BETWEEN : SHAMSALLAH HOLDINGS PTY LTD (ACN 008 974 865)

CBD REFRIGERATION AND AIRCONDITIONING SERVICES PTY LTD (ACN 009 459 063)

Corporations - Oppression - Passive investors - Whether directors' remuneration and restriction of dividends oppressive - Turns on own facts

Alba Nominees Pty Ltd v Cecil Bros Pty Ltd (1996) ACLC 1773

Dynasty Pty Ltd & Ors v Coombs [1995] FCA 1447; (1995) 13 ACLC 1290

Fedorovitch & Anor v St Aubins Pty Ltd & Ors (1999) 17 ACLC 1558

Knightswood Nominees Ltd v Sherwin Pastoral Co Ltd (1989) 15 ACLR 151

McWilliam & Anor v LJR McWilliam Estates Pty Ltd & Ors (1990) 8 ACLC 1097

O'Neill v Phillips [1999] UKHL 24; (1999) 1 WLR 1092

Re Back 2 Bay Pty Ltd (1994) 12 ACLC 253

Re Dernacourt Investments Pty Ltd (1990) 8 ACLC 900

Re London School of Electronics Ltd (1985) 3 WLR 474

Swane v Swane Bros Pty Ltd (1992) 10 ACLC 904

Wayde & Anor v New South Wales Rugby League Ltd [1985] HCA 68; (1985) 3 ACLC 799

1 OWEN J : This is an application under the so-called oppression remedy (then s 246AA but now s 232 and s 233) in Pt 2F.1 of the Corporations Law. The applicants are shareholders of the first respondent ("CBD"). They seek orders that the third respondent ("Darian"), which is the other shareholder in CBD, purchase their shares. The applicants do not seek the winding up of CBD although that option is open to the Court under s 246AA(2).

2 CBD was incorporated on 14 June 1990. It has an issued share capital of $60,042 comprising 60,000 ordinary shares of $1.00 fully paid and there are six shares each of $1.00 fully paid in each of classes "A" to "G". The "A" to "G" classes of shares having varying rights, mainly in relation to dividends. The shares in some of the classes carry no voting rights. However, for the purposes of determining control of CBD, in the sense of exercising voting power at a shareholders' meeting, it is not necessary to go beyond the ordinary shares.

3 Peter Healey and John Allan, respectively, control Shamsallah Holdings Pty Ltd ("Shamsallah") and De Chelor Nominees Pty Ltd ("De Chelor"), the applicants. Healey and Allan along with two other persons, Dawn Grundy and Luke O'Malley, had interests in an airconditioning installation business called Envar Engineering and Contractors Pty Ltd ("Envar"). They decided to expand into the airconditioning servicing business. In February 1990 they placed an advertisement in the newspaper seeking an airconditioning and refrigeration mechanic to "establish and manage a new business". Ian Wooten, one of the second respondents, was a technical engineer with an airconditioning company. He answered the advertisement and on 1 April 1990 commenced employment with Envar pending the formation of a company to carry on the new business.

4 When CBD was established the ordinary shares were held as follows:

Shamsallah - 16,800 (28 per cent)

De Chelor - 16,800 (28 per cent)

A company controlled by Grundy - 4,200 (7 per cent)

A company controlled by O'Malley - 4,200 (7 per cent)

Ian Wooten - 18,000 (30 per cent)

5 It appears that Shamsallah, De Chelor, the Grundy company and the O'Malley company, and for that matter Darian, held or hold their shares in CBD in their capacities as trustees of family trusts. The fact that the shareholdings reside ultimately in trusts is not material for the resolution of this dispute and for simplicity I will refer only to the companies. Ian Wooten was appointed Managing Director. Healey, Allan, Grundy and O'Malley were appointed directors. Grundy was the secretary of CBD. The interests of Healey, Allan, Grundy and O'Malley are sometimes referred to as "the Envar interests".

6 In April 1992 Ian Wooten transferred his shares in CBD to Darian. In September 1991 Darryl Wooten, who is the brother of Ian Wooten, joined CBD. Prior to joining CBD he had worked in the refrigeration and airconditioning industries for over 20 years, mainly in the sectors of industrial and marine refrigeration. In June 1992 Darian (on behalf of Darryl Wooten) acquired 18,000 ordinary shares in CBD by way of transfers of part of the interests held by Shamsallah, De Chelor, the Grundy company and the O'Malley company. On 12 August 1992 Darryl Wooten was appointed a director of CBD.

