Bergmuller v Auswild [2022] VSCA 8
Pontifical Society for the Propagation of the Faith v Scales (1962) 17 CLR 9
Re Lowes Park Pty Ltd
Source
Original judgment source is linked above.
Catchwords
59 ACSR 373Bergmuller v Auswild [2022] VSCA 8
Pontifical Society for the Propagation of the Faith v Scales (1962) 17 CLR 9
Re Lowes Park Pty Ltd
Judgment (6 paragraphs)
[1]
Introduction
James, Maria and Dennis have each made an application for a family provision order under Chapter 3 (sections 55-100) of the Succession Act 2006 NSW.
Each of their applications was made within the time limited by section 58(2) of the Act: 12 months from the date of death of the deceased (27 January 2018). An application is generally taken to have been made at the time when a claim is first made for a family provision order in an applicant's originating process. Maria's application was made in a summons filed on 25 January 2019, upon which she relied at the final hearing. James' application was made by a cross claim filed on 16 January 2019, although he relied on an amended pleading at the final hearing. Dennis' application was made on by a summons filed on 25 January 2019, although he too relied upon an amended pleading at the final hearing.
Each applicant has standing to make an application for a family provision order because, as a child of the deceased, he or she is an "eligible person" within the meaning of sections 57(1)(c) and 59(1)(a).
The large questions for determination on each application are:
1. whether at the time when the Court is considering the application, adequate provision for the proper maintenance, education or advancement in life of the applicant has not been made by the will of the deceased: section 59(1)(c).
2. if so, whether, having regard to the facts known to the Court at the time the order is made, an order for provision ought to be made for the maintenance, education or advancement in life of the applicant out of the estate of the deceased: section 59(2).
Section 60 is in the following terms:
"60 Matters to be considered by Court
(cf FPA 7-9)
(1) The Court may have regard to the matters set out in subsection (2) for the purpose of determining:
(a) whether the person in whose favour the order is sought to be made (the "applicant" ) is an eligible person, and
(b) whether to make a family provision order and the nature of any such order.
(2) The following matters may be considered by the Court:
(a) any family or other relationship between the applicant and the deceased person, including the nature and duration of the relationship,
(b) the nature and extent of any obligations or responsibilities owed by the deceased person to the applicant, to any other person in respect of whom an application has been made for a family provision order or to any beneficiary of the deceased person's estate,
(c) the nature and extent of the deceased person's estate (including any property that is, or could be, designated as notional estate of the deceased person) and of any liabilities or charges to which the estate is subject, as in existence when the application is being considered,
(d) the financial resources (including earning capacity) and financial needs, both present and future, of the applicant, of any other person in respect of whom an application has been made for a family provision order or of any beneficiary of the deceased person's estate,
(e) if the applicant is cohabiting with another person--the financial circumstances of the other person,
(f) any physical, intellectual or mental disability of the applicant, any other person in respect of whom an application has been made for a family provision order or any beneficiary of the deceased person's estate that is in existence when the application is being considered or that may reasonably be anticipated,
(g) the age of the applicant when the application is being considered,
(h) any contribution (whether financial or otherwise) by the applicant to the acquisition, conservation and improvement of the estate of the deceased person or to the welfare of the deceased person or the deceased person's family, whether made before or after the deceased person's death, for which adequate consideration (not including any pension or other benefit) was not received, by the applicant,
(i) any provision made for the applicant by the deceased person, either during the deceased person's lifetime or made from the deceased person's estate,
(j) any evidence of the testamentary intentions of the deceased person, including evidence of statements made by the deceased person,
(k) whether the applicant was being maintained, either wholly or partly, by the deceased person before the deceased person's death and, if the Court considers it relevant, the extent to which and the basis on which the deceased person did so,
(l) whether any other person is liable to support the applicant,
(m) the character and conduct of the applicant before and after the date of the death of the deceased person,
(n) the conduct of any other person before and after the date of the death of the deceased person,
(o) any relevant Aboriginal or Torres Strait Islander customary law,
(p) any other matter the Court considers relevant, including matters in existence at the time of the deceased person's death or at the time the application is being considered."
There is no need in the present proceedings to consider whether any property should be designated as notional estate of the deceased. The deceased's actual estate is ample enough to meet any family provision order that might conceivably be made, and no application has been pressed by any applicant for an order designating property as notional estate.
There is no need to consider the operation of any indigenous customary law. Each of the applicants and the person most likely to bear the burden of any family provision order that might be made (Nick) are Australians born of Greek heritage.
An exercise of the Court's family provision jurisdiction requires an evaluative process of reasoning. In Bassett v Bassett [2021] NSWCA 320 at [171] the Court of Appeal described the following statement as a "useful summary" of the approach to be taken:
"In the exercise of its statutory powers in the determination of an application for a family provision order (in particular, sections 59(1)(c) and 59(2) of the Succession Act), the Court must generally endeavour to place itself in the position of the deceased, and to consider what he or she ought to have done in all the circumstances of the case, in light of facts now known, treating him or her as wise and just rather than fond and foolish (In re Allen [1922] NZLR 218 at 220-221; Bosch v Perpetual Trustee Co Ltd [1938] AC 463 at 478-479; Scales Case (1962) 1[0]7 CLR 9 at 19-20), making due allowance for current social conditions and standards (Goodman v Windeyer (1980) 144 CLR 490 at 502; Andrew v Andrew (2012) 81 NSWLR 656) and, generally consulting specific statutory criteria referred to in section 60(2) of the Act so far as they may be material."
