HIS HONOUR:
The proceedings
1 This is the judgment on the final hearing of three proceedings, which were heard together pursuant to orders made by White J on 29 October 2009:
(i) Equity Division proceedings No 2008/282203 (legacy No 6280/08), in which the plaintiffs, Mr Tomanovic and Australian Financial Services Corporation Pty Ltd ("AFSC") seek the winding up of Global Mortgage Equity Corporation Pty Ltd ("GMEC") on either the oppression ground or the just and equitable ground (Corporations Act 2001 (Cth), s 461(1)(f) and (k)), or alternatively the making of a buy-out order under Part 2F.1, ss 232 and 233;
(ii) Equity Division proceedings No 2008/282201 (legacy No 6278/08), in which the same plaintiffs seek the same relief in relation to Argyle HQ Pty Ltd ("Argyle HQ");
(iii) Common Law proceedings No 2009/297497 (legacy No 20107/09), in which Mr Sayer (the second defendant in No 2008/282201), Ken Sayer Investments Pty Ltd ("KSIPL") and Mortgage House of Australia Pty Ltd ("MHA") seek recovery from Mr Tomanovic and AFSC of money totalling $1,341,750.
2 Broadly speaking, the two equity proceedings had been initiated by the Tomanovic interests against the Sayer interests, while the Common Law proceedings have been initiated by the Sayer interests against the Tomanovic interests. Mr Tomanovic and Mr Sayer are the protagonists.
3 The sum claimed in the Common Law proceedings is alleged to have been paid by Mr Sayer and MHA to Mr Tomanovic and AFSC pursuant to arrangements reflected in a document entitled "Heads of Agreement" ("the First Heads of Agreement") executed on 31 March 2005, which provided for the separation of the Tomanovic and Sayer interests, and a later amending document ("the Second Heads of Agreement") entered into in about November 2006.
4 Mr Tomanovic and AFSC have filed a Defence and Amended Notice of Cross Claim in the Common Law proceedings seeking, inter alia, orders for specific performance of the First Heads of Agreement as amended by the Second Heads of Agreement, and payment of the balance of money alleged to be owing under those arrangements. The plaintiffs in the Common Law proceedings deny the efficacy or enforceability of both the First Heads of Agreement and the Second Heads of Agreement. A central dispute in this case is whether those "agreements" gave rise to any legally binding rights and obligations.
Overview
5 Mr Tomanovic and Mr Sayer were in a kind of business marriage from about 1999 to December 2004, and it was a successful marriage. From late 2004 they made a general agreement to go their separate ways, but on friendly terms. The relationship became very sour when differences emerged between them as to the separation arrangements, and frustration mounted upon frustration as attempts to finalise a concrete separation agreement did not bear fruit.
6 One would have thought that, being experienced businessmen, they could have faced up to some tough negotiations to arrive at a way to move forward in their separate careers and to leave the past behind them. But for reasons that only partially emerged from the evidence, and may have to do with glimpses of stubbornness that emerged during the cross-examination of both men, no reconciliation has been achieved, and tragically, they have fought out their disputes in an eight-day hearing.
7 When, as occurs too often, the Court is confronted with this kind of spectacle in a failed business relationship, there is a judicial temptation to use the powers under the Corporations Act to find the solution that the parties have been unable to reach by negotiation. During the hearing I went so far as to issue a warning that after a contested eight-day trial, there was at least a non-negligible prospect that the Court would take the view that some kind of orders would be better than nothing at all, and in the absence of any other solution, winding up on the just and equitable ground might be given serious consideration. The parties listened carefully to what I had to say but they soldiered on.
8 Even in exercising the broad discretions conferred by Part 2F.1 of the Corporations Act, the Court is required to act strictly on the evidence that has been presented. Now that I have had the chance to consider the evidence as a whole, I have reached the conclusion that there are no sufficient grounds under Part 2F.1 for any of the relief that the Tomanovic interests have sought. The accumulated evidence has persuaded me that they are unsuccessful on all counts. I have also decided, for reasons elaborated more fully at the end of my judgment, that a winding up order should not be made of commercially viable business companies.
