United Rural Enterprises v Lopmand

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST

4039/99 UNITED RURAL ENTERPRISES PTY LIMITED v LOPMAND PTY LIMITED & ORS JUDGMENT HIS HONOUR: 1 I have delivered numerous judgments concerning the relief to be granted in this matter - United Rural Enterprises v Lopmand [2002] NSWSC 1178 (12 December 2002); United Rural Enterprises v Lopmand [2003] NSWSC 269 (28 February 2003); United Rural Enterprises v Lopmand [2003] NSWSC 403 (11 March 2003); United Rural Enterprises v Lopmand [2003] NSWSC 404 (20 March 2003); United Rural Enterprises v Lopmand [2003] NSWSC 405; (2003) 45 ACSR 271 (27 March 2003). 2 The first of those judgments set out how Painten Holdings Pty Ltd ("Painten") was a company with three issued shares. At the time of issue of those shares in July 1993 Painten was an incorporated joint venture between companies associated with Mr Lake, Mr Lindsay-Owen, and Mr Alexander. Mr Lake and Mr Lindsay-Owen were friends, as well as business associates, who shared an office. Painten set about carrying through a real estate development project for the purchase and strataing of seven industrial units in the western Sydney suburb of Marayong, and the eventual sale of at least some of those units. Painten retains one of those units, which is leased on a long lease to a reliable tenant. 3 United Rural Enterprises Pty Ltd ("URE"), a company effectively controlled by Mr Lindsay-Owen, lent $250,000 to Mr Lake and to a company effectively controlled by Mr Lake, Lopmand Pty Ltd ("Lopmand"). Part of the security for that loan was a charge over the share which Lopmand held in Painten, called "the Lopmand Painten Share". With interest, the loan had grown, by 28 February 2003 to an amount of $528,794.09. Judgment for that sum was entered on 28 February 2003, against both Mr Lake and Lopmand. The judgment debt will continue to accrue interest at the rate specified from time to time in Schedule J to the Supreme Court Rules from 25 February 2003 to the date of satisfaction of the judgment. 4 Since a settlement agreement reached on 9 November 2000, URE has been entitled to be registered as the holder of the share, referred to as the "Gilbert Painten Share", which had originally been issued to a company associated with Mr Alexander. From September 1997 Mr Lindsay-Owen had been claiming that interests associated with him were entitled to the Gilbert Painten Share, but Mr Lake contended that Lopmand was entitled to a half interest in the Gilbert Painten Share. That claim of Mr Lake's was given up by the settlement agreement reached in November 2000. 5 Lopmand has received no financial statements or notices of annual general meetings from Painten for the 1996, 1998, 1999, 2000, 2001 or 2002 financial years. Mr Lake attended the Annual General Meeting of Painten in May 1998, and, in circumstances which I outlined in the judgment of 12 December 2001 at [121], opposed the adoption of various resolutions. Mr Lake remained a director, in name alone, until he resigned following the November 2000 settlement agreement. 6 Lopmand remained a shareholder in Painten all this time. As an equitable chargee of the Lopmand Painten Share, URE would have been entitled to become registered as proprietor of the share. However, URE did not make any such election until 28 February 2003. It took a little longer, until 17 April 2003, for URE actually to become registered as the holder of the Lopmand Painten Share. 7 My judgment of 12 December 2002 had proceeded on the basis that the shareholding in Painten was held in the manner shown by an ASIC search of Painten, so that Lindsay-Owen Holdings Pty Ltd held the Lopmand Painten Share. After delivery of the judgment of 12 December 2002 supplementary evidence showed that the ASIC records were wrong in this respect, and that Lopmand remained the registered holder of the Lopmand Painten Share. On 20 March 2003 I permitted Lopmand to further argue the question of whether there had been oppression, but declined to permit the evidence on that topic to be re-opened. I also decided that it was appropriate to make an order permitting inspection of the books of Painten. 8 On 27 March 2003 I settled the terms of an order permitting inspection of the books of Painten. I also held that, in circumstances where, for years, Lopmand had not been accorded the legal rights to which a member of a company is entitled, and when from a time in the first half of 2002 when an earlier hearing before Barrett J was aborted Lopmand's claim that it had such rights had been resisted, there had been conduct which was unfairly prejudicial or unfairly discriminatory against a member. Consideration of what relief should follow from that conduct was stood over. 9 The present judgment relates to what, if any, relief should be given concerning the oppression which has been found. The Statutory Provisions 10 The Corporations Act 2001 (Cth) provides: "232 The Court may make an order under section 233 if: (a) the conduct of a company's affairs … is … (e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member or members whether in that capacity or in any other capacity 233(1) The Court can make any order under this section that it considers appropriate in relation to the company, including an order: (a) that the company be wound up … (d) for the purchase of any shares by any member … (e) for the purchase of shares with an appropriate reduction of the company's share capital … (j) requiring a person to do a specified act. 234 An application for an order under section 233 in relation to a company may be made by: (a) a member of a company, even if the application relates to an act or omission that is against: (i) the member in a capacity other than as a member; or (ii) another member in their capacity as a member; or … (c) a person who ceased to be a member of the company if the application relates to the circumstances in which they ceased to be a member. 11 In this judgment I shall use the word "oppression", and its cognates, as shorthand for the statutory phrase "oppressive to, unfairly prejudicial to, or unfairly discriminatory against", and its cognates. Results of the Inspection 12 Mr Brigden, an accountant engaged by Mr Lake, gave evidence of the results of his inspection of the books, as part of an affidavit read (after argument - United Rural Enterprises v Lopmand [2003] NSWSC 870) at the hearing which related to what, if any, relief should be given for the oppression. He found that various management fees totalling over $349,000 had been charged to Painten by interests associated with Mr Lindsay-Owen over the years 1997-2003, that Painten had, in the year ended 30 June 2000, paid $30,000 of superannuation, even though it had no employees, that in the year ended 30 June 2000 it had paid a dividend of over $81,000 to Lindsay-Owen Holdings Pty Ltd even though Lindsay-Owen Holdings Pty Limited was not a shareholder, and that various amounts of interest had been paid to interests associated with Mr Lindsay-Owen. More detail of these matters appears later in this judgment. 13 Mr Cashion SC, for URE, submitted that this evidence could not be allowed to be treated as additional evidence on the topic of whether or not there was oppression. I agree. It is evidence which can be used only for the purpose of deciding whether a remedy should be granted, and if so what remedy, for the oppression I have already found exists. URE's Registration as Holder of the Lopmand Painten Share

