McLaughlin v Dungowan Manly Pty Ltd

The Principal Judgment 4The purpose of the exceptional exercise of my discretion to allow a further hearing was not to detract from my original decision but possibly to add to it. As I explained, I thought that I may not have gone as far as was desirable to facilitate the resolution of the real issues in dispute. For that reason, I should at the outset of these reasons, repeat and adopt all of the analysis, explanation, findings, conclusions and orders that I set out in my principal judgment: [2011] NSWSC 215. Those reasons speak for themselves, as does my explanation of them in the second judgment given on 10 May 2011, but I will summarise their principal features and some aspects of the original hearing in what follows.

The Dispute 5These proceedings were commenced, effectively at the direction of a judge of appeal, in order to expeditiously resolve whether an appeal from a decision of Ward J listed for hearing in February this year could proceed. Ward J had conducted a lengthy hearing in which she had seen the protagonists, heard evidence from them and been in a position to form views about their credibility. The hearing before her canvassed many factual and legal issues arising in the relationship between the plaintiffs, the Company, its directors and other shareholders. Her judgment, which is of impressive length and contains much detail, set out many conclusions and findings relevant to the conduct of the parties. On one issue she gave a monetary judgment in favour of the plaintiffs. From that monetary judgment the Company appealed. The hearing of the appeal was stymied however because the plaintiffs (who were the respondents to the appeal) contended that they now controlled the Company and were entitled to prevent the appeal going ahead. I explained what occurred in paragraphs [4] and [5] of my principal judgment. 6The hearing before me was of a different order. I have not seen the protagonists. The plaintiffs relied only on solicitors' affidavits which added nothing to the contentious correspondence which they annexed. There was no evidence from the plaintiffs themselves - even though their counsel submitted, surprisingly, that I should grant relief in their favour based on, among other things, estoppel, representation and oppression. On the other hand the defendants relied on an affidavit of a director, Mr Garratt QC. The plaintiffs' counsel chose not to cross-examine Mr Garratt QC but then submitted, even more surprisingly, that Mr Garratt "failed to appear for cross-examination". 7Not only was there no cross-examination of, and evidence from, the plaintiffs in the hearing before me, but in addition neither party referred me to any particular paragraph, or any relevant conclusion of fact or law, or any reasoning, in the judgment of Ward J which was said to be applicable. As I saw it, that was because the primary issue in this case is quite different. It is whether the share surrender agreements, properly construed in their context, and having regard to the applicable provisions of the Corporations Act, have the effect for which the plaintiffs contended. This was reflected in the prayers for relief which the plaintiffs claimed.

Claims for Relief & Issues 8The primary relief, sought first in the summons and subsequently in the statement of claim, consisted of two declarations. The first amounted to a contention that the only remaining members of the Company were the plaintiffs and Beacon Properties Pty Limited. The second was a contention that the plaintiffs were now the only directors of the Company, having appointed themselves at a meeting which they requisitioned and at which they were the only attendees. The secondary relief was ancillary and was designed to facilitate the formalisation and regularisation of the state of affairs that should be held to exist if those principal contentions were upheld. 9The primary claims for relief devolved into two broad issues. The first concerned the proper construction of the share surrender agreements. In particular, it required resolution of the contention that, upon entry into those agreements, the members who did so ceased ipso facto to be shareholders or to have, or be entitled to exercise, any rights as shareholders. The second issue concerned the application of the Corporations Act. In particular, it concerned whether, properly understood and characterised, the share surrender agreements constituted an agreement by the Company to buy back shares in itself within the meaning of Section 257A or an acquisition by the Company of shares in itself contrary to the prohibition in Section 259A. 10I decided these issues adversely to the plaintiffs. I explained my decision and my reasons on the question of construction and the operative significance of the context in paragraphs [14] - [41] of the principal judgment. I explained my decision and my reasons on the issue as to whether the agreements constituted a share buy back in paragraphs [42] - [46] of the principal judgment. I treated a share buy back as a method by which a company could acquire shares in itself. As I have made clear, this further hearing is not the occasion to re-agitate the correctness of those decisions. The only occasion to do so is an appeal to the Court of Appeal. 11Nor is this further hearing the occasion to re-agitate a third issue which was put, and decided, on a narrow basis. I explained my decision and my reasons on that issue in paragraphs [47] - [56] of the principal judgment. That issue was constrained by the way in which it was presented. I determined it accordingly. I did not grant a re-hearing in order to allow a re-agitation of the correctness of that decision.

