These proceedings were originally commenced by Summons by the Plaintiffs, Victory Projects Pty Limited ("Victory") and Mr Gerard Kirkpatrick, on 27 July 2015. A Statement of Claim was then filed pursuant to orders made by Bergin CJ in Eq on 4 December 2015, and an Amended Statement of Claim was filed, by leave, on 25 August 2016.
By way of background, Victory holds one-third of the ordinary shares in AAA Self Storage Pty Limited ("AAA") and the Third and Fourth Defendants, Langwood Pty Ltd ("Langwood") and Portborough Pty Ltd ("Portborough") each also hold one-third of the ordinary shares in AAA. Mr Kirkpatrick holds one-third of the shares in the Second Defendant, Kirco Properties Pty Limited ("Kirco") and the Fifth and Sixth Defendants, Messrs Cooper and Prince, each hold one-third of the shares in Kirco. Kirco in turn holds 600,000 Class F redeemable preference shares in AAA. Messrs Kirkpatrick and Cooper are directors of AAA and Messrs Prince, Cooper and Kirkpatrick are directors of Kirco.
[4]
The affidavit and other evidence and issues as to credit
The Plaintiffs relied on many affidavits in respect of the proceedings, several of which initially appear to have been prepared in respect of applications for security for costs, but which were read in this hearing without any apparent attention being paid to whether they were relevant to it. Large parts of those affidavits were plainly inadmissible, but were pressed over objection, and rejected.
The Plaintiffs rely on Mr Kirkpatrick's affidavit dated 26 July 2015 which referred to the shareholdings in AAA and Kirco, the history of a self-storage business operated by AAA in Hobart, to which I will refer below, and the circumstances in which resolutions for removal of Mr Kirkpatrick as a director of AAA and Kirco were proposed by the Defendants. The Plaintiffs also relied on Mr Kirkpatrick's further affidavits dated 11 September 2015, 21 September 2015, 23 September 2015, 23 October 2015, 26 February 2016 and his two affidavits dated 26 April 2016 in response to the affidavit evidence of Messrs Cooper and Prince respectively. The Plaintiffs also relied on a further affidavit of Mr Kirkpatrick dated 13 October 2016, parts of which were admitted in reply to Mr Cooper's evidence, and other parts of which were not admitted, so far as they sought to raise new issues, late in the trial and after the Plaintiffs' case had closed.
I will refer to important aspects of Mr Kirkpatrick's evidence in outlining the chronology of events below. Mr Braham, who appeared for the Defendants, squarely put to Mr Kirkpatrick that aspects of his affidavit evidence was invented and false. It is not necessary to go that far for the purposes of determining this case, although I do find that the inconsistencies in Mr Kirkpatrick's evidence to which I refer below are such that his recollection of events is unreliable, whether because he is mistaken, or because he has reconstructed these events, or possibly because he has tailored his evidence to the result for which he contends.
The Plaintiffs also relied on the affidavit of Ms Karen Kirkpatrick, Mr Kirkpatrick's wife, dated 21 September 2015 which contains several paragraphs in substantially identical form to Mr Kirkpatrick's affidavit of 11 September 2015. Mr Kirkpatrick accepted in cross-examination that his wife had read his affidavits before he swore them (T97-98). He also accepted that his wife had supplied dates and information that was required for his affidavits, including information held on computer which she could access more easily than he could (T98). Mr Kirkpatrick's evidence in cross-examination was that he had not reviewed Ms Kirkpatrick's affidavit before she swore it (T98); that is not inconsistent with the identical form of the affidavit evidence, if Ms Kirkpatrick or the solicitor acting for the Plaintiffs had copied her affidavit from Mr Kirkpatrick's affidavit. Mr Kirkpatrick accepted that he had read his wife's affidavit after she swore it and had had access to his wife's affidavit before he swore his affidavits of 26 April 2016 (T99).
[5]
Chronology of events
I should now set out a chronology of significant events in the matter. In 2003, Mr Kirkpatrick, the late Mr Terrence Kirkpatrick and Mr Cooper became involved in a self-storage business in Hobart. AAA conducted the business, and Kirco held the lease of the premises, owned the fit-out and acted as trustee of a trust known as the Kirco Property Trust (Cooper 13.4.16 [11]-[14]). The Plaintiffs contend that, about 2003, the directors of AAA agreed that work performed by the directors in relation to AAA's business would be charged and paid at the rate of $40 per hour and that accounting services provided to AAA by Cooper & Associates would also be charged and paid at the rate of $40 per hour. AAA's Hobart self-storage business was sold to a third party in mid-2009.
In early 2009, Messrs Kirkpatrick and Cooper registered a business name "Sydney Mini Storage" and caused AAA to lease two separate premises at 204 and 216 Wyndham Street, Alexandria, to conduct a self-storage business under the name "Sydney Mini Storage". The premises at 216 Wyndham Street were leased from Belmorta Pty Limited ("Belmorta"). After the entry of the lease, Messrs Kirkpatrick and Cooper formed the view that a director of Belmorta had misrepresented the outgoings of the leased premises to them (Cooper 13.4.16 [19]-[27]). AAA subsequently took legal advice in relation to a potential claim against Belmorta, and one of the issues in dispute between the parties is the circumstances in which that claim was not pursued. I will address that issue below. From 2009 onwards, AAA was under financial stress and depended upon capital injections reflecting amounts received from the subsequent lease of the fit-out of the Hobart premises to the purchaser of the Hobart business, loan funds from Mr Kirkpatrick and Mr Cooper, and subsequent funds received by equity injection and loans from Mr Prince (Cooper 13.4.16 [26]; Ex D1, Tab 4).
The fit-out of AAA's Hobart business was transferred on 30 June 2010 from Kirco to Kirco Investments Pty Ltd ("Kirco Investments"), as manager of the Kirco Investment Syndicate. The syndicate deed for the Kirco Investment Syndicate, dated 28 June 2010, contained specific provisions dealing with the appointment of directors to represent the interests of the parties and the removal of directors, as follows:
"6.1 Each Syndicate Member shall be entitled to act as a Director or to nominate an appointee as Director. In the case of joint Syndicate Members, one director only may be nominated in respect of that joint interest in the Syndicate Capital; …
6.4 A Syndicate Member or his nominee shall not be removed as a Director except by a unanimous resolution of the Syndicate Members. The Syndicate Member who or whose nominee is sought to be removed by such a resolution shall be entitled to be heard at the meeting convened for that purpose but shall not be entitled to vote thereat."
[6]
The effect of the 2010 resolutions
The Plaintiffs plead that, on or about 23 September 2010, the directors of AAA, Messrs Cooper and Kirkpatrick, resolved that all major decisions affecting AAA and all financial decisions involving expenditure in excess of $5,000 would not be passed or agreed to without the unanimous resolution of the board of directors ("AAA 2010 resolution") (ASC [26]). Mr Cooper and Langwood admit that such a resolution was circulated but deny that it was passed. The Plaintiffs also plead that, on or about the same date, the directors of Kirco, Messrs Cooper, Kirkpatrick and Prince resolved, inter alia, that all major decisions affecting Kirco and all financial decisions involving expenditure in excess of $5,000 would not be passed or agreed to without the unanimous resolution of the board of directors ("Kirco 2010 resolution") (ASC [27]). Mr Cooper and Langwood again admit that such a resolution was circulated but deny that it was passed. The Plaintiffs seek a declaration that the AAA 2010 resolution and the Kirco 2010 resolution prevent the calling of a general meeting of AAA and Kirco which has as its agenda the removal of Mr Kirkpatrick as a director of both or each of AAA and Kirco, unless the calling of that general meeting is by unanimous resolution of the directors of the companies. These matters are also relied on to support the Plaintiffs' oppression claim, which I will address below.
The AAA 2010 resolution (Kirkpatrick 26.2.16 Annexure "B", CB 244) purported to confirm proceedings of the directors of AAA on 23 September 2010 (although it is plain that no meeting had occurred on that date) and resolved to give effect to an issue of shares that would have the result that there would be a one-third shareholding for each of Langwood, Victory and Portborough; that consideration should be given to further capitalising AAA in the future, with such funds utilised in reducing "internal" debt to the Kirco Property Trust; and that Mr Prince be appointed as a director of AAA, effective immediately. A lengthy further narrative under the heading "Business Matters" appears to have reflected a number of matters set out in the information memorandum that was previously sent to Mr Prince, partly in the form of a narrative rather than resolutions. That narrative recorded a resolution to the effect that:
"Proceedings of Directors
Resolved that all major decisions affecting [AAA] and all financial decisions involving expenditure in excess of $5,000 shall not be passed or agreed to without the unanimous resolution of the Board of Directors."
That resolution is expressly directed to "proceedings of directors", and to acts of the board of AAA, and not to the act of a single director exercising a power that may be vested in an individual director under AAA's constitution.
[7]
The oppression claim
The Plaintiffs also seek a declaration that the affairs of AAA and Kirco are being conducted in a manner oppressive to, or unfairly prejudicial to, or unfairly discriminatory against the Plaintiffs. This claim turns on allegations of oppression pleaded against Mr Cooper and no allegations of oppressive conduct are pleaded against Mr Prince or Portborough, which are shareholders in Kirco and AAA respectively. The Plaintiffs allege that the conduct of the companies' affairs is oppressive, for the purposes of s 232(a) of the Corporations Act in respect of a number of matters; and also allege that an act or proposed act or omission by or on behalf of the companies, or a resolution or proposed resolution is oppressive, for the purposes of s 232(b)-(c) of the Corporations Act, namely the proposed resolution to remove Mr Kirkpatrick as a director of AAA and Kirco.
Before turning to the range of matter relied on to support this claim, I should first refer to the applicable legal principles. I have drawn upon my summary of those principles in Byrne v A J Byrne Pty Ltd [2012] NSWSC 667 and Re Ledir Enterprises Pty Ltd [2013] NSWSC 1332; (2013) 96 ACSR 1 in that respect. Section 232 of the Corporations Act provides that the Court may 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 a company; or
(c) a resolution, or a proposed resolution, of members or a class of members of a 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."
