shareholders. Prime (sic) facie at least, that is what was
happening, even taking all reasonable offsets into account.
There
is no expert evidence as to what a reasonable rent for the
land in all these years would have been."
39. Mr Evans relied heavily
on the absence of evidence as to a proper rent
and suggested that as Cambusdoon Proprietors had only made a profit in two
years (1974
and 1976) it was unlikely that a higher rent was obtainable. He
sought to explain the rent charged in 1980 and 1981 as an accounting
exercise
to transfer unusable tax losses to Cambusdoon Proprietors. Again I think
these submissions fail to address the real issue,
namely, whether family
interest or self interest has prevailed over the interests of the company as a
whole. It was open for His
Honour to conclude the company was not recovering
a proper return on the land it was making available to Cambusdoon Proprietors,
particularly given the evidence as to the higher rents which had been paid in
some years. As His Honour said, the failure to recover
a proper return would
not have mattered had the interests of the company and those of the firm been
identical. But that is not the
case as was evidenced from Mrs Reid's dissent.
The petulant attitude implicit in the decision in 1987 to reduce rent to
nothing because
Mrs Reid had instituted these proceedings only serves to
reinforce the conclusion that self interest led to the failure to determine
a
proper rental.
40. The trial judge was critical of the fact that Cambusdoon Proprietors did
not pay interest on its borrowings
from Bagot Well. The amount of the loan
account of Cambusdoon Proprietors had steadily increased from a debit of
$21,646 in 1968
to $100,566 in 1980, reaching a peak of $308,130 in 1986. In
1991 it was $211,729. The debt is unsecured and no interest has ever been
paid. Mr Evans submitted that the
increase in the amount of the loan due by
Cambusdoon Proprietors and the failure to charge interest was offset by the
fact that throughout
the relevant time Bagot Well itself was substantially
indebted to the Shannon family. The loans by the Shannon family to Bagot Well
almost entirely consisted of loans by the estate of Mr E L Shannon and a loan
by Mr J.M. Shannon. Mr J.M. Shannon was entitled
to the residuary estate
subject to the life interest of his mother. Thus, the indebtedness of Bagot
Well to the Shannon family is
in effect an indebtedness to Mr J.M. Shannon.
From 1969 to 1980 the amount of Bagot Well's indebtedness to members of the
Shannon
family substantially exceeded the amount due by Cambusdoon Proprietors
to Bagot Well. Since 1982 the position has quite significantly
reversed so
that as at 30 June 1985 the loan to Cambusdoon Proprietors exceeded the loan
from the Shannon family by some $185,000.
The amount due by Cambusdoon
Proprietors reached a peak in the year ending 30 June 1986 of $308,130. At 30
June 1991 (the latest
figures available) Cambusdoon Proprietors owned Bagot
Well $211,729.
41. The trial judge had regard to items which could be set
off against any
interest payable by Cambusdoon Proprietors. Items which he said should go
into the balance were directors fees,
the interest free loans by the Shannon
family, and the amount of labour expended by Mr Shannon and his family on the
affairs of Bagot
Well. His Honour properly questioned the extent to which the
Shannon family could be reimbursed for unpaid services, particularly
given the
fact that the overlapping activities of Bagot Well and Cambusdoon would lead
to difficulty in determining what was properly
payable by Bagot Well and what
was payable by Cambusdoon Proprietors. I nevertheless understand His Honour's
reasons to acknowledge
that some offset for those services was reasonable
although it was practically impossible to assess the overall position with
anything
approaching accuracy. Mr Evans attempted to demonstrate that, if the
trial judge had given effect to all relevant offsets, the position
of the
company might be little different from that in which it now finds itself. His
submission fails again to address the relevant
issue. These unsatisfactory
financial arrangements are but another instance of Mr Shannon's plan to put
self interest or his family's
interest to the forefront without regard to the
interests of other shareholders. Apart from the fact that no attempt was made
to
determine a proper rent, the rent charged in each year was not paid by
Cambusdoon Proprietors but was simply added to its loan account.
In addition,
in most of the years between 1971 and 1985 Bagot Well has advanced to
Cambusdoon Proprietors amounts in addition to
the advances to cover the
liability for rent. Any benefit to the company from these advances could only
be quite remote. The force
of the argument that an allowance must be made for
these offsets is severely diminished by this advancement of self interest.
