Krupace Holdings Pty Limited v China Hotel Investments Pty Ltd [2018] NSWSC 276 | Case summary

Krupace Holdings Pty Limited v China Hotel Investments Pty Ltd [2018] NSWSC 276 | Case summary | Zoe

Background

The parties in the matter were: 1. Krupace Holdings Pty Limited (plaintiff) (Krupace). 2. China Hotel Investments Pty Limited (first defendant) (China Hotel Investments). 3. Staywell Hospitality Group Pty Limited (second defendant) (Staywell). 4. Six Star Capital Pty Limited (third defendant) (Six Star Capital). 5. Kardina Real Estate Inc (fourth defendant) (Kardina Real Estate). 6. Richard Doyle (fifth defendant). 7. Simon Wan (sixth defendant). 8. Bal Sohal (seventh defendant).
Krupace, Staywell, Six Star Capital and Kardina Real Estate respectively own approximately 10%, 10%, 30% and 50% of the shares in China Hotel Investments. Six Star Capital holds 5% of its 10% interest for the benefit of Krupace, such that Krupace effectively holds 15% of the shares in China Hotel Investments.
The business of China Hotel Investments was the operation of the Park Regis Hotel in Sydney. It sold the hotel to One Funds Management Limited (as trustee for the Atlas Cornerstone Property Income Fund) on or about 17 August 2017. Since that time, Krupace and China Hotel Investments have been in dispute as to the future direction of China Hotel Investments' business.
Krupace, Staywell, Six Star Capital and Kardina Real Estate were parties to a shareholders deed. Clause 10.6 of the deed contained provisions relating to what it described as a 'Russian Roulette Notice'. It provided: (a) At any time after the first anniversary of this Deed, any Shareholder may serve a notice (Russian Roulette Notice) on the other Shareholders specifying: (i) the number and class of Shares held by that Shareholder (which must be all of that Shareholders Shares); (ii) that the notice is a Russian Roulette Notice; and (iii) all of the terms applicable to potential transfer of the Shares which terms may not be solely within the control of that Shareholder and which terms must include a price per share (Transfer Terms). (b) The Russian Roulette Notice may only be withdrawn with the consent of all other Shareholders. (c) On receipt of the Russian Roulette Notice the other Shareholders may issue a notice to the issuing Shareholder within 90 days of the receipt of the Russian Roulette Notice electing to either: (i) sell their Shares to that Shareholder at the price specified in the Russian Roulette Notice; (ii) buy the shares of the Shareholder who issued the Russian Roulette Notice; or (iii) issue their own Russian Roulette Notice. Any new notice must be (sic) higher amount or contain fewer conditions. (d) If a Shareholder issues a notice under clause 10.6(c)(i) or (ii) then the parties will be bound as vendor and purchaser on the Transfer Terms specified in the notice and if multiple notices are issued under clause 10.6(c)(ii) then the Shares will be distributed to the accepting Shareholders in proportion to their existing Shareholding. If a Shareholder issues a notice under clause 10.6(c)(ii) and another Shareholder issues a notice under clause 10.6(c)(i) then the Shareholder issuing a notice under clause 10.6(c)(i) may require the Shareholder who issued a notice under clause 10.6(c)(ii) to also buy its Shares within the 90 day period. (e) If a notice is issued under clause 10.6(c)(iii) the terms of this clause 10.6(c) will apply to that notice. (f) If no notices are issued under clause 10.6(c)(ii) within the 90 day period the Shareholder who issued the Russian Roulette [Notice] will be required to buy the Shares of all of the other Shareholders on the terms specified in the Russian Roulette Notice issued by it.
