Solicitors:
Plaintiff: Goodwin Legal
First Defendant: no appearance
Second, Third and Fourth Defendants: H & H Lawyers
File Number(s): 2013/00296630
[2]
INTRODUCTION
In proceedings commenced by statement of claim, the Court is called upon to make determinations necessary to facilitate the winding-up of a failed joint-venture for residential development of land in Marsden Road, Dundas ("the Dundas Land"). The object of the joint venture was the construction of 16 townhouses, sale of the townhouses and distribution of profits anticipated to arise from such sales.
The joint venturers were the plaintiff and the second defendant, each a corporation. In colloquial terms, the plaintiff's role in the joint venture was that of an investor; the second defendant's role was that of a project manager.
The joint venture had its genesis in an oral agreement between representatives of the plaintiff (Mr JJ Lee) and the second defendant (Mr R Shin, the third defendant) on or about 15 June 2007. Although that agreement was acted upon in ensuing months, it was superseded by an undated written agreement (styled "Shareholders Deed") executed by the plaintiff, the second defendant and (as those parties' joint venture corporate vehicle) the first defendant on 7 April 2008.
Preliminary steps towards execution of that written agreement were the following: (a) the registration of the first defendant on 2 August 2007 as the corporate vehicle of the plaintiff and the second defendant for the purpose of carrying the joint venture into effect; (b) by a contract made on 7 March 2008 and completed on 1 July 2008, the purchase of the Dundas Land by Mr Lee, as trustee for the first defendant, and, upon completion of the purchase, his transfer of the land to the first defendant subject to a mortgage in favour of the ANZ Bank; (c) the provision to the first defendant of a written tender by the fourth defendant (a corporation), by a letter dated 4 April 2008, for construction of townhouses on the Dundas Land; and (d) the preparation of a written construction contract (styled "Design and Construct Contract-Lump Sum") executed by the first and fourth defendants on 7 April 2008 following execution of the Shareholders Deed.
The "construction contract" took the form of a printed document (partially completed in handwriting) which was not, in terms, wholly consistent with either the written tender or the Shareholders Deed. It was purportedly amended, on or about 21 February 2010, to allow for the prospect of increased construction costs, and delays, without attaining any degree of regularity of form greater than it formerly had.
The third defendant supplies a link between the second and fourth defendants. He was, effectively, the owner or controller of both of those co-defendants, and their main representative in dealings associated with the joint venture. In general terms, he might be described as a land developer. He was the person through whom the joint venture project was proposed to the plaintiff by the second defendant. He was the person through whom the fourth defendant (a self-styled company of architects and builders) submitted the construction tender to the first defendant. Through him, the second defendant enlisted the plaintiff to provide financial assistance for a development project which the second defendant, on its own, had sought to advance since early 2004.
The plaintiff and the second defendant are equal shareholders in the first defendant. The first defendant's board of directors comprises the third defendant as nominee of the second defendant and Mr SW Kang as nominee of the plaintiff. The third defendant is the managing director and secretary of the first defendant. As nominee director of the plaintiff, Mr Kang commonly reported to Mr Lee, a principal of the plaintiff. Mr Kang was at one time personally interested in the plaintiff, but no longer is so.
A common bond between Mr Lee, Mr Kang and the third defendant is a Korean heritage. This is relevant to note, in three respects. First, the joint venturers came together in the context of social connections between their principals as Korean-Australians. Secondly, negotiations between the plaintiff and the second defendant associated with the oral joint venture agreement of 15 June 2007 or thereabouts were conducted in the Korean language, as were many subsequent dealings associated with the joint venture. Thirdly, in advancing contentions that the third defendant managed the affairs of the first defendant in his own interests and in the interests of the second and fourth defendants, without the fully informed consent of the plaintiff, the plaintiff points to a lack of English literacy on the part of Mr Kang, who is said to have been largely dependent upon, and deferential to, the third defendant in discharge of his duties as a director of the first defendant. Mr Kang's deference to the third defendant was, in my assessment, no more than Mr Lee's indulgence towards the third defendant in the provision of funds before the parties fell out on or about 25 October 2011.
It is common ground between all parties to the proceedings that management of the first defendant is, and has been for some time, deadlocked and that, consequentially, it would be just and equitable for an order to be made, under the Corporations Act 2001 Cth, for the first defendant to be wound-up. The relief sought in the statement of claim includes (in prayer 14(b)) an order that the first defendant be wound-up and that a liquidator be appointed for that purpose, and (in prayer 16) an order that a receiver and manager of all property of the first defendant be appointed.
Because management of the first defendant is deadlocked, the company has not been separately represented in the current proceedings. The plaintiff and the second defendant, as the first defendant's only shareholders, have expressly conducted the proceedings on the basis that the company's interests are adequately protected given the constitution of the proceedings. All have acquiesced in this.
The time at which management of the first defendant became deadlocked. might reasonably be identified with meetings held on 18 and 25 October 2011 during the latter of which the plaintiff asserted, and the second defendant denied, that the joint venture was at an end.
The plaintiff contends that at that time the third defendant, on behalf of the second defendant, repudiated "the joint venture agreement" and, on behalf of the fourth defendant, repudiated the construction contract: (a) by an admission that no construction work had been performed over a three year period because of cost increases that the second defendant would have had to bear under the Shareholders Deed; and (b) by unjustified demands on behalf of the second and fourth defendants for the payment of money.
I accept that the second and fourth defendants' inaction was, in substantial part, a product of their lack of financial resources of their own, and that (in the person of the third defendant) they were trying to pressure the plaintiff (particularly Mr Lee) into providing more funds; but I am not prepared to accept that the conduct of the second and fourth defendants amounted to a repudiation of their respective obligations under the Shareholders Deed and the construction contract. At least part of the delays in the performance of construction work was attributable to a discovery by the third defendant, in or about July 2008, that the drawings on which the Development Approval for the Dundas Land was based were wrong (because they depicted a ground level different to the actual ground level), with a consequent need to obtain a variation of the DA. The third defendant, representing both the second and the fourth defendants, continued in his determination to develop the Dundas Land in association with the plaintiff. The history of financial dealings between Mr Lee and the third defendant - in which Mr Lee indulged the third defendant's incessant need for money - colours an assessment of what occurred in October 2011.
