"If no restraint were laid upon the power of altering articles of association, it would be possible for a shareholder controlling the necessary voting power so to mould the regulations of a company that its operations would be conducted or its property used so that he would profit either in some other capacity than that of member ... or, if as member, in a special and peculiar way inconsistent with conceptions of honesty so widely held or professed that departure from them is described, without further analysis, as fraud ...

The chief reason for denying an unlimited effect to widely express powers such as that of altering a company's articles is the fear or knowledge that an apparently regular exercise of a power may in truth be but a means of securing some personal or particular gain, whether pecuniary or otherwise, which does not fairly arise out of the subjects dealt with by the power and is outside and even inconsistent with the contemplated objects of the power".

See also Gambotto v W C P Ltd [1995] HCA 12; (1995) 182 CLR 432 at 444-5. In my judgment these principles apply to bodies corporate formed under the Act, and to the powers of the proprietors exercisable at general meetings.

The Judge found that the common property appropriated by the defendants, pursuant to the 1996 resolution, was worth $600,000. They challenged this finding and argued that the relevant common property was worthless. It will be necessary to consider the valuation evidence at a later point in these reasons. However, if the common property had more than a nominal value, there can be no doubt that the special resolution authorised the appropriation of what had been common property for their exclusive benefit, and the resolution was a fraud on the minority. See Cook v Deeks [1916] UKPC 10; [1916] 1 AC 554 at 564-5.

Although the common property on and above the original roof was incorporated in the penthouses, it remained common property until the plan was registered. It was still common property at the time of the 1996 annual general meeting. Mr McDougall disclaimed any reliance on the special resolution as creating or evidencing a contract for sale. This was understandable in the light of s 25(1) which provides:

"A body corporate may, pursuant to a unanimous resolution, execute a transfer ... of common property ...".

This section does not refer to contracts, but nothing turns on this distinction. Section 21 prohibits any dealing with common property "except in accordance with the provisions of this Act", and prohibits any transfer of common property pursuant to a contract unless either the contract or the transfer has been approved by a unanimous resolution.

The resolution authorised the transfer of the former common property after the plan had been registered. It constituted a revocable mandate and did not confer rights on the appellants unless and until it was acted on. The subject matter of the future transfer was the body corporate's interests in lots 18 and 19 as constructed.

This analysis focuses attention on the legal situation prior to the 1996 resolution. The 1993 resolution authorised the majority proprietors "to undertake the construction of two penthouse units upon the fourth floor and the roof level". This purported to take effect as a licence under by-law 16 in Sch 1 of the Act, which provides that a proprietor shall not damage any structure that forms part of the common property without the approval in writing of the body corporate.

The work authorised involved the construction of permanent improvements, which would become part of the common property. The resolution, which was not unanimous, could neither authorise a contract for the transfer of an interest in the common property, or bring about such a transfer in equity. Equity enforces proprietary estoppels arising from representations or acquiescence which have induced a party to act to his detriment where it would be unconscionable for the inducing party to ignore the change of position. Compare Willmott v Barber [1880] 15 ChD 96 and similar cases. The equity created by the estoppel may be a beneficial interest or a charge. In the present case, even if the elements of a proprietary estoppel were otherwise present, the defendants could not acquire a further beneficial interest in the common property because of their improvements, because this would involve a transfer, contrary to s 25, or a dealing not authorised by the Act, contrary to s 21. Compare Chalmers v Pardoe [1963] 1 WLR 677 (PC).

The defendants could not acquire an equitable charge or lien for the cost of their improvements either. Such a dealing is not authorised by the Act and is forbidden by s 21. Moreover s 24 (2) prevents any dealing with the beneficial interest of a proprietor in the common property except in conjunction with the relevant lot, and s 23 (4) prohibits the recording of any mortgage or charge on the common property.

"the proprietor for the time being of lot 5 ... shall have special privileges in respect of the common property to undertake the construction of the apartments identified in the development approvals of South Sydney City Council ... within the building ... and to retain the consequent improvements".

Section 58 (7)(a) provides that the body corporate, by special resolution, may make a by-law conferring on the proprietor of a lot:

The first part of the 1995 resolution was capable of taking effect under s 58 (7), but not the second. Title to the permanent improvements accrued automatically to the owners of the common property, and this could not be prevented by any declaration of a contrary intention. In any event the attempt, by special resolution, to give the majority a separate interest in the improvements was contrary to s 25.