The Russian Roulette Notice described in the deed is in short a deadlock mechanism whereby: (a) one shareholder can make an offer to buy the shares of the other shareholders; (b) any other shareholder can either sell their shares to that shareholder for the nominated price, buy the shares of that shareholder for the nominated price, or issue their own Russian Roulette Notice with a higher price or better conditions; or (c) if no shareholder chooses to buy the shares of the shareholder that issued the Russian Roulette Notice, the shareholder that issued the Russian Roulette Notice must buy out all of the other shareholders for the nominated price. Just as a man playing Russian roulette cannot tell when he pulls the trigger whether he is going to live or die, a shareholder under the deed cannot tell when it issues a Russian Roulette Notice whether it is going to sell or buy.
On 12 May 2017, China Hotel Investments held a shareholder meeting. The agenda for the meeting included a proposal to amend the shareholders deed. Krupace did not attend the meeting. Mr Richard Doyle, a director of China Hotel Investments and the fifth defendant in these proceedings, emailed Krupace a copy of the minutes of the meeting, and a copy of an amended shareholders deed for Krupace to sign. The amended deed shortened the 90 day period included in clause 10.6 of the deed to 30 days. Krupace did not sign the amended deed.
On 18 July 2017, Staywell served a Russian Roulette Notice on Krupace, Six Star Capital and Kardina Real Estate. The expiry date stated on the notice was 17 August 2017 - 30 days after the date of issue of the notice. Krupace disputed the validity of the notice.
On 14 August 2017, China Hotel Investments served Krupace with a notice of a directors meeting to be held on 21 August 2017. The agenda for the meeting included the passing of resolutions to give effect to Staywell's Russian Roulette Notice.
On 16 August 2017, Krupace appeared before the duty judge, Pembroke J, and commenced these proceedings by way of summons. It sought interlocutory orders that the defendants be restrained from taking any steps to give effect to the Russian Roulette Notice and that Messrs Doyle, Wan and Sohal (three of the four directors of China Hotel Investments and the fifth to seventh defendants) be restrained from facilitating share transfers in relation to the Russian Roulette Notice and/or passing any resolutions tabled for the directors' meeting on 21 August 2017.
Krupace contended that the amendment to the shareholders deed was invalid because it was not done in accordance with clause 18.3 of the deed, which stated that: 'This Deed may be amended only by a written document signed by all parties'. It also argued that it had a prima facie case that the Russian Roulette Notice was itself invalid, on the basis that the notice was incapable of comprising an offer from any of the shareholders to any of the other shareholders. Krupace said that if the relief was not granted, it would suffer prejudice for which damages would not be an adequate remedy.
On 18 August 2017, Pembroke J made the interlocutory orders sought by Krupace and listed the matter for final hearing before me for three hours on 24 August 2017, and the second to seventh defendants filed in court a cross summons seeking a declaration that the final date for Krupace to respond to the Russian Roulette Notice was 30 days from the date of service of the notice, and an order that Krupace execute the amended shareholders deed.

