(iv) Derivative suit
43 I consider that the McLaughlins have established a basis on which leave should be granted to bring a derivative suit in the name of the company against the directors for breach of their statutory duties as directors. In particular I consider that there is a serious question to be tried as to such a breach of duty in relation to the circumstances in which construction contracts were entered into in advance of satisfaction of the conditions to which finance for the project was subject and in light of the non-disclosure to shareholders of the extent of Mr Garratt's beneficial shareholding in the company (in the context of the resolutions put to the members both to approve the buy-back of certain of his shares for $950,000 and the $250,000 payment to compensate him for his efforts in relation to the project, information which might have led the meeting to a different result in relation to those resolutions).
Facts
44 Given the history of this dispute (and the exhortation by Mr Priestley, Counsel for the company, in his submissions of the need for examination of the primary sources), it is necessary to set out the facts giving rise to this dispute in some detail. I do so in paragraphs 47 - 279 below.
45 Mr and Mrs McLaughlin acquired their parcel of shares (designated as share group "D") in the company in 1996. Ownership of that parcel of shares entitled the holder under the Articles of Association to the use and enjoyment of unit 4 (which, as part of the redevelopment, is now renumbered unit 6) in Dungowan Flats and to the use of common areas in the building.
46 It appears that in October 1994, Mr Garratt, the now chairman of the company, or his service company (Loafer Pty Limited) had acquired an interest in the company through an undisclosed agent, Ms Sheridan Pether. That interest related to the (former) unit 17. In 1995 and again in 1997, shares entitling the holder to occupation of two other units (the former units 20 and 11, respectively) were acquired by Ms Candida Ashford, as undisclosed agent for either Mr Garratt or Loafer Pty Limited. (Ms Ashford was for some period in 1999/2000 a director of the company.)
47 In 1997, a parcel of shares (in relation to the then numbered unit 6) was acquired by Mr Peter O'Meagher as undisclosed agent of Loafer Pty Limited (in evidence was an Agency Agreement between Mr Garratt, Loafer Pty Limited and Mr O'Meagher in relation to that acquisition.)
48 Thus, by 1997, Mr Garratt had a beneficial and apparently undisclosed interest (directly or indirectly as the case may be) in at least four units in the building.
49 Mr Garratt's interest in the building, by 2000, also included shares in respect of two other units, one in the name of an associated company, Garmen Pty Limited, and another by his service company Loafer Pty Limited. A seventh unit (unit 22) was acquired in his and his wife's name. In the witness box Mr Garratt was unsure of the precise number of units (6 or 7) in which he or his companies or agents had held an interest as at 2000 (T 411) but conceded that he was the company's largest shareholder. Mr Garratt's evidence was that he purchased the first four units in the names of other people as he was not on the board and (as those people were then living in the building) this was a means of keeping tabs on a "significant investment" (T 419) (an explanation the immediate logic of which escaped me). More understandable was his evidence that his interest in the building was at first undisclosed in effect so as not to push up the price for shares in respect of other units in which he ht later acquire an interest (T 420). In either event, it seems to belie the suggestion that Mr Garratt's interest in the outcome of the project was the same as any other shareholder. In relative terms, the greater the size of his investment the more he had to gain (or less he had to lose) overall on the outcome of the project (a matter which in my view was material when the general meeting came to consider the proposal for him to be remunerated for efforts thus far voluntarily provided in relation to the project).
50 In late 1997, the McLaughlins, with board approval, undertook renovations to their home unit, including the removal of an internal wall, balcony floor levelling and treatment of what was described as "concrete cancer" at a cost of $10,000. (Part of their present complaint relates to the reconfiguration of their unit which renders useless those earlier works.) By 2000, Mr Garratt and/or companies associated with him had an interest in six or seven of the then 22 units in the building although the extent of his interest in the building would not have been apparent from an inspection of the company's register of members. (The company records (to Mr Garratt's apparent surprise in the witness box) did not disclose, for example, that the shares held by Ms Ashford and Ms Pether were not beneficially held by them.)
51 In May 2000, Mr Garratt was elected to the board of the company at an extraordinary general meeting called by Mr Garratt apparently due to his concerns as to the then financial stewardship of the company. Mr McLaughlin held similar concerns at that time (T 21.45).
52 Ironically, in light of the complaints subsequently made by the McLaughlins, it seems that Mr Garratt had expressed his dissatisfaction with the level of information provided to members of the company and had disputed the company's contention that he was disqualified from voting for non-payment of certain levies (which he had disputed because of a lack of information as to that for which the moneys were being levied).
53 It seems that there had been ongoing problems from at least 1982 in relation to the structural condition of the building with concrete spalling (or concrete cancer) and water penetration (though Mr McLaughlin would only concede that there were minor structural issues with the building as at May 2000 or, as he put it, 'minor maintenance issues of the kind you would associate with any building' (T 22)).
54 In August 2000, Mr Garratt, writing as chairman to shareholders not long after his appointment, referred to 20 years' worth of company records indicating problems in relation to the water/concrete issues and the necessity to attend to a proper understanding of the structural condition of the building (TB 200-202).
55 In 2000, the building lift broke down. Reports were obtained by the board in 2000 in relation to the repairs necessary to the lift and to the building generally (see Exhibit 9, TB pp 203-204). In the meantime, in October 2000, a special levy of $200,000 was struck for the repairs to the lift or for replacement of the building's lift. The payment of the levy was to be spread over two years, apparently in recognition of the fact that many of the shareholders had limited financial means (see Mr Garratt's letter TB 205-206). However, the proposed repairs to the lift were, in the main, not carried out until the redevelopment took place and then only as part of that redevelopment, a matter of no little complaint by the McLaughlins. (In that regard, although Mr McLaughlin seemed to resist the proposition that the board had advised shareholders what was happening with the lift - T 43 - he ultimately accepted that the board had given shareholders information in the form of a letter on this issue.)
56 The correspondence reveals that consideration was given by the board as to whether it was appropriate to do minimum work to reinstate the lift (and later replace the lift to an acceptable standard), as recommended by one firm of engineers, Close Consultants, (TB 203-4) or whether the cost of immediate lift repairs would simply be wasted expenditure if further repair work was required to the building. Mr Garratt said in his evidence that there was doubt as to whether the minimum work necessary to reinstate the lift would meet WorkCover/insurance requirements and it was considered likely that the lift would require replacement in any event within one to two years. A decision was ultimately made by the board to postpone the lift repairs and to investigate ways in which to carry out the more extensive repairs required to deal with the structural conditions of the building (namely, the concrete spalling and water penetration problems).
57 At about the same time as the "lift" levy was struck, the board resolved to appoint two firms of engineers (Bonacci Rickard and Close Consultants) to review the structure of the building. By letter dated 16 October 2000, Mr Garratt engaged those two firms to provide a preliminary report as to the building's structural condition and to address the ability of the building to support penthouses on the roof or reconstruction, strata title, lift replacement/refurbishment and fire protection. (A report as to the safety and fire protection issues was also sought.) Interestingly, given the terms of Mr Garratt's letter, it would seem that the possibility of an extension to the building (whether or not with the aim of funding the repairs) was something which first emanated from Mr Garratt, or the board, not the engineers who were advising in relation to the structure of the building, though nothing turns on this.
58 In November 2000, Bonacci Rickard gave a preliminary report to the directors on the building's condition, proposing that one extra storey be constructed with two to four new units. It was said that this would allow tenants to use the new units as units were upgraded. (This proposal seems to have been made with a view to utilising the funds generated from the renovation to pay for the repairs; not because the repair work of itself necessitated an extra storey being added to the building.) This report recommended that additional tests be carried out, as well as maintenance of the lifts in the short term but with their replacement in the master plan (TB 207-219). (Close Consultants had reported that the fire safety protection work could be carried out without major building works but recommended further investigation.)
59 Although much emphasis was in due course placed by the McLaughlins on the recommendation contained in this report, it was clear from Mr Rickard's evidence that the recommendation was very much preliminary in nature at that stage. Mr Rickard (at T 235) acknowledged that the extent of the concrete cancer in the building had not been quantified. The basis of the conclusion that a one storey addition could be made to the building also seems to have been a preliminary view in that he expressed the opinion that the roof was the principal cause of the building's problems (that being a waterproofing issue) and he said that in his experience the 'rule of thumb' was that there could be up to a 25% weight increase to a building without the need for (expensive) underpinning of a building. Hence, his recommendation that the board consider addressing the roof problem by adding one floor to the building, which he said would create a new capital asset "if not to offset, to equal the cost of repairs".
60 Mr Rickard said that he did some broad costing, based on the quantity surveyor WT Partnership's figures, in effect excluding car park costings and underpinning, and attributed a cost per floor of $1.1 million for the extension.
61 From the outset, the McLaughlins were critical of the board's decision not to carry out the lift works (for which the $200,000 levy had been struck) and as to the extent of the repairs pursued by the board. In particular, the McLaughlins were critical of what they say was the failure of the board to carry out any further investigation of the proposal put forward by Bonacci Rickard for repairs to the building to be funded by one additional level to the building rather than (as the board ultimately chose to do) by pursuing a more ambitious redevelopment. Mr McLaughlin persisted, up to and during the hearing, in contending that (what I might call patchwork) remedial repairs from a local builder, Joe Clancy, would have been sufficient by way of repair, an assertion which flies in the face of the expert evidence as to the building's problems.
62 According to Mr Garratt, by January 2001 the board realised that very extensive repairs were required to the building and that neither the company nor the shareholders had the funds to pay for them.
63 In January 2001, a consultant retained by Close Consultants (Savcor Pty Limited) reported to Close Consultants as to the building condition and recommended that a pilot repair of one unit and area of façade (costing $45,000 to $65,000) be carried out. Savcor's estimate was that it would cost approximately $1.3 to $1.6 million for the repairs in total to be carried out, subject to the findings once the pilot repair was carried out. (Mr McLaughlin said in the witness box that he accepted the Savcor report's conclusion that there be a test on one unit to find out the extent of the problem (T 26.22-25).)
64 By letter dated 4 January 2001, shareholders were advised as to the preliminary reports which had been received from Bonacci Rickard, Close Consultants and Savcor. The state of the lift was said to be of pressing importance. It was recommended that shareholders think carefully about taking on tenants for longer than six month leases (due to the possibility of building repairs). The prospect of significant levies was drawn to shareholders' attention. It was noted that shareholders would be presented with a proposal outlining costs, risks, delays and benefits (TB 235-237).
65 Close Consultants' report of 31 January 2001 concluded that major works were required and also recommended (as had Savcor) that there be a pilot repair of one unit. An estimate of $2 million for total repair costs was given, subject to the results of the pilot test (TB p 238).
66 In February 2001, the directors decided to defer the lift repair works pending the building restoration proposal. According to the minutes of the 4 February board meeting it seems that Mr Garratt and Close Consultants informed the board that building repairs were not feasible (Exhibit 9) and that a full report as to options would be given to directors and shareholders. It is not clear why the recommendation for a pilot repair was not adopted (as advised in Mr Garratt's letter of 17 May 2001).
67 By letter dated 27 February 2001 the McLaughlins were provided with copies of the reports of Close Consultants and Bonacci Rickard, as well as the minutes of the board of directors meeting on 4 February 2001 (Exhibit 10).
68 Almost immediately, Mr McLaughlin raised complaints as to lack of information in relation to the repairs. He also (by email of 7 March 2001 - TB 256-257) sought clarification of the extent of Mr Garratt's interest in the company (an odd request unless by then he had some reason to believe Mr Garratt had a greater interest than in one unit). Mr Garratt (who, in the witness box, suggested that, at least by 2006, there was no secrecy in relation to his interest in the company) responded to Mr McLaughlin that the board (not he) would respond to Mr McLaughlin. The board does not seem to have so responded and the extent of Mr Garratt's beneficial interest in the company was not apparently made clear to the McLaughlins until his evidence in these proceedings. What the knowledge of other shareholders was in this regard is not clear but, in the absence of disclosure of that interest at the relevant meetings, I can only assume that Mr Garratt's overall interest in the building (as the company's largest shareholder) was not generally known - a matter of some relevance when I come to consider the information put before the meeting when Mr Garratt's compensation payment was approved.
69 By letter dated 17 May 2001, Mr Garratt advised the shareholders that Savcor had recommended a pilot project be conducted on a vacant unit, at an estimated cost of $45,000 to $60,000, and that Close Consultants had advised the board to add to that cost estimate the costs of fire safety works, lift replacement, and repair/restoration works on the windows and balconies, for a general budgeted cost of $2.5 million or more. Mr Garratt's letter (TB 268), relevantly in the context of Mr McLaughlin's complaints on this issue, advised that the board had decided there was no point in proceeding with a pilot work at that time and that it should investigate the options available in relation to the repair, renovation or reconstruction of the building. The letter noted that one (unidentified) owner had raised the possibility of selling the building (but did not suggest that the board was actively pursuing that possibility). The letter also noted that, after further testing, Savcor had advised that it was essential for an inspection of the concrete below the floors to assess the extent of the cracking and the action required to prevent the possibility of structural failing caused by the cracks. The letter noted the fact that a special levy of $250,000 had been raised for the purpose of the lift replacement (or its complete renovation) and advised that the board was keeping the situation with the lift under review.
