Lucy v Lomas

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2144/01 - LUCY v LOMAS JUDGMENT 1 HIS HONOUR: This is an oppression suit brought by a forty-seven percent holder of shares in a number of companies. The principal company is the second defendant, Prescribing Biochemists Pty Ltd (PB). The other companies are Manucom Pty Ltd (Manucom), the third defendant, and the College of Somatic Studies Pty Ltd (CSS), the fourth defendant. 2 The companies are involved in the manufacture and supply, and education as to the use, of vitamins and minerals for medicinal and health services. Manucom manufactures the product, PB is the wholesaler, and CSS trains naturopaths. PB supplies distributors in most States, the great majority of the distributors being Brendal, or its associates, a company controlled by the first defendant, Mrs Lomas. 3 In each of PB, Manucom and CSS the shareholdings, prior to Robert Lucy's death on 14 July 1999, were forty-seven percent to Robert Lucy and fifty-three percent to the first defendant, Brenda Lomas. It would seem that the shares are still registered in the name of the Estate of Robert Lucy, but the plaintiff David Lucy was granted letters of administration of Robert Lucy's estate on 1 May 2000. 4 It would seem that the proceedings are brought pursuant to s 234(d) of the Corporations Act, but no-one has taken any point about the status of the administrator to bring the action and I will say nothing further about it. 5 The plaintiff is concerned that neither his father nor the estate has received any dividend from the companies for some years. Essentially, he says that this is because the first defendant operates the companies to ensure that that state of affairs comes about. The first defendant denies this and says that that result is because of the great expense that the companies have to bear, in particular the imposition of more stringent standards of manufacture, which has necessitated the move of the business from New South Wales to south east Queensland, and the corresponding loss of production and goodwill whilst that change was implemented. 6 There has been previous litigation between the parties. In two separate District Court actions, which were heard together by Phegan DCJ, PB and Manucom sued Robert Lucy for repayment of his loan account, which was said to be a sum somewhere in the vicinity of $469,000. In due course the action was amended to substitute the administrator as defendant. 7 It would appear that the main dispute before Phegan DCJ was the quantum of the loan account. In a decision handed down on 19 July 2001 his Honour determined that, including interest, PB was entitled to judgment for approximately $260,000 and Manucom for $32,500. His Honour also made an order for the costs. 8 The judgments are unsatisfied. The parties agreed before me that, with interest to date, the total owing under his Honour's orders was $336,998. The defendants say that they are entitled to a further $84,000 for costs, but costs have not yet been assessed by a costs assessor, and the plaintiff denies that they would be this high. I do not have to determine the matter, nor guess as to what a reasonable amount for costs might be in these proceedings. 9 The second set of proceedings came about when on 12 April 1999 Robert Lucy issued a summons in this Court against PBT Publishing Pty Ltd, as trustee for the Brenda Lomas and Associated Employers Unit Trust, seeking a declaration that he was entitled to benefits from the trust. In other words, to get paid his superannuation. The matter was settled before the first return date and payment of $227,175.81 was paid to the plaintiff, or his father. However, the matter was not finalised in court until February 2001 when some orders for costs were made for the plaintiff, and some for the defendants. I will return to this matter later in these reasons. 10 On 30 October 2000 David Lucy made an application in this Court pursuant to s 247A of the Corporations Act for inspection of the books of the three companies. These were proceedings 4386/00. For reasons he gave on 28 November 2000, Hamilton J granted the application and made an order for inspection, subject to certain undertakings. 11 The parties have agreed that the issues I have to decide are as follows: 1. Whether the conduct of the affairs of the corporate defendants has been and continues to be oppressive to, unfairly prejudicial to or unfairly discriminatory against the plaintiff. 2. If the first issue is resolved in the plaintiff's favour, whether the Court should make an order under s 233 of the Corporations Act, and in particular whether the Court should make an order that the first defendant purchase the shares of the corporate defendants held by the plaintiff, or make some other order. 