McLaughlin v Dungowan Manly Pty Ltd [2006] NSWSC 1001 | Case summary

(I have added the numbers for ease of referral.) 4 The plaintiffs were present at the meeting by proxy. Theirs were the only votes cast against the resolutions. They voted against all four resolutions. The resolutions were declared carried. 5 The resolutions relate to a proposal to extend and refurbish the residential flat building which was constructed in 1919. The proposal involves, in broad terms, the conversion of two of the existing flats into garages or parking spaces and the construction of several new flats above the existing building, with the object of selling the additional flats and parking facilities (or, at least, issuing shares carrying rights to those new areas) to defray the cost of the extension and refurbishment. One aspect involves the payment of "compensation" to the members who hold the shares associated with the two flats (flats 22 and 23) to be eliminated. There was also reference to giving them some form of priority right to purchase two of the new flats upon payment of a pre-determined price (presumably as subscription moneys for new shares carrying rights to the new flats) but nothing in the resolutions seems to deal with that. It is also proposed that a special "allowance" be paid by the company to Mr Garratt, the chairman of the board of the company, who, according to a narration of events at the 9 September meeting, is seen by many members to have done particularly valuable work in connection with the extension and refurbishment proposal. 6 The project of extension and refurbishment is very extensive. The cost is expected to be $18 million. Repairs to and refurbishment of the existing building alone entails more than $6 million. Work has not yet started. Because of the age of the building, the need for repairs appears to be pressing. 7 The plaintiffs' case is that there is a serious question to be tried on several matters of deficiency regarding the resolutions. They contend, first, that there has been (or is to be) an abridgement or variation of their rights such as to trigger the operation of the constitution requiring unanimous or class consent. Second, they say that the statutory requirements for the passing of a special resolution were not observed so that resolution 1 (purporting to alter the constitution) is ineffective. The third contention is that the materials given to members in advance of and for the purposes of the meeting were deficient in such a way as to invalidate the decisions purportedly made. 8 As my brief description of the overall proposal suggests, there will be some re-configuration of shareholder rights. Resolution 1 purported to approve amendments to article 3 of the company's constitution. That article begins in paragraph (a) in the usual way by dividing the 56,550 shares in the company's capital into 26 groups identified by the distinguishing numbers the shares were given in order to comply with a requirement imposed by the Companies Ordinance 1954 (ACT) under which the company was incorporated in 1957. Article 3(b) then confers rights on the holder for the time being of each group of shares, being, in the case of a flat, "the right to use as a home" without the payment of rent but subject to the payment of levies under the constitution. The plaintiffs hold share group D being shares 7,751 to 10,000, so that the right they enjoy under article 3(b) is a right in respect of flat 4 which is further described by that provision as being a two bedroom flat at the north rear of the first floor. Article 3(d) confers a right for a member to let the member's flat subject to the approval of the board of directors, which approval may be withheld by the board. Under article 3(d), it is made clear that any rent from the letting of a flat belongs to the particular shareholder. Article 3(e) requires the shareholder to comply with statutory and similar requirements applicable to the flat. Then comes article 3(f) on which the plaintiffs place particular reliance: "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 and present in person or by proxy at a meeting of the Company." 9 This provision presents something of a difficulty of construction. The unanimous consent required is that of "the members who are holders of a share group". This may refer to the member or members holding the shares that make up a particular share group - such as the plaintiffs as holders of share group D. Or it may refer to all the members who are members holding the shares making up all the share groups - that is, the totality of the members holding the 56,550 shares comprised in all the share groups and disregarding, therefore, members holding shares that are ungrouped (a possibility at least contemplated by the constitution). There is a similar question about the opening words "The rights conferred on [which obviously should be "or"] the obligations imposed by this Article". Does this refer to the rights and obligations created by the article that pertain to the shares of a particular designated group; or is the reference to the totality of the rights and obligations created by the article in respect of all 56,550 shares making up all the groups? 10 The plaintiffs adopt the former approach to each of these questions. The defendant adopts the latter approach in each instance. On the plaintiff's approach, therefore, the rights and obligations attached by article 3 to a particular group of shares cannot be altered except with the consent of all the persons who are the holders of the shares of the group. On the defendant's approach, the provision only means that the total scheme of rights and obligations under article 3 cannot be changed without the unanimous consent of every person who holds any of the 56,550 shares in the groups. 