In each case the criteria for which the Succession Act provides must be applied to the facts of the particular case without resort to normative generalisations. Although it is customary for practitioners to discuss cases using shorthand expressions to refer to the criteria for which sections 59(1)(c) and 59(2) provide, any analysis must remain focused on the text of the legislation. It does not, in terms, require an applicant to establish a "need" or call for an assessment of a deceased's "moral duty" despite the practical utility of those expressions in some cases.
The concepts of "adequate" and "proper" embedded in section 59(1)(c) are relative to the facts of the particular case: Pontifical Society for the Propagation of the Faith v Scales (1962) 17 CLR 9 at 19-20. Decision making on such topics is fact sensitive. Nevertheless, it is sometimes said that "adequate" is concerned with the quantum of provision, whereas "proper" is concerned with a standard of maintenance, education and advancement in life of an applicant for relief: Devereaux-Warnes v Hall (No 3) (2007) 35 WAR 127 at [72]-[77]. What is "adequate" and "proper" in a particular case depends on the circumstances of the case.
Upon an exercise of family provision jurisdiction, the Court is not necessarily constrained by a deceased person's statements of testamentary intention. That is inherent in the nature of the jurisdiction and the necessity for its exercise on evidence of facts that may not have been known to the deceased person. Nevertheless, a deliberate scheme of testamentary dispositions by a capable testator is entitled to respect: Slack v Rogan; Palffy v Rogan (2013) 85 NSWLR 253 at [127], approved in Sgro v Thompson [2017] NSWCA 326 at [1]-[2] and [83]-[87].
In the present proceedings, notice must be taken of the deceased's firm views. She had a strong concept of "family". She wanted the Soulos family to work together to develop the property that she, her husband and her children had accumulated. She favoured the male line of the family. As a member of the family who shared her vision of the future, she favoured Nick and his branch of the family even though, according to her lights, she sought to make generous provision for each branch of the family.
Although respect must be shown for the deceased's testamentary intentions, the scheme of her will has been undermined by erroneous assumptions. The need for an order that the will be rectified to correct misdescriptions of shares in Esperia Court left to James and Dennis may be left to one side. Fundamentally, the will was predicated upon a false assumption that the deceased was beneficially entitled to all of the shares in A&R and to Dennis' shares in Esperia Court, as well as a false assumption that A&R was beneficially entitled to 10 Chapman Street. The deceased also evidently had no regard to James' moral claim to the return of all the shares in Esperia Court he dutifully surrendered as a price paid for his love match marriage. Nor did she have regard to the possibility that, if she placed Esperia Court within the control of Nick and he pursued his plans for development of the Company's properties, any benefits conferred on his siblings by their shareholdings in the Company could be illusory, dependent upon the discretion of a person unable to command the respect given by all family members to her in her lifetime.
As any relief granted under Chapter 3 of the Succession Act 2006 NSW and any relief granted under section 233 of the Corporations Act 2001 Cth must be assessed at the date of determination of these proceedings, allowance must be made in both contexts for the potential interaction of each form of relief.
Despite tensions within the Soulos family, and a breakdown in the relationships between the deceased's children in the wake of her death, fairness to all concerned requires an acknowledgement that each of the children (James, Maria, Dennis and Nick) had a close and loving relationship with the deceased throughout her lifetime, as they did with their father throughout his lifetime. That is true of James, no less than his siblings, even though his choice of spouse attracted parental disapproval.
It is equally pertinent to note the advanced ages of each of the deceased's children and the primacy given to each of the applicants for family provision relief to their legitimate expectations of material wealth associated with the conduct of the affairs of Esperia Court, and their hope to be able to pass on wealth to their own children and grandchildren.
I am not minded, in disposition of any of the applications for family provision relief before the Court, to make an order that Esperia Court be wound up so that the applicants can realise the net asset backing value of their shares in the Company. There is, however, in my opinion, strong force in Maria's submission that a gift which is subject to the exercise of a discretion by a third party, such as may be made by way of a discretionary testamentary trust or (as in the present case) shares without rights of participation in the management of a company, is not a proper provision in favour of a donee. Such a gift is illusory because the discretion in question may never be exercised in favour of the donee: William Bkassini v Sonya Sarkis [2017] NSWSC 1487 at [304]-[305], citing with approval Hedman v Frazer [2013] NSWSC 1915 at [180]-[185].
The illusory character of the rights attaching to the "A", "B", "C" and "D" class shares of Esperia Court absent any intervention by the Court is tangibly illustrated by expert evidence that they have no commercial value unless the Company is wound up but, if the Company were to be wound up, a value of $3 million would attach to every 1,000 shares.
There is no evidence attributing a particular value to the shares if Esperia Court is not wound up, but the rights of shareholders to participation in management of the affairs of the Company and to any surplus assets on a winding up, are equalised. Nevertheless, a reasonable inference is that shares with rights uniform with all other shares in the Company may have a substantial value and be able to be sold or used as security for a borrowing of funds.
In my opinion, each of James, Maria and Dennis has been left without adequate provision for his or her maintenance, education or advancement in life if and to the extent they are unable to unlock the asset-backed value of their "A", "B" and "C" class shares in Esperia Court and they remain without a voice in management of the Company. That is because they were, throughout the joint and several lives of their parents, encouraged in an expectation that the shares would enable them to enjoy substantial material wealth in their mature years and the shares, in themselves, provide a measure of what the parents regarded as proper provision for their children. For this reason, I propose to make orders (supported by orders made under Chapter 3 of the Succession Act 2006 NSW, as well as orders made under section 233 of the Corporations Act 2001 Cth) to the effect that, in addition to any provision made for them in the will of the deceased, they each receive 125 of the 500 shares held by the deceased in her lifetime in the character of management shares in Esperia Court.
