While initially poker machines were viewed with caution by hotel investors it soon became apparent that gaming would be a sustainable source of revenue. Within 2-3 years of the new gaming legislation it was evident that hotel investors viewed gaming as an integral part of hotel trade and demand became strongest for hotels in locations where gaming would perform strongly. The success of gaming has been the catalyst for a particularly robust market over the last 7-8 years resulting in unprecedented growth in hotel capital values. This growth has continued unabated despite the announcement in October 2004 by the then NSW Premier, Bob Carr, of a total smoking ban to take effect in hotels from July 2007 ... " (Valuation report of Tony Owen)
1248 Thus, Mr Owen was of the opinion that the market value of Jackson's on George had increased from $20,220,000 in 1997 to $31,930,000 in 2005. This was so notwithstanding that his assessment of "normalised" earnings before interest, tax, depreciation and amortisation, was largely unchanged over the period. The difference in values reflected his view as to the appropriate capitalisation rates to be applied. In the case of the Marlborough Hotel, he was of the view that its value had increased from $5,640,000 in 1997 to $19,260,000 in 2005, partly as a result of increases in normalised earnings before interest, tax, depreciation and amortisation, partly to changes in what he regarded as the appropriate capitalisation rates, and partly because he considered that there were five to ten poker machine permits which were surplus to current needs and which had a capital value of about $300,000 each.
1249 Whilst not disputing that part of the increase in value of the hotels was attributable to changes affecting the industry generally, the defendants also submitted that the group experienced a "renaissance" under Mr Crawley's stewardship and as a result of his courage in providing his own securities to secure the Aldonet facility which provided the funds necessary for the group to stave off the imminent threat of receivership in 1997. The defendants submitted that the plaintiffs were seeking a "free ride" in seeking a compulsory buy-out at current valuations. The plaintiffs did not challenge the Aldonet/Springsley transaction when it occurred, or at any time until 2004, but were content to allow Mr Crawley to build "a new empire" where his assets were at risk if the group failed, and theirs were not. The defendants submitted that, at the time of what they euphemistically described as the "disengagement", the companies had small value as witnessed by the fact that Mr Davis, an experienced publican, with the benefit of advice, accepted $1,000,000 as a fair price for his company's one-third shareholding.
1250 The defendants also submitted that the plaintiffs themselves enjoyed the benefit of the growth in value of the hotels over the relevant period which enured to the industry generally. Because the plaintiffs' assets were not required as security for the borrowings of the group, they were able to acquire other hotels which enjoyed the same growth in value.
1251 Whilst the defendants accepted that, after May 1997, the affairs of J & J O'Brien and Marsico had been conducted contrary to the interests of the members as a whole, they did not accept that there were any acts of oppression involved in Mr Crawley's moving to a position of control of the group. The defendants submitted that:
" In 1997 both Mr Short and Mr Crawley were manoeuvring to buy each other out. It was in fact undoubtedly appropriate that this should occur. The situation had reached a stage where they could not work together. The trust between them had evaporated to the extent that board meetings were so dysfunctional as to require the presence of legal and financial advisors, and the taking of tape recorded transcripts. Decisive action was required and both men had realised what had to be done; there had to be a buy-out. For either to have succeeded in such a course would not have been an act which would justify the description of oppression, but rather it would have been an act which would justify the description of the exercise of what was necessary in harsh commercial reality. The reasonable hypothetical director postulated by the High Court as the touchstone of oppression in Wayde v New South Wales Rugby League Limited (1985) 180 CLR 459 is not such a timorous soul as would not have seen the need for drastic steps to be taken at this time to break the impasse as being ' burdensome, harsh or wrongful' or ' lacking probity or fair dealing' ( Scottish Co-operative Wholesale Society Limited v Meyer [1959] AC 324)."
1252 The defendants also submitted that Mr Short intended to exclude Mr Crawley in the same way as he had been excluded by Mr Crawley.
1253 Of course, there was no buy-out of Nabatu. Even when proceedings were commenced in June 1998 in which an order was sought for the compulsory purchase of Nabatu's shares, no offer was made to purchase Nabatu's shares at valuation. As was said in Profinance Trust SA v Gladstone (at 1042), the time at which a valuation is to be made will be heavily influenced by the parties' conduct in making and accepting or rejecting offers, both before and during the proceedings.