The common property incorporated in lots 18 and 19 on the registration of the plan was not unimproved air space, but part of the completed penthouses. It was clearly valuable and on no possible basis could it have been worth only $1.

Section 65 (1)(d) authorised the body corporate to dispose of, or otherwise deal with, "any lot" vested in it by a sub-division effected under s 9. The body corporate had a partial interest in lots 18 and 19 being a co-owner for a divided interest, and it was submitted by Mr Birch that s 65 (1)(d) did not enable it to sell the lesser interest. In my judgment the commonsense principle that the greater includes the less should be applied, and the section construed as applicable to any interest in a lot vested in the body corporate. There is no apparent reason why Parliament would want to authorise the body corporate to dispose of a lot which it owned outright, but not authorise it to dispose of a partial interest.

The 1996 resolution, being a fraud on the minority, was voidable in equity. However, that and earlier resolutions had been acted on. Proceedings were commenced in July 1996 before work had finished, but the plaintiff did not seek interlocutory relief. The defendants were thus able to complete the construction of lots 18 and 19 and register the plan. As the Judge said:

"It is now too late, in practical terms, to revert to the position in which the parties were placed prior to the commencement of any development work in late 1992".

The plaintiff did not challenge the 1993 and 1995 resolutions but they could not confer any title on the defendants. The Judge rejected a defence of laches and said that it would be unconscionable for the majority to have the benefit of the common property in the roof area without being required to compensate the minority. He said:

"I consider that the plaintiff, in lieu of the relief claimed, is entitled to equitable compensation in accordance with the principles referred to in Greater Pacific Investments Pty Ltd (in Liq) v Australian National Industries Ltd & Anor (1996) 39 NSWLR 143 at 153".

The case referred to involved breaches of fiduciary duty, and was not directly in point. However nothing turns on this because the finding of equitable fraud must be upheld, and there was power to award equitable compensation for the reasons given by Lord Haldane in Nocton v Lord Ashburton [1914] AC 932 at 951-3 and following.

A permanent injunction against acting on the 1996 resolution would prevent any award of equitable compensation for the loss of the plaintiff's interest. It would preserve the interests of the body corporate in the lots, but allow the defendants to acquire those interests under s 65 (1)(d) for what they considered was a proper price. In all probability this would provoke further litigation. Section 63 of the Supreme Court Act directs the Court to grant plaintiffs all remedies to which they appear to be entitled so that, as far as possible, all matters in controversy may be completely and finally determined, and all multiplicity of legal proceedings avoided. In these circumstances the appropriate course was to allow the body corporate to transfer its interests to the defendants for $1, pursuant to the resolution, and award the plaintiff equitable compensation.

Equitable compensation is intended to compensate for loss caused by conduct which equity holds to be fraudulent. Since the defendants are not in a fiduciary relationship with the plaintiff and have not committed a tort, they are not accountable for profits derived from the project. Compare Mason & Carter, "Restitution Law in Australia", para 1630. The award should compensate the plaintiff but it is no part of its function to strip profits from the defendants, or to punish them for wrongdoing.

If the 1996 special resolution is implemented, the defendants will acquire proprietary interests in the penthouses as constructed, but they have already paid the costs of construction. The plaintiff will have lost an undivided interest in the common property on and above the roof in its improved condition as at 13 September 1996, when the plan was registered.

If equitable compensation was assessed on a basis which ignored the cost of construction, the plaintiff would be over-compensated, and the defendants penalised by having to pay more than once for the improvements. It would be contrary to principle to assess equitable compensation in this way, and authority requires a different approach.

Section 18 (3) by vesting common property in the body corporate as "agent" makes the proprietors equitable tenants in common. A co-owner, either at law or in equity, who improves the common property has no remedy for the money expended "so long as the property is enjoyed in common". See Brickwood v Young & Ors [1905] HCA 12; (1905) 2 CLR 387 at 394-5. However, a remedy is required when the co-ownership comes to an end. Griffith CJ said, at 396:

"... I cannot regard the equitable right of a tenant in common to compensation as against his co-tenants as merely personal to the individual tenant who effects the improvements. The principle appears to be that the making of permanent improvements by one tenant in common ... gives rise to an equity attaching to the land ... enforceable only in the event of partition or a distribution of the value of the land amongst the tenants in common".

