Saykan & Anor v Elhan & Anor [2006] VSCA 230

For the Respondents in 8134 of 2002 and the Appellants in 8291 of 2002

1 These are appeals from judgements given on 26 March 2004 in two proceedings which were heard together in the Commercial and Equity Division. In the first proceeding ("the contract proceeding"), the appellants sought orders to give effect to an agreement made on 2 August 2002 for the respondents to withdraw from involvement in Unique Doors Pty Ltd ("Unique Doors") and for the second respondent Elbek Investments Pty Ltd ("Elbek") to sell its shares in Unique Doors to the appellants. The judge held that the agreement had been rescinded by another agreement made on 30 September 2002 and consequently refused the relief which was sought.

2 In the second proceeding ("the oppression proceeding"), the respondents alleged that the appellants had conducted the affairs of Unique Doors in a manner that was unfair to the respondents and oppressive to Elbek as a shareholder of Unique Doors, and they sought orders that the appellants purchase Elbek's shares in the company and for regulating the conduct of the company or alternatively that the company be wound up. The judge held that the appellants had conducted the affairs of the company in a manner that was unfair to the respondents and oppressive to Elbek, and his Honour ordered pursuant to s.233 of the Corporations Act 2001 that the appellants should pay Elbek the fair value of its shares as at 30 June 2002.

3 The appellants appeal against the whole of both judgments on a number of grounds. In the contract proceeding appeal they seek a declaration that the respondents repudiated the agreement made on 2 August 2002 and an order that the respondents pay the appellants nominal damages and costs. In the oppression proceeding appeal they seek orders to set aside the orders made by the judge and in lieu thereof that the respondents' claim be dismissed.

4 One may wonder what is thought to be the utility of these appeals. In substance, the appellants are content to retain Elbek's shares in Unique Doors, and they do not dispute that they were liable to pay at least $220,000 for them. Furthermore, although the fair value of the shares remains to be determined, the appellants suggest that any difference between the $220,000 already paid and the fair value still to be determined is unlikely to be more than marginal. If that be so, the only tangible benefit to the appellants of success in the appeals would be in terms of the costs below. Yet, in the scheme of things, that does not seem probable. The appellants are business people and experienced litigators. They are unlikely to risk the costs of an appeal for no more than a chance of recovering some part of the costs of the trial. Perhaps the explanation is that there may be a larger difference between the $220,000 already paid and the fair value still to be determined than the appellants would allow.

Contract proceeding - the judge's findings

5 Turning first to the contract proceeding appeal, the judge found that the appellants and respondents had once been good friends, who had together established Unique Doors in or about December 1999, and had together operated the company successfully until in or about June 2002. But they had then fallen out for a variety of personal reasons and, led by the first appellant, had procured the appointment of an administrator to the company as a device to force the respondents out of the company. Once having appointed the administrator, however, the appellants very soon realised that the administration was liable to destroy all of the value of the company and with it the worth of their shareholding. So, upon more mature reflection, they entered into an agreement with the respondents on 2 August 2002 that Elbek sell its shares and other entitlements in Unique Doors to the appellants for a total of $220,000. That led to orders being made on 6 August 2002 for the termination of the administration.

6 The first respondent then had second thoughts about selling out and he conveyed to the appellants that he wished to buy them out instead. Not surprisingly, perhaps, that led to more dissension. But after some more to and fro, the parties resolved that they would wait for the return of the first respondent's father, Bekir, from an overseas trip to help them find a solution. And, true to their expectations, when Bekir returned on 30 September 2002, he conducted a form of mediation between the parties which managed to resolve the impasse.

7 The judge found that the mediation resulted in an agreement for the respondents to buy out the appellants for a total of $660,000 with payment to be made as soon as reasonably possible consistent with the need for the first respondent to raise finance necessary to complete the purchase.

8 The judge also found that there was no suggestion of a "fall-back resolution" in that the first appellant had repudiated any notion of return to the 2 August 2002 agreement by saying that she did not want to purchase the business and would rather lock the doors of the company and sell the assets.