The parties allowed their relationships to drift beyond that time. The first defendant effectively ceased to carry on business in or about April 2012 when the fourth defendant completed excavation work and installed footings on the Dundas Land in order to prevent the first defendant's Development Approval from lapsing. Thereafter, the only work done on the land was low-order maintenance (primarily lawn mowing), in respect of which the second and fourth defendants have abandoned any claim for an allowance.
Despite the absence of construction work on the Land, costs associated with holding the Land were incurred after the parties' relationships irretrievably broke down and management of the first defendant became deadlocked. As claimed by the second defendant, those costs principally comprised bank fees, interest on borrowings, council rates and land tax.
The second defendant seeks to have its funding of such costs taken into account in its favour on the taking of accounts as between itself and the plaintiff. The pleadings do not clearly articulate this, but the second defendant's case was articulated (including by reference to draft amended pleadings marked for identification MFI D13 and MFI D16) sufficiently for that case to be adjudicated, in principle, without further amendment of the defence -responsive as is the defence to a statement of claim which includes as a primary claim for relief an order that an accounting be taken. Disputes about arithmetical detail can be dealt with, if need be, in light of determinations made about the proper construction and operation of the Shareholders Deed and the construction contract.
These proceedings were not commenced until 20 July 2015, when the plaintiff filed its statement of claim. That pleading sought an accounting for the joint venture (and damages) from the second, third and fourth defendants in terms broadly consistent with an allegation that "the joint venture agreement" had been terminated by the plaintiff for breach on 25 October 2011. However, it was also predicated upon an assumption that the construction contract remained on foot.
All in all, difficulties attend a finding that the Shareholders Deed and the construction contract were terminated (discharged) by acceptance on 25 October 2011 of repudiatory conduct on the part of the second and fourth defendants. The better view of the facts is that the parties became entrapped in their deadlocked management of the first defendant, a consequence of which was that the first defendant ceased to carry on business in or about April 2012. All parties, including the fourth defendant, at about that time and thereafter, acquiesced in failure of the Development Project. The plaintiff sought refuge in claims for an accounting from the second, third and fourth defendants. For their part, they hoped that, by resisting those claims and by anticipating a capital appreciation of the Dundas Land, they could ultimately achieve a financial advantage.
Although nominal works were undertaken on the Dundas Land in 2012 (when, in April, footings were installed) in order to preserve a Development Approval attaching to the land, no substantial work was at any time undertaken by or on behalf of the first defendant in construction of the projected townhouses, beyond demolition of existing buildings .
Well beyond commencement of the final hearing of the proceedings, the second, third and fourth defendants maintained that the joint venture (and the associated construction contract) remained on foot. Mutual recognition that the Development would never be completed by these parties came only during the course of the proceedings. That manifested itself in the parties' agreement that the Dundas Land be sold under direction of an external officer appointed by the Court.
The practical reality is that, but for a necessity for decisions to be taken consequent upon abandonment of the joint venture project and the construction contract, both the project and the construction contract were abandoned by the parties to them in or about April 2012, in the wake of their falling out on or about 25 October 2011. Substantial delays after that time in resolving differences between the parties reflect, on the plaintiff's side, a reluctance to accept that the outcome of the joint venture project could be anything other than profit to itself in line with aspirational projections made by the third defendant and, on the part of the defendants other than the first defendant, a reluctance to accept responsibility for alleged mismanagement of the project, combined with intransigence in winding up the joint venture.
There was some debate at the time of agreement to a sale of the Dundas Land as to whether the external officer to be appointed by the Court should be a provisional liquidator or a receiver and manager of the first defendant's property. A receiver and manager was preferred by the plaintiff as the means best calculated to facilitate a determination of questions in dispute (the evidence upon which had been taken by the Court) before the making of an order that the first defendant be wound-up.
By and with the consent of the parties, on 13 October 2017 orders were made for the appointment of a receiver and manager of the first defendant's property, with directions for the Dundas Land to be sold.
The receiver sold the land by auction on 7 December 2017. Settlement of the sale contract was effected on 7 February 2018. The sale price was $5.2 million plus GST, subject to adjustments.
On 27 April 2018, the evidence before the Court was formally closed.
Allowing for steps ancillary to the sale, necessary for an orderly conduct of the receivership, on 4 June 2018 the receiver paid into court the sum of $3,997,213.60, representing proceeds of sale of the Dundas Land after discharge of a National Australia Bank mortgage secured on the land (in the sum of $1,021,390.22) and net of selling and other expenses.
On the joint application of the parties, on 29 August 2018, the funds in court, including interest, were ordered to be paid out to the solicitors for the parties jointly, to be held by them on trust pending the determination of the proceedings.
[3]
UNUSUAL FEATURES OF THE PROCEEDINGS
The proceedings are unusual, if not irregular, in a number of respects.
First, the pleadings are complex and obscure, beyond the norm. The statement of claim pleads a broad range of "causes of action", some of which are asserted by the plaintiff on its own account and others of which are asserted (subject to orders being made under section 237 of the Corporations Act 2001 Cth authorising the conduct of a derivative action) on behalf of the first defendant.
The defence filed in answer to the statement of claim bears an appearance of greater discipline (focusing attention on the Shareholders Deed, the construction contract and the tender letter which preceded them) but, by its generality, the defendants acquiesced in, if not embraced, deficiencies in the statement of claim, endeavouring to channel all disputation into an "accounting" process.
An illustration of obscurity in the defendants' case in presentation is that, whilst maintaining that the joint venture and the construction contract remained on foot, the defendants' closing submissions conceded that, upon the filing of its statement of claim on 20 July 2015, the plaintiff became entitled to have its $2 million loan contribution to the joint venture project (for which clause 2.1(a)(i) of the Shareholders Deed provides) repaid, implicitly recognising that the joint venture and the construction contract effectively came to an end at that time.
The parties' pleadings cannot be characterised as satisfactory. However, to be fair to the lawyers and accountants charged with presenting the parties' competing cases, and with endeavouring to move them towards a resolution of their disputation, the informal manner in which the parties' conducted their multifarious business dealings is a root cause of the complexity of the proceedings and the unattainability of a consensual resolution. With but mixed success, the parties have endeavoured to refine their disputes via "accounting" procedures, a route full of cul-de-sacs.