[2]
James' Family Provision Application
James' application for a family provision order is the most challenging of the three applications before the Court, at least as regards his claim for the remaining 1,000 "B" class shares in Esperia Court left by the deceased to Nick rather than to him.
There are five fundamental reasons for that. First, although James' case is able to be presented as that of an impecunious claimant his impecuniosity is in part due to a decision, of his own making, to place property in a discretionary trust for the benefit of his family, rendering him reliant upon the continuing support of his wife and children in management of the trust. Secondly, respect needs to be given to the deceased's deliberate intention that Nick be favoured over James, albeit that the favour the deceased showed towards Nick was in part a response to Nick's displacement of James in the performance of work for Esperia Court after 2008 or thereabouts; Nick's displacement of James' soured relationships between James (on the one hand) and Nick and the deceased (on the other hand). Thirdly, James' claim is essentially grounded less on "need" than upon a "moral" claim for return to him of all the shares which his parents, he submits "unjustly", required him to surrender as a consequence of a marriage of which they disapproved. Fourthly, James' claim is based on an expectation, fuelled by the deceased during her lifetime, that his shares (upon which no dividends had ever been paid to him) would be returned to him upon the deceased's death so that, in common with his siblings, he could enjoy substantial material wealth. Fifthly, James' advanced age might be thought to limit the extent of any personal, future "need" on his part beyond the satisfaction he might experience from passing family wealth onto his own children.
Paying attention to all these factors, and the extent of the deceased's bounty as expressed in her will (particularly, 2,000 shares in Esperia Court and ownership of 79 The Boulevard, which has an agreed value of $2.3 million), the Court might reasonably conclude that James has not been left without "adequate" or "proper" provision from the estate of the deceased.
The constraint imposed by the will on his ability to sell freely and without qualification 79 The Boulevard might well have warranted an intervention of the Court. But, whether or not that is the case, the effluxion of time has nearly erased the burden of the constraint. The operation of the constraint, for the period of five years from the death of the deceased on 27 January 2018, is about to expire.
What would a wise and just testatrix in the position of the deceased do with James' application, taking into account community standards and the whole circumstances of the case?
In my opinion, in the circumstances of the present proceedings the question of what is "adequate and proper" for the purpose of section 59(1)(c) is closely associated with the question of what, if any, family provision order "ought" to be made in disposition of James' application for relief upon an exercise of the discretion for which section 59(2) provides. That is because I accept that, within the community of the deceased (her extended family) if not also within the broader community, the allocation of 3,000 shares to each of the deceased's children was long seen as necessary and appropriate to make proper provision for them. This was in recognition of the roles they played in helping the family to acquire the wealth embedded in the assets of Esperia Court, including the fact that they acquiesced in the absence of any payment of dividends to them throughout what must be seen as the better part of their lives. The expectation of James and other members of the Soulos family was that James' shares would be returned to him. Nick, for his part, had no expectation that he would be the beneficiary of any of the shares formerly held by James.
In my opinion, wisdom and justice point to the making of an order that, in addition to the provision made for James in the will of the deceased, he receive the 1,000 shares in Esperia Court given to Nick and that Nick bear the burden of that order for provision.
This outcome is consistent with what, in my opinion, is demanded by wisdom, justice and community standards in so far as it makes good the injustice of the deceased's confiscation of James' shares at the commencement of what appears to have been, in retrospect, a long and happy marriage.
In my opinion, for the reasons I have articulated, James should have the benefit of all 3,000 of the shares formerly held by him, together with 125 of the 500 shares formerly held by the deceased as management shares. Nothing more can be justified in circumstances in which the deceased's testamentary constraint on James' disposal of 79 The Boulevard is about to expire and, in any event, if required to be complied with, it does not diminish the value of James' enjoyment of the value of the property.
There is no need to make an adjustment under Chapter 3 of the Succession Act 2006 NSW in favour of Nick as compensation for his "loss" of the 1,000 shares gifted to him but, by the Court's orders, returned to James. That is because: (a) Nick retains the 3,000 shares held by him in Esperia Court independently of the will of the deceased; (b) he retains under the will of the deceased 125 of the 500 "management shares" formerly held by the deceased; and (c) he also retains a right, in due administration to be compensated for the executors' sale of 77 The Boulevard (for $4,201,000), gifted to him in the deceased's will. His sons, to whom he is close, retain the deceased's Balmoral Beach unit with an agreed value of $2.1 million, with any indebtedness to the estate for finance provided for acquisition of property forgiven.
[3]
Maria's Family Provision Application
In my opinion, Maria has been left without "adequate and proper" provision for her education, maintenance and advancement in life from the estate of the deceased only in so far as she has not been given, by force of the deceased's will, 125 of the 500 shares formerly held by the deceased as management shares.
In my opinion, that measure of the inadequacy of "proper" provision made for Maria in the will of the deceased informs an exercise of the discretion to be exercised in her favour under section 59(2) of the Act.
In my opinion, there is no foundation for the making of a family provision order in the form of a legacy in lieu of the gift of 8 Parsons Avenue made to Maria in the will. She retains her 3,000 shares in Esperia Court and the deceased's Greek property.
On the evidence before the Court, 8 Parsons Avenue has a value in the vicinity of $1.35-1.5 million.
[4]
Dennis' Family Provision Application
Dennis' application for family provision relief invites analysis in terms similar to those applied to Maria's application.
In common with James and Maria, he should receive 125 of the 500 shares formally held by the deceased as management shares in Esperia Court. That is necessary for him, and them, to have an entitlement to participation in management of the affairs of Esperia Court and, so, to realise the underlying value of the 3,000 shares all parties now acknowledge to be his entitlement independently of the will of the deceased.