1254 The first to sixth defendants pleaded that the plaintiffs were not entitled to equitable relief in respect of any of the transactions about which they complained because of offers made by Mr Crawley by letters dated 13 April 1995 and 28 April 1995 to purchase Nabatu's shares in Marsico and J & J O'Brien (by means of an option agreement) and to relieve the plaintiffs of security which they had provided to support the liabilities of the group, which offer, it was alleged, Mr Short unreasonably declined (defence para 122(d)).
Rejection of Offers of 13 and 28 April 1995
1255 The minutes of the directors' meeting of 27 February 1995 record that Mr Davis indicated his interest in participating in a sell-down of his equity stake to the existing members, and that Mr Short indicated a similar interest, subject to his obtaining independent financial and legal advice. Mr Cohen was asked to prepare a schedule of assets and liabilities of the group which would enable the directors to assess a range of values attributable to the net assets of the group from which further discussions regarding restructuring of equity holdings might flow (TB 44/4566).
1256 On 2 March 1995, Mr Cohen provided his analysis of the group's net assets (TB 44/4614.1). He opined that the value of the group was about $2,500,000. In reaching that figure, he referred to the group's having an unresolved tax liability of about $2,000,000, to its having a severe liquidity shortage requiring $500,000 of working capital and an estimated $2,000,000 required for capital investment in plant and equipment. His assessment was made on the basis of the group owing Mr Crawley $1,400,000. Subsequently, he advised Mr Crawley that, until proceeds of sale from the Australian Youth Hotel were obtained, there would be six to eight weeks of "living on the edge" where the hotels were barely raising sufficient cash to meet recurrent cash flow needs. He advised that the current liquidity problems could be used as the key to forcing Mr Short's hand and that the funds to pay out Mr Davis and Mr Short could be met from future cash flow without too significant a strain on operations. This would be dependent upon asset sales proceeding as planned.
1257 On 2 March 1995, Mr Short wrote to Mr Crawley and said that if Mr Davis decided to sell his shares and he decided not to participate equally with Mr Crawley in the purchase, it would be unacceptable for him to remain indefinitely as a one-third shareholder with his guarantee and family home at risk. If no satisfactory arrangement was made for Mr Crawley to buy Mr Short's shares as well as Mr Davis' shares, Mr Short proposed that the assets of the group be realised without any forced sales and the group's liabilities, including its liability to Mr Crawley, be paid out, subject to Mr Crawley's substantiating the amount claimed by him, and the balance distributed to shareholders (TB 44/4612 at 4613).
1258 On 23 and 24 March 1995, Mr Short wrote to Mr Cohen and to Mr Crawley asking for, amongst other things, a breakdown of costs of the accounting and bookkeeping services, and a breakdown of the fees paid since 1 July 1991 and of the costs incurred. He complained about the variable statements as to how much was owed to Mr Crawley (TB 45/4693, 4718).
1259 The acrimony between Mr Crawley and Mr Short continued undiminished. Mr Crawley made further demands for Mr Short to make capital injections. He asserted that Mr Short had been given the details of the professional fees. On 29 March 1995, he threatened to exercise his powers under the mortgages and equitable charges unless the company ceased to pay directors' fees and paid all interest which was due to him. He said that no interest had been paid to him on "the moneys advanced to the company by way of deferral of legal costs". He demanded that Mr Short contribute funds to provide liquidity. He said:
" If you haven't got the money, as I have said to you before tell me what your price is so that maybe you can retrieve something out of the investment because otherwise you're going to have to hoe a very hard road in the future. If there is not a satisfactory resolution this week I must consider my options in relation to my position and exercise my rights under my charges and mortgages as I cannot get any constructive assistance in the operation of the Companies from yourself neither can I obtain an injection of Capital. " (TB 45/4748)
1260 Further correspondence followed between Mr Short and Mr Crawley. As set out in section 5 (paras [649] and following), on 5 April 1995, Mr Crawley wrote to Mr Short asserting that the debt he was owed was much greater than had previously been expressed because "the company" had overlooked the accumulation of unpaid interest, and asserting that he was owed $1,862,765. Mr Crawley was using the cash flow difficulties then experienced by the group and the alleged indebtedness of over $1,800,000 as levers to attempt to obtain favourable terms on which to purchase Nabatu's and Athann's shares.
