Fedorovitch v St Aubins Pty Ltd [1999] NSWSC 506 | Case summary

JUDGMENT 1 HIS HONOUR : These proceedings are what in my young days at the Bar were called a "backyarder" involving approximately $2,000. However, they are in the Supreme Court because this is the only court that can deal with this particular type of dispute. 2 Unfortunately although only $2,000 is, in the first instance, involved, the proceedings raise quite important issues of principle and the result of the proceedings will be very expensive for at least one of the parties. There have, I understand, been mediation and settlement talks, but they have got nowhere. 3 The case concerns a company title block of home units at Waverton. The shares in the company entitle the holders to occupation rights of units in the block. That was permissible under s 195(13) of the Corporations Law (now repealed) even though it involves a reduction of capital in allowing shareholders to have and use for their own profit the property of the company. 4 At present unit 1 is held by King Nest Pty Ltd, a company of which the second defendant, R F King, is the controlling director. Unit 2 is held by Henrietta Lopacinski. Unit 3 is held by the second defendant, and unit 4 by the plaintiffs. Units 1, 2 and 4 are let: Mr King lives in unit 3. Mr King is a professional investor, he does not go out to work but conducts his money-making activities in his unit. Accordingly, he is on site, not only during the night, but also during most of the day. 5 The factual background to the present problem is that in 1994 there were a series of incidents in and around the building. The then "tenant" of unit 4 was Sydney Tour Services Pty Ltd. I put the word "tenant" in quotes because under this sort of arrangement probably no tenancy is created; see Tittman v Traill (1957) 74 WN (NSW) 284. However, the parties and their associates at all times seem to have thought that there was a tenancy, even though many of them could not spell the word. 6 It would now seem that part of the business of that company was to supply Korean prostitutes to Asian tourists. There is no evidence, however, that anyone in the block knew of this at the time when the plaintiffs' real estate agent, who was managing the property for them, granted the rights to the company. 7 On 7 July 1994 Mr Prestele, a tenant of unit 1, came into contact with two gentlemen who appeared to be minders of the prostitutes. He was assaulted and his glasses smashed. During the same period police were called on more than one occasion, and a gun was seized by the police. 8 The incident upset Mr King considerably and he made contact with the first plaintiff, Mr Fedorovitch, and also the second plaintiff. Mr King was quite sure in his own mind that the plaintiffs were not doing anything to cure the situation. He took the view that the plaintiffs, whose attitude was "refer the matter to our managing agents, please" were insensitive to the problems of other people who were living in the building, such as Mr King and his tenants. 9 Just what action the plaintiffs could have taken is unclear. There was no evidence of the lease between the plaintiffs and Sydney Tour Services Pty Ltd, or what action they or their managing agents in fact took. However, it was not until 12 October 1994 that the troublesome tenants moved out of the building. 10 When these events took place and Mr King formed the view that not enough was being done, he went into great activity. During August and September 1994 he took a number of steps to solve the perceived problem. The first relevant step which appears in the minute book is that there was a so-called minute of a meeting of directors held on 18 August 1994 at unit 3. According to the minutes no-one was actually present at the meeting, though Mr King was in attendance and as minuted a proxy had been received from Mr S Lesser in favour of Mr King. Mr Lesser was a nominee of King Nest Pty Ltd, who it would appear at least in 1992 may have had a general authority to attend meetings of members of the company and who was also a director. 11 I will refer to the Articles of Association of the company throughout the case but at this stage it is only necessary to note that under Article 69 two directors were a quorum and that, of course, means two directors personally present. Accordingly, the so-called meeting of directors of 18 August 1994, which took a whole seven minutes and whose "minutes" record fifteen different motions, is just a complete nullity and the "minutes" can only be considered to be a piece of paper generated by Mr King as his own aide memoir. 12 The so-called minutes suggested that legal advice and a court order be sought, if required. A notice of meeting is stuck in the minute book in respect of a directors' meeting to be held on 25 August 1994. It is not signed, though Article 103 requires it to be signed, but bears the words "R F King Chairman". There is no evidence to suggest that Mr King was ever the chairman of directors, as required by Article 70. Article 70 required the directors at their first meeting after the yearly elections to elect a chairman of the directors in the ensuing year. They never did this. 13 The minute book shows that what happened was that virtually no meetings of directors were held in the years 1984 to 1994, but that all the business was done at the annual general meeting and each annual general meeting elected its own chairman. This is one of the few matters of which I can be certain by reading the minute book. Its form gives very little confidence that it is at all accurate. 