7 During 1994, Grundy and O'Malley ceased their association with CBD. They resigned their offices and agreed to transfer their respective shareholdings to the Healey and Allan interests. This may have been in contravention of the rights of pre-emption in the articles of association (which are in relatively standard form). However, I am not sure that much now turns on it because the share transfers may not have been finalised. In the end, Ian and Darryl Wooten came to learn of the transaction and in September 1994 other arrangements were made. From that time the ordinary shares in CBD have been held as follows:

Darian (for Ian Wooten) - 20,000 (33.33 per cent)

Darian (for Darryl Wooten) - 20,000 (33.33 per cent)

Shamsallah - 10,000 (16.66 per cent)

De Chelor - 10,000 (16.66 per cent)

8 The shares in classes "A" to "G" are held in the same proportions.

9 Shamsallah and De Chelor each hold 30 per cent of the shares in a company called Enrac Pty Ltd, which is involved in the airconditioning servicing business. By at least 1997, Enrac was in competition with CBD. As early as April 1997 discussions commenced for the possible sale of the applicants' interests in CBD to the respondents. On 15 September 1997 Healey and Allan resigned as directors of CBD. On 17 November 1997 Ian Wooten replaced Healey as secretary of CBD. Since then the business has continued under the sole management control of Ian and Darryl Wooten. However, the relationship between the applicants and the second respondents has continued to deteriorate. No agreement was reached about the purchase of the shares. On 29 June 1999 the applicants commenced these proceedings.

10 During the interlocutory stages, I referred to Mr Wayne Clarke (an independent accountant) acting as a referee under s 51 of the Supreme Court Act 1935, the valuation of CBD and, accordingly, the value of the shares. The valuation was carried out by Clarke on varying scenarios. His report is dated 28 February 2000.

The Oppression Remedy - The Basis of the Applicants' Case

11 By virtue of s 1471 of the Corporate Law Economic Reform Program Act 1999, where an application is commenced under s 246AA but not completed before the coming into operation of that legislation, s 246AA continues to apply in respect of that application. That is the situation here.

12 Section 246AA(1) provides, relevantly, that a member who believes that the affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members, may apply to the Court for relief. It will be convenient for me, for the most part, to refer to the concepts of oppression, unfair prejudice and unfair discrimination simply as "oppression". Under s 246AA(2), if the applicant makes out the case of oppression the Court can, among other things, make an order for the purchase of the shares of any member by other members.

13 It is appropriate, at this stage to say a little about the way in which the statutory regime has been interpreted and applied. In Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC 136 at 145 - 46 the Court said:

"The applicant must show either that the affairs of the company or an act or omission of the company was or would be oppressive to, or unfairly prejudicial to, or unfairly discriminatory against members, or contrary to the interests of members of the company as a whole. Whether the word 'oppression' connotes more than unfairness it would seem to include unfairness where the unfairness results from abuse of majority power or control (see, for example, [Scottish Co-operative Wholesale Ltd v] Meyer [(1959) AC 324] at 342; Re Jermyn Street Turkish Baths [1971] 1 WLR 1042 at 1060 per Buckley LJ; Re Tivoli Freeholds Ltd [1972] VicRp 51; [1972] VR 445 at 452 per Menhennitt J; and De Terri Co Pty Ltd (1988) 12 ACLR 457). It is now enough to show that the relevant conduct was 'unfairly prejudicial': Re Dalkeith Investments Pty Ltd (1985) 9 ACLR 247 at 253 per McPherson J; and see Parker v NRMA (1989) 1 ACSR 227. The key word is 'unfairly': Wayde [v New South Wales Rugby League Ltd [1985] HCA 68; (1985) 59 ALJR 798] and see Re Spargos Mining NL (1990) 3 ACSR 1 at 43 per Murray J; and Morgan v 45 Flers Avenue Pty Ltd (1987) 10 ACLR 692.

In our opinion the application of the test involves a question of fairness. It is for the court to decide whether in balancing the interests of the company as a whole against minority interests the directors have acted so as to unfairly prejudice the interests of the minority. The court decides this 'according to ordinary standards of reasonableness and fair dealing'. Whether the conduct is unfairly discriminatory will be judged on standards which reasonable directors with such skills as directors should have, acting bona fide, would think to be fair."

14 In applying s 246AA the courts must respect the traditional roles of the directors and shareholders in relation to management of the company. Accordingly, the powers should not be lightly exercised, especially when a lack of probity or want of good faith is not established: Thomas v HW Thomas Ltd (1984) 2 ACLC 610 at 620; New South Wales Rugby League Ltd v Wayde (1985) 1 NSWLR 86 at 102.