1261 In his letter of 13 April 1995 to Mr Wiseman (who was then acting for Mr Short and Mr Davis), Mr Crawley rejected an offer which had been made on their behalf for their shares to be sold for $3,500,000. He commented that there was a cash shortfall of $400,000 to meet outstanding accounts. One of the difficulties for the group in raising further funds to meet its cash flow difficulties was that it could not mortgage the Newtown properties without Mr Crawley's consent and that he claimed that the mortgages secured the debt which he alleged was owed to him. Mr Crawley made a counter offer in his letter of 13 April 1995. He proposed that Athann and Nabatu grant to him, or his nominee, for nominal consideration, an option to purchase their shares in the companies for $2,000,000, to be payable over two years from the exercise of the option. The term of the option would be not less than twelve months. The purchase price would be reduced by two-thirds of any additional moneys advanced to the company by Mr Crawley exceeding $496,775. Mr Crawley would have full and unfettered control in the day-to-day management of the companies with power to deal with the assets of the companies subject to providing notice to Athann and Nabatu. Athann, Nabatu and their respective officers and guarantors of the loans to Westpac and BAC would be required to acknowledge the debt of $1,862,765 owed to Mr Crawley by the J & J O'Brien group of companies (TB 46/4848.2).
1262 This offer was rejected. On 26 April 1995, Mr Short advised Mr Crawley, presumably with Mr Davis' consent, that he and Mr Davis were prepared to accept $3,000,000 for their entire interest in the group, provided there were mutual releases and they were released or indemnified in relation to their guarantees and other obligations to Westpac and other lenders. Mr Short stated that the vendors were willing for the arrangements to be implemented on terms which involved not a sale, but the granting of an option to Mr Crawley for nominal consideration to purchase the vendor's interest in the group at a price of $3,000,000. The option would be for a term of ten months expiring on 26 February 1996 and require payment of $1,000,000 on the exercise of the option and $2,000,000 within a year thereafter with interest at twelve percent. Messrs Short and Davis would resign as directors, but be replaced by Mr Hannan who would receive $2,000 per month as director's fees. Mr Crawley would have control of the day-to-day management of the group's operations, except where Mr Hannan reasonably considered that the group was being materially adversely affected by the exercise of such control. Mutual releases and the release of guarantees would be given at settlement. Messrs Short and Davis would receive consultancy fees of $8,000 per month during the currency of the option, but other directors' fees would cease (TB 47/4877).
1263 This offer was rejected by Mr Crawley on 28 April 1995 (TB 46/4857.21). He said that the fundamental issue which the group then faced was the requirement for the injection of capital of at least $500,000. He said that capital should have been contributed in equal shares. He said that a realistic estimate of the group's net asset values would value the group's assets at $37,185,000 and its liabilities at $34,450,000, giving net assets of $2,735,000. The assessment of liabilities included a tax liability of $2,000,000, a debt owed to Mr Crawley of $1,800,000, and the injection of working capital of $500,000. He said that the price which Mr Davis and Mr Short asked for their shares was outside the ambit of any properly commercially-orientated assessment. He said that the companies could not afford to pay consultancy fees of $8,000 per month, which were double the amount then being paid as directors' fees. He said that for there to be an agreement, there needed to be agreement upon the quantum of the outstanding costs which were secured by an equitable charge over the assets of the companies, agreement on the payment of service and managerial fees in the amount of $31,567 per month to Mr Crawley, and director's fees to Mr Crawley of $12,000 per month. Mr Crawley said that if the option were not exercised, he should have the option to require each of Mr Davis and Mr Short to provide further equity, either by way of capital or by further security, or that they would cause their companies to relinquish their shares to the extent of the equity imbalance or consent to the issue of additional shares to Mr Crawley to the full value of the difference in the supporting guarantees. He proposed that separate options be given, and that he should have the discretion to exercise either or both options. One option would be for him to acquire Athann's shares for $1,000,000, and the other to acquire Nabatu's shares for $1,500,000. The options should be for a term of twelve months. Two-thirds of the further advances to be made by Mr Crawley to the companies would be deducted from the purchase price. Whilst Mr Hannan would be appointed as a director in place of Messrs Short and Davis during the term of the option, Mr Crawley should have free and unfettered control of the management of the group's operations and authority to deal with all assets.