9 The judge expressly rejected evidence given by the second appellant that the purpose of the agreement of 30 September 2002 was to give the first respondent only a limited time in which to come up with the finance to buy out the appellants and that, if he were not able to do so within that time, that the agreement of 2 August 2002 would still apply. As his Honour put it:

"I also reject evidence of Nebahat that the purpose of the agreement on 30 September 2002 was to give Anthony a chance to buy her shares and, failing that, that the agreement of 2 August 2002 would apply. I accept Bekir's evidence that that agreement was not mentioned at the meeting on 30 September 2002. There was no suggestion of a fall back resolution. I accept Bekir's evidence that Nebahat said that she would not want to purchase the business and would rather lock the doors of the company and sell the assets."

10 On that basis the judge rejected the appellants' claim to enforce the agreement of 2 August 2002 and gave judgment for the respondents.

Contract proceeding - the appellants' contentions

11 The appellants no longer dispute that the agreement of 2 August 2002 came to an end by no later than 30 September 2002. Consequently, they no longer dispute that they had to fail in their claim for specific performance of that agreement. They say now, however, that the judge should have found that they brought the agreement of 2 August 2002 to an end by accepting the respondents' repudiation of the agreement, either before entry into the agreement of 30 September 2002, or alternatively by entry into the agreement of 30 September 2002, and on that basis they contend that they are entitled to judgment for breach of the agreement and for nominal damages or alternatively damages to be assessed after fair value has been established.

12 In my view that contention is not persuasive. True it is that the respondents repudiated the agreement of 2 August 2002 but the judge found that the appellants did not accept the repudiation. Instead they kept the agreement alive until 30 September 2002 and then agreed to replace their rights and obligations under the agreement of 2 August 2002 with the rights and obligations constituted of their new agreement. As his Honour put it:

"I find that at the meeting on 30 September 2002 the shareholders present together concluded an agreement whereby Anthony was to purchase the shares of Nebahat for $440,000 and of Selfet for $220,000. It was known that Anthony would have to raise the necessary funds. The purchase price was payable as soon as possible or, it would be implied, within a reasonable time in the circumstances. The agreement is inconsistent with, and cannot stand with, the 2 August 2002 agreement signed by Anthony. That agreement had been repudiated by him, but Nebahat and Selahattin had neither enforced nor rescinded it, and the parties had awaited the return from overseas of Bekir to adjudicate a resolution of the stalemate that existed between them. The adjudication resulted in the agreement made on 30 September as that which the shareholders would move forward on. Regarded objectively, the actions of the shareholders must be held to have the effect that the earlier agreement and any rights thereunder was terminated and that they moved forward on the later agreement. See CGM Investment Pty Ltd v. Chelliah.[1] The subsequent actions of Nebahat and Selahattin are consistent with this conclusion. This being the case, the claim of Nebahat and Selahattin in proceeding 8134 of 2002 which is based upon the earlier agreement must fail. I should add that this conclusion concerns only the heads of agreement signed by Anthony and Elbek."

13 With respect, the judge was right. The appellants did not before 30 September 2002 evince an intention to bring the agreement of 2 August 2002 to an end. To the contrary, they maintained that the agreement of 2 August 2002 was still on foot and that they would wait for the return of Bekir to work out what they would do about the respondents' refusal to comply with it. Nor did they by entry into the agreement of 30 September 2002 evince an intention to accept the respondents' repudiation of the agreement of 2 August 2002. To the contrary, the clear implication of the events of 30 September 2002, as found, is that they gave up such if any rights as they may have had under the agreement of 2 August 2002 in return for the new agreement. There is no indication that they impliedly reserved to themselves the right to hold the respondents accountable for repudiation of the agreement of 2 August 2002. Evidently, the parties saw the agreement of 30 September 2002 as a new start which washed away the rights and obligations of the past and as the judge put it the basis on which they would move forward.

14 It follows in my view that the appellants were not entitled to judgment for breach of the agreement of 2 August 2002 and that the judge was right to refuse it.

Oppression proceeding - the judge's findings

15 Turning then to the oppression proceeding appeal, s.232 of the Corporations Act provides that:

"232. Grounds for Court order

The Court may make an order under section 233 if:

(a) the conduct of a company's affairs; or

(b) an actual or proposed act or omission by or on behalf of a company; or

(c) a resolution, or a proposed resolution, of members or a class of members of a company;

is either:

(d) contrary to the interests of the members as a whole; or

(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity."

