Determination
131The matters for decision have to be determined in a slightly different way to the way in which the Defendants set them out in their written submissions. It seems to me that I must first determine the question whether the claim of a duty, fiduciary or otherwise, owed by Mr Kabraji and by Mr Bruckner to the Owners Corporation, as pleaded, is one upon which a reasonable cause of action cannot be founded.
132Nowhere in the Strata Titles Management Act, other than in s 61, is there any statement of the obligations of the Owners Corporation in carrying out its powers and responsibilities under the Act, or to whom any duties of the Owners Corporation are owed.
133Nor is there any statement of the duties of the executive committee, or identification of any person, or persons, to whom a member of the executive committee owes any duties. However, again it seems arguable, because of the nature of the duties of an Owners Corporation, that any duties of an executive committee member are owed to the Owners Corporation itself, and, perhaps, to its members, that is to say, to the Lot Owners.
134Counsel for Mr Kabraji, Mr Bruckner and hendersenhayes appeared to accept, for the purposes of their application, that fiduciary duties, or duties in the nature of fiduciary duties, may be owed by the members of the Executive Committee to Lot Owners who had provided a particular member with a proxy.
135In any event, Eastmark relied upon what has been determined under the prior legislation (the Conveyancing (Strata Titles) Act 1961), in respect of which the council of the body corporate was the equivalent of the executive committee of the Owners Corporation and in respect of which, it was said, in Re Steel and The Conveyancing (Strata Titles) Act 1961 at 470-471, that members of the council of a body corporate:
"... are at least in a position analogous to company directors; they may even have a higher fiduciary duty ... It is ... their duty to manage the affairs of the body corporate for the benefit of all the lot holders, and that the exercise of any of their powers in circumstances which might suggest a conflict of interest and duty requires them to justify their conduct ... [T]he onus lies on them to prove affirmatively that they have not acted in their own interests or for their own benefit ...
There is no doubt in my mind that ... there have been breaches of the fiduciary duty which flows from membership of a council of a body corporate ..."
136Furthermore, in Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41, Mason J made clear (at 96-97):
"The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations (cf Phipps v Boardman [1967] 2 AC 46 at 127), viz trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions "for", "on behalf of" and "in the interests of" signify that the fiduciary acts in a "representative" character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal.
It is partly because the fiduciary's exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed ..."
(Citations omitted.)
137To similar effect, are the statements of Gaudron and McHugh JJ in Breen v Williams [1996] HCA 57; (1996) 186 CLR 71, at 107:
"... the categories of fiduciary relationship are not closed, and the courts have identified various circumstances that, if present, point towards, but do not determine, the existence of a fiduciary relationship. These circumstances, which are not exhaustive and may overlap, have included: the existence of a relation of confidence; inequality of bargaining power; an undertaking by one party to perform a task or fulfil a duty in the interests of another party; the scope for one party to unilaterally exercise a discretion or power which may affect the rights or interests of another; and a dependency or vulnerability on the part of one party that causes that party to rely on another." (Citations omitted.)
138In Calvo v Sweeney [2009] NSWSC 719, White J, after referring to the authorities quoted above said:
"The fiduciary's obligation, or more accurately the obligation which gives rise to the fiduciary relationship (Bristol & West Building Society v Mothew [1998] Ch 1 at 18) is one of undivided loyalty to the principal. As it is said, the fiduciary's obligation is proscriptive, not prescriptive. Except with the informed consent of the principal (or leave of the court, Breen v Williams at 135) the fiduciary is prohibited from entering into a transaction where there is a conflict or sensible possibility of conflict between the fiduciary's duty to his principal and his personal interest (Chan v Zacharia (1984) 154 CLR 178 at 198), (or between his duty to one principal and his duty to another)."
139Whether a person is a fiduciary may now be determined from the circumstances in which that person was acting, not from his, or her, status or description. Then, if found to be a fiduciary, his, or her, freedom is diminished by an obligation that includes an avoidance of a conflict of duty and self-interest.
140In all the circumstances, I am of the view, in light of the appropriate concession made by counsel for the Defendants, and in the light of authority to which reference has been made, that the existence of a fiduciary duty, or duty in the nature of a fiduciary duty, owed to the Lot Owners, by each of Mr Kabraji and Mr Bruckner, is not untenable.