70 Mr Garratt's concern at that stage was said to be that the company investigate options for the greatest value in order to enhance individual investments and fund development (TB 277-287).
71 By May 2001, an issue had arisen between the then company secretary (Mr Adrian Stark) and the McLaughlins (who had apparently expressed strident criticism as to his competence and/or integrity). Whether for that reason or otherwise, Mr Stark advised Mr McLaughlin in a letter dated 19 May 2001, that the board would not release any records except to an agreed accountant but that the board minutes were available (Exhibit 10).
72 Notwithstanding Mr McLaughlin's insistence to the contrary, it does not seem seriously able to be disputed that, as at 2001, the common areas of the building were in a poor state and there was a need for repairs to be carried out to part or all of the building (to address water penetration, concrete cancer problems and to repair or replace the lift). During 2001 steps were taken by the company to investigate the options for the company to fund repairs to the building by way of a redevelopment of Dungowan Flats (see TB 288-290).
73 In 2001, the board, having been provided with certain recommendations from Architectural Projects Pty Limited (a firm retained in that regard), advised Architectural Projects that it was proposing to proceed with one of the then identified options of rebuilding (option 3), namely for a four storey addition to the building (TB 291).
74 In September 2001, the McLaughlins vacated their unit and rented it out for $415 per week. (Mr McLaughlin's evidence in the witness box was that this occurred after Mrs McLaughlin was assaulted - T 84.) They have not occupied their unit as a home since then (nor is it suggested that they now wish to do so).
75 In October 2001, shareholders were given notice of the Annual General Meeting, together with a summary of information in relation to the condition of the building. They were advised that the cost of repairing the slabs was likely to be in the order of $1.3 to $1.6 million and that the current building would not support more than one additional storey on the roof. Mr Garratt's 19 October 2001 letter to shareholders also noted the engineers' proposal for demolition of the rear and the construction of four additional floors with ten new units. The letter advised as to the possibility that shareholders would have the opportunity to be included in the design process and might be able to reconfigure or retain particular features of their units. (Mr McLaughlin says he did not ask for anything in this regard as he understood the board was proposing to build as per the development application subsequently obtained, which indicated that heritage features were to be retained (T 53).)
76 The Annual General Meeting was held on 14 November 2001 (the minutes of which are at TB 338-339). There were presentations at the meeting, which was attended by a heritage architect (Mr O'Reilly) a fire services consultant and a consultant town planner. Mr McLaughlin accepts that he raised various questions at the meeting. (He was not, however, entitled to vote at that meeting due to non-payment of levies.) The McLaughlins say that at that meeting it was said that the board expected there to be a surplus from the proposed development. (I interpose at this stage to note that the McLaughlins have taken issue with the varying estimates given over the course of the project as to the likely final outcome of the development. However, at no stage does it seem that any assurances were given by the board as to the financial outcome of the project, nor would I have expected it likely that the board would have been in a position to do so given the uncertainties associated with any redevelopment project of this kind.)
77 In March 2002, Richmond & Ross Pty Limited, engineers, reported to Architectural Projects Pty Limited, summarising various reports over a 20 year period and concluding that major works were required. Richmond & Ross outlined various repair options for consideration (TB 367-432) (from reactive maintenance to re-building).
78 Another firm of consultants, BDA Consultants Pty Limited, also reported to the company, favouring the option of a construction of four additional levels with eight new units. It was said that this was the only option addressing heritage conservation requirements and generating enough dollars to fund the project. Estimated construction costs were put at $11.2 million with an estimated sale price on completion per unit of $1.5 million (TB 434-440).
79 Mr McLaughlin raised further complaints with the board in March and April 2002 (having by, or around that time, paid his outstanding levies) and asked for the plans/costings of the works (Exhibit 10).
80 A development application was lodged with Manly Council on 29 April 2002 for the addition of four floors with twelve new units (TB 441). (This was in due course rejected by the Council).
81 On 13 May 2002, the McLaughlins emailed Mr Garratt seeking information in relation to the special levy account and as to past and planned expenditure and raising various concerns. In particular, it was asserted that the lack of detail was causing them concern. There was a reference to a still awaited promised options paper (which I assume was a reference back to the January 2001 letter promising that a proposal would be put to shareholders, unless the McLaughlins were referring to an options paper foreshadowed at the November 2001 meeting).
82 The McLaughlins suggested that expressions of interest should be called for the development of the site and to put proposals in relation to the site. They asserted that most of the problems which arose from inadequate drainage could be addressed with less disruption and uncertainty than the proposed development and that the rear demolition was unnecessary. Complaint was also made as to lack of accountability and lack of transparency (Exhibit 10).
83 By letter dated 16 May 2002 (TB 434-440), Mr Garratt informed shareholders that the development application had been lodged on 29 April 2002. The letter enclosed a copy of BDA Consultants' report of 25 March 2002, a draft environmental impact statement and quantity surveyor's costing and an economic viability statement. That letter expressed the opinion that even if the project only broke even, or had a net loss, the shareholders would be in a greatly improved position (and that until the receipt of tenders and the presale of units, actual costs and revenue would not be known).
84 On 18 May 2002, apparently responding to their 13 May email, Mr Garratt emailed the McLaughlins, noting that an information package to shareholders was in the mail and that they would receive theirs early the next week with a copy of the engineer's report to Council including as to the structural condition of the building (Exhibit 10).
85 The McLaughlins opposed the development application. Mr McLaughlin expressed that opposition at a meeting of the Council. The basis on which he said he opposed the project at that stage was that it was for an additional four floors (105% over the height restrictions) (T 29; T 31.49; T 67, T 75). He also said that he thought any figures forwarded were unreliable (T 58), emphasising the difference from a figure of $2.78 million to the consultants' figure in 2002 of $11.2 million. At the Council meeting, Mr McLaughlin apparently said that the basis of the application was 'fraudulent' (T 59), justifying that description, in the witness box, on the basis that the cost of repairs would not have been in the millions and asserting that there was no need to demolish and put in new floors (T 60).
86 It was Mr McLaughlin's firm opinion that the work could not be done without his consent (T 60.40), although the advice on which he based that opinion at the time seems to have been very general advice as to the import of company title (T 61). The company relies on this as support for the submission that the McLaughlins have sought to use their perceived 'upper hand' by reference to such an effective right of veto to put pressure on the company to pay above market price for their shares. I say more about this in due course. However, I think it fair to say that the emphasis placed by the McLaughlins at the outset on the need for their consent seems principally to have been directed to their understanding that they could prevent the redevelopment from proceeding, not to any attempt by them to force a buy-out of their shares (though they did put that forward later as a means of extracting themselves from a development with which the other shareholders, but not they, wished to proceed).
87 Fundamentally, the McLaughlins' objection was to the four storey addition as a basis for the carrying out of repairs to the building (T 75). Mr McLaughlin, in his evidence, emphasised more than once his view that it was a "speculative" development (T 75, T 76) and one which exposed shareholders to significant financial risk. (Not surprisingly, Mr McLaughlin sees the result of the project as having vindicated his unwavering criticisms of it.)
88 In early November 2002, Manly Council refused the development application. By letter dated 26 November 2002 (TB 493-496) Mr Garratt reported to shareholders on the rejection by Manly Council of the development application. That letter stated that the company would appeal and would pay the costs out of the special levy funds held and general receipts. A report from Mr O'Reilly of Architectural Projects (of 14 November 2002), setting out three options for the building, was enclosed.
89 On 3 December 2002, the company lodged with the Land and Environment Court its appeal from the rejection by Council of its development application. (That appeal was in due course unsuccessful.)
90 The material provided in the notice of the Annual General Meeting (sent January 2003) to be held on 31 January 2003 (TB 497-499) included an estimate of the total cost of renovation at $11.2 million and a real estate agent's estimate of unit values as renovated. Both the McLaughlins' unit (unit 4) and Mr Garratt's ground floor unit (unit 22) were valued in the order of $600,000 - $650,000.
91 At the Annual General Meeting on 31 January 2003, Mr McLaughlin complained about the minutes of the previous general meeting, and the decision to appeal to the Land and Environment Court. At that meeting the suggestion of a buy-out of the McLaughlins' shares seems to have been raised for the first time (TB 501-503). Mr Garratt's recollection is that Mr McLaughlin suggested at that meeting that the other shareholders "band together" to buy him out (T 386). (Mr McLaughlin says he offered a buy-out at the estimated or agreed cost price as at the Land and Environment Court proceedings (T 69).)
92 At that meeting, Mr McLaughlin indicated his view that all shareholders were required to agree to any redevelopment of the building (an opinion which the board does not, and did not at the time, share). Therein, lies the nub of the present dispute.
93 The directors, at a meeting on 31 January 2003, confirmed the November decision to appeal to the Land and Environment Court (TB 499-500).
94 By letter dated 21 February 2003 (TB 505-566), Mr Garratt, on behalf of the company, wrote two letters to the McLaughlins. In the first, he noted that they had been asked at the Annual General Meeting to state their reasons for opposing the project and he recorded that the primary reason given by them was rent loss and that they felt that a local builder (Joe Clancy) could do all that was required. Mr Garratt sought a considered written statement of reasons within 14 days. The second letter on that date indicated that shareholders might be willing to buy-back the McLaughlins' shares, either after auction with an agreed reserve price or on an average of two independent valuers. Mr Garratt noted that this would need an agreement approved by the general meeting and that if the Land and Environment Court appeal was lost it was unlikely that the general meeting would approve such an arrangement (TB pp 505-506). (It must be noted that not only was this offer conditional on shareholder approval but also that Mr Garratt had, in effect, indicated that such approval would be unlikely in the circumstances which later transpired. Nevertheless, this letter is now relied upon by the company as a "standing offer" to purchase the McLaughlins' shares at an independent valuation.)
95 The McLaughlins' response, by letter dated 10 March 2003 (TB 507-508) was, in effect, that they had made their reasons for opposing the development very clear and that if Mr Garratt had an offer it should be made, reiterating that they opposed the development application and saw no benefit to shareholders. They asserted that they were waiting for a cost breakdown and board minutes.
96 Mr McLaughlin was adamant in the witness box that the independent valuation proposal put forward in the context of a buy-out offer was not workable: "Well how was it going to be valued? … on the new development that was going to take place? … on the valuation of the Land and Environment Court. We didn't believe there was any need to have an independent valuer, because the board knew how much all the units in there were sold for, because they had to pass each change of shares …" (T 71) (and see T 72 and T 73).
97 Consideration was apparently not given by the parties to there being agreement as to a set of assumptions on which the shares could have been valued, so as to resolve any issue as to uncertainty of the basis for the valuation (nor, indeed, is it apparent that the McLaughlins had articulated this uncertainty as the basis for not accepting such a proposal). In any event, it seems clear that Mr McLaughlin was not prepared to accept the uncertainty of the buy-out figure which an independent valuation might produce (T 74) (or, perhaps more accurately, the possibility that any buy-out would be at a price reflecting the assertions which the chairman and/or the board had made to the effect that the building was in imminent danger of collapse). At the heart of the McLaughlins' refusal to contemplate an independent valuation process, there thus seems to have been a distrust of the board.
98 On 14 April 2003, an amended development application was lodged with the Land and Environment Court. The company wrote on the same date to shareholders advising that the plans had been revised to adopt recommendations from the Council's expert (causing a loss of the Land and Environment Court hearing date which had thereafter been relisted for September that year) and copying the exchange of correspondence with the McLaughlins in February/March of that year.
99 By letter dated 7 May 2003, (TB 512-514) Mr Garratt responded to the McLaughlins that he was unaware of the reasons for their opposition, enclosed a schedule of renovation costs as had been requested at the Annual General Meeting, and asserted there was no doubt as to the ability of the company legally to issue shares and to convert the building to strata title (which, as a statement of general principle, seems uncontroversial but which did not address the particular facts pertaining to this redevelopment).
100 In July 2003, a valuation of the units in the building "as is" was obtained by the company. Unit 4 (the McLaughlins) was valued at $650,000; the two ground floor units 22 (Mr Garratt) and 23 (Mr Heyworth) were valued at slightly more, $675,000; and the building overall was valued at $14.675 million. This valuation was apparently obtained for use in the Land and Environment Court proceedings.
101 In August 2003, Richmond & Ross provided an engineering report for the purposes of the Land and Environment Court proceedings, in which it advised that under the option of a "do nothing" approach the building would have 10 to 20 years left and was no longer feasible. The report also advised that to adopt a "patch" approach of making repairs in a haphazard manner was akin to a "do nothing" approach but might extend the life of the building some time beyond the "do nothing approach" (TB 525-544). (Mr McLaughlin accepted, in the witness box, that any solution to the building problems would need to take into account both upfront costs and ongoing maintenance costs - T 35; a relevant consideration in light of engineering reports which put the ongoing costs of "reactive maintenance" at $100,000 per annum and of "aggressive maintenance" at $40,000 per annum.)
