Eastmark's Standing
77It is both logical and convenient to deal first with the question of Eastmark's standing to bring these proceedings which concern the enforcement of rights of the Owners Corporation.
78In Carre v Owners Corporation - Strata Plan 53020 (2003) 58 NSWLR 302; [2003] NSWSC 397 Barrett J (as his Honour then was) held that the proper plaintiff rule in Foss v Harbottle applied to an owners corporation governed by the Act (see at [20]-[25]). All parties appeared to accept the correctness of that proposition. All parties also appeared to accept the existence of the interests of justice exception to the rule in Foss v Harbottle. I would in any event reach that conclusion, based on the reasons advanced by Barrett J in Carre (supra) at [34]-[40].
79However, each of the defendants submitted that the present case was not one of those "rare" or "unusual" cases in which it was in the interests of justice to permit a plaintiff, who is unable to bring itself within one of the four well-recognised exceptions to the rule in Foss v Harbottle, to nonetheless pursue a derivative action. It was further submitted by the defendants that in order for Eastmark to bring itself within the interests of justice exception to the rule, it was necessary for Eastmark to demonstrate:
(a)that it brings the action bona fide in the interests of the Owners Corporation and not for an ulterior purpose;
(b)that normal corporate procedures have failed to achieve the justice sought;
(c)that there is no other remedy to address the alleged wrong; and
(d)that serious injustice would arise if it was precluded from pursuing the derivative action.
80The defendants relied upon various authorities in support of the contention that the four matters listed above were requirements that had to be satisfied before the interests of justice exception could be found to apply. These authorities included Barrett v Duckett (1996) 14 ACLC 3101 at 3106 (a decision of the English Court of Appeal), Cope v Butcher (1996) 20 ACSR 37 at 40, and Biala Pty Ltd v Mallina Holdings Ltd (1993) 13 WAR 11 at 73.
81Eastmark, for its part, submitted that, unlike the statutory regime which now exists under the Corporations Act 2001 (Cth) (see ss 236 and 237), there was no list of matters which needed to be "ticked" in order for the interests of justice exception to apply. Eastmark further submitted that Cope v Butcher (supra), a decision of Johnston AM of the Supreme Court of Western Australia, should not be regarded as an authority for the proposition that it is necessary to show that normal corporate procedures have failed to achieve the justice sought. Otherwise, Eastmark appeared to accept that the matters identified by the defendants were at least relevant to whether the interests of justice exception applied in this case. It was further submitted by Eastmark that the circumstances of the present case were analogous to those which existed in Biala v Mallina Holdings Ltd (supra) in which Ipp J found that the interests of justice required that he allow the minority shareholder in a company to pursue a derivative action in relation to breaches of fiduciary duties owed to the company. In this context it was also submitted that (as in Biala v Mallina Holdings Ltd (supra)) where the Court has received all of the evidence concerning the alleged breaches of fiduciary duty, and where that evidence establishes those breaches, it would be absurd for the action to be defeated by a complaint of a lack of standing.
82Nevertheless, as mentioned earlier, it seems to me that it is both logical and convenient to deal first with the question of standing. There is no reason why the question of the applicability of the interests of justice exception cannot be so dealt with in this case. Moreover, it seems to me that, at least as a general rule in cases of this kind, the Court should not embark upon a determination of the merits of alleged causes of action unless it has first determined that it is in the interests of justice that such causes of action be able to be pursued by the plaintiff. To do so would tend to undermine the rule in Foss v Harbottle.
83Eastmark essentially contended that it was in the interests of justice to permit it to bring the action because:
(a)the Court should take a strict approach to breaches of fiduciary duties;
(b)the case was "very strong", and was brought without delay;
(c)the Owners Corporation has not sought to set aside the Agreement, or otherwise assert its rights, but has instead actively resisted the attempts by Eastmark to do so (including by unsuccessfully withholding production of documents relevant to the Agreement on the grounds of client legal privilege), which attempts are manifestly for the benefit of the Owners Corporation;
(d)an earlier attempt by the defendants to have the proceedings dismissed or struck out (including in relation to the issue of standing) was unsuccessful (see Eastmark Holdings Pty Ltd v Kabraji [2012] NSWSC 802);
(e)until early 2012 the same solicitors acted for both the Owners Corporation and Mr Bruckner;
(f)the Owners Corporation (or its Executive Committee, members of which were involved in the events giving rise to the alleged breaches of fiduciary duties) has attempted to "poison the minds of Lot Owners against Eastmark and the merits of its claim" such that the Court could not be satisfied that a true and proper resolution on the issue could be achieved at a further meeting of the Owners Corporation;
(g)the case involves a substantial sum (referable to the $380,000 plus GST payable each year by the Owners Corporation under the Agreement), and when the proceedings were commenced Eastmark had a lot entitlement of 11.65%; and
(h)the defendants do not assert that Eastmark was acting in bad faith or for a collateral purpose in bringing the proceedings.