1264 Not surprisingly, this offer was not acceptable to Mr Short or Mr Davis. On 2 May 1995, Mr Short advised that the offer was rejected. Amongst other things, Mr Short rejected Mr Crawley's claimed debt of $1,800,000 which formed part of the basis on which he calculated the offered price of $2,500,000. Mr Short took issue with other estimates of the value of assets and liabilities. He also rejected the idea that Mr Crawley might have a discretion to acquire only one party's interest which would leave the other party locked in as a minority shareholder (TB 47/4902).
1265 There was no further progress in relation to the acquisition by Mr Crawley of Nabatu's shares.
1266 Mr Crawley made no offer which, had it been accepted, would have compelled him to purchase Nabatu's shares. All he proposed was that he be given the option to do so on onerous conditions, including that Athann and Nabatu acknowledge his asserted debt. Had his offer been accepted, he could have obtained control of the group by electing to acquire Athann's shares rather than Nabatu's shares. He exerted pressure on Mr Short and Mr Davis to accept his offer by reason of the cash flow difficulties of the group, as it was common ground that the group needed further advances from him to meet its obligations, and/or that it needed to be able to raise funds on security of the Newtown properties. The group's cash flow difficulties were contributed to by the excessive payments for accounting and management fees made to Vensel, as well as by the obstacles to raising funds on the security of the Newtown properties posed by Mr Crawley's assertions as to the amount of the debts secured over those properties.
1267 No reasonable offer was made by Mr Crawley for the purchase of Nabatu's shares. Rather, he obtained majority control of the companies in a deceitful way as described in Section 9.
1268 I do not accept the defendants' contention that the group was an "economic basket case" in 1997, or that receivership was inevitable if Mr Crawley had not provided finance through Aldonet but had complied with his fiduciary obligations. Despite Mr Crawley's efforts to frustrate the raising of finance, an offer of finance (which did not depend upon security being taken over the Newtown properties) had been obtained from Prudential.
1269 The hotels had substantially increased in value by 1997 compared with the values which Mr Crawley and Mr Short ascribed to the hotels in negotiations in 1995. Thus, in explaining the basis of his offers by reference to the net assets of the group companies, Mr Crawley, in April 1995, ascribed a value of $15,500,000 to Jackson's on George and $5,500,000 to the Marlborough Hotel (TB 46/4857.22). Mr Short adopted a value of $16,000,000 for Jackson's on George and $5,500,000 for the Marlborough Hotel (TB 47/4904). The August 1996 valuation of JLW Transact valued Jackson's on George as at 13 May 1996 at $19,500,000, and the Marlborough Hotel at $6,800,000. (Mr Crawley refused to make that valuation available to Mr Short or Mr Davis.)
1270 I do not regard the $1,000,000 price agreed on for the purchase of Athann's shares as being a reliable indicator of the true value of each of the shares in 1997. Moreover, for the reasons in paras [982]-[985] of Section 10, I do not accept that the Aldonet offer of finance was the only means of discharging the Westpac debt and avoiding receivership.
1271 For the reasons in Section 9, I do not accept the defendants' submissions that the manner in which Mr Crawley acquired control of the group did not involve oppressive conduct. There is nothing in Wade v NSW Rugby League Ltd which suggests to the contrary. I accept that the relationship between the shareholders had broken down. Had Mr Crawley proceeded openly and not sought to exploit his position of advantage as a purported secured creditor for in excess of $1,800,000, and had Mr Davis' shares been offered in accordance with the articles of association of each company, and had Mr Crawley not sought to frustrate the other directors' attempts to refinance, the case would have been very different. But it is not correct to say that because both Mr Short and Mr Crawley were manoeuvring to buy each other out, and a buy-out was commercially essential, the means adopted by Mr Crawley to obtain control can be dismissed as merely decisive steps the circumstances called for.
1272 In any event, the steps taken by Mr Crawley did not involve a commercial buy-out of Nabatu's share. It involved obtaining control and excluding Mr Short from further involvement in the businesses of the companies without buying Nabatu's shares.
1273 The defendants submit that Mr Short was manoeuvring to attempt to exclude Mr Crawley from any management role in the group. The defendants referred to the fact that in the mortgage proposal to Prudential, no security of Mr Crawley was offered to Prudential and Prudential was told that Messrs Short and Davis were considering "unwinding their partnership with Mr Crawley" (TB 70/7516.10). At the board meeting held on 1 April 1997, attended by Mr Mumby, Mr Mumby said that Mr Crawley was not amongst the directors and shareholders included in the application for loan. He added "there is no problem including you in the application". Mr Crawley said "good" (TB 72/7710). The defendants referred also to a conversation between Mr Wiseman and Mr Linden on 3 April 1997 in which Mr Linden told Mr Wiseman that Prudential did not require security from Mr Crawley. Mr Linden added that:
" If he is not prepared to sign a guarantee, he could be removed as a director. It would be difficult for him to argue that he is being oppressed in circumstances where the remaining directors were prepared to give security ." (Linden 6/2/04 para 5).