102 On 3 August 2003, there was a meeting of directors at which two further special levies were resolved to be struck (for legal expenses and on account of emergency repairs - $110,000) and it was noted that a similar levy was to be raised in December to cover the balance of the appeal costs (TB 518-521).
103 On or about 23 July 2003, the company wrote to the McLaughlins advising as to the change of the development application. By letter dated 7 August 2003, the McLaughlins wrote to the board complaining that they had received an inadequate response from the company on 23 July 2003 as to the amendment to the development application and requesting that all documents in relation to concrete problems be provided for an independent structural engineer to survey. A breakdown of the (then said to be $12.6 million) renovation option was sought (Exhibit 10).
104 On 8 August 2003, a further special levy notice was issued for $5,175.85 in addition to the quarterly general levy of $705.80.
105 By letter dated 11 August 2003 (TB 523-524), the company wrote to shareholders notifying of the $110,000 general levy for costs of the appeal and emergency repairs, noting that another "wrap up" levy would come in December; that the spalling in at least one unit must be dealt with as soon as possible; that the general levy had been kept low by not doing patchwork repairs and that nothing further had been heard from the McLaughlins in relation to a buy-back of their shares.
106 By letter dated 14 August 2003, the company secretary responded to the McLaughlins in relation to the costs and forwarded the reports of Close Consultants and Savcor (Exhibit 10).
107 The Land and Environment Court appeal proceedings were heard commencing in September 2003. Mr Garratt advised shareholders by letter dated 30 September 2003 (TB 550-552) that the company's engineering evidence was that the building, without major works, had 10 to 20 years' remaining life; that extensive repairs, but not replacing the slabs, would extend the building's life to 30 to 50 years, but that the proposed course was best and would extend the building's life by 100 years. The letter also noted that the agent had advised that (unnamed) investors were keen to buy the entire block but that enquiries had produced no name.
108 On 17 December 2003, Mr Garratt advised shareholders (TB 553-556) that the Land and Environment Court had taken a longer time than anticipated; that there would be a further special levy of $260,000 for legal costs and that the alternative to appeal was a repair cost of $7 million.
109 At around this time, Mr McLaughlin lodged a complaint against Mr Garratt with the Legal Ombudsman (Exhibit 11) and there was a suggestion (from a draft letter, dated 19 January 2004, prepared by a firm of solicitors, Adamsons (Exhibit 10)) that Mr McLaughlin had left abusive telephone messages with them (the solicitors acting for the company in relation to the recovery of levies). (While I consider that no weight can be put on a "draft" letter of complaint - for the obvious reason that, even if it had been issued, it would not of itself be cogent evidence that any "abusive" phone calls were made - the complaint made by Mr McLaughlin against Mr Garratt was a very serious one, and there was no suggestion on the material before me that it could have been substantiated.)
110 On 30 January 2004, the company's solicitors wrote to the McLaughlins threatening forfeiture of shares for non-payment of levies.
111 The further hearing of the appeal in the Land and Environment Court took place in February 2004. There was a directors' meeting on 21 February 2004 at which it was noted that there were outstanding levies from four shareholders and it was resolved that the McLaughlins' shares should be forfeited and sold. The minutes refer to an offer to buy the building (which was said to have increased from $9 million to $11 million), but that the board had decided that as that was less than the valuation obtained at the time of the Land and Environment Court appeal (some $14 million), this was not to be referred to shareholders (TB 561-563).
112 On 6 April 2004, there was an Annual General Meeting at which Mr Garratt held proxies for Ms Ashford, Ms Pether and Mr O'Meagher). The meeting resolved that the McLaughlins' shares be forfeited and sold. The McLaughlins point out that at that meeting another shareholder, Mr Murphy (who had resigned as a director in September 2003), complained as to non-receipt of statements and suggested that the appeal had been rushed into and the design was wrong (TB 566-569). (Mr Murphy subsequently sold the shares for all five units which he owned in the building - some to Mr Brown and some to Mr Heyworth.)
113 On 21 July 2004, the Land and Environment Court dismissed the company's appeal from the rejection by the Council of the development application. (A copy of the judgment is at TB 579-655). It appears from the judgment that both Ms Ashford and Mr Garratt had given evidence at the hearing. (Criticism was made by Mr McLaughlin, though not put to Mr Garratt in the witness box, of the evidence given by Mr Garratt at that hearing.)
114 The McLaughlins apparently instructed the managing agent to pay the rent ($400 per week) from their unit directly for the levy and on 9 August 2004, the company restored the McLaughlins' shares (after they had paid outstanding levies and approximately $2,000 in legal costs).
115 On 11 August 2004, the company wrote to shareholders reporting on the Land and Environment Court decision (TB 656-657).
116 In November 2004, the McLaughlins moved from Sydney to Melbourne. Mr McLaughlin says that they were unable to return to the UK until they could sell their shares. According to Mr McLaughlin, he was informed by the managing agent that they would not be able to sell their unit (more precisely, their shares) unless they could provide additional information to any prospective purchaser about the current problems in regard to the maintenance. It was said that they would not get the "best price" for the unit until they knew what was happening with the building and that large levies "put people off". (I interpose to note that the idea that large levies might deter potential purchasers is hardly surprising but nor is it a matter for which the company would necessarily be responsible insofar as the potential levies were required to address a problem with the structural condition of the building. The company points out that the board's proposal to address that problem had been stalled by the fact that it had not met with regulatory approval.)
117 On 10 November 2004, a second development application (number 524/2004) was lodged. This time the proposal was to add three floors to the building. However, the proposal did not at that stage include the demolition of the two ground floor units (including that in respect of which Mr and Mrs Garratt had rights of occupation - unit 22).
118 On 27 December 2004 two levy notices were issued - a general levy of $750.80 and a special levy of $5,175.85.
119 On 4 January 2005, the company wrote to shareholders (TB 665-670) advising in relation to the Land and Environment Court appeal; stating that if additional works were not allowed the building would have to be closed; that the building continued to deteriorate and that it needed in excess of $5 million worth of repairs. A further special levy was struck of $110,000. It was said that once annual financial statements came in an Annual General Meeting would be called. (The McLaughlins have complained at the delay in calling this meeting.)
120 During February 2005, solicitors acting for the McLaughlins proposed resolutions for the forthcoming Annual General Meeting for the sale of the building or to buy-back the McLaughlins' shares for $650,000 as per the July 2003 valuation. A breakdown of levy expenses was also sought (see letter at TB 671-675, 676).
121 On 31 March 2005 (TB 678-679) solicitors for the McLaughlins wrote again to the company asserting that the McLaughlins had not received the annual report or the Annual General Meeting notice, that the meeting was nine months overdue, the past reports and financials were also late, and that they intended to seek the winding up of the company or other relief unless the company agreed to buy their shares for $650,000. This seems to have been the first occasion on which a buy-out was demanded in the context of threatened court proceedings.
122 I pause to note that at this stage (whatever be thought of the fact that the demand was made under threat of a winding up application), it surely could not be suggested (unless, perhaps, it was thought that the share value had dropped over the period from July 2003) that the McLaughlins were seeking to coerce the company or other shareholders into buying their shares for more than the market or fair value for their unit, insofar as they were seeking a buy-out based on the very valuation of the shares on which the company had itself relied in the Land and Environment Court proceedings.
123 In early May 2005, and prior to the Annual General Meeting, the second DA was approved by the Council. The Annual General Meeting for the year ended 2004 was ultimately held on 8 May 2005. A resolution sought to be put by the McLaughlins (that the building be sold or that they be bought out for $650,000) was included in the notice for the meeting. (The McLaughlins claim that no copy of the 2003 Annual General Meeting minutes, which were to be confirmed at that meeting, was included with the notice dated 11 April 2005) (TB 688-689).
124 At the Annual General Meeting for 2004, Mr Garratt again held a number of proxies, including those of Ms Ashford and Pether. Mr O'Meagher was present at the meeting. Mr Garratt advised the meeting that the development application had been approved the previous week for three instead of four storeys. He ruled that Mr McLaughlin was ineligible to vote because of his non-payment of levies and, on a poll put to the meeting by Mr Garratt, it was agreed that Mr McLaughlin was not able to put resolutions to the meeting or to speak (TB 694). (It should be noted, however, that the McLaughlins were not the only shareholders who had been in arrears of levies. The minutes of the 8 May 2005 directors' meeting note that three shareholders were consistently late in paying levies (Mr Lambert, Mr McLaughlin and Mr Murphy), something of relevance when it comes to a consideration of how the board later responded to the McLaughlins' requests for a refund of part of the 2007 levy.)
125 From May 2005, the McLaughlins were represented or accompanied at various Annual General Meetings by representatives from their solicitors (Turner Freeman). Mr Bonanno was one such solicitor (who gave evidence at the hearing). His file note of the 8 May 2005 Annual General Meeting is at TB 695-698.
126 On 21 June 2005, Turner Freeman wrote to Mr Garratt, recording a telephone call in which they said he had offered to lend Mr McLaughlin the outstanding levies for 12 to 18 months at interest but on the condition that he have the right to vote their shares in relation to the development. Mr Garratt does not deny that he made such an offer. It was also noted that Mr Garratt had indicated that in his view a price of less than $500,000 for the McLaughlins' shares was "realistic" (TB p 698-701).
127 In mid-2005, a real estate agent (or vendors' advocate) was appointed by the company to assist in selling units off the plan in respect of the proposed redevelopment (Ms Christina Trotter).
128 In about August 2005, Mr Steven Bartrop (or, more precisely, his then company Stane Project Services Pty Limited) was approached by the board to assist with the project. Mr Bartrop understood his role to be to act as development manager representing the company in discussions and negotiations with builders and others and to liaise in relation to the project.
129 I interpose to note that a common theme by the McLaughlins (persisting insofar as various witnesses were cross-examined on this issue) was to challenge the independence or integrity of those engaged in the project, such as Ms Trotter and Mr Bartrop, and/or their competence (and to suggest that there was some connection between those individuals and Mr Garratt), conduct which no doubt exacerbated the acrimonious nature of this dispute. There seems to be no basis for any suggestion as to the lack of integrity or independence of persons such as Ms Trotter and Mr Bartrop nor that there was anything underhand in the appointment of either of them. (Their competence on this project or, in the case of Mr Bartrop, on other such projects is not for me to judge in these proceedings.)
130 On 9 August 2005, Mr Heyworth wrote to the McLaughlins indicating that he was prepared to buy their unit if they were interested in selling (TB 702). He said he was purchasing another unit in the building (and was aware of the proposed renovation) but preferred unit 4 to that other unit. It is not clear why that proposal did not proceed. (Mr Heyworth subsequently acquired unit 23, one of the ground floor units later earmarked for conversion for the car stacker, for $740,000.)
131 On 16 August 2005, Turner Freeman put forward a proposal for the McLaughlins' outstanding levies to be paid off with an initial lump sum payment and monthly repayments thereafter. It seems this was rejected (para 57A McLaughlin affidavit) for reasons again not made clear to me.
132 By letter dated 22 August 2005 (Exhibit 10), Turner Freeman wrote to Mr Garratt, acknowledging that a copy had been provided of the development application but asserting that it was meaningless without plans which would not be released by the Council. Approval was sought for the company to authorise release of a copy of the plans to Turner Freeman and to supply the fire safety consultant's report mentioned in the development application. Mr Garratt's response (given quite promptly on 24 August 2005 (TB 703-5) was that the McLaughlins could obtain copies of the development application material from the company's architects (and arrangements were apparently made by Mr Garratt for that purpose).
133 On 30 August 2005, a resolution was again passed that the shares relating to the McLaughlins' unit be forfeited for non-payment of levies. Mr Garratt wrote to the McLaughlins on 31 August 2005, rejecting the proposal for payment by instalments made on 16 August 2005 and noting that since May 2005 Mr Murphy had sold three or four units (seemingly implying that there would be no obstacle for the McLaughlins themselves to do so). He asked them to advise by 9 September 2005 why the company should not sell their shares.
134 On 21 September 2005 (TB 706-709), Mr Bartrop's company, Stane Project Services, was retained and was asked to make a presentation to the board the following Sunday. (Perhaps somewhat curiously, Mr Bartrop's retainer letter seems to have been in the form of a letter with an accompanying memorandum of fees for work yet to be done.)
135 By letter dated 23 November 2005, Mr Garratt rejected the proposal put in relation to levies and imposed conditions for sale of the McLaughlins' unit at a reserve of $475,000. By letter dated 30 November 2005, Turner Freeman wrote to the company advising that all costs and interest claimed had been paid, without admission, and requesting information in relation to the proposed development for the purpose of advising proposed buyers. The proposal for sale was rejected because the value of the Land and Environment Court appeal had been put at $650,000. An oppression suit was threatened (TB p 712-714).
136 Richardson & Wrench, by letter dated 1 December 2005 (TB 715-6), advised the McLaughlins that there was no comparable sales information to assess the price of their unit; there were unknown variables due to the redevelopment; that the recent three sales (the Murphy sales) were either on specific information or speculation on profit from the development; and that information was needed in relation to the development in order to advise buyers (TB 715-716).