As that decision made clear (at 398) the equity of the co-owner is to be reimbursed for the appropriate proportion of the money expended on permanent improvements not exceeding the increase in the value of the relevant share resulting from such expenditure. See also Forgeard v Shanahan (1994) 35 NSWLR 206. This equity does not include any allowances for risk or profit, any expense, including interest, in borrowing the funds, or any holding charges. An increase in value above cost accrues to all co-owners, and any loss because the cost exceeded the increase in value falls on the improver.

This equity is normally an interest in the land, but a proprietary equity is excluded by the requirement for a unanimous resolution. Ordinarily, as Griffith CJ said in Brickwood v Young at 396 "the equitable right of a tenant in common to compensation as against his co-tenants [is not] merely personal". But where a proprietary equity is excluded by statute, a personal equity will remain to recover in restitution for any unjust enrichment that another proprietor receives, on a sale or partition, as a result of such expenditure. Compare Mason & Carter, para 616. The conversion of the common property into property in the lots, and its transfer to the defendants, will constitute a sale for this purpose.

This personal equity must be taken into account when assessing the compensation due to the plaintiff. This should reflect its 20% share of the market value of the common property, as improved, reduced by setting off the increase in value resulting from the improvements not exceeding their cost. The defendants would have the onus of proof on the latter issues.

Valuers qualified by both sides gave evidence orally and by report, Mr Watts in the plaintiff's case, and Mr Edmonds in the defendants'. In his report Mr Watts adopted the direct comparison method based on comparable sales and on this basis valued the roof space at $447,000. For comparison purposes he also applied a hypothetical development or residual value analysis and arrived at a value of $402,000.

Mr Edmonds, on the other hand, relied solely on a hypothetical development analysis and concluded that "it was not financially feasible to use the common property on the roof" and so it had only a nominal value.

The Judge did not accept the evidence of Mr Edmonds. He noted that the methods adopted by both valuers were very much dependent on hypothetical and speculative considerations and allowances. He said that he was not greatly assisted by either valuation, which I take to refer to the written valuations prepared before the trial. He found that the roof area "obviously had some value" which would depend on the price a developer would pay for such unique space. He preferred the approach of Mr Watts and in particular his oral evidence that the common property on and above the former roof represented about one third of the value of the completed penthouses.

The Judge also accepted Mr Watts' evidence that units 18 and 19 were worth about $950,000 each. He allowed for the cost of selling those lots and took an estimated nett realisable value of $900,000 for each or $1,800,000 for both. On the basis of Mr Watts' oral evidence, he held that $600,000 of this sum represented the value of the former common property included in those lots, and assessed the plaintiff's compensation at $120,000.

In the light of my earlier analysis, much of the valuation evidence on both sides was irrelevant. The Court is not concerned with the value of the common property in its unimproved condition, or with an analysis of a hypothetical development either in conjunction with other floors, or on a stand alone basis. It is also clear that the defendants are not entitled to the other allowances discussed in the evidence.

The Judge relied on evidence given by Mr Watts in re-examination to arrive at the figure of $600,000 for the value of the former common property included in lots 18 and 19. Mr McDougall submitted that his Honour misunderstood this evidence. At the trial Mr Watts submitted a revised residual value analysis (Ex A) in which he deduced a value of $315,000. He was skilfully cross-examined and made a number of significant concessions about this analysis, but maintained his opinion based on comparable sales. In re-examination he gave the following evidence:

"Q. If the penthouses are actually sold can we say that the value that you have given expresses or reflects any component of that price?

A. Well, the component I am suggesting is about a third of the value of the extra space created.

Q. And does that, in turn, reflect some part of the input into the total construction of the units taking account of all of the materials and rights and entitlements that were necessary to construct them?

A. I have allowed for the right of the developer to make a profit out of the venture; that is, the profit and risk allowance, and I have also allowed for the costs of creating those parts of the penthouses that now exist on the roof ...

His Honour: Q. When you said the sale price would reflect one third of the value of the space, are you suggesting that the sale price of Unit 18 or 19, whatever that sale price is, one third of it could be attributed to the area or the value of the area of the roof space?

Q. So if, for example, the units were sold for $900,000 you would attribute a $300,000 component to the fact that there is this building above the old roof line?

Q. In that figure do you take into account the costs of the development that had taken place necessary to produce the $900,000?