11 There is a question as to the correct construction of article 3(f) and whether any abrogation of the plaintiffs' rights as the holders of share group D requires, in order to be effective, the consent of both of them. Even so, it may be that any variation of "the rights attached to" the shares in group D requires the consent of 75% of the holders of those shares pursuant to a separate provision in article 11, which is a modification of rights article in a common form, and as to the possible operation of s.246B of the Corporations Act 2001 (Cth). Matters of this kind have been canvassed in a number of cases - most recently by the Court of Appeal in Wilson v Meudon Pty Ltd [2006] ANZ ConvR 93. 12 It is, however, important to identify the "right" to which the plaintiffs' preoccupation extends and the way in which they apprehend that it will be invaded. Taken at their widest, the proposals the defendant has in mind to pursue do not involve any permanent removal or diminution of the right of the holders of share group D to use flat 4 as a home and the ancillary right to let it, subject to board approval. They do involve, however, the necessity to vacate the flat for a time to enable the renovation and extension works to take place. The plaintiff maintains that this is an invasion of the right of user conferred by the constitution, although it cannot in any sense be said to be a product of resolution 1, but might possibly be a product of resolution 2 (depending on just what resolution 2 achieves, if anything). On the view the plaintiffs take, the right is an absolute right that subsists in perpetuity regardless of practical necessities occasioned by matters such as refurbishment of the kind now under consideration. 13 I pause at this point to consider what the resolutions under attack actually do. Resolution 1 does nothing to diminish or alter the rights attaching to the plaintiffs' shares or any other group of shares. It merely adds references to additional groups of shares and allocates parts of the building not yet in existence to them. That cannot entail any interference with the plaintiffs' right to use flat 4 as a home and to let it subject to the board's approval. Resolution 2 purports to commit the company to certain agreements and the wider re-development proposal, subject to the directors being satisfied with certain documents. Resolution 3, in terms, approves $950,000 as the amount for which the company "might buy back" the shares representing each of flat 22 and flat 23 "on completion of the project". Resolution 4 determines that there should be paid an "allowance" of $250,000 to Mr Garratt "on completion of the project" for "his work in relation to the project". 14 The only one of these matters having any immediate impact or effect is that dealt with by resolution 2, that is, proceeding with the agreements and other steps "as Mr Bartrop had proposed" in connection with the re-development. The matters covered by resolutions 3 and 4 - like the matter concerning the creation of new share groups (resolution 1) - cannot have any immediate impact or effect because they are to take effect "on completion of the project", which obviously refers to completion of the extensive program of construction and refurbishment. 15 Except for the resolutions concerning the alteration of the constitution (resolution 1) and the payment of the "allowance" to Mr Garratt (resolution 4), I must confess to being unable to see with any clarity, first, why there was thought to be a need for a resolution of shareholders and, second, what force and effect the resolution of shareholders has, except as something in the nature of an expression of wishes which might give directors greater confidence to move forward. 16 In relation to resolution 2 it is pertinent to note that, under article 74 of the constitution, all powers of the company as are not required by the constitution or by "the Act" to be exercised by the company in general meeting are reposed in the board of directors. There is no apparent reason why decisions with respect to the extension and refurbishment of the building are not within what, under an article such as this, has been recognised for at least a century as the exclusive preserve of the directors which may not be usurped by the shareholders in general meeting: see, for example, Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] Ch 34; Quin & Axtens Ltd v Salmon [1909] AC 442. In other words, it seems that resolution 2, as a resolution of members, is of no legal force or effect. It can be no more than an expression of wishes. 17 As for resolution 3, the words "might buy back", used on two occasions, refer to future possibility rather than present actuality. The two units referred to are those that are to be taken for parking spaces in the proposed redevelopment and the figures mentioned are obviously those proposed to be allowed to the relevant shareholders for loss of their rights in respect of those units. But, as Mr Priestley of counsel acknowledged on behalf of the defendant, implementation of that part of the overall arrangement will require either two selective share buy-backs under Division 2 of Part 2J.1 of the Corporations Act or a selective reduction of capital under Division 1 of Part 2J.1. And in either such case, there will be a need, at the minimum, for a special resolution (s.256C(2), s.257D(1)), with no vote being cast by the holder of the shares involved. Resolution 2 can accordingly operate, at its highest, as no more than an informal expression of members' willingness to see the matter of the possible future buy-backs or capital reduction approached on a particular footing as to pricing with a view to abolition of flats 22 and 23 and payment by the company "on completion of the project". 18 The position in relation to resolution 4 and the "allowance" to Mr Garratt stands in a somewhat different light in view of the fact that he is a director and therefore within the general principle that he may not be remunerated by or receive any benefit from the company except as provided by the constitution or voted by the members: Re George Newman & Co [1895] 1 Ch 674. A decision on that matter is therefore within the province of the members and the fourth resolution is accordingly capable of having some meaningful effect - although, as I have noted, its immediate impact is very slight. Mr Garratt will not qualify for the payment until "completion of the project" and that, clearly enough, lies quite some distance in the future. 