137 The 2005 Annual General Meeting was held on 21 December 2005. The McLaughlins were not present at that meeting but had an observer (a solicitor from the office of Turner Freeman). (At that stage the McLaughlins' shares remained as having been forfeited.) At that meeting, Mr Garratt is noted as having advised that a feasibility study was almost finished, that a summary would be circulated in coming days and that a real estate agent had been selected; Mr Bartrop confirmed that he had been appointed development manager to do a feasibility study for shareholders' benefit, that the development would be on a non-recourse funding basis with all profits to shareholders, and that Southern Cross Constructions had been chosen as the builder after discussion with the board; and Mr Andrew Box from Southern Cross confirmed that the re-design had reduced the cost to $13.99 million and construction would take a 12 month period. Mr Box also advised that it was thought feasible to retain the back section of the building, install a car stacker in Units 22 and 23 and strengthen the footings for three extra floors. Mr O'Reilly from Architectural Projects advised there was a need for a s 96 amendment to the development application. Mr Bartrop advised that the building contract would be a guaranteed maximum price and that Southern Cross would bear all risk of latent problems or defects. Mr Garratt advised that a special levy of $20,000 would be due in January 2006 for part of feasibility study costs (TB 717-722; 726-731). Mr Brown and Mr Heyworth were appointed as directors.
138 By letter dated 15 March 2006 (TB 723-731) Mr Garratt advised that with the replacement of the roof and adding nine car spaces for existing units the costing still showed a break-even result. The letter said that since November 2005 the board had investigated a joint venture with developers for which there was insufficient interest. The only feasible course was said to be a fixed price design/construction contract.
139 On 21 March 2006, Mr Garratt wrote to the McLaughlins' solicitors advising that rescission of forfeiture of their clients' shares would be considered at the next directors' meeting, refuting that there was any basis for an application to the court for access to company documents or for any information for purchasers; advising that he considered that the McLaughlins' opposition to the development was 'selfish'; and making various other allegations as to the McLaughlins' conduct (Exhibit 10).
140 On 3 April 2006 Mr Garrett wrote to inform the McLaughlins of the directors' resolution to rescind the previous resolution for the forfeiture of shares for the McLaughlins' unit.
141 On 11 April 2006, the company entered into a Memorandum of Understanding (binding for six weeks) with Southern Cross Constructions for a $14 million contract (with a provisional $1 million for an additional nine car spaces). That Memorandum of Understanding provided a penalty of $150,000 for withdrawal. Mr Bartrop appointed quantity surveyors (WT Partnership) to vet the costing by Southern Cross and to verify that the final price was reasonable.
142 By letter dated 12 May 2006, Mr Garratt advised the McLaughlins that a Memorandum of Understanding had been entered into with Southern Cross Constructions. Final layout plans and schedules of finishes were enclosed. The McLaughlins were advised as to a substantial upgrade of the existing units and common areas. Costings to the end of the month were provided. It was said that until finalization of the building contract, funding and presales it could not be said whether the project would break even or make a small loss or profit (TB 735-736).
143 By letter dated 16 May 2006 (TB 1008-1015), Mr Garratt confirmed that, over a 12-18 month period from mid 2005, the shares referable to Mr Murphy's respective units had been sold.
144 On 30 May 2006, a s 96 amendment application was lodged with Manly Council to allow the construction of car stackers and the demolition of unit 23 (Mr Heyworth's unit).
145 As at 30 June 2006, it appears that there were four shareholders (units 1, 4, 8 and 12) in arrears in relation to levies (TB p 2126).
146 On 14 July 2006, (T770-772) Mr Garratt wrote to shareholders noting that only a two level car stacker would be feasible, in place of units 22 and 23; that there was a firm fixed price of $14.85 million including upgrading existing units, adding some costs but significant value; that Mr Bartrop remained confident that the project was close to breaking even and was on track to commence in September 2006; and that most consultants' payments would be deferred to first funding draw down to avoid levies. At that stage Mr Garratt reminded shareholders that it remained necessary to enter into a construction agreement, finance agreements and presales agreements (expected for August 2006).
147 In July 2006, a potential purchaser was located for the shares owned by the McLaughlins (a Mrs Rose). A contract was prepared and forwarded to the purchaser disclosing a sale price of $680,000. (By that stage there had been a number of sales in the building ranging in prices from $540,000 (unit 2) to $733,000 (unit 7), $707,000 (unit 14); $908,000 (unit 15) and $740,000 (unit 23) (TB 754).
148 On 18 July 2006, Landsbury valued all of the units in the building on an 'as renovated' basis and put the value of the McLaughlins' unit (once renovated) at $770,000 (TB 773-968).
149 The solicitor acting for the proposed purchaser of the McLaughlins' unit sought information, by letter dated 24 July 2006, including a copy of the Southern Cross Memorandum of Understanding, a copy of the building valuation, advice as to funding, particulars of ongoing amounts and special levies to be paid, and advice in relation to the project generally (TB 1008). Turner Freeman wrote to the company on 26 July 2006 (TB 1010-11) requesting the information which had been sought by the proposed purchaser's lawyers. Some information was provided by letter dated 27 July 2006 (TB 1012-1013), broadly noting the Memorandum of Understanding and the fixed price building contract.
150 Unfortunately for all parties (except perhaps Mrs Rose), the proposed sale to Mrs Rose did not proceed. There was some dispute as to why this was the case. By email on 31 July 2006 (Exhibit9), the real estate agent advised that the buyers had withdrawn after learning that contracts for building and funding had not been signed (TB 1015).
151 Mr McLaughlin said, more than once, in the witness box, that he had been unable to sell his unit since 2000 (see eg T 80) but he did concede that at one point, after the court proceedings in September 2006 and for only a short period of time, he and his wife had not wanted to sell their shares (or at least were prepared to await the outcome of the redevelopment in order to do so). However, this seems to have been on the basis of the understanding expressed by Mr McLaughlin in the witness box that from then on they would suffer no loss; that they did not believe they could be levied (although it is by no means apparent why that would have been the case) and that as the building work was supposed to finish in October 2007 it would be better waiting for that to happen.
152 Accordingly, it would seem that at best for a short period from about September 2006 until the January 2007 levy was raised it could be said that the McLaughlins may have chosen not to mitigate any perceived loss by seeking a buyer for their shares - at all other times their position is that they wanted to sell their shares but were unable to do so because of a lack of information as to the project.
153 On 7 August 2006, Mr Garratt emailed the real estate agent, demanding that a "for sale" sign placed on the property by the McLaughlins be removed so that company marketing signage could be placed on the building in relation to the planned presales. (The McLaughlins take issue with the fact that Mr Brown was more recently permitted to display such signage for the sale of some of the new units he had acquired in the development.)
154 By letter dated 8 August 2006, (TB 1016-1017), Mr Garratt wrote to shareholders providing information in relation to the valuations for their respective units on an 'as renovated' basis and the process for bids for car spaces; advising that the work should commence on 1 October 2006 and the building needed to be vacated by 30 September 2006; and that it was still expected that the project would break even or be close.
155 An indicative facility offer was given to the company by St George on 11 August 2006 (TB 971-976). It noted the existing land value at $6 million, construction cost at $15 million with a $700,000 contingency; and indicated the provision of a facility of $18.73 million with security including guarantees by the shareholders of the residual debt, estimated at $2 million, plus 10%. It noted that it was likely that there would need to be a mortgage over all shares and an acknowledgement by shareholders of a charge over their unit for the full facility. There was also provision for shareholders to ratify the decision. The letter expressly noted that this was not a binding offer.
156 Preparation for the marketing of the new units began in late August 2006.
157 By letter dated 15 August 2006 (Exhibit 10), Mr Garratt wrote to Mr Bonanno advising that he expected that there would be a finance agreement within two weeks and that the building would be uninhabitable and uninsured from the end of September. The letter stated that there was no reason to think the s 96 application would be unsuccessful and the company would then execute the construction contract. No assurance of a break-even result was given.
158 On 18 August 2006, notice of the Annual General Meeting on 9 September 2006 was forwarded to Turner Freeman (TB 1018-1039) by way of an agenda which included proposed amendments to article 3, a resolution endorsing the proposed redevelopment and a resolution approving the terms of the sale of one new unit each to Mr Garratt and Mr Heyworth. There was no reference to any resolution relating to a payment by way of remuneration for Mr Garratt. Reference was made to an indicative offer of finance from Capital Finance of $19.4 million plus costs and contingency.
159 On 22 August 2006, the quantity surveyor's report (WT Partnership) noted that a $15 million building contract price was reasonable but recommended that it should have a contingency. The report noted that with fixed price design/construct contracts there was a risk that the builder would look for cheaper design alternatives (TB 977-1007), a proposition which Mr Bartrop was not prepared to accept in the witness box.
160 Curiously, while Mr Bartrop's evidence was that he discussed the indicative facility letters with Mr Garratt many times and told the board that it would be difficult to get formal approval despite the indicative letters (Bartrop affidavit para 22), Mr Garratt denied that this was the case (T 470) "He certainly did not tell me he expected a difficulty to get a formal offer of funding".
161 By letter dated 30 August 2006, further complaint was made on behalf of the McLaughlins in relation to the lack of details in relation to the project (TB 1040-1045).
162 In September 2006, Mr Bartrop met with the board. He says he was asked by one of the directors, Mr Cannen, to ascertain as an independent observer what a reasonable fee would be to pay Mr Garratt for his services in relation to the project.
163 On 4 September 2006, Mr Bartrop (writing on the letterhead of Stane Project Services Pty Limited) wrote to Mr Garratt a letter, which was then circulated by Mr Garratt to shareholders, (TB 1089-1096) advising (among other things) that a s 96 application had been lodged three months ago and was expected to be approved; that Southern Cross Constructions had guaranteed a maximum price contract of $15 million; that all construction risk was with the builder and not with the company; that three indicative offers of project funding had been received (the most attractive of which was from St George Bank) none of which had required a level of pre-sales as a condition of funding; and that the board would be seeking shareholder approval for a compensation allowance to two shareholders (Mr Heyworth and Mr Garratt) whose ground floor units were required to be surrendered to make the project feasible.
164 The letter noted that the "completed" value of their units (as per the Landsbury valuation) was $710,000 and that compensation should bear in mind the following:
"(i) Both shareholders will forego any further capital growth, a likely lift in values over the bank valuation figures, on completion of the project and conversion to strata title.
[though this value had arguably already been taken into account when using an "as is" renovated valuation.]
(ii) Each shareholder will have to pay capital gains tax in consequence of the surrender, and will lose the investment worth (in Manly seaside real estate) of the money paid in tax.
[though no assessment was apparently made as to this amount.]
(ii) [sic] They are acting voluntarily in the interests of all shareholders and are not 'holding the company to ransom'. [though Mr Heyworth might be thought in due course to have attempted to do so when he later demanded increased "compensation" for his unit.]
(iii) The compensation is not payable until after completion of the project.
[though not dependent on the outcome of the project.]
(iv) Each must compete on the open market along with all other potential purchasers in order to purchase one of the new units, notwithstanding the work that he has done to bring the Project to realization. [seemingly suggesting that they risked losing the opportunity to retain an interest in the building.] This could mean that either or both could miss out on purchasing a unit, though their compensation will probably push the yield to the company higher."
165 The letter went on to say that Mr Bartrop had discussed this at length with board members (Messrs Brown, Cannen and Dunn) and believed that a total sum of $950,000 would be "fair and reasonable compensation" for forfeiture, together with the right to share on a 50/50 basis on the first $500,000 of any surplus. (I note that the latter component of the compensation was apparently not pursued at the meeting, although it is not clear who made the decision in that regard).
166 The letter also noted that Mr Bartrop had been asked by the directors, except the chairman, to recommend compensation to the chairman for his contribution; that the chairman had been involved for 12 months and that, but for his involvement, the company would not be in this "fortunate position". It noted "our recommendation" of a $250,000 payment on completion of the project. (Seemingly, therefore, this payment was for what Mr Garratt had done to progress the matter to that point - ie where there was an approved development application and negotiations had reached the point where it was anticipated that contracts for the building/construction and finance aspects would shortly be signed - not for any work he might do later in connection with the project.) The McLaughlins criticize this payment (among other things) as it was not contingent on the success or otherwise of the project (the payment to be treated as a project expense before any calculation of profit).
167 The letter noted that project costs were locked in at $18 million, allowing a project contingency of $400,000 and the St George funding package was for $18.793 million; that if sales were at the minimum of the expression of interest figures then there would be a shortfall of $2.15 million (being the amount of the directors' compensation). The letter said that a 10% movement above the minimum would reduce the deficit to $375,000 while a 15% movement would provide a surplus of $500,000 (to go 50/50 to the directors). Feasibility schedules were enclosed. It was recommended the shareholders approve the project going forward.