15 The concept that the courts must have respect for business and commercial decision making processes was also the subject of comment by Young J in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413; (1998) 28 ACSR 688 at 739. In the same passage his Honour stressed the importance of having regard to the circumstances as a whole and of assessing the cumulative effect of the impugned conduct:

"Although, there may well be cases where each single allegation in itself could not be regarded as oppressive, I must assess the totality of the allegations to see if there is oppression. The authorities show that this type of case has to be judged on all the circumstances; see eg Re Horwood & Co Ltd (1921) 21 SR (NSW) 750, affirmed by the High Court as Menard v Horwood & Co Ltd (1922) 31 CLR 32. Although that was a "just and equitable" winding up case, the principle is the same under [s 246AA] as appears from Re Ashby Bergh & Company Ltd (1988) 4 NZCLC 96-194 at p 64,141 and Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452, 474.

It is important when assessing corporate activities to see if there has been oppression that judges do not remain in their ivory tower. The business world is replete with individuals who quite legitimately are seeking the best for themselves. For mutual enrichment, they may enter into contractual regimes or corporate structures. They may also take on fiduciary obligations. However, subject to these obligations, they can act as they like in their own interests."

16 The applicants' contention that the affairs of CBD are being conducted in an oppressive manner is advanced in three main areas. First, it is said that the second respondents have paid themselves excessive remuneration. Secondly, that they have restricted the payment of dividends and retained cash resources that are surplus to the operating needs of the company. Finally, they have prevented the applicants from having access to information to which they are entitled.

17 Before turning to the three main areas I should say something of a more general nature about the progress of CBD. All of the evidence was adduced on affidavit. There are conflicts within the affidavits. There was no cross-examination of the deponents. Accordingly, resolution of the conflicts of evidence has been difficult.

18 As a general statement, CBD has been commercially successful. From a purely financial viewpoint, the following table (which has been complied from the annual financial statements) demonstrates the progress that the company has made.

19 This demonstrates that gross revenues and profits before tax increased steadily from 1991 to 1996. There was a slight downturn in 1997. Gross revenues increased again in 1998 and dipped slightly in 1999. There was a significant decrease in profits before tax in 1998 but the position was reversed in 1999.

20 Clarke employed future maintainable profits methodology for his valuation of the shares in CBD. He made certain adjustments to the profit and loss statements in doing so. I will return to the valuation issue later.

21 In his affidavit of 27 August 1999 Ian Wooten says that he paid $18,000 for the 18,000 ordinary shares that were allotted to him. He says that the money was used to purchase a vehicle and as initial working capital. He also says that Darryl Wooten paid the previous holders a total of $20,000 for the 18,000 ordinary shares that he acquired in June 1992. That evidence is not controverted. The initial allotment of 42,000 ordinary shares to the Envar interests was in consideration of them making certain contributions in kind to the value of $42,000. Following correspondence between the second respondents and CBD's accountants in 1994 it was discovered that there had been some miscalculations resulting in a balance still owing $4,474. This was paid in June 1994. Although there may be some residual arguments about the valuation of the assets contributed by the Envar interests at the outset I find that the various parties have made the contributions outlined in this paragraph.

22 When the arrangements were made for Grundy and O'Malley to withdraw from CBD, Darian agreed to pay, and did pay, $10,005 for the shares that it was acquiring.

23 The respondents say that initially CBD was established with the object of servicing airconditioning plant and equipment in high rise buildings. The applicants say that the target market was commercial buildings generally in Perth. I am not sure that much turns on the difference. After 1990 the demand for those services dropped significantly and CBD expanded and diversified its operations towards the design, construction, repair and servicing of industrial and maritime refrigeration plant and industrial airconditioning systems. That appears to be within the area of expertise that had been developed by the second respondents.

24 In their affidavits the respondents say that CBD is basically a "2 man, hands on operation" and that Healey and Allan played little part in the business. Healey denies that assertion and says that Allan was in regular, often weekly, contact with the second respondents regarding the day to day running of the business. This is a conflict that is difficult to resolve on the affidavits. However, there is considerably more detail in the Wooten affidavits (particularly par 13 and par 14 of the 15 November 1999 affidavit). It is noteworthy that Healey concedes that most of the day to day contact was between Allan and the second respondents. From that perspective it is a little surprising that in his affidavit of 7 June 2000 Allan merely confirmed the contents of Healey's affidavit and did not condescend to further detail on this issue. In his affidavit of 1 September 1999 Healey asserts that "Envar was directly responsible for the early success and continuing profitability of CBD". Ian Wooten denies this in his affidavit of 15 November 1999. Again, he gives significantly more detail than does Healey in support of this aspect of the case. Until the end of the 1997 financial year (being approximately when this dispute arose) the revenues derived by CBD from its subcontracts with Envar represented $379,622 out of total revenues of $7,217,266. This is about 5 per cent.