84In relation to the last point, it should be noted that Eastmark ultimately accepted that it had the onus of establishing its standing, including insofar as that required a demonstration of its bona fides and a proper purpose. It maintained, however, that it was not necessary for it to adduce direct evidence going to its bona fides and its purpose in seeking to bring the proceedings, and it did not adduce such evidence. The defendants submitted that Eastmark's forensic decision in that respect had the consequence that the Court could not be satisfied that Eastmark was acting bona fide and for a proper purpose, particularly having regard to the evidence of long-standing antagonism between Eastmark on the one hand, and the Owners Corporation and Mr Kabraji on the other.
85The defendants also submitted that Eastmark had failed to show that the justice sought could not be achieved through normal corporate procedures, or through the dispute resolution regime contained in Chapter 5 of the Act. In this regard, emphasis was placed on the absence of any evidence to show that the Owners Corporation was at any relevant time under the control of the alleged wrongdoers. It was contended that Eastmark had failed to seek to have the matter raised at any subsequent general meeting (pursuant to its rights under clause 36 of Schedule 2 to the Act), and had failed to seek relief pursuant to Chapter 5 of the Act.
86The defendants further submitted that Eastmark had failed to show that serious injustice would ensue in the absence of the proposed derivative action. Here, emphasis was placed on the unanimous resolution passed at the November EGM which demonstrated, so it was said, a strong desire on the part of the lot owners (who were not shown to be under the control of the alleged wrongdoers) to uphold the Agreement and receive the services for which it provided.
87It was also put that there was no evidence that such services could be provided with greater skill than that offered by Mr Kabraji, or at a lower cost. The evidence suggested, and I accept, that as at June 2011 Mr Kabraji already had considerable experience in providing services of the type which were to be the subject of the Agreement. The evidence also established that at least the other members of the Executive Committee were satisfied with the services which were being provided. The alternative quote from Acity Pty Ltd was for a figure only $28,000 per annum less than the amount Mr Kabraji wanted. I was invited by Eastmark to draw the inference that Mr Davies of Acity Pty Ltd (who had also earlier provided services to the Owners Corporation) was better qualified than Mr Kabraji to provide the services, but I do not think that any such inference can be drawn from the limited evidence available. In this context, it was further put that in circumstances where the Agreement has now been fully performed, the relief available to the Owners Corporation would be restricted to payment of an amount representing the extent (if any) to which Hendersenhayes was paid more than a reasonable remuneration (or more than the amount of a just allowance).
88As far as Mr Bruckner is concerned, the additional point was made that the only relief sought against him was a declaration that he breached his fiduciary duty to the Owners Corporation, and it could not be said that the pursuit of proceedings in order to obtain such relief was in the interests of the Owners Corporation, let alone that a serious injustice would arise if Eastmark was prevented from bringing such a claim.
89I agree with Eastmark's contention that the four matters identified by the defendants should not be seen as factors, each of which must invariably be established before a plaintiff can invoke the interests of justice exception to the rule in Foss v Harbottle. I do not think that the exception ought to be so confined. However, the four matters are each plainly relevant to the question whether the exception applies in any particular case, and the failure of a plaintiff to establish any one of them will generally indicate that the exception is not applicable. In the present case, I accept the general thrust of the submissions made by the defendants concerning those matters, and, for the reasons which follow, I have concluded that Eastmark has failed to show that, in all the circumstances, it would be in the interests of justice for it to be permitted to prosecute the derivative claims it seeks to bring.
90As to the question of Eastmark's bona fides, it was submitted by Eastmark that there was no evidence of any bad faith or ulterior motive on its part, and that the mere existence of conflict and litigation between it and the Owners Corporation does not, by itself, establish such. That may be accepted, as may the submission that it is not necessarily fatal that Eastmark adduced no evidence as to its bona fides (see Re President's Club Ltd [2012] QSC 364 at [50]).