14 After about 1992 Mr King was in fact elected as chairman of the meeting, but he was never ever elected as chairman of directors, though he kept signing pieces of paper throughout this case as "Chairman". 15 Minutes of the meeting held on 25 August 1994 which are in the minute book, show that there were in attendance Mr King and Mr Lesser and that a motion was put that: "Mr and Mrs Fedorovitch, being the member entitled to occupation of Unit 4, through the actions of their tennants, (sic) have failed to observe the conditions set forth in paragraphs (d), (g), (h), (i) and (j) of Article 7 of the Articles of Association. 2. That Mr and Mrs Fedorovitch be called upon to remedy such breaches to the satisfaction of the board by removal of the existing occupants of Unit 4 within seven (7) days, and that if such breaches are not remedied within such time, that Messrs Spanswick & Gilchrist are directed to give notice and cause to be convened a special general meeting of the Company to consider whether the member in question shall be required to cease to be a member of the Company". 16 Another notice of meeting was given for the next day and on the next day the minutes again record that there were present everyone except Mr King, though Mr Lesser was present and the minutes record that he was proxy for Mr R King. 17 The minutes also show that Mr Beatty, solicitor, was in attendance. The minutes record that after extensive discussion a resolution was passed: "That the Board obtain a written report from Mr Amery of North Sydney Council regarding the tenants (such report already having been requested by Mr Fedoravitch (sic)) on the basis that if that report supports the complaints made, Mr Fedoravitch (sic) undertakes to instruct his agents to terminate the lease immediately. The retention of Mr Beatty as solicitor for the company is confirmed." 18 The activities of Mr Beatty are rather strange. His name does not appear in the Law Almanac of recent years, except for the years 1994 and 1995. He appears to be an American lawyer who has gained qualifications in Australia. He is either a poor typist and does his own typing or, alternatively, has never learned how to spell "tenant". 19 He generated a bill, which bears date 2 August 1994, for $1,000 for five hours' work and rendered it to the company. However, the evidence shows that he gave his draft costs agreement to the company only on 24 August. 20 It would appear that he was retained by Mr King. There is nothing in the various alleged minutes to refer to his appointment except the minute of 26 August 1994, which is a "confirmation". Although he was only retained on the 24th we have his bill dated 2 August, which must be wrong, as everyone concedes, for work which appears not to have been done at that stage. 21 It would further seem that on 26 August the parties had come to a sensible arrangement to resolve the problem, yet Mr Beatty continued to do work, or so he claims, and on 2 October rendered a further bill for $700, reminding the first defendant company that the $1,000 of 2 August had not been paid. 22 This is a very strange document because it tends to show that 2 August was not just a typographical error, yet we know on the evidence it could not have been right. Extreme doubt, accordingly, exists as to the bona fides of those two accounts. 23 Mr King himself claimed various expenses in connection with the occupants of unit 4, including photocopying and use of time, and these meant that the total expenses of $1700 for Mr Beatty and $129 for Mr King were claimed against the company. 24 The evidence tends to suggest that someone actually paid these bills. However, there is no minute anywhere which gave authority for the company's money to be expended. Company money cannot be expended without authority. It is normal for the directors who have the control of the company under the Articles to resolve that accounts be paid or, alternatively, to delegate that authority to officers of the company for bills under a certain amount. None of this happened. Yet somehow or other these accounts, which appear on the face of them to be suspicious, and of very doubtful benefit to the company, as opposed to Mr King, were charged against the company. 25 However, having generated paper that showed the company owed $1829 in respect of the work done by Messrs Beatty and King, the company then purported to raise a special levy to have these sums payable only by the proprietor of the shares relating to unit 4. 26 A piece of paper was generated by Mr King somewhere in early December 1994 purporting to be a notice of annual general meeting. When it was received by Mr Fedorovitch and Mrs Lopacinski they complained that the date chosen of 27 December was a public holiday and they would not be in the area. Mr King replied that the meeting had to be held that calendar year and that he would convey their apologies. 27 This was not good enough. The Articles do not confer on a director, even a person who may be the de facto chairman, the right to choose the date of the annual meeting. The Articles require that the directors convene the meeting. The directors never met to do so. Further, when one finds that two out of the four directors object to the date it is quite clear that the point is not just a technicality. 