A reference to orders in respect of oppression where the affairs of a company were being conducted in, or an act or omission was, "contrary to the interests of the members as a whole" was introduced into Australian companies legislation by amendments to s 320 of the Companies (NSW) Code made in 1983, and s 260 of the Corporations Law continued that reference, which then appeared in the same section as the other bases for relief in oppression. In New South Wales Rugby League Ltd v Wayde (1985) 1 NSWLR 86 at 96, the Court of Appeal noted that that formulation "reflects recognition of a long established principle of company law". The language of the section was amended by the Corporate Law Economic Reform Program Act 1999 (Cth) to separate the concepts which now appear in s 232(d) and (e) respectively. Section 53 of the Corporations Act in turn identifies the "affairs of a body corporate" for several provisions of the Act, including s 232, as including the "promotion, formation, membership, control, business, trading, transactions and dealings of the body" (s 53(a)) and "the internal management and proceedings of the body" (s 53(c)). The orders which may be made include, relevantly, an order for the purchase of any shares by any member (s 233(1)(d)) and an order that the company be wound up (s 233(1)(a)).
[8]
Whether the AAA 2015 resolution and the Kirco 2015 resolution amounted to oppression
The Plaintiffs identify several aspects of Mr Cooper's alleged conduct in conducting the affairs of AAA and Kirco that are said to constitute oppressive conduct for the purposes of s 232(d) and (e) of the Corporations Act. Mr Kirkpatrick submits, and I accept, that Mr Kirkpatrick placed trust in Mr Cooper over the relevant period (T153) where Mr Cooper was his accountant, and Mr Kirkpatrick had a background in construction and development, whereas Mr Cooper had accounting qualifications. Mr Kirkpatrick also submits, and I accept, that Mr Cooper exercised substantial control over financial aspects of the business, at least in the relevant period. The Defendants also submit, with considerable force, that it was not unfair for Mr Cooper to exercise discretion as to matters, without consultation with Mr Kirkpatrick, where that appears to have been the practice adopted, without objection by Mr Kirkpatrick, over a number of areas of the companies' activities over the relevant period. I have regard to these matters in addressing the particular issues on which the Plaintiffs rely below.
First, the Plaintiffs plead (ASC [38]) that the calling of the general meeting to approve the AAA 2015 resolution and Kirco 2015 resolution constituted conduct that is contrary to the interests of the members of AAA and Kirco as a whole and is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member of AAA and Kirco namely, Victory and Mr Kirkpatrick. The Plaintiffs also plead, and the Defendants deny, that the calling of the general meetings to remove Mr Kirkpatrick as a director of AAA and Kirco were major decisions affecting AAA and Kirco; that they were contrary to the AAA 2010 resolution and the Kirco 2010 resolution; and that they constituted conduct of the affairs of AAA and Kirco in a manner oppressive to or unfairly prejudicial to, or unfairly discriminatory against the Plaintiffs. The Plaintiffs seek an order that AAA, Kirco, Langwood, Portborough and Messrs Cooper and Prince be permanently restrained under s 233(1)(c) of the Corporations Act or alternatively under s 233(1)(i) of the Corporations Act from moving or causing to be moved the AAA 2015 resolution and the Kirco 2015 resolution, and that the relevant companies, Langwood and Portborough, be restrained from voting in favour of the AAA 2015 resolution and that Messrs Cooper and Prince be restrained from voting in favour of the Kirco 2015 resolution. The Plaintiffs also seek an order that general meetings of members of AAA convened by notice to members dated 3 July 2015 not be held and that resolutions in the form of the AAA 2015 resolution and the Kirco 2015 resolution not be included in any general meeting of AAA and Kirco.
[9]
Alleged failure to produce financial records and minute books
The Plaintiffs allege (ASOC [39(o)]) that AAA and Kirco have refused or neglected to produce financial records of AAA and Kirco to the Plaintiffs despite requests and contrary to AAA's and Kirco's obligations to do so under s 290(1) of the Corporations Act. The Plaintiffs also allege (ASOC [39(p)]) that AAA and Kirco have refused or neglected to provide copies of minute books of those companies to the Plaintiffs, or provide those minute books for inspection by the Plaintiffs, contrary to the companies' obligations under s 251B of the Corporations Act. The Defendants accept that denial of access to financial information could amount to oppression in an appropriate case: Re Back 2 Bay 6 Pty Ltd (1994) 12 ACSR 614; Re Ledir Enterprises Pty Ltd above at [194]. Their response is that they provided all relevant corporate and financial records relating to the companies to the Plaintiffs. The factual basis of this allegation has not been established, where the evidence indicates that AAA and Kirco have in fact offered to make available, and have made available, such records to the Plaintiffs.
[10]
Appointment of Ms Johnstone to execute document
The Plaintiffs allege (ASOC [39(q)]) that Mr Cooper appointed his de facto partner, Ms Johnstone, as secretary of AAA on or about 19 December 2014 without Mr Kirkpatrick's agreement or a resolution of the board of directors. Mr Cooper leads evidence to explain the circumstances in which Ms Johnstone was purportedly appointed as AAA's company secretary, for a short period, to allow execution of an otherwise uncontroversial document (Cooper 13.4.16 [90]-[91]). That conduct does not seem to me to rise to the level necessary to establish a claim in oppression.
[11]
Expenditures on Lygon Street property
The Plaintiffs also allege (ASOC [39(r)]) that Mr Cooper used monies belonging to AAA to fund a project at Lygon Street, East Brunswick in Victoria exclusively for his benefit and contrary to the interests of AAA.
Mr Cooper, through an associated entity, owned the Lygon Street property. Mr Kirkpatrick undertook work on that property between January and April 2010 and charged amounts for materials for that work to his AAA credit card (T352-353). Mr Cooper did not make the payments to which this allegation refers from the companies in relation to the Lygon Street property (Cooper 29.8.16, [35]). The sums paid were treated as a debit to Mr Cooper's loan account. Mr Kirkpatrick was paid, albeit not in cash, by Mr Cooper for his time in working on this project and expenses relating to the project were adjusted in the "squaring up" of Messrs Kirkpatrick's and Mr Cooper's loan accounts in September 2010 (Ex D1, Tab 99). There is no evidence of any complaint by Mr Kirkpatrick as to these arrangements prior to the commencement of the hearing.
In Mr Cooper's cross-examination, on the second last day of the hearing, Mr Morahan put to Mr Cooper that he had breached a promise to Mr Kirkpatrick to reimburse the sums to AAA (T353), as distinct from their being charged to the loan account. Mr Kirkpatrick had not led evidence in chief of such a promise. Mr Cooper denied in cross-examination that he had instructed Mr Kirkpatrick to put the charges incurred by Mr Kirkpatrick in relation to the Lygon Street property on AAA's credit card or that there was any discussion as to whether Mr Cooper would deposit money back into the AAA account (T353). Mr Cooper accepted that he had not reached any agreement with Mr Kirkpatrick that the amounts should be debited to Mr Cooper's loan account (T354), presumably as distinct from being reimbursed by Mr Cooper as they were incurred. Mr Cooper's evidence in cross-examination was that he consolidated the loan accounts at the end of the year in accordance with the usual practice (T355).
There is no room for a proposition that Mr Kirkpatrick did not consent to the expenditures that he had himself made from AAA's credit card in respect of the Lygon Street property, although for Mr Cooper's benefit, and there is no evidence of impropriety in the way in which these payments were treated in the loan accounts or in the "squaring up" of those accounts before Mr Prince invested in the companies. Mr Kirkpatrick's case in respect of the expenditure of funds on the Lygon Street property shifted somewhat, in reply and closing submissions, presumably in recognition of the fact that the relevant expenditures were made by him rather than without his knowledge, to rely on the unpleaded case that the use of these funds was in breach of Mr Cooper's undertaking to pay those funds back to AAA, rather than record them in his loan account. That case is not properly open to the Plaintiffs where the Defendants did not have a proper opportunity to meet it, and I did not allow the evidence to advance it to be read for the first time in reply.
[12]
Other personal expenditures
The Plaintiffs allege (ASOC [39(s)]) that Mr Cooper transferred monies in the amounts of $24,200, $5,382.50 and $6,517 to an account unrelated to the business of AAA or Kirco in September and October 2010. Mr Cooper's evidence is that these sums relate to three transfers made in October 2010 for accounting fees, at the time that the directors' loan accounts were "squared up" in late 2010 before Mr Prince invested in the companies (Cooper 13.4.16 [140]-[144]). Invoices for these charges were provided to Mr Kirkpatrick at the time and he does not then appear to have suggested they were not proper charges (Ex D1, Tab 105, p 769; Tab 107, pp 808, 816). The allegation that these monies were paid appears to be established, although it appears that those monies were then lent back to the companies by Mr Cooper in order to improve their cash flow (Cooper 13.4.16 [144]). Mr Kirkpatrick accepted, in cross-examination, that these amounts were dealt with in the squaring up of his and Mr Cooper's loan accounts and that Mr Cooper did not take cash out of the companies as part of this process (T153,155).
It may be that this complaint overlaps with a complaint that I will address below in relation to fees charged by Mr Cooper and Cooper & Associates generally, although the pleading does not indicate that and little was said about this issue in the Plaintiffs' submissions. Quite apart from any justification for the charges and the lack of any contemporaneous protest by Mr Kirkpatrick, any benefit to Mr Cooper or disadvantage to the companies or Mr Kirkpatrick of these payments, which was then addressed in the square-up process prior to Mr Prince's investment in the companies, was not material. I am not satisfied that this matter, alone or with other matters, supports the oppression claim.
The Plaintiffs also allege (ASOC [39(t)]) that Mr Cooper used other monies relating to AAA for his own purposes. Several personal expenditures made by Mr Cooper were recorded in shareholder loan accounts, and Mr Kirkpatrick made similar expenditures recorded in a similar way, where Messrs Cooper and Kirkpatrick or their associated entities had advanced substantial funds to AAA. The practice of incurring personal expenditure and consolidating it in shareholder loan accounts had existed over a considerable period, prior to the breakdown of the parties' relationship (Cooper 13.4.16 [107]-[123]; Ex D1, Tabs 69-94). Over the period in which those personal expenditures were charged against the loan account, Mr Cooper in turn paid substantial costs on AAA's behalf, which are also recorded in that loan account.
[13]
Payments to PDF and Mero Enterprises Pty Ltd
The Plaintiffs also allege (ASOC [39(u)]) that Mr Cooper paid monies to third parties, namely PDF and Mero Enterprises Pty Ltd ("Mero") and that such services and payments were unrelated to the business of AAA and contrary to the interests of AAA.