Mr McDougall argued that Mr Watts did not intend by this evidence to endorse a valuation of the space at $600,000, so much higher than his earlier valuations of $447,000, $403,758 and $315,000. Exhibit A showed the improved value of the space derived from the common property as $1,092,150, and his residual value of $315,000 was approximately one third of this figure. With respect to the Judge, I do not think that the witness can properly be understood as intending, by this evidence, to nearly double the result of his last residual value analysis. His first answer to Mr Birch, referring to the figure of one third, was consistent with his analysis in Ex A. The Judge's first question ("when you said ...") appears to repeat this answer, and the witness probably understood it in that way. The second question and answer are ambiguous, but the witness could well have understood "the units were sold for $900,000" as meaning $900,000 each, to give a gross sales price of $1,800,000, again in line with Ex A. The next question and answer can also be read consistently with Ex A, where the witness deducted the cost of construction from the estimated sales price of each unit.

In my judgment this evidence, properly understood, did not support the Judge's finding that the unimproved common property incorporated in lots 18 and 19 was worth $600,000. This conclusion requires the Court to consider whether it can properly assess the compensation payable to the plaintiff. In the light of the Judge's general findings, the Court should adopt Mr Watts' valuation of $950,000 for each unit, and his analysis in Ex A which shows that the improved value of the space in lots 18 and 19 derived from the common property was worth $1,092,150.

The defendants are entitled to a set-off for the actual cost of the improvements, but there was no evidence of this cost. The accounting issue would normally be referred to a Master but the trial was not conducted on this basis. The defendants would have great difficulty in such an enquiry, since no attempt appears to have been made to keep separate records of the cost of constructing the improvements on the common property.

The builder, Mr Ross Georges, swore an affidavit but was not available for cross-examination. He estimated the cost of constructing lots 18 and 19 at $1,141,520, but this was a notional cost for a stand alone development of lot 5 and the common property, whereas his work involved the development of lots 2-4 as well. The defendants were not entitled to deduct the notional costs of the notional development, but only the additional costs incurred in the development of the common property over and above those incurred for the development of lots 2-5 and these were not proved.

At this stage the Court should only remit the matter to a Master as a last resort, if no other course is fairly open. The defendants, having improved common property without lawful authority, and attempted to effect a fraud on the minority, are wrongdoers, and their failure to keep and produce proper accounts of their actual expenditure on the common property has made it difficult to assess the compensation due to the plaintiff. Compare Armory v Delamirie (1722) 1 Stra 505 [1722] EWHC KB J94; (93 ER 664). In my judgment the Court should assess the compensation in a robust manner, relying on the presumption against wrongdoers, the onus of proof, and resolving doubtful questions against the party "whose actions have made an accurate determination so problematic". See LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (1990) 24 NSWLR 499 at 508.

In Ex A, Mr Watts estimated the cost of constructing the improvements on the common property at $518,260. After deducting the estimated building cost from the value of the space as improved, a figure of $573,890 is obtained, 20% of which is $114,778, $5,222 less than the sum awarded by the Judge.

The plaintiff relied on the decisions in Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798, Bracewell & Anor v Appleby [1975] Ch 408, Carr-Saunders v Dick McNeil Associates Ltd [1986] 1 WLR 922 and LJP Investments Pty Ltd & Anor v Howard Chia Investments Pty Ltd (1990) 24 NSWLR 499, where allowance was made in assessing damages for the bargaining position of a party possessing rights which could prevent or inhibit a proposed development. The courts were assessing damages under Lord Cairns' Act (Supreme Court Act, s 68) but this plaintiff was in a similar position in its claim for equitable compensation. If the defendants wished to undertake this development lawfully, so that they acquired a good title to their improvements, they had to purchase the common property on the roof before commencing work, but this required the consent of the plaintiff. In my judgment, the unlawful course pursued by the defendants has deprived the plaintiff of the chance of obtaining something more than its 20% share of the value of this common property, and that chance was worth at least $5,222.

The appeal should be dismissed with costs but the orders below should be varied by adding the following as order 2A:

2A Order that the third defendant be restrained from transferring its interest in lots 18 and 19 of the Strata Plan pursuant to paragraphs 7.1(iv) and (v) of the resolution of 16 April 1996, and that the first and second defendants be restrained from accepting such a transfer, until the sum of $120,000 and interest thereon from 13 November 1996, has been paid to the plaintiff.

Wayne Lawrence HOUGHTON & Anor v IMMER (NO. 155) PTY LTD & Anor