168 By letter dated 6 September 2006 (TB 1097-98), Turner Freeman asserted that various requests for information the subject of the Annual General Meeting had been unanswered and that they required a reasonable opportunity in advance to consider the information. They advised that they considered notice of "terms to be circulated" was inadequate and suggested a withdrawal of the development items on the agenda until information was obtained. Also sent on that date was a "without prejudice" letter with the McLaughlins offering to accept $880,000, including GST, for their shares (TB 1108).
169 By letter dated 8 September 2006, (TB 1109-1112) the McLaughlins' solicitors responded in relation to the documents in the letter of 6 September 2006 (said to have been emailed to them at 4.54 pm that day), in particular noting that there was no basis for the assessment of the compensation calculation and that it seemed particularly advantageous to Mr Heyworth, who had bought with knowledge of the development for $740,000 in September 2005; that there was no approved development application yet; that the Southern Cross price had increased, and that it was contemplated there be payment to Mr Garratt for the project irrespective of any losses caused. It was said that there was no basis for the assessment of the payment to Mr Garratt and no contact details for Mr Bartrop to obtain information from him.
170 The 2006 Annual General Meeting was held on 9 September 2006. The McLaughlins (represented by their solicitors) voted against the proposed resolutions for amendments to the articles and asserted that unanimous consent was required both for those and for the compensation payment. (TB 1115). I refer to the resolutions at this meeting as the "September 2006 Resolutions".
171 The minutes record that the following resolutions were passed at the meeting: that the company enter into agreements for an implement [sic] to redevelopment of Dungowan, the resolution approving the buy-back of shares for units 22 and 23 for $950,000 each and the resolution that a $250,000 allowance be paid to Mr Garratt. The only dissent recorded was that of Mr Bonnano, on behalf of his clients, the McLaughlins (TB 1118). What is not clear on the minutes is whether Mr Garratt and Mr Heyworth voted on the respective resolutions (although Mr Garrett declared his interest and stood down as chairman, and Mr Heyworth declared his interest (TB 1117)).
172 In September 2006, the s 96 amendment was passed by Manly Council.
173 On 11 September 2006, there was a sales launch in respect of the units. There was also a rather curious exchange of correspondence with Richardson & Wrench suggesting that an offer to buy the McLaughlins' shares for $700,000 (with a three to six month delayed settlement) had been made and that a second buy-out offer (with no strings attached) for $680,000 (Exhibit 8) existed. As to the $700,000 offer, Mr McLaughlin's evidence in the witness box was that he understood Mr Bartrop had personally offered $700,000 but he said that he had probably by then spent $200,000 on the development in levies and had a huge legal bill, so the offer was only worth $580,000. He agreed that the company's final offer to buy the shares for $700,000 was one he did not accept (T 274). (There was an internal email of Richardson & Wrench which suggested that the vendors had offered to sell for $880,000 but as at 11 September 2006 were thinking of increasing the offer to $950,000 considering what the two directors had received (Exhibit 8). However, Mr McLaughlin did not admit to any knowledge of this exchange.)
174 As to the $880,000 offer, Mr McLaughlin seemed to concede that this built in a payment to allow for the cost of having sought information to sell on the market (T 120). "I was trying to get what I thought was a reasonable price less than the directors were willing to pay themselves for units. I thought it eminently reasonable to do that".
175 By letter dated 15 September 2006, Mr Garratt wrote to the McLaughlins' solicitor asserting, among other things, that an offer at $880,000 was "several hundred thousand dollars" above value (TB p 1129-1133).
176 Undertakings not to act on the resolution having been sought and rejected, these proceedings were commenced in September 2006 by the McLaughlins and injunctive relief was sought. The first interlocutory application was heard in September 2006 and, as noted above, was unsuccessful.
177 By letter dated 22 September 2006, Mr Bartrop summarised the outstanding project costs to that date as $784,287.
178 During the first week of October 2006, Southern Cross Constructions took possession of the site. There was an issue as to precisely what work was done at that stage but at the very least it appears that work to prepare the site had commenced around this time. (The reference in the work programme to demolition was said not to refer to the ultimate demolition of the rear of the building, which happened at a later stage, as described in the witness box by Dr Facioni.)
179 When the matter came before Barrett J, on the McLaughlins' first application for interlocutory relief, his Honour flagged the question whether a responsible board of directors, acting prudently, would have allowed a situation to arise in which builders had started work but no binding promise of loan finance was available [at 36]. The evidence before me on this issue, with respect, did not allay such a concern.
180 On 4 October 2006, a facility offer letter was issued by St George Bank for a facility for $18.793 million. Conditions precedent to draw down included pre-sales totalling of $12.75 million and evidence that all shareholders approve of the special levy required by the Bank. The security was described as including acknowledgements/security from the shareholders, including the McLaughlins, over their shares and entry into a tripartite agreement with the builder (TB 1134-1145).
181 On 13 October 2006, St George amended the facility offer (the amendment in question relevantly relating to the level of pre-sales required before the first draw down of funds could take place. Under the amended offer, the conditions precedents to draw down included the release of all other security over the shares as well as were pre-sales of $9.35 million (by the second progress payment, pre-sales of $12.75 million in total were required) (TB 1146-1149).
182 On 18 October 2006, Mr Garratt and Mr Brown signed both the building contract with Southern Cross Constructions and the finance documentation in the offices of the company's lawyers (Exhibit 4). It is not, however, clear that there was an exchange of contracts at that stage; Mr Garratt's evidence was that the contracts were signed and the original counterparts left with the company's lawyers (T 385). The signed documents were to be forwarded to the bank's lawyers. Mr Garratt did not retain a copy and seemed surprised at the suggestion that he might have done so.
183 Mr Bartrop says that, in late October 2006, he was told by the bank of further requirements for draw down including a change to the articles to make provision for a levy in relation to the bank debt (see his affidavit paragraph 33).
184 By letter of 25 October 2006, (Exhibit F), the bank's solicitors advised the company's solicitors that the substantive issues remaining outstanding included the shareholders' agreement to a special levy in relation to all amounts owing to the bank as per the facility letter of 4 October 2006. The bank required certainty in relation to the special resolution to amend the article to include rights to new units and a special levy declaration prior to funding referable to all amounts owing to the bank. It was said that the directors' powers to levy were not wide enough and needed amendment. The bank required to be satisfied that the directors had power to call a levy to pay the bank debt and to sell shares if that levy was not met.
185 There was an issue as to whether the special levy was to be for the shortfall or for the whole of the facility. Mr Bartrop says that by early November 2006 he was told by the bank that it probably did not need a levy for the whole of the facility and that it was not sure whether unanimous consent was still required.
186 In mid November 2006, it appears that the tripartite agreement was signed by Southern Cross Constructions, St George Bank and the company.
187 On 15 November 2006, Mr Bartrop confirmed with the bank the need for an acknowledgement from shareholders. On 20 November 2006, Mr Bartrop and Mr Garratt, with their solicitor, met St George Bank officers in order to resolve the outstanding documentary requirements. Mr Garratt said that he told the bank it was unlikely the McLaughlins would sign and expressed his view that this was unnecessary. Mr Garratt says that the bank's representatives indicated that this was acceptable to them.
188 Mr Garratt was taken at some length in the witness box to the chronology of events in relation to the situation which pertained as at the time the company had permitted the builder to take possession of the site and commence site preparation works. Mr Garratt was adamant that "I would not have allowed the board to commit itself to the builder or the builder to commence work if I did not consider that we had funding in place." (T 398). He says he had no doubt in his mind that the bank had committed itself to the funding and that it had verbally done so by October 2006 (T 398). (No conversation to that effect between Mr Garratt and the bank officers is deposed to in his affidavit.)
189 Nevertheless, equally dogmatically, Mr Garratt said that he "wouldn't expect anyone who knew anything about borrowing from a bank to think that funding was certain until there was an unconditional or final letter of offer" (T 465) and he was aware as at the time of the September 2006 meeting that the bank's requirements had not yet been resolved (T 464).
190 Mr Garratt said that it was always his position that he "certainly would not sign a building contract until the finance was there. I was not going to allow the board or the company to incur a liability to a builder without finance in place" (T467). Yet it is hard to see how that is not precisely what was done. Mr Garratt accepts that the building contract was signed and the builder allowed into possession (and seems to have commenced some work) prior to the time at which it was known what the bank's final conditions for draw down of funding were to be, let alone whether the company would be in a position to satisfy those conditions. The basis on which Mr Garratt seems to have rejected the suggestion that he had acted inconsistently with what he says was always his position appears to turn on the reliance he placed on what was told to him by Mr Bartrop and/or the trust he placed in the builder and the bank.
191 Mr Garratt says that the builder acted on the expectation that the contract which had been negotiated with the builder would in fact be finalized (T 467); he said that "The actual execution of the banking documents and the building contract had by that time simply become a matter of formality" (T 469); that the bank officers had indicated (it seems to Mr Bartrop not to Mr Garratt himself - T 476) that the bank was happy for the builder to take possession (T 468) and had told "us" that construction could proceed (T 475), having visited the site to express that opinion; that being why he says that he was happy to execute the building documents. It was Mr Garratt's opinion that it was "self evident that the bank was lending money because the bank had told him and it was directed to solicitors to prepare the security documents. Banks do not do that without having agreed a loan" (T468).
192 Mr Garratt, somewhat testily, observed that he had no understanding as to what might be the content of an onerous condition in relation to presales at the time the bank's indicative letter was amended in relation to the level of pre-sales but then said that "You would not agree to the finance unless you were comfortable that you could meet the condition. There would be no point" (T 473). He described the bank's requirement as to the need for shareholder ratification as new (T 475) (although by reference to the indicative letters it would seem that the requirement for shareholder acknowledgement had been foreshadowed and so at best it might have been the bank's subsequent insistence on that requirement that came as something new to Mr Garratt).
193 Rather surprisingly (or at least I suspect it would come as a surprise to many of those practising in the area of banking and finance), Mr Garratt thought one thing was clear - that he was "never going to get on the same day and in the same place execution of all things at the same time" (T 476). Even if that were to have been the case, there surely would have been mechanisms (whether in the form of conditional contracts or the like) which would have permitted the company not to have finally committed itself to exposure under the building contract until the banking arrangements had been concluded such that the bank was committed to allow draw down of the funds. Be that as it may (and the company may well have suffered no loss as a result of being put in the rather precarious position as it was in late 2006), the explanation seems to be that Mr Garratt considered the legal documentation a formality and that it was appropriate to proceed on the basis of trust. Tellingly, when asked what his legal advice to clients would be he said "My advice would be that it is a matter of negotiation between customer and bank and most important thing is trust" (T 477).
194 By notice dated 23 November 2006, shareholders were notified of an extraordinary general meeting to be held on 17 December 2006 to consider a special resolution that the amendments at the previous Annual General Meeting be ratified, that article 4 be amended and that article 27A be amended to provide that the share on which the company has granted security may be transferred to a mortgagee or purchaser for a mortgagee (TB 1397-1398). The notice did contain express reference to the resolutions being proposed as special resolutions. The McLaughlins' solicitor, Mr Della Marta, in his affidavit sworn 21 February 2007, deposes that the McLaughlins received this notice "on or about 28 November 2006" (at [3]). Similarly, Mr McLaughlin, in his affidavit sworn 28 July 2009, states he received the notice of the extraordinary general meeting "on or about 28 November 2006" (at [73]). Article 110 deems notice to have been given 24 hours after the notice is posted. Absent evidence as to when the notices were actually posted, notice would therefore be counted from and including 28 November 2006 up to and including 16 December 2006 (section 105 of the Corporations Act), ie it seems that 19 days' notice was given.
195 By letter dated 8 December 2006, Mr Garratt wrote to shareholders (TB 1387-1393). This letter, according to the McLaughlins, was not received by them until 12 December 2006. Its content is heavily relied upon by the McLaughlins for the assertion that the December 2006 resolutions were procured by material misrepresentations. The letter referred to the extraordinary general meeting which had been called to pass the amendments required by St George Bank and to ratify the September amendments to the articles, and to consider Mr Heyworth's request to raise his compensation to $1.15 million. It noted that the builder had taken possession in October 2006 and that there was a delay pending the bank's requirement for shareholder acknowledgement of the article amendments; that six of the eight new units had been sold for $12.75 million; that it was expected that there would be a $1 million shortfall payable at the end of the project and no levies until completion, and that there was no practical choice but to amend the articles as required by the bank in order to finalize funding. (This letter was roundly criticised by the McLaughlins in these proceedings for having made no mention of Barrett J's comments in relation to the adequacy or otherwise of the information provided before the September 2006 general meeting, and for simply referring to the need for ratification of the special resolution as being to put beyond argument their validity as per the findings of Barrett J.)
196 The level of disclosure required to be provided by directors to shareholders is a question influenced by the nature of the decision that shareholders are required to make (ENT Pty Ltd v Sunraysia Pty Ltd [2007] NSWSC 270; (2007) 61 ACSR 626; 25 ACLC 399). Where the directors have a personal interest in a matter to be approved by a general meeting, the notice must clearly bring the nature and extent of the interest to the attention of the members with full disclosure (Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 11 ACLR 94, at 96).