1274 It is not profitable to speculate what would have happened had Mr Short and Mr Davis borrowed funds from Prudential to discharge the Westpac debt and had Athann's shares not been sold to Springsley. That has no bearing on what orders should be made to relieve the effects of the oppressive conduct engaged in by Mr Crawley. Even if Mr Crawley had been excluded from the future management of the group, that would not necessarily have been oppressive conduct on the part of Messrs Short and Davis. But if they had engaged in oppressive conduct, Mr Crawley would have been entitled to relief. That possibility is irrelevant to the relief to which Nabatu is entitled in respect of the oppressive conduct which has occurred.
1275 The defendants also referred to evidence that Mr Short would have found Nabatu's position as a minority shareholder after Athann's shares had been purchased as untenable. There is certainly plenty of evidence to that effect. Mr Short said as much, for example, in his letter of 2 March 1995 (TB 44/4612) referred to above. The defendants then submitted that it should be inferred that the plaintiffs would not have been prepared to provide guarantees and to mortgage the Cremorne property had that security been sought by Aldonet. They referred to the fact that in Mr Linden's letter of 3 April 1997 referred to in para [119] of Section 1, Mr Linden did not say that the Shorts would provide security for the Aldonet transaction, but that they were not prepared to consider providing such security if they were exposed to the risk of being the sole guarantor of the facility. They submitted that the Shorts were not prepared to provide security in the circumstances of Athann's shares being bought.
1276 The question never arose because such security was not required. The defendants' submission that the plaintiffs enjoyed a free ride is answered by the fact that this was the result of the means adopted by Mr Crawley to obtain majority control. Nabatu remained a shareholder. No reasonable offer was made to acquire its shares. It was entitled to expect that, as a shareholder, it would share in the profits and increases in asset values of the companies. At least that would be so in the absence of a reasonable offer to acquire its shares.
1277 The defendants submitted that the date of the so-called "disengagement" was the appropriate date for valuation because that was the time the plaintiffs knew of the facts that would have permitted them to commence proceedings to restrain the Aldonet/Springsley transaction if they saw fit to do so. I have found that the plaintiffs' laches and acquiescence in the Aldonet/Springsley transaction precludes them from claiming half of the advantage derived by Springsley from its shareholding. But its acquiescence in Springsley's acquisition of Athann's shares says nothing as to what is a fair basis for valuing Nabatu's shares.
1278 I do not accept that the management of the companies from July 1997 under the stewardship of Mr and Mrs Crawley constituted a "sea-change" in the affairs of the companies which would justify a compulsory acquisition order based upon 1997 or 1998 values. Mr Crawley described in some detail the work which he carried out from July 1997 in relation to the hotels. He said that the businesses were affected by low staff morale arising from disunity of the board of directors, and the hotel buildings were dilapidated. He worked such hours as were required, sometimes early and late, in dealing with all matters concerning the businesses. He met with the managers daily to discuss management and operational issues. He dealt with architects, plumbers, engineers, builders and the like in connection with the building works carried out at the hotels. The accounting staff continued to perform the functions which they had previously in connection with maintaining the books, preparing accounts, dealing with creditors and debtors and like activities. There is no doubt that Mr Crawley had overall responsibility for the management of the hotels and that he performed those functions. He deposed:
" 7. From July 1997 in relation to management of the businesses of the hotels:
(a) I continue to deal with the representatives of the lenders to Aldonet and to me;
(b) I monitored daily banking balances, statements from the bank on all of the accounts, staffing numbers and wage costs as a percentage of turnover, divided into separate profit centres with pertinent revenue and costing details. I perused cash flows daily, monthly balance sheets and profits and loss accounts, liaising with the stock taking personnel, to minimise stock holding and maximise rotation of stock prior to payment. I supervised preparation of budgets. I refined the financial reporting regime and structure to be provided to me. I perused the monthly (now quarterly) BAS statements and Group Tax Remittance returns and signed same. I met, and continue to meet, Janet Kuan usually for a daily weekday meeting to discuss current bank balances, bank statement printouts and any events of the previous day of importance. Each Monday I met, and continue to meet, Ms Kuan to discuss weekend sales revenues and the prior week's performance in respect of revenue as to wage costs. I was, and continue to be, involved in annual consultations with the auditors upon presentation of trial balances and satisfying all audit requirements.