16 As has been seen, the judge concluded that the appellants' conduct of the affairs of Unique Doors was oppressive to, unfairly prejudicial to, or unfairly discriminatory against, the second respondent in its capacity as a member of Unique Doors. As is explained in the reasons for judgment, his Honour based that conclusion on the following considerations:

1. The appellants' initial decision of 26 July 2002 to close the business, which was commercially illogical. As the judge put it:

"...It was otherwise illogical and contrary to all interests to close down a successful business and to do so without at least seeking an interim arrangement for the conduct of the business and appointing an agent for the sale of the business as a going concern. Selahattin went along with his wife. Selfet had not choice but to agree."

...no reasonable director would have decided to close the business down... The decision was bred and made in anger and spite, peremptorily and without any proper consideration of the commercial alternative."

2. The fact that the appointment of an administrator was a contrivance undertaken for the purpose of meeting the first appellant's object that she be rid of the respondents from the company. As the judge put it:

"... was contrived for the purpose of dealing with the problem of Anthony, and should not have been undertaken. The other directors continued in their peremptory manner, forcing their view upon Anthony. There had still been no reflection, and no considered advice as to the commercial alternatives ... available to the directors for their consideration including advice as to the relative wisdom involved in the alternative."

3. The fact that, after the agreement of 30 September 2002, there was ongoing hostility towards Anthony and difficulties were placed in his path, notwithstanding the agreement and his interest in knowing the financial position of the business. As the judge observed:

"...once Anthony had agreed to purchase the remaining shares, he was subjected to further unfair conduct. Nebahat and Selfet staying away from the factory for a few days, the Ferdi Cokelek resignation and reinstatement, [a] contrived Designerform invoice, ...continued and worsening anger and spite directed to Anthony, ...pressure on Anthony to pay, ... making it difficult for him to know the state of the business when he needed to raise finance, and stopping his wage and access to the business.

Those actions, as his Honour found, were designed to undermine the first respondent's position and make it difficult for him to be able to complete the purchase.

4. The fact that the first appellant countermanded the first respondent's decision to promote one of the employees of the company to fill a position which had been occupied by Ferdi Cokelek after he resigned and procured Cokelek's return to work adding considerably to the level of stress and tension at the premises.

5. The fact that on 7 October 2002, Selfet advised the agents for the landlord of Unique Doors' premises, in effect that Unique Doors would not be renewing or entering into a new lease of the premises. The respondents were not advised of the intention to send that letter and it had been their wish to extend the lease. As the judge found, a significant if not the reason for the letter was that the appellants planned to move the business to other premises used by them.

6. The fact that on a date after 3 October 2002, the first appellant prepared an invoice for $259,170 which she back-dated to 3 October 2002 and processed as recording a claim received. It claimed from Unique Doors amounts for the use of vehicles, interest charges for a deposit on machinery and for a variety of services in one instance going back to May 1999. The judge found and it is not now disputed that the invoice did not represent a bona fide claim and that the amounts claimed were not owed. As the judge put it, the first appellant prepared and provided the invoice well appreciating that the amount claimed would constitute a significant embarrassment to the respondents in any attempt they made to raise funds to finance the share purchase.

7. The fact that on 28 October 2002 the first appellant had all locks and security codes of Unique Door's premises changed to prevent the first respondent entering. That meant that he could not enter after hours, and that was intended.

8. The fact that the payment of the first respondent's wage was terminated in October 2002.

9. The fact that on 21 November 2002 the first appellant caused Unique Doors to advance $20,000 by way of loan to the appellants' company, Designerform Pty Ltd. She did so on her own authority without reference to the respondents and knowing that litigation had been commenced.

Oppression proceeding - Appellants' contentions

17 The appellants contend that the judge erred in finding that the appellants' conduct came within any of paragraphs (a) to (c) of s.232 of the Corporations Act and they argue that the judge erred in finding that the appellants conduct was oppressive to, unfairly prejudicial to, or unfairly discriminatory against the second respondent within the meaning of s.232(e) of the Corporations Act. In the appellants' submission it was not open to conclude, or at least this court should not conclude that any of the matters mentioned constituted the conduct of Unique Doors Pty Ltd's affairs or an actual or proposed act or omission by or on behalf of Unique Doors Pty Ltd within the meaning of paragraphs (a) or (b) of s.232 of the Corporations Act.