9 My findings are generally in accordance with the submissions on behalf of the Sayer interests, and I agree with their overview submission is that:
(a) the Heads of Agreement upon which the proposed separation of interests was based were never legally binding, whether by contract estoppel or otherwise, and the proposal was subject to legal and accountancy advice;
(b) the Sayer Interests generally acted in good faith in relation to the negotiations of the Heads of Agreement;
(c) there is no basis for the invocation of the oppression remedy to impose on the Sayer Interests a compulsory buy-out, by reason only of the failure to consummate the separation of interests;
(d) there is no basis for a finding of oppression in relation to the other miscellaneous allegations that were pressed at the trial;
(e) there is also no basis for winding up on the just and equitable grounds arising merely from the failure to consummate the separation of interests, and no basis for a finding that there is a justified lack of confidence in Mr Sayer's management of the business;
(f) another factor weighing against the making of a winding up order is that the relief would likely compromise the business as a going concern and cause a very substantial loss of shareholder value.
10 Consequently, for the reasons explained in detail below, I have decided to dismiss the two equity proceedings and the cross-claim in the Common Law proceedings, and enter judgment for the plaintiffs in the Common Law proceedings.
Background facts
11 Mr Sayer claims that he conceived the name "Mortgage House" and designed the first logo, and that he conducted a finance business under the name "Mortgage House" through his own company, One Australia Pty Ltd and a number of other business partnerships, prior to commencing any business relationship with Mr Tomanovic. There was a contest at the hearing as to the ownership of intellectual property rights concerning Mortgage House, and I shall return to this issue.
12 Mr Tomanovic and Mr Sayer established some form of commercial relationship in 1994, and from some time later, a loose "partnership" commenced, and they came to operate together what became a large multi-service mortgage business under the umbrella name "Mortgage House of Australia" ("MHA").
13 Mr Sayer's evidence is that the "partnership" regarding MHA began in 1999; whereas Mr Tomanovic says it began in 1996. The issue is of significance because of another disputed matter that I have noted above, relating to Mr Sayer's evidence that he believed that the rights to the "Mortgage House" name vested in him personally, on the ground that he had previously conducted business under that name before commencing the "partnership" with Mr Tomanovic.
14 Mr Tomanovic strongly maintained in his affidavit evidence and in the witness box that his relationship with Mr Sayer concerning the MHA business began substantially earlier than 1999, but it was submitted on behalf of Mr Sayer that Mr Tomanovic's own records corroborated Mr Sayer's evidence that the loose partnership arrangement only commenced in 1999. I find this submission to be correct:
(a) in his e-mail dated 2 March 2005, copied to Mr Sayer, Mr Tomanovic set out what he calls some "historical facts", and as to the period 1996-1999, he said "we have worked together, but we were running an individually owned and controlled business, but equally dividing the incomes from our common effort and still any income individually from other non-common efforts/bus" (TB6.2590);
(b) in his affidavit sworn on 29 March 2004 in trademark proceedings in the Federal Court, para 4, he said he and Mr Sayer entered into an oral agreement "under which we agreed that all profits, from the loans processed by MHA for persons I introduced to that business, were to be shared equally between Mr Sayer and myself", and he said that the agreement stayed in place until MHA was incorporated in early 1998 (Exhibit D4);
(c) he made a diary note on 5 December 2004 which indicated that between 1994 and 1999 there was a "loose relationship of two entities" (TB6.2425, ZT2 at [20]);
(d) Recital 2(c) of the First Heads of Agreement dated 31.3.05 says that Mr Tomanovic and Mr Sayer "have been in business for approximately the last 5 years".
15 There is no dispute that it was agreed, from about 1999, that Mr Sayer would be the "top boss and ultimate decision maker in control of the money side of business": Tomanovic, at T196.21; KS1 at [84]. Mr Sayer gave affidavit evidence, not contested by Mr Tomanovic, that his general practice was not to seek Mr Tomanovic's prior agreement to business proposals for the MHA Finance Business: KS1 at [149(c)].
16 From 1999 the finance arm of the business has pursued a strategy of rapid growth, which has involved both the reinvestment of profits and the need to raise substantial additional capital and finance. According to Mr Sayer's evidence, the Sayer interests have born the overwhelming financial burden of supporting the operations and growth of the finance business (and see Mr Tomanovic in cross-examination at T 214). From 1999 the Sayer interests have advanced very substantial sums to the business and the Tomanovic interests have not made corresponding contributions. Mr Sayer asserts that the net level of funding provided by the Sayer interests was $3,035,764 in 2003, and as at 30 June 2009 the Sayer interests were owed over $4 million. That is generally supported by Mr Gunderson-Briggs' affidavit, at [43], and the audited GMEC accounts at 30 June 2008 (TB.13.5812). Mr Sayer says that in addition to bearing the burden of direct funding, the Sayer interests have provided numerous guarantees to support financing and business operations, in circumstances where no corresponding guarantees were provided by the Tomanovic interests (KS1 at [136)-[138], [225]-[228]).