197 As to the adequacy of information, generally, it is said by Mr Priestley that the McLaughlins were given extensive information about the structural condition of the building in the reports provided in February 2001 (including reports from Close Consultants and Bonacci Rickard, the Savcor report on concrete structure and reports on fire safety and the lift); they were provided with material in May 2002 as to the project costing and viability statement; they were informed in August 2005 that development application materials could be obtained from the architects, they were informed in March 2005 that their representatives could attend to inspect the contract documents (but did not do so). Mr Priestley further asserts that the information sought from June 2006 was put on the basis that it was necessary to inform purchasers not that it was necessary to consider the proposed development. Mr Burchett takes issue with that and refers to requests made for information which went to the consideration of the project itself (TB 712). My impression, from the material produced as to the communications made by the company to shareholders was that there was a reasonably regular flow of information in relation to the project provided to shareholders and that what the McLaughlins complained of (at least up until the time at which requests were made for copies of the contractual material) was the summary nature of some of the information provided or the conclusions reached by the board to which reference was noted in the material (but the reasoning for which was not always included).
198 At the 17 December 2006 extraordinary general meeting, which was attended by Mr McLaughlin and Mr Bonanno, the amendments to the articles were passed. I refer to the resolutions made at this meeting as the "December 2006 Resolutions". The minutes of the meeting held on 17 December 2006 record that the special resolution to ratify the amendments to article 3 which had been passed in September 2006 was approved without any dissent being recorded (TB 1406). Mr Bonnano's file note of that meeting does not record anything in relation to the resolution regarding the ratification of the previous resolution to amend Article 3, TB 1410). As to the special resolution to make amendments to articles 4 and 27A, the minutes record that all voted in favour but for Mr McLaughlin who voted against (by his solicitor Mr Bonnano). There was no resolution regarding, let alone ratifying the compensation payment to Mr Garratt or the buy-back amounts.
199 Mr McLaughlin said that at this meeting he sought copies of the building and finance contracts and that these were refused. (Mr Bonanno's evidence was that he wanted to look at these documents in order to see where risk was apportioned (T 168). He referred to a view "however naively held" (which I understood to be a view he believed was held by the McLaughlins) that if other members were given information as to how losses were or were not to be apportioned some might also think that was not the best option (T 170).) There was discussion about the possibility of a swap between Mr Heyworth's unit and the McLaughlins' unit (as to the contents of which discussion there was some dispute, in particular as to whether the board had advised Mr Heyworth not to pursue such a swap). Mr McLaughlin says that Mr Garratt assured the meeting that the finance contract had been signed in October 2006 (T 118) (and had confirmed that the car stacker was included in the May 2006 amended development application which had been passed in September 2006) (TB 1405-1409).
200 As at the end of December 2006 it seems that three further requirements had been raised by the Bank - that there be a clearance of an existing mortgage over one particular shareholder's shares; that Mr Brown settle the sale of other properties; and that the McLaughlins sign an acknowledgement or sell and settle the litigation. Mr Garratt says he became aware of these additional requirements in early January 2007, only when Mr Bartrop told him.
201 By letter dated 29 December 2006, Turner Freeman confirmed to Pikes that the McLaughlins repeated the offer to swap their unit shares for Mr Heyworth's unit shares on the basis of the compensation package (TB 1415-1416). That letter asserted that Mr Heyworth had been "warned off" by the board (something that Mr Garratt denies). (Mr Heyworth did not give evidence in the proceedings.)
202 By letter dated 4 January 2007, Pikes responded that Mr Heyworth was not interested in unit 4 (though, at least in 2005 Mr Heyworth had expressed an interest in that unit) and was only interested in a front unit worth $950,000 on completion; that the board would be prepared to recommend buy-back of unit 4 at current market value "being in the order of $700,000" or to procure a buyer at a price per valuation. The letter also noted that the $950,000 (sought by the McLaughlins) was "grossly inflated", that sum for Mr Heyworth's unit having been based on a larger unit and factors having no bearing on unit 4, and that it took no account of the special levy to be paid on shares of up to $100,000.
203 By email 9 January 2007 (Exhibit L(1)) the McLaughlins' lawyer, Mr Della Marta, informed his clients that the board was prepared to recommend a buy-back for market value at $700,000 and that Mr Garratt was anxious to obtain a response to the proposed offer.
204 On 10 January 2007 Mr Garratt emailed Mr Della Marta (TB 1482-1502) advising that debts incurred in the project were of the order of $2.5 million; that although finance was approved by the bank it would not allow a draw down without the McLaughlins signing the acknowledgement form and resolving the litigation, and that, if they did so then the company would waive costs as part of the settlement of the litigation, but that if they did not do so by 5.00 pm on 12 January 2007 then the board would need to strike a special levy of approximately $2.5 million and that this would be enforced promptly against any shareholder who did not pay on time. (The McLaughlins describe the acknowledgement required by the company to be signed by them as one to the effect that the unit holder could be forced to sell everything the unit holder owned; had been advised that if all new units sold the shortfall was likely to be $2 million but could be in excess of $20 million; had sought independent legal and financial advice before signing; and had not signed under duress or forced to or persuaded by anyone (TB 1482-1502).)
205 It was again noted that the board was willing to buy-back the McLaughlins' shares or to find a purchaser at an agreed price by 15 January 2007. Otherwise, to avoid the levy, the McLaughlins were required to produce evidence of a third party sale and settlement. On 11 January 2007, Pikes proposed to Turner Freeman a put and call option for the purchase of the McLaughlins' shares at an option fee payable of $40,000 but with the price to be agreed. On the same day, Mr Bartrop presented to the board a schedule of expenses incurred and outstanding for the project of $2.8 million.
206 On 12 January 2007, St George Bank forwarded a further amended facility letter, superseding its letters of 4 and 13 October 2006, noting that the loan amount ($20,887,000) included an amount for the purchase of unit 4 for up to $950,000. It required, among other things, a contract for the sale of unit 4 plus a waiver and indemnity in relation to the legal proceedings; as well as evidence that the shareholders had received independent legal and financial advice; that the shareholders were liable to pay a special levy anticipated to exceed $150,000 per shareholder and that their liability continued and would not be released until all money owing under the facility was repaid; and that a special levy resolution had been approved by all shareholders.
207 By letter dated 12 January 2007, Turner Freeman advised Pikes that it could not comply with the two day time frame advised in the 10 January 2007 letter; and noted that copies of loan documentation had been refused; that they requested copies of relevant documents and information to be able to advise the plaintiffs and that any proposal requiring valuation was likely to cause further dispute that it would be better to agree on a price. The letter asked whether Mr Garratt was prepared swap his unit (22) and right to "compensation".
208 By letter dated 12 January 2007, Pikes responded that they were prepared to allow limited inspection of loan documents (if the relevance was explained) and of the building contract on Monday and that two progress payments were due totaling $1.63 million with a further $570,000 due after the end of the month. The total due at the end of January 2007 was said to be $2.8 million. The letter stated that Mr Garratt was not interested in swapping his unit. The letter stated that the company was willing to buy-back at a fixed price but needed it to be substantially resolved by 15 January 2007 or the board would need to strike a special levy.
209 The McLaughlins' then negotiating position (as appears from an email sent from the McLaughlins to Mr Della Marta on 14 January 2007) was that $950,000 would end the legal action, without costs, as well as to sell their shares (thus presumably netting the McLaughlins less than the full purchase price for their shares but also costing the company, in effect, more than $950,000).
210 Just before 5.00 pm on 15 January 2007, Pikes forwarded to Turner Freeman a letter enclosing a draft put and call option including a Notice of Discontinuance, noting that the board was considering the amount of the special levy for the expenses of the project and seeking advice by 5.15 pm whether the signed Acknowledgement or terms would be considered. An offer was then made by Turner Freeman to Pikes on 16 January 2007 for the company to buy-back unit 4 for $950,000 or for a swap of either units 22 or 23 for unit 4.
211 At the same time as the correspondence in relation to the buy-back was taking place, Mr Garratt emailed the managing agent (Christine Frith at Robinsons) at 1.12 pm on 16 January 2007 in relation to the special levy, instructing her to prepare notices for $2.8 million to be posted to the McLaughlins that afternoon (unless he, Mr Garratt, advised otherwise) with the rest to be sent to him so that he could do a covering letter to the others. Ms Frith asked what the due date for the levy notice was to be and Mr Garratt responded that it was 30 January 2007. There was some curious evidence in relation to the first line of this email, one copy of which contained the sentence "McLaughlin proving difficult to deal with", which I am told did not appear on the copy email produced by the company on discovery.
212 On 16 January 2007, Pikes emailed Turner Freeman saying that they had asked for an offer by 4.00 pm that day and that none had been made; that if they wished to make a signed offer to the company per option or otherwise they should do so; in the meantime the directors must proceed.
213 Turner Freeman emailed in response on that same day that an offer had been made; that it was not in final documentary form as this would be onerous to prepare without acceptance of basic terms; and seeking advice as to whether the terms were acceptable.
214 On 17 January 2007, an email was sent from Mr Garratt to Christine Frith at Robinsons, "Thanks for voice mail, assume levy will go this morning, McLaughlins' sent directly and balance to me for dispatch. Change date to Thursday 30/1/07" (Exhibit E).
215 There was further communication about the $950,000 offer. On 22 January 2007, Pikes emailed Turner Freeman that the form of the documents was acceptable and requested execution by the McLaughlins in anticipation of identification of a grantee. The email stated that it was imperative that an option be entered, levies struck or acknowledgement signed that week. On 23 January 2007, Turner Freeman forwarded to Pikes the option and sale agreements for execution.
216 Somewhat inexplicably in that context (the agreements seemingly by then having been approved by the company's lawyers and being in the throes of execution), at 11.23 am the following morning Mr Garratt emailed Christine Frith at Robinsons instructing her to prepare the special levy notices per recent email and dispatch to the McLaughlins that day, with copies of the other shareholders' notices to him in Melbourne so that he could send a covering letter to them (Exhibit G). Ms Frith sought confirmation of the date of determination (by email 4.19 pm) and the address in Melbourne that all other levy notices were to be posted to and Mr Garratt responded at 10.52 pm "treat the levy as struck today … send notices for the shareholders other than the McLaughlins to me".
217 Minutes of a directors' resolution on 24 January 2007 show the passage of the resolution for the special levy of $2.8 million and to serve levy notices and default notices on any shareholder who "opposes payment" (T 28(2)07) (TB 1627-1628). (I refer to this as the January Levy Resolution.) That resolution of 24 January was as follows:
The Directors resolve, noting that debts totalling $2.8 million have been incurred by the Company in relation to the renovation and construction works in progress in relation to the Company's building at 7 South Steyne, and having regard to the continuing delay in the provision of funds to the Company by St George Bank Ltd to pay those debts, to strike a special levy in the amount of $2.8 million payable by the shareholders in proportion to their shareholdings in the Company on 12 February 2007.
The Directors resolve further to instruct the Company's managing agents to serve levy notices accordingly, and that a default notice be served promptly on any shareholder who or which opposes payment of the levy.
218 On 25 January 2007, Turner Freeman received from their clients the executed documents and had confirmed receipt of the executed document (as per Mr Della Marta's affidavit).
219 The McLaughlins appear to have received notice of special levy due 12 February 2007 by at least 29 January 2007. The amount of the levy payable by them was $119,771.86.
220 On 30 January 2007, Mr Della Marta telephoned Pikes to say that he held the executed documents. Mr Baxter at Pikes said he was waiting for the name of purchaser from Mr Garratt, that the purchaser might require an indemnity from the company that the property was worth $950,000 when the work was done and that he did not know the levy had been struck but that the company was under pressure from the bank.
221 By letter dated 1 February 2007, Pikes advised Turner Freeman that the special levy had been struck to put the company in a position to meet its obligations, that resolution of these proceedings was one of the outstanding conditions which had been imposed by St George Bank, and it was further said that the builder would not continue without payment.
222 According to Mr Garratt, construction work by the builder ceased on 2 February 2007.
223 By letter dated 5 February 2007, Turner Freeman again sought advice as to which of the bank's conditions had not been met. They sought copies of the loan approval and security documentation, the building contract, progress claims, particulars of information provided to shareholders in respect of the issue of the levy, and other information.
224 By letter dated 6 February 2007 (TB 1636-1639), Mr Garratt advised shareholders in relation to the levy and said "The McLaughlins have not signed the shareholders acknowledgement or sold their shares, nor have they put forward any separate proposals to resolve the litigation. Instead they have offered to sell their shares and settle the litigation for $950,000", noting that this required a special resolution to buy-back and that it would take a month and was not assured. It was said that it was likely a valuation would be at $700,000 and they could find a purchaser at that price; that there was no alternative but to issue the levy to meet debts and assure the builder. The letter stated it was considered that the bank would allow draw downs if there was a substantial payment and that if it were possible to suspend all or part of the levy the company would do so (TB p 1636-1639).
225 On 10 February 2007 (before the levy was due), Mr Garratt emailed Robinsons asking for the exact amount of levy unpaid by the McLaughlins and stating that "a default notice will be served directly on Tuesday" (ie 13 February 2007) (TB p 1347).