18 In my view, however, the judge was right to find as he did. On the evidence, the closure of the business and the appointment of an administrator cannot have been anything but a device to force the respondents out of Unique Doors. As it seems to me there is no other reasonably possible explanation for such commercially improvident and destructive activity. It may also be added that the appointment of the administrator and the consequent likely destruction of the value of the company put very considerable pressure on the respondents to enter into the agreement of 2 August 2002 without a reasonable opportunity to consider the worth of its terms.

19 Like the judge, I also think it to be more likely than not that the countermanding of the first respondent's decision to appoint a replacement for Ferdi Cokelek was part of a campaign of ongoing hostility towards the first respondent, and the placing of difficulties in his path, notwithstanding the agreement of 30 September 2002 and his interest in knowing the financial position of the business. The timing is too acute to accept that it was otherwise. The agreement was made on 30 September 2002. At that time the first respondent was ill. He needed staff to maintain the operations of the company. Yet the very next day, Cokelek resigned and then, when the first respondent moved to overcome the problem in a fashion which seemed best to him, he had Cokelek thrust back on him very much against his wishes.

20 The same is true of the fact that a few days later, on 7 October 2002, the third appellant advised the agents for the landlord of Unique Doors' premises in substance that Unique Doors would not be renewing or entering into a new lease of the premises. As the judge said, there was no satisfactory explanation for taking that step other than to frustrate the respondents. The idea that there were concerns about remaining liable as guarantors was not convincing. And as the evidence showed, the effect of the notice was that the landlord's estate agents refused to deal with the first respondent when he later attempted to negotiate a new arrangement.

21 Counsel for the appellants contended that, whatever may have motivated the notice, it was without relevant legal effect. As he would have it, the option to renew the lease had in any event to be exercised by no later than 8 October 2002 and there would have had to be a new lease because the appellants would not have been prepared to guarantee the lease once the shares in the company had been sold to the respondents. On that basis he argued, the giving of the notice could not be seen as so unfair as to amount to oppression.

22 Despite the ingenuity of that argument, I do not find it persuasive. Allowing that the option had to be exercised by 8 October 2002, and that a new lease would in all probability have to be entered into, it remains that the notice was calculated to convey to the landlord's agents that the company was not interested in the premises or at least that there was good reason for the landlord to be concerned about the rationality and reliability of the company's management and the conduct of its affairs. In the real world, as I have no doubt the appellants would have known, such things are very likely to influence commercial landlords as to whether they will deal with an entity and if so on what terms.

23 The same is true, but only more so, of the fact that on a date after 3 October 2002, the first appellant prepared a false invoice for $259,170 which she back-dated to 3 October 2002 and processed as recording a claim received. In my view there can be no doubt that the first appellant prepared and provided the invoice well appreciating that the amount claimed would constitute a significant embarrassment to the respondents in any attempt they made to raise funds to finance the share purchase. And the evidence is that it did. As the first respondent put it in answer to a question asked in cross-examination:

"After that [3 October 2002] the situation started to change, you see, because then they came up with this invoice, $259,000 and I go, hang on, I can't - you know, I can't afford a million dollars or thereabouts, you see. And that's when I stopped - that's when I didn't decide to make any more inquires because it was an amount which was, which I couldn't afford."

24 Counsel for the appellants submitted that the issue of the invoice was in the nature of a joke - an exercise in "tit for tat" for an invoice for $6,000 for outstanding wages which the first respondent issued to the company - which was never taken seriously by the parties to the litigation. But that submission is also not persuasive. As the evidence just quoted shows, the respondents believed that the invoice may well have been legitimate and perceived that if so it fundamentally altered the financial position of the company which they had agreed to purchase. There was also uncontradicted evidence deposed to by Bekir in his affidavit of 10 March 2003 that Selahattin had telephoned him on 19 November 2002 and offered to sell the shares held by Nebahat to Anthony and Selfet Cokelek or Kerry Cokelek and that, if the offer were accepted, Designerform would not pursue the company for the debt of $259,170 which was alleged to be due to Designerform. In yet further uncontradicted evidence, deposed to by the first respondent in his affidavit of 29 November 2002, it will be seen that an offer on 28 November 2002 which was made by the appellants' solicitors six days after the proceedings were issued was "the first open offer made by the Defendants to sell their share in the Company which had not been conditional upon payment by me of their invoice for $259,170...". All things considered, therefore, the inference is clear that, at least until after the institution of proceedings, the appellants were contending that the invoice was legitimate and they were exploiting its existence to impose increased pressure on the respondents.

