Kriketos v Eisman [2007] NSWSC 1038 | Case summary

3908/07 BILL CHRISTOPHER KRIKETOS v MARC RICHARD EISMAN & 2 ORS JUDGMENT 1 These proceedings were commenced by an originating process filed on 6 August 2007. The plaintiff, Mr Kriketos, sues three defendants: Mr Eisman, Mr Matthews and Rehab Associates Pty Limited. Kriketos, Eisman and Matthews are recorded as shareholders of Rehab. Kriketos's claim is a claim for an order that Rehab be wound up on the just and equitable ground or on the ground of oppression or other like matters contemplated by ss.232 and 233 of the Corporations Act 2001 (Cth). 2 There is no allegation that Rehab is insolvent. There is evidence that it has some $259,000 in its bank account. 3 On 6 September 2007 (the first return date of the originating process), an interlocutory process was filed in court by two of the defendants, being Eisman and Matthews. The time for service of that interlocutory process was abridged by order of Hammerschlag J made on 6 September and the interlocutory process was made returnable on 11 September. 4 When the matter came before the court on 11 September, Mr Sydney Jacobs of counsel, on behalf of the applicants Eisman and Matthews, moved for the relief sought by the interlocutory process, namely, orders restraining Kriketos "from voting on any shares in Rehab Associates Pty Limited that are held by him" and "from nominating for appointment any further directors in Rehab Associates Pty Limited". 5 The desire of Eisman and Matthews to have Kriketos restrained in these ways stemmed from Kriketos's action in issuing a notice dated 18 August 2007 by which he purported to convene a general meeting of Rehab with a view to three resolutions being proposed and, if thought fit passed - namely, a resolution to appoint Marion Kriketos and Valerie Kriketos as additional directors of Rehab, a special resolution for voluntary winding up of Rehab and a special resolution for the appointment of a named person as liquidator of Rehab. 6 It appears that Eisman and Matthews accept not only the efficacy of the notice issued by Kriketos but also that each of the resolutions proposed by Kriketos would be effective if passed by the requisite majority of votes at a general meeting of Rehab. I say this because Eisman and Matthews do not impugn those matters and seek only to have Kriketos restrained as to voting and nomination of directors in the way I have described. 7 There is disagreement, it seems, as to the precise voting rights the parties enjoy at shareholder level within Rehab; but for the purposes of the interlocutory process it was accepted on both sides that Kriketos has the ability to cast or control sufficient votes to cause all the foreshadowed resolutions to be passed. The application of Eisman and Matthews as it relates to voting at general meetings can thus be seen to involve the basic proposition that equity should not countenance the obtaining by Kriketos of the results that an exercise of its voting rights would otherwise bring home to him. 8 The restraining orders that Eisman and Matthews seek through their interlocutory process are in absolute terms, in the sense that the restraint is without limit as to time and is not expressed to be until further order. The injunctions sought are in their terms permanent injunctions. Mr Jacobs nevertheless made it clear that the application was in reality advanced as an application for interim relief intended to maintain a status quo pending full and final determination of relevant matters. Mr Jacobs clearly and deliberately proceeded on the basis that the court is required to consider merely whether there is a serious question to be tried and, if there is, to have regard to the balance of convenience or the balance of hardship. Mr Jacobs emphasised that the court is not called upon to make any final determination of the merits. 9 The basic proposition on which the applicants rely, as I have related it, is advanced by reference to a shareholders agreement made in the form of a deed in July 2000. The parties to the agreement were Kriketos and one Kitas of the first part, Eisman, Matthews and one Livschitz of the second part and Rehab of the third part. Kitas and Livschitz later dropped out of the picture and may, I think, be ignored for present purposes, the parties having approached the present application on the basis, in essence, that the deed of July 2000 and a deed of variation made later in the same year define rights and obligations of Kriketos, Eisman and Matthews with respect to Rehab and their shareholdings in Rehab. 10 The deed was made in a context briefly stated in its recitals. Eisman and Matthews were already shareholders in Rehab which had contracted to purchase a property in Darlinghurst for $3.6 million. It was also recited that certain D class shares were to be allotted to the five individuals and also that Kriketos and to Kitas had "agreed to acquire a major interest in Rehab on the terms and conditions provided for herein". I may interpolate that the Darlinghurst property housed or came to house a gymnasium and that the premises were in due course leased by Rehab to another company, Gold's Gym. 11 Clause 2.9 of the deed obliged Kriketos and Kitas to pay $10 to Rehab on or before settlement of the contract for Rehab's purchase of the Darlinghurst property "by way of subscription for shares to be allotted to [Kitas and Kriketos] in Rehab which sum shall be applied by Rehab towards the purchase price", that is, the purchase price of the property. It was then provided in clause 3.0 that Rehab would on 1 September 2000 or a later date agreed by the parties allot shares in return for the sum of $10 paid by Kitas and Kriketos. 12 It appears from clause 3.3 but is not altogether clear that the shares to be allotted to Kitas and Kriketos were 50 shares in several parcels of different classes and that these would, as it were, stand against 30 shares also in several parcels of different classes held by Eisman, Matthews and Livschitz. The significance of the classed may be left to one side for present purposes. 