(c) Until 2004, I monitored quarterly poker machine returns for the LAB;
(d) I discussed with my fellow director, my wife, issues as to marketing and purchasing. I consultation [sic] with my wife I considered and discuss [sic] what competitors to the Businesses were doing and what needed to be done to maintain market share in the face of increasing competition;
(e) I maintained and reviewed the long term plans for the Businesses and the buildings from which they operate. The full implementation of those plans has been restricted because of the existence of this litigation;
(f) I have developed and established management systems and controls, and with the economies of scale in terms of buying and marketing, maintained and improved the profits derived from the Businesses' operations; and
(g) I am informed of available software and upgrading of hardware to accommodate main office access to all rep9orting facilities within the hotel, and am involved in the negotiation and purchase of intelligent cash registers and ensuring that price changes are implemented in line with the competitors' prices in the area.
(h) I supervise and communicate with the licensee/manager of each property on matters of property maintenance (covering the buildings, air-conditioning plant & equipment, kitchen equipment, furniture, carpets, painting and television supply agreements), so as to:
(i) negotiate maintenance contracts and pricing; and
(ii) ensure that the works quoted on are correctly performed. This includes negotiation of all maintenance contracts including the pricing for an employment of electricians, painters, plumbers, carpenters and other general maintenance work performers.
8. I have daily contact with managerial staff in respect of operational matters, covering:
(a) The running and operation of the management of the businesses;
(b) Maintenance and equipment matters;
(c) Staffing levels;
(d) Receive and review all final reports
(e) Peruse monthly management profti and loss accounts and balance sheets;
(f) Day to day overseeing of cash flows of the business;
(g) Negotiation of all purchases of plant and equipment, furniture, fixtures and fittings;
(h) Supervision of maintenance contracts of plant and equipment;
(i) Finalises all contract for purchases of all group buying of stock in bulk buying;
(j) Consults upon the calculation of all product margins and profit margins;
(k) Ordering guidelines and management principles;
(l) Basis of staff training and staff training manuals;
(m) Public relation planning;
(n) Marketing;
(o) Oversees management of stock holdings; and
(p) Daily monitoring of overdraft facilities."
1279 This was not a "sea-change" in the affairs of the companies.
1280 Mr Crawley also described the work he did in obtaining poker machine entitlements and the finance for such entitlements and the realisation of profits from the sale of poker machine permits with respect to another hotel, the Railway View Hotel. He also described the building works carried out to Jackson's on George and the Marlborough Hotel. Whilst I do not doubt that this work has increased the values of the hotels, it did not involve moving into new areas of business that would not have been expected to have been embarked upon had Mr Short not been excluded from involvement in the affairs of the companies. In causing the companies to embark upon such works and carrying out the duties he did, Mr Crawley was performing his duty as a director, and as managing director, to act in what he considered to be the best interests of the companies. I do not think he can be heard to complain that the shareholder should not enjoy the benefits of that work. He was obliged to act in the interests of all shareholders.
1281 It may also be observed that Vensel and Gladewood were paid for the management and accounting services which they provided. Whilst they will have to account for a portion of the fees received, being the portion which constitutes excessive fees, they will be entitled to keep what, on the evidence adduced, are reasonable fees for the services provided. Mr Crawley and Aldonet were paid and are entitled to keep fees of $150,000 per annum for his services. In the financial years ended 30 June 1999, 2000, 2002, 2003, 2004, 2005 and for eight months of 2006, Springsley was paid a total of $359,412 in respect of the services provided by Mrs Crawley. No claim was ultimately made by the plaintiffs for the recovery of those payments. In other words, not insubstantial payments were made to Mr Crawley, Aldonet, Vensel, Gladewood and Springsley in respect of services provided by Mr and Mrs Crawley, or their companies, which they are entitled to retain.