The Further Issues 12The question at this hearing is what, if any, possible further declarations I should make in relation to the rights of shareholders after entry into a share surrender agreement, given the conclusions of fact and law that I have already reached. In disregard of the limited basis on which I allowed a further hearing, the plaintiffs sought to have me revisit my reasoning, reverse my findings and grant the primary declaratory relief to which they originally claimed entitlement. They also sought substantial further relief most of which constituted ever increasing refinements on their primary claim that they were in control of the Company, not the defendants. 13On the other hand, the defendants submit that no further declaration of the type envisaged by me as a possibility, need be made. They accept that there must be some limitation on the rights of a shareholder after entry into a share surrender agreement. It is obvious, for example, that pending cancellation of shares and alteration of the share register, a shareholder could not seek to exercise rights as a shareholder in a manner inconsistent with the terms or the substance of a share surrender agreement to which it is a party. But the defendants contend, with some justification, that there is not currently, and may not be, any particular factual dispute or controversy which requires further elucidation of the precise limitations on the rights and entitlements of shareholders after entry into a share surrender agreement. Significantly, neither the plaintiffs nor the defendants formulated any form of further declaration, consistent with my reasons, that was said to be necessary. This may well reflect the fact that there is no current factual dispute in relation to which any such declaration can operate and which can inform its terms. 14Before there can be a declaration, there must be an actual controversy. In this case, the parties are at odds as to whether the defendants are directors and shareholders in the Company, but there is no crystallised difference of opinion about some particular aspect of the rights of shareholders after entry into a share surrender agreement: California v San Pablo & Tularc Railroad Company 143 US 308 at 314 cited in Bruce v Commonwealth Trade Marks Labour Association (1907) 4 CLR 1569 at 1571. See also Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 581-582. I am satisfied, contrary to my initial inclination, that the occasion is not ripe for a declaration. A declaration in the abstract may well satisfy the curiosity of the plaintiffs' legal representatives, but it will not resolve any existing dispute. The plaintiffs are more interested in re-visiting my principal findings. The fact that neither party proffered a form of declaration relevant to the rights of shareholders after entry into a share surrender agreement, is a sound indicator that I need not go there - despite the initial concerns that I expressed in my judgment on the application to re-open. 15In my principal judgment, I did my best to quell the actual controversy between the parties that gave rise to these proceedings. I decided that the plaintiffs are not the directors in control of the Company; that they are not the only remaining shareholders in the Company - along with Beacon Properties Pty Ltd; and that they were not entitled to act in such a way as to prevent the hearing of the Company's appeal from the decision of Ward J proceeding. Importantly, I removed the only obstacle that the evidence reveals is preventing the plaintiffs from entering into their own share surrender agreement with the Company. In that respect, I held that the Company's reason for not agreeing to allow them to do so has no legal foundation.

Share Surrender Agreements 16This takes me back to where I started. The share surrender agreements were devised by the directors for the benefit of all members of the Company as part of a scheme that was approved by the majority of members. They are an aspect of the overall process by which the building was to be redeveloped and the single company title converted to multiple strata titles. The plaintiffs may not have liked the proposal, but the overall process of redevelopment, conversion to strata title and entry into share surrender agreements was the subject of many meetings of members, much correspondence and majority decision. The hearing before Ward J was the occasion for the plaintiffs to advance their complaints about that process. And they did so. 17The share surrender agreements came later in time. As eventually finalised, the language of the share surrender agreements did not say that each shareholder would lose all rights as a shareholder immediately on entry into his or her agreement. Nor did it say that a shareholder who entered into a share surrender agreement, who also happened to be a director, would immediately cease to be qualified to hold office as a director. 18In making findings adverse to the plaintiffs, I had regard to some important matters of context. And I weighed in the balance the actual language of the agreements with the absence of anything explicit in that language that directly indicated the outcome for which the plaintiffs contend. I considered the language that appeared to be favourable to the plaintiffs. But I did not regard that language as conclusive in isolation, let alone in context. As is often the case, it would have been so easy for the drafter of the share surrender agreements to include a provision stating that, on entry into each agreement, the shareholder immediately ceased to be a shareholder, or ceased to have any rights as a shareholder. The ease with which a clear statement could have been included (but was not), can sometimes be a telling reason for not straining to construe incomplete or ambiguous language to achieve the result contended for by one party. In most cases, what the parties have actually stated and agreed upon, can be taken to represent the totality of their willingness to agree: Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 346 (Mason J). If they have stopped short, as in this case, one should ordinarily assume that there was a reason for so doing. 19I dismissed the result sought by the plaintiffs because it did not accord with an orderly approach to the winding down of the operations of a company which held property in company title that was undergoing conversion to strata title; because it would produce capricious and commercially inconvenient consequences; and because it was effectively a "last man standing" approach, so that a recalcitrant or opportunistic shareholder would be left in control of the Company - as the plaintiffs contend they are. The last matter is not a moral consideration. It simply reflects my view that the plaintiffs' approach to the meaning and effect of the share surrender agreements is objectively unlikely. I did not think that the outcome for which the plaintiffs contended could reasonably reflect the objective intentions of persons in the position of parties to the agreement.