91However, the existence of ongoing disputes between Eastmark and the Owners Corporation is an important part of the context in which the Agreement arises. Indeed, the very subject matter of the Agreement is the provision of services to the Owners Corporation designed to assist its position in relation to those disputes. In these circumstances, it seems to me that in the absence of any affirmative evidence as to Eastmark's purpose in bringing the proceedings in which that Agreement is attacked, it is difficult for the Court to conclude in Eastmark's favour that it is indeed acting in good faith and for a proper purpose. Whilst I do not make any positive finding that Eastmark is acting in bad faith or for an improper purpose, I do not think that, on the evidence which has been placed before the Court, I can infer in Eastmark's favour that in bringing these proceedings it is acting in good faith and for a proper purpose (compare South Johnstone Mill Ltd v Dennis (2007) 163 FCR 343; [2007] FCA 1448 at [68] - [69]).
92In any event, a consideration of the other factors identified by the defendants would lead me to the conclusion that Eastmark has failed to establish that the interests of justice exception should apply in this case.
93Eastmark points out, rightly, that the pursuit of relief under Chapter 5 of the Act could yield neither an award of damages nor an order setting the Agreement aside, and that any orders which would have the effect of causing the Owners Corporation to terminate the Agreement could expose it to an action for damages. Against that, it is theoretically possible that an order invalidating the resolution of the Owners Corporation to enter into the Agreement could have been made under s 153 of the Act, in which case the Agreement itself might have been rendered unenforceable. More importantly, however, the fact remains that it has always been open to Eastmark to seek to utilise the procedures of the Owners Corporation itself to cause it to pursue the claims against the other defendants.
94In particular, it has always been open to Eastmark to exercise its right to have a motion put before a general meeting of the Owners Corporation to the effect that appropriate action be taken in relation to the alleged breaches of fiduciary duty and in relation to the alleged irregularities in the voting of proxies. Since June 2011 there have been three annual general meetings (in addition to the November EGM). It is not to the point to submit, as Eastmark did, that it would be futile to put a motion to a general meeting because "the outcome would be the same". There is no evidence that any of the lot owners are, or have been, relevantly subject to control by Mr Kabraji, Mr Bruckner or anyone else. The fact that the resolutions concerning the Agreement were passed at the general meetings held in June and November 2011 is entirely consistent with the notion that the lot owners who voted (whether in person or by proxy), did so freely in pursuit of their own interests as they saw them.
95As was pointed out by Barrett J in Carre (supra) at [40]:
One of the important themes running through the cases in this area is the reluctance of the courts to interfere in a situation that is capable of being resolved by an appropriate resolution of the members of a company. Where an individual shareholder seeks to assert a claim of the company in relation to some supposed cause of action and the company declines to proceed, the court will be reluctant to assist or to play any role at all unless and until it is seen that the matter cannot be resolved by a resolution of shareholders. The rationale was explained thus by Lawrence Collins J in Konamaneni v Rolls Royce Industrial (India) Ltd [2002] 1 WLR 1269 at 1277-1278 [25]; [2002] 1 All ER 979 at 987 [25]:
Where what has been done amounts to a fraud and the wrongdoers are themselves in control of the company, the rule is relaxed in favour of the aggrieved minority who are allowed to bring a minority shareholders' action on behalf of themselves and all others. The reason for this is that if they were denied that right, their grievance would never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue: Edwards v Halliwell [1950] 2 All ER 1064 at 1067; the Prudential Assurance Co Ltd case [1982] Ch 204 at 211...
96Reference should also be made to the judgment of Jordan CJ in Australian Coal and Shale Employees' Federation v Smith (1937) 38 SR (NSW) 48 at 54.
97In the present case, not only has Eastmark declined to invoke its rights to seek to have the Owners Corporation pursue the alleged wrongs against it, but the Owners Corporation, in general meeting in November 2011, unanimously resolved to in effect uphold the Agreement notwithstanding the allegations which Eastmark was making in proceedings in this Court. It is noteworthy that Eastmark attached a copy of its Statement of Claim to the letter it sent to each of the lot owners on 4 November 2011. It seems to me that, even if the disclosure of information at that time was insufficient to amount to full disclosure for the purposes of "curing" any antecedent breach of fiduciary duty, the information which was provided concerning the complaints made by Eastmark was such that the resolution unanimously passed at the meeting in November 2011 should be understood as a clear rebuff to any suggestion that steps be taken to move away from performance of the Agreement and seek redress from Mr Kabraji and/or Hendersenhayes. Eastmark itself seems to accept that there is no enthusiasm amongst lot owners for its cause, but suggests that their minds have been "poisoned". I do not accept that proposition.
