Plaintiffs v Defendants

2 Huntingdale is the joint venture vehicle for an investment project to develop land at 1221-1249 Centre Road, Oakleigh South. The land forms a substantial site, with frontage to Huntingdale Road, Centre Road and Talbot Avenue in Oakleigh South. It is 18 kilometres from the Melbourne CBD. The site was originally a sand quarry, and over its life has been used for the disposal of municipal waste. The site has potential for residential development upon completion of remediation work that is to be carried out under the supervision of the EPA auditor among others.

3 The joint venture partners are Sino and the first defendant, Mainland Projects (Oakleigh) Pty Ltd, a company controlled by the second defendant, Daniel Schwartz.

4 There is a lengthy joint venture agreement dated 3 November 2010 under which Mainland was appointed development manager. By that agreement, Sino was to hold 50.1% of the issued shares in Huntingdale, and Mainland 49.9%.

5 The joint venture partners have fallen out. On 21 February 2012 the Board of Huntingdale, controlled by Sino, terminated Mainland's position as development manager. It is unnecessary to go into the detail of the dispute for the purpose of this proceeding. It is sufficient to say that there was and is a complete breakdown of trust and confidence. That is accepted by all parties. The only question is whether Mainland should be wound up or an order made that Mainland purchase the shares of Sino in Huntingdale for $9 million or some other amount.

6 The dispute first came before the court on application by Sino on 9 March 2012 for an injunction to restrain the defendants from entering the property, taking any step as development manager or purporting to bind Huntingdale under any agreement or incurring any liability. Undertakings were given that permitted some work to continue, and on 16 March 2012 a trial date was fixed and directions given to prepare the case for an expedited hearing.

7 Had the trial proceeded on all issues, it was estimated to take five days. A central issue was whether it was open to the board to terminate Mainland's agreement. A resolution of that issue would have required the court to explore allegations and counter-allegations that explain the mutual loss of trust and confidence. The parties were directed to mediate. A mediation was arranged and conducted at short notice by an Associate Judge. While the mediation did not result in the resolution of all issues, it did have a very beneficial outcome. The parties accepted that the jurisdiction of the court to make an order under s 233 of the Act was enlivened. All that was required was for the court to decide between two possible orders - winding up or compulsory acquisition.

8 Sino submitted that the only practical course was for Huntingdale to be wound up by a liquidator who would almost certainly sell the land. The defendants wish to pursue the project and take over Sino's interest in Huntingdale. They have made an open offer, set out in more detail below, to pay Sino $9 million for its share in 90 days. Sino rejected the proposal, although its ground of objection was not so much about price as the futility of such an order, because the defendants would be unable to meet the obligation. Thus, Sino argued, the inevitable winding up would only be delayed.

9 The history of the relationship between Sino and the defendants did much to explain Sino's scepticism about the worth of the defendants' offer. Under the joint venture agreement, each party was to contribute $7.5 million. In the case of Sino, it was to be in cash. The agreement recognised that $1.75 million had already been paid by Mainland. Mr Schwartz said this represented pre-venture expenditure incurred by him. The joint venture agreement made provision for Mainland to borrow the balance of its contribution by using the property as security. There was an issue between the parties as to whether Mainland had exceeded its authority by borrowing more than was authorised and by allowing Huntingdale to be bound as principal debtor. Thus, Huntingdale and the defendants are already burdened by a debt for more than $6 million to support the acquisition by Mainland of its shares.

10 Under a loan agreement dated 24 November 2010, Paradise Resources Pty Ltd loaned Huntingdale $6,007,265.54 secured by the land. Mr Schwartz, Mainland and another company controlled by Mr Schwartz, guaranteed repayment. An instalment of principal, in the sum of $3 million, was due on 2 December 2010. The balance was due on 9 January 2011. The instalment was not paid; nor was the balance on a January 2011. Mr Schwartz has not been able to refinance the loan and consequently Huntingdale, as borrower, is in default and obliged to pay a higher rate of interest.

11 It is no doubt true that some of the defendants' apparent difficulty in refinancing the loan from Paradise can be explained by the breakdown in the relationship between the parties. Since around mid-2011, the defendants have been attempting to find a new partner to acquire the interest of Sino. Another difficulty the defendants confront is best summarised in the words of Mr Schwartz:[1]

The Property has contamination issues (as a disused sand quarry and landfill site) that were the subject of significant geo-technical, engineering and environmental reports. Remediation Properties on the EPA Register are seen as high risk sites with significant downside for a lender.