25 CBD has employees (between 6 and 8) and subcontractors. However, the uncontroverted evidence of the second respondents is that they work between 60 and 65 hours per week and have taken only three weeks annual leave. All of this suggests to me (and I find) that Envar's contribution to the progress of the company has not been particularly significant and that CBD's financial development has been due mainly to the efforts of the second respondents.

26 Ian Wooten and CBD entered into a written agreement by which the latter agreed to employ the former for a term of five years from 14 June 1990 at $45,000 (reviewable annually in line with the Consumer Price Index) plus a 5 per cent superannuation contribution and fully maintained motor vehicle. When he joined the company, it was agreed that Darryl Wooten would enjoy the same terms and conditions. It seems that the salaries were not reviewed annually until after the end of the 1993/94 financial year.

27 In his affidavit sworn 27 August 1999, Ian Wooten says that after reviewing the operating results for 1993/94 he and Darryl Wooten decided to increase their salaries to $65,000 and their superannuation contributions to $26,125 (which is approximately 40 per cent) and that these salaries were claimed and paid from 1 July 1995 to 8 February 1999. He also says: "Healey and Allan were ... fully aware of the increases in our salaries and the superannuation contributions. The salary increases were disclosed to all shareholders in CBD's financial statements for the 1994/95 financial year and were approved and adopted by the shareholders". He also says that they were disclosed in the financial statements for 1994/95, 1995/96 and 1997/98 and that Healey and Allan never complained until the issue of the share purchase arose. On 8 February 1999 the second respondents decided to increase their salaries to $71,500, their superannuation contributions to $29,125 and, in addition, to take a director's fee of $1,600 per annum.

28 Healey asserts that he did raise the issue of salary levels. He says that in a meeting in or about December 1995 he discussed with the second respondents the salaries received by them. He said words to the effect that their salary packages were "as much as the company would want to bear as an operating expense" and asked what portion of it was in lieu of dividends. He also asked for an analysis of the salary package on at least one other occasion. In relation to the December 1995 meeting, his evidence in this respect is supported by the affidavit of Rinze Brandsma, who was present at the time. Ian Wooten says that he has no recollection of any such discussion about salaries, although there is no express denial that such a meeting was held. In view of the existence of independent supporting evidence, I prefer the evidence of Healey in this respect.

29 Consistent with that finding, I am not sure that the disclosure of the salary levels in the financial statements does much to advance the cause of the respondents. I presume that they are contending that as the applicants were, or must be taken to have been, aware of the salary levels because of their inclusion in the financial statements, it cannot amount to oppressive conduct. I am not sure that this is correct. There is no clear disclosure of the levels of salaries payable to the second respondents until the presentation of the audited accounts for 1997. By that time, Healey and Allan were no longer directors and the parties were in dispute. Any lack of action by the applicants has to be seen in that light.

30 In any event, it seems to me that the real issue is whether the level of salaries is justifiable. If they are then it can hardly be said that there is an element of unfairness. If they are not, and it constitutes what might, in the vernacular, be regarded as "ripping off" the company and therefore the other shareholders, then it is a different matter. It is true that directors should make a bona fide attempt to estimate proper remuneration and that there is no evidence that the second respondents did so before voting themselves the several increases from which they have benefited: see Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 11 ACLC 568 at 571-72; Roberts v Walter Developments Pty Ltd (1997) 15 ACLC 882 at 898 - 99. The mere fact that no independent investigation was carried out at the time when the increases were made is a factor to be taken into account. But the ultimate question remains: are the salary levels so high as to amount to oppressive conduct?

31 Certainly, Clarke seems to have been of the view that a package in excess of that being received up to 1997 would have been too high. The applicants adduced expert evidence from Mr Robin Smith, the director of a specialist human resources consulting firm. He has proffered an opinion on the basis of his estimate that the salary package was $120,000. He said that would be high, even for a single manager, let alone for two persons occupying a managerial role. However, it is apparent that Smith did not receive any information from the second respondents as to the affairs of this company and the work that they actually carried out in relation to the business. It is not clear to what extent he was influenced by the fact that there were two people occupying the managerial role. He mentions it at least twice in his affidavit. I do not think it is a factor because there was a clear agreement from the very outset of Darryl Wooten's employment by CBD that he would be entitled to the same salary and benefits as his brother: see par 26.1 of Ian Wooten's affidavit.