Despite inclusion in the Shareholders Deed of an "entire contract clause" (clause 11) and a "non-reliance clause" (clause 12), and the assertion of "misleading and deceptive conduct" causes of action (under the Trade Practices Act 1974 Cth and/or the Australian Consumer Law) which fall short of an allegation that such conduct vitiated the making of the Shareholders Deed or any other contract, the plaintiff maintains that the oral joint venture agreement continued to have operative effect after the execution of the Shareholders Deed.
This contention is based upon an implausible contention that, in negotiating the oral joint venture agreement with the plaintiff, the third defendant acted not merely as the second defendant's representative but also on his own account. In dealings with the plaintiff, the third defendant introduced the second and fourth defendant as his corporate vehicles and the plaintiff contracted with the second defendant on that basis.
The plaintiff's case is complicated by complex allegations of breaches of fiduciary duty, and alleged breaches of duty by the third defendant as a director of the first defendant, which pay insufficient attention to the terms of the Shareholders Deed and the extent to which steps taken by the third defendant in management of the business of the first defendant were acquiesced in by Mr Kang as the plaintiff's nominee director of the first defendant or by Mr Lee as a representative (director/shareholder) of the plaintiff.
Complexity attaching to the plaintiff's case has been accentuated by the putative conduct of a derivative action on behalf of the first defendant without, but in anticipation of, a grant of leave to conduct a derivative action.
Insofar as management of the first defendant has been deadlocked, the application for a grant of leave is not without an essential foundation. However, the statutory criteria for a grant of leave include requirements that the applicant for leave is acting in good faith, that it is in the best interests of the first defendant that the application for leave be granted and that there is a serious question to be tried. The second, third and fourth defendants have called into question the plaintiff's good faith. They point to the complexity and obscurity of the statement of claim as an impediment to identification of a serious question to be tried. For much of the proceedings, if not consistently, they have contended that the interests of the first defendant would best be served by an order for its winding-up rather than a determination of the plaintiff's putative derivative action.
A second unusual, if not irregular, feature of the proceedings is the fact that, before (not after) the determination of the basis upon which any accounting between joint venturers should be conducted, the plaintiff, the second defendant and the third defendant sought, and obtained, from the Court (on 10 December 2013) an order for accounts of the joint venture to be taken.
That order, in terms, was to the effect that "an account be taken of all the dealings and transactions, payments, disbursements and receipts in relation to the acquisition and development of [the Dundas Land] and sale of units to be constructed on [the Dundas Land]", coupled with an order that "an inquiry be held as to what are the assets and liabilities of the parties in relation to the acquisition, development of [the Dundas Land] and the sale of any part of [the Dundas Land]".
The process of accounts being taken, or at least agreed between the parties, has proceeded without a finite end, and cannot confidently be said to have been completed, in part because the basis upon which accounts were to be taken lacked clarity in the context of the parties' complex and obscure pleadings.
A third unusual, if not irregular, feature of the proceedings arises from the parties' preparation of accounting schedules as a focus of attempts to resolve ongoing disputation. Notwithstanding repeated assurances that, as a matter of accounting, there are but a few questions remaining in dispute, the parties engaged in lengthy presentations of evidence, and submissions, about the terms of the joint venture and disputation associated with its performance. At the same time, they have manifested substantial agreement that the outcome of the proceedings is, in large measure, governed by the terms of the Shareholders Deed, properly construed.
A fourth unusual, if not irregular, feature of the proceedings is that, throughout the time that the parties' joint venture project and the associated construction contract were in a state of negotiation, formation and purported execution, the parties and their respective principals intermingled their affairs and those of the joint venture with such a degree of informality as to engender misunderstandings and to impede any attempt to unravel their affairs.
A fifth unusual, if not irregular, feature of the proceedings is that, in part because of language difficulties, the informal nature of many business dealings, the inadequacy of records kept and the passage of time, the evidence of all the principal witnesses who gave evidence in the proceedings was more or less unsatisfactory. The third defendant and Mr Lee, in particular, were witnesses whose credit was specifically challenged; Mr Kang less so. Objectively, the proceedings cannot be determined, as the parties (particularly the plaintiff) invite the Court to do, by the simple expedient of discounting the evidence on one side or the other on credit grounds. All the evidence, in whatever form, needs to be examined critically in an assessment of objective probabilities.
[4]
THE SHAREHOLDERS DEED AS A PRIMARY POINT OF REFERENCE
Given: (a) the parties' ultimate agreement that the joint venture could not realistically result in the construction of the projected townhouses by the first defendant; (b) their agreement that the Dundas Land should be sold by a receiver empowered by orders of the Court to effect a sale; and (c) the fact of a sale resulting in proceeds surplus to any indebtedness of the first defendant as the parties' joint venture vehicle, the justice of the case can, with one qualification, be accommodated within the context of the Shareholders Deed without resort to any form of derivative action or prolonged examination of extra-contractual "causes of action".
There is no dispute about the enforceability of the Shareholders Deed, only about its construction and its application to the facts of the case. Once a determination is made about the proper construction and operation of the Shareholders Deed and the construction contract, it is doubtful whether (and I am not satisfied that) the plaintiff, directly or indirectly through the first defendant, has suffered any loss or damage to sustain an extra-contractual cause of action.
The qualification upon a prospective dismissal of the plaintiff's "derivative action" is this. Before any order for dismissal is made, an assessment needs to be made of whether there is, or may be, money due to the first defendant from one or more of the other defendants. If that is a real possibility, consideration might need to be given to whether such an accounting can, and should, be undertaken in the context of the current proceedings (via the plaintiff's "derivative action" or by the intervention of a liquidator, yet to be appointed, for the first defendant) bearing in mind that, should there be a requirement for fresh proceedings to be commenced, any claim that the first defendant may have had might, in the context of fresh proceedings, be held to have become "statute barred".
The possibility that there might be a need for an accounting as between the first defendant and other defendants is a possibility which might arise, for example, in the context of payments having been made to the fourth defendant by the first defendant (under the effective management of the third defendant) beyond any entitlement the fourth defendant has to retain the money paid to it. For example: the fourth defendant was paid a substantial "deposit" upon execution of the construction contract on account for future work, ostensibly not done, but any need to account for the deposit may be accommodated as between the plaintiff and the second defendant. If the deposit is not, in whole or part, recoverable by the first defendant from the fourth defendant, on my construction of the Shareholders Deed the second defendant is liable, on a working out of rights and obligations under the Deed, to indemnify the plaintiff for its loss.