13 Provision was made in the deed for the refurbishment of the Darlinghurst property to provide a fully functional gymnasium. Kriketos and Kitas promised by clause 3.8 (to whom they promised is not stated) that they would "with the cooperation of Rehab" procure an advance of $750,000 to Gold's Gym, with repayment being guaranteed by Rehab and with this sum being applied to fund the refurbishment of the Darlinghurst property. Clause 3.8 went on to say that the loan to be procured by Kitas and Kriketos would be repayable by Gold's Gym with interest at the rate of 10% per annum if Rehab failed to procure the issue of shares in Rehab as specified in clause 3.3 but "in all other events" (which may be the same as saying if Rehab did not fail to procure the issue of the shares to Kitas and Kriketos), the Gold's Gym loan would "not be repayable". The upshot of this appears to be (and given the uncertainties of drafting, I do not intend to make any definitive finding) that, if Kitas and Kriketos were allotted the shares in Rehab promised to them, they would cause a gift of $750,000 to be made to Gold's Gym; but if the shares were not so allotted to them, they would cause a loan of that sum to be made to Gold's Gym bearing interest at the rate of 10% per annum. 14 The evidence suggests that Kitas and, relevantly for present purposes, Kriketos did not cause any payment of $750,000 to be made to Gold's Gym whether as a gift or as a loan and that the shares due to them under the earlier provisions of the deed were allotted to them. Whether they paid the $10 required by clause 2.9 is something not shown either way by the evidence. 15 By clause 4.3, Kitas and Kriketos made promises concerning redevelopment of the Darlinghurst property as distinct from mere refurbishment. Again the recipients of the promises are not specified. Kitas and Kriketos undertook in clause 4.3 to do things reasonably necessary to obtain development and building consents, albeit at the cost of Rehab, and also to seek funding for the redevelopment on behalf of Rehab. Again the evidence suggests that Kitas and Kriketos did not do these things; also that the redevelopment has never eventuated. I interpolate here that Rehab has continued as owner of the property and, as I have said, leases it to Gold's Gym. Ownership of the leased property appears to be Rehab's sole activity. 16 Clause 4.7 of the deed stated that Eisman, Matthews and Livschitz had a first option to acquire a residential unit of their choice in the redevelopment "at market value" prior to any residential units being offered for sale. Because the redevelopment has not occurred, Eisman and Matthews have not been able to obtain any direct and tangible benefit from this provision. 17 The last provision of the deed to be mentioned is clause 4.2 which says, in effect, that neither Kitas nor Kriketos shall be entitled to sell, transfer or dispose of or encumber his D class shares in Rehab except to the other of them or to someone who is a nominee controlled by the transferor and who agrees to be bound by the covenants of the deed. It is said against Kriketos that he transferred some of his shares to a family member who had not agreed to be bound by the covenants of the deed. Reference is also made in that connection to a provision of Rehab's constitution which allows the directors to decline to register a transfer of shares to anyone of whom they do not approve. I say no more about that, however, as there is no evidence of action having been taken under the provision. 18 Mr Jacobs submitted on behalf of the applicants upon the interlocutory process that, in the circumstances I have briefly related, Kriketos breached the deed provisions in several respects. Let it be assumed that that is so and, in particular, that Kriketos is in breach of the covenants of the deed regarding the procuring of $750,000 for Gold's Gym, that he is in breach of the covenants of the deed regarding things to be done by him towards the redevelopment of the property, that the latter breach rebounded to the disadvantage of Eisman and Matthews because there has not come into existence any residential unit to which they can lay claim by reference to clause 4.7 and that Kriketos breached 4.2 by transferring shares to a family member. 19 When those assumptions are made, what follows? According to Mr Jacobs' submission, the whole of Kriketos's shareholding should be cancelled or vested in Eisman and Matthews. I refer, of course, to his shareholding in Rehab. That submission, as I understand it, is advanced on two bases. The first is contractual. Mr Jacobs referred to a passage in Lewinson, "Interpretation of Contracts" (1997) at 414-415: "A contractual obligation may give rise to a liability which may only be enforced by a party to the contract if he has performed or offered to perform his own obligations under it ('a dependent obligation'); or it may be capable of enforcement whether or not the party seeking to perform has performed or offered to perform his own obligations ('in independent obligation'). Which species of obligation has been created is a question of construction, but if the obligation constitutes the whole or a substantial part of the consideration for the contract, the court is likely to construe it as a dependent obligation." 20 Mr Jacobs says that the present situation is one of "dependent obligations" - that Kriketos was entitled to have shares in Rehab allotted to him only if he in turn did all the things he had promised to do under the provisions to which I have referred. More correctly, I should say that Mr Jacobs submitted that there is a serious question to be tried to that effect. 21 I do not accept that submission. The possibility that any such construction would be embraced at trial is very remote indeed. The express consideration for the allotment of the shares due to Kriketos and Kitas under the deed was the payment of $10. After that payment was made (assuming it was made), the agreed consideration had been provided. If the payment was not made, the promise to pay continues to stand as consideration for the issue of the shares, the concept of issue of shares at a discount having been abolished in 1998. The clear and unmistakable tenor of the deed is that refurbishment and redevelopment and other matters would follow on after Rehab had, as to shareholdings and capital structure, assumed the form the deed envisaged. 