The Plaintiffs relied on payments made to PDF on 14 June 2013 in the amounts of $20,000 and $44,221, and to payments for a mobile phone for Mr Sha. Those matters were addressed in Mr Cooper's affidavit dated 29 August 2016 (at [19]-[24]) and he was also cross-examined as to those matters (T370). Mr Cooper's evidence is that he and Mr Kirkpatrick agreed that it would be in AAA's best interests if Mr Cooper assisted PDF by helping the business, so as to seek to ensure its continued viability and that it could continue to meet its rental obligations (Cooper 13.4.16 [65]). The contemporaneous documentary evidence does not cast further light on whether such a discussion took place, although it makes clear that significant assistance was provided by Mr Cooper to AAA, and I do not reach a finding as to that question, where it is not necessary to do so.
No oppression is established in respect of the two payments to PDF, which appear to have been funded by payments previously made to AAA by Mr Tao, the Chinese principal of the Power Dekor Group, and were made by AAA to PDF, then a company of which Messrs Cooper and Kirkpatrick were joint directors and shareholders that had been established to complete subleasing arrangements for the Belmorta lease. The payment from AAA to PDF appears to have been made to allow a proper accounting for the rental payments, and monies transferred to that entity were then repaid to AAA in subsequent months. Messrs Cooper and Kirkpatrick subsequently resigned as directors of PDF prior to the point at which PDF stopped paying rent and was locked out of the premises.
The Plaintiffs place particular reliance on the fact that AAA incurred expenses in providing a phone for PDF, or a person associated with it, Mr Sha. There is some correspondence with Mr Kirkpatrick in relation to the mobile phone provided to Mr Sha, for example an email dated 19 July 2013 (Cooper 29.8.16, Annexure "J"). That correspondence does not expressly refer to AAA's funding of the mobile phone charges, but those charges were included in AAA's 2014 accounts (Cooper 29.8.16 [30]-[31], Annexure "K"). Mr Kirkpatrick's evidence is that he first became aware of those expenses in November 2014, approximately 16 months after AAA supplied the phone and service in July 2013 (Kirkpatrick 13.10.16 [30]). The amount involved is not material, and had at least some connection with AAA's business so far as AAA stood to benefit, as sublessor, if PDF successfully conducted business as sublessee. This matter does not support the relief sought, whether alone or together with other matters.
[14]
Fees charged by Cooper & Associates
The Plaintiffs allege (ASOC [39(v)]) that, contrary to the 2009 Work Agreement (as defined) and in breach of it, Mr Cooper has, through Cooper & Associates, charged AAA and Kirco for accountancy services at a rate greater than $40 per hour and obtained payment of those charges from AAA's monies and has not charged those amounts to his loan account, and that those actions are contrary to the interests of AAA and Kirco. The Plaintiffs also allege (ASOC [39(z)]) that Mr Cooper has caused accounting, bookkeeping and administrative functions to be performed by a third party, Cooper & Associates, at a rate above the agreed rates in the 2003 Work Agreement, as varied, when there was no resolution or agreement to do so and thus gained advantage for himself and caused detriment to AAA. The Plaintiffs also allege (ASOC [39(aa)]) that Mr Cooper has allowed invoices of a third party, Cooper & Associates, to be paid by AAA where there was no resolution or agreement to do so, detrimentally affecting the cash reserves of AAA and as a consequence, gained advantage for himself and caused detriment to AAA.
The Plaintiffs submit that, in 2003, Mr Cooper, Mr Kirkpatrick and the late Mr Terrence Kirkpatrick agreed that work performed for AAA would be charged at agreed rates of $25 per hour for administration performed by all three directors and $40 per hour for work done in their professional or trade capacity, and those rates were varied in late 2009 to $50 per hour for professional and trade work and $25 per hour for administrative work. The Plaintiffs also submit that it was agreed in 2003 that neither Mr Kirkpatrick nor Mr Cooper would claim payment for any fees they incurred in line with the agreement until the business was in a position to meet the costs. The Plaintiffs also submit that Mr Cooper has invoiced AAA for work done and taken payment for that work without approval or consultation with Mr Kirkpatrick. The Plaintiffs refer to an example of a payment to Mr Cooper (Ex D1, Tab 105, p 770) which they contend was made at the time cash injections were being obtained to alleviate cash flow problems of AAA.
I should set out further evidence that relates to this matter, before reaching a conclusion about it below. Mr Kirkpatrick refers to this matter in his first affidavit in the proceedings (Kirkpatrick 26.7.15 [17]) which refers to an email from Mr Cooper which he dates as at 2008 in which Mr Cooper stated:
"Expense Items Accountancy Fees have been charged (and paid) at the rate of $40 per hour, which is the agreed rate for work performed by Directors. I note that it was never agreed or discussed that this rate be applied to Accountancy work, indeed it was agreed that AAA (and Kirco) would be normal accountancy clients and be charged at normal rates (currently $165 per hour), however in the interests of fairness between the parties (and because we have a long way to go together with AAA/Kirco) I have charged my accountancy time out at the rate of $40 per hour".
[15]
Exclusion of Mr Kirkpatrick from the business
The Plaintiffs also allege (ASOC [39(w)]) that, contrary to the 2009 Administrative Work Agreement (as defined) and in breach of it, Mr Cooper has refused to allow Mr Kirkpatrick to share in the administrative work of the Sydney self-storage business. The Defendants respond that Mr Kirkpatrick's own evidence does not support that the Defendants refused to permit him to participate in the relevant business (Kirkpatrick 23.10.15 [20]-[21]). This allegation was not established as a matter of fact.
[16]
Failure to bring proceedings against Belmorta
The Plaintiffs allege that, in or about 2009, AAA entered into a lease with Belmorta relating to the premises occupied by AAA's Sydney self-storage business (ASC [28]) and that Belmorta and its executive director made false and deceitful representations to AAA about the outgoings in relation to the property (ASC [29]). The Defendants do not admit the second of those allegations. The Plaintiffs plead that AAA received legal advice in respect of the commencement of proceedings against Belmorta and approximately $50,000 was spent preparing the claim; Mr Cooper and Langwood admit that legal advice was obtained but do not admit the amount of costs spent, and Mr Prince and Portborough do not admit the allegation. The Plaintiffs plead (ASC [32]) that Messrs Cooper and Prince have declined to agree to the prosecution of the proceedings against Belmorta. In substance, the Plaintiffs alleged that Mr Cooper failed to support, or promote, the proceedings which Mr Kirkpatrick wished to have brought by AAA against Belmorta and its director. The Plaintiffs rely (ASOC [39(x)]) on that matter as a particular of oppression.
As I noted above, Mr Connolly, who was a barrister who advised AAA in respect of its claim against Belmorta, gave oral evidence on subpoena. Mr Connolly's evidence was, in substance, that he had given oral advice that he thought the claim was a strong one, and that AAA was likely to recover something on such a claim, but the question of the calculation of any damages was open (T222). That evidence provides little assistance to the Plaintiffs, so far as the desirability of bringing litigation depends, not only on the strength of any claim, but on the likelihood of a substantive recovery. In cross-examination, Mr Connolly indicated that his recollection was that a claim based only on the excess of outgoings, over what was alleged to have been represented to AAA, would have been a relatively small recovery, and any larger recovery depended on the more complicated proposition that, but for the alleged misrepresentation, AAA would not have entered into the Belmorta lease, and could recover other loss that it allegedly incurred as a result of doing so, including trading losses from running an unprofitable business (T226). Mr Connolly noted that there were significant complications in that respect, including the fact that AAA had subleased part of the premises, but had been unable to recover the monies due under that sublease (T226-227).
[17]
Claim in respect of the contribution of $136,000 from Mr Prince
The Plaintiffs rely, in respect of the oppression claim, on several allegations as to the treatment of an amount of $136,000 contributed by Mr Prince to AAA between September 2012 and March 2013.
I will first set out the evidence in respect of this issue, before turning to the three allegations made by the Plaintiffs in respect of this issue. Mr Cooper's evidence is that he and Mr Kirkpatrick had a discussion as to AAA's difficulties in meeting its rental obligations to Belmorta and agreed to approach Mr Prince for further funding in late 2012 (Cooper 13.4.16 [56]). Mr Cooper maintained that evidence in cross-examination, although he accepted that the figure of $136,000 was not mentioned in that conversation, which was directed to AAA's need for funds to pay rent until it resolved the issue as to the lease of the 216 Wyndham Street premises from Belmorta (T325). Mr Kirkpatrick denied that such a conversation took place, and denied that he and Mr Cooper had discussed how to get the money to meet the obligations to Belmorta, although he accepted in cross-examination, that at the time of the further funding by Mr Prince in 2012, AAA had a serious financial problem, since it was unable to fund rent that still had to be paid to Belmorta after it had moved out of the property leased from Belmorta (T177). Mr Kirkpatrick's evidence in cross-examination was that he could have put in money to cover what was needed (T178). I prefer Mr Cooper's evidence as to this matter, given the difficulties with Mr Kirkpatrick's evidence to which I have referred above.
Mr Prince advanced $136,000 to AAA between September 2012 and March 2013, which was reflected in an issue of $120,000 of additional units in the Kirco Property Trust and as a loan of $16,000. An amount of $120,000 of the loan accounts of Messrs Kirkpatrick and Cooper was similarly converted into equity in the Kirco Property Trust to preserve the parties' comparative positions.
The initial part of the loan of $136,000 by Mr Prince was described, in an email dated 4 September 2012 from Mr Cooper to Mr Prince, as a "short term loan" for a term of 30 days which would be repaid for interest (Ex P2, 13). It seems to me that that proposition says little about the ultimate character of the investment, since it was plain that the financial needs of the business required more than a loan for 30 days at that time. Mr Prince's evidence in cross-examination, which I accept, and which was consistent with his approach generally, was that he did not take any notice of that description when he received the email and left Mr Cooper to deal with the matter (T274). After extended cross-examination, Mr Prince agreed that he "must have" agreed with the description of the monies as being a short term loan at that time; however, that concession seemed to me to be of little weight, and to reflect Mr Prince's lack of interest in either the characterisation of the transaction or how counsel for the Plaintiffs wished to describe it (T276). The facts that, as Mr Prince accepted, the money was not repaid, interest was not paid on it, and Mr Prince was not worried as to that matter (T276) do not support a characterisation of those funds as a short term loan.