12 The defendants are currently negotiating with the National Australia Bank Ltd to replace the Paradise loan with a new facility. That requires the cooperation of Sino because of the need to mortgage the land to the bank. Mr Schwartz said that Sino has thus far refused to give permission to allow Huntingdale to grant a new mortgage.

13 To support their application to the NAB, the defendants have obtained a valuation of the project. The valuation was prepared by a NAB panel valuer, Knight Frank Newmark Global, and is dated 20 February 2012. Of relevance to this proceeding is the 'as is' valuation of $23.9 million. That valuation was made using a discounted hypothetical development cash flow analyse based on an estimated realisation value of the development on completion.

14 Sino accepts that value for the purpose of this proceeding, but has made it clear that it does not wish to acquire Mainland's shares. The parties agree that if an acquisition order is to be made, Mainland should be required to acquire Sino's interest at a price derived from the agreed value of the project for mortgage purposes of $23.9 million.

15 In the absence of evidence of a valuation of the shares, as opposed to the project land, great care must be taken when imposing upon a party an obligation to acquire another's shares at a particular price. In Campbell v Backoffice Investments Pty Ltd[2] Gummow, Hayne, Heydon and Kiefel JJ acknowledged the scope of the power, but declined to say how the power to fix a price for a compulsory sale should be exercised. They said,

The chief form of relief sought at trial was an order for compulsory purchase of Backoffice's share in Healthy Water for an amount not less than the sum paid for it. Although s 233(1)(d) gives the court power to make an order for the purchase of shares by a member, the Corporations Act is silent about the terms on which such a sale may be ordered. In particular, the Corporations Act does not identify the basis upon which the price for the shares is to be fixed if an order for compulsory purchase is made. Under earlier forms of the oppression provisions of companies legislation, orders were made for the compulsory sale of shares by one member to another at prices to be fixed according to various criteria. In some cases174 the price has been fixed at the value the shares would have had at the commencement of the proceedings but for the effect of the oppressive conduct. In other cases175 a date other than the date of commencement of the proceedings has been fixed. Again, there is no reason to give the present oppression provisions some narrower construction. In particular, the power given to the court by s 233(1)(d) should not be hedged about by implied limitations.176 It is not necessary, however, to decide in this case how the power to fix a price for compulsory sale of Backoffice's share in Healthy Water could or should have been exercised. This was not a case in which there should have been an order for compulsory sale. [3]

16 The time at which a price ought to be fixed is not in issue. If a sale is to be ordered, the parties accept that the price should be determined by reference to the valuation. After all, the project has not advanced very far, save for remediation works and preparation for an application for town planning approval.

17 Nor is this a case where the court is called upon to frame an order for the compulsory purchase of shares in order to compensate for a defendant's unreasonable and improper conduct. The parties wish to avoid the attribution of blame in favour of a separation of their respective interests. Accordingly, those cases in which the court seeks to do justice to injured shareholders by an order that the oppressor purchase their shares at a fair price, have only limited application. Nevertheless, there are some general principles that assist even when the choice is between winding up and an order for acquisition. In Re Hollen Australia Pty Ltd[4] Robson J reviewed the authorities. He said,

1. In Rankine v Rankine,[5] Thomas J of the Supreme Court of Queensland identified the compensatory aspect of an order for the compulsory purchase of the applicant's shares. He said:

In granting a remedy in favour of an oppressed shareholder under CL s 260(2)(e) or 260(2)(f) by ordering the compulsory purchase of the applicant's shares at a stated price, the court is in effect awarding compensation for the respondents' breach of duty. The nature of the duty is both subtle and complex, and not capable of exhaustive definition, but the most useful expressions of it are collected in McPherson, The Law of Company Liquidation, 3rd ed, Donovan, pp 143-44. One such expression describes it as a duty of probity and fair dealing [Scottish Co-Operative Wholesale Society Ltd v Meyer[6]]. The compensatory nature of the remedy is recognised by Lord Denning in Meyer[7]...., in _Re a Company[8]_and in Coombs v Dynasty,[9] .... The ultimate finding of the price that should be paid cannot be made until the nature and effect of the oppression has been identified and its effect quantified or allowed for. By contrast a valuation of shares on the basis of the value of the company as a going concern, or by reference to its underlying assets, as has been directed in this case, is a conventional valuation exercise without adjustments for the oppression factors.[10]