In the absence of any agreement between the parties, these possibilities need to be specifically addressed before any order for dismissal of the plaintiff's derivative action can properly be made.
The oral agreement made on or about 15 June 2007 was made between the plaintiff and the second defendant. The third defendant was the agent through whom the second defendant made an agreement. He was not a party to the agreement in his personal capacity.
The oral agreement did not, in terms, survive the making of the Shareholders Deed; but, in two respects, it supplies contextual facts which, as part of the circumstances surrounding the Shareholders Deed, may bear upon construction of the Deed or, at least, an understanding of why the joint venturers later fell out.
First, the third defendant, represented to Mr Lee that the plaintiff's contribution to the joint venture project would be the provision of funding in sum of $2 million, leaving the plaintiff to expect that that would be the limit of its financial obligation and that the second defendant was able to fund, and would be responsible for funding, the project beyond the plaintiff's $2 million investment.
Secondly, the third defendant represented to Mr Lee that his companies (the second and fourth defendants) would complete the project, with a substantial profit return to the plaintiff, within 1-2 years, allowing 15 months construction time.
That 15 months estimate finds reflection in the terms of the fourth defendant's tender letter of 4 April 2008, signed by the third defendant as its managing director.
[5]
THE PLAINTIFF'S INVESTMENT IN THE JOINT VENTURE PROJECT
As events unfolded, between 5 July 2007 and 11 April 2008 or thereabouts, one way or another the plaintiff contributed to the project instalments totalling $2,010,000 (including an inadvertent overpayment of $10,000) which the parties agree must be accounted for in favour of the plaintiff (by a judgment in favour of the plaintiff which includes the sum of $2.01 million plus, I would add, interest at court rates):
1. on or about 5 July 2007 the plaintiff ostensibly funded the deposit of $210,000 paid on purchase of the Dundas Land.
2. on or about 31 August 2007 the plaintiff paid $200,000 to the fourth defendant by way of a loan which, in about June of 2008, the plaintiff, the second defendant and the fourth defendant agreed be "repaid" to the first defendant as part of the plaintiff's contribution to the joint venture.
3. on or about 19 March 2008 the plaintiff paid out $600,000.
4. on or about 4 April 2008 the plaintiff paid out $500,000.
5. on or about 11 April 2008 the plaintiff paid out another $500,000.
On or about 21 August 2008 the plaintiff also paid a total of $170,000 to Fidelity Legal (solicitors for the first defendant) as deposits on the purchase of three townhouses to be constructed as part of the Project. On or about 30 September 2008, the plaintiff authorised those solicitors to release that money to the first defendant as vendor. As a director of the first defendant, the third defendant directed that the money be paid to himself. In these proceedings the second defendant accepts that that money should be accounted for by an allowance in favour of the plaintiff. That allowance should be made by way of a judgment in favour of the plaintiff which includes the sum of $170,000 plus interest at court rates, not a mere adjustment to accounts from which, when debits and credits are offset, the second defendant may itself obtain a benefit. Repayment of the $170,000 (plus interest) is, within the context of the definition of "Net Value of the Project" in clause 1.1 of the Shareholders Deed (read with clause 2.3 of the Deed), a "Project expense" which ranks above any entitlement the second defendant may have to participate in a distribution of property.
Thus, the total sum directly invested by the plaintiff in the project was $2.18 million, not allowing for interest incurred by it upon its own borrowings to fund that investment.
In essence, at a minimum, the plaintiff seeks to recover its investment of $2.18 million together with compensation for being out of its money.
The plaintiff's contribution of $2.01 million to the project was by way of an interest free loan. As the defendants have conceded, it became repayable upon the plaintiff's statement of claim being filed on 20 July 2015, if not earlier. In accounting to the plaintiff for it, the second defendant should make an allowance for interest calculated, from at least that date, at the rates prescribed pursuant to the Civil Procedure Act 2005 NSW, section 100. Such an allowance would be in the order of $340,000 or thereabouts.
Whether the commencement of the proceedings is the correct time from which an allowance for interest on the plaintiff's $2.01 million should run is open to question. If, as I have found, the first defendant ceased to carry on business in or about April 2012, an "Insolvency Event" occurred within the meaning of clause 1.1 of the Shareholders Deed at that time, activating clause 2.3 of the Deed and enlivening the plaintiff's entitlement to be repaid its $2.01 million.
I will allow the parties an opportunity to make submissions about this. In the meantime, I note that an allowance for interest calculated at court rates since 1 May 2012 would be in the order of $780,000.
In accounting for the plaintiff's $170,000 the second defendant should be required to make an allowance for interest, at those same rates, from 30 September 2008. Such an allowance would be in the order of $117,000 or thereabouts.
The entitlement of the plaintiff to be returned its $2.18 million operates as a charge upon the proceeds of sale of the Dundas Land before any entitlement the second defendant may have to participate in a distribution of those proceeds. The sum of $2.01 million is charged against the sale proceeds by virtue of clause 2.3 of the Shareholders Deed and the definition of "Net Value of the Project" in clause 1.1 of the Deed. The sum of $170,000 is charged against the sale proceeds (as it was against the Dundas Land) because it bears the character of a lien in favour of a purchaser who released to its vendor a deposit paid on a purchase of land not completed.
[6]
MATERIAL TERMS OF THE SHAREHOLDERS DEED
The Recitals to the Shareholders Deed are in the following terms, with editorial adaptation:
"A. The issued share capital of [the first defendant] is [$] 2.00 comprising two ordinary shares of $1.00 each fully paid.
B. [The second defendant] and [the plaintiff] each beneficially own one (1) ordinary share in [the first defendant].
C. [The second defendant] and [the plaintiff] have agreed to enter into the Project.
D. This is a shareholders' agreement intended by the parties to modify the effect and operation of the constitution of [the first defendant], and in particular to regulate the future management of [the first defendant], and to prescribe the entitlements of the parties to contribute to the expenses or losses of, or share in the earnings or profits of, the Project."
In the working out of the parties' rights under the Shareholders Deed, clause 2 of the Deed is of central importance.