1282 The defendants submitted that, because the plaintiffs had no security at risk in relation to the borrowings of Marsico and J & J O'Brien, they were able to build a "hospitality empire" to trade in competition to the J & J O'Brien group and enjoy the benefits of increases in hotel values which applied across the industry generally.
1283 However, the plaintiffs were not able to realise the capital value of Nabatu's shares. On 15 September 1997, Mr and Mrs Short borrowed $1,500,000 from Prudential on security of their property at Shellbank Avenue, Cremorne in order to pay out an existing liability to Westpac of $300,000 and to purchase the leaseholds of the Australian Hotel in The Rocks and the Youth Hostel Tavern. As the plaintiffs correctly submit, the only freehold interest owned by Nabatu at the time was a one-third interest in the Bridgeview Hotel, which it had held since 1991. In the absence of a reasonable offer in 1997 or 1998 to purchase Nabatu's share, it is not just that Nabatu not enjoy the advantages of the increases in the value of the Marlborough Hotel and Jackson's on George when it was unable to realise its investment in the companies in 1997 and hence unable to make the investments in hotels which it could otherwise have done. It is clear from their behaviour in 1997 and subsequently that the Shorts wished to continue their investments in hotels.
1284 Nor was there the complete "disengagement" as the defendants contended for if, by that, was meant the parties going their separate ways with no interference by the one of the other. Not only did the plaintiffs, from 1998, maintain their claims against Mr Crawley including claims for a compulsory purchase of Nabatu's shares, but from 16 April 2003 (by the cross-claim filed on that date) Mr Crawley contended that the properties and businesses acquired by Mr Short, or members of his family through companies they controlled, being the Bridgeview Hotel, the King Street Wharf Bar, the Australian Hotel, and Scubar Down Under, were acquired by reason of breaches by Mr Short of his duty as a director of J & J O'Brien and Marsico. That claim was not abandoned until final submissions. Until then, Mr Crawley was contending that the properties and businesses acquired were held on trust for Marsico and J & J O'Brien. In other words, although the defendants contend that Nabatu's shares in J & J O'Brien and Marsico should be valued as at the "disengagement" in 1997 (with provision for interest thereafter), until final submissions, the defendants were maintaining a claim that they (at least indirectly through their majority shareholding in Marsico & J &J O'Brien) were entitled to the current values of the businesses and properties acquired by the cross-defendants.
1285 For all these reasons, I consider that the fair basis upon which to value Nabatu's shares is at their current value.
Discount for Minority Parcel
1286 If Nabatu's share in J & J O'Brien and Marsico were to be offered for sale to any willing purchaser, Nabatu could not expect to obtain a price equal to one-third of the value of the net assets of the companies assessed on the assumption that there was an orderly realisation of assets, nor, (if the value were different), one-third of the value of the companies as going concerns. Any such purchaser would apply a discount to reflect the fact that it was a minority shareholding and that the articles of association of each company placed restrictions on transfer of the share. In part, the discount could be expected to reflect the vulnerability of the minority shareholder to an abuse of the majority shareholders' control of the board as exemplified in this case. Clearly, it would be inappropriate for the price to be paid on a compulsory buy-out to reflect a discount which an outside purchaser would apply for this reason. However, the discount would also reflect the fact that, as a minority shareholder, the purchaser could not control, or necessarily influence, the direction of the company. A discount for these reasons would be made even if it were assumed that those having control of the companies faithfully performed their duties to act in the interests of the companies and the shareholders as a whole and sought no personal advantage.
1287 The cases generally hold that where an oppressed minority shareholder obtains an order for compulsory purchase of shares the price is fixed pro rata according to the value of the shares as a whole without a discount for the fact that the shareholding is a minority shareholding (In re Bird Precision Bellows Ltd [1986] Ch 658 at 667; Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 at 145-146; CVC/Opportunity Equity Partners Ltd v Almeida (Cayman Islands) [2002] UKPC 16 at [40]-[41]). One reason for this is that the minority shareholder seeking a compulsory purchase order as relief against oppression is not truly to be regarded as a willing vendor. In Virdi v Abbey Leisure Ltd; Re Abbey Leisure Ltd [1990] BCLC 342, Balcombe LJ said (at 350) that the cases "show a general inclination towards a pro rata basis for valuation".