[18]
Claim in respect of issue of redeemable preference shares to Kirco
Next, it is alleged (ASOC [39(dd)]) that Mr Cooper caused the issue of 600,000 redeemable preference shares in AAA to Kirco on or about 30 June 2011 without proper authority, altering the ownership and control of AAA. The Plaintiffs particularise that allegation by particulars that, prior to the issue of the 600,000 shares, Victory, Langwood and Portborough each had one-third of the voting rights at general meetings of AAA; the issue of the 600,000 redeemable preference shares allowed Kirco voting rights at a general meeting, diluting the voting power of each of the members of Victory, Langwood and Portborough in AAA; and the 600,000 redeemable preference shares would rank ahead of ordinary shares in a winding up of AAA. The Defendants accept that the issue of 600,000 Class F redeemable preference shares in AAA to Kirco, which rank ahead of ordinary shares on a winding up and carry a right to vote in general meeting under clauses 5.1 and 5.3(d) of AAA's constitution, have the result that AAA is effectively controlled by Kirco.
The Plaintiffs submit that the issue of 600,000 class F redeemable preference shares in AAA on 30 June 2011 to Kirco was undertaken without Mr Kirkpatrick's knowledge or concurrence. This share issue was recorded in the financial statements of AAA and Kirco for each of the financial years ending 30 June 2011-30 June 2014 (Cooper 29.8.16 [7]-[11]). Mr Kirkpatrick was also informed, by email dated 6 January 2012 copied to him, that Kirco Property Trust had been advancing loan funds of between $9,000 and $11,000 per month to AAA, but that $600,000 of those loans had been capitalised into redeemable preference share capital in order to give financial stability to the company from a balance sheet perspective (Cooper 29.8.16, Annexure "A" Ex D2). Mr Kirkpatrick accepted in cross-examination that he was aware of that matter since that date (T183). Mr Kirkpatrick made no contemporaneous complaint as to this matter.
There appears to have been a lack of formality about the process of authorising the issue of redeemable preference shares, but that is consistent with the parties' approach to the management of the companies as a whole; those redeemable preference shares were allocated to an entity in which the economic interests were the same as the economic interests in AAA; and it does not seem to me that there was any reason to expect that that allocation would have control implications, unless it were accepted (which I do not) that there was an agreement that allowed Mr Kirkpatrick to veto Mr Prince's appointment as a director of AAA. I am not satisfied that this matter, alone or with other matters, supports the relief sought in respect of oppression.
[19]
The Buy-Sell Agreement
For completeness, I should note that the Plaintiffs also referred to a Buy-Sell (Shareholders) Agreement for AAA and Kirco (Ms Kirkpatrick 21.9.15 [7]), which it appears was not updated when Mr Prince invested in the companies. Mr Braham submitted, and I accept, that no pleaded issue was raised in respect of that agreement. The Plaintiffs relied on the failure to update that agreement as an example of ignoring, when Mr Prince came on board, the "protective elements" that were put in place at the time AAA was founded. It does not seem to me that the evidentiary basis for that submission was established, where it is equally possible that that agreement was simply not updated by reason of more pressing concerns in addressing AAA's day-to-day financial and operational issues. Even if this unpleaded matter could properly be relied on in an already complex case, it does not assist the Plaintiffs.
[20]
Remedies in respect of oppression claim
Although I have held that a claim in oppression is not established, I should briefly address the question of remedies as to which the parties made submissions. The Plaintiffs refer to the observation of Young J (as his Honour then was) in John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'Asia) Pty Ltd (1991) 6 ACSR 63 that:
"It is incumbent on the court when making an order under [s 233] to endeavour to find a scheme, short of winding up … which will 'put the company back on the rails' and avoid the causes of conflict and oppression, yet will as far as possible allow members to participate in the business."
Mr Morahan submits that the court frequently orders the purchase of shares by the oppressor from the oppressed under s 233(1)(d) of the Corporations Act at a fair price, and that a broad discretion is given to the court as to the mode of valuation, and that the court may adopt a valuation of the shares that has regard to their value but for the oppression. Mr Morahan also acknowledges that, in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd above, the Court of Appeal declined to make an order that the majority's shares be sold to the minority, although he submits that that does not preclude this Court from ordering such relief if it is seen as the fairest method of achieving a just and equitable remedy for the oppression. It seems to me that, for the reasons the Court of Appeal indicated, it would be an unusual case where a majority was required to sell its shares to a minority, and this is not that case. I am also not satisfied that the matters to which I have referred above support an order that the Defendants buy the Plaintiffs' shares other than for fair value, which they have already offered to do.
In closing written submissions, the Plaintiffs proposed a "two-step" process for relief, and characterised the first step as involving a determination whether oppression has occurred and whether there is enough evidence to warrant a further detailed investigation by a competent and appropriate person. They submitted that that course was appropriate given Mr Cooper's position as Mr Kirkpatrick's former accountant and the companies' accountant, and the fact that documents were retained by him and that he was the author of those documents, and submitted that Mr Dawson's preliminary report suggested that further investigation was required.
[21]
Breach of fiduciary duty
The Plaintiffs also plead (ASOC [40]) that several allegations of oppressive conduct "may constitute" a breach of fiduciary duty to AAA and Kirco by Mr Cooper. That allegation falls short of alleging the fact of a breach of fiduciary duty, and there is no proper basis on which the Court can or should determine whether there is a possibility of such a breach, as distinct from whether such a breach in fact occurred.
[22]
The claim for orders for inspection under s 247A or s 290 of the Corporations Act
The Plaintiffs seek an order under s 247A or alternatively under s 290 of the Corporations Act that AAA and Kirco produce to the Court their books, records, financial statements and minute books and that AAA and Kirco make those documents available for inspection by the Plaintiffs.
Section 247A(3) of the Corporations Act provides that, relevantly, a person who applies for leave under s 237 of the Corporations Act or is eligible to apply for such leave may apply for an order for inspection of documents under s 247A of the Corporations Act. Section 247A(4) in turn provides that, in such an application, the Court may make an order authorising the applicant to inspect books of the company. The term "books" is particularly defined in s 9 of the Corporations Act as including registers, records of information, financial reports or records and other documents.
The Court is able to make such an order only if it is satisfied that the applicant is acting in good faith and that the inspection of the books is to be made for a purpose connected with the application for leave under s 237 or bringing the relevant proceedings pursuant to leave under that section: 247A(5) of the Corporations Act; Chuen v Laredo Pty Ltd [2005] WASC 58. The exercise of the court's discretion whether to make an order under that section requires the court to consider both whether it should make such an order and also which of the books of the company should be made available under that order: Majestic Resources NL v Caveat Pty Ltd [2004] WASCA 201 at [21]; Mathews Capital Partners Pty Ltd v Coal of Queensland Holdings Ltd [2012] NSWSC 462 at [56]. The circumstances in which such an order should be made have also been considered in, for example, Vinciguerra v MG Corrosion Consultants Pty Ltd [2007] FCA 503; [2007] 61 ACSR 583 and Re Akierman Holdings Pty Ltd [2015] NSWSC 1395 at [34]ff, on which I have drawn for the outline of these principles. Section 290 of the Corporations Act establishes a director's right of access to a company's financial records, and allows the Court to authorise a person to inspect a company's financial records on a director's behalf.
I am not satisfied that an order should be made under these sections, where the evidence does not establish that the Plaintiffs have been deprived of such access, and Mr Dawson has already been permitted access to the companies' financial records on the Plaintiffs' behalf without the need for such an order.
[23]
Order for the purchase of the majority's shares
The Plaintiffs initially sought an order under s 233(1)(d) of the Corporations Act that Victory or Mr Kirkpatrick purchase the shares of Langwood and Portborough in AAA and the shares of Messrs Cooper and Prince in Kirco on such terms as the Court thinks fit. No evidence was led to identify the basis of the terms on which such an order could be made, or to establish the financial capacity of either Victory or Mr Kirkpatrick to purchase the shares if such an order was made. The "two-step" process proposed by the Plaintiffs, to which I referred above, seemed to be advanced in substitution for this order. I am not satisfied that such an order should be made, if the application for it is pressed.
[24]
Removal of Cooper & Associates as accountants of AAA and Kirco
The Plaintiffs sought an order that Cooper & Associates be removed as accountants of AAA and Kirco and that the firm be replaced by accountants "deemed appropriate by the Court". The question of how the Court might determine, without assistance from the Plaintiffs, which accountants might be "appropriate" for such an appointment was not addressed. I do not consider that the Court could or should make such an order.
[25]
Application for leave to bring proceedings under s 237 of the Corporations Act
The Plaintiffs seek an order that, if the Court finds it warranted, and under s 237 of the Corporations Act, Mr Kirkpatrick have leave to commence and continue proceedings in the name of and on behalf of AAA and Kirco against Mr Cooper for an alleged breach of Mr Cooper's duty to AAA and Kirco under the Corporations Act. An immediate problem with that application is that the Court has not been provided with a draft Statement of Claim in respect of such a proceeding, and it is therefore uncertain whether the claim sought to be brought, once pleaded, would raise a serious question to be tried or whether bringing it would be in the best interests of the companies. I would not have dismissed the application for such leave on that basis alone, without allowing Mr Kirkpatrick the opportunity to bring in a draft Statement of Claim and the parties the opportunity to make submissions about it. However, there is no utility in allowing that opportunity given the conclusions that I have reached on other grounds.
The matters relevant to the grant of leave under s 237 of the Corporations Act are well established. The first requirement is that it is probable that AAA and Kirco will not itself bring the proceedings or properly take responsibility for them or for the steps in them. That matter is plainly established where the board of AAA is deadlocked, and the likelihood of such proceedings by AAA will be further reduced when the restraint on the removal of Mr Kirkpatrick as a director of the company is removed, and Messrs Cooper and Kirkpatrick constitute the majority of directors on the board of Kirco.