17 From at least 1999, there was a division within the Mortgage House business between the finance and non-finance sides of the business. In his second affidavit Mr Tomanovic refers (at [78]) to the "MHA Mortgage Management System Business", which he describes as a financial strategy business that, among other things, assisted clients in acquiring assets and eliminating debt. In around 2004, the Multi-own group of companies was established, in part to take over the running of the non-finance side of the MHA business. Mr Tomanovic described this development in his first affidavit (at [44]). Multi-own was to provide specialised mortgage strategies, loans and investments to clients. It was initially established as an equal partnership between Mr Tomanovic, Mr Sayer, and Gabriel Baca. According to Mr Sayer's second affidavit, at [158], from late 2003 until early 2004, Mr Tomanovic was devoted to developing and establishing the multi-own business. Mr Sayer has subsequently resigned his directorships in Multi-own and transferred almost all of his shares, and he says he has never received any profit share or dividend from the Multi-own entities (KS1 at [281]). Mr Tomanovic says that Mr Sayer did not invest any money in Multi-own. All of this evidence may well be true.
18 There was a reorganisation of the corporate structure of the financial and non-financial arms of the Mortgage House businesses in about June 2003, in anticipation of the investment in the financial businesses by Macquarie Bank.
19 As to the finance group structure, since July 2003 GMEC has been the holding company of the finance group, with shareholdings in various subsidiaries including MHA, Mortgage House Broker Services, Pr1me, Mortgage Loan Company, Direct Mortgage Solutions and National Mortgage Group. The shareholders of GMEC after 4 July 2003 and until November 2008 were One Australia for 45%, AFSC for 45% and Macquarie Bank Ltd for 10%. Macquarie Bank disposed of its 10% holding to One Australia on 11 November 2008 so that One Australia now holds 55% of GMEC.
20 As to the non-finance group, AFSC and One Australia each held shares in Mortgage House & Land Pty Ltd, Multi-Own Pty Ltd and 9 Argyle St Unit Trust. The principal member of the non-finance group is Argyle HQ in its capacity as trustee of the 9 Argyle St Unit Trust. The Trust owns two properties in Parramatta in which there is substantial equity. The Tomanovic interests hold 50% of Argyle HQ while the Sayer interests effectively hold the other 50%. Mr Tomanovic and Mr Sayer were the sole directors of Argyle HQ from 9 December 1998 to 20 January 2005, when Mr Tomanovic resigned as director pursuant, he says, to the First Heads of Agreement. Since 20 January 2005 Mr Sayer has been the sole director of Argyle HQ, except for the period from 9 June 2005 to 5 October 2006, when Derek Angel was an additional director.
21 Mr Tomanovic and his wife are the sole shareholders of AFSC, and Mr Sayer holds 100% of the shares in One Australia. Mr Tomanovic and Mr Sayer were the main directors of the MHA Group until the incorporation of GMEC in June 2003, as part of the restructure to accommodate the entry of Macquarie Bank as 10% shareholder and capital provider. Mr Tomanovic and Mr Sayer were the sole directors of GMEC from 16 June 2003 until 27 June 2003, when Mr Tomanovic resigned as part of the Macquarie Bank entry arrangements.
22 Since 27 June 2003, Mr Sayer has been sole director of GMEC, save for the period from 20 May 2005 to 5 October 2006 when Derek Angel was also a director. Mr Tomanovic has not played an active part in the finance group business since at least about December 2004, in consequence of the separation of interests envisaged under the First Heads of Agreement, and the finance group business has since been under the sole management and control of Mr Sayer.
Relevant facts
23 From about mid-2004, negotiations commenced for the Sayer interests to buy out the Tomanovic interests in the finance group companies. Mr Tomanovic says that the negotiations were instigated by Mr Sayer, but Mr Sayer claims that they arose out of the fact that in 2004 Macquarie Bank was interested in buying more shares in GMEC and Mr Tomanovic asked Mr Sayer to make inquiries with Macquarie Bank, and subsequently this developed into a proposal for the Sayer interests to acquire the Tomanovic interests in GMEC. Nothing turns on this issue.
24 According to Mr Sayer, from late 2003 or early 2004 there have been protracted negotiations with the separation of interest between the Sayer and Tomanovic interests, but those negotiations have never produced a binding contract.