1. In Re Bodaibo Pty Ltd,[11] Vincent J cited with approval Scottish Co-Operative Wholesale Society v Meyer[12] and said:

The court is clearly endowed with a wide discretion in order that justice can be achieved in the variety of circumstances encompassed by the statute. As Lord Denning pointed out, in some situations an element of compensation is integral to the determination of a fair price. Certainly, in the ascertainment of a fair price, consideration must be given to the selection of the most appropriate method of valuation in the particular circumstances of the matter before the court, and to the possible necessity that some adjustment should be made to the figure arrived at in order to offset the effects of the oppressive behaviour. In other words, as far as reasonably practicable, the court must endeavour to achieve equity between the parties and to ensure that an oppressor does not profit from the wrongful behaviour in which that party engaged to the detriment of those against whom it has so acted.[13]

1. The English Court of Appeal has recognised that relief for oppression is of a compensatory nature: Re Cumana Ltd[14] and Re a Company.[15]
2. The impecuniosity of the oppressor should not be a relevant factor in ordering the purchase by him of the oppressed party's shares. In Re a Company[16] Vinelott J considered that if the company were wound up the respondent oppressor (who was seeking such an order on the ground that he could not afford to purchase the shares of the oppressed) would be in a position to appropriate substantially the whole of the business of the company for himself, since he had always dealt with the company's suppliers and customers the senior members of staff would follow him and there would be no one to outbid him if he made an offer to the liquidator for the right to use the company's name and logo. Justice Vinelott said:

The result, it seems to me, would be far more unfair to Mr Lewis [the oppressed] than a compulsory order for the acquisition of the shares by Mr Bolton [the Oppressor]. It would be unfair that he should be deprived of a share in the "going concern" value of a company in the formation of which he participated and to the establishment of a business of which he made a significant if not indispensable contribution.[17]

1. Accordingly, the following appear to be the relevant principles:

(1) Generally, the purpose of granting a remedy under s 232 is to bring an end to the oppression and to fairly compensate the person oppressed.

(2) Typically, the oppression can be ended and the oppressee properly compensated by the oppressor being ordered to acquire the oppressee's shares at a fair value.

(3) Generally, the order should seek to put the company back on the rails and avoid the causes of conflict and oppression.

(4) Winding up is a remedy of last resort.

(5) Winding up a profitable and operating company is an extreme step and requires a strong case to be make.

(6) In choosing a remedy under s 233 the Court is exercising a discretion.

(7) In exercising that discretion, the Court should keep in mind the above principles.

(8) Bearing in mind those principles, circumstances may dictate that the most appropriate remedy to bring an end to oppression and to fairly compensate the person oppressed is a winding up.

18 These principles have more relevance in a context where there is a business undertaking by the company that is worthy of protection and which may be injured or even destroyed on winding up. A winding up order may threaten jobs, valuable goodwill may be lost and productive assets sacrificed in a 'fire sale'. To those features may be added proven oppression, and an apparent victim who is entitled to compensation. In such circumstances an order that an oppressor compensate the victim through an order for compulsory acquisition may be just and equitable; and an order to wind up the company may properly be regarded as a last resort. But that is not this case.

19 The present case has none of the characteristics mentioned above. The parties have conducted this case on the basis that there is no apparent oppressor or victim. More important is the nature of the business undertaking of Huntingdale. The company is a joint venture vehicle. The development project is a single parcel of land, although comprising six titles. The development is in its infancy. Remediation work is not yet complete. The value created by preparation for development approvals will not be lost if a winding up order is made.

20 This is not a business that the court should strive to preserve. A winding up oder will resolve the dispute. There are practical impediments to alternative approaches, such as a compulsory acquisition order. A determination of a fair price at which the shares might be purchased is not straightforward. There is no independent valuation of the shares. The value of the shares will not necessarily bear a direct relationship to the value of the land. Further, the valuation of the land made by Knight Frank does not necessarily equate with what might be achieved on a sale of the land 'in one line' by a liquidator.