The second requirement under s 237 of the Corporations Act is that Mr Kirkpatrick is acting in good faith. The factors relevant to that requirement include whether Mr Kirkpatrick has an honest belief that a good cause of action exists and has reasonable prospects of success, although that belief will be tested against whether a reasonable person in the circumstances would hold that belief, and whether he is seeking to bring the action for a collateral purpose. In Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 at [36], Palmer J observed that:
"[T]here are at least two interrelated factors to which the courts will always have regard in determining whether the good faith requirement of s 237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly, whether the applicant honestly holds such a belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process."
The Court does not consider the merits of the claim in deciding whether the applicant has satisfied s 237(2)(b) of the Corporations Act, since the merits are considered in respect of the question whether there is a serious question to be tried, which arises under s 237(2)(d) of the Corporations Act: Fitzpatrick v Cheal [2010] NSWSC 717 at [41]. I will assume, without deciding, that Mr Kirkpatrick is acting in good faith, in that he at least subjectively believes that the companies have claims against Mr Cooper, although I find it difficult to see that, with the benefit of adequate legal advice, Mr Kirkpatrick could have formed the view that those claims would lead to recoveries that warranted the costs of pursuing them.
[26]
Appointment of independent investigator
The Plaintiffs seek an order under s 241(1)(d) of the Corporations Act that a qualified and independent person be appointed to investigate and report to the Court on the financial affairs of both AAA and Kirco. Such an order can be made in proceedings brought or intervened in with leave, or in an application for leave under Part 2F.1A of the Corporations Act, dealing with a statutory derivative action. The jurisdiction to make this order is available prior to a grant of leave to bring a derivative action, at least where that application has not been pressed (as occurred here) and dismissed.
The Plaintiffs suggest that the Court may receive evidence and then determine if further investigations in respect of the conduct of the companies' affairs are warranted or a valuation of the company should be undertaken as a court-directed exercise. The Plaintiffs also submit that an "investigator" should be appointed under s 241(1)(d) of the Corporations Act, because Mr Cooper has been in control of the financial affairs of both companies and has prepared annual returns and financial reports and retained relevant documentation. I am not persuaded that that course is appropriate. The Defendants have offered access to the Plaintiffs to documentation held by Mr Cooper; the Plaintiffs have had access to the compulsory process of the Court in these proceedings, for an extended period, to obtain documentation if they wished to do so; the Plaintiffs had previously appointed an investigator, Mr Dawson, who has made some investigations, and expressed some views, with significant qualifications; and it seems to me that the Plaintiffs have had the opportunity to raise any challenges to the approach adopted by Mr Cooper in respect of the companies' accounting, and have done so. The Plaintiffs also seek a consequential order that the investigator's reasonable costs be paid by AAA and Kirco. That order should not be made where no such investigator is to be appointed.
[27]
Orders and costs
Any interlocutory relief previously obtained by the Plaintiffs, or undertakings given to them, should be discharged and the proceedings should be dismissed with costs. The parties should bring in short minutes of order to give effect to this judgment within 7 days.
[28]
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.
Decision last updated: 09 December 2016
Parties
Applicant/Plaintiff:
Victory Projects Pty Limited & Anor
Respondent/Defendant:
AAA Self Storage Pty Limited & Ors
Legislation Cited (2)
Corporate Law Economic Reform Program Act 1999(Cth)
The extent to which the evidence of Mr Kirkpatrick and Ms Kirkpatrick provides any corroboration of the other's evidence is undermined by those matters, and by the evidence of the Plaintiffs' solicitor, Mr Sali, that Mr Kirkpatrick and Ms Kirkpatrick had each looked at the information that was put in their respective affidavits and "agreed on the facts" and each had the opportunity to look at the material proffered by the other (T203). That course was inappropriate, as should have been apparent to Mr Sali, for the reasons identified in the cases to which I referred in Re Colorado Products (in prov liq) [2014] NSWSC 789; (2014) 101 ACSR 233 at [15]ff. The weight that can be given to Ms Kirkpatrick's evidence, as providing any corroboration of Mr Kirkpatrick's evidence, is further undermined by the fact Ms Kirkpatrick remained in Court for the substantial part of Mr Kirkpatrick's evidence, notwithstanding that the risk to her credit of doing so had been identified by Mr Braham in her presence and that Mr Kirkpatrick was cross-examined as to her presence (T175).
The Plaintiffs also relied on the affidavit of Mr Kirkpatrick's solicitor, Mr Sali, dated 27 July 2015 and an affidavit of the accountant for Victory, Mr Poole, dated 22 September 2015. The Plaintiffs also called Mr Andrew Connolly, a barrister who advised AAA in respect of the prospect of proposed proceedings against Belmorta Pty Ltd ("Belmorta"), who gave oral evidence on subpoena. I will refer to Mr Connolly's evidence in dealing with the question of the Belmorta proceedings below.
The Plaintiffs also relied on an investigation report of Mr Thomas Dawson (Ex P1). There were several difficulties with that report, including the fact that Mr Dawson had not complied with the Expert Witness Code of Conduct and that he indicated that he had relied on books and records provided as part of affidavits filed in the proceedings without identifying the particular information relied upon so as to allow the assumptions that he had made to be identified. Mr Dawson also significantly qualified the opinions which he expressed, observing that there had been (Ex P1, Dawson [7]:
"a restriction of time available to prepare and fully investigate the matters, a limited scope as to the areas to be considered, and a limit as to the availability of some of the documentation."
Many of Mr Dawson's opinions were also expressed in equivocal terms, identifying matters of possibility rather than reaching any conclusion involving the application of his expertise to identified factual assumptions. For example, Mr Dawson identified a possibility that "inflated rates may have been paid to Mr Cooper for time spent performing accounting services" and that there "may be" issues as to the recording of loans to directors, shareholders and associated companies (Ex P1, Dawson [17]-[18]).
The Defendants relied on Mr Cooper's affidavits dated 30 September 2015, 13 April 2016 and 29 August 2016. The latter affidavit addressed the circumstances leading to the issue of redeemable preference shares in AAA, additional contributions made by Mr Prince in an amount of $136,000 from September 2012 to March 2013 and the accounting for those contributions, AAA's dealings with Power Dekor Flooring Pty Ltd ("PDF") and the views expressed by Mr Dawson. Mr Cooper was cross-examined at length and I will address aspects of that cross-examination in dealing with particular issues below. Mr Cooper seemed to me to be a careful witness, who was alert to areas which may be adverse to the Defendants' interests and at times anxious to provide explanations that might assist the Defendants' interests. However, his evidence was broadly consistent with the contemporaneous documentation, and I generally accept that evidence.
The Defendants also relied on Mr Prince's affidavits dated 12 April 2016 and 30 August 2016. Mr Prince was also cross-examined at some length. Mr Morahan, who appeared for the Plaintiffs, did not make any criticism of Mr Prince's credit but suggested that his evidence was unsatisfactory in substance (T404). Mr Prince is a grazier by occupation, and his evidence in cross-examination suggested that he paid limited attention to the investment when he made it and essentially left it to Messrs Cooper and Kirkpatrick to run the business (T248). Mr Prince's recollection of events, including as to the receipt of documents from Mr Cooper relating to the original investment in AAA and Kirco, was significantly less precise in cross-examination than his affidavit evidence of those events (T251ff). It seems to me that the difference between the relatively precise form of Mr Prince's affidavit and his less precise recollection on cross-examination is an unfortunate, but innocent, consequence of a solicitor having sought to prepare that affidavit with a degree of precision, where Mr Prince in fact had a less precise understanding of events.
Mr Prince was also cross-examined as to whether he had seen Mr Cooper's affidavit before swearing his affidavit and accepted that he had done so. However, as Mr Braham pointed out in closing submissions, Mr Morahan had not shown the affidavit to which he was referring to Mr Prince during that cross-examination. When Mr Braham did so in re-examination, Mr Prince said that he had not seen that affidavit. As Mr Braham points out, that evidence is at least potentially explicable by the fact that Mr Prince had seen an earlier affidavit, sworn by Mr Cooper in support of a security for costs application, which had been sent to him in late 2015 (Mesiti 1.9.16). I consider that Mr Prince had a limited understanding of the relevant issues and a somewhat imprecise recollection of his involvement in them.
The Defendants also relied on an affidavit dated 30 September 2015 of their solicitor, Mr Anderton, only parts of which were read, and a further affidavit dated 1 September 2016 of a solicitor, Mr Mesiti, which related to the circumstances in which Mr Prince's affidavit of 12 April 2016 was affirmed.
The Plaintiffs plead (ASC [13]) that the transfer of the fit-out of the Hobart premises was effected by Mr Cooper without Mr Kirkpatrick's knowledge or approval, although that matter was rightly given little attention in the proceedings, given the time that has passed since the sale of that business and the fact that Kirco Investments is not party to the proceedings. Although the Plaintiffs lead extensive evidence as to dealings between Mr Kirkpatrick and Mr Cooper in respect of the Hobart self-storage business, it does not seem to be necessary to reach findings of fact as to the history of that business in any detail, where no issue in respect of that business is to be determined in these proceedings, or could be determined in these proceedings where Kirco Investments is not party to them.
The Plaintiffs plead (ASC [25]) that a resolution was passed by Messrs Cooper and Kirkpatrick as directors of AAA, in about 2009, that Messrs Cooper and Kirkpatrick would share the administrative work for the Sydney self-storage business; that all work performed by them would continue under the arrangements agreed in relation to the Hobart business, including that work performed by Cooper & Associates would be charged and paid at the rate of $40 per hour, subsequently varied to $50 per hour, and that all work performed by the directors and Cooper & Associates for accounting services would be credited to the respective directors' loan accounts. (Mr Cooper and Langwood denied the latter two matters.) The Plaintiffs describe this agreement as the "2009 Administrative Work Agreement". Little attention was given to that pleaded agreement in the course of the hearing.
In June 2010, a loan agreement with Mr Kirkpatrick's mother, by which Kirco had borrowed the sum of $178,143.41 from Mrs June Kirkpatrick, was also restructured, so that Kirco Investments assumed liability under it, guaranteed by Messrs Kirkpatrick and Cooper. It is common ground between Mr Cooper and Mr Kirkpatrick and the companies associated with them that that amount was initially repayable on 30 June 2014 and that the time for repayment was extended to 30 September 2014. That loan was not repaid on its due date, but Mr Kirkpatrick subsequently caused it to be repaid in the circumstances to which I refer below.