14 On 17 April 2003 URE became registered as the holder of the Lopmand Painten Share. This fact only became known to Lopmand at the conclusion of the argument relating to what, if any, relief should be given for the oppression. It led to an application by URE, which I granted, to reopen evidence to explain the circumstances of that registration. 15 The Articles of Association of Painten contain the following provisions: "2. ... Words importing the singular shall include the plural number and vice versa 77. The number of Directors shall not be less than two nor more than six. 80. The Directors shall have power from time to time and at any time to appoint any person as a Director either to fill a casual vacancy or as an addition to the Board... 82. A director shall not be required to hold a share qualification..." 16 On 17 April 2003 Mr Lindsay-Owen made a written resolution, said to be in accordance with section 248B Corporations Act 2001, as follows: "I, Gregory Hamilton Willoughby Lindsay-Owen, being the sole director of the Company, hereby record my resolution to appoint Mrs Christine Bantick as a director of the Company effective immediately upon receipt of her signed form of consent to act as director of the Company to fill a casual vacancy to increase the number of directors to two, and who shall hold office until the conclusion of the next annual general meeting of the Company."

Ms Bantick has been the personal assistant to Mr Lindsay-Owen for many years. 17 Mr Lindsay-Owen and Ms Bantick then held a meeting of directors, which resolved as follows: "The Chairman reported that he had received a Statutory Declaration by Tracey John Lake declaring the loss of the original Share Certificate held by Lopmand Pty Limited ACN 002 49 662 in the Company, and a Share Transfer Form duly executed (and stamped), in respect of the Share in the Company, which was currently owned by Lopmand Pty Limited naming to the named transferee United Rural Enterprises Pty Limited ACN 064 435 785. It being noted that the share is to be held non-beneficially by United Rural Enterprises Pty Limited as set out in the judgment of Campbell J in the Supreme Court of New South Wales, proceedings no. 4039 of 1999 dated 12 December 2002. RESOLVED that, the transfer of the share be approved in accordance with the Company's Constitution." 18 They went on to resolve the new share certificate be issued, and that the register of members of Painten be updated. 19 Section 248B Corporations Act 2001 provides: "(1) The director of a proprietary company that has only 1 director may pass a resolution by recording and signing the record." 20 An article like clause 80 of the Painten articles is construed so as to permit a casual vacancy to be filled by those who are the directors from time to time, even if the number of directors acting for the purpose of filling the casual vacancy is less than the minimum required by a general clause in the articles saying how many directors there must be: The York Tramways Company Ltd v Willows (1882) 8 QBD 685 at 690 per Manisty J, 695 per Lord Coleridge CJ, 698 per Brett LJ; Channel Collieries Trust Ltd v Dover, St Margaret's and Martin Mill Light Railway Company [1914] 1 Ch 568 at 577 per Sargant J, affirmed Channel Collieries Trust Ltd v Dover, St Margaret's and Martin Mill Light Railway Company [1914] 2 Ch 506 at 510 per Lord Cozens-Hardy MR, 514 per Swinfen Eady LJ. 21 Section 201A Corporations Act 2001 provides: "(1) A proprietary company must have at least 1 director. That director must ordinarily reside in Australia." 22 That provision does not detract from any provisions in the constitution of a proprietary company which requires that particular company to have more than one director. Thus, for most purposes, Painten required two directors to be able to pass a valid directors resolution. However, there is no reason to read down section 248B Corporations Act 2001 so that it applies only to companies whose constitution permits there to be only one director. Section 248B can apply to a company whose constitution requires it to have two or more directors, if only one director remains in office, and if that company also has an article like article 80 of Painten, which permits a single director to act for the purpose of filling a casual vacancy. In that situation, section 248B provides the means whereby that one director can act to fill the casual vacancy. 23 It follows that Mr Lindsay-Owen's appointment of Ms Bantick as a director was valid. Once the appointment of Ms Bantick is valid, no reason has been put forward to question the validity of the resolution which Mr Lindsay-Owen and Ms Bantick then passed. 24 This means that, by the time of the argument before me, Lopmand had ceased to be a member of Painten. 25 Mr Cashion SC accepts that section 234 Corporations Act 2001 is satisfied in the present case, because Lopmand was a member of Painten at the time of filing the Initiating Process in these proceedings. Any relevance of its having ceased to be a member in April this year lies at the level of discretion, not jurisdiction. The Appropriate Type of Remedy to Grant 26 In Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 at 742 Young J said that the then section conferring jurisdiction to grant a remedy for oppression: "… should be applied by first considering whether orders can be made for regulating the company's affairs in the future so that there is no further oppression or unfair conduct, if that cannot be done, to see if there should be a buy-out by one faction of another: Re Enterprise Gold Mines NL (1991) 3 ACSR 531, at 539. The remedy chosen should be the least intrusive: Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452 at 475. Only as a last resort is the Court to make a winding up order of an otherwise solvent company under the section."

