backoffice and none of the other judges in the High Court or this Court considered the matter. I think it would be unwise to decide it in this case when there has not been full argument on the point. I will, however, take into account as a factor that ordinarily it is difficult to say there has been oppression in a 50/50 company between two persons of equal strength of character.
The next point that concerned me is whether the situation where the parties have made a decision that their joint enterprise will cease, is so close to a decision to wind up that the remedy provided for in s 461(1)(k) of the Corporations Act was more appropriate. Failure of substratum has been recognised as a sufficient reason for winding up a company ever since Re Suburban Hotel Co (1867) 2 Ch App 737, 750. A company is formed for a particular purpose and once that particular purpose becomes impossible, it should be wound up. In the instant case, the decision of the two men involved in the company to part got the company to this stage.
I would have thought, uninstructed, that, were it not for the more recent attempts of Mr Tomanovic to become re-involved in the company, a just and equitable winding up was almost automatic in this case.
Whilst Austin J was perhaps one of the most experienced corporate lawyers to grace this bench, it is a great pity that the instant case, which was his last case, evidently did not conclude in the time allotted, leaving his Honour very short of time to prepare the final judgment so that there are imperfections in it, not only in the matter of proof-reading. Time obviously just beat the judge and his staff to completing their normal perfect product. With respect to his Honour, his reasoning with respect to just and equitable is a little on the light side. However, I do not consider that there is much purpose in pursuing this matter as it would appear that neither party really does want a winding up (though probably the appellant would prefer that to a dismissal of the case). Even if a winding up order was to be made, then that order should be postponed for 3 months to enable the parties to work out some more commercially acceptable solution.
Accordingly, I come back to the question of whether this case does fit within s 232.
I agree with Campbell JA [174]-[181] that the learned primary judge did err as criticised in ground 2 of the amended notice of appeal. This means, in view of the parties' concession, that this Court must analyse the material to see whether it is appropriate for an order to be made under s 233 of the Corporations Act.
This involves two stages:
stage 1: whether there has been conduct of the type which gives the Court jurisdiction to make a compulsory buy-out order; and
stage 2: whether, in the Court's discretion, it should make such an order.
As to the first point, it should be observed that the conduct of the Sayer interests should be put into two compartments, compartment (a) before the decision of the men to go their own separate ways; and (b) what happened afterwards.
As to (a), to a considerable extent this conduct has ceased because of changed circumstances. The plurality in the High Court in Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; 238 CLR 304 at 362 strongly suggested, though did not decide, that the Court had power to make an order under s 233 in respect of past conduct, but it was a matter of discretion. A wise judge follows such strong hints.
However, since the decision to go separate ways, there has been other conduct. That conduct was, to a degree, the result of the fact that the parties had not thought through the taxation implications of their deal. The fact, if it be the fact, that the conduct has occurred without ill will, see eg Thomas v H W Thomas Ltd [1984] 1 NZLR 686, 697, approved by Brennan J in the High Court in Wayde v NSW Rugby League Ltd [1985] HCA 68; 180 CLR 459, 471 is of no real relevancy.
I also agree with Campbell JA that the maxims that have come into use in this area of the law are of limited assistance. To illustrate, I agree with the propositions in the three maxims following, but one must remember that every case has to be looked at on its own facts and circumstances and that, whilst the proposition in each of the maxims is correct, cumulative conduct may produce a different result. The maxims that I have in mind are:
A. "The mere fact a person is unable to regain capital or dispose of his or her shares is not a matter of oppression": Lucy v Lomas [2002] NSWSC 448 at [43]; see also Re a Company [1983] Ch 178, 191.
B. The emergence of irreconcilable differences is not in itself sufficient to establish oppression: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; 37 ACSR 672, 687.
C. There will be no oppression if the plaintiff has refused a reasonable offer to acquire his or her shares: O'Neill v Phillips [1999] 1 WLR 1092, 1107.
Campbell JA said at [205] that the important elements of the commercial unfairness after the decision to separate, are the fact that the Sayer interests seek to keep the value of the equity of the Tomanovic interests locked up in the companies, in circumstances where:
(a) the income that the Tomanovic interests used to receive on the basis that it was theirs to keep has stopped being paid;
(b) there is no present prospect of the Tomanovic interests receiving income from their shareholding other than at the discretion of the Sayer interests, regardless of how the companies fare;
(c) there is no real prospect of the Tomanovic interests selling to anyone else for a fair value; and
(d) resumption of the former basis on which the two men co-operated is no longer possible.
I respectfully agree.
Thus, I agree there is power to make an order for buy-out. So far as discretion is concerned, I cannot see any reason why, in the circumstances of this case, the Court should not exercise its discretion in favour of a buy-out and indeed, nothing has been put to us to the contrary.
There was little put to us as to the terms of the buy-out. I have little to say in addition to what Campbell JA has said on this point.
All I wish to note is that I suspect that there are at least two difficulties in the way of the buy-out:
(1) valuers agreeing on the value of the shares, even assuming that they are given full and free access to all the necessary material; and
(2) if a value can be put on the shares, either by the valuers or by determination by the Court, whether the Sayer interests have the wherewithal to actually make the purchase without disposing of the company's assets.
Accordingly, I consider that there should be liberty to apply to an Associate Justice in the Equity Division with respect to the valuation of the Tomanovic shares and generally, and there should also be liberty to apply to seek an order to wind up the company should the valuation process be unduly delayed or prove to be impracticable. These matters, to my mind, should be included in the formal orders to be drafted by the parties.
Subject to what I have said, I agree with the decision of Campbell JA.
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