In mid-2010, Mr Prince, who was a client of Mr Cooper's accounting practice, was introduced to provide funding to the Sydney Mini Storage business. Mr Cooper prepared a draft email to Mr Prince and an information memorandum relating to Sydney Mini Storage, and sent it to Mr Kirkpatrick for his comment and approval on 15 August 2010 (Ex D1, Tab 7). It is plain that Mr Kirkpatrick had read the email dated 15 August 2010 and the draft information memorandum carefully, since he identified a typographical error in it, as he fairly accepted in cross-examination (T159). Mr Kirkpatrick confirmed his agreement with the contents of those documents on the same day (Ex D1, Tab 8). Mr Cooper then sent that information memorandum to Mr Prince, with a copy to Mr Kirkpatrick, also on 15 August 2010 (Ex D1, Tab 9). The proposal put to Mr Prince for his investment in Sydney Mini Storage, in the form approved by Mr Kirkpatrick, contemplated that he or his nominee would be entitled to be a director of both AAA and Kirco, since it invited him to advise who would be the director of those entities (Ex D4, Tab 12), and the information memorandum also referred to the appointment of a "nominated party" as a director in the two business entities, AAA and Kirco.
Mr Kirkpatrick's evidence was that he had a conversation with Mr Cooper, prior to Mr Cooper's email dated 15 August 2010 to Mr Prince and the draft information memorandum sent to Mr Prince, in which Mr Cooper had accepted that Mr Prince would not be a director of AAA. However, that evidence is impossible to reconcile with the fact that, as I noted above, that email and information memorandum, both approved by Mr Kirkpatrick, provided for Mr Prince or his nominee to be a director of AAA. I am unable to accept Mr Kirkpatrick's attempt to explain that difficulty, in cross-examination, by the fact that that fundamental inconsistency "got past" him when he reviewed the draft information memorandum (T172), notwithstanding his acceptance that he had carefully read that document and the objective evidence that he had read it sufficiently carefully to pick up a typographical error in it. In cross-examination, Mr Kirkpatrick also sought to explain that inconsistency on the basis that the email dated 15 August 2010 to Mr Prince and the draft information memorandum were prepared prior to his discussion with Mr Cooper. However, that explanation was in turn inconsistent with Mr Kirkpatrick's evidence that the discussion on which he relied had taken place prior to a meeting with Mr Prince (T173), which had in turn taken place before that email and information memorandum was sent. Mr Kirkpatrick's account of that conversation is also impossible to reconcile with the fact that he later signed the AAA 2010 resolution (to which I refer below) which provided for the appointment of Mr Prince as a director of AAA, the very matter that Mr Kirkpatrick claims he had agreed with Mr Cooper would not occur. In cross-examination, Mr Kirkpatrick initially accepted that he could not explain the inconsistency; when he later sought to do so, that explanation was both difficult to follow and unpersuasive (T174).
Mr Kirkpatrick initially gave evidence of a meeting at Sydney on 11 and 12 September 2010 between Messrs Cooper, Prince and Kirkpatrick which discussed "share transfers, business matters, management and staffing, possible name change, proceedings of Directors [sic], working capital and business marketing" (Kirkpatrick 23.9.15 [9]). It is now common ground that a meeting did not then occur, although Messrs Cooper, Prince and Kirkpatrick met once at AAA's Sydney premises in mid-2010.
The parties devoted substantial attention, in affidavit evidence, cross-examination and submissions, to the circumstances in which two resolutions of the directors of AAA and Kirco, purportedly passed at a meeting on 23 September 2010, were signed by Messrs Cooper and Kirkpatrick and as to whether they were signed by Mr Prince. I will address those matters in dealing with the Plaintiffs claim for declaratory relief in respect of those resolutions below. Portborough and Mr Prince became shareholders of AAA and Kirco respectively on or about 23 September 2010, on payment of the amount of $300,000 (Ex D1, Tab 12).
Mr Cooper's evidence, on which Mr Kirkpatrick relies, is that AAA's financial position continued to deteriorate through late 2011 (Cooper 13.4.16 [53]) and that, by September 2012, AAA had moved out of the premises leased from Belmorta but was required to continue paying the rent on those premises, and Mr Cooper's belief was that the business would fail unless it could secure additional funding (Cooper 13.4.16 [55]). Mr Cooper's evidence is also that he and Mr Kirkpatrick contributed funds as required to "keep the business afloat" until September 2012 (Cooper 13.4.16 [115]).
In late 2013, Mr Kirkpatrick moved overseas for an extended period. Mr Cooper's evidence is that this reduced Mr Kirkpatrick's direct involvement in the affairs of the companies, although Mr Kirkpatrick contends that he was able to maintain the same level of administrative involvement in the business from overseas, for example, by remote access to business systems. The arrangements which were available to permit day-to-day management of the storage facility, by remote access, do not seem to me to have been sufficient to allow Mr Kirkpatrick to assume any real responsibility for the larger financial and strategic difficulties then facing AAA and Kirco and I accept Mr Cooper's evidence that he carried the substantial burden of dealing with a number of those issues, including seeking to assess the loss suffered by AAA for the purposes of its claim against Belmorta; negotiations in respect of a sublease, and attempts to recover funds from PDF (Cooper 13.4.16 [80]-[84]).
Mr Cooper's evidence, on which Mr Kirkpatrick also relies, is that AAA's financial position remained poor through late October 2014, although it eventually subleased the premises rented from Belmorta to a third party (Cooper 13.4.16 [87]). It is common ground that the business relationship between Mr Kirkpatrick and Mr Cooper significantly deteriorated in late 2014 or early 2015 and has now broken down. Mr Cooper's evidence, which I accept, is that Mr Kirkpatrick's relocation to Europe, to which I referred above, was a significant contributor to the breakdown of that relationship, and other contributing factors appear to have included a dispute as to fees claimed by Mr Cooper for dealing with PDF, and a dispute arising from the appointment of Mr Cooper's partner, Ms Johnstone, as a temporary company secretary in order to execute the sublease with a third party to replace PDF as sublessee in the premises at 216 Wyndham Street Alexandria, to which I will refer below.
By a lengthy email dated 20 January 2015 from Mr Cooper to Mr Prince and Mr Kirkpatrick, Mr Cooper advanced a proposal for a third party, a larger self-storage company, to manage the Sydney self-storage business, and reiterated his view that there was no advantage to utilising funds in pursuing the proceedings against Belmorta rather than to ensure the future viability and saleability of the business (Ex D4, Tab 10). Mr Kirkpatrick replied on 21 January 2015, agreeing that the current situation was not workable, attributing blame for that situation to Mr Cooper, and otherwise in argumentative terms. Mr Kirkpatrick there raised the possibility that either Mr Cooper or Mr Kirkpatrick should exit the business. By a further email dated 26 January 2015, Mr Kirkpatrick rejected the proposal that the third party storage operator might manage the business.
Between January 2015 and April 2015, Mr Kirkpatrick made payments from an account of Kirco, including to members of his family, totalling $19,400 for work performed by his brother and for the costs of a solicitor who he claimed was engaged on behalf of AAA to seek mediation with Mr Cooper (Kirkpatrick 26.7.15 [37]). I am comfortably satisfied that that solicitor was retained to advance Mr Kirkpatrick's personal interests in the dispute between the shareholders in AAA, and not in respect of any corporate purpose of AAA, and that payment was not properly made from Kirco's account.
The Defendants led evidence of several offers that they subsequently made to allow the Plaintiffs, the Defendants or both parties to exit the business, including proposals for an auction by which each shareholder would be entitled to bid for the companies' assets; having a third party accountant value the business; or the Defendants purchasing the Plaintiffs' shares at an independently assessed value; sale of the business on market. By email dated 29 January 2015, Mr Cooper raised several options which might address the then position, including meetings of shareholders or directors which might "temporarily" resolve the issues by a majority decision, although recognising that that course could leave aggrieved parties, unresolved issues and badly impact the business; placing the entities in voluntary administration, to allow sale of the business on market; or conducting an "in-house" auction, where the shareholders bid for the various business components, to be conducted by the solicitor acting for AAA. By a further email dated 10 February 2015, Mr Cooper raised further possibilities to resolve the position, including that Mr Kirkpatrick could appoint an independent accountant to value the business on his behalf, or choose to have Mr Kirkpatrick's accountant value the business on his behalf and approach the other shareholders to buy or sell, or the parties could conduct an "in-house auction overseen by a solicitor", which was the approach favoured by Mr Cooper.
Further correspondence followed, involving other proposals for division of the assets of the companies in the business, which did not reach a resolution. By email dated 16 March 2015, labelled "without prejudice" but tendered without objection, Mr Kirkpatrick proposed that he receive a payment of $250,000, and retain the AAA entity, as well as being released from liabilities owing by AAA and Kirco. By email dated 16 March 2015, Mr Cooper responded, indicating his view that the business did not have the value contemplated by Mr Kirkpatrick's offer and repeating an offer that had apparently previously been made to Mr Kirkpatrick in the amount of $129,397, comprising acceptance of liabilities and a cash component of $36,654. Mr Cooper also provided financial information relating to the business and invited Mr Kirkpatrick to have his accountant review that material.
By email dated 17 March 2015, Mr Cooper referred to a further offer made by Messrs Cooper and Prince that both parties would have valuations prepared by their respective accountants and the average of those valuations would be adopted, or that a valuation would be prepared by an independent third party and both parties would be bound to accept it, and confirmed that both of those offers remained open. By another email dated 17 March 2015, Mr Cooper advanced a further offer on behalf of himself and Mr Prince, that the business be put up for sale on market, outstanding liabilities be paid, and the company and trust be wound up. That proposal was also not accepted by Mr Kirkpatrick, who advised by email dated 12 April 2015, that he was prepared to move forward for the business, but only if there was agreement as to how to do that, and was "not interested" in any of the previous proposals that had been put.
By a further email dated 1 June 2015, again labelled "without prejudice" but tendered without objection, Mr Cooper put a proposal for him and Mr Prince to exit the business.