25 Mr Tomanovic claims that the negotiations led to an agreement in principle, reached in December 2004, for a complete separation of the Sayer interests on the one hand and the Tomanovic interests on the other. He claims that the agreement in principle was recorded in the First Heads of Agreement, which was executed by Mr Tomanovic on 31 March 2005. That agreement provided for the Sayer interests to acquire the Tomanovic shareholding in AFSC for the price of $6 million and for the Tomanovic interests to retain that part of the non-finance group known as the "Multi-own" companies".
26 The First Heads of Agreement contemplated the preparation and execution of formal documentation embodying the terms of the agreement, but no formal documentation was ever finalised. Mr Tomanovic says, however, that in various ways both parties acted in conformity with the obligations imposed by the First Heads of Agreement.
27 Mr Tomanovic alleges the following acts of performance of the First Heads of Agreement:
(i) Mr Tomanovic has been paid 69 individual payments of various amounts, to a total of $1,241,750 in the period from December 2004 to June 2006;
(ii) Mr Tomanovic resigned as a director of all Mortgage House Group entities in January 2005;
(iii) Mr Sayer indemnified Mr and Mrs Tomanovic and AFSC in respect of guarantees they had provided for Mortgage House entities;
(iv) the sale of Mortgage House Realty was finalised in late 2005;
(v) a commercial building in Fairfield was sold in late 2005;
(vi) Mr Tomanovic and Multi-own continued to service Mortgage House clients;
(vii) "hedging" deals were serviced;
(viii) Mr Tomanovic made steps to restructure AFSC in preparation for change of ownership;
(ix) an extension of the deadline to implement a formal agreement was organised by Mr Gunderson-Briggs of Grant Thornton in June 2005.
28 Mr Sayer denies that any actions of the parties after the making of the First Heads of Agreement could be described as "part performance". The nature and legal effect of the First Heads of Agreement will be addressed separately below.
29 In November 2006, agreement in principle was reached to vary the First Heads Agreement, notwithstanding that the time for execution of formal documentation had elapsed. A second document, also entitled "Heads of Agreement" ("the Second Heads of Agreement"), was prepared and executed by Mr Tomanovic on 24 November 2006. This document also contemplated the preparation and execution of formal documentation, which again did not occur, by reason of ongoing disputes between the parties. The principal difference between the First Heads of Agreement and the Second Heads of Agreement was a reduction in the purchase price payable to the Tomanovic interests from $6 million to $5 million, evidently in return for bringing forward the time for payment of the last instalment of the purchase price from 15 October 2010 until December 2008. $250,000 out of the $5 million price was payable only if Mr Tomanovic achieved a certain performance hurdle.
30 Mr Tomanovic points to various acts by the parties that, he says, are referable to and in conformity with the Second Heads of Agreement. He lists the following items as constituting "part performance" of the Second Heads of Agreement:
(i) payment to Mr Tomanovic of $100,000 upon his signing the document;
(ii) in April/May 2007 Mr Tomanovic's solicitor sent draft documentation to Mr Sayer's solicitors;
(iii) Mr Sayer resigned as a director of Multi-own Loans (July 2007) and Grant Thornton made preparations for the relevant change of ownership of Multi-own;
(iv) Mortgage House provided a database for some Mortgage House clients for reviews and servicing;
(v) Mr Tomanovic finalised the restructuring of AFSC in preparation for change of ownership;
(vi) "hedging" deals clients were serviced;
(vii) Mr Sayer indemnified Mr Tomanovic and AFSC in respect of guarantees provided by them to Mortgage House entities.
31 Once again, Mr Sayer denies that any of this could be treated as "part performance" of the Second Heads of Agreement. The nature and effect of the Second Heads of Agreement is dealt with separately below.
32 In the period from December 2004 to November 2006 Sayer interests paid to the Tomanovic interests a total of $1,241,750 under the First Heads of Agreement. On 27 November 2006 payment of $100,000 was made by the Sayer interests to the Tomanovic interests under the Second Heads of Agreement. The Second Heads of Agreement contemplated further payments by the Sayer interests to the Tomanovic interests: $1,404,250 on completion of the sale under a formal documentation that was in contemplation; a further $1 million on the first anniversary of completion, a further $1 million on the second anniversary of completion; and a final payment of $250,000 on the achievement of a performance hurdle. According to Mr Tomanovic, the amounts totalling $1,241,750 paid under the First Heads of Agreement were brought into account as part of the reduced purchase price of $5 million, and any entitlement to characterise that amount as a loan under the First Heads of Agreement was forgiven. Apart from the first payment of $100,000, the payments contemplated by the Second Heads of Agreement totalling $3,654,250 have not been made.