32 The respondents adduced evidence from Ms Annette Black, the managing director of a national human resources consultancy. She was in possession of details of the actual package and of the duties and responsibilities that the second respondents carried out in the management of the business. In her affidavit she says:

"8. Following the preparation of the position descriptions I compared [the second respondents'] salary packages to those of other directors of small companies in Australia generally having similar roles and responsibilities using the AIM National Survey (Small Companies) as at 31 August 1998 ('the AIM Survey') published by AIM NSW Limited.

9. The AIM Survey considers companies of CBD's structure and performance generating low turnover and employing small numbers of staff. In my experience as a human resources consultant I believe that the AIM Survey provides an effective, though not exhaustive, guide to remuneration practices in Australia. To my knowledge it is used extensively in the human resources industry in the evaluation of remuneration packages for employees and officers of small companies."

33 The median figure for a company with a turnover up to $2,000,000 within the construction and engineering industry group was $117,464. Counsel for the applicants criticised the evidence because there was no disclosure of particular industry knowledge. It was no more than a statistical approach based on broad information of general application. He also criticised the small selection of comparable companies within the various categories disclosed in the AIM Survey.

34 I acknowledge that the evidence is far from perfect. But the evidence of Smith has similar failings. At least the Black opinion is based on an actual job description. I have to do the best I can with the information that I have been given. I am not called upon to conduct the type of exercise that a Salaries and Allowances Tribunal would have to do in order to met the appropriate level of remuneration. I have to decide whether the impugned conduct is oppressive in the relevant sense. The applicants bear the onus in that respect. The Black material provides some evidence of a statistical nature to support the contention that the salary packages, while perhaps on the high side, are not entirely out of kilter with "the going rate". I am inclined to accept that evidence.

35 There are other issues of a more general nature. I have already said that I accept that the second respondents have been substantially responsible for the progress and development of the business. It is a notorious fact that executives of large companies in Australia, indeed in the Western economies generally, are paid astonishing salaries to create shareholder wealth. The irony is that the salaries are payable whether or not the envisaged increment to shareholder wealth is actually attained. I am not suggesting that salary levels of a large conglomerate should translate to the situation in which CBD finds itself. However, it is another notorious fact that small business is difficult and so often the success of an enterprise is dependent on the experience and willingness to work of the proprietors. All of this suggests to me that salary levels ought not to be divorced from the actual circumstances of the individual business. I do not think that, taken alone and in the circumstances of this case, for the managers of the company, who have been materially responsible for the development of the business, to take salaries that are high but not excessively so, is oppressive. I am not suggesting that "hands on" directors can take, as salaries, whatever they like or whatever they think the company can bear and thus ignore the interests of persons whose interests are represented solely by invested capital. As will appear in the next section of these reasons, salary levels are relevant when the overall financial situation of the company is being considered.

36 I should also add that there was some criticism by the applicants of the motor vehicles provided for the second respondents by CBD. I do not think there is anything in these criticisms. The terms of employment agreed to by CBD require it to provide a fully maintained vehicle for each of Ian and Darryl Wooten. The former had been using one of CBD's Ford Panel Vans and the latter a Mitsubishi Express Van. In February 1996 the second respondents (by then the sole directors of CBD) agreed that CBD should acquire a 1986 Mercedes Benz Sedan for Darryl Wooten's private and business use. It cost $37,200 and now has a value of $16,000. In September 1996 they agreed that CBD should purchase a Toyota Landcruiser for business and private use by Ian Wooten. It cost $55,000 and has a current value of $35,000. The provision of the vehicles is a benefit to the second respondents which needs to be taken into account when assessing what they are deriving from the business as a whole. However, it is within the terms of their respective engagements and nothing has been put forward to demonstrate that it is a breach of any duty they may owe to the company or that it is otherwise excessive or unfair.

37 In my view, the first of the major areas relied on the applicants has not been made out.

38 In some respects the problem of distribution of profits is connected with, and in some ways the reverse of, the salaries question.

39 At a meeting of the then directors of CBD held on 12 August 1992 it was resolved that, commencing in the 1992/93 financial year, dividends be paid at the rate of 50 per cent of the net profits after tax. It was also resolved that the dividends would be paid annually by 31 December next following the end of the financial year in which the profit was derived. At a meeting on 8 June 1994 the dividend policy was confirmed.

40 It is little difficult to tell from the evidentiary material exactly what dividends have been paid. Despite the fact that par 25 of Healey's affidavit of 29 June 1999 says that he is annexing financial statements for the years from 30 June 1991 to 30 June 1998, the earliest statement is that for 30 June 1995. The notes of the meeting held on 8 June 1994 suggest that dividends for previous years may not have been paid in full at the rate of 50 per cent of the after tax profits. However, it seems to be common ground that the dividend policy formulated at 12 August 1992 has, generally speaking, been adhered to.