3. If the Court considers it should make an order that the shares of the plaintiff in the corporate defendants should be purchased, what the terms of that purchase should be and, in particular, what the purchase price should be. 12 Essentially, the plaintiff says that the first defendant, Mrs Lomas has so operated the companies that the Lucy interests have decreased in value by about $435,000 in three years. They say that she has done this by diverting the profit that should have been earned by PB to the distributors of the product, most of which she controls. They also say that one must add to this the "discrimination" shown by Mrs Lomas against the Lucy interests. This is manifested, for instance, in the difficulty of Mr Lucy obtaining his superannuation and in the difficulty of the present plaintiff obtaining information about the companies, which he could only get after the order of Hamilton J. 13 The plaintiff says that Mrs Lomas has effectively excluded a forty-seven percent shareholder from any real involvement in the companies, and from providing any input as to how the companies' funds should be deployed. 14 Mr Smark, who appeared with Mr M Sneddon for the plaintiff, rightly submitted that the court had to consider all these matters as a package when considering whether there had been oppression, and submitted that this was a clear case of oppression. 15 He further submitted that the appropriate remedy was an order that the defendants purchase the plaintiff's shares, but not on the value of the shares today, but at that value increased by a factor to compensate the plaintiff for the fall in value of the shares as a result of the first defendant's activities. It was submitted that this increment was difficult to assess, but probably in the vicinity of $100-150,000. The plaintiff conceded that the amount owing under the orders of Phegan DCJ should be offset. 16 The parties have now agreed that the plaintiff's shares in the combined companies have a value of $397,000. 17 The defendants say that Mrs Lomas rescued the companies from administration in 1994. Indeed there is no doubt at all that she did this. They say that the "deal" that was done was that thereafter she would have a majority interest in the company. 18 In 1997 Mr Lucy physically left the business. He was removed from his directorship in 1998. The defendants say that well before Mr Lucy quit the business he was not devoting his full time to it. They tendered in evidence his diary entries to show that he was spending considerable time in his practice as a naturopath. 19 They say that Mrs Lomas has had to do all the administration, has had to cope with increased demand to comply with industry standards, move the base to south east Queensland, bear all the problems on her own shoulders and even fund the building of a new factory in Queensland. 20 They say that Mrs Lomas worked since 1994 without pay, apart from contributions to the superannuation fund, and a payment of $500,000 made to her in 1999, which the defendants say represented $100,000 a year for five years. She has not been paid anything since. The defendants say that this material shows that really the plaintiff has no ground for complaint. 21 I might interpolate at this point that the defendants called evidence from a director of a large human resources centre as to the remuneration that might reasonably be paid on an arm's length basis to a chief executive officer of a concern of the size of the corporate defendants. That evidence showed that this was well in excess of $100,000 per year. 22 Even though it is an extremely hard matter to assess, and the gentleman who gave the evidence was perhaps not the most impressive witness I have seen in the witness box, the basal proposition which he made was uncontradicted and I think I must accept it. 23 Accordingly, I proceed on the basis that when one looks at the remuneration over a period there has not been excessive payment made to Mrs Lomas for what she has done in the work for the companies. 24 The relevant sections to the Corporations Act are ss 232 and 233. So far as this case is concerned, s 232 provides that if the conduct of a company's affairs is oppressive to, unfairly prejudicial to or unfairly discriminating against a member, the court can make an order under s 233 of the Act. The orders which the court may make under s 233 include an order for the purchase of the plaintiff's shares. 25 The first question to consider then is whether there has been oppressive conduct, the first of the three issues which have been stated before me. 26 1. As I said in Fexuto v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 at 740 (a decision which was basically affirmed by the Court of Appeal in (2001) 37 ACSR 672), even though a reasonable bystander might properly think it sensible to divorce two sets of warring shareholders in a commercial sense, the court has no power to make such an order absent consent, unless it finds oppression. 27 The fact situations in which the court may find oppression are infinitely various. However, for the reasons I there gave, and for the reasons I gave earlier in John J Starr (Real Estate) Pty Ltd v Robert R Andrew (Australasia) Pty Ltd (1991) 6 ACSR 63, 65-67, we have now had sufficient experience with this type of litigation to have created a number of guidelines as to how one sees whether there has been oppression in any particular case. 28 The plaintiff's submissions on the first issue were short and sweet. They were as follows: " A. Oppression amply demonstrated 1. It is submitted that there is little doubt that the plaintiff is oppressed within the meaning of s 232(e). In summary, Mrs Lomas has been conducting (and will apparently continue to conduct) the affairs of the PB companies without regard to the interests of the plaintiff. Indeed, it would appear that she has no conception of her duties in this respect." 