21 The difficulty with the 'back of the envelope' analysis proposed by counsel for Sino, which valued Sino's share at $10.5 million, and the offer made by the defendants, is that the existing and contingent liabilities of the company were unknown. There was evidence about some of the liabilities. The defendants may be more familiar with the liabilities than Sino, if only by reason of Mainland's position as project manager. On the other hand, if a liquidator of Huntingdale were to sell the land there is no guarantee that the net proceeds would yield $10.5 million to Sino Oakleigh, or even $9 million as offered by the defendants.

22 The rationale advanced by the defendants for its offer of $9 million is that by accepting the proposal Sino is repaid its initial investment of $7.5 million and interest at the rate of 12% pa. The defendants open offer was in the following terms:

Taking into consideration all those matters what we propose by way of a further open offer is as follows:

1. A liquidator be appointed to wind up the company.

1. The order for the appointment of the liquidator be stayed for a period of 90 days.
2. Mainland purchase Sino shares for the sum of $9 million payable with 90 days.
3. In the event that the purchase by Mainland is not completed then Sino is granted a priority in the winding up for payment of the sum of $225,000.

The priority payment represents 12% interest on Sino's investment of $7.5 million over a period of 90 days which is the entirety of any delay brought about by reason of the order requiring Mainland to purchase Sino's shares. The interest rate of 12% is the same rate of interest that would be have been earned by Sino if its $7.5 million investment had have been turned into a $9 million return within 90 days of today's date.

Sino does not contend that the price is manifestly unreasonable.

23 At one point the defendants advanced other options. They suggested that if a liquidator were to be appointed, directions might be given to facilitate an opportunity for them to acquire the shares following a valuation. The difficulty with that proposal is that it would undoubtedly delay finality from Sino's point of view. Sino is anxious for certainty and finality in the separation, preferring the immediate appointment of a liquidator. The basis of Sino's contention was that it considered the defendants offer to be worthless, and any corresponding order for compulsory acquisition pointless. Sino relied on the defendants demonstrated inability to raise funds and secure any concrete proposal for a buy out.

24 The affidavits filed in the proceeding by the parties were taken as read, and only Mr Schwartz was cross-examined. The only factual issue was the likelihood that the defendants offer, if accepted or imposed, would be made good within a reasonable time frame. The defendants relied upon an indication by the NAB of its willingness to provide financial accommodation and various proposals involving Mirvac Ltd, and, to a lesser extent, VicUrban to lend credibility to their offer.

25 The defendants tendered correspondence with a manager at the NAB concerning a facility of $12,325,000 to replace the contentious funding provided by Paradise, and for planning and remediation costs. That finance would not, however, be sufficient to pay out Sino even if it were permissible to use such funds for that purpose. Thus the defendants proposed to secure the necessary funds to buy Sino's shareholding from Mirvac or some other third party investor.

26 Mr Schwartz said that the bank had required a number of steps to be completed, including a valuation, prior to considering the defendants' application for finance. He expressed a high degree of confidence that the bank would provide the financial accommodation sought, although the bank had not yet issued a letter of offer. There was not even a draft terms sheet. In any event, the finance would only be sufficient to discharge the Paradise loan and pay for some planning and remediation costs over the next two years.

27 The defendants had a separate plan for the purchase of Sino's shares in Huntingdale. Attempts had been made to have Sino participate in negotiations with Mirvac. Mr Schwartz said that Sino would not respond to proposals. The discussions with Mirvac extended back to mid-2011.

28 Mirvac had not made an offer, but had indicated a willingness to negotiate. Mr Schwartz said that he spoke to a representative of Mirvac the previous day and anticipated a letter from them in the next few days. It is not clear what he meant by that unless it was an indicative offer of some kind. According to Mr Schwartz, Mirvac indicated that they would require a six week period for due diligence and board approval. The proposal put to Mirvac involved the acquisition of all of Sino's shares and 50% of Mainland's shares, so that Mirvac would hold a 75% interest in the project. By a letter dated 17 June 2011, Mirvac wrote that it would be willing to conduct due diligence on the project, with a view to acquiring at least 75% of the site. The letter suggested that Mirvac may seek to acquire Sino's share in the project for $9 to $10 million.