141In relation to Mr Kabraji, Eastmark is asserting that he had a duty owed to the Owners Corporation not to make improper use of his position as a member of the executive committee, to gain, directly, or indirectly (through hendersenhayes), an advantage for himself and for hendersenhayes, and that in doing so he put himself in a position of conflict of interest.
142In relation to Mr Bruckner, Eastmark asserted that he, too, had a duty owed to the Owners Corporation, not to make improper use of his position as a member of the executive committee, to allow Mr Kabraji and hendersenhayes to gain, indirectly or directly, an advantage, and that in doing so, he put himself in a position of conflict of interest.
143Although it had not been specifically pleaded, it was submitted that a similar duty was owed, in each case, to Lot Owners, of which Eastmark was one. However, ultimately, senior counsel eschewed any reliance on this aspect in relation to the applications now being determined.
144I am unable to conclude, on this application, that the duties that were owed by each of Mr Kabraji and Mr Bruckner could not include, for example, at least, a duty not to make improper use of his position as a member of the Executive Committee, to gain, directly, or indirectly, an advantage for himself, or herself, or for any other person, or to put himself in a position of conflict of interest. As has been said by Devonshire, Peter in "Account of Profits for Breach of Fiduciary Duty" [2010] SydLawRw 18; (2010) 32(3) Sydney Law Review 389:
"Fiduciary obligations are neither fixed nor immutable. - particularly as the fiduciary principle has expanded from the trust paradigm to relationships that are not inherently fiduciary."
145I cannot conclude also, if it were pleaded (as was suggested that it would be if an amendment of the pleadings were permitted), that a similar duty to Lot Owners (either those who gave proxies or others) is untenable.
146Nor is there anything stated in the Strata Titles Management Act providing immunity to members of the Executive Committee.
147The evidence relied upon to establish an arguable case for the breach alleged, included the Minutes of the Executive Committee meeting of 17 June 2011. Those Minutes reflect that Mr Kabraji and Mr Bruckner were "present by voting paper". Those Minutes also reflect that the resolution passed to convene an EGM on 30 June 2011, was "to consider the matters of concierge services, cleaning services and engaging Eddie Kabraji's consultancy firm".
148The latter matter demonstrates that the Executive Committee of the Owners Corporation knew of the relationship between Mr Kabraji and hendersenhayes and that it had considered the necessity of convening an EGM for the purpose of having Lot Owners consider the engagement of Mr Kabraji's firm.
149It was next submitted that there was nothing in the Notice of EGM sent to all of the Lot Owners, or in the Minutes of the June EGM itself, to indicate that "Eddie Kabraji's consultancy firm" was the firm being considered to carry out the concierge and cleaning services for the Owners Corporation, or that it was to be an agreement with the company of which he was the sole director and shareholder. A reading of that document suggests that the submission may be correct.
150Nor did the proposed Agreement the subject of each resolution to be considered form part of the Notice of EGM. In fact, the reference to the "Consultancy Agreement" the subject of each identified resolution was simply to "the form of agreement tabled as Exhibit A at this EGM".
151An issue was raised regarding whether any copy of the Agreement had, in fact, been tabled, and a number of differences between the document said to have been a copy of the Agreement marked "A" and the Agreement signed by the parties to it were identified.
152If the Agreement formed part of the Notice and if it had been tabled at the June EGM, the only reference to Mr Kabraji that a Lot Owner would see, was as the "Project Manager/Administrator's Representative" and the only reference to hendersenhayes as the "Project Manager/Administrator". Nothing in the Agreement indicated that Mr Kabraji was the sole director and shareholder of hendersenhayes.
153These matters, at least, raise real questions, whether of fact or law, to be tried. In any event, when one considers the authorities referred to above, I am unable to conclude that the assertions, made against each of Mr Kabraji and Mr Bruckner, are "untenable".
154Then, it seems to be accepted by Eastmark that unless it establishes it is within one of the exceptions to the rule in Foss v Harbottle, it is not the proper Plaintiff in the proceedings and that the Owners Corporation would be. The exceptions relied upon appear to be the fifth one, namely "the interests of justice", although reference was made in the written, and oral, submissions to "where the plaintiff's personal rights have been infringed".