41 Healey and Allan resigned as directors in September 1997. In par 39.2 of his affidavit of 27 August 1999 Ian Wooten says that dividends of $35,871 were distributed after the end of the 1996/97 year and that the directors recommended a dividend of $10,418 for the 1997/98 year. Both of these were in line with the policy. The latter has not been paid because the applicants did not attend the general meetings at which the dividend was to be considered. In his answering affidavit, Healey does not comment on that paragraph. Accordingly, it appears to be common ground. Note 14 in the financial statements for 1998/99 suggests that dividends of $38, 872 have been paid in the 1997/98 year but that there is no provision for a dividend in the 1998/99 year.

42 The reasons why the applicants did not attend the general meeting are detailed in a myriad of correspondence which passed between the parties or their solicitors once the dispute had erupted. I have read the correspondence. I do not regard anything in it as being particularly significant in terms of the overall resolution of this dispute.

43 The question is not whether the second respondents have ignored a dividend policy that was initially set by the directors but whether, in the light of changing circumstances, their failure to review the policy is oppressive. Put in a slightly different way, the respondents are prepared to adhere to the dividend policy formulated in 1992 and the question is whether it is oppressive to the "passive investors" to restrict them to returns of that nature.

44 Another table will demonstrate the movements in the relevant financial data, extracted from the annual financial statements. It should be read with the previous table in which is set out annual turnover and pre-tax profit figures.

45 In relation to cash assets, there is a discrepancy between the cash figure in the body of the balance sheet as at 30 June 1997 and the reconciliation in the accompanying notes 7 and 17(a). For the year ending 30 June 1999 there is a discrepancy between the cash figure in the balance sheet and that referred to in par 5 of Ian Wooten's affidavit of 15 November 1999 ($280,007). The explanation seems to be that the lower figure allows for an off-set of the bank overdraft. In each instance, I have used the figures in the body of the balance sheet. It must also be recognised that not all of the cash is available for distribution. It is prudent business practice for an entity to retain cash for working capital and similar purposes.

46 In the period from 1 July 1994 to 30 June 1999 annual trading revenues averaged $1,624,636. As at 30 June 1994 (and therefore 1 July 1994) retained earnings were $97,069. They have increased steadily since then and as at 30 June 1999 they stand at $369,561. Throughout this period the company has held significant cash reserves. When measured against cash reserves, the bank overdraft (at least as at 30 June in each year) has not been significant.

47 The explanation given by Ian Wooten (par 44) for the cash retentions is so that the company will always have sufficient working capital available to tender for and undertake increasingly large projects without having to borrow funds. During 1997 CBD entered into a significant project for Kailis Brothers. The contract price was $400,000 and the company entered into commitments with subcontractors and suppliers to the value of about $350,000. It seems that CBD was able to fund these commitments from its own cash resources without putting in jeopardy its cash position. As at 30 June 1998 it still had cash reserves of $250,363. It has also been earning relatively substantial interest income from these cash holdings. This also suggests that the availability of cash in significant amounts is constant.

48 In his valuation (par 6.1(i) and par 6.3) Clarke proffered the opinion that CBD had cash holdings that were surplus to operating requirements. He has prepared his valuation on the basis that cash available for distribution is that which is surplus to working capital requirements. Clarke's valuation proceeds on the basis of his opinion that as at 30 June 1999 surplus cash (understood in that sense) was $250,000.

49 Counsel for the applicants submitted that the fact that a dividend policy may have been appropriate at the inception of a business does not mean that it will continue to be so once the business has matured. It should be reviewed in the light of an improved, and improving cash position.

50 Counsel for the respondents submitted that this was very much a matter of business and commercial policy for the directors. The court should not substitute its own decision and assessment for that of the directors.

51 There have been cases in which dividend policy has been held to justify the intervention of the court: Re Jeffery (Mens Store) Pty Ltd (1984) 2 ACLC 421. On the other hand, in Morgan v 45 Flers Avenue Pty Ltd (1987) 5 ACLC 222 Young J said, at 234:

"As has been said time and time again, the mere fact that dividends may not be as high as they could be is not of itself an indication that there is unfairness in the decision of the directors who limit the dividends. There may very well be good business reasons why dividends are not high."

52 This is a manifestation of the principle that the impugned conduct is not to be assessed in a vacuum. It is necessary to look at the history of the company, the extent of its financial needs and the reasonable expectations of its members, among other factors: Re D G Brims & Sons Pty Ltd (1995) 16 ACSR 559 at 588.