98It is true that some of the statements made by Mr Kabraji to lot owners on 9 November 2011 were inaccurate and, indeed, the tone of the letter is extravagant and somewhat emotional. However, the essential nature of the issues which existed between Eastmark and Mr Kabraji was disclosed by the information which went to lot owners. There was a debate over highly contentious matters to do with the lot owners' property interests. Both sides participated in that debate. Rightly or wrongly, the lot owners who subsequently voted on the resolution overwhelmingly supported Mr Kabraji's position. Presumably they did so in their perceived self-interest. In my opinion, this is not case where a serious injustice would be suffered if Eastmark is not permitted to pursue its derivative action.
99The various points raised by Eastmark which are summarised in paragraph 83 above do not lead to any different conclusion. The last of those points (concerning Eastmark's bona fides) is dealt with above, as is the point about the poisoning of minds. Of the remaining points, some of them appear to me to have little or no relevance. For example, the fact that the defendants were unsuccessful on their application to have the proceedings dismissed or struck out, the fact that the Owners Corporation and Mr Bruckner shared the same solicitor for a time, and the fact that the Owners Corporation made claims for privilege over certain documents, do not seem to me to be particularly relevant. Similarly, the fact that the Owners Corporation has resisted (and continues to resit) Eastmark's attempts to seek redress in relation to the Agreement seems to me to be of little consequence in circumstances where so acting appears to entirely accord with the desires of the lot owners, and where Eastmark's efforts are not shown to be manifestly for the benefit of the lot owners.
100Insofar as the extent of Eastmark's lot entitlement is relevant, that lot entitlement has diminished to around 5% since the commencement of the proceedings as Eastmark now only owns four lots in the Strata Scheme.
101I also do not accept Eastmark's submission that the circumstances of the present case are analogous to those which existed in Biala v Mallina Holdings Ltd (supra). As Ipp J noted (at 75), that case was, factually, a most unusual case. It is readily distinguishable from the present case, not least because the wrongdoers had (at least at the time of commencement of those proceedings) control over the company which they had wronged. Conversely, no question of fraud on the minority has been raised here.
102Insofar as Eastmark contends that it has a very strong case and that a strict approach should be taken in relation to breaches of fiduciary duties, it is sufficient to note that I do not agree that the claims of breach of fiduciary duty which Eastmark wishes to pursue can be described as very strong or even strong. Even if it is assumed that the members of the Executive Committee owe fiduciary duties to the Owners Corporation of the nature contended for by Eastmark, it is doubtful in my view that either Mr Kabraji or Mr Bruckner breached such duties.
103There is no doubt that Mr Kabraji, through Hendersenhayes, had a significant personal interest in the making of the agreement. Nevertheless, it is difficult to see how Mr Kabraji permitted that personal interest to come into conflict with any duty he owed to the Owners Corporation as a member (including as Chairman) of the Executive Committee.
104Eastmark submitted that Mr Kabraji placed himself in conflict with his duty to obtain the most favourable commercial terms for the Owners Corporation, and that Mr Kabraji favoured his own interests over the discharge of that duty. It was contended that Mr Kabraji breached his fiduciary duty by proposing the Agreement to the Owners Corporation, and then causing Hendersenhayes to enter into the Agreement.
105On 17 June 2011 the Executive Committee resolved to convene an EGM to consider "engaging Mr Kabraji's consultancy firm". It has not been suggested that the members of the Executive Committee who so resolved were in breach of any duty. Thereafter, Mr Kabraji, acting on behalf of Hendersenhayes, negotiated the terms of the proposed agreement with members of the Executive Committee who were acting on behalf of the Owners Corporation. These members had the benefit of legal advice to guide them. The proposed agreement was then put to the June EGM where it was considered (in Mr Kabraji's absence), and it was resolved that the Owners Corporation enter into the Agreement.
106Aside from the decision to convene an EGM to consider the matter, that process did not involve any decisions on the part of the Executive Committee or Mr Kabraji as its Chairman. Mr Kabraji's conduct throughout the process was otherwise undertaken as an officer of Hendersenhayes.