With editorial adaptation, it is in the following terms:
"2. USE OF ASSETS
Parties' intentions
2.1 The parties acknowledge that:
a) the Project is to be funded by [the second defendant] and [the plaintiff] as follows:
i) [the plaintiff] is to provide an initial interest-free unsecured advance of capital to [the first defendant] of $2 million (the NWEC Loan) which shall be applied towards the purchase of [the Dundas Land];
ii) [the second defendant] shall procure that [the fourth defendant] contracts to construct the Development for the lump sum of $3,520,000;
iii) [the second defendant] shall procure that a Bank advances construction finance for the Project, secured by a first registered mortgage over the Land, for the principal sum of $3,520,000 (the Bank Loan);
iv) [the second defendant] shall bear all construction costs exceeding $3,520,000 and all interest payable in respect of the Bank Loan and shall reimburse to [the first defendant] any such costs and interest paid by [the first defendant];
v) [the second defendant] and [the plaintiff] shall bear all expenses of the Project (other than the excess construction costs and interest referred to in paragraph (iv) above) equally including all Council application and approval fees, all stamp duty, taxes including GST, consultants' fees including legal fees, valuation fees and borrowing costs, all holding costs, all marketing costs and agent's commission;
vi) the expenses referred to in paragraph (v) above shall so far as practicable be paid from the cash flow of [the first defendant] but if necessary shall be advanced to [the first defendant] (interest-free and unsecured) by [the second defendant] and [the plaintiff] (or as they agree between themselves from time to time).
2.2 [The second defendant] is to be responsible for the management of the Project and the supervision of the construction and in consequence:
i) is at liberty to cause a contract for the construction work to be entered into with [the fourth defendant].
ii) is to be responsible to ensure the servicing of and repayment of the liabilities of [the first defendant] in relation to the Project.
2.3 The parties agree that, on completion of the Project or on the earlier happening of an Insolvency Event, [the second defendant] and [the plaintiff] are to be entitled to 50% of the Net value of the Project.
2.4 The parties agree to use their best endeavours to ensure that [the first defendant] gives effect to this Deed and agree to manage [the first defendant] to give effect to the intention referred to in clause 2.1.
2.5 The parties agree and acknowledge that each shall do all acts and things and execute all necessary documents to ensure that [the first defendant] pays any income tax liability that accrues to it as a result of the sale of the Assets.
2.6 The parties agree to execute all documents necessary to give meaning and effect to this Deed in the time periods specified in this Deed and if no time period is specified then within a reasonable time".
Clause 1.1 of the Shareholders Deed contains several definitions (expressly defined "unless otherwise indicated by the context") that serve to elaborate clause 2:
(a) "Assets" is defined to mean "the assets for the time being of [the first defendant], including the [Dundas Land] and any accumulated earnings of [the first defendant]".
(b) "Bank Loan" is defined to mean the loan procured for the purposes of clause 2.1(a)(iii).
(c) "Development" is defined to mean "a residential strata development of 2 two-bedroom, 7 three-bedroom and 7 four-bedroom townhouses to be erected on [the Dundas Land], generally in accordance with… attached sketch plans".
(d) "Insolvency Event" is defined to mean the occurrence of any one or more of specified events in relation to the first defendant. One of those events is described in the following terms: "An application is made to a court for an order that [the first defendant] be wound up, declared bankrupt or that a provisional liquidator or receiver or receiver and manager be appointed, unless the application is withdrawn, struck out or dismissed". Another is defined in the following terms: "[The first defendant] ceases to carry on business or threatens to do so."
(e) The expression "Net Value of the Project" is defined to mean "the net realised value of [the Dundas Land] and the Development calculated as follows:
Net proceeds of sale of the strata units (being the sale price after deducting all Project expenses including acquisition costs, development costs, holding costs and costs of sale) Less repayment of the aggregate of: (1) the Bank Loan, and (2) the NWEC Loan".
(f) The expression "NWEC Loan" is defined to mean "the loan made by [the plaintiff] for the purposes of clause 2.1(a)(i)".
(g) "Project " is defined to mean "the joint venture to be known as the 'NW and RS Marsden Road Project' whereby [the first defendant] acquires the [Dundas Land] and develops the Land by erecting the Development for the purpose of selling the strata lots comprising the Development at a profit ".
The attribution of management responsibility for the Project to the second defendant for which clause 2.2 provides is elaborated in clauses 3.10 and 3.11. Those causes (with editorial adaptation) are in the following terms:
[7]
Day-to-day management, administration and financial records
3.10 [The second defendant] shall be responsible for the day to day management of the Project and the general administration of [the first defendant] including statutory compliance. The parties agree that the board of [the first defendant] shall delegate to [the second defendant] the power to make all decisions concerning the day to day management of the Project and the general administration of [the first defendant], subject only to any policies adopted by the board.
3.11 The parties acknowledge that the powers of management referred to in the immediately preceding clause does not [sic] include a power of sale in respect of [the Dundas Land] or any part thereof".
With editorial adaptation, clause 17 is in the following terms:
"17 Indemnity
17.1 Each party shall indemnify and keep indemnified the other party from and against all and any loss, claim, damage, action, suit, demand, cost, interest, charges and expenses of any kind whatsoever which they [sic] other party may suffer or incur or be called upon to suffer or incur by virtue of any breach of default by the first mentioned party of any of its obligations or duties arising in this Deed.
17.2 [The second defendant] shall be solely responsible and liable for and shall indemnify [the plaintiff] against liability arising out of performance of [the second defendant] in this project and [the second defendant] shall be wholly responsible and liable for and shall indemnify [the plaintiff] against liability incurred by [the second defendant] in relation to the works other than this project ".
[8]
THE SCHEME OF THE SHAREHOLDERS DEED
The Shareholders Deed does not, in terms, provide a time limit within which the Project was to have been completed. The plaintiff alleges, and the defendants deny, that the Deed should be read as containing an implied term that the Project would be completed within a reasonable time.
In my opinion, there is no basis for finding such an implied term. By clause 2.3, the Deed contemplated that the Project would be "completed" - or that the parties' entitlements would crystallise "on the earlier happening of an Insolvency Event", an expression defined (by clause 1.1) in terms sufficiently broad to contemplate an endpoint such as the filing of the originating process in these proceedings or the first defendant's cessation of business. The duration of the joint venture remained open-ended, subject to the Deed's mechanism for bringing it to an end in one of the ways contemplated by clause 2.3 and the definition of "Insolvency Event" in combination.