Had Dennis' claim to beneficial ownership of 10 Chapman Street and the deceased's shares in A&R not been successful, a family provision order that vested in him all the deceased's shares in A&R might conceivably have been an appropriate application of sections 59(1)(c) and 59(2) of the Succession Act 2006 NSW. Dennis might be said to have been left without "adequate" or "proper" provision for his education, maintenance and advancement in life out of the estate of the deceased had his ownership of 10 Chapman Street (directly or indirectly) not been vindicated, and orders necessary to secure his ownership of that property might, in all the circumstances of the case, have been relief that "ought" to have been made. But maybe not.
Hesitancy about that conclusion arises from the fact that Dennis has secured his ownership of shares in Esperia Court and, by the deceased's will, he has been left 132-134 Smith Street (a property with an estimated value within the range of $3.4-5.8 million).
[5]
CONCLUSION
Before any final orders are made in disposition of these proceedings, I propose to entertain such, if any, submissions that might be made about:
1. my provisional findings about beneficial entitlements to shares in A&R.
2. any modifications that may be perceived to be necessary to the scheme of orders under section 233 of the Corporations Act 2001 Cth that I have proposed arising from the fact that NAB's loan of $29,050,000 to Esperia Court, Nick and John fell due on 31 October 2022, after the conclusion of the final hearing.
3. the form of the orders to be made to give effect to these reasons for judgment generally, including particularly the section 233 orders.
4. the amount of any allowance to be made in favour of Nick and John consequent upon their transfer to Esperia Court of their interests in the Symond Arcade land.
5. the identity of a person or persons who might be suitable to be nominated:
1. as chairman of the meeting of the members of Esperia Court to be convened to elect a new board of directors.
2. to act as an independent director on the board of the company.
1. any problems that might arise from the non-payment of stamp duty on intra-family share transfers.
As presently advised, I propose to deal with any disputes about orders for costs after final orders are made in disposition of all substantive disputes.
In the meantime, I record the following summary of the types of orders that appear necessary to determine the proceedings:
1. Orders under section 233 of the Corporations Act 2011 Cth, as proposed in these reasons for judgment, with or without modification in light of current arrangements for repayment of NAB's loan.
2. Orders to make good James' entitlement to his 3,000 shares in Esperia Court and 125 of the deceased's management shares.
3. Orders to make good Maria's entitlement to one share in A&R and 125 of the deceased's management shares.
4. Orders to make good Dennis' entitlements to 10 Chapman Street, the deceased's shares in A&R and 125 of her management shares.
[6]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 07 November 2022
Constitution. Esperia Court was incorporated (registered) on 6 May 1964 with two shareholders. As appears in the company's memorandum of association and its articles of association (both dated 5 May 1964) the deceased and her late husband (Andrew Soulos) each subscribed for a single management share.
The Articles of Association were amended at an annual general meeting held in November 1969. A significant feature of the amendments made to the articles at that time was the introduction of the office of a "Governing Director".
Shareholders. The articles record that the nominal share capital of the company of $25,000 is divided into:
1. 1,000 management shares of £1 ($2) each, numbered 1-1,000.
2. 4,000 "A" class shares of £1 each, numbered 1,001-5,000.
3. 4,000 "B" class shares of £1 each, numbered 5,001-9,000.
4. 4,000 "C" class shares of £1 each, numbered 9,001-13,000.
5. 4,000 "D" class shares of £1 each, numbered 13,001-17,000.
6. 4,000 "E" class shares of £1 each, numbered 17,001-21,000.
7. 4,000 "F" class shares of £1 each, numbered 21,001-25,000.
The issued share capital of the company comprises:
1. 500 management shares.
2. 3,000 "A" class shares, numbered 1,001-4,000.
3. 3,000 "B" class shares, numbered 5,001-8,000.
4. 3,000 "C" class shares, shares, numbered 9,001-12,000.
5. 3,000 "D" class shares, shares, numbered 13,001-16,000.
According to the company's Register of Members, on 30 June 1964:
1. The deceased's husband Andrew was issued with 299 management shares, bringing to 300 the total number of management shares then held by him.
2. The deceased was issued with 199 management shares, bringing to 200 the total number of management shares then held by her.
3. Dennis was issued with 3,000 "A" class shares, numbered 1,001-4,000.
4. James was issued with 3,000 "B" class shares, numbered 5,001-8,000.
5. Maria was issued with 3,000 "C" class shares, numbered 9,001-12,000.
6. Nick was issued with 3,000 "D" class shares, numbered 13,001-16,000.
According to the Register of Members:
1. On 31 May 1973 James' 3,000 "B" class shares were transferred by him to his parents. 1,500 of those shares (numbered 5,001-6,500) were transferred to his father, the deceased's husband. The other 1,500 shares (numbered 6,501-8,000) were transferred to his mother, the deceased.
2. On 30 September 1999 Dennis' 3,000 "A" class shares were transferred by him to the deceased.
In evidence is a stamped Transfer of Shares form dated 2 April 1972 (signed by James as transferor and by his parents as transferees) evidencing a transfer of James' shares in the Company for "nil" consideration.
Dennis' transfer of his shares to the deceased on 30 September 1999 is consistent with the 1998, 1999 and 2000 annual returns of the Company, read together.
On the death of the deceased's husband in December 2003, the shares then registered in his name were transferred to the deceased. She thus received from him:
1. 300 management shares, bringing her holding of management class shares to a total of 500.
2. 1,500 "B" class shares, bringing her holding of "B" class shares (all sourced from James' original holding) to 3,000 shares.