155Sir James Wigram in Foss v Harbottle said at [491]-[492]:
"During the argument I intimated an opinion, to which, upon further consideration, I fully adhere, that the rule was much too broadly stated on the part of the defendants. I think there are cases in which a suit might properly be so framed. Corporations like this, of a private nature, are in truth little more than private partnerships; and in cases which may easily be suggested it would be too much to hold that a society of private persons associated together in undertakings, which, though certainly beneficial to the public, are nevertheless matters of private property, are to be deprived of their civil rights, inter se, because, in order to make their common objects more attainable, the Crown or the Legislature may have conferred upon them the benefit of a corporate character. If a case should arise of injury to a corporation by some of its members, for which no adequate remedy remained, except that of a suit by individual corporators in their private characters, and asking in such character the protection of those rights to which in their corporate character they were entitled, I cannot but think that the principle so forcibly laid down by Lord Cottenham in Wallworth v Holt (4 Myl & Cr 635;17 see also Ves.320 per Lord Eldon) and other cases would apply, and the claims of justice would be found superior to any difficulties arising out of technical rules respecting the mode in which corporations are required to sue.
But on the other hand, it must not be without reasons of a very urgent character that established rules of law and practice are to be departed from, rules which, though in a sense technical, are founded on general principles of justice and convenience."
156In Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd [1969] 2 NSWR 782, at 789, Street J described the fifth exception as "a useful door to be left open lest in some extremely unusual circumstances injustice would result from applying the rule".
157In Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1993) 11 ACLC 1082, Ipp J (as his Honour then was), at 1102, stated that the exception should operate "where an unjust or unconscionable result may otherwise ensue" so that a minority shareholder could bring a claim on behalf of a company "where the justice of the case clearly demands that such a claim be brought".
158In Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, at 144-145, Lord Russell of Killowen explained:
"The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made."
159In Boardman v Phipps [1967] 2 AC 46, at 105, Lord Hodson stated the relevant legal principle:
"The proposition of law involved in this case is that no person standing in a fiduciary position, when a demand is made upon him by the person to whom he stands in the fiduciary relationship to account for profits acquired by him by reason of his fiduciary position and by reason of the opportunity and the knowledge, or either, resulting from it, is entitled to defeat the claim upon any ground save that he made profits with the knowledge and assent of the other person."
160In Hospital Products Ltd v United States Surgical Corporation, Mason J, at 107 summarised the principle as follows:
"The principle, accepted by the courts below, is that the fiduciary cannot be permitted to retain a profit or benefit which he has obtained by reason of his breach of fiduciary duty. A fiduciary is liable to account for a profit or benefit if it was obtained (1) in circumstances where there was a conflict, or possible conflict of interest and duty, or (2) by reason of the fiduciary position or by reason of the fiduciary taking advantage of opportunity or knowledge which he derived in consequence of his occupation of the fiduciary position." [Citations omitted]
161Furthermore, Eastmark has raised the alternative claim that its "personal rights have been infringed". It has pleaded that it is a Lot Owner, although it has not stated, in the Statement of Claim, precisely how its personal rights have been exposed. Senior counsel asked me to draw that inference from the fact of the remuneration to be paid to hendersenhayes, which remuneration would be paid for out of levies imposed upon it as a Lot Owner was one personal right; another was to have the Executive Committee carry out its duties in good faith. (It was accepted that Eastmark would have to amend the pleadings to raise the infringement of the personal rights exception. In the circumstances, I merely note that amendment of the pleading may be required on this aspect also.)
162In the circumstances, I am not prepared to say that Eastmark's lack of standing is so clear that the claims it has made are untenable on that basis.
163Another factual dispute, it seems to me, that will arise is whether the benefit Mr Kabraji obtained was an "unauthorised benefit". Another will be the nature and quantum of the benefit.
164The more difficult question relates to Mr Bruckner. There is no suggestion that he received, or retained, a profit or benefit, by reason of any breach of fiduciary duty owed to the Owners Corporation. However, his knowledge of the benefit to hendersenhayes and to Mr Kabraji, gives rise to at least an argument that he breached his duty to the Lot Owners generally, and also to those Lot Owners who had appointed him as proxy at each EGM, in failing to raise the matters of which he knew.