While his Honour's actual decision concerning the remedy appropriate for the oppression found in that case was varied on appeal ( Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672) nothing in the judgment of the Court of Appeal casts doubt on this statement of principle. 27 It is fundamental that a company member has the right to receive information about the company, and the opportunity to attend at general meetings. As I have already held, for Lopmand to have been deprived of those rights, and the other rights which arise from being a member, is in itself unfairly prejudicial or unfairly discriminatory against it. The seriousness and thorough-going nature of the denial of Lopmand's rights is a relevant matter to take into account in deciding on the appropriate remedy. 28 The fact that large management fees have been charged, a "dividend" paid to a company associated with Mr Lindsay-Owen even though that company was not a member of Painten, and the other irregularities relating to the administration of Painten which I mention later in these reasons have occurred over the many years that Lopmand has been denied any role in the affairs of Painten, have the effect, it seems to me, that it is not possible to undo the effects of Lopmand's exclusion. Mr Lindsay-Owen has treated Painten, over these years, as his private fiefdom. The various improper payments made from Painten, and the way it has paid no dividend over the years, are things which might not have occurred if Lopmand had been accorded its legal rights. Even though Lopmand could have been out-voted at every general meeting, it cannot be concluded that Mr Lindsay-Owen would have run Painten in the same way it was actually run, if Lopmand was in a position, through provision of accounts, to know about the payments made by Painten, to argue about the propriety or business justification from Painten's point of view of those payments, and to argue about whether dividends should be paid. It cannot be assumed that Mr Lindsay-Owen would have been immune to argument, particularly argument which had a sound basis. After so many years, there is no sufficient evidentiary basis for deciding how the company might have been run, if Lopmand had been accorded the rights to information and to participation to which it was entitled. Thus, it is not, it seems to me, possible to make an order which will remedy past irregularities, and permit the company to be operated on a regular basis in the future. 29 This conclusion is also affected by the fact that URE has security rights over the Lopmand Painten Share. If the result of proper running of the company had been that dividends were paid, this could have significantly affected the amount which is now owing on the security of Lopmand Painten Share. 30 Also relevant to the question of the appropriate remedy for the oppression is the fact that Painten started out as a company in which Mr Lake and Mr Lindsay-Owen were both directors and shareholders, as an incorporated joint venture. While Mr Lake voluntarily relinquished his position as director in the settlement agreement of November 2000, the past history of the company as an incorporated joint venture is still relevant to what form of order should be made. So is the fact that the former friendship between Mr Lake and Mr Lindsay-Owen has ended: United Rural Enterprises v Lopmand [2002] NSWSC 1178 at [73] ff. 31 URE's conduct in these circumstances is the type of conduct which would justify a winding up on the just and equitable ground. The past history of Painten shows that the exclusion of Lopmand from participation in the affairs of the company was not merely a denial of the ordinary rights which any shareholder in any company has, but was also radically at odds with the basis on which Painten was first established. 32 On 13 March 2003 the solicitors for Lopmand wrote to the solicitors for URE. Lopmand's solicitors had inspected the Company Register of Painten. It contained, unsigned, a document which purported to be minutes of an extraordinary general meeting of shareholders of Painten held on 18 December 2000. That document related to the passing a special resolution which amended the Articles of Painten so as to permit the number of directors to be reduced to one. Lopmand's solicitors asserted (correctly) that if any such meeting had been held it was invalid because no notice of it had been given to Lopmand. Lopmand's solicitors went on to assert (incorrectly, because they overlooked how Article 80 applied) that a new director needed to be elected at a general meeting before the transfer of the Lopmand Painten Share could be registered. Lopmand's solicitors asked for written confirmation that Painten would refrain from registering the Lopmand share transfer until such time as the Board was properly constituted. No such confirmation was given, and it was only at the hearing on 19 September 2003 that Lopmand's solicitors found out that the registration had occurred. While this incident is not of any great significance in itself, it illustrates the way in which the initial cordial and co-operative basis on which Painten was established has now ceased to exist. 33 I recognise that, if URE had decided to become the registered holder of the Lopmand Painten Share, as it was entitled to do, Lopmand would have had no rights as a member of Painten to information or participation. But it seems to me the that the question of the appropriate remedy for the oppression needs to be decided taking into account the actual circumstances in which it occurred, where Lopmand actually was a member of Painten, rather than what the appropriate remedy would have been if the circumstances had been different. When URE has held back from becoming registered as the holder of the Lopmand Painten share, there has been oppression which can be remedied only by a compulsory buy-out order. The only order which will fully remedy the oppressive conduct which has actually occurred, is for URE to buy the Lopmand Painten Share. Principles of Valuation 34 In Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 Lord Denning said, at 369 that one of the orders possible under a section which was a predecessor of section 233 was: "... to order the oppressor to buy their shares at a fair price: and a fair price would be, I think, the value which the shares would have had at the date of the petition, if there had been no oppression…. It is, no doubt, true that an order of this kind gives to the oppressed shareholders what is in effect money compensation for the injury done to them: but I see no objection to this. The section gives a large discretion to the court and it is well exercised in making an oppressor make compensation to those who have suffered at his hands. "