25 Finally, the fact that on 28 October 2002 the first appellant had all locks and security codes of Unique Door's premises changed to prevent the first respondent's entry was to my mind equally plainly intended to make it more difficult for the respondents and to oppress them. The fact that the first respondent may have had some access to the company during business hours is not to the point. He was not permitted to attend there during business hours when the first appellant was present, and it is clear from the correspondence that he was seeking access to books and records of the company that was not being provided. One asks rhetorically, what possible purpose could there be to exclude a director and principal shareholder of the company at a time when he was attempting to make arrangements required to complete the agreement of 30 September 2002 unless it were, as the judge found, to frustrate him and oppress him?

26 Counsel for the appellants argued in the alternative that, even allowing that the appellants may have engaged in conduct as found, it should be seen simply as the manifestation of bad blood and the spontaneous outpouring of emotion, as opposed to any campaign or orchestrated plan to take over the company and exclude the respondents. As he submitted, any other conclusion would fly in the face of the fact that at all relevant times the appellants remained ready to purchase the respondents' shares for $220,000.

27 In that connection counsel also placed considerable reliance upon a number of decisions in which it has been held that conduct did not amount to oppression because, at the time at which it was committed, the culprit was ready and willing to buy out the victim for fair value of the victim's holding. He instanced in particular the judgment of Hoffman, J. (as his Lordship then was) in Re a Company;[2] his Lordships' speech in O'Neill v. Phillips;[3] the judgment of Foster, J. in Tainsh v. Barber;[4] and the judgment of Young, J. in McWilliam v. L.J.R. McWilliam Estates Pty Ltd.[5] Counsel submitted that it emerged from those authorities that, if a claimant is complaining of conduct which would be unfairly prejudicial only if accompanied by a refusal on the part of the majority to buy his shares at fair price, and the articles provide a mechanism for determining such a price, he should not be entitled to relief for oppression until he has invoked that mechanism, and that that in substance if not in form was what had happened here.

28 In my opinion that submission breaks down at a number of levels. To begin with, the judge found as a fact that the activities of which complaint here is made were the result of a campaign to push the respondents out of the company, and, for the reasons which I have already given, I agree with that finding.

29 In the second place, the cases to which counsel referred are in point of fact a very long way from the facts of this case. In Re a Company, the complaint was about a rights issue made for legitimate purposes in which the claimant was free to participate but in which he did not have sufficient funds to participate. It is hardly surprising, therefore, that his claim was held to fail. In O'Neill v. Phillips the complaint was that the respondent had not honoured a profits-sharing arrangement which upon examination was found not to be legally binding. The case is authority for little more than the rather unremarkable proposition that ordinarily unfairness to a member of a company requires some breach of the terms on which he agreed that the affairs of the company should be conducted. Tainsh v. Barber was a case about a woman who had brought about a situation where her co-directors had no option but to terminate her employment, given that she was in breach of her obligations to give the company the means to produce its products and she was found to have had acted in a fashion which was unfairly prejudicial to the company by adopting that course. The case thus stands for the equally unremarkable proposition that in such circumstances an order for the purchase by the other co-directors of her shares was the appropriate relief. It may be noted in passing that that is the same relief as the judge accorded the respondents in this case. Finally, in McWilliam v. L.J.R. McWilliam Estates Pty Ltd, the dispute was about whether the board had acted oppressively to shareholders who were in need of cash by adopting a policy, in what the board bona fide conceived to be in the best interests of the company as a whole, of reinvesting profits in the means of production instead of paying out large dividends. At one level it is difficult to imagine a case more unlike that with which we are concerned. But the case is important for present purposes in one respect, in emphasising the point which counsel's submissions were inclined to gloss over, that there is a danger in dealing with incidents one by one rather than the cumulative effect of all the various pieces of nastiness. As Young, J. said:

"The whole matter is really a question of fact, and having looked at all the matters complained of..."[6]

30 In the third place, the judge found that, despite the agreement of 2 August 2002, after 30 September 2002, the appellants were not prepared to purchase the company. The first appellant told Bekir that she did not wish to purchase the respondents' shares and if they did not purchase the appellants' shares she would close down the company. It is true that the appellants' solicitors sent the open offer of 28 November 2002 to which reference has already been made. But as has been noted, that was six days after proceedings were instituted and it was on the eve of the matter coming on for hearing and, upon examination, it will be seen that the terms of the offer were such and allowed so little time for completion as be in themselves oppressive.