165In Brunninghausen v Glavanics [1999] NSWCA 199; (1999) 46 NSWLR 538, the Court of Appeal referred to the "body of authority" that "establishes that directors proposing resolutions for adoption by a general meeting owe a duty to the shareholders to advise and disclose material facts". As the Executive Committee appeared to realise, in this case, it was necessary to consider the matters of the "concierge services, cleaning services and engaging Eddie Kabraji's consultancy firm".
166In this regard, it is also useful to refer to Whitlam v Australian Securities & Investment Commission [2003] NSWCA 183; (2003) 57 NSWLR 559, in which it was pointed out, at 602-603:
"[160] At the beginning of the second day of the hearing of the appeal, the Court raised with Counsel the possibility that the appellant had a duty as a director to the company to make an appropriate contribution to the proper running of the Annual General Meeting, and in particular to the carrying out of voting procedures, and a duty not to subvert those procedures; and that a deliberate attempt to subvert those procedures would be a breach of that duty as a director. Viewed in that way, while the appellant certainly had a duty as a fiduciary to the proxy givers to act in accordance with their directions, he may also possibly have had a duty to the company, in so far as he was a director having some control over the voting procedures, not to subvert those procedures. If so, both duties would have required him to vote as directed.
[161] It could also possibly be argued that, in a large company like NRMA, one of the roles of a director is to serve the company by being available to represent, at general meetings, members who are unable to attend. When a director does so, particularly where the company has held out to members that the director will act as their proxy, it could be argued that the director then has the dual roles of agent for the particular members and director serving the company. In those cases where a member gives no direction how to vote, it may be the case that the director must cast the vote bona fide in the interests of the company, so that there would be no difficulty in seeing this as an exercise of director's duties. Where the member does give a direction how to vote, the director's duty as agent for the member would generally require that this direction be followed, even if the director does not think it in the interests of the company; but it could possibly be argued that this does not mean that the casting of the vote is not a discharge of director's duties, because the director has a duty to serve the company by acting faithfully as proxy (so that the company fulfils what it has held out to members), which displaces any duty as director to consider how the vote itself would affect the interests of the company."
167In all the circumstances, I am unable to conclude that the complaint against Mr Bruckner can be regarded as bound to fail.
168I turn now to some specific matters that were the subject of argument that I am able to deal with quickly.
(a)The proxies were not invalid proxies as alleged by the Plaintiff
169The Defendants point to the words "must be in or to the effect of" in regulation 28(2) and say that "the legislative intention is clearly to allow for departure from the absolute strict words of Form 2 in Schedule 8".
170It will be for a trial Judge to determine whether the addition of the words in the proxy form providing for an alternative proxy holder falls within the ambit of the phrase "to the effect of".
171It is not for me, on such an application as this, to make that determination.
(b)In any event, at the November EGM, with all material facts before them, the Owners Corporation passed a unanimous resolution to authorise the entry into the Agreement, thereby ratifying the Agreement
172On the ratification point, Eastmark made three points, namely, that there was not the full and frank disclosure necessary; that there was not a quorum, and that Mr Bruckner, in any event, should not have voted.
173Under the common law, if the Owners Corporation effectively ratified the alleged wrong, this will constitute a complete bar to action taken on behalf of the Owners Corporation. Ratification has the effect of 'curing the wrong' so that there is no cause of action in respect of which the Owners Corporation (and therefore the Lot Owner) can bring proceedings.
174In Forge v Australian Securities and Investments Commission [2004] NSWCA 448; (2004) 213 ALR 574; (2004) 52 ACSR 1; (2005) 23 ACLC 1010 in dealing with ratification, it was said:
"[390] In order for ratification to be valid it must be based on full disclosure of all material circumstances: Bamford v Bamford [1970] Ch 212 at 238; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 at 672 & 704 and Miller v Miller (1995) 16 ACSR 73 at 89.
[391] In Bamford v Bamford, above, at 238, Harman LJ spoke of directors who discover they have acted wrongly being able "by making full and frank disclosure and calling together the general body of the shareholders [to] obtain absolution and forgiveness of their sins ... ".