28 Company meetings cannot just be held, they have to be convened and unless a meeting is convened by the appropriate people it is not in law a meeting of the company. Moreover, it is usual practice, and a good practice, that at every company meeting the notice convening the meeting must be read or somebody must move that it be taken as read. In any event, the notice of meeting would have to be signed under Article 103 by the person convening it, or by a director on their behalf, and that did not happen either. 29 Up until 27 December it would seem from all the material that Mr Fedorovitch was a director. It was suggested that he had ceased to be a director on that day because he indicated a desire to resign, or had indicated that he would not sign a consent to act. 30 At the so-called meeting of 27 December there were present Mr King and Mr Lesser. Mr Lesser had no right to be at that meeting because he was not a shareholder, other than as a representative of King Nest Pty Ltd. He could not have been there in that capacity because the signed minutes say that no proxy was received and such minutes are prima facie evidence that that is so (Corporations Law s 251A(6)) and, indeed, under the Articles, they are conclusive evidence. Accordingly, on the face of the minutes there was no quorum at the meeting. Either or both because it could not have been properly convened or there was no quorum, the meeting was a complete nullity. Under "Directors" the minutes say: "Resolved that Messrs King and Lesser and Mrs H Lopacinski, all being eligible, be elected as Directors. Mr Fedorovitch had advised that he did not seek re-election." 31 However, as that was quite invalid, the directors presumably all ceased to hold office. 32 There was a proposal put to the meeting that future leases to tenants should incorporate an extra clause and that: "There be raised a one time special levy of the amount of $1829 for expenses incurred in relation to the tenants in Unit 4 and that this amount be levied on the owners of shares entitling occupancy of Unit 4 instead of this amount being apportioned amongst all shareholders." 33 The so-called meeting of 27 December resolved that discussion on that matter be adjourned to 16 January 1995. A notice was given of that adjournment and on 16 January there was a meeting in which the minutes recorded Mr Fedorovitch, Mrs Lopacinski, Mr Lesser and Mr King attended. However, as this was an adjournment of the annual general meeting, and as the annual general meeting had never been properly convened, this meeting was also a nullity. 34 However, there is a cross-claim that the meeting be validated under s 1322 of the Corporations Law and one should give very serious consideration to this because all four units were duly represented at the meeting and intended that what they transacted at the meeting would not just be a solemn farce. However as the result of the case is the same whether the meeting was or was not valid, there is no need to make any order on the cross-claim. 35 There was some doubt as to whether Mr Fedorovitch attended or not. I consider on the evidence he did. The minutes show that the proposal regarding future leases was passed unanimously, but the meeting also resolved, according to the minutes, that the special levy be raised in accordance with the notice. The minutes say that Lopacinski, Lesser and King voted in favour. Mrs Lopacinski denied on oath that she had ever voted in favour. I thought that she was a very credible witness and accepted virtually all her evidence, but I think in this respect she was in error and that given the political circumstances existing at that time she did in fact support it. Whether she meant to support it or not may have been another matter. 36 The question then is whether the levy was validly passed. This leads one to consider the terms of Article 16 of the Articles of Association. The Article is as follows: "16. Once in each half year or at such other interval as the Directors may from time to time determine the Directors shall have the right to make a levy on the shareholders in the Company, provided that such levy shall not exceed the sum required to meet all expenses charges and outgoings set out hereunder and that each shareholder shall only be required to contribute to such levy on the basis of the proportion of the number of shares held by such shareholder in the Company at the time such levy is made to the total number of issued shares of the Company at that time or such other basis as the Company by ordinary resolution from time to time may determine:- (Various particulars (a) to (j) were then specified and the Article continued) Upon any such levy being made in accordance with this Article notice in writing shall be given to the holder of each group of shares addressed to him at his registered address and the amount of such levy shall become due and payable fourteen days thereafter, and may be recovered by action in any court of competent jurisdiction. Should the holder of any group of shares fail to pay the amount of such levy within such period of fourteen days a second notice in writing shall be forwarded to such holder as hereinbefore provided and unless such holder shall pay the amount of such levy within such additional period of fourteen days the Directors (without prejudice to any other right that the Company may have against the shareholder for the recovery of such levy) may enter into possession of the flat which the holder has the right to occupy and receive the rents therefrom until the amount of such levy is fully satisfied. The directors shall also have a lien upon the shares of the holder until such levy is fully satisfied in similar manner as to the liens attaching in case of non-payment of calls." 