29 Indeed, Mr Marshall, who appeared for the defendants, remarks on the lack of details, generally, in the plaintiff's presentation of submissions and evidence. 30 However, in their oral submissions plaintiff's counsel took me to the points of claim. They noted that it was admitted that the plaintiff had not received any dividend, wages, remuneration, or the like, from any of the companies, yet the first defendant or her company Brendal Pty Ltd had received at least $500,000, probably more. Furthermore, the first defendant had received rent from leasing her premises to the companies, from which she must have made a profit. 31 Plaintiff's counsel further said that the plaintiff's expert had valued the estate shares at $831,000 only a few years ago, yet now they have a value of only $397,000. 32 They say that when examining the accounts and hearing the cross-examination of Mrs Lomas, one can see that the accounts are typical intergroup accounts, whereby care is taken to ensure that PB and Manucom break even and do not produce taxable income, though it is not alleged that there is anything illegal, or nefarious about the way this result is obtained. 33 They say that it is apparent from the cross-examination that the affairs of the group were involved in transfer pricing, so it was the retailer that was making the profits and not PB. It is quite usual for this sort of thing to happen in enterprises which are all owned by the one person, but it is quite unfair to arrange affairs this way where there is a forty-seven percent minority interest in the manufacturer and wholesaler. 34 Mr Marshall merely says that there is no material in the areas covered by the plaintiff's counsel which would make out a case of oppression. He says that the companies were in a parlous financial state. Mrs Lomas rescued them under a deal whereby she was to get the controlling interest in return, thereafter she and she alone of the shareholders worked in the business and supported it financially. The plaintiff has taken no interest in the business, except every now and again to ask to be bought out. While Mr Lucy was alive he was paid the same superannuation as Mrs Lomas and apart from the $500,000 there has been no profit to distribute for the reasons that I have already given. He says actually that now is probably the worse time for the plaintiff to realise his shares because the value of the shares are probably at their lowest because of the troubles caused by the relocation. 35 The cases show that to establish oppressive conduct the court should usually find "some overbearing act or attitude on the part of the oppressor": Re Jermyn Street Turkish Baths [1971] 1 WLR 1042, 1060. 36 Often in this sort case there are some procedural irregularities used by the majority to secure an advantage. That is not the case in the present matter. Counsel took me through the memorandum and articles of PB. These show that the directors are to remain in office until removed by ordinary resolution. Mrs Lomas is clearly legally the only director. The control of the companies is vested in the directors. She has exercised that control and, indeed, no irregularity in this area is even suggested. 37 What is suggested is that Mrs Lomas has (a) operated the companies as if they were solely owned by her, and completely overlooking any return that may be expected by Mr Lucy's estate; and (b) has gone out of her way to discriminate against the estate. 38 The plaintiff points to what was said by the New Zealand Court of Appeal in Thomas v H W Thomas Ltd (1984) 2 ACLC 610, 617 (endorsed by Brennan J in Wayde v NSW Rugby League Ltd (1985) 180 CLR 459, 471) that it was: "… not necessary for a complainant to point to any actual irregularity or to an invasion of his legal rights or to a lack of probity or want of good faith towards him on the part of those in control of the company". 39 However, it must be remembered that these words were said in the context of a discussion of the leading cases, all of which point to the plaintiff having to demonstrate a course of conduct amounting to an unjust detriment to the plaintiff. That conduct needed to be conduct involving "at least an element of lack of probity or fair dealing": Elder v Elder & Watson Ltd [1952] SC 49, 60. 40 There have, of course, been cases, of which Roberts v Walter Developments Pty Ltd (1992) 10 ACLC 804 is an example, where discriminatory payments in favour of directors has been held to be oppressive. 41 However, at the other end of the scale, it has been held that the mere subordination of wishes of the minority by exercise of the voting power of the majority is not itself oppressive: Re H R Harmer Ltd [1959] 1 WLR 62, 84. Nor is it oppressive for the majority to adopt a particular policy, which the majority could reasonably adopt: Re Broadcasting Station 2GB Pty Ltd [1964-5] NSWR 1648. Mere proof of prejudice or discrimination against a member again is itself insufficient: Wayde's case at 472. 42 It must always be remembered that investment of capital in a company is a long-term investment. The corporators expect that the capital will remain for the company's purposes until those purposes are complete or some frustrating event occurs, such as the failure of the substratum of the company. Only then can the company be dissolved and the capital returned. 