James' evidence is that he was required by the deceased to transfer his 3,000 "B" class shares to his parents because they did not approve of his marriage to Margaret in February 1971. He says that his loss of these shares was a price he was obliged by parental pressure to pay for his decision to marry his wife.
James' evidence is corroborated by minutes of meetings of the Company relating to declarations of dividends to shareholders. He alone was excluded from a declaration of dividends for the year ended 30 June 1970. The minutes for subsequent years are consistent with the absence of any declaration of dividends in his favour. When, in 1974, there was an adjustment of the Company's profits for the 1972 year James was again the only family member excluded. The fact that no dividends declared in favour of the children appears ever to have been paid does not diminish the force of James' exclusion.
Any inconsistency in dates attributed to James' transfer of his shares does not detract from the fact that there is a cluster of significant events around the date of his marriage. That is consistent with his complaint that he was, by parental pressure, obliged to surrender his shares to his parents as a form of punishment.
Dennis' evidence is that his 3,000 "A" class shares were transferred to the deceased at the insistence of his parents because they wanted to preserve them within the Soulos family during a period when he was engaged in family law proceedings associated with his divorce from Kerrie. He says that his parents insisted upon this transfer, but told him that they would in due course transfer the shares back to him. The evidence includes contemporaneous documentation that supports Dennis' contention that, when she took a transfer of his shares in September 1999, the deceased regarded herself as holding the shares on trust for him.
Dennis' evidence is that Kerrie was aware of this when they effected their property settlement. For her part, Kerrie's evidence is that she always believed that Dennis owned one quarter of the shares in the Company, and that she always disclaimed any personal interest in them.
Whether or not Dennis' evidence is to be accepted in every respect, his claim to ownership of the 3,000 "A" class shares initially issued to him has been vindicated by orders made in these proceedings, with the consent of all parties, on 9 September 2022.
An ASIC search of the company as at 9 September 2022 records the identity of its shareholders as being the following:
1. The deceased (more accurately, her deceased estate):
1. 500 management shares.
2. 3,000 "A" class shares.
3. 3,000 "B" class shares.
1. Maria: 3,000 "C" class shares.
2. Nicholas: 3,000 "D" class shares.
The deceased's "A" class shares represent those initially issued to Dennis and subsequently transferred to his parents at their request. Her "B" class shares represent those initially issued to James and subsequently transferred to his parents at their request. No consideration passed from either parent to either son for either transfer.
With the consent of all parties to the proceedings, on 9 September 2022 orders were made to the effect, inter alia, that:
(a) the register of members of Esperia Court be rectified so as to delete the record of transfer of 3,000 "A" class shares from Dennis to the Deceased, and record Dennis as the holder of 3,000 "A" class shares in the Company.
(b) the Company provide such notification as is necessary to the Australian Securities and Investments Commission of the correct details with respect to the identity of the holder of the 3,000 "A" class shares in the Company.
Directors. The deceased's husband was a director of Esperia Court from the date of its incorporation until the date of his death. The deceased likewise was a director of the company from the date of its incorporation to the date of her death.
Nick's son John became a director of the company in December 2003, upon the death of his grandfather. Nick became a director of the company in December 2016. They both remain directors. They are the only directors of the company.
Secretary: The deceased was the secretary of Esperia Court between the date of its incorporation and her death. Nick has been secretary of the company since 30 July 2019.
Rights Attaching to Shares: Articles 7 and 8 of Esperia Court's articles of association define the rights attaching to shares in the Company.
Those articles are in the following terms:
"[7] The holders of Management shares shall:
(a) Be the only persons entitled to vote at any meeting of the Company;
(b) Be entitled to receive a fixed preferential non-cumulative dividend at the rate of 5 pounds per centum per annum on the capital paid up thereon, payable as regards each year out of the profits for that year without any right in the case of deficiency to resort to profits of prior or subsequent years but shall not be entitled to receive any further or other dividend.
[8] The holders of 'A', 'B', 'C', 'D', 'E' and 'F' class shares shall be entitled:
1. To receive in any year such dividend (if any) as the Directors may from time to time determine, in respect of any particular class of shares;
2. To receive (to the exclusion of all other members of the Company) any distribution whether by way of dividend or reduction of capital or otherwise of any premium paid to the Company in respect of any shares in the Company;
3. To receive (to the exclusion of all other members of the Company) any surplus on a winding up after repayment to all members of the amount of capital paid up on their shares,
but the holders of such shares shall not be entitled to receive notice of or to attend and vote at meetings of members of the Company."
Article 9 provides that "[the] shares [in the Company] shall be under the control of the Directors who may allot or otherwise dispose of the same to such persons on such terms and conditions and either at premium or at par, or (subject to the provisions of the Companies Act) at a discount and at such times as the Directors think fit …". This provision needs to be read in the context of the powers of a Governing Director of the Company under article 86 of the Company's articles of association.
There has been no debate in these proceedings about whether it would be open to the directors of the Company, since the death of the deceased and her husband, to allot the unissued shares in the Company in a manner that would operate to the detriment of one or more of the deceased's children without varying rights attached to any shares.
The Office of "Governing Director": Esperia Court's articles of association (as amended) make provision for the office of a "Governing Director", the occupant of which enjoys almost absolute powers of management over the affairs of the Company.
It is sufficient for the moment to extract articles 75, 76, 86 and 107:
"GOVERNING DIRECTOR
[75]. The term 'Governing Director' shall for the purpose of these articles mean:
(a) Andrew Soulos [the husband of the deceased] until he dies or ceases to be a Director of the Company and thereafter Rene Soulos [the deceased];
(b) An alternative or substitute Governing Director appointed by Andrew Soulos or after he dies or ceases to be a Director Rene Soulos pursuant to these Articles but subject to any limitation of powers contained in such appointment;
(c) A successor (if any) after death appointed by Andrew Soulos after the death of Rene Soulos or after he dies or ceases to be a director by Rene Soulos pursuant to these Articles but subject to any limitation of powers contained in such.