29 Mr Schwartz was cross-examined about the difficulty in finding replacement finance for the Paradise loan. He was asked why he had not been able to discharge the Paradise loan on the due date. In part he blamed 'an extremely difficult project'. It is only since receiving a valuation that some limited bank funding now seems possible. Mr Schwartz was asked about his capacity to raise funds through other of his entities. He conceded that his entities did not have the capacity to discharge the Paradise loan without securing funds from a third party lender. That would necessitate a discharge of the existing mortgage and a new mortgage of the property, which in turn would require the cooperation of Sino.

30 Mr Schwartz was asked about an attempt to sell the land. In August 2011, he engaged National Sterling Real Estate Pty Ltd to sell the land for $23 million, subject to board approval. At the time he executed the sale authority on behalf of Huntingdale, Mr Schwartz had not informed the board or obtained its approval. The agent had expressed an opinion, noted in the sale authority, that the expected price range was between $21 and 23 million.

31 The sale authority incorporated a 'notice of commission sharing' in which George Stathopoulos was identified as a person with whom commission would be shared. According to Mr Schwartz, Mr Stathopoulos had introduced Thalassa Property Division Pty Ltd who, on 27 September 2011, executed heads of agreement for the purchase of the land at a price of $21,300,000. Mr Stathopoulos had signed the heads of agreement on behalf of Thalassa as its sole director. The heads of agreement were not signed on behalf of Huntingdale. Mr Schwartz said that he submitted the heads of agreement to the board, unsigned. He said that he did not receive any response from Sino. The contract did not proceed. Mr Schwartz said that he was unwilling to proceed at that price.

32 Mr Schwartz sought to explain the difficulty in obtaining replacement finance by reference to the nature of the project. But that difficulty must have been apparent at the time the Paradise loan was negotiated. Mr Schwartz also explained the difficulty in negotiations with Mirvac, or some other interested party, by reference to the unwillingness of Sino to sell.

33 The evidence of Mr Schwartz about his attempts to raise funds to discharge the Paradise loan, coupled with his concession that he was dependent upon borrowed funds to replace the loan and for the development of the project over the next two years, indicates a lack of capital within his group and a dependency on third parties to achieve his desired outcomes.

34 The circumstances surrounding the defendants' procuring the Paradise loan, their inability to meet the terms of the loan, the purported sale to Thalassa and the uncertainty surrounding negotiations to introduce a new third party investor, all go to justify Sino's scepticism about the defendants prospects of closing a deal at the offer price within a reasonable time. Mr Schwartz said that if a satisfactory offer from Mirvac was not forthcoming he had many other people to approach. The evidence revealed a high degree of uncertainty about the defendants' prospects of attracting a new investor at the right price and within a reasonable time.

35 The reservations of a potential investor to negotiate with one partner in a joint venture, where the other is an unwilling seller, may be overcome by an order of the court that the unwilling partner sell its interest at a fixed price. But in the end, I am not satisfied of the defendants' capacity to close a deal that will result in a payment of $9 million to Sino, even if that is a proper price. Further, I have very real reservations about imposing on Sino the price offered by the defendants, even in the absence of serious objection by Sino, because of the absence of information about the liabilities of Huntingdale. I accept that the uncertainty may very well favour Sino if an order were to be made for purchase of its shares at $9 million. Nevertheless, to order that Sino sell at the offer price, in the absence of any valuation would, in my view, involve the exercise of the power to order a sale at a price without a proper foundation.

36 An order to wind up Huntingdale is the most appropriate remedy. A liquidator may sell the land and distribute capital back to the parties after all liabilities of Huntingdale have been discharged. A sale of the land provides an opportunity for the defendants and Mirvac, if they are so inclined, to purchase the land from Huntingdale. Such a remedy will give certainty to all parties while not undermining the value of the project for a purchaser of the land.

37 I propose to order that Huntingdale be wound up under s 233 of the Corporations Act.

[2] [2009] HCA 25; (2009) 238 CLR 304.

[4] [2009] VSC 95.

[5] (1995) 18 ACSR 725.

[6] [1959] AC 324 per Lord Keith at 364.

[8] No 002612 of 1984 (1986) 2 BCC 99, 495

[9] 13 ACLC 925 at 918.

[10] (1995) 18 ACSR 725 at 730-731.

[11] (1992) 6 ACSR 509.

[12] [1959] AC 324.

[13] (1992) 6 ACSR 509 at 513.

[14] [1986] BCLC 430.

[15] (1986) 2 BCC 99,453.