Considerations of time, and the reasonableness or otherwise of an effluxion of time, are not wholly absent from the Shareholders Deed. That is because: (a) clause 2.4 requires the parties to use their "best endeavours" to give effect to the funding agreement recorded in clause 2.1; (b) clause 2.6 requires the parties to execute necessary documentation "within a reasonable time" ; and (c) the attribution to the second defendant of management responsibility for the Project (in clauses 2.2, 3.10 and, implicitly, 17.2, read with clause 2.1(a)(ii)) is predicated upon due performance by the second defendant of its management functions.
Those functions are to be viewed in the context of clause 2.1(a) of the Deed, in which the second defendant assumed responsibility for procuring a lump sum construction contract with the fourth defendant, responsibility for procuring construction finance from a Bank, and responsibility for bearing all construction costs exceeding the amount of the lump sum contract and all interest payable in respect of the Bank Loan.
The second defendant's responsibility for management of the Project was not limited to entry into a construction contract with the fourth defendant, leaving the first defendant to look to the fourth defendant alone for a remedy in the event of a failure of the development project.
In particular, the second defendant was obliged to procure a lump sum construction contract with the fourth defendant (clause 2.1(a)(ii)); to procure construction finance for the project (clause 2.1(a)(iii)); to bear all construction costs exceeding the lump sum cost of construction (clause 2.1(a)(iv)); to bear all interest payable in respect of the construction finance (clause 2.1(a)(iv)); to be responsible for the servicing and repayment of liabilities of the first defendant in relation to the Project (clause 2.2(ii)); to be responsible for management of the Project and supervision of construction of the Development (clauses 2.2 and 3.10); and to be responsible for, and to make all decisions concerning, the general administration of the first defendant, including statutory compliance (clause 3.10).
The second defendant's obligation under clause 17 of the Deed to indemnify the plaintiff against loss (differently expressed, but to the same effect, in both clause 17.1 and 17.2 of the Deed), in combination with the provisions of the Deed (particularly clauses 2.2 and 3.10, read with clause 2.1(a)(ii)) attributing management responsibility for the project to the second defendant, and reinforced by common knowledge that the third defendant was the moving mind behind both the second and the fourth defendants, effectively rendered the second defendant a surety for the fourth defendant's due performance of obligations under the construction contract or otherwise referable to the development project.
As contemplated by clause 2.3, in circumstances in which the parties agree that these proceedings will culminate in the appointment of a liquidator (and which have already seen the appointment of a receiver and manager to sell the Dundas Land), the parties' primary entitlements are to be assessed as "50% of the Net value of the Project", subject to any adjustments arising from clause 17 of the Deed.
Clause 17 is not confined in its operation to an adjustment, or charge, upon whatever entitlement a party might otherwise have to an amount available upon realisation of "[the Dundas Land] and the Development". It can support the making of adjustments in the taking of accounts as between the joint venturers in the working out of clause 2.3 or an award of damages.
The primary definition of the expression "Net Value of the Project" in clause 1.1 of the Deed is "the net realised value of the [Dundas Land]".
In the context of a crystallisation of the parties' entitlements before completion of the Project, the method of calculation set out in the definition of "Net Value of the Project" needs to be read by substitution for the words "the strata units" the words "the [Dundas] Land".
That is because the introductory words of clause 1.1 contemplate that the definition of the expression "Net Value of the Project" is to be read, inter alia, in the context of recognition in clause 2.3 that the definition might fall to be applied at a time before completion of "the Project" - that is, before construction of the projected strata development.
The expression "Project expenses" within the definition of Net Value of the Project" is not defined beyond its elaboration: (a) in the definition of "Net Value of the Project" as "including acquisition costs, development costs, holding costs and costs of sale"; and (b) by inference, in clause 2.1(a)(v).
The definition of "Net Value of the Project" contemplates that any entitlement conferred by reference to clause 2.3 arises only in respect of "the net realised value of [the Dundas Land]", Less repayment of the aggregate of:
1. "the Bank Loan", defined in clause 1.1 as "the loan procured for the purposes of clause 2.1 (a)(iii)" by the second defendant; and
2. "the NWEC Loan", defined in clause 1.1 as "the loan made by [the plaintiff] for the purposes of clause 2.1(a)(i)", more particularly described in clause 2.1(a)(i).
The expression "Bank Loan" is not confined to a particular loan from a particular bank, but includes a "bank loan" from time to time arranged, taking colour from the description in clause 2.1(a)(iii) as "a Bank [advance for] construction finance for the Project, secured by a first registered mortgage over [the Dundas Land.]". The Land was purchased with the benefit of a loan secured by a mortgage in favour of the ANZ Bank. That bank's facility expired in October 2009. An alternative facility was approved by the National Australia Bank in July 2009. So far as they provided for construction finance, both facilities were a "Bank advance" within the meaning of clause 2.1(a)(iii).
Clause 2.3, in combination with the definition of "Net Value of the Project", contemplates that before either joint venturer obtains a 50% "entitlement", a Bank mortgage over the Dundas Land securing an advance for construction finance and the plaintiff's "loan" or "advance" (to quote both the definition of "NWEC Loan" in clause 1.1 and the descriptive elaboration found in clause 2.1(a)(i)) must be repaid. That is, the plaintiff must be repaid its $2 million advance before any shared entitlement arises.
The concept of "Project expenses" is the subject of differences between the parties in its application.
Insofar as a liability to provide an indemnity might arise under clause 17, it might be accommodated within the context of the concept of "Project expenses" by recognition that certain expenses must be borne by the joint-venturer required to indemnify its co-venturer. An expense which might otherwise properly be characterised as a "Project expense" might fall outside the concept of a "Project expense" because required to be borne by the indemnifier.
[9]
THE CONSTRUCTION CONTRACT (AND TENDER)
The proximity in time between the fourth defendant's written tender (4 April 2008) and execution of the construction contract (7 April 2008), with the intervention between those two times of execution (on 7 April 2008) of the Shareholders Deed, point towards a need to construe each document in the context of the other.
Execution of the construction contract may thus be seen, as Mr Kang accepted in discharge of his functions as the plaintiff's representative director on the Board of the first defendant, as acceptance of the fourth defendant's tender, giving rise (by reference to the tender letter) to an obligation on the part of the first defendant to pay to the fourth defendant "5% of contract sum payable at acceptance of tender".