By notice of general meeting dated 3 July 2015, Mr Cooper sought to call a general meeting of AAA to consider a resolution removing Mr Kirkpatrick as a director of AAA and appointing Mr Prince as a director in his stead (Ex D4, Tab 7) ("AAA 2015 resolution"). A further notice of general meeting also dated 3 July 2015 in respect of Kirco provided for the removal of Mr Kirkpatrick as a director of Kirco (Ex D4, Tab 8), which would have left Messrs Cooper and Prince as the directors of Kirco ("Kirco 2015 resolution"). A resolution was proposed to be passed by Kirco appointing Mr Cooper as its proxy to vote at the meeting of AAA in respect of the resolution to remove Mr Kirkpatrick as a director of AAA (Ex D4, Tab 9). The notices of the 2015 general meetings were despatched by Mr Cooper in his capacity as a director of AAA and Kirco, and the constitutions of AAA and Kirco each provide that any director may convene a general meeting whenever the director thinks fit. That power seems to me to be conferred on a director in an individual capacity, rather than requiring any collective action of the board. That has significant implications for the Plaintiffs' case that that meeting was convened in breach of the 2010 resolutions, if they had taken effect, to which I will refer below.
The parties attended a mediation, after these proceedings had commenced, on 25 November 2015 and were unable to reach agreement at that mediation. By letter dated 27 November 2015, the solicitors acting for the Defendants advanced a proposal to appoint Mr Prince as a third director of AAA, and identified a mechanism by which that could be achieved in accordance with AAA's constitution, by the removal of Mr Kirkpatrick as a director, on the undertaking that, upon Mr Prince's appointment, Messrs Cooper and Prince would then resolve to appoint Mr Kirkpatrick as a director and also vote in favour of a resolution that at least 72 hours' notice would be given of any resolution of the board in relation to any material matter outside of the ordinary course of business. Acceptance of that proposal would have had the result that Mr Kirkpatrick was one of three directors on AAA's board, and would have reflected the board representation contemplated by the information memorandum originally provided to Mr Prince, the directors' resolutions which the Plaintiffs contend were passed in September 2010, and the economic interests in the companies. That proposal was rejected by a letter from Mr Kirkpatrick's solicitor dated 30 November 2015.
By letter dated 22 January 2016, the Defendants' solicitor wrote to the Plaintiffs' solicitor setting out a comprehensive response to the allegations made in the proceedings. That letter referred, inter alia, to the case law as to the circumstances in which the Court would grant relief under s 233 of the Corporations Act; set out the Defendants' position in respect of the several issues in dispute; referred to costs already incurred by the Defendants in respect of the proceedings and the likely future costs of the proceedings, including the costs of a final hearing; and made a further offer, subject to the preparation of a formal deed, of the separation of the parties' interests. The further offer contemplated a payment of $130,000 by the Defendants to the Plaintiffs; that assets of the Sydney mini storage business would be transferred to Kirco; a payment by Mr Kirkpatrick to the Defendants, on the basis that Mr Kirkpatrick would acquire Langwood's and Portborough's interests in AAA and be able to pursue the proceedings by AAA against Belmorta; and the distribution of certain monies held on trust in relation to the Kirco Investments Syndicate.
By letter dated 3 February 2016, the Plaintiffs made an offer that would have allowed the Defendants to acquire the Plaintiffs' interests in AAA and Kirco, on terms that the Defendants pay Mr Kirkpatrick's loan account and that he also receive half of the monies held on trust in respect of the Kirco Investment Syndicate. The Defendants responded to that proposal, in positive terms, by letter dated 22 February 2016 which, not surprisingly, sought clarification of what Mr Kirkpatrick considered was the value of Mr Kirkpatrick's loan account, which had not been stated in the Plaintiffs' offer. They indicated that they were prepared to accept that offer if Mr Kirkpatrick's understanding was that the value of his loan account was the amount recorded as such in the ledgers for AAA and the Kirco Property Trust, and identified further terms for a possible settlement, including an option of an exit price determined by an independent valuer. It appears that offer was subsequently rejected by Mr Kirkpatrick. The most recent offer by the Defendants to purchase the Plaintiffs' shares and units remains open, and will remain open until three months after judgment is given in these proceedings (Ex D5).
Mr Kirkpatrick accepted that he rejected each of the proposals between late January 2015 and June 2015 and explained his reasons for doing so (Kirkpatrick 26.4.16 [100] [102]). It appears that Mr Kirkpatrick's primary position is that he should be able to purchase the shares of Messrs Cooper and Prince and their associated entities and he is less interested in any arrangement which would bring about a sale of his shares or a realisation of the assets of the business, and he also seeks further disclosure of information in that regard. Mr Kirkpatrick also appears to have an understanding that Mr Cooper is in some way seeking to make him a "minority shareholder" (Kirkpatrick 26.2.16 [45], [55]), although that has the difficulty that he has held only a one-third interest in the companies at least since the point of Mr Prince's investment in them.
On 19 May 2016, the Defendants' solicitors invited the Plaintiffs, without the need for a court order, to appoint an investigator of their choice to undertake an examination of the financial affairs of AAA and Kirco, in parallel with the proceedings. Mr Dawson was appointed by the Plaintiffs to undertake such an investigation and was provided with access to a substantial quantity of documents of the companies. The Plaintiffs submit that Mr Dawson's report is "preliminary only" and would not replace the appointment of an inspector or such other investigative relief as the court might order. I will address the relief sought by the Plaintiffs in that respect below.
The Kirco 2010 resolution (Kirkpatrick 26.2.16, CB 252, 254) differs from the AAA 2010 resolution, since the first page of the resolutions signed by Mr Cooper and Mr Kirkpatrick also includes a resolution, under the heading "Proceedings of Directors", that:
"Resolved that all major decisions affecting [Kirco] shall not be passed or agreed to without the unanimous resolution of the Board of Directors."
That resolution is also expressly directed to the proceedings of the directors acting collectively, as a board, and not the act of a single director exercising a power that may be vested in that director under Kirco's constitution. The subsequent pages also include a similar narrative outline, again in similar form to the information memorandum that was provided to Mr Prince, which also includes the statement in similar but not identical form to the resolution noted above that:
"Proceedings of Directors
"Resolved that all major decisions affecting [Kirco] in its capacity as Trustee and all financial decisions involving expenditure in excess of $5,000 shall not be passed or agreed to without the unanimous resolution of the Board of Directors."
That resolution is also expressly directed to "proceedings of directors", and to acts of the board of Kirco, and not to the act of a single director exercising a power that may be vested in an individual director under Kirco's constitution.
Mr Cooper's evidence was that the relevant clause in the AAA 2010 resolution and the Kirco 2010 resolution was included as an "afterthought" and to protect Mr Prince's interests. That evidence was contested by the Plaintiffs. I do not find it necessary to reach a finding as to that matter, where a characterisation of that kind would not impact upon the effect of the resolution, had it been passed. It is common ground that the AAA 2010 resolution and the 2010 Kirco resolution were each signed by Mr Cooper and Mr Kirkpatrick at some point. Messrs Kirkpatrick, Prince and Cooper were each cross-examined at some length as to the signature of these resolutions and whether they were returned to Mr Cooper's office. The evidence as to this matter was of real significance as to credit, particularly in respect of Mr Kirkpatrick, and I will deal with it at some length.
On 15 September 2010, Mr Cooper sent emails to Messrs Kirkpatrick and Prince which attached transfer documents and directors' resolutions for AAA and Kirco relating to the proposed investment by Mr Prince (Ex D1, Tabs 10-11). Mr Kirkpatrick's evidence was that his wife had returned the signed transaction documents including the directors' resolutions to Mr Cooper by express post, although that would not have been consistent with Mr Cooper's request in his email that the documents be returned with a shorter timeframe to allow them to be provided to Mr Prince (Kirkpatrick 21.9.15 [5]), and Mr Kirkpatrick first annexed copies of the resolutions signed by Mr Cooper to his affidavit dated 26 February 2016. In Mr Kirkpatrick's affidavit dated 11 September 2015 (paragraph 4), he stated that Mrs Kirkpatrick "drew [his] attention" in 2015 to the AAA 2010 resolution and the Kirco 2010 resolution, and that affidavit plainly implied that Mr Kirkpatrick had previously forgotten the existence of those resolutions. However, Mr Kirkpatrick's evidence in cross-examination (T109) was, to the contrary, that he had always recalled those resolutions and that the relevant paragraph of his affidavit was simply poorly phrased. Mr Kirkpatrick subsequently denied that he was reminded of the resolution by his wife, notwithstanding the statement to that effect in paragraph 4 of his affidavit dated 11 September 2015 (T163). I am unable to accept Mr Kirkpatrick's evidence as to these matters.
Mr Kirkpatrick's evidence as to these matters is further weakened by the position taken in paragraph 7 of his affidavit dated 21 September 2015, where he denied Mr Cooper's evidence that there was no physical meeting convened for the execution of the resolutions and the share transfers, and claimed that such a meeting took place in September 2010. He then varied that evidence in cross-examination, suggesting that such a meeting occurred in July or August 2010 (T167), and explained his earlier evidence by the fact that he had lost emails from his computer and had previously been "convinced" that the meeting had occurred in September 2010 (T168). If that explanation could be accepted, it nonetheless casts significant doubt on the strength of Mr Kirkpatrick's recollection of the only occasion on which he met with Mr Prince.
Mr Kirkpatrick's affidavit evidence also indicated that the 2010 resolutions reflected his concern to ensure that he was not removed as a director, in part, because his mother had previously advanced funds to the companies. However, that proposition faced the difficulty that Kirco Investments had assumed liability for the loan to Mr Kirkpatrick's mother in connection with Mr Prince's investment in AAA, in a rearrangement which was plainly sensible to facilitate that investment without Mr Prince assuming part of that liability. Mr Kirkpatrick did not accept that proposition in cross-examination (T126), although that may have reflected a lack of understanding of the commercial logic of the arrangements, as distinct from a deliberate refusal to acknowledge a matter that he in fact appreciated.
In cross-examination of Mr Prince, Mr Morahan sought to establish that the documents sent by Mr Cooper to Mr Prince for signature included the draft board resolutions attached to an email dated 15 September 2010 from Mr Cooper. It was plain from Mr Prince's cross-examination that he had no real recollection of which documents he had received, and his evidence indicated that he had little interest in the detail of the documentation and paid little attention to it since, as he explained in cross-examination, in respect of the reference to unit transfers referred to in his affidavit, he was "not up in the paper world" (T260). I accept that that was a fair description of Mr Prince's attitude to the documentation of the transaction. The evidence does not establish that Mr Prince had signed the draft board resolutions. That matter is ultimately of little significance to the outcome of the proceedings, both because he was not then a director of the companies so his signature was not required for the passage of the resolutions, and given the findings that I reach on other grounds below.