[4]

The hearing on 24 August 2017

When the matter came before me on 24 August 2017, Krupace sought to make two arguments. The first was the argument that the amendment of the shareholders deed was invalid. The second was the argument concerning the validity of the Russian Roulette Notice. It is appropriate to deal with Krupace's second argument first, as it was the nature of its second argument that led to its decision to seek leave to file a statement of claim.
Krupace relied on its previous submission that the Russian Roulette Notice was invalid on the basis that it was incapable of comprising an offer from any of the shareholders to any of the other shareholders. The notice itself included the following terms: 1. The total price applicable to the transfer of our shares is an amount of A$2,083,526 comprising the A$1,833,526 owed by us to the Company plus A$250,000 being A$1.2051 per share. 2. The offer is for all of our shares; 3. It is a condition of our offer that $A1,833,526 of the purchase price be satisfied by paying this amount to the Company or as it directs in satisfaction of all monies owed by us to the Company (or the buyer agreeing an arrangement with the Company regarding the assumption of this liability which discharges us from liability in relation to such loan); 4. It is a condition of our offer that the purchaser of our shares procure that the Company confirm in writing that it releases us, all entities affiliated with us (including Leisure Inn Hospitality Management Pty Ltd) and our directors from any and all liabilities which we owe or may owe to the Company on Completion; 5. It is a condition of our offer that the purchaser of our shares confirm in writing that it releases us, all entities affiliated with us (including Leisure Inn Hospitality Management Pty Ltd) and our directors for any and all liabilities which we owe or may owe to the purchaser on Completion; …
Staywell's notice proposed that any purchaser of its shares pay a total purchase price of $2,083,526, but that the purchaser pay $A1,833,526 of the $2,083,526 total to China Hotel Investments to discharge a debt that Staywell owed to that company, and the purchaser both itself release, and procure China Hotel Investments to release, Staywell, its affiliated entities and directors, from any liabilities. In other words, Staywell incorporated the discharge of its debt and the full release of any liabilities into the terms of its Russian Roulette Notice.
Counsel for Krupace submitted that the effect of Krupace electing to purchase Staywell's shares on the terms set out in its Russian Roulette Notice would be the forfeiture of certain claims that it potentially intended to make, including a claim for breach of directors' duties, a derivative action, and an oppression action. It submitted that the Court should not permit Staywell to use the Russian Roulette Notice mechanism to serve what it alleged was an improper purpose.
I raised with counsel for Krupace the possibility that this submission encompassed issues that extended beyond the relief claimed in its summons. I suggested that it would require Krupace to plead the facts that gave rise to its assertion that it had claims against Staywell or its affiliates or directors, in order to establish that the Russian Roulette Notice had been issued for an improper purpose. I also expressed doubt that the matter, if it was more than a simple question of construction of the shareholders deed and the Russian Roulette Notice, could finish within the three allotted hours.
After obtaining instructions, counsel for Krupace indicated that it would seek an order that the matter proceed on pleadings. It then returned to its first argument, that the amendment of the shareholders deed was invalid, and proposed that that matter be determined as a separate question within the remaining time on the day.
The second to seventh defendants opposed the making of an order for the determination of a separate question. Their counsel submitted that it would be a dangerous course for the Court to order the determination of a separate question when, because Krupace had not yet pleaded its case, the nature of the proceedings and the issues involved remained unclear. In other words, before the Court could determine an application for an order for the determination of a separate question, it had to know what the question was separate from.
I accepted the submission made by the second to seventh defendants, and declined to order that the validity of the amendment to the shareholders deed be determined as a separate question. I then made orders that the matter proceed on pleadings, set in place a timetable for the filing and service of the pleadings and evidence, and stood the matter over to 14 September 2017 for directions.
On 14 September 2017, I made various case management orders and stood the matter over for further directions on 19 October 2017. On that date, I ordered the parties to provide written submissions as to the costs of the 24 August 2017 hearing on the basis that I would determine the dispute in chambers.

[5]