53 In my view, the relevant history of the company is not limited to the adoption of a dividend policy in August 1992. It has to be seen against the background to the creation of the business. In one sense, CBD was created because of its synergies with the existing Envar interests. As I have already said, I accept that it is the second respondents, rather than those associated with Envar, who have been materially responsible for the success of the business. However, it is not as if the Envar interests were, from inception, passive investors. They were involved at board level and, as I have already said, had a special interest in developing the company in a way that would be compatible with their other business interests. For reasons that have already been canvassed, the position changed. They relinquished their board positions and with them certain rights and responsibilities in relation to the business activities of the company. They were, and are, left with initial contributions, in cash and kind, amounting to $42,000, upon which the company was founded.

54 In relation to borrowings, it is, as I have already said, prudent business practice to retain cash for working capital and not to rely too heavily on borrowings. However, it is not as if this company has an aversion to borrowings in any guise. In each of the years since 1994/95, as at the balance date the company has had a bank overdraft.

55 I now return to the question of salaries. It seems apparent that the second respondents have reviewed their salary packages from time to time and have voted themselves increases that are not insignificant. I have already said that I do not regard the salary increases as amounting to oppressive conduct and I do not resile from that conclusion. However, it can be assumed that in deciding whether or not to increase their remuneration the second respondents took into account the profitability and changing financial circumstances of the business. In this respect the question can be asked: why did they not also review the dividend policy? The applicants represent a sizeable minority within the corporate structure. It is the only set of interests within that corporate structure other than the interests of the second respondents themselves. It should have been apparent to the second respondents that any decision they took in relation to salaries would have a negative impact on the applicants. If the dividend policy were to be followed there would be less money in the after-tax profit pool. They should also have been aware that the payment of dividends was the only mechanism by which the applicants could benefit from the activities of the company.

56 In my view, the second respondents, as directors of CBD, should have reviewed the dividend policy in the light of changing, and improving circumstances to see it remained as relevant at it was seen to have been in 1992. Not to do so when, at the same time, they were taking steps to ensure that their own interests were properly recognised and that they were adequately remunerated for their business activities on behalf of the company is, it seems to me, oppressive.

57 I find that the second of the main areas advanced on behalf of the applicants has been made out.

58 I can deal with this aspect of the applicants' case rather more briefly. I accept that the disinclination of the second respondents to provide much, if any, information to the applicants arose because of their assessment that Envar was in direct competition with CBD. The disclosure of sensitive commercial information could be to the disadvantage of CBD.

59 The financial statements for the year ending 30 June 1998 were not provided to the applicants until November 1998. In December 1998 the applicants sought information concerning things such as the reduction of the cash position, and the sudden reduction in profitability (from 10.7 per cent in 1997 to 2.8 per cent in 1998). The financial statements themselves do not contain as much information as they did in previous years.

60 One of the major issues raised by the applicants is the apparent movement of CBD's funds away from the banking institution with which the company had customarily banked. It seems to me that where and how the banking arrangements of a company are conducted are matters that fall squarely within the powers of the directors and I do not think it could found a case for oppression.

61 There was a substantial request for information in a letter dated 18 March 1999 from Healey and Allan to the second respondents. I accept as reasonable, the explanation given by the second respondents in par 46 of Ian Wooten's affidavit of 27 August 1999. It must be borne in mind that by this time litigation had been threatened and was imminent. The posturing of the respective sides, given those circumstances, is understandable.

62 Given that the applicants are associated with a competitor of CBD I would be reluctant to find that the failure of the second respondents to provide information which they were not, by law, obliged to provide to a shareholder, would amount to oppressive conduct.

63 The applicants have persuaded me that the affairs of CBD have been conducted in a manner that is oppressive to them by reason of the failure of the second respondents to review the dividend policy. I now turn to decide what flows from that conclusion.

64 The relationship between the parties has broken down, irretrievably so. The applicants are associated with a competitor of CBD. They have some risk capital that is "locked in" to the capital structure of CBD. The business is profitable and the company is progressing. As I have already said, no party has suggested that I should order that the company be wound up. However, it seems to me that the circumstances are such that the commercial affairs of the parties should be disentangled. This can only be done by an order that Darian purchase the shares which the applicants hold in CBD. This is what I intend to do. I have a broad discretion to frame an order so as to do justice between the parties.