19 In view of what I have said to this point about resolution 1 - the only one which, to be effective, needed to be a special resolution (see s.136(2)) - there is limited utility in deciding whether there is a serious question to be tried regarding compliance with the requirements for the due passing of a resolution as a special resolution. I simply record my conclusion that there is a serious question to be tried - at least because the notice convening the meeting made no reference to any proposal to pass a special resolution (it described the item of business as merely: "Adopt proposed amendments to Article 3 of the Articles of Association of the company in the form distributed herewith"). There might also conceivably be a question arising from the fact that the resolution was apparently not referred to as a special resolution at the meeting, either upon being introduced or upon the declaration that it had been passed. In light of paragraph (a) of the s.9 definition of "special resolution", its reference to notice "as set out in s.249L(c)" (which requires a statement in the notice of "an intention to propose the special resolution"), it seems likely that the notice of meeting must, under the present legislation (as under earlier legislation: see, for example, In re North Victoria Deep Leads Gold Mines Ltd [1934] ALR 221), make it clear that the proposed resolution is a special resolution. The position is much less clear as regards any similar statement at the time the proposed measure is actually put before the meeting and the time of the declaration of the result of voting. However, there is a serious question to be tried on these issues. 20 The plaintiff also makes a number of points about inadequacy of information given to members, thus invoking principles of the kind with which cases such as Bulfin v Bebarfalds Ltd (1938) 38 SR (NSW) 423 and Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 are often associated. On this, I observe that the material sent to members in advance of the meeting of 9 September 2006 included a directors' report containing a section headed "Building Renovation" running to about half a page, the minutes (or draft minutes) of a shareholders meeting of 21 December 2005 containing just over three pages of discussion at that meeting on the subject and a letter of 4 September 2006 from Mr Bartrop of Stane Project Services Pty Ltd running to just over four pages and beginning: "In this letter I summarise the status of the Dungowan Redevelopment in point form for distribution to Directors and shareholders." 21 This last document contained discussion of the way in which the sum of $950,000 for purchase by the company of each of the unit 22 and unit 23 shareholdings had been calculated, taking a "completed value" of $710,000, as determined by "the Project Valuers", as a starting point and making an addition thereto on account of four specific (but unquantified) factors spelled out in the letter. There was also reference to discussion "at length" with three named board members, none of whom was the owner of the unit 22 or unit 23 shareholding. Mr Bartrop's letter also contained "draft feasibility" figures for the project as a whole showing three different outcomes based on different assumptions regarding prices obtainable for the new units. The outcomes are a surplus of $500,000, a deficit of $375,000 and a deficit of $2,150,000. Mr Bartrop's letter also contains a relatively short section on the factors relevant to the calculation of the sum of $250,000 as the "allowance" for Mr Garratt. 22 Bearing in mind that, as is shown by the minutes of the December 2005 meeting, shareholders have been exposed to the redevelopment proposal and its overall ramifications for some time, the overall impression is that Mr Bartrop's letter is informative. That said, however, there are possible grounds for criticism. Thus, for example, the plaintiffs' solicitors, in a letter of 8 September 2006, complained that the sum of $950,000 for each of unit 22 and unit 23 was to apply whether or not the project made a profit - although whether that is a matter for criticism when the two units are to be abolished regardless of the financial outcome is debatable. It is also complained that the information given about calculation of the $950,000 is not such as to enable a shareholder to have his or her own expert make a check or critique. There is some substance in this. The same criticism is made in relation to what may be unexplained or unsupported value judgments in Mr Bartrop's letter. It is said, for example, that a financing package offered by St George Bank is the most attractive, when there is no information about alternatives. The same point might be made about the section on Mr Garrett's "allowance" where the brief discussion is qualitative rather than quantitative. There is, I accept, a serious question to be tried about the adequacy of disclosure to shareholders. 23 Because there is a serious question to be tried on a number of matters, I turn to the balance of convenience. 24 For reasons I have explained, there are only two things of immediate relevance that are, in a legal sense, arguably achieved by the four resolutions. One is the alteration of the constitution to create additional share groupings referable to the additional flats that may be constructed. That, of itself, does not involve any invasions of any right of the plaintiffs. The second is the decision of the members to pay Mr Garratt an "allowance" of $250,000 "on completion of the project". The plaintiffs incur no immediate prejudice from that resolution, even if it may eventually be found to be invalid, given that any payment will be made only on completion of a very substantial program of building and refurbishment that has not yet even begun. 