22 The date fixed by the deed for allotment of the shares was 1 September 2000 or any later date agreed by the parties. There is nothing to suggest that any later date was agreed. The relevant date must therefore have been taken to be 1 September 2000, less than two months after the deed was made. The provisions with respect to refurbishment and redevelopment were, of their nature, obviously not intended to be performed within a space of 4 to 8 weeks. 23 There is no serious question to be tried as to the contractual basis put forward on behalf of Eisman and Matthews. 24 The alternative basis on which the applicants say that the shareholding of Kriketos should be eliminated or vested in the applicants is that Kriketos's conduct is itself within ss.232 and 233 of the Corporations Act - in other words, that the applicants have, as members of Rehab, been the victims of conduct by Kriketos in the form of several breaches of covenant that I have assumed, that is, objectively speaking, oppressive, inequitable or unjust. 25 Mr Jacobs submitted that the deed forms an important part of the context in which the members of the company came together as members. I accept that. There can be no real doubt that the rational expectations against which conduct must be assessed for the purposes of ss.232 and 233 include any part of the members' compact which exists as a contractual adjunct or supplement to the constitution. In the present case, the deed was such an adjunct or supplement. But it does not follow that breaches of the deed are automatically within ss.232 and 233. On the face of things, there is no reason why the breaches on the part of Kriketos, if established, would not have been perfectly well dealt with by an ordinary action for damages. 26 Again I am not at all persuaded that the serious question Mr Jacobs postulates in reality exists. 27 There is, in any event, a fundamental obstacle in the way of the applicants upon the interlocutory process. There is no claim for final relief. As I have said, Mr Jacobs clearly and deliberately approached the application as an application for interlocutory relief by reference to a serious question to be tried and balance of convenience. True it is that Mr Jacobs sought to articulate in the course of submissions potential claims for final relief by order rectifying the register of Rehab by expunging the shareholdings of Kriketos altogether or vesting those shareholdings in Eisman and Matthews. He also referred in submissions about ss.232 and 233 to the possibility of an order altering the constitution of Rehab, although he did not elucidate the way in which the alteration might be framed. 28 There is no cross-claim in the proceedings seeking any final relief. Rather the interlocutory process of Eisman and Matthews floats free. The applicants do not present themselves as standing in need of interim protection pending determination of any claim of theirs for final relief. I refer in this connection to the decision of the High Court in Australian Broadcasting Corporation v Lenah Game Meats Pty Limited (2001) 208 CLR 199 as to the true nature of interlocutory relief. Gleeson CJ there said at page 217, after referring to the treatment of the subject by Sir Frederick Jordan in "Chapters on Equity in New South Wales": "The corollary of the proposition stated by Frederick Jordan is that a plaintiff seeking an interlocutory injunction must be able to show sufficient colour of right to the final relief, in aid of which interlocutory relief is sought." 29 The Chief Justice later said at page 218: "If the respondent cannot show a sufficient colour of right of the kind sought to be vindicated by final relief, the foundation for the claim for interlocutory relief disappears. In a context such as the present, a proposition that the respondent has a 'free-standing' right to interlocutory relief is a contradiction in terms." 30 In the present case, the applicants have not, as plaintiffs or as cross claimants, taken tangible steps to define any right sought to be vindicated by final relief. Approximations formulated on the run at the Bar table are not good enough. The objection to which the High Court referred is made good in this case and is fatal to the applicants' claim. 31 Of the other bases on which Kriketos sought to resist the applicant's claim I need mention only one, namely, the question of delay. The breaches of covenant on which the applicants seek to rely relate to a deed made in July 2000, that is, more than seven years ago. The various promises, of their nature, were intended to be performed within a relatively short time thereafter. By that I do not mean days or weeks but rather months or, perhaps, a year or something of that order, given the nature of the activities concerned. 32 Attempts by the applicants to obtain equitable relief several years later - by which I mean something like five or six years later - on the basis of those breaches are properly met by the riposte that the opportunity to do so has existed for a very long time indeed but has not been pursued. This represents a basis on which any discretion to award the interim relief sought would have been exercised against the applicants even if the fatal obstacle I mentioned had not existed. 33 I would add that the delay further undermines the notion that there would be any serious issue under ss.232 and 233. It is recognised in the cases that these provisions represent a means whereby the court is freed from technical consideration of legal rights and may do what is just and equitable in the circumstances. It follows that equitable defences or matters tending against the discretionary grant of equitable relief will very likely play the same role in the case under ss.232 and 233. Even assuming in favour of the applicants that the claims in the interlocutory process are intended to be confined to the meeting to which the notice dated 18 August 2007 relates, the applicants have failed to make good their claims. 34 The interlocutory process filed on 6 September 2007 is therefore dismissed with costs.

Kriketos v Eisman

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (12 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (1)

Cited By (1)