33 Macquarie Bank disposed of its 10% shareholding in GMEC to One Australia in November 2008, thereby making One Australia the majority shareholder in GMEC. In December 2008 the two Equity Division proceedings were commenced by the Tomanovic interests. In March 2009 Common Law proceedings were commenced by the Sayer interests claiming repayment of the $1,341,750 paid under the First and Second Heads of Agreement. Mr Tomanovic and AFSC have cross-claimed for specific performance of those agreements, or alternatively they assert that the Sayer interests are estopped from denying them.
Allegations of oppression by the Tomanovic interests
34 In the written outline submissions made on behalf of the Tomanovic interests and dated 25 January 2010, counsel grouped the oppression claims into four categories:
(a) failure of the Sayer interests to complete the separation of interests envisaged by the First Heads of Agreement (as amended by the Second Heads of Agreement) and the buy-out of the Tomanovic interests by the Sayer interests while excluding Mr Tomanovic from management;
(b) diversion of money and assets of GMEC for the benefit of the Sayer interests;
(c) reduction in equity in Argyle HQ assets for the benefit of the Sayer interests, without the consent of Mr Tomanovic, and unauthorised assumption voting control of Argyle HQ;
(d) oppressive conduct generally, including failure to make books and records available, failure to provide information, failure to maintain books and records, failure to convene annual general meetings, failure to pay dividends to AFSC since December 2004, failure to reinstate Mr Tomanovic as a director, attempts to dilute the shareholdings of the Tomanovic interests, and a complete breakdown in the relationship between Mr Sayer and Mr Tomanovic.
35 In the written outline submissions, counsel for the Tomanovic interests provided some brief particulars of each of these four categories of oppression claims. At the conclusion of the hearing, in final submissions, he handed up an "evidence table" which provided references to affidavits and documentary evidence, tender bundle references and transcripts. Counsel for the Sayer interests provided the court with lengthier and more discursive submissions, principally concentrating on a detailed analysis of the evidence, but fortunately adopting the framework of the particulars of oppression of the Tomanovic interests.
36 I intend to proceed by first setting out some relevant legal principles concerning the oppression remedy, and the remedy of winding up on the just and equitable ground. I shall then consider whether the First or Second Heads of Agreement or either of them is legally binding, because that is a large issue that needs to be resolved as a matter preliminary to the oppression claims, in the interests of clarity. Having dealt with the contractual issues, I shall then work through the four categories of oppression claims, making findings on each of them. Finally, I shall address winding up on the just and equitable ground.
Legal principles - oppression remedy
37 Section 232 of the Corporations Act 2001 (Cth) empowers the Court to make an order under s 233 if:
(a) the conduct of a company's affairs; or
(b) an actual or proposed act or omission by or on behalf of the company; or
(c) a resolution or proposed resolution, of members or a class of members of the company;
is either:
(d) contrary to the interests of the members as a whole; or
(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.
38 The resolution of the present case turns largely on the facts and it is unnecessary to embark upon a general exposition of the scope of the concepts in s 232 or of the remedies in s 233. It is sufficient to make a few points that are germane to a case such as the present one.
39 Thus, as to the grounds in s 232:
(a) consistent with the principle that the purpose of relief is to terminate the effects of oppression, relief will generally be inappropriate as a matter of discretion if there is no continuing oppression: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, at [182]; [2009] HCA 25.
(b) unfairness is assessed by reference to whether "objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair": eg, Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359 , per Basten JA at [181]; [2008] NSWCA 95.
(c) while it is recognised that conduct may be oppressive if inconsistent with the "legitimate expectations" of shareholders, expectations are not immutable. The non-fulfilment of expectations will not establish oppression, if there has been some good reason for the extinguishment of the expectation: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672, at [85], [86], [175]; [2001] NSWCA 97; Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343, at [96]; [2009] NSWSC 342 per Barrett J;
(d) "it is important when assessing corporate activities to see if there has been oppression that judges do not remain in their ivory tower": Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd And Others (1998) 28 ACSR 688, Young J at 739; [1998] NSWSC 413;
(e) a particular matter which will be taken in account in assessing the gravity of any allegation of oppression, is the extent to which the minority shareholder has "baited" the majority shareholder to act in an oppressive manner: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688, at 741; [1998] NSWSC 413;
(f) there is no basis for an oppression claim in relation to conduct undertaken with the "acquiescence, or consent" of the applicant John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'asia) Pty Ltd (1991) 6 ACSR 63, at 66 per Young J at 66.