If and when there shall no longer be a Governing Director as defined by these Articles, the other Directors (if any) shall convene a general meeting of the Company for the purpose of electing a Board of Directors; and in default of such meeting taking place within 14 days of such time, then any member or the Secretary may convene such meeting for such purpose upon giving proper notice pursuant to the could Articles of the Company.
DIRECTORS APPOINTMENTS ETC
[76] At the first annual general meeting of the Company held after there ceases to be a Governing Director all the directors shall retire from office and at the annual general meeting in every subsequent year one-third of the directors for the time being or if their number is not three or a multiple of three then the number nearest one third shall retire from office. A retiring Director shall be eligible for re-election. …
POWERS OF GOVERNING DIRECTOR
[86] The Governing Director shall as far as the law allows have power to exercise all the powers conferred upon the Company in general meeting by the Memoranda of Association and by the Articles and shall have authority to exercise all the powers, authorities and discretions by the Articles expressed to be vested in the Board or in the Directors jointly; and all other Directors for the time being of the Company shall be under his control, and shall be bound to conform to his directions in regard to the Company's business or in respect of particular matters or classes of matters or by way of particular or general limitation of authority. The Governing Director shall not be required to devote any of his time to the management, control and superintendents of the business of the Company.
In addition to the other authorities expressly or by implication hereby conferred on a Governing Director as aforesaid, the Governing Director shall have to the exclusion of general meetings and of the Board absolute authority (subject to the [Companies] Act) to do the following:
(a) appoint any person as Directors of the Company;
(b) define and restrict their powers and fix their duties and remuneration;
(c) determine his own remuneration as Governing Director;
(d) remove any Director, hower [sic] appointed;
(e) convene a general meeting of the Company;
(f) appoint and remove the Managing Director, secretary and other officers of the Company;
(g) determine who shall be admitted as shareholders;
(h) determine what resolutions shall be proposed at general meetings and Board meetings respectively;
(i) determine what mode of valuing the Company's assets shall be adopted;
(j) determine what amounts shall be carried to the Reserve Fund and the Depreciation Fund respectively and how those Funds shall be dealt with;
(k) determine the dividend to be declared on individual shares and in this context he may declare dividends:
(i) one or more classes of shares to the exclusion of other classes;
(ii) at different rates on different classes of shares respectively;
(iii) on any particular share or shares to the exclusion of other shares;
(iv) at different rates on different individual shares;
(l) determine what business within the scope of the Memorandum of Association shall be undertaken or given up by the Company;
(m) determine when and to what extent and in what manner and upon what terms and conditions and for what purpose the Directors may exercise their powers of borrowing or raising any sum or sums of money;
(n) determine what amounts (if any) may be withdrawn from the loan accounts of the various shareholders and what amounts may be called up on any of the shares of such shareholders …
SUCCESOR TO GOVERNING DIRECTOR
[107] A Governing Director may by Deed or Will or codicil appoint a person (being a member or non-member) to exercise all or any of his powers as Governing Director after his death and may limit and define such of his powers as are to be conferred on such appointee, his remuneration and the duration of such appointment PROVIDED THAT such appointee may not appoint an alternate in his place or a successor after his death."
Under the heading "Interpretation", article 2 includes a provision that "[words] importing the masculine gender only shall include the feminine gender".
Observations. The deceased at no time appointed a Governing Director of the Company in succession to herself.
The parties agree that the last paragraph of article 75 was enlivened upon the death of the deceased. However, no general meeting of the Company has been convened for the purpose of electing a Board of Directors pursuant to article 75 pending the determination of these proceedings.
No dividends appear ever to have been paid in favour of any holder of the "A" to "D" class shares.
Minutes of meetings of the Company (usually the deceased and her husband, whether in the character of directors or that of shareholders) for the years ending 30 June between 1967 and 1996 inclusive record that dividends were declared for 1967-1972 and 1974. No dividends were declared for the 1972 year until (upon an adjustment of accounts) 1973. The practice of dividends being declared appears to have come to an end at the end of that time or possibly in 1974 or 1975.
The fact that dividends were "declared" does not mean that they were ever "paid". There is no evidence of an accumulation of dividends for the children in loan accounts with the Company. It is likely that declarations of dividends were unaccompanied by payments of any kind.
In these proceedings, Nick and John are accused by Maria of acting in breach of fiduciary and statutory duties, owed by them to the Company as directors of Esperia Court, when engaging in what might be characterised as "self dealing transactions" involving their acquisition of an interest in the Symond Arcade and (in the case of Nick) the grant to Nick's company SPH of a lease for the Strathfield Private Hotel on terms commercially favourable to him.
The significance of the Governing Director provisions of the company's articles (particularly article 86) is that Nick and John contend, in relation to the impugned transactions, that:
1. they acted at the direction of the deceased, in her capacity as the Governing Director of the Company, as they were obliged by article 86 to do;
2. the content of any duties owed by them to the company as directors must be assessed against their obligation under article 86 to do as directed by the deceased; and
3. because the deceased, as Governing Director of the company, had "power to exercise all the powers conferred upon the company in general meeting" and "authority to exercise all the powers, authorities and discretions … vested in … the Directors jointly", her directions that Nick and John give effect to the impugned transactions operate in the same manner as if the company in general meeting had ratified the impugned transactions, thereby providing a complete answer to Maria's allegations of breach of duty.