65 The next question is the price at which the purchase should take place. The first issue is the date at which the valuation should speak. For better or worse, the applicants have been involved as shareholders despite efforts which they have been making since 1997 to extricate themselves. I am not privy to the negotiations that occurred. It seems to me that the purchase should speak as at the date when the order is pronounced. Accordingly, the valuation should be as at the most convenient date that is proximate to judgment. This is 30 June 1999.

66 I can say at the outset that I accept the Clarke valuation and the premises on which it is based. I agree with him that in a company of this nature the capitalisation of future maintainable profits is the preferable method of valuation. I also accept that 40 per cent is an appropriate capitalisation rate. In Appendix 2.1, Clarke has assessed the future maintainable profits as $132,000 per annum. In doing so he has made a number of adjustments to the operating profits before tax as disclosed in the financial statements. I should discuss these adjustments.

67 The first adjustment is to deduct interest income on surplus assets from the operating profit. The rationale for this is set out in par 6.1(i) and par 6.3 of his report. I accept that rationale and I accept also the figure of $13,000 as being a fair estimate of the relevant interest income.

68 Secondly, legal and accounting fees incurred in relation to the dispute between the majority and minority shareholders have been added back to operating profits. It seems to me that this is an appropriate adjustment because those expenses are not related to the operating assets and are an extraordinary item. I note that a further adjustment has been made for accounting fees incurred in 1998 in relation to an equity restructure.

69 The next issue is the level of remuneration. In Appendix 2.1, Clarke has used a "market rate" of $182,000 per annum for each year since 1996. I have considered whether, notwithstanding that I have found that the salary levels do not amount to oppressive conduct, I should take into account some other or lesser figure for the purposes of valuation. I do not think I ought to do so. I am not convinced that the selection of $150,000 with further deductions for motor vehicle benefits (as set out in Appendices 2.2 and 2.4) gives a fair result. I have reached this conclusion on at least two bases. First, the operating profits have been struck using actual figures and I have not been persuaded that they represent unreasonable imposts on the company or that there is an element of unfairness in them. The second reason is tied in with the question of goodwill, to which I will turn shortly. In relation to salary levels, it may be that the valuation in Appendix 2.1 ought not to have reflected the small adjustments for 1998 and 1999. However, on my calculations it only makes a difference of about $4,000 in the assessed total value of the minority interest. For reasons that will appear later, I do not intend to make that further adjustment.

70 The final issue relates to goodwill. In Appendix 6 Clarke has shown that the total adjusted wealth of CBD for the purposes of Appendix 2.1 by including goodwill of $156,000. The respondents made representations to Clarke, and repeated them by way of submissions to me, that there should be no recognition for goodwill at all in the valuation. Clarke did not accept that position and nor do I. The goodwill has been generated largely by the efforts of the second respondents. It is dependent on the second respondents and it may not be readily saleable if the second respondents were to leave the company. Nonetheless it is an asset, albeit an intangible one, that belongs to the company. It is not an asset that it personal to the second respondents. It appears in the balance sheet of CBD and is unquestionably an asset of CBD. The whole idea of the future maintainable profits method of valuation is predicated on the company operating as a going concern. It makes a nonsense of the valuation if goodwill is removed.

71 When he came to assess the value of the shares in CBD held by the applicants Clarke started with the figure of $156,000. He then took one-third of that figure and reduced it by 25 per cent to recognise that the applicants were in a minority position, thus arriving at a notional goodwill component of $39,000.

72 In my view this is a fair result. At the risk of repeating myself, I accept that the second respondents have been instrumental in developing the goodwill. But it has enabled them to conduct the affairs of the company in a particular way, including having a relatively free hand in deciding the level at which they should be remunerated. They will continue to have the benefit of the goodwill. The 25 per cent deduction for the applicants can also been seen as, in part, a recognition, that the applicants have played a lesser role in the production of the goodwill.

73 In their respective submissions to me, it became apparent that the applicants' case (that the purchase price should be $200,000) proceeded on the basis of Appendix 2.2 of Clarke's valuation while the respondents contention that the appropriate price was $120,000 was based on Appendix 2.1 without an element of goodwill. In my view, Appendix 2.1, including the goodwill component, gives a result that is fair in all of the circumstances. To the extent that the value of $166,000 is about $4,000 more than would be the case if there were no salary adjustments in 1998 and 1999, it can be justified as a small allowance for the fact that the applicants have had the use of the money for some time.

74 In my view, the affairs of CBD have been conducted in a manner that is oppressive to the applicants by reasons of the failure of the second respondents to review the dividend policy. In all of the circumstances I think the appropriate relief is an order under s 246AA(2)(e) for the purchase of the shares held by the applicants in CBD by Darian for a price of $166,000.

75 I will hear counsel as to the formulation of the orders.