See also Re Bodaibo Pty Ltd (1992) 10 ACLC 351 at 354; Re Bagot Well Pastoral Company Pty Ltd; Shannon v Reid (1992) 11 ACLC 1; Coombs v Dynasty Pty Ltd (1994) 12 ACLC 915; on appeal Dynasty Pty Ltd v Coombs (1995) 59 FCR 122. 35 Lord Denning's formula is, however, only one of the approaches which is permissible to the valuation of shares for the purpose of a compulsory buy-out order. In Re Bird Precision Bellows Ltd [1986] 1 Ch 658 at 669 Oliver LJ, rejected a submission that a compulsory buy-out order only could be made "… at a market price of the holding being purchased, to be arrived at only by ordinary valuation principles, which would take into account of the proportionate size of the holding in relation to the issued capital as a whole and to the control of the company."

Rather, his Lordship said "... the whole framework of the section... is to confer on the court a very wide discretion to do what is considered fair and equitable in all the circumstances of the case, in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders in the company; and I find myself quite unable to accept that that discretion in some way stops short when it comes to the terms of the order for purchase in the manner in which the price is to be assessed. It has been pointed out, and I mention it again, that section 75 (4) is merely a collection of possible methods of giving effect to section 75 (3), and it is expressed to be without prejudice to the generality of subsection (3), which gives the court a very wide discretion as to the granting of relief in general terms in respect of the matters of which complaint has been made. … In my judgment, the "proper" price is the price which the court in its discretion determines to be proper having regard to all the circumstances of the case." 36 Similarly, the opening words of section 233 (1) Corporations Act 2001, empowering the court to "make any order under this section that it considers appropriate in relation to the company" is not restricted by the terms of paragraphs (a) to (j) of section 233 (1). Further, section 233 (1) (d) says nothing about the price for which purchase of shares can be ordered, or the basis for calculation of such a price. The only legal restriction on the way in which the price may be calculated is that it be a proper exercise of a judicial discretion. 37 There is no restriction stated or implicit in the section concerning the date as at which valuation should take place. In Shirim Pty Ltd v Fesena Pty Ltd [2002] NSWSC 10 at [14] Davies AJ said: "Moreover, although valuations usually occur as at the date of the commencement of the proceedings, other dates may be selected if to do so will exclude the financial effects of the oppressive conduct complained of. In Re O C (Transport) Services Ltd [1984] BCLC 251, it was held that the valuation should be made at a date earlier than the date of the petition, at the date when the unfair prejudice had occurred. In In re Bird Precision Bellows Ltd , the valuation was made as at the date of the order that the shares be purchased. In Re Jermyn Street Turkish Baths Ltd (1971) 1 WLR 1042, the assets were valued as at the date of the Master's certificate." 38 Even though there is this broad discretion as to the appropriate remedy, and as to the mode of valuation of shares if a compulsory buy-out order is held to be the appropriate remedy, if the case before a court is one which is similar to others which have been decided by the courts, the judge should take that into account in exercising his or her discretion. As Young J. said in Fedorovitch v St Aubins Pty Ltd (1999) 17 ACLC 1558 at 1559: "... the section is fairly common in the Common Law world and the approach to the section has been relatively uniform. It is important in the public interest that that uniform approach continued to be followed, so that shareholders and their legal advisers and accountants will be able to advise them." Date of Valuation 39 Both parties proceeded on the basis that the appropriate date as at which to value the share, if a compulsory purchase order were to be made, was 30 March 2003. This date seems to have been adopted for no better reason than that it was the latest date as at which a balance sheet of the company was available. When the company is one which continues to be profitable, this date of valuation is perhaps unduly favourable to URE. However when both parties have adopted 30 March 2003 as the relevant date, I shall do likewise. Share Valuation 40 Both Lopmand and URE called an accountant to give evidence about the value of a share in Painten. Lopmand called Mr Harry Brigden, while URE called Mr Michael Potter. Both used what they called a net asset basis of valuing the share. Mr Brigden came to a value for the share of $618,172. Mr Potter came to a valuation of $328,149. Each of them started from the balance sheet of Painten as at March 2003, and made some adjustments to arrive at a figure for net assets. The balance sheet as at March 2003 showed net assets of $217,788. I will deal seriatim with the adjustments which one or both of the two experts made to that balance sheet. Real Estate Value 41 The balance sheet showed land and buildings at cost. Both experts agreed that figure should be adjusted to the actual current value. They differed about what that value was, because Mr Brigden adopted the value which one real estate valuer had arrived at, while Mr Potter adopted the value which another real estate valuer had arrived at. Each of those real estate valuers gave evidence about the value of the industrial unit which Painten owns. 42 Lopmand called Mr Andrew Graham. He valued Painten's industrial unit at $2,480,000. URE called Mr Peter Phippen. He valued it at $2,270,000. 43 Each valuer proceeded by capitalising the net market rental value of the property. The valuers arrived at an identical figure for the net market rental value of the property, namely $220,030 per annum. However they used different capitalisation rates - Mr Graham used a capitalisation rate of 9%, while Mr Phippen used a capitalisation rate of 9.75%. 44 Both valuers agreed that the rent actually being received under the current lease was slightly above a market rental. Mr Graham made allowance for this by adding $8,000 to his valuation. Mr Phippen thought that the effect on value was too small to justify any addition. 45 Both valuers used as a comparable sale the sale of a strata title industrial unit located immediately adjacent to the subject property, which sold in April 2003, for a price which reflected a yield of 9.64%. This was a private sale, without the intervention of an agent. 46 Otherwise, the valuers used different sales as comparables. Without setting out all the characteristics which he identified as relevant ones, Mr Graham's comparables had the following characteristics: Sales Date Yield April 2003 7.94% June 2003 Initial 7.08% Reversionary 6.87% December 2002 8.92% February 2003 9.06% November 2002 7.34%