1288 In CVC/Opportunity Equity Partners Ltd v Almeida, the Privy Council said (at [41]):
" 41 The rationale for denying a discount to reflect the fact that the holding in question is a minority holding lies in the analogy between a quasi-partnership company and a true partnership. On the dissolution of a partnership, the ordinary course is for the court to direct a sale of the partnership business as a going concern with liberty for any of the former partners who wish to bid for the business to do so. But the court has power to ascertain the value of a former partner's interest without a sale if it can be done by valuation, and frequently does so where his interest is relatively small: see Syers v Syers (1876) 1 App Cas 174. But the valuation is not based on a notional sale of the outgoing partner's share to the continuing partners who, being the only possible purchasers, would offer relatively little. It is based on a notional sale of the business as a whole to an outside purchaser."
1289 However, as the other cases show, that is not the only rationale for denying a discount. Nor would it be a sufficient rationale for denying a discount in the present case. Whilst Marsico and J & J O'Brien could be regarded as a "quasi-partnership", their affairs were carried on on the basis that they were corporate entities and not partnerships.
1290 It is also relevant that Nabatu was placed in the position of a minority shareholder, rather than having an equal one-third say in the operation of the companies, by oppressive conduct of Mr Crawley's. To discount the value of its share by virtue of its being a minority parcel would infringe the principle for which Scottish Co-Operative Wholesale Ltd v Meyer is authority, that the valuation must exclude the depreciating effect on the plaintiff's shares of the defendant's oppressive conduct.
1291 The defendants submitted that the cases in which courts have ordered a minority shareholder's shares to be purchased without a discount had involved unwilling vendors, who, absent oppression, would not wish to sell. The defendants submitted that Nabatu was not in that position because it had declined to restrain the transfer of shares from Athann to Springsley and had "gratefully accepted" the opportunity to use their assets to build up hotel businesses in competition with the group.
1292 I do not accept this submission. It is true that Mr and Mrs Short accepted the opportunity to build up other hotel businesses which may have traded in competition with the group after the mortgage to Westpac over their Cremorne house to secure the debts of the group companies had been released. But I do not accept that, in the absence of oppression, Mr and Mrs Short would have wished to sell Nabatu's shares in Marsico and J & J O'Brien. As this case illustrates, oppressive conduct may be engaged in by a shareholder who does not control a majority of the shares. (This is different from the proposition that a minority shareholder cannot oppress a majority shareholder.) Mr Crawley's oppressive conduct was not confined to the events of 1997 whereby Springsley acquired Athann's shares and Aldonet became the secured lender to the companies. As set out earlier in these reasons, it extended to his control of the accounting and management of the company to which excessive fees were charged for accounting and management services and his procuring (in breach of his fiduciary duties) of deeds acknowledging indebtedness which were not due, and securing that alleged indebtedness against the assets of the company. I do not accept the defendants' submission that, in the absence of oppression, Nabatu would still have been a willing shareholder.
1293 In my view, the fair basis for valuing Nabatu's share in J & J O'Brien and Marsico is that it be valued without discount for the fact that Nabatu has a minority shareholding.
Conclusion
1294 For these reasons, orders for the winding-up of Marsico and J & J O'Brien should not be made if Mr Crawley is able to purchase Nabatu's shares in those companies on the basis of a valuation carried out in accordance with these reasons.
1295 The valuation should be made on the basis of what would be realised on an orderly sale of the assets of the companies in the current market. As the principal assets are the hotels, I think it unlikely that there would be any difference between a valuation on the basis of an orderly realisation of assets and a valuation of the companies as going concerns. The evidence is that hotels are valued by capitalising their future maintainable earnings.
1296 The valuations would not be on the basis of a forced sale but on the basis of current market values assuming willing but not anxious vendors and purchasers.
1297 There should be no discount for the fact that Nabatu's shares are a minority holding.
1298 In valuing Nabatu's shares, account must be taken of the assets and liabilities of Marsico (and its subsidiary Trudale), and of J & J O'Brien, to reflect the judgments to be entered pursuant to these reasons.
1299 To the extent either party raises it, the valuation will also need to take account of any liabilities for any taxation of the companies for which provision is not otherwise made in their balance sheets. It will need to take account of the tax consequences of the judgments to be entered in accordance with these reasons.
1300 It will be necessary to bring up to date the accounting for excessive accounting and management fees, for interest paid on the alleged debt of $1,769,568, for any payments made or fees credited in respect of the provision of Mr Crawley's services over and above the fees of $150,000 per annum, and for the profits derived in respect of the Aldonet loans.