Cambusdoon
Proprietors has made but minimal repayments. These are all benefit
which prefer one group of shareholders over another. Further,
it is simply
not practicable now to attempt to reopen the affairs of the company and seek
to determine what the position of both
the company and the petitioner would
have been had the directors had regard to the interests of Bagot Well as a
whole and conducted
its dealings with Cambusdoon Proprietors and other family
interests on an arm's length basis. So much has occurred over so long
a
period tat it is quite an impossible task.
42. The conclusion is, I think, inescapable that the directors, themselves
the principals
of Cambusdoon Proprietors, were preferring their interests to
the interests of other shareholders, at least in the later years.
As Mr
Clayton, who appeared for Mrs Reid put it: "Mr. Shannon had improperly
confused the voting and other rights conferred on the Life Governor with a
right
to use the company and its assets exclusively for the benefit of himself
and other members of his immediate family to the exclusion
of the petitioner."
43. This conclusion is reinforced by evidence given by Mr Shannon as to
guarantees provided to the principals
of Cambusdoon Proprietors by Bagot Well.
Since at least 1971, Bagot Well has provided guarantees of the bank overdraft
of Cambusdoon
Proprietors and Gloaming Proprietors. Mr Shannon said that when
his father was alive, the Cambusdoon overdraft was linked to the
land but
acknowledge that the Gloaming overdraft was always quite separate. On 13
April 1971 the directors of Bagot Well resolved
to execute a guarantee for an
advance by the Bank of Adelaide to Mr Shannon and his mother for $18,000. The
limit of those guarantees
has gradually increased over the years. On 23
December 1981 it had increased to $48,000, in July 1982 to $55,000, in
November 1982
to $65,000 and February 1983 to $75,000. There was no reference
to these guarantees in the annual financial statements of the company
until
the financial statements for the year ending 30 June 1984. A note attached to
those accounts records that on 11 October 1984
the company had executed
guarantees supported by a registered mortgage for an advance to Cambusdoon
Proprietors limited to $110,000
and to Gloaming Proprietors limited to a sum
of $32,000, making a total sum guaranteed of $142,000. In 1985 the limit of
the two
guarantees had increased to $160,000 and it has continued to increase
thereafter. In 1991 the limit of the two guarantees was $520,000.
44. Despite the closeness of the relationship between Bagot Well and
Cambusdoon Proprietors and the interaction of their commercial
interests, I do
not think that the interests of Bagot Well could legitimately be served by
guaranteeing the borrowing arrangements
of its tenant Cambusdoon Proprietors
over such a long time. While there might be some advantage in the company
providing financial
assistance to its tenant for a short time, it is not
possible to identify any advantage in providing guarantees for steadily
increasing
amounts for as long a period some twenty years particularly having
regard to the fact that at the same time the liabilities of Cambusdoon
Proprietors to Bagot Well continually increased and Cambusdoon Proprietors did
not trade at a profit, except in 1974 and 1976. No
matter how close the
relationship between Bagot Well and Cambusdoon Proprietors, it could not
justify continuing to furnish the guarantees
over such a long time to what was
an unprofitable trading entity. The provision of a guarantee for the
borrowings of Gloaming Proprietors
has even less justification. Not only was
the provision of these guarantees for such a long time not in the interests of
Bagot Well
but it also unfairly discriminated in favour of the group of
shareholders to the disadvantage of another. Further, given the level
of
borrowings of Bagot Well, the existence of guarantees had the capacity to
inhibit its ability to borrow should the occasion arise.
45. When considering whether a petitioner has demonstrated conduct to attract
the operation of s.320, the conduct complained of
must be viewed as a whole.
Section 320 invites attention not to events considered in isolation but to
events considered as part of
a consecutive story: cf. re H.R. Harmer Ltd
(1958) 3 All ER 689, 704-5. As Young J noted in McWilliam v LJ.R. McWilliam
Estates Pty Ltd (1990) 2 ACSR 757 at 764, the danger in dealing with events
one by one is that the cumulative effect of the various pieces of unfairness
might be overlooked.
When viewed in its totality, the evidence wholly
justified the conclusions of the learned trial judge. The Cross Appeal The
trial
judge rejected Mrs Reid's allegation first that the allotments of shares
made by the company in 1978, 1981 and 1982 were made for
improper purpose and,
second, that the purchase by Bagot Well of Anlaby Station and sale of
Cambusdoon was not in the best interests
of the company. In her cross-appeal,
Mrs Reid complained of these findings. For the reasons which follow, I do not
think the Court
should interfere with the findings on these questions.
46. I deal first with the purchase of Anlaby Station. There is no evidence
that the acquisition of this property was not for the benefit of the company.