47 The comparables which Mr Phippen chose had the following characteristics: Sale Date Yield April 2000 owner occupied, hence no yield December 2001 9.75% December 2001 10.7% December 2001 10.6% September 2001 10.5% January 2002 10.6%

48 While the comparables which Mr Graham relied upon were mostly not in the same local government area as the subject property, he gave evidence, which I accept, that the difference in local government area did not make a difference of any significance, so long as the comparables were located within the western Sydney area (as these were). 49 While the recent sale of a unit immediately adjacent to the subject property is a significant piece of evidence concerning the value of the subject property, I accept Mr Graham's evidence that the fact that it was marketed privately makes it a less reliable indicator of value than a sale of a property, so close in both space and time to the subject property, would ordinarily be. I also accept Mr Graham's evidence that, by comparison with overall market yields, the price achieved for that unit "was actually soft". 50 The age of the comparable sales relied upon by Mr Phippen (apart from the immediately adjacent property) makes them less persuasive than the more recent sales which were adopted by Mr Graham as his comparables. 51 In these circumstances, I would adopt a capitalisation rate of 9.25% on the net market rental value. That gives a figure of $2,400,324. 52 In principle, if the rent presently achieved under the lease is greater than the net market rental, an allowance should be made for the effect on value of that excess. I add $8,000 to the valuation to take account of that factor. That gives a valuation of the property, rounded, of $2,408,000. That is the value which should be used in the balance sheet of Painten which is used to calculate the value of the Lopmand Painten Share. Costs Connected with Realisation of Real Estate 53 Mr Potter has included, as notional liabilities of the company, agent's commission and valuation fees of $34,050 in connection with the sale of the real estate, advertising and marketing costs of $15,000 in connection with the sale of the real estate, and income tax at 30% on the net profit on sale (an amount of $328,568). 54 No evidence was called to dispute the correctness of these three figures. Mr Brigden did dispute, however, whether as a matter of principle liabilities of this kind should be recognised. He said that he was valuing the company on a "going concern" basis, while these three types of expenses would be incurred only in a liquidation. As well, the actual quantum of any allowance for income tax on the net profit on sale will necessarily be different to the figure which Mr Potter adopted, because Mr Potter's figure was based upon Mr Phippen's valuation of the real estate. 55 Whether these three types of expenses ought be recognised as a liability depends on a matter of principle, concerning the type of task that is being undertaken when shares are being valued for the purpose of a compulsory buy-out order under section 233 Corporations Act 2001. 56 If a share is being valued on the basis that a company is to be liquidated, all expenses which the company would need to pay in the course of being liquidated should be taken into account. Thus, for a valuation of the Lopmand Painten Share on the basis of a liquidation, it would be necessary to take into account the expenses which would be incurred in selling its real estate, and the income tax it would be obliged to pay once that real estate had been sold. 57 The question, however, is whether the Lopmand Painten Share ought be valued on the basis that Painten is being, at least notionally, liquidated. I see no reason why it should be valued on that basis. The effect of URE purchasing the Lopmand Painten Share will be that URE holds all of the issued shares in Painten. There is no basis in the evidence for believing that Mr Lindsay-Owen has plans to cause Painten to sell the real estate in the foreseeable future. The investment is cash flow positive, and has been cash flow positive for many years. Even if the time were to come when Mr Lindsay-Owen decided to realise the investment, it would be commercially attractive for him to try to realise it by selling all the shares in Painten, rather than by having Painten sell the land. Upon any such sale of shares, expenses analogous to the selling expenses which Mr Potter recognised may well be payable, but they would not be payable by Painten. Further, Painten would not pay income tax by reason of that sale occurring. 58 I was not taken, by either party, to any cases which had previously considered whether expenses such as these marketing expenses, and income tax expenses, should be treated as a notional liability of a company, for the purpose of a compulsory share buy-out order under an oppression section. 59 Fedorovitch v St Aubins Pty Ltd (1999) 17 ACLC 1558 deals with the effect of taxation on a compulsory buy-out order, but in a different context to the present one. Fedorovitch involved a home unit company, where there was dispute about how much a shareholder, who held his shares in the home unit company as an investment, should be paid when an order was made for the compulsory purchase of his shares. The valuers in that case had valued his share as though the value was identical to the value of the apartment which could be occupied by the owner of the shares. The owner of the share contended that he should receive more than that, to take account of the fact that he would have to pay capital gains tax when the shares were sold, and would have to pay legal costs on selling the shares which gave an entitlement to occupy the existing apartment, and legal costs and stamp duty in buying a home unit to act as a replacement investment. Young J declined to make an allowance for any of these expenses. His Honour reasoned that the incurring of the liabilities for capital gains tax, and for the legal and stamp duty costs involved in changing investments might well be loss which was sustained as a consequence of the oppressive conduct, but it was not something which affected the value of the shares. His Honour recognised that it was possible to value the shares, for the purpose of a compulsory buy-out order, at the value they would have had if the oppressive conduct had not occurred, and also by making an allowance if the oppressive conduct has resulted in a shareholder being forced to sell at the bottom of the market, but his Honour held that consequences of oppression which could not properly be taken into account in valuing the share could not be compensated for under the section. 60 The way in which tax and selling expenses impacted on the decision in Fedorovitch can readily be distinguished from the present case. However the general principle applied in Fedorovitch, that it is only matters which affect the value of a share which should be taken into account in fixing a price for a compulsory buy-out order, can and should be applied here. In the present case, the prospect that, even if Mr Lindsay-Owen were to decide to quit the investment, the way in which he might choose to do so is by sale of the Painten shares has the effect that no allowance should be made for income tax on any net profit made by Painten, nor for marketing expenses which might become payable, at some stage in the future, in connection with a sale of shares in Painten which gave effective control of the Marayong unit. If the Marayong unit were owned as to two-thirds by Mr Lindsay-Owen personally, and as to one-third by Mr Lake personally, and Mr Lindsay-Owen were to purchase of Mr Lake's one-third interest, at a fair valuation, one can readily see that if Mr Lindsay-Owen were to sell the Marayong unit at some stage in the future, presumably he would have to pay marketing expenses in connection with that sale, and income tax on any profit he made on the sale. But the need to incur those marketing expenses in the future, or to pay that income tax in the future, is not something which would be taken into account in assessing the value of Mr Lake's one-third interest in the real estate. When the Marayong unit is held by a single-purpose corporate vehicle, and there is no proved intention to realise the investment in the foreseeable future, I likewise do not see any need to take into account the prospect that marketing expenses and income tax might be payable on any future sale. I therefore decline to make any adjustment to the value of the Painten assets, for the purpose of valuing the Lopmand Painten Share, to take account of that possibility. 61 The practical effect of this way of valuing the Lopmand Painten Share is that it has a higher value, for the purpose of a compulsory buy-out order under section 233, than the amount which Lopmand would have received if I had decided that the appropriate remedy to grant under section 233 was to wind up Painten. There is no oddity in this conclusion, however. It frequently happens that the value of a share in an enterprise which is a going concern, is higher than the value which that same share would have if the enterprise were in the course of liquidation, or about to be liquidated. Management Fees 62 The company profit and loss accounts show management fees being charged, over the period in question, as follows: Year Amount 1997/1998 $16,995.00 1998/1999 $38,797.00 1999/2000 $91,823.00 2000/2001 $73,821.00 2001/2002 $73,210.00 2002/2003 $54,908.00 $349,554.00

63 The documents produced by the company included a worksheet which explained the makeup of the management fee which had been charged for the year ended 30 June 2000. It reads: Accounting fees (25%) - Brigid 6,659 Salaries - Chris Bantick (25%) 14,405 Superannuation (25%) 706 21,770