On or about 7 April 2008 the first defendant paid the fourth defendant $193,600 ($176,000 plus GST) in discharge of that obligation. Although characterised by the parties as a "deposit", that characterisation is not to be found, in express terms, in the construction contract. The payment was not "non refundable". The payment was made on account of work to be done by the fourth defendant, or entitlements that might accrue to the fourth defendant, under or in performance of the construction contract. The fourth defendant is not entitled to retain, but must restore to the first defendant, any money beyond reasonable compensation for work done. To the extent that it does not do so, the second defendant has, on my reading of the Shareholders Deed, a liability under the Deed to indemnify the plaintiff against loss.
Reading the construction contract in light of the written tender also carries a consequence that, although the tender suggests that the fourth defendant was entitled to submit claims for progress payments, any such entitlement was limited to the value of work (including the provision of materials and design) carried out by the fourth defendant on the construction project.
As has been noted, an advance payment of "5% of contract sum" was paid to the fourth defendant on or about 7 April 2008. That payment stood to the credit of the first defendant until such time as the fourth defendant made, and substantiated, a claim for work done of greater value.
I am not presently satisfied that work undertaken by the fourth defendant, or expenses claimable by the fourth defendant under the construction contract, ever exceeded the amount of that first payment.
[10]
THE SECOND DEFENDANT'S MANAGEMENT OF THE PROJECT
However viewed, the joint venture project between the plaintiff and the second defendant must be taken to have failed. No substantial construction work was undertaken on the Dundas Land by or on behalf of the joint venturers before, they having fallen out, their joint venture vehicle (the first defendant) became deadlocked, and, by reason of that deadlock, ceased to carry on business. The plaintiff's investment in the project was locked in the Land until such time as the Land, with the consent of the parties, was sold under the supervision of the Court. The joint venture produced no return to the parties independently of a sale of the Land, undeveloped.
The second, third and fourth defendants explain delay in performance of the second and fourth defendants' respective obligations under the Shareholders Deed and the construction contract with a series of excuses: (a) the third defendant's discovery of an error in the Development Approval attaching to the Dundas Land, necessitating an application to Council for a revised Development Approval; (b) delays in obtaining a revised Development Approval, and subsequently a Construction Certificate, from Council; (c) the lapse of construction finance available from the ANZ Bank; a need to obtain alternative construction finance from the National Australia Bank, and difficulties encountered in drawing down loan funds; (d) increases in costs, giving rise to a perceived need to vary the construction contract; (e) the reluctance of the plaintiff to provide funds beyond its investments of $2.18 million; and (f) deadlock in management of the first defendant.
There is an element of truth in each of these excuses. Nevertheless, an underlying problem is a story of unjustified delay and lack of finance on the part of the second and fourth defendants. This does not require or permit an adjustment in favour of the plaintiff by reference to clause 17 of the Shareholders Deed except in two respects. First, the second defendant must indemnify the plaintiff (by an accounting allowance including an interest component) against loss arising from retention by the fourth defendant of "deposit" moneys beyond the value of work done by the fourth defendant. Secondly, the second defendant must indemnify the plaintiff (by an allowance, in the accounts, for the repayment of funds with interest) against loss arising from misapplications of project funds by or at the instigation of the third defendant through loans or other transactions.
Problems in advancing the Development were not assisted by the third defendant's diversion of project funds away from the first defendant (via the second defendant), in some instances by loans ultimately to himself for the purpose of serving his private interests. One example of this is the third defendant's misapplication of the plaintiff's $170,000 deposit money on or about 30 September 2008. Another is his misapplication on or about 11 September 2008 of $180,000 of a GST refund due to the first defendant. That this money was (to use a neutral expression) misapplied is admitted, accompanied by a denial of misappropriation, but with a concession that allowances are to be made in favour of the plaintiff.
Any such allowance made only on accounts being taken should, prima facie, include an allowance for interest calculated at court rates. The second defendant is liable, under the indemnity for which clause 17.1 of the Shareholders Deed provides, to indemnify the plaintiff against loss.
Contractually, the second defendant took upon itself responsibility for construction of the Development (through the fourth defendant operating under its supervision) within budgetary constraints implicit in clause 2.1 of the Shareholders Deed, and primary responsibility for funding of construction work beyond the plaintiff's contribution of an interest-free advance of $2 million.
The second defendant cannot, consistently with the scheme and provisions of the Shareholders Deed, impose on the plaintiff the costs of construction work not performed, interest on construction finance or the costs of borrowing for such work: clauses 2.1(a)(ii)-(v). However, interest on borrowings by the first defendant for general expenses referable to the development project are to be borne by the plaintiff and the second defendant: clauses 2.1(a)(v)-(vi).
[11]
DETERMINATION OF QUESTIONS IN DISPUTE ON ACCOUNTS BEING TAKEN
The parties' accounting procedures have borne fruit to the extent that they have identified particular disputed items required to be the subject of a determination by the Court in light of its determination of the proper construction of the Shareholders Deed and the construction contract.
The disputed items tendered for determination were initially placed before the Court in a schedule entitled "Main areas of dispute on the account" marked for identification "MFI PD1". In a revised form, that schedule is reproduced as annexure "D" to the closing written submissions of the second, third and fourth defendants marked for identification "MFI D20", subsequently modified in MFI 2/3D 23.
These schedules do not precisely conform with questions addressed by the parties' experts in a joint report (Exhibit PD 17) arising out of reports separately prepared by Mr Howman-Giles (for the plaintiff) and Ms Jones (for the second, third and fourth defendants) upon analysis of a detailed document entitled "Amended Account" (Exhibit PD 4), referred to by the parties as "the Further Amended Account".
The parties' experts gave oral evidence concurrently, and they were examined by counsel. Their examination was conducted, essentially, by reference to their joint report, incorporating as it does reference to the experts' earlier reports.
The experts engaged in a consultative process which began with Ms Jones' criticism of Mr Howman-Giles' analysis of the Further Amended Account, rather than with an independent analysis by her of the Further Amended Account.
The approach of the experts was to consider whether particular items of expenditure were a "project expense", treating the second and fourth defendants as representing a common interest against the plaintiff.
Mr Howman-Giles concluded that the second and fourth defendants were obliged to pay $671,994 to the first defendant before any sharing of loss on the project. Ms Jones concluded that they were obliged to pay only $19,161. The Court was invited to adjudicate their differences.
Subject to three qualifications, the most convenient means of addressing the questions debated by the experts is to do so by reference to the joint report, taking their oral evidence into account.