25 My task here is to weigh up the comparative injury that will arise from the granting or withholding of the interlocutory injunction, seeking out the major risk of damage and, in particular, of any irreparable damage. The parties approached the interlocutory hearing on the footing that grant of the interlocutory injunction would prevent commencement of the building work. It is relevant to point out, in that respect, that all holders of shares have been told that they must vacate and have their tenants vacate by 30 September. In a circular of 14 July 2006, the chairman said that all was on track to commence work in September 2006. In a circular of 8 August 2006, he gave notice that work would start on 1 October 2006 and that the building had to be vacated by 30 September 2006. The plaintiffs have in fact complied with this requirement and their tenants have departed. They have not taken steps to re-let. All other occupants have also left or are about to do so. As a result, as the defendant points out, the building is in need of security measures and, as it were, a point of no return has been reached on the road to redevelopment. 26 In reality, and as I have explained, commencement and undertaking of the redevelopment is not something that is dependent on the validity of any of the resolutions. I should develop that point. The redevelopment could continue whether or not resolution 1 has been validly passed. There is nothing in the company's constitution to require that any new units be associated by share groups or to prevent their being let as a commercial and profit-making venture by the company. Indeed, clause 3(14) of the memorandum of association (to the extent still relevant since conferral upon all companies of the capacity of a natural person) contemplates that the company may "let on lease … the whole or any part of the real and person property of the Company …". The validity of the alterations to article 3 would become a live issue only if and when the company was about to issue any of the new groups of shares to which it relates. That point must be quite some way off, even though some steps towards marketing of new units are apparently in train. The company could not, consistently with the article, actually issue the shares unless and until the physical property referred to in the article existed. Until that point, the definition of the right attached to each new share group would have no meaning because the descriptions refer to parts of a building. 27 Resolution 2, as I have said, is not essential to the redevelopment which, under the constitution, lies within the province of the board of directors. The concept of "acting upon" resolution 2 - the thing sought to be restrained - is therefore meaningless in legal terms. Resolution 3 is also concerned with the future and something that "might" happen "upon completion of the project". There can be no "acting upon" this resolution, in any event, except pursuant to a share buy-back or reduction of capital approved by separate decision in the future. Nor does resolution 4 present any imminent prospect of its being "acted upon", given that the approval relates to the making of a payment "on completion of the project". A project involving $18 million is going to take quite some time to complete. 28 The only immediate matter of prejudice to which the plaintiffs point is the supposed denial of the right of user (or letting) that is a necessary consequence of the need for their flat to be vacant during the building work. That right, arising from a provision of the constitution, is contractual in nature by reason of s.140 of the Corporations Act. If it will, in reality (and upon a proper construction of the articles), be denied by the company's insisting on vacant possession for a period to carry out refurbishment works, there will presumably be a remedy in damages and, particularly in light of the fact that the plaintiffs' flat has apparently been tenanted, there is no reason to think either that damages would not be an adequate remedy or that there would be difficulties with quantification. 29 In summary, while there is a serious question to be tried as to the validity of resolution 1 as a special resolution and as to the adequacy of materials given to shareholders for decision-making purposes (and thus as to the validity of all four resolutions), none of the resolutions presents prospects of immediate hardship or irremediable prejudice to the plaintiffs. The question of the validity of the resolutions can be left to be dealt with at a final hearing without apparent hardship to the plaintiffs in the meantime, particularly in light of the long time that will necessarily elapse before "completion of the project" occurs. To the extent that the plaintiffs' real complaint is about exclusion from their flat, it is not of itself a product of the resolutions and such invasion of their rights as it might ultimately be found to entail is of such a nature as to be adequately compensable by damages. For the defendant, however, an order forcing it to halt the development project (if that is what the interlocutory injunction would really do) will entail particular hardship of a financial nature, bearing in mind that contractors are ready to start, work is due to commence within a few days and the building is now largely, if not completely, uninhabited. That hardship would be shared by the shareholders, none of whom (except for the plaintiffs) appears to have any complaint about what is happening and what is proposed. 30 The balance of convenience favours the defendant. The application for an interlocutory injunction is dismissed with costs. **********

McLaughlin v Dungowan Manly Pty Ltd

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Judgment (13 paragraphs)

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Legislation Cited (2)

Cases Cited (1)

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