43 Thus the mere fact a person is unable to regain capital or dispose of his or her shares is not a matter of oppression: Re G Jeffrey (Mens Store) Pty Ltd (1984) 9 ACLR 193; McWilliam v LJR McWilliam Estates Pty Ltd (1990) 2 ACSR 757. 44 The mere disadvantages of being in a minority, no matter how "galling and even financially damaging these may be ... they do not in themselves constitute oppression": Re M Dalley & Co Pty Ltd (1968) 1 ACLR 489, 492. 45 One must take all the matters alleged together and remember that each case must be decided on its own facts because there is no such thing as oppression in a vacuum: Thomas' case at 618; Fexuto at 740. 46 I now return to the specific complaints noted earlier as (a) and (b). 47 As to (a), that is the financial matters, the case presented by the plaintiff not only fails to impress when considered in broad outline, it also, to my mind, does not get any better when one looks more closely at the tax returns of Mrs Lomas and her companies. 48 It would seem clear that Mrs Lomas is a comparatively wealthy woman and I suppose she would have had to have been a wealthy woman first of all to own the properties which she leased to the company prior to 1994 and onwards, and also to effect the financial rescue. Her income return shows considerable income each year. However, there is no proper link with the respondent companies to show that any great proportion of her income originates from those companies. 49 Apart from a bumper year in 1999, the profits of Brendal have merely been in the five figure range. There is no dispute that Brendal buys from PB at a thirty percent discount, though I am not one hundred percent sure what that means, but this proportion shows up in Brendal's accounts, when one looks at the sales as against the cost of sales. 50 It was suggested that if the price were put up then there would be more profit in PB and less in Brendal. It is, with great respect, hard to see the logic in this. Mrs Lomas' answer was that that may just inhibit sales, and this may be correct. 51 The case really does not get beyond suspicion. The facts do not seem to add up to the situation of Mrs Lomas milking these companies in her own interest, and financially there has not been a case of oppression made out. 52 As to (b), the focus is on the failure to give information until ordered to do so by Hamilton J, and the superannuation case. 53 In each matter it is clear that there has been some bad personal relations between the parties. Doubtless the Lucys have no love towards Mrs Lomas because they fear that she is taking them down. Likewise Mrs Lomas is probably very frustrated with the Lucys, feeling she has put a tremendous amount of time and energy into the companies and yet is constantly being criticised by them. However, there does not seem to me, even if there were ill-motives on one or both sides, to be sufficient here either, even added to the financial case, to show a case of oppression. 54 There probably were some further details which could be legitimately asked before the superannuation moneys were paid over, though, on the other hand, when proceedings were started the moneys were paid without those objections being pressed home too much. 55 So far as the lack of information is concerned, there was probably too much playing the cards close to the chest before Hamilton J's orders, but after that there does not seem to be any difficulty in investigating accounts and, on the plaintiff's side, finding all the information they needed for the plaintiff's case to be presented to the court. 56 Thus, considering all the facts, the plaintiff has failed to make out the case of oppression. 57 2. My finding on question 1 makes question 2 otiose. As I said in Fexuto at 742, if oppression is established, the court endeavours to find a solution for regulating the company, if that is possible, but if not the usual order made is for one party to buy out the other. Whilst it is possible to dream up some solution in the present case for regulating the company, both parties would prefer a buy-out if oppression is established and that is the order I probably would have made. 58 3. Finally, there was debate as to if a buy-out was ordered whether it should be as at today's date, that is with the value of $397,000, or whether it should be at an anterior date, or with the increment that I mentioned earlier. 59 The cases strongly suggest that, without special factors coming into the mix, such as were discussed by the English Court of Appeal in Profinance Trust SA v Gladstone [2002] 1 BCLC 141, one orders the buy-out at the value of the shares at the date of the order. See particularly Fexuto in the Court of Appeal, and see also a case whose facts are not far removed from the instant, Re A Company; ex parte Harries [1989] BCLC 383. It seems to me that had I ordered a buy-out it would have been at the present day value. 60 However, because of my answer to question 1, the only order I need make is to dismiss the proceedings with costs and order that the exhibits may be returned on the basis that should there be an appeal they should be returned to the court, though if the parties so wish, non-bulky documentary exhibits can remain.

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