[392] Bamford v Bamford was applied in Winthrop Investments Ltd v Winns Ltd, above. Samuels JA said at 684:
... if the directors are to get the protection which they seek, the [ratifying] resolutions must reach well beyond any question of commercial interest. They are ineffective, unless they can be regarded as having authorised a breach of duty, or as having waived its consequences. I would myself have thought it clear beyond argument that, the purpose of the meeting being to excuse the directors, that purpose must have been clearly stated, and the nature of the contemplated breach of duty clearly disclosed by the directors seeking to be absolved.
(emphasis supplied)
[393] Glass JA observed (at 672) that the principle that a shareholder resolution was not valid unless there had been "disclosure of material facts to enable shareholders to make a properly informed decision" looked at the substance of what was placed before the meeting."
175In this case, Eastmark submitted that it is for the Defendants to establish that ratification occurred and that there was full and frank disclosure. Eastmark also submitted that whether there was full and frank disclosure gives rise to another triable issue which the court will, ultimately, have to determine. I agree.
176Another issue that is said to arise relates to the numbers at the November EGM. This involves the question whether each Lot Owner who voted, or who provided a proxy to vote, which proxy was exercised, had before the Meeting, made payment of all contributions levied on that Lot Owner, and any other amounts recoverable from that Lot Owner, in relation to the lot, that was owing at the date of the notice for the meeting.
177In this regard, I do not accept Eastmark's submission that the critical question whether someone can vote at a general meeting is whether the Lot Owner is "financial", not at the date of the meeting, but at the date of the notice for the meeting. In my view it is tolerably plain that Clause 10(8) refers to contributions and any other amounts recoverable from that Lot Owner, in relation to the lot, that was owing at the date of the notice for the meeting (in this case, the date being 31 October 2011) and whether those contributions and any other amounts recoverable from that Lot Owner, in relation to the lot, had been paid before the meeting.
178However, this does not mean that there is not an issue of fact to be determined. The document relied upon by the Defendants, which is referred to in Ms Hennessey's second affidavit as a "Meeting Summary" is relied upon in order to establish the requisite number for a quorum. That document is dated 10 November 2011. It refers to "arrears" but does not identify the date at which those "arrears" were determined or quantified. Nowhere in the document is there any reference to the date of the notice for the meeting. The document then states what amounts were "owing" at the date of the Meeting.
179What is not clear from the "Meeting Summary" document is whether the "arrears" referred to as "owing", in whole or in part, were contributions and any other amounts recoverable from that Lot Owner, in relation to the lot, that was "owing" at the date of the notice for the Meeting. Thus, I am unable to ascertain, from the Defendants' evidence, whether each of the Lot Owners with "arrears" "owing" was, or was not, entitled to vote. For example, there may be Lot Owners identified who are shown as having "arrears" "owing" as at the date of the Meeting, but who were entitled to vote because those arrears were not owing at the date of the notice of the Meeting.
180No doubt, this is a matter that the Defendants will be able to clarify by further evidence at a final hearing. Unfortunately, it is not as clear as it ought to be at the date of the Defendants' application for summary dismissal. Accordingly, on the question of the number required for a quorum, the Defendants have not established what is asserted to the appropriate level of satisfaction.
181Of course, another matter raised relates to whether the proxy votes exercised by Mr Bruckner should have been exercised by him and whether his votes should be counted. This, too, raises an issue which a trial judge will have to determine.
182As is, I hope, clear from what I have written, I have decided that there are real questions to be tried. There are also conflicts in the evidence that are, or may be, material, and a robust approach to those conflicts on this type of application is not appropriate. I am satisfied that the Defendants have not discharged the onus of demonstrating that the claims made by Eastmark are untenable. It follows that the Defendants cannot succeed on their two notices of motion.
183However, it is equally clear that some of the claims being made are inadequately pleaded and that Eastmark will need to amend its Statement of Claim and also to file a reply.
184I shall stand over the proceedings to enable the parties to consider these reasons and prepare short minutes that give effect to the conclusions reached, including in relation to a prompt timetable for the filing of amended pleadings and/or a reply. I would also suggest that they give consideration to the question of costs of the notices of motion and whether it is now necessary to determine the remaining motion and if so, when.
185I stand the proceedings over to a date convenient to the parties and to the court. At that time, a date for the determination of the third notice of motion and any argument as to costs can be given.