Markup 50% 10,885 32,655

Rent (25%) 12,234 Other office costs (25%) - electricity, office equip etc 2,421 Directors fee (already claimed $30,000 in super) 5,000 52,310

Bank charges (most bank charges related to Euroka & URE) 2,000 Motor vehicle 5,000 59,310

In a different hand, below this, is the notation "Lease up Fee $32,513" . This refers to a fee for the negotiation, during the year ended 30 June 2000, of a new lease for the premises. The addition of $59,310, and $32,513 is $91,823, the amount actually charged as management fee in the 1999/2000 year. Other worksheets for the years ended 30 June 1999, and 30 June 2001, were also produced. 64 The general ledger and journal of Painten record that the majority of the management fees were paid to either Lindsay-Owen Holdings Pty Ltd or to Mr Lindsay-Owen. There were no director's minutes, minutes of meetings of shareholders, or any agreement or any other documentation produced by the company to evidence authorisation of any of those management fees. As an order had been made for the inspection of the books of the corporation, in terms calculated to require all material relevant to the value of the corporation's shares to be produced, I can infer that no such documentary authorisation of the management fees exists. 65 Mr Brigden expressed the view that, as the only asset of the company was a single property, rented to a government department, and the rent was paid directly into a bank account, the appropriate fee for management of the property would be at the lower end of the range of the fees which an external managing agent would pay for managing a commercial property. That range is 5% to 7% of the gross rental income. Mr Brigden expressed the view that a management fee of 5% of gross rental income was appropriate. He therefore allowed only that 5% of gross rentals as a management fee. 66 Mr Potter made no adjustment in his report on account of management fees. Mr Potter has tabulated all the information which is available on that topic, and identified the items which went into management fees charged as: "(i) Reletting fee in the 2000 year; (ii) Accounting fees; (iii) Staff salaries; (iv) Office rent; (v) Vehicle charges and other; (vi) Time of Gregory Lindsay-Owen (Director's fee); and (vii) Markup." 67 Mr Potter expresses the view: "It would appear the charges may be excessive given the limited nature of the company's operations of managing a single property. In particular, the extent of the markup and wages for staff, in addition to property management fees, is likely duplicative. It is also apparent that there are other items or work undertaken in addition to the management of the property. I have made enquiries as to the market rate for managing a property of this type. In the table at section 7.2.4 below I set out my calculations of what the management fee would be given this market rate. However, I am unable to comment on the appropriateness of the fee charged as I am not aware of the full extent of the services provided to the company. Whilst it is difficult to form a view of the value of other services (services other than property management), I am of the opinion a charge of $5,000 per annum would not be unreasonable." 68 Mr Potter's enquiries led him to conclude that a reletting fee of $22,423 would be reasonable, for the reletting of the property which occurred in the 2000 financial year. On that basis, he came to the conclusion that, if no charge should properly be made for directors' time, there had been a total excess management fees paid of $196,159. However, the net cost to the company of excess management fees (on that basis) was lower, because if the excess management fees were not paid, tax at 30% would be payable on the income before deduction of the excessive management fee expense. After allowing for income tax in this way, the net excess charges made to the company over the 1998 to 2002 tax years for management fees would be $137,311, on the assumption that no amount should be charged for directors' time. 69 Because Mr Potter had doubts about whether any amount should be charged for directors' time, and he had no information on the basis on which he could quantify a proper amount for directors' time, he felt he would not be justified in reducing the management fees below that which had actually been charged. I do not take this approach to the question of charging for directors' time. Once the difference of opinion between Mr Brigden and Mr Potter, concerning the appropriate quantum of management fees, had been exposed by the experts' reports, URE did not seek to put on any evidence to better explain what services had been provided by Mr Lindsay-Owen or other companies in his group to Painten, connected with the management of Painten. The property management fee of 5% of gross rentals would include as one component allowance for the executive time involved in collecting the rentals. It is appropriate to allow an extra fee for the work involved in negotiating a renewal of the lease. Mr Potter's figure of $22,423 is the appropriate figure for this work. URE has not demonstrated that the tasks actually carried out by the directors of Painten involved anything of substance beyond the activities in collecting the rents and doing the other supervisory tasks that a real estate management agent performs, and the extra work involved in negotiating a renewal of the lease. While there would be some activities, such