107At one point Eastmark's complaint seemed to be that by proposing and then entering into the Agreement, Mr Kabraji engaged in self-dealing. However, the decision of the Owners Corporation to enter into the Agreement was made, not by Mr Kabraji or the Executive Committee, but by the lot owners in general meeting. It is not truly a case of self-dealing (see Clay v Clay (2001) 202 CLR 410; [201] HCA 9 at [51]). Moreover, the mere proposing, by a member of the Executive Committee, of an agreement for the Owners Corporation to consider in general meeting does not seem to me to involve a breach of any fiduciary duty owed to the Owners Corporation.
108The breach of fiduciary duty case against Mr Bruckner is also problematic. The breaches alleged against him are essentially that:
(a)as Chairperson of the June EGM, he permitted the resolution concerning the Agreement to be put to a vote when he knew or should have known that Mr Kabraji was in a position of conflict about which full disclosure had not been made to the lot owners, and that Mr Kabraji would be in breach of fiduciary duty if the Agreement was entered into; and
(b)as the holder of proxies, he voted them in favour of the resolution that the Owners Corporation enter into the Agreement.
109There was no allegation that Mr Bruckner was in any position of conflict. It was contended, however, that he was in breach of a duty not to act to the detriment of the Owners Corporation or to the benefit of a third person.
110The conduct said to be in breach of fiduciary duty did not take place in Mr Bruckner's capacity as a member of the Executive Committee, but rather as the Chairperson of the June EGM and as the holder of proxies. Whilst I accept that Mr Bruckner had the power under clause 14 of Schedule 2 to the Act to rule the relevant motion out of order if he considered that the motion would, if carried, conflict with the Act or by-laws or would otherwise be unlawful or unenforceable, I do not think that his allowing the motion to be put to a vote can be said to be a breach of any fiduciary duty owed to the Owners Corporation in circumstances where:
(a)the minutes of the 17 June 2011 Executive Committee meeting (which were sent to lot owners) stated that the EGM would consider "engaging Eddie Kabraji's consultancy firm";
(b)the draft agreement was tabled at the EGM; and
(c)Mr Kabraji took no part in the discussion at the EGM concerning the proposed agreement.
111In addition, I do not think that Mr Bruckner, in voting proxies (whether at the June EGM or the November EGM), can be said to have breached any fiduciary duty he owed to the Owners Corporation (compare Whitlam v ASIC (2003) 57 NSWLR 559; [2003] NSWCA 183 at [150]-[154])
112Eastmark, in its written submissions, stated that the so-called "third exception" to the rule in Foss v Harbottle, being that "the plaintiff complains that his personal rights have been infringed" was relied upon as another factor in support of the application of the interests of justice exception. In this regard, Eastmark points to the difference between the position of a shareholder in a company and the position of a lot owner in a strata scheme. It was put that the liability of the former is limited whereas lot owners are liable to pay continuing levies. I accept that the consequences of a breach of fiduciary duty may be felt more directly by a lot owner as compared to a shareholder, but that circumstance does not in my view mean that the breaches of fiduciary duty complained of by Eastmark should be regarded as infringements of its personal rights. The submission that the "infringement of personal rights exception" applied in this case was not further developed, whether in writing or orally, and it does not seem to me to be correct.
113For all the above reasons, I conclude that Eastmark does not have standing to bring the derivative claims the subject of these proceedings.
114It was strongly urged upon me by the defendants that if I concluded that Eastmark lacked standing then I should consider the case no further and dismiss the proceedings forthwith. I propose to adopt that course in circumstances where Eastmark accepted that it was open to the Court to do so, and no party suggested that, if a decision on the question of standing was made adversely to Eastmark, any part of the proceedings would remain alive.
115Accordingly, the proceedings will be dismissed. Costs will follow the event. It was submitted on behalf of Mr Bruckner that the case against him should be dismissed with indemnity costs on the basis that Eastmark should always have considered that the case was doomed to fail. There is some force in that submission. However, in circumstances where applications to summarily dismiss the proceedings were refused (see Eastmark Holdings Ltd v Kabraji [2012] NSWSC 802), I decline to make an order for indemnity costs.
116The orders of the Court will be:
(1)The proceedings are dismissed.
(2)The plaintiff is to pay the costs of each defendant.