The contention of Nick and John that they acted at the direction of the deceased in her capacity as the Governing Director of the Company evidently does not depend upon knowledge by them of the existence of the office of Governing Director or the deceased's occupation of it.
On their own evidence, they were not aware of the existence of the office of Governing Director until after the death of the deceased. If their evidence that they acted at the direction of the deceased is accepted, a factor in their obedience to the will of the deceased was likely to have been knowledge that she held the Management Shares in the Company. It is just as likely, however, that their obedience to her will was a combination of social convention within the Soulos family and enlightened self-interest as she favoured those who conformed to her will.
Ultimately, the contention that Nick and John acted at the direction of the deceased "as they were obliged to do", focuses attention on the form of the constitution of the Company rather than Nick and John's knowledge of its provisions. The critical factor is that with the power (by virtue of her ownership of all management shares) to control all meetings of the Company, the deceased might be taken to have authorised, or ratified, any breaches by Nick and John of fiduciary obligations they owed to the Company as its directors, and the content (if not the existence) of their obligations must be examined in the context of the deceased's "exclusive" powers of management.
Nick and John rely heavily upon the judgment of Brereton J in Australian Securities and Investments Commission v Maxwell [2006] NSWSC 1052; 59 ACSR 373; 24 ACLC 1308 at [100] and [102]-[103], here reproduced in the context of associated paragraphs (with emphasis added):
"[96] Section 180(1) of the Corporations Act provides as follows:
A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation's circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
[97] Section 181(1) provides as follows:
A director or other officer of a corporation must exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.
[98] Section 182(1) provides as follows:
A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
[99] The statutory duty imposed by s 180(1) reflects, and to some extent refines, that which obtains at general law. As Santow J (as his Honour then was) explained in ASIC v Adler (2002) 41 ACSR 72, [372], both the common law and equity imposes on directors a duty of care and skill [Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 109; 14 ACSR 109; Daniels (formerly practising as Deloitte Haskins & Sells) v Anderson (1995) 37 NSWLR 438; 16 ACSR 607], the content of which is essentially the same as the statutory duty [Sheahan v Verco (2001) 79 SASR 109; 37 ACSR 117, 134 (Mullighan J); Daniels v Anderson, 603 (Powell JA); see also Australian Innovation Ltd v Petrovsky (1996) 21 ACSR 218, 222 (Lockhart J)]. Similarly, the statutory duties imposed by s 181 and s 182 reflect, and to some extent refine, corresponding obligations of directors under the general law.
[100] In determining whether a director has exercised reasonable care and diligence, as s 180(1) expressly contemplates, the circumstances of the particular corporation concerned are relevant to the content of the duty. These circumstances include the type of company, the provisions of its constitution, the size and nature of the company's business, the composition of the board, the director's position and responsibilities within the company, the particular function the director is performing, the experience or skills of the particular director, the terms on which he or she has undertaken to act as a director, the manner in which responsibility for the business of the company is distributed between its directors and its employees, and the circumstances of the specific case [Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, 427; (Romer LJ); Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, 125 (Tadgell J); ASC v Gallagher (1993) 11 WAR 105; 10 ACSR 43; 11 ACLC 286; Daniels v Anderson, 504-505; ASIC v Adler, [372]; Explanatory Memorandum to the CLERP Bill 1999 (para 6.75)].
[101] Directors are not required to exhibit a greater degree of skill in the performance of their duties than may reasonably be expected for persons of commensurate knowledge and experience, in the relevant circumstances [ASC v Gallagher]. And while directors are required to take reasonable steps to place themselves in a position to guide and monitor the management of the company [Daniels v Anderson (1995) 37 NSWLR 438, 495-505; 16 ACSR 607, 659-668], they are entitled to rely upon others, at least except where they know, or by the exercise of ordinary care should know, facts that would deny reliance [Re City Equitable Fire Insurance Co; Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1993) 11 ACSR 785, 856-8; 11 ACLC 1082; (1994) 15 ACSR 1, 60-2; Daniels v Anderson (1995) 37 NSWLR 438, 502-504; 16 ACSR 607, 665-6; Re Property Force Consultants Pty Ltd (1995) 13 ACLC 1051 (QSC)].
[102] The constitution of the corporation, and concomitantly the identity of those to whom the duty is owed, is of importance because the duties referred to in ss 180, 181 and 182 are not duties owed in the abstract, but duties owed to the corporation. As Clarke and Sheller JJA observed in Daniels v Anderson (at NSWLR 504), the duties imposed by former s 232 (the predecessor of s 180) reflected the concept of negligence at general law, in that a director owes to the company a duty to take reasonable care in the performance of the office. In Vrisakis v ASC (1993) 9 WAR 395, 449-50; 11 ACSR 162, 211-13; Ipp J (as his Honour then was) (with the concurrence of Malcolm CJ) held that although the statutory duty of care and diligence would be contravened if a director had not exercised a reasonable degree of care and diligence in the exercise of his powers or the discharge of his duties, even if there was no actual damage, that could only be so if it was reasonably foreseeable that the relevant conduct might harm the interests of the company - which means the corporate entity itself, the shareholders, and, where the financial position of the company is precarious, the creditors of the company - and, moreover, that in determining whether the relevant duty had been breached, the foreseeable risk of harm must be balanced against the potential benefits which could reasonably be expected to accrue to the company from that conduct [see also ASIC v Doyle (2001) 38 ACSR 606, 641]. As His Honour explained:
Under s 229(2), however, there is no reference to damage suffered by the company, and an offence may notionally be committed under that section without any damage having been sustained. The question is merely whether the defendant director has exercised a reasonable degree of care and diligence in the exercise of his powers in the discharge of his duties. Nevertheless, a criminal offence will not have been committed if an omission to take care did not carry with it a foreseeable risk of harm to the company. No act of commission or omission is capable of constituting a failure to exercise care and diligence under s 229(2) unless at the time thereof it was reasonably foreseeable that harm to the interests of the company might be caused thereby. That is because the duty of a director to exercise a reasonable degree of care and diligence cannot be defined without reference to the nature and extent of the foreseeable risk of harm to the company that would otherwise arise.