It is a well known and substantial property of considerable
historic interest.
It may be, as Mr Shannon admitted, that he had long cherished the desire to
acquire it. It may be too that the
Anlaby homestead is a much grander
building that the homestead at Cambusdoon. But there is no direct evidence
that the company did
not acquire an asset of at least equal value to
Cambusdoon. There is no evidence, for example, to compare the value of each
property
or the farming potential of each. There is no evidence to show
whether Bagot Well has received a benefit or a burden in consequence
of the
sale of Cambusdoon and the purchase of Anlaby. Given the state of the
evidence, it is not possible to identify any impropriety
in relation to the
purchase of Anlaby Station. The trial judge accepted Mr Shannon's evidence
that the purchase of Anlaby was a
sound commercial transaction and that the
homestead added nothing to the cost of Anlaby. There was no evidence to the
contrary and
I do not think there is any basis upon which this Court could
interfere with His Honour's finding. The only issue in relation to
the Anlaby
property was whether Cambusdoon Proprietors way paying a proper rent.
47. Mrs Reid alleged that the share issues made
in 1978, 1981, 1982 and 1984
were all made for an improper purpose. Pro rata allotments had been made in
1978 and in 1981 to all
shareholders and Mrs Reid took up her entitlement and
maintained the percentage of her shareholdings. The trial judge found that,
although some criticism could be made of the directors with respect to the
1978 and 1981 allotments, these were not important and
there was no ground to
interfere with the allotments. Mr Clayton QC, who appeared for Mrs Reid,
submitted that the issues were not
made for the declared purpose of increasing
the working capital of the company. He contended that the purpose was to
dilute the
interest of Mrs Reid. That argument must fail as Mrs Reid had the
same percentage as shares after the allotment as before. Mr Clayton
also
suggested that the allotment made to Mr Shannon in 1978 might have been in
breach of s.67 of the Companies Act, 1962 which was
then in operation. The
allegation was not pressed at the trial and the evidence is somewhat
inconclusive. I do not think there
is any sufficient evidence on which to
uphold that submission which was but faintly pressed.
48. The allotments in 1982 and 1984
were made in similar circumstances. In
each case, Mr Shannon had written to the company applying to take up a parcel
of unissued
shares pursuant to his entitlement to do so in Article 5(f). On
each occasion the directors, Mr and Mrs Shannon, resolved to make
an issue in
order that Mr Shannon could exercise his right as life governor. No shares
were offered to any other shareholder. In
consequence Mrs Reid's proportion
of issued shares fell from approximately one-third to approximately one-
fifth. Mrs Reid complained
that the issues, if they were to be made at all,
should have been made at a premium, that they were discriminatory and were in
any
case unnecessary. The trial judge dismissed these complaints. The trial
judge also considered whether the allotments made in 1982 and 1984 were made
in breach of the
fiduciary duties of the directors. He held that they were
not. Having referred to Ngurli Ltd v McCann [1953] HCA 39; (1953) 90 CLR 425; Whitehouse v
Carlton Hotel Pty Ltd [1987] HCA 11; (1987) 162 CLR 285 and J.D. Hannes v N.J.H. Pty Ltd
(1992) 7 ACSR 8, His Honour continued:
"The company records show that the formal initiative, if
not the inspiration, for these allotments
came from Mr Shannon.
Paragraph (f) of Article 5 gave the holder of the Life Governor's
Share `the right at any time to take
up any unissued shares in
the capital of the Company,' and in each case, in purported
exercise of that right, Mr Shannon
notified the company that he
intended to exercise it and the board of directors made the
allotment accordingly. It seems
to me that it had no real choice
in the matter. While the right to take up the unissued shares is
attached under Article
5 to the holder of the Life Governor's
Share, that person will not necessarily be a director - see
par.(a) of Article 5 -
and, even where he is, the right
exercisable under par.(f) is not directorial in character. It
seems more appropriate to
regard it as a special right conferred
by the Articles on a particular privileged shareholder and not
itself affected by
the fiduciary restraints applicable to persons
acting as directors of a company. People usually apply for
shares with only
their own interests in mind and often with the
object of increasing their own proportion of the issued capital
at the expense
of others. Generally speaking, a shareholder does
not owe any fiduciary duty to the company or to his fellow
shareholders.