37 The Article is rather hard to construe and in fact it was never observed. The scheme is that at least every six months the directors were to determine to make a levy on the shareholders and unless some other basis had been laid down by ordinary resolution the levy was to be shared equally. 38 The minutes show that at no stage did the directors ever do this, but the annual general meeting set the levy. Technically, it did not really even do this because the method chosen was to increase or vary the amount paid in the previous year rather than making a fresh levy. Probably under the Duomatic principle (see Re Duomatic Ltd [1969] 2 Ch 365) that levy was well levied, though ordinarily where the Articles confer a power on directors then the power must be exercised by the directors and not by the company in general meeting. 39 However, there is a long step from that argument to the argument put by Mr Davidson, who appeared for the second defendant, that because the company had behaved in such a way for ten years, that it was for the general meeting to make the levy not the directors. 40 The Articles of Association are to be the governing constitution of the company and although people can waive rights the court does not lightly hold that the parties have agreed by acquiescence, even over a long period of time or otherwise, that an informal procedure take the place of a formal procedure. It was for the directors to make the levy, not the general meeting, and unless everybody acquiesces in it the purported making of a levy by the annual general meeting was just null and void. 41 Even if that were wrong, the true construction of Article 16 is that the levy is to fall equally on the members, unless the company by ordinary resolution has determined from time to time otherwise. 42 When one looks at the penultimate paragraph of Article 16 one can see the scheme is that the directors are to make a levy, and as soon as they make it, it is to be communicated to the persons levied and they are to pay it within fourteen days. To my mind this means that the company in general meeting must make the determination as to how the levy is to be borne before the directors pass their resolution. As it is the directors who are to make the levy and the company that is to set the rules, there is no room for an eo instanter decision or for one made afterwards. 43 It is not competent for the general meeting to both pass a resolution that the levy be made and that it be paid by a certain person. 44 There are other matters which could be considered, such as bad faith, et cetera, but it is just not necessary to consider those. 45 The further costs were allegedly incurred from an additional bill from the accountants of the company of $800. Again Mr King thought that these should be paid by the plaintiffs. Those matters came to a head on 4 December 1995. 46 There is in the minute book a piece of paper which has the date on it "23 November 1995" and which purports to convene an annual general meeting of shareholders to follow the directors meeting to be held at 5pm on 5 December. Not only is it not signed, it also does not indicate who was convening the meeting. However, it did contain a provision that there be a resolution in accordance with Article 16 that the amount of $800 be levied on the plaintiffs and that ten percent interest on outstanding levies on 16 January 1995 was to be imposed. For some unexplained reason the directors met on 4 December at 1pm and simultaneously met as the annual general meeting at the same time. 47 Mr Fedorovitch was elected as a director. A Mr Fewings was invited to chair the meeting. Mr Fewings was not a director or a member of the company, he was an employee of the managing agents. The proposal of the levy of $800 was put to the meeting. Mr King and Mr Lesser voted in favour. Mrs Lopacinski and Mr Fedorovitch voted against and the chairman, Mr Fewings, purported to carry the motion on his casting vote. This, of course, was a complete nullity so that it does not really make much difference whether the meeting was convened or not. Mr Fewings never had a vote because he was never a director. The Articles allow the chairman of directors on a poll to have a casting vote, but it did not mean that a chairman who was not a director was given a vote. In any event there was not a poll called for. 48 Accordingly, the levy allegedly imposed in December 1995 was also invalid. 49 The next matter is whether in addition to making the declaration that it is invalid, the conduct of the meeting has shown oppression within the meaning of s 246AA of the Corporations Law. It is really amazing that a relatively small though disturbing incident would have led to the considerable amount of activity against the plaintiffs, who after all were not guilty of anything other than perhaps not activating their managing agents with sufficient force to get rid of the occupants of their unit. They, however, did that within a couple of months. 