as ensuring that statutorily required meetings were held, statutorily required accounts were kept, and statutorily required returns were submitted, the extremely simple nature of the business operations of Painten is such that it is unlikely that these activities would take very much of a director's time. Further, they are to some extent covered by the allowance of $5,000 per annum which Mr Potter has made for the value of services other than property management. It has not been shown that any allowance at all is appropriate, beyond the property management fee, the lease renegotiation fee, and the allowance of $5,000 per annum, to take account of directors' time. 70 As well, Mr Potter points out that Painten's loan of $900,000 from the Macquarie Bank was guaranteed by Mr Lindsay-Owen. He says: "Whilst the property value is significantly higher than the debt to the Bank, Mr Lindsay-Owen's financial position includes a contingent liability which would ordinarily be taken into account by other parties, such as a financier considering other projects or businesses in which he is involved. In my experience the usual costs charged by a financial institution for guarantees secured by assets is in the range of 1 to 2 percent. From my experience and given the level of risk in this case I consider a charge of 1 percent would suffice. This would result in a charge of $9,000 per annum or $45,000 over five years in this case. 71 I accept that a notional charge by Mr Lindsay-Owen for the provision of his guarantee to Macquarie Bank is appropriate. Mr Potter's quantification of that charge at $9,000 per annum was not disputed. In my view, such a charge should be allowed. 72 Further, Mr Brigden does not appear to have calculated an adjustment in fees for the nine months to March 2003. Mr Potter would recognise an excess of $42,750 in that period, before allowing a fee for provision of the guarantee to Macquarie Bank. After allowing that fee, the excess reduces to $36,000 for that nine-month period. It is appropriate that management fees be allowed, for the nine months to March 2003, on the same basis as I have held appropriate for the year ending 30 June 2002. The amount of the excess management fees paid should be added back into the balance sheet of Painten which is used to calculate the value of the Lopmand Painten Share. Superannuation Expense 73 Painten's profit and loss account for the year ended 30 June 2000 shows an expense of $30,000 for superannuation. The general ledger showed a payment to MLC Superannuation by Lindsay-Owen Holdings Pty Ltd. There is no evidence that Painten had any employees whatsoever. No evidence has been put on by URE to explain the payment. There were no director's minutes, minutes of meetings of shareholders, or any agreement or any other documentation which authorised the payment. If the contribution was made on behalf of a director, it should have been taken into consideration in determining the management fee for that year. In my view it is an inappropriate deduction for the purpose of valuing a share in Painten. It should be added back into the balance sheet of Painten which is used to calculate the value of the Lopmand Painten Share. Dividend 74 In the period of 1 July 1999 to 30 June 2000 a dividend payment of $81,648 was credited against the Lindsay-Owen Holdings Pty Ltd loan account. There was no director's minute authorising this payment. Lindsay-Owen Holdings Pty Ltd was not a member of the company at that time, according to the register of members. (The members, according to the register, were Lopmand Pty Ltd and URE). The amount of that dividend payment should be treated as a debt owing by Lindsay-Owen Holdings Pty Ltd in the balance sheet used to calculate the value of the Lopmand Painten Share. Interest 75 The accounts of Painten show that it paid interest to URE in the 1998 tax year of $40,965, and in the 1999 tax year of $10,074. In the 2000 tax year interest of $4,015 was paid to Lindsay-Owen Holdings Pty Ltd. There is no documentation to support the making of the loans. Mr Brigden has not been able to ascertain whether any adjustment or allowance has been made for the cash benefit that URE and/or Lindsay-Owen Holdings Pty Ltd would have gained from the surplus funds from the rental receipts over property outgoings. 76 Nor was Mr Potter able to comment on the appropriateness of the interest expense which had been charged. 77 When URE had it within its power to clarify the uncertainties concerning these interest expenses, but did not do so, the appropriate course to take is to disallow them. 78 The disallowance of the interest expenses is also supported by the fact that the excessive management fees have been paid by Painten to companies associated with Mr Lindsay-Owen over the years, and also by the fact that the "dividend" of $81,648 was paid in the year ended 30 June 2000. Merely adding back the excessive management fees and "dividend" into the balance sheet as at March 2003 does not take account of Mr Lindsay-Owen's companies having had the benefit of the excess management fees and "dividend" at dates earlier than March 2003. 79 These interest expenses should be added back into the balance sheet which is used to calculate the value of the Lopmand Painten Share. Summary 80 The price at which URE should purchase the Lopmand Painten Share is that derived from the balance sheet of Painten as at March 2003, with the following adjustments.