North-West Transportation Co Ltd v. Beatty (1887)
12 App.Cas. 589, at 600-1; Peters' American Delicacy Co. Ltd v.
Heath [1939] HCA 2; (1939) 61 CLR 457, at 504. It is true that the application
for shares by the Life Governor and their subsequent allotment by
the directors
are two different things, but I do not think that
the Articles of Bagot Well can have been intended to make an
application
under par.(f) of Article 5 examinable by the
directors by reason of the applicant's self-interest. That would
limit the
right conferred by the Article very severely if,
indeed, it did not make it a dead letter. So for more than one
reason this
complaint must, in my opinion, fail."
49. I respectfully agree with His Honour's conclusion. There was evidence
which suggested
that Mr Shannon's purpose in exercising his ultimatum was to
dilute the interests of Mrs Reid. But as His Honour held, one shareholder
does not have a fiduciary duty to another at least where an exercise of voting
power is not involved. What is under consideration
is not whether the
directors have acted in breach of their fiduciary duties or whether a majority
of shareholders have misused their
power as a majority but whether there is
any limitation upon the entitlement of the life governing director to take up
unissued shares.
The power to do so is plainly expressed in the Article 5(f).
It is reinforced in other Articles. Article 9 provides that the power
of the
directors to control the allotment of shares is subject to "the rights and
restrictions attached to or conferred upon the
whole of any shares or class of
shares and to the provisions of Articles 5 and 55." Article 55 provides that,
upon any increase in
share capital, all new shares shall be offered in the
first instance to the holder of the life governor's share and any shares not
taken up by him shall be offered to other members in proportion to their
existing shareholdings. Given the clear intention expressed
in the Articles
to enable the whole of the life governor's share to take up a pre-eminent
shareholding position, I do not think it
is possible to circumscribe that
power in the way for which Mrs Reid contends.
50. For these reasons I dismiss the cross-appeal.
The Remedy Granted
51. The trial judge held that Mrs Reid was not entitled to have her shares
valued according to the net asset
backing for that would be to ignore her
disadvantageous position as a shareholder under the Articles, including
Article 5 whereby
the whole of the life governor share has the right in a
winding up to all surplus assets. He further held that the shares not be
valued as though Bagot Well was about to be wound up. The basis of the
assessment of the value of the shares was expressed in his
order in these
terms:
"2. That for the purposes of such assessment the following
inquiries be made and taken that is to
say:
(a) an inquiry as to the revised annual accounts for the
Company for the period from the date on which the said James
MacDonald Shannon became sole life governor and up to the date of
the presentation of the petition herein prepared on the
assumption of proper commercial arrangements between the Company
and those bodies or persons with whom it had relevant financial
dealings including but not limited to:
(i) the proper commercial rent that should have been paid to
the Company for
the use and enjoyment of its land and
improvements;
(ii) the interest that should have been received or payable
by
the Company calculated at proper commercial rates of interest
in respect of all loans made by or to the Company;
(iii)
any offsetting benefits provided to the Company by the
said James MacDonald Shannon or members of his family or the
family
partnerships;
(b) an inquiry as to the assumed dividend history of the
Company on the basis of such revised annual accounts
that would
have occurred had the directors consistently with the Articles of
the Company maintained a fair and justifiable
balance between
capital growth and an immediate return to shareholders in the
years when a dividend could prudently have been paid.
3. That such inquiries be made by
a Master reserving liberty
to him if he shall think fit to appoint a Court expert to take
and report on the findings of such
inquiries.
4. That the Master assess the reasonable price to be paid by
the said James MacDonald Shannon for the petitioner's
shares
having regard to inter alia;
(i) the advantage to the said James MacDonald Shannon of his
owning all the shares
of the Company; and
(ii) the petitioner's loss of income by reason of the
Company's failure to pay proper dividends in
that period prior to
and including 1985."
52. Mr Shannon's appeal was directed to the question whether he had been
guilty of
conduct attracting the operation of s.320. He did not adduce any
argument on the manner of assessment of the value of the shares.
Mrs Reid
cross-appealed against the finding that she was not entitled to have her
shares value according to net asset backing but
no argument was addressed on
that issue. I do not think any basis has been shown for interfering with the
directions as to the assessment
of the value of the shares.
53. For these reasons I would dismiss the appeal and the cross-appeal in
action no. 3455 of 1985.
Action
No. 2787 of 1991
54. Mr Shannon also appealed from the judgment dismissing his claim that he
validly exercised the powers vested
in him to compulsorily acquire Mrs Reid's
shares. As the finding of oppressive conduct made by the trial judge has been
upheld,
this appeal too must be dismissed.