31 In the fourth place, and even if it were assumed against the odds that the appellants remained willing and able throughout to buy out the respondents for $220,000, it has not been established that that was fair value. The respondents contended at trial that it may be as much as $490,000 and while of course the agreements of 2 August 2002 and 30 September 2002 are some indication that it is a good deal less than that, they are plainly not determinative.

32 In the fifth place, it seems to me that there was within the appellants' submissions a hint of the limited conceptions of oppression and the requirement that oppressive conduct to be directed to a victim in the capacity of member of the company which used to apply under earlier versions of the oppressive conduct legislation. If so, it was misplaced. As was explained in Aqua-Max Pty Ltd v. M.T. Associates Pty Ltd,[7] s.260 of the Corporations Law (the precursor of s.234 of the Corporations Act) represents the results of a series of amendments made to precursors, which included s.186 of the Companies Act 1961 and s.320 of the Companies Code, that have had the effect of broadening the operation of the section to include conduct which is unfairly prejudicial to or unfairly discriminatory against a member or members rather than merely oppressive, and to include discrimination against a member other than as a member. Thus, as it has been said, the section as it is now exposes to legitimate complaint any conduct of the company which is unjustly detrimental to any member of the company whatever form it takes and whether it adversely affects all members alike or discriminates against some only.[8]

33 Finally, and allowing that the whole matter is really a question of fact, and having looked at all the matters complained of in conjunction with the other activities identified by the judge, I agree with his Honour that the appellants left a trail of conduct driven by Nebahat's anger with Anthony, which Selfet came to support with vigour having no option otherwise than to support her and Selahattin, which was designed to rid the business of Anthony. Accordingly, I too am of the view that the appellants' conduct of the affairs of Unique Doors was on any objective analysis[9] plainly unfair and discriminatory against the second respondent as a member of the company.

34 In their written submissions, the appellants argued in the alternative that, even if the judge were right to find that the appellants conducted the affairs of Unique Doors in a fashion which was oppressive to the second respondent, and thus right to order that the appellants purchase the second respondent's shares in the company, the judge should have found that the appropriate consideration was the sum of $220,000 specified in the Agreement of 2 August 2002.

35 I do not accept that contention either. The judge held that it was appropriate that the appellants pay the fair value of the second respondent's shares as at 30 June 2002. In my view that was correct. As already noted, the agreement of 2 August 2002 was some evidence of the fair value of the shares as at that time, but it was not determinative. Failing agreement, the fair value had to be determined and that is what his Honour ordered to be done.

Conclusion

36 For the reasons which I have given, I would dismiss both appeals.

37 I agree with the reasons given by the learned presiding judge that the appeal should be dismissed.

39 The orders of the court are that in each proceeding the appeal will be dismissed with costs.

(Discussion ensued re costs.)

[1] [2003] FCA 79; (2002) 196 A.L.R. 548.

[2] (1986) 2 BCC 99,191 Ch.D. esp. at 99,194.

[3] [1999] UKHL 24; [1999] 1 W.L.R. 1092 at 1098 esp. at 1107.

[4] (1997) 23 ACSR 158 esp. at 177.

[5] (1990) 20 N.S.W.L.R. 703 esp at 711 -721.

[6] Ibid at 712.

[7] [2001] VSCA 104; (2001) 3 V.R. 473 at 483[61].

[8] Thomas v. H.W. Thomas Ltd [1984] 1 N.Z.L.R. 686 at 693, which is cited in Aqua-Max Pty Ltd v. M.T. Associates Pty Ltd, above .

[9] See Wayde v. New South Wales Rugby League Limited [1985] HCA 68; (1985) 180 C.L.R. 459 at 427-3, to which the judge referred; Aqua-Max Pty Ltd v. MT Associates Pty Ltd [2001] VSCA 104; (2001) 3 V.R. 473 at 482[61].