2. No expenses allowed for notional selling expenses of the real estate, or income tax upon sale of the real estate.

3. Reimbursement of excessive management fees charged over the period from 1 July 1997 to March 2003. The management fees are excessive to the extent to which they make charges other than for

(c) a reletting fee of $22,423 in the 2000 financial year; and

4. Reimbursement of the superannuation charge of $30,000 in the year ended 30 June 2000.

6. Reimbursement of the "dividend" paid to Lindsay-Owen Holdings Pty Ltd. 81 There will also be adjustments needed to take account of the consequences of these adjustments on the income tax which would have been payable by Painten, over the years, if its operations had been carried out so that they were consistent with these adjustments. 82 It is not apparent to me whether the result of performing these calculations will be that the present value of the Lopmand Painten Share exceeds the amount for which it is security, or not. Whatever might be the situation on that score, the purchase price of the share should be set off against the debt owing. The effect of carrying through the purchase will be that URE becomes the holder of the share free of Lopmand's equity of redemption. In the event that the value of the share exceeds the amount secured, URE will owe Lopmand the difference. In the event that the value of the share is less than the amount secured, URE will be an unsecured creditor of both Mr Lake and Lopmand for the difference.

83 I direct the parties to bring in short minutes of order to give effect to these reasons for judgment. **********

Last Modified: 10/28/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.