Further, the mere fact that a director participates in conduct that carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that he has failed to exercise a reasonable degree of care and diligence in the discharge of his duties. The management and direction of companies involve taking decisions and embarking upon actions which may promise much, on the one hand, but which are, at the same time, fraught with risk on the other. That is inherent in the life of industry and commerce. The legislature undoubtedly did not intend by s 229(2) to dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity. Accordingly, the question whether a director has exercised a reasonable degree of care and diligence can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question.
[103] One consequence of this, of present significance, is that where there is an identity of interest between the directors and the shareholders, so that in effect the directors are the shareholders, the requirement to prevent self-interested dealing, constrain management and strengthen shareholder control - which is fundamental purpose and rationale of these duties - is much less acute. That is a circumstance which can impact considerably on the content of the duties. The significance of a correspondence between the identity of the directors and the shareholders is illustrated by the circumstance that, at general law, a fully informed general meeting can prospectively or retrospectively ratify the actions of directors of the company, though they involve negligence, breach of fiduciary duty or the exercise of the directors' powers for an improper purpose [North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589; Furs Ltd v Tomkies (1936) 54 CLR 583; 9 ALJ 419; Hogg v Cramphorn [1967] Ch 254, 265-266; [1966] 3 All ER 420 (Buckley LJ); [1970] Ch 122 (CA); Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n; [1942] 1 All ER 378; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666; (1975) 1 ACLR 219]. Where the directors and the shareholders are one and the same, ratification is implicit. Although the shareholders of a company cannot release the directors from their statutory duties imposed by s 180, 181 and 182 [Forge v ASIC (2004) 52 ACSR 1, 81-82; ASIC v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305, 314-315; Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 53 ACSR 208, 219 [32]], their acquiescence in a course of conduct can affect the practical content of those duties, including any question of whether directors acted with a reasonable degree of care and diligence, and whether they made improper use of their position [Angas Law Services Pty Ltd (in liq) v Carabelas, 218-219, [29]-[32]].
[104] There are cases in which it will be a contravention of their duties, owed to the company, for directors to authorise or permit the company to commit contraventions of provisions of the Corporations Act. Relevant jeopardy to the interests of the company may be found in the actual or potential exposure of the company to civil penalties or other liability under the Act, and it may no doubt be a breach of a relevant duty for a director to embark on or authorise a course which attracts the risk of that exposure, at least if the risk is clear and the countervailing potential benefits insignificant. But it is a mistake to think that ss 180, 181 and 182 are concerned with any general obligation owed by directors at large to conduct the affairs of the company in accordance with law generally or the Corporations Act in particular; they are not. They are concerned with duties owed to the company. …"
Even if article 86 provides, in substance, a defence for Nick and John against allegations of breach of fiduciary and statutory duties, it does not displace the operation of sections 232-233 of the Corporations Act 2001 Cth in an "oppression suit" under those sections. The text of article 86 itself recognises that limit on the powers of a Governing Director in use of the expressions "so far as the law allows" and "subject to the [Companies] Act". However, the registration of a company pursuant to the companies legislation must be taken, in any event, to create an entity governed by the legislation, including, in this case, sections 232-233 of the Corporations Act 2001.
The Pleaded Case
With the support of James and Dennis, Maria alleges (within the context of sections 232-233 of the Corporations Act 2001 Cth) that:
1. The affairs of Esperia Court have been, and are being, conducted in a manner that is contrary to the interests of the members of the Company as a whole and in a manner oppressive to, unfairly prejudicial to or unfairly discriminatory against her in relation to:
1. the acquisition of the Symond Arcade between 28 March 2017 and 14 November 2017 or thereabouts, and the conduct thereafter of a partnership between Esperia Court, Nick and John for the conduct of a business involving leases of rental space within Symond Arcade to tenants for a profit.
2. the leasing of the Strathfield Private Hotel by Esperia Court to SPH Holdings Pty Ltd from January 2015 or thereabouts on terms which were not at arm's length or commercially reasonable.
1. As directors of Esperia Court, each of the deceased, Nick and John breached duties owed to the Company under sections 180, 181 and 182 of the Corporations Act 2001 Cth (and analogous duties owed by them to the Company under the general law) in relation to:
1. the acquisition of the Symond Arcade between 28 March 2017 and 14 November 2017 or thereabouts, and the conduct thereafter of a partnership between Esperia Court, Nick and John for the conduct of a business involving leases of rental space within Symond Arcade to tenants for a profit.
2. the leasing of the Strathfield Private Hotel by Esperia Court to SPH Holdings Pty Ltd from January 2015 or thereabouts on terms which were not at arm's length or commercially reasonable.
Maria claims standing as a member of Esperia Court to include in her claim for relief under section 233 of the Corporations Act 2001 Cth a claim, on behalf of the Company, that the Company be compensated for the breaches of duty she alleges. She has not sought, or obtained, a grant of leave under section 237 of the Corporations Act 2001 Cth to pursue a "derivative action" on behalf of the Company. The course thus taken is authorised by section 233: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672 at [527]-[528]; Parker v Auswild; Bergmuller v Auswild [2022] VSCA 8 at [133]-[138]; In the Matter of Imperium Projects Pty Ltd [2015] NSWSC 16 at [15].