50 I think part of the problem is, as Mrs Lopacinski said in her evidence, that Mr King has not enough to occupy himself during the day and allows these trivial matters to prey upon him. Mr Davidson in cross-examination put that matters of guns and being assaulted by the minders of prostitutes were not trivial. Mrs Lopacinski agreed with that, but said there were a number of other matters as well. 51 Because each shareholder in a home unit company is more concerned with his or her own unit rather than the company as a whole, fiduciary duties owed to the average hypothetical member are hard to discern: Woods v Cann (1963) 80 WN (NSW) 1583. This problem does not, however, mean that the court cannot, in an appropriate case, find that the majority have oppressed the minority in such a company. Indeed the close emotional attachment to the shareholders' place of residence that goes with their shares may mean that it is easier to come to the view that oppression exists. 52 In the present case, Mr King and his company control half the units. Mrs Lopacinski fairly said that no-one can resist Mr King assuming the position of chairman and as such purporting to exercise a casting vote at each meeting. The activities of the generation of fictitious meetings and minutes, the circumstances of the acquisition of Mr Beatty's services and the invalid attempt to impose the liability for fees on to the plaintiffs, to my mind show that the affairs of the company are being conducted in a manner which is oppressive or unfairly prejudicial to the plaintiffs. 53 Accordingly, in the circumstances, under s 246AA the plaintiffs being in the minority, the orders sought have been made out. The next question is what sort of order should be made. 54 The ordinary order in cases of this nature is that the minority sell their shares to the majority because the minority usually are complaining that they have been oppressed and that they cannot extricate themselves from a corporate structure which is not returning them the benefit that they reasonably expected: see Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688. 55 However, that ordinary order would to some extent really give Mr King, the oppressor, what he wanted, that is to have Mr and Mrs Fedorovitch get out of the building. On the other hand Mr and Mrs Fedorovitch have bought this unit as an investment and provided the price is right then they may well invest more profitably elsewhere. 56 I have not found any case in Ms Boros' book Minority Shareholders' Remedies (Clarendon Press, Oxford, 1995) of an order being made under s 246AA of the Corporations Law in respect of a home unit company. I thought for a while that one way of dealing with the matter was to order that the sale be at a premium, but at present it seems to me that this is beyond the power of the court and that one cannot order a premium unless the conduct of the oppressor has affected the value of the shares; see eg Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 10 ACSR 606. 57 It seems to me that the appropriate order in a home unit case where the owners cannot get on together is to order that the whole building be sold, or that the oppressor be ordered to buy out the oppressed on the basis, if there are four shareholders, of one-quarter of the value of the building and land, rather than the value of the shares which give the occupancy of that unit. This may give rise to capital gains tax problems or other problems. 58 There is also in the instant case the fact that Mrs Lopacinski is not a participant to the proceedings. Ordinarily in a partnership suit or in a partition suit all the persons interested would have to be parties; see Van Sandau v Moore (1826) 1 Russ 441; 38 ER 171. However, a company suit is well constituted the way it is. There is some suggestion that Mrs Lopacinski may wish to sell out anyhow, which may remove this difficulty. However, there may be capital gains tax problems which should not be visited upon the plaintiffs or Mrs Lopacinski. 59 Another way of dealing with the matter is to order that the capital in the company be reduced by transferring the whole of the property to the four owners as tenants in common so they can then proceed under s 66G of the Conveyancing Act 1919. 60 As I indicated at the close of argument yesterday, I will not proceed to make an order under s 246AA at this stage, but will direct that the parties exchange valuations of (a) the shares entitling occupation of unit 4; and (b) the whole parcel of the land and building, no later than 30 June 1999, and I will list the matter before me on 19 July at 9.50 am for the purpose of considering what order needs to be made. It will be necessary because I will not be sitting after the end of July to conclude the matter that week or the week after. 61 My present feeling is that this is a matter which essentially involved $2,000 that has got out of hand. The costs are enormous. The problem has been brought about solely by Mr King and, accordingly, the costs to date should be paid by the second defendant on the indemnity basis, but as I have not yet heard counsel on that matter I will note my preliminary thoughts and they can be debated on 19 July 1999. Any short minutes should note that the cross-claim should be dismissed, with no order for costs of the cross-claim. oOo

Fedorovitch v St Aubins Pty Ltd

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Judgment (7 paragraphs)

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