The costs dispute

The second to seventh defendants seek an order that Krupace pay their costs of the hearing on 24 August 2017 on the basis that in substance the hearing was wasted because of the application by Krupace for an order that the matter proceed on pleadings.
Krupace's position is that the appropriate order in relation to the costs of the hearing on 24 August 2017 is that they be costs in the cause.
As the second to seventh defendants explained in their submissions, on 18 August 2017 they consented to interlocutory injunctions restraining them, in effect, from acting on the basis of the validity of the Russian Roulette Notice, because it was agreed between the parties that the proceedings could be determined expeditiously in about two hours. That agreement was based upon the expectation that it would only be necessary for the Court to deal with two issues. The first was whether the Russian Roulette Notice was invalid because, as Krupace contended, in the event that it became the seller, the notice required the giving of releases by Krupace, and required the indebtedness of Krupace to be set off against the purchase price of its shares. The second issue was whether amendments to the shareholders' deed purportedly made at a shareholders' meeting on 12 May 2017 were invalid.
In fact, during the course of the hearing on 24 August 2017, counsel for Krupace made submissions concerning the purpose of Staywell in issuing the Russian Roulette Notice that caused the Court to understand that Krupace may have been relying upon an additional ground for the notice being invalid; being that Staywell had an improper purpose, being to prevent Krupace from prosecuting claims that it had against the second to seventh defendants in connection with the sale of the Hotel. While the two grounds that the parties had expected would be the basis of the argument as to the validity of the Russian Roulette Notice were within a reasonably narrow compass, it appeared to the Court that an argument based upon the possible existence of some right of action in Krupace against the defendants, and the potential need for an enquiry as to whether Staywell had the purpose alleged, raised questions of fact beyond the scope of the issues before the Court. Furthermore, it appeared to the Court that not only had the second to seventh defendants not been given notice about the additional reason proffered by Krupace for the invalidity of the notice, but the new argument appeared to raise factual issues that should be pleaded. In response to the Court having raised these issues, counsel for Krupace on instructions informed the Court that Krupace applied for an order that the issue of the validity of the Russian Roulette Notice proceed on pleadings, so that Krupace could challenge the validity of the notice on the third ground that it had raised. Krupace acknowledged in its submissions on the costs application that the hearing on 24 August 2017 had effectively been adjourned because of this application.
The second to seventh defendants have submitted that in circumstances such as these, where a hearing cannot proceed to a conclusion because one party changes the nature of the case, that party has in effect applied for an adjournment, and on conventional principles an order that the party pay the costs of the hearing thrown away would virtually be an automatic price that the party is required to pay for the benefit of the adjournment.
Krupace responded that the present is a not case where it would be appropriate for the Court to make the usual costs order, because Krupace offered to deal with the second issue that was before the Court, being the question of whether the amendments made to the shareholders deed were valid, as a separate question. Krupace submitted that the Court should in the exercise of its costs discretion order that the costs of the day be costs in the cause, whether or not it was reasonable or unreasonable for the second to seventh defendants to decline their consent to that issue being dealt with formally as a separate question.
Krupace also submitted that it had not acted unreasonably, because all parties had thought that the two issues could be dealt with by the Court on 24 August 2017 on the limited grounds expected by the parties, and it was only as a result of unexpected observations by the Court that Krupace determined that it would be necessary to file a statement of claim that raised the third ground for the invalidity of the Russian Roulette Notice that I have described above.
In my view it does not matter whether, as Krupace appears to think, its decision to seek leave to file a statement of claim that introduced a new issue into the proceedings was prompted by some spontaneous and unexpected observation made by the Court, or whether, as I recall it, Krupace's counsel started to develop his client's case as if the new issue had always been part of its case, though not specifically raised. It is my recollection that the possibility that the new issue may be relevant was not one raised by the Court, but was raised by Krupace as if it always had intended to rely upon the argument. From my perspective, the question was whether it was proper to allow Krupace to rely upon an argument that it had formulated but was not one that had been identified as part of the two relatively narrow issues that had led to the matter being fixed for an early final hearing.
The fact is that this is a commercial case that was set down for hearing on an early final basis in the expectation that the Court would be required to determine two issues that would resolve the dispute, but Krupace resolved to change its approach to enable it to rely upon a third issue that was of a nature that required to be pleaded, so Krupace sought the Court's leave to file a statement of claim, which had the result that the hearing was effectively wasted. That consequence is not altered by the fact that Krupace was prepared to agree that one of the original issues be dealt with as a separate question on that day. It was not unreasonable for the second to seventh defendants to resist a spontaneous application that one of the issues be dealt with separately. Their resistance was successful, so the fact remains that the hearing was wasted.
In the circumstances it is appropriate that Krupace be ordered to pay the second to seventh defendants' costs of the wasted hearing.
Accordingly, I order Krupace to pay the costs of the second to seventh defendants of the hearing on 24 August 2017 and the costs of conducting the costs argument.

Krupace Holdings Pty Limited v China Hotel Investments Pty Ltd

At a glance

Court

Decision date

Before

Source

Judgment (6 paragraphs)

Parties

Cited By (1)