226 By letter of 12 February 2007, Turner Freeman wrote to Pikes demanding certain undertakings by 5.00 pm on 16 February 2007. They asserted that there was no power of speculative development or to strike a levy for it, that the McLaughlins were not bound by amendments to the articles increasing their liability, and they asserted the misuse of the board's power to appropriate part of the building and oppression of the minority. (Mr Garratt relies on this letter as indicating that the McLaughlins would not pay the levy. He said that no one else disputed the levy, though most wanted additional time to pay.)
227 By letter dated 13 February 2007 Mr Garratt (TB p 1651-1652) wrote to the McLaughlins advising that unless the special levy was paid by 28 February 2007 their shares would be liable to be forfeited and for sale without notice. The letter noted that "Mr Kent" may still be interested in purchasing the shares for $750,000. (There was no evidence as to Mr Kent, although Mr McLaughlin seemed to acknowledge an offer which he believed had been made by Mr Bartrop of around $700,000 at about this time.)
228 By letter dated 15 February 2007, Pikes repeated a proposal to buy-back at "market value" and refused to provide the undertaking sought in relation to the forfeiture notice. The letter noted that the substantial reason for the levy was the decision of the McLaughlins not to settle the litigation and either sell their shares at market value or sign a shareholders acknowledgment (TB p 1656-1659).
229 There was evidence (Exhibit F 21) that on 6 March 2007 the managing agents, Robinsons, had printed a receipt dated 21 February 2007 noting that unit 5 (Garmen Pty Limited; Dunn) had paid $7,000; unit 22 (Garratt) had paid $10,000 and unit 3 (Garmen) had paid $12,000 of the special levy. (Garmen Pty Limited is a company associated with Mr Garratt.) As discovered, the notices of levy disclose an issue date of 23 February 2007 (Exhibit G). This, however, must be a computer glitch as there seems no doubt that the levy notice was received by the McLaughlins on at least 29 January 2007, if not before, since that was the date it was forwarded by them to their lawyers.
230 By email of 25 February 2007, Mr Lambert (Unit 1) advised Mr Garratt that he had received the special levy notice after the due date and thought he would be in a position to pay half in the next few weeks and understood from his conversation "that some resolution is expected this week that could result in the levy being substantially less" (TB p 1660).
231 By letter dated 5 March 2007, Mr Garratt wrote to St George Bank in which among other things he said that calling in half the levy in 45 days should satisfy for the draw down and that in the board's view the striking of the levy afforded the basis for draw down (Exhibit F 19). Mr Garratt says that in early March 2007, Mr Bartrop told him that St George Bank only required 50% of the special levy to allow draw down of funds.
232 As at 6 March 2007, it appears that of the special levy due 12 February 2007 only $29,000 had been received. No other default notices had been issued.
233 In correspondence passing at the time, reference was made to a telephone conference on 8 March 2007, in which the bank's solicitors apparently confirmed that the bank required three things: that there be no other mortgages over the shares; that pre-sale contracts to the requisite value had been exchanged; that shareholder acknowledgements were obtained and a resolution of the McLaughlins' litigation, preferably by purchase of shares (TB 1667-1668).
234 Mr Garratt says that on 12 March 2007, the directors resolved that only 50% of the special levy due in respect of each parcel of shares be required by 24 April 2007 with the balance stood over for the time being. The resolution made no reference to any conditions pertaining to the ability of shareholders to take the benefit of this resolution. Pikes, by letter dated 14 March 2007, advised Turner Freeman of this resolution (TB 1670). Turner Freeman responded (perhaps as a matter of more abundant caution) that day requesting whether the relief from the obligation to pay the levy in full included the McLaughlins.
235 On 15 March 2007, (TB 1672-1673) Pikes reported that "the board has ascertained the position of all the shareholders in respect of the special levy. [I interpose to note that there is no evidence that it had done so, although there are some email communications from shareholders in relation to the levy which were in evidence.] All shareholders [except the McLaughlins] intend to pay the special levy and apparently have means to do so. As a matter of fair treatment, all are to be informed that 50% of the amount in respect of each parcel of shares is to be paid by 24 April 2007, with the date for payment of the balance held over for the time being. … The board will not respond to a hypothetical situation such as you postulate in your letter about [the McLaughlins] somehow coming into funds at some uncertain time". (In that regard, how it was that the board had ascertained the position of all shareholders in respect of the special levy was not apparent on the evidence before me.)
236 By letter dated 16 March 2007, the company wrote to shareholders advising of the board's resolution that only 50% of the special levy need be paid by 24 April 2007 and the remainder held over for the time being (TB p 1678). (On its face that would not exclude the McLaughlins from the category of shareholders required only to provide a 50% levy.)
237 By 16 March 2007 letter (TB p 1675-1679), Pikes again said that the board would not respond to inquiries about time to pay based on hypothetical premises, such as the McLaughlins coming into funds at some future date by some uncertain means and then deciding to make a payment towards a levy that they denied any liability to pay. "All other shareholders are paying the special levy without protest and apparently have the means to do so". Again, the basis on which the latter assertion was made is not clear to me.
238 Turner Freeman requested information by letter dated 16 March 2007 as to what the company required to show an ability to pay part of the levy, what information it had had from other shareholders that it had apparently found acceptable and what payments had been made by shareholders other than the three disclosed in the Supreme Court proceedings before Barrett J.
239 By letter dated 19 March 2007, Pikes responded that it seemed to them that the McLaughlins were seeking time to pay a levy which they stated they had no means to pay and had no intention of paying and asked if this was not the case. Their letter stated that the only practical way that the company might achieve payment of the contribution in respect of the levy due in respect of unit 4, by about the date that the other shareholders were obliged to pay it, would be if the company were to pursue enforcement action in respect of the shares of unit 4 at the first available opportunity (TB p 1680).
240 By letter dated 19 March 2007, Turner Freeman advised that the plaintiffs were attempting to borrow funds from a third party but that if they had to make a payment under protest they would do so. Pikes responded, by letter dated 20 March 2007, that they would consider any reasonable credible payment proposal but would not "grant indulgences" and the only practical basis for payment appeared to be forfeiture. It stated that the board had relied on what it knew of the finances of other members, "who always paid on time without threat" (TB p 1682-1683), an assertion that seems to ignore the fact that at least Mr Lambert and Mr Murphy had at times been in default of payment of levies. In fact, less than 22% of the lesser (50%) portion of the total January 2007 special levy was paid by 24 April 2007.
241 On 20 March 2007, Turner Freeman enclosed a cheque for 100% of the special levy for the McLaughlins under protest disputing the validity of the levy.
242 By 21 March 2007 letter, Turner Freeman then requested a refund of the 50% levy paid and noted that the McLaughlins had now shown that they could pay the levy (TB p 1685). The response from Pikes on 21 March 2007 was that they would only remit the payment as part of a wider agreement if the proceedings were discontinued and the McLaughlins signed a shareholder acknowledgement (as required by the bank) (TB p 1686-1687).
243 On 10 April 2007, Pikes wrote to St George Bank's lawyers in relation to outstanding items, including the requirement that Mr Garratt's agent (Mr O'Meagher) provide a shareholder acknowledgement (TB p 1690-1695). (It was the later discovery of this letter that led to a subpoena being issued by the McLaughlins for evidence of any agreements or arrangements between Mr Garratt and other shareholders in order to ascertain the extent of his interest in the company.)
244 Minutes on 20 April 2007 of a directors' meeting show the ratification and confirmation of execution of the Bank's facility offers of 4 October 2006 and 2 April 2007, mortgage, charge, Builder's Tripartite Deed, Shareholders' Ratification, Bluestone contract 17 March 2006, road dedication deed with Manly Municipal Council, Building Contract 10 November 2006 and settlement deed with Southern Cross Constructions (TB p 1749-1752) and refer to the pre-sales contracts entered into by Mr Brown and his company in relation to certain of the units to be constructed.
245 The first draw down of funds occurred on 3 May 2007 and Southern Cross Constructions re-commenced work.
246 As at May 2007 Mr Garratt had apparently had no further contact with Mr Lambert and emailed asking for the half levy payment from him and saying it would be "good if the payment could be got out of the way soon" (Exhibit F (25), correspondence which seems inconsistent with the assertion that the board had satisfied itself as to the ability and intention of all shareholders to make payment of the levy within the time specified.
247 By letter on 6 June 2007, Mr Garratt wrote to shareholders enclosing notice of extraordinary general meeting of 28 June 2007 to authorise buy-back of unit 22 for $950,000 within 30 days of strata title registration. It enclosed a feasibility from Mr Bartrop showing a deficit of $1.67 million and that the special levy instalment due 24 April 2007 had been substantially paid by 15 of 22 units (with 8.2% interest capitalised monthly payable "where time to pay has been requested" on the outstanding amounts of the levy) (TB 1755-1756). I was informed that the arrangement as agreed by the board was that interest was to be payable only on any outstanding portion of the 50% component of the levy required to be paid by 24 April 2007, not the balance due at some later time as notified by the board - ultimately 30 September 2009.
248 On the same day, a notice of intention to carry out a share buy-back was lodged with ASIC (Ex N). However, this notice related to an intention to buy-back Mr Garratt's shares only (ie not those of Mr Heyworth, who at that stage was pressing for additional 'compensation') and the share buy-back agreement was an earlier version of the agreement into which the company ultimately entered with Mr Garratt. There was no evidence of any further notice lodged in relation to the intention to buy-back either of the directors' shares. Accordingly, as a procedural matter there was non-compliance with the requirements under the Act in relation to the buy-backs in this regard.
249 On 28 June 2007, the Annual General Meeting was held. Proxies for Ms Ashford and Ms Pether were given to Mr Dunn. Amended motions were put in relation to both Mr Heyworth's and Mr Garratt's units, namely that the buy-back be at $950,000 or a value determined by an independent valuer 60 days after completion (TB p 1757-1759).
250 By notice dated 27 December 2007 (TB 1784), the January 2008 annual general meeting was convened. It is not clear when the notice was posted or received (TB 1784; Affidavit of Mr McLaughlin, sworn 28 July 2009, at [84]) - there would have been 27 days' notice assuming that the notice was posted on the day it was dated (27 December 2007), given the deeming provision in article 110), ie notice would run from and including the day of 28 December 2007 to the day of the 23 January 2008 (section 105 of the Corporations Act 2001 (Cth)), which is 27 days. (Voting on the Buy-Back Resolutions at the 2008 annual general meeting was not by any means unanimous as the McLaughlins voted against (TB 1792).)
251 Mr Garratt's letter to shareholders enclosing the notice of Annual General Meeting included the accounts to the end of June 2007. Mr Garratt noted that of the special levy $2,545,455 had been received and $1,677,820 was receivable "in arrears"; that all shareholders had paid 50% of the levy except unit 12 (per agreement), units 7, 14 and 15.
252 Draft share buy-back agreements were prepared, clauses 5 and 7 of which had the effect that those shareholders would not be liable to contribute to any losses/levies after completion of the buy-back. (Mr Burchett submits that this provided an incentive to Mr Garratt to ensure that the final units were not sold (or a final accounting done) until after 21 days after the strata plan was registered. However, nothing was put to Mr Garratt to suggest that there was any deliberate delay in that regard and the evidence would not support any such conclusion - the difficulty in sale of the penthouse units being attributed to a hitherto undisclosed encroachment with the neighbouring property).
253 According to Mr Porman of Turner Freeman, at the January 2008 meeting Mr Garratt said that the reason why half the levy had not been refunded to the McLaughlins was that the board had offered to exempt shareholders where the board was satisfied they were able to pay (if required) or had undertaken to pay interest when required that the board was not satisfied that the McLaughlins were able to pay and therefore the full amount was "considered voluntary". Mr Porman says he asked whether the shortfall would be $1 million and would need another special levy and that Mr Garratt had said that the project was within budget and the shortfall would be unknown until sales.
254 By letter dated 16 January 2008, Mr Garratt wrote to the McLaughlins advising that on transfer to strata title the company would be wound up with final accounting of moneys and costs of the litigation set off against anything due. Mr Garratt expressed the view that the litigation did not prevent the transfer of strata titles and could leave the McLaughlins as the only shareholders (with unit 4 sold up to defray the costs of liquidation (TB 1785-1787). The McLaughlins (not unreasonably) perceived this letter as a threat to reduce the company's capital and leave to them as "the only shareholder left in the company". (Much reliance was placed on the import of this letter in the February 2010 injunction application before me).
255 According to the minutes for the 24 January meeting, it is not clear whether Mr Garrett and Mr Heyworth were absent during the consideration of and passing of the buy-back resolutions. The minutes indicate that both the resolutions in relation to the buy-back of units 22 and 23 were passed as special resolutions and that the sole dissenters were the plaintiffs (TB 1788 - 1792). Reference to the sole dissenters being the plaintiffs does not automatically lead to the conclusion that Mr Garratt and Mr Heyworth did vote on these resolutions as they could have abstained, rather than dissented, although there is no express record of either Mr Garratt or Mr Heyworth abstaining or being absent for these resolutions. It is noted that Mr Garratt declared his interest with respect to the resolution regarding the buy-back of his share and stood down as chair in respect of consideration that resolution (TB 1791).