Corporations Act 20Nor did I think that the Corporations Act dictated a different result. I will adumbrate and further explain the reasoning which led to my findings on the application of the Act. The starting point is that the parties can be taken to have made their agreements with knowledge of the terms of the Act. They referred expressly in the share surrender agreements to Section 258B and not to the provisions of Division 1 (Sections 256B-E) or Division 2 (Sections 257A-J). I regarded this as a clear indication that what was contemplated was the process of capital reduction which is validated in Division 3. I concluded that Section 258B contemplates the process that is necessarily involved when real estate held in company title is converted to strata title. 21It seemed to me to be relevant that the parties did not use the language of a share buy back (Section 257A) or of an acquisition of shares by the Company in itself. They did however adopt the term "surrender" which appears in the example to Section 258B(2). It may be that the brevity of the language of Section 258B(2) belies its full import. However, the example to the section reflects what I think is the unique nature of the capital reduction which is contemplated in these circumstances: Example: A person has a right to occupy an apartment in a block of units because they hold shares in a company. As part of converting the block of units to strata title, the person surrenders the shares in return for a transfer of strata title over the apartment. The capital reduction involved in the transfer is authorised under this sub-section. 22I should note that the use of examples in legislation is addressed by Section 15AD of the Acts Interpretation Act, 2011 (Cth). Examples are a legitimate aid to interpretation but must give way where they conflict with a substantive provision of the legislation: Pearce & Geddes, Statutory Interpretation in Australia, 7 th edition, 2011, pages 163-4; Brooks v FCT (2000) 100 FCR 117 at 134-6; Hinterland Marine Pty Ltd v Maritime Global Pty Ltd [2010] FCA 683 at [27]. The heading to Division 3 of Part 2J.1 is also part of the Act and therefore another legitimate aid to interpretation: Section 13(1) of the Acts Interpretation Act, 2011 (Cth). The heading is "Other share capital reductions". 23It seemed to me that whatever language may otherwise have been used in the share surrender agreements, it was proper to proceed on the basis that the parties were intending to invoke and embrace the process contemplated by Section 258B(2) and not some other process. In particular, I did not think that it was correct to characterise the process contemplated by the share surrender agreements as a share buy back or as an acquisition by the Company of shares in itself. I concluded that the contemplated process would not be a share buy back for the reasons explained in paragraphs [43]-[44] of my principal judgment. 24Nor could that process be an acquisition of shares by the Company in itself in contravention of Section 259A. If it were, Section 259A would not make sense. It purports to be a blanket prohibition on a company acquiring shares in itself with specified exceptions. If the process contemplated by Section 258B were an acquisition by the Company of shares in itself, for which there is statutory validation, you would expect it to be listed as one of the exceptions to Section 259A. Sections 258B and 259A should be presumed to operate in a consistent and harmonious fashion: Ross v R (1979) 141 CLR 432 at 440 (Gibbs J). To construe Section 258B as involving a process that requires the Company to acquire shares in itself would create an inconsistency within the Act. 25I did not think that the language of the share surrender agreements compelled a different result. As I explained in paragraphs [40] and [41] of my principal judgment, the reference to the "former relationship of Shareholder and Company" (clause 6) and "the persons who were its members" (Clause 7 and 8) was not conclusive of the plaintiffs' central proposition. That proposition had an important temporal aspect, namely that immediately upon entry into an agreement each shareholder would, one by one, and without further ado, cease to be a shareholder and cease, where applicable, to be qualified to hold office as a director. 26It is obvious that the parties must clearly have contemplated a cessation of the relationship of Company and shareholder - but not, in my view, in a piecemeal fashion, immediately upon entry by individual shareholders into their share surrender agreements. I formed the view that the parties contemplated the physical surrender of individual certificates and the orderly, but collective, cancellation of shares. They were not however proceeding down the path of a share buy back or acquisition by the Company of shares in itself. The process they contemplated was intended to be qualitatively different. For those reasons, I also thought that the warranty of title (Clause 10) did not advance the plaintiffs' case. It is perfectly understandable that, before cancellation, the Company would want to ensure that each shareholder who surrendered his or her certificate was the true owner thereof. This is consistent with the process of surrender contemplated by Section 258B. 27I should add that the parties provided expressly for the possibility of further steps that may be reasonably required to achieve the objects of the agreement (Clause 12). And they must be taken to have been aware of the primacy of the register of members - a matter to which I referred in paragraph [32] of my principal judgment. These were both matters which assisted the defendants' analysis. 28After I had concluded the third hearing, the plaintiffs' counsel sought leave to submit yet further written submissions to address the application of Division 1 of Part 2J.1. In the peculiar circumstances of this case, I thought it prudent to allow the plaintiffs to do so. The submissions on Division 1 constituted the third set of written submissions that the plaintiffs proffered at this hearing - a hearing that I had only permitted on a strictly limited basis. 29In any event, the reasoning that I have already explained indicates why Division 1 does not apply. The purpose of Part 2J.1 is to state the rules to be followed for reductions in share capital and for share buy backs. Division 1 deals with reductions in share capital not otherwise authorised by law. Division 2 deals with share buy backs. Division 3, which the parties nominated and which I have held is the applicable division, deals with, among others, the unique form of reduction of share capital that occurs when there is a conversion from company title to strata title. It is a share capital reduction "otherwise authorised by law" and therefore outside Division 1. It follows that whether the process envisaged by the share surrender agreement could be characterised as an "equal reduction" for the purpose of Division 1, is immaterial. The share capital reduction in question is authorised by Division 3 and governed by Section 258B.