The first qualification is that the experts did not purport to determine legal questions relating to the proper construction of the Shareholders Deed and the construction contract. Their respective calculations may require adjustments to accommodate court rulings.
The second qualification is that the experts' evidence was prepared, and given, before the parties, in the course of the final hearing, agreed that the Dundas Land should be sold under the supervision of the Court, an agreement which finally put paid to any lingering doubt about whether the joint venture project had come to an end.
The third qualification is that the experts' evidence did not address issues (particularly issues about liability for holding costs pending a sale of the Dundas Land) which emerged in greater clarity after they gave their evidence.
The joint report deals with disputes between the experts under a series of headings, namely: (a) sub contractors costs, principally the 5% deposit paid to the fourth defendant; (b) interest; (c) bank charges; (d) legal fees; (e) stamp duty; (f) consultancy; (g) adjustments for costs not in the Further Amended Account; and (h) the Deposits Paid adjustment.
The primary issue concerning "sub contractors costs" is whether amounts paid to the fourth defendant under or by reference to the construction contract were properly payable. This, in turn, turns largely upon whether the fourth defendant was entitled to an upfront "deposit" on entry into the construction contract. A secondary question is whether, if the deposit was payable to the fourth defendant, whether the fourth defendant was entitled to retain all of it in circumstances in which very little construction work was ever performed.
On my construction of the parties' contractual arrangements, the upfront "5% deposit" paid to the fourth defendant on 7 April 2008 was payable, reading the fourth defendant's tender letter with the construction contract as signed by the parties. To that extent, and only to that extent, I do not accept Mr Howman-Giles' conclusion that the second and fourth defendants are liable to bring $228,396 to account. However, as I have held, the fourth defendant (for whom the second defendant may, for practical purposes, be regarded as its surety) can only retain so much of the money paid to it as represents a reasonable remuneration for work done. What that amount is, I am unable to determine without further assistance from counsel.
Clause 2.1(a)(iv) of the Shareholders Deed required the second defendant to "bear", inter alia, "all interest payable in respect of the Bank Loan" obtained for construction finance, although clause 2.1(a)(v) contemplated, inter alia, that expenses other than those relating to "construction finance", including "valuation fees" and "borrowing costs" (which I take to include interest), would be borne by plaintiff and the second defendant. Each category of expense is a "Project expense" within the meaning of the definition of "Net Value of the Project" clause 1.1 of the Deed to the extent that it can reasonably be attributed to an advance for construction finance. On this topic, I prefer the reasoning of Ms Jones (in paragraph 37 on page 13 of the joint report) save that she makes an allowance for "interest cost" extending to 30 September 2013 whereas, in my assessment, an allowance should be made only up to the end of April 2012. After the parties' falling out the second defendant resisted the plaintiff's contention that their joint venture project was at an end. Liability for ongoing expenses could have been eliminated by a timely sale of the Dundas Land.
Legal fees of $14,324 are to be treated as "project expenses" to the extent they represent costs relating to ANZ financing, but not to the extent they relate to court proceedings involving the second defendant rather than the first defendant. Any other component is de minimus.
In my opinion, National Australia Bank mortgage duty (stamp duty) costs of $16,530 are to be characterised as a "project expense". The duty falls within the concepts of "stamp duty" and "borrowing costs" identified in clause 2.1(a)(v) of the Shareholders Deed as elaborations of the concept of "expenses of the Project".
Likewise, I accept Ms Jones' opinion that "consultancy costs" associated with the ANZ finance facility are to be treated as "project expenses".
At this stage of the proceedings, I do not propose to deal with any other items referred to in the joint report without further assistance from counsel. As presently advised, it seems to me that I have dealt with the main questions in dispute, although I do not exclude the possibility that there are other questions that may need to be dealt with after the parties have had an opportunity to review their respective positions in the light of these reasons for judgment.
The second defendant's claim to an allowance for holding costs (bank fees, interest on borrowings, council rates and land tax) it may have borne in the first instance after the first defendant ceased to carry on business suffers from the impediment that the Dundas Land was retained, until sold under the supervision of the Court, upon the insistence of the second defendant that, notwithstanding the first defendant's cessation of business, the joint venture project should be treated as if ongoing. In my opinion, upon an application of clause 17.1 of the Shareholders Deed, those costs should be laid to the account of the second defendant, in whose perceived interests they were incurred.
In expressing that opinion, I note that the parties' retention of the Dundas Land might, in a sense, have enured to the benefit of the plaintiff no less than the second defendant to the extent that the land appreciated in value. However, the parties have not adduced evidence, beyond evidence of the prices at which the the Land was bought and sold, that might allow inferences to be drawn about whether (and, if so, to what extent) the incurring of particular costs contributed to a capital gain. Against that, the language of clause 17.1 is broader than merely a "loss" incurred. The indemnity given by the second defendant in this instance extended to "cost, interest, charges and expenses of any kind whatsoever" suffered or incurred "by virtue of any breach [or] default" of an obligation or duty arising under the Deed. In my opinion, the second defendant's insistence that the Land be retained, rather than clause 2.3 of the Deed being engaged with a sale of the land, sufficiently falls within the concept of such a breach in my opinion.
[12]
OVERVIEW
The ultimate financial outcome of these proceedings requires the parties to give further attention to their "accounts" in light of the Court's determination of questions about the proper construction and operation of the Shareholders Deed and the construction contract.
Leaving aside vexed questions about the costs of the proceedings, I anticipate that the rights and obligations of each party will be able to be accommodated within the parameters of the net proceeds of sale of the Dundas Land.
In summary, the plaintiff is entitled, as a priority, to recover its capital ($2.18 million) plus interest at court rates for the time it was deprived of its money. The second defendant will be entitled to a reasonable allowance for bank charges, stamp duty and interest associated with the period before the joint venture's abandonment, although it is not entitled to burden the plaintiff with amounts paid to the fourth defendant for work not done.
[13]
CONCLUSION
I propose to allow the parties an opportunity to make submissions about the future course of the proceedings if they cannot, in light of these reasons for judgment, resolve their differences.
Submissions have been made about costs, but I propose to refrain from making any dispositive or costs orders at this stage. I note, however, that the plaintiff contends that the second, third and fourth defendants should pay its costs, and they contend that the costs of all parties should be paid out of the proceed of sale of the Dundas Land (if there is a surplus sufficient to bear them) or be borne by the parties themselves.
[14]
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Decision last updated: 27 February 2019