256 By letter dated 15 February 2008 Mr Garratt wrote to shareholders updating them as to completion due in May/June 2008, with the roof and lift works due to be completed by the end of February 2008, and as to the procedure for buying one of the three new car spaces. The letter asserted that $150,000 to $200,000 had been added to the value of the units and also attached the company's letter to the McLaughlins, which was mentioned at the Annual General Meeting, setting out the course to be followed in making the transition from company title to strata title.
257 By letter dated 26 February 2008, Turner Freeman again requested a refund of half the levy on behalf of their clients on the basis that (by in fact paying the sum) their clients had shown that they could pay the levy. They also demanded a withdrawal of the "threat" selectively to reduce capital which they said had been made by Mr Garratt in his 16 January letter (TB 796-1798; TMP 106).
258 By letter dated 27 February 2008, Pikes refused to refund the half levy requested, saying that it had been paid as a voluntary advance payment (stating that this was since the levy had not been rescinded and the parties knew that only a 50% payment was required). It was said that payment did not demonstrate the ability of the McLaughlins to pay.
259 After further correspondence, by letter dated 7 May 2008 Pikes again seemed to suggest (at TB 1810-1815) that the 50% was paid voluntarily (and was not paid not under protest), this time on the basis that no demand had been made for payment in full at that time, and noted that there was an inference that there was a third party maintaining the litigation (though it is not clear how the latter related to the voluntariness of the payment or the company's refusal to refund half.)
260 By letter dated 19 June 2008, Mr Garratt wrote to shareholders advising that completion was due on 15 July 2008 and to expect re-occupation on 1 September 2008. The letter said that the marketing of the two unsold units would be by the end August. (It was anticipated that by the end of August bank debt would be reduced to approximately $4.5 million.) A complete accounting, it was said, would be provided once penthouse sales were settled.
261 On 1 July 2008 the agreement to buy-back shares from Mr Garratt was signed. It made it clear that Mr Garratt would be liable for levies only until completion of the sale (which was to take place on the earlier of winding up of the company or 21 days after strata registration). (Thus, as Mr Burchett has noted, Mr Garratt will not have incurred a liability for any part of the January 2010 levy referable to his surrendered shares for unit 22 - though he will of course have been liable for levies in respect of the remaining units in which he has an interest. Conversely, holders of shares in respect of the new units would presumably also now have a liability to share in those levies - unless exempted in some fashion.)
262 On 18 September 2008, the agreement to buy-back shares from Mr Heyworth's company (Permfast Pty Limited) was signed - again, as an outgoing shareholder he was to bear all levies referable to unit 23 only to completion of the sale on the earlier of the winding up of the company or 21 days after strata plan registration.
263 By letter dated 17 October 2008, Mr Garratt advised shareholders as to the delay in Council approvals; that the penthouse had failed to sell on 20 September 2008 but contracts had exchanged for $3.92 million; and that, on settlement of sales, the company should be able to repay almost all construction debt.
264 On 22 October 2008, Mr Garratt wrote to shareholders advising of Hookers' rental estimate for the renovated units - $750 per week for McLaughlins' unit - and that completion was expected in November.
265 On 6 November 2008, Mr Garratt wrote to shareholders (TB 1857-1863) advising that their units would be available for occupation on 15 November 2008. Notice was given of an extraordinary general meeting to be held on 30 November 2009 to amend the articles to amalgamate the four units on level four into two units (which was a condition of sale in respect of those units - acquired by Mr Brown) and that the proceeds were to go towards the bank debt.
266 On 1 December 2008 McLaughlins' unit was tenanted again at an increased rental of $750 per week. (The McLaughlins complain, however, that there is no access to the ground floor drying room, garden area with outside washing line, storage room at back of ground floor stairs or roof area.)
267 In February 2009, the strata plan for Dungowan was registered.
268 On 8 May 2009, Turner Freeman again wrote to Pikes requesting repayment of half levy to enable the plaintiff to visit an ill relative in England. Information was requested as to why an advertising sign had been allowed for Mr Brown's unit and why there was a change to configuration of the McLaughlins' unit. (In evidence at the hearing, the answer to that last question was provided by Mr O'Reilly, namely that it was regarded as necessary to meet Council heritage requirements.)
269 On 14 May 2009, notice of Annual General Meeting to consider enclosed reports for end June 2008 was issued. The enclosed directors' report noted that all members had paid 50% of the January 2007 special levy except the owners of unit 12 and the owners of units 7, 14 and 15 who had agreed to pay with interest on completion. The bank loan owing was said to be $15.638 million, with total assets said to be $18.3 million including the unpaid balance of the special levy.
270 On 18 May 2009, Mr Garratt wrote to shareholders advising that the registration of the strata plan had been delayed by an encroachment until the end of April 2009 and that the strata titles would not be released until bank debt was paid. In the letter it was recommended that the company redecorate the foyer, keeping the penthouses vacant and selling them within three to six months. The letter noted that the balance of the special levy was now required and there would be another when the penthouse was sold. Reference was made to the renegotiation of bank facilities for another 12 months. A shortfall was forecast and as was second levy of $2.177 million.
271 On 6 June 2009, the first Annual General Meeting of Owners Corporation was held. The quarter yearly levy increased from roughly $750 to $1,370.
272 On 10 July 2009, Pikes wrote to Turner Freeman, noting that as the balance of the January 2007 levy was shortly to be called no refund could be made.
273 By letter dated 20 August 2009, St George Bank emailed Mr Bartrop advising of an increase in the facility limit to $8.6 million. The email stated that if the sub-penthouses were sold at valuation (for $6.5 million) there would still be a further $2 million debt to extinguish.
274 By letter dated 27 August 2009, Cooraclare Pty Limited (Mr Bartrop's new company) advised the bank that with all levies and the current levy, over $3 million had been "raised" without recourse to security (a questionable statement when in fact that sum had been levied but not by that stage in fact received by the company) and all had contributed to the development. (The main outstanding creditors were disclosed to be Southern Cross Constructions, $380,000, Australian Taxation Office, $1.1 million, and Mr Heyworth, $950,000, totalling $3.3 million. No mention was made of any amount due to Mr Garratt, something said by Mr Bartrop in the witness box to be an oversight.)
275 30 September 2009 was the due date for balance of first levy to be paid by all other shareholders.
276 Following the hearing, a further (short) extension of the St George Bank facility was approved in December 2009. In the meantime, as noted earlier, winding up proceedings were commenced by Southern Cross in November 2009.
277 There was a report to shareholders as to the financial status of the development in January 2010 and, as indicated earlier, the company issued a further special levy in 2010. The company also forwarded to shareholders in January 2010 a pro forma Deed of Surrender of Shares, which it informed shareholders it would enter into in order to release to them the strata titles for their respective units. That deed made provision for a reconciliation of company debts as to 28 February 2010 and for outgoing shareholders to be liable to the company for any shortfall on the reconciliation of these debts.
278 It was asserted by the McLaughlins, in their response (issued through their lawyers) to the company's letter of 25 January 2010, that what was being proposed would undermine any judgment of this Court in favour of the McLaughlins. An undertaking was sought from the company not to deliver any titles to shareholders pending delivery and satisfaction of judgment "or that any shareholder who seeks to have their share certificate exchanged for release for their individual strata title will be required to undertake to contribute any shortfall of the company for any money it may owe to our clients as a result of any orders made in the court proceedings including any order for costs related to those proceedings." The company, in effect, acceded to that demand.
279 An undertaking was also sought (and in due course given by the company) that the company not seek to enforce against the McLaughlins any non-payment of the proposed levy (at all if there were to be a judgment in the McLaughlins' favour or otherwise until at least 30 days after the judgment was handed down).
280 Given the 28 February 2010 reconciliation date, (and the fact that I had refused interlocutory relief to restrain the release of strata titles to unit holders under the proposed arrangement which included potential liability for outgoing shareholders in relation to debts of the company arising under these proceedings, at least if those accrued prior to 28 February 2010), I adopted the course of making final orders in advance of publication of these written reasons.
281 Finally, before turning to the relevant Articles of Association and the issues for determination, I should note that there was a suggestion put during cross-examination of Mr Garratt and Mr Bartrop that there had been some collusion between them as to their evidence (although no submission to that effect was made at the close of the hearing). It arose at least in part because paragraph 57 of Mr Garratt's affidavit, as sworn (though this part was not formally read), contained the following statement "Steve: give as much detail as you can", in a paragraph commencing with the words "Mr Bartrop told me most times when we spoke in December and January that creditors were pressing him for payment and that they were becoming increasingly agitated." Mr Garratt agreed that those words had been left in the sworn affidavit by oversight. Mr Garratt, who accepted as "axiomatic" the impropriety of collaboration between witnesses as to their evidence (T 391), insisted that this was an instruction to the company's solicitor (Ms Kim Probert) to follow up the issue with Mr Bartrop (T 395). As a short hand mode of conveying such an instruction this might be so, although an instruction to Ms Probert would surely not commence with the word "Steve". That said, Mr Bartrop appeared genuinely taken aback in the witness box at any suggestion that he had discussed his evidence with any other witness and it seems to me that the infelicitous method of conveying instructions to Ms Probert, if that is what this reference was, is insufficient to form any adverse conclusion as to the credit of the respective witnesses in relation to a matter (contact from creditors) of which it is not suggested that Mr Garratt had personal knowledge and to which he did not attempt to depose other than in the broad terms which were contained in that unread part of his affidavit.
Articles of Association
282 The company's Memorandum of Association (TB 107) set out the specific objects for which the company was established as being, inter alia, to "purchase… manage and conduct the building known as Dungowan Flats … as first class homes, flats or self-contained units with all necessary and convenient facilities, garages and appurtenances for the use and occupation of members" (clauses 3(1) and (2)) and to acquire other land or buildings to and "reconstruct and adapt any … buildings… found necessary or convenient for any of the purposes of the Company: (clause 3(9)) (my emphasis).
283 Clause 3(26) empowered the company "to do all such acts matters and things as are or may appear to the company to be incidental or conducive to the attainment of the above objects or any of them or any objects of a like or similar nature".
284 Prior to the amendments made in the course of the redevelopment project, the share capital of the company was divided into 56,550 shares with power to reduce or increase the share capital and to divide it into several classes to which special rights could be attached (clause 5).
285 Under the Articles of Association (TB 116), the company's shares are classified into 26 "share groups". Mr Burchett submits that this creates different classes of shares (each group being a separate class) with both common and individual attached rights (citing Crumpton v Morraine Hall Pty Limited (1965) NSWR 240; (1965) 82 WN (Pt 1) (NSW) 456 and Wilson v Meudon).
286 The holding of each of the share groups relating to units in the building confers on its holder "the right to use as a home" the unit to which the particular share group relates (with corresponding rights of use as an office or garage conferred on holders of shares in the groups relating to the office/garage areas) as well as the entitlement "to use in common … all hallways, lifts, passage-ways and stairways and other portions of the … building and the grounds …, which are available for the general use of members (article 3(b)). (The holder of shares in share group Y (had such shares been issued) would be entitled to use of the roof space and to erect thereon a penthouse.)
287 Although not stated as a right of "exclusive" use of the units in question, it seems to me that this follows from the right that the unit(s) are to be used "as a home", which to my mind would connote exclusivity of use.
288 Sub-articles 3(c)-(e) make provision for the further rights and obligations of those described variously as "the holder of each such group", "the holder of the group" and the "holder of any group", including the right to lease the unit to which the share group related with the consent of the board.
289 Relevantly, for present purposes, article 3(f) provides that:
the rights conferred on [sic] the obligations imposed by this Article shall not be abridged, varied, restricted or released except by unanimous resolution of the members who are holders of a share group (my emphasis)
290 Article 4 (with the amendments passed in January 2007 italicized) provides:
The Directors shall have the right in each year at six monthly intervals or oftener if they shall so determine to make a levy on the holders of shares in the Company for an amount not exceeding the amount of the expenses charged and outgoings referred to hereafter and so that each shareholder shall only be required to contribute to such levy his proportion of these expenses charges and outgoings in the same proportion as the total number of shares in each group bears to the total number of issued shares in the Company save that where any shareholder has or shareholders have not paid an amount previously levied the directors may include any such unpaid amount in a subsequent levy ('a shortfall levy') which shall be calculated and payable by the other shareholders on the basis that the shares relating to the shareholder or shareholders who have not paid are excluded from liability in respect of the shortfall levy and the total number of issued shares in the Company for the purposes of the calculation is reduced accordingly. Any unpaid levy amount as aforesaid remains payable to and recoverable by the Company, notwithstanding the striking and payment of a shortfall levy, and when payment of any such unpaid amount is received, the same shall be credited to the account of the shareholders the subject of the shortfall levy in the proportions in which the shortfall levy was struck.
The expenses charges and outgoings abovementioned shall be as follows:-
(a) All rates and taxes.