Moderation & Restraint 30This leads me to another matter that I feel compelled to address. It needs to be emphasised that the efficient conduct of commercial litigation, indeed all litigation, can only be assisted by restraint, moderation, sensible co-operation and sound judgment by counsel. Indeed the due administration of justice demands it. Written submissions, such as those of the plaintiffs, that are unduly lengthy, excessively detailed or unnecessarily tendentious, will often fail to advance the case of the party on whose behalf they are put. If that occurs, the interests of justice will not be served. The duty of counsel in this regard is part of the wider duty to the Court to which I referred in Thomas & Ors v SMP (International) Pty Ltd & Ors [2010] NSWSC 822 at paragraphs [19] - [22]. It is also a manifestation of the statutory duty imposed on practitioners by Section 56 of the Civil Procedure Act, 2005 (NSW). 31In his article entitled "Reciprocal Duties of Bench & Bar" (2007) 81 ALJ 23, the Hon Justice J D Heydon AC explained how every aspect of modern litigation has tended to become "sprawling, disorganised and bloated". That tendency, he explained, can be seen not just in pleadings, discovery, affidavits and cross-examination but also in "oral, and in particular written argument". The plaintiffs' written submissions on this further hearing illustrate the point. There were in total almost 50 closely worded pages. I have marked the plaintiffs' three sets of written submissions Exhibits A, B and D. They referred to 59 separate authorities of which I was taken to virtually none in argument. The fact that they also ignore the limitations that I stipulated in my judgment given on 28 April 2011 considerably exacerbates the matter. 32An additional problem is the absence of moderation in the tone, expression and delivery of the plaintiffs' oral argument. This feature also deserves comment. The promiscuous use of extravagant language tends to obscure the value that may exist in the underlying submission. It is timely to repeat the compelling wisdom of the words attributed to Lord Bingham of Cornhill by Lord Mackay of Clashfern in his address at the Thanksgiving Service for Lord Bingham; The Times , 26 May 2011: The effective advocate is not usually he or she who stigmatises conduct as disgraceful, outrageous, or monstrous, but the advocate who describes it as surprising, regrettable or disappointing. 33The defendants' submissions exemplified this approach. Regrettably, the plaintiffs' submissions represented the polar opposite. No doubt they were delivered with the best intentions but they did not assist the efficient conduct of this litigation. They have prolonged it unduly.

Finality of Litigation 34This dispute has now occupied an inordinate amount of time. Not only was the hearing of an appeal by the Court of Appeal vacated in February, but I have conducted three separate hearings (2 March, 28 April and 8 July 2011) and given three separate judgments (25 March, 10 May and 29 July 2011). What is more, in their related litigation, the parties had earlier conducted a hearing over seven days before Ward J in 2009 and 2010. Her Honour delivered a judgment that is 234 pages long. Enough is enough. I am against the plaintiffs. They may not like the result but questions of contractual construction and statutory interpretation can sometimes be notoriously difficult and I have done my best. The law is not an exact science and on issues such as these, reasonable minds may occasionally differ. That is why an unsuccessful party has a right of appeal. Adherence to the principle of finality of litigation is of paramount importance in the administration of justice. The judicial system would become discredited if decisions were unduly subjected to further consideration. Litigants consumed by the uncompromising certainty of their own rectitude must accept the result, subject to their rights of appeal, and the exceptional but limited power to re-open: DJL v The Central Authority (2000) 201 CLR 226 at 262-263 (Kirby J).

Conclusion 35I repeat the orders that I made on 25 March 2011. The Company's appeal against the decision of Ward J should be permitted to go ahead. As the plaintiffs have not improved their position and the further hearings have achieved nothing, the plaintiffs should pay the costs of the hearings on 28 April and 8 July 2011. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 August 2011