In support of the proposition that the resolutions took effect, the Plaintiffs also rely on an email dated 9 January 2015 from Mr Cooper to Mr Kirkpatrick (Kirkpatrick 26.2.16, Annexure "A") which stated that:
"When [Mr Prince] came on board as an investor, he was given a written undertaking by us that he would not be required to contribute any further funds. Since then, he has contributed a further $136,000 at my request, and I am not prepared to go back on my word again."
Mr Cooper's evidence was that the "undertaking" referred to in that email was given in the email attaching the information memorandum provided to Mr Prince, which referred to the fact that Messrs Kirkpatrick and Cooper were currently topping up the monthly cash flow to meet operating costs, and indicated they would continue to do so until the break-even point was achieved, and represented that "a new equity partner will not be required to contribute funds for this purpose" and also represented that "no further capital input will be required" on the part of that new equity contributor. A similar statement was contained in the AAA 2010 resolution.
Mr Morahan submits that the reference to the "undertaking" in the email dated 9 January 2015 was more probably to the contents of the AAA 2010 resolution than to the statement in the email attaching the information memorandum to similar effect. It seems to me that a board resolution would not ordinarily be described as a "written undertaking" and, at best, the reference to a "written undertaking" could refer either to the statement in the email attaching the information memorandum or to the AAA 2010 resolution. This matter provides little assistance in determining whether the resolutions were passed. The Plaintiffs also rely on the fact that Mrs Colleen Cooper was not called to give evidence as to the return of the signed 2010 resolutions. There is no evidence to support a finding that Mrs Cooper, who appears to be Mr Cooper's former wife, can be described as within the Defendants' "camp" for the purposes of these proceedings and I do not draw any inference from the Defendants' failure to call Mrs Cooper.
The Plaintiffs' submitted, in written closing submissions, that it is more probable than not that the AAA 2010 resolution and the Kirco 2010 resolution were signed by Mr Kirkpatrick, Mr Cooper and probably Mr Prince. It is common ground that the resolutions were signed by Mr Kirkpatrick and Mr Cooper, but I am not persuaded that the evidence establishes that they, as distinct from other transaction documents, were signed by Mr Prince. The resolutions therefore do not take effect on the basis for which the Plaintiffs contended, that they were signed by each of Messrs Kirkpatrick, Cooper and Prince, albeit not at a physical meeting. The Plaintiffs did not submit that the resolutions took effect on the basis that they were circulating resolutions signed by both of the then directors of AAA and Kirco, Messrs Kirkpatrick and Cooper. The evidence does not suggest that the parties intended to proceed in such a fashion, rather than by seeking Mr Prince's assent to the resolutions, although he had not yet been appointed as a director of the companies, since that was to occur by the terms of those resolutions. The Plaintiffs also did not suggest that the resolutions could take effect on any other basis than by all parties' assent to them, or seek to have them treated as effectively passed by Messrs Kirkpatrick and Cooper alone by any operation of s 1322 of the Corporations Act.
Even if the case put by the Plaintiffs as to the manner in which the AAA 2010 resolution and the Kirco 2010 resolution took effect had been established, contrary to the finding that I have reached above, the parties thereafter seem to have paid no attention to those resolutions. The AAA 2010 resolution provided for Mr Prince's appointment as a director of both AAA and Kirco, but Mr Prince was subsequently treated by the parties as being a director of Kirco only and not as a director of AAA. There is no evidence that the parties thereafter sought to pass unanimous resolutions, or sought unanimous approval even by informal means, before making payments in excess of $5,000. Mr Kirkpatrick himself made payments in excess of that amount, without a unanimous resolution of directors or the consent of Messrs Cooper or Prince, in making the payments to his brother and his solicitor to which I referred to paragraph 29 above.
Mr Braham also points out that the AAA 2010 resolution and the Kirco 2010 resolution, by contrast with the position in respect of the syndicate deed for the Kirco Investment Syndicate, were not specifically directed to a removal of a director of those companies. Even if, contrary to the finding that I have reached above, the AAA 2010 resolution and the Kirco 2010 resolution took effect in the manner for which the Plaintiffs contended, Mr Braham also points out that clause 19.1 of the constitutions of AAA and Kirco permits any director to convene a general meeting whenever the director thinks fit and clause 21.2 provides for the appointment and removal of directors by shareholders by ordinary resolution. Those resolutions were not structured as an agreement between shareholders and do not, in their terms, restrict the ability of the shareholders of AAA or Kirco to change the composition of the board at a general meeting of shareholders; indeed, the shareholders of AAA, which are Victory, Langwood and Portborough rather than the individual directors, were not party to the AAA 2010 resolution.
Even if the 2010 resolutions took effect, they seem to me to have applied only to decisions to be made by the board of directors of AAA, and not to decisions made by an individual director in his personal capacity or by shareholders. It is, of course, clear that powers in respect of the governance of a company may be conferred on individual directors, as distinct from a board; or on the directors collectively, acting as a board; or on shareholders in general meeting under the Corporations Act and under a company's constitution. It does not seem to me that the AAA 2010 resolution or the Kirco 2010 resolution could be read as having effect that each of the rights conferred on an individual director or on a shareholder of AAA or Kirco could only be exercised by the agreement of other directors or other shareholders respectively. That proposition can be illustrated by a straightforward example. The Plaintiffs' decision to commence these proceedings was plainly a "major decision" affecting AAA and Kirco, which would fall within the language of those resolutions, but the Plaintiffs rightly did not consider that they were required to obtain a unanimous resolution of the board of directors of AAA or Kirco before they brought these proceedings. It seems to me that a decision of an individual director of AAA or Kirco, acting in his own right and not as a member of the board, to call a general meeting or a decision of a shareholder as to how to exercise a voting right conferred on that shareholder in its individual capacity, cannot properly be characterised as a decision of director acting collectively or as a board within the scope of the 2010 resolutions.
The construction of the AAA 2010 resolution and the Kirco 2010 resolution for which the Plaintiffs contend, so far as it seeks to prevent an individual director calling a meeting for the removal of a director under clause 19.1 of AAA's and Kirco's constitutions without the consent of all directors, is potentially inconsistent with s 249D of the Corporations Act which requires the directors of a company to call and arrange to hold a general meeting at the request of members with at least 5% of the votes that may be cast at the general meeting. The construction for which the Plaintiffs contend would also provide little protection for Mr Kirkpatrick's interests where members with more than 50% of the votes of all of the members who made the relevant request under s 249D of the Corporations Act could themselves call and arrange to hold a general meeting if the directors did not do so under s 249E of the Corporations Act, and members with at least 5% of the votes that may be cast at a general meeting could call, and arrange to hold, such a meeting under s 249F of the Corporations Act.
In his closing submissions, Mr Morahan submits that it cannot seriously be submitted that the calling of a general meeting to remove a director was not a "major" decision. The proposition does not assist the Plaintiffs since, assuming that such a decision was a "major" decision, it would not have been a decision of the directors, acting collectively or as a board within the scope of the AAA 2010 resolution or the Kirco 2010 resolution, as distinct from a decision of Mr Cooper in exercising his right, as an individual director, to call a meeting of shareholders under cl 19.1 of the companies' constitutions and a decision of shareholders in general meeting as to how to exercise their votes.
In summary, although it is clear that the AAA 2010 resolution and the Kirco 2010 resolution were signed by Messrs Kirkpatrick and Cooper, the Plaintiffs have not established that they were also signed by Mr Prince and took effect when signed by all parties, as they contended. The Plaintiffs did not submit that the resolutions took effect as a circular resolution of directors when signed by Messrs Kirkpatrick and Cooper alone, and that does not appear to have been the parties' intent. The parties, including Mr Kirkpatrick, did not subsequently act in accordance with the AAA 2010 resolution or the Kirco 2010 resolution. Those resolutions were, on their proper construction, directed to the exercise of powers vested in the directors as a board and not to the exercise of an individual director's right to call a shareholders meeting under clause 19.1 of the companies' constitutions or to the exercise of shareholders' votes at such a meeting. The declarations sought by the Plaintiffs therefore should not be made.
These sections and their predecessors extend to conduct involving "commercial unfairness" or where the conduct complained of involves a visible departure from the standards of fair dealing and a violation of the conditions of fair play, or a decision has been made so as to impose a disadvantage, disability or burden on the plaintiff that, according to ordinary standards of reasonableness and fair dealing, is unfair: Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704; Wayde v New South Wales Rugby League Ltd [1985] HCA 68; (1985) 180 CLR 459. In Thomas v HW Thomas Ltd [1984] 1 NZLR 686; (1984) 2 ACLC 610, Richardson J observed (at 618) that
"Fairness cannot be assessed in a vacuum or simply from one member's point of view. It will often depend on weighing conflicting interests of different groups within the company. It is a matter of balancing all the interests involved in terms of the policies underlying the companies legislation in general and s 209 [the NZ provision] in particular: thus to have regard to the principles governing the duties of a director in the conduct of the affairs of a company and the rights and duties of a majority shareholder in relation to the minority; but to recognise that s 209 is a remedial provision designed to allow the Court to intervene where there is a visible departure from the standards of fair dealing; and in the light of the history and structure of the particular company and the reasonable expectations of the members to determine whether the detriment occasioned to the complaining member's interests arising from the acts or conduct of the company in that way is justifiable."
In Morgan v 45 Flers Avenue Pty Ltd above at 704, Young J (as his Honour then was) formulated this aspect of the test for oppression by reference to the nature of the business carried on by the company and the nature of the relations between its participants and as:
"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."
In Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672 Spigelman CJ observed (at [4]) that the statutory formulation of "oppression" confers a wide-ranging remedial jurisdiction on the court and that jurisdiction should not be confined by technical distinctions. 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" and can be established by wrongful exclusion from participation in a company's management or by conduct in breach of a shareholders or services agreement even if the person undertaking that conduct thinks he or she is acting properly: Morgan v 45 Flers Avenue Pty Ltd above at 704; Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 at [176]; Harding Investments Pty Ltd v PMP Shareholdings Pty Ltd (No 2) [2011] FCA 567; (2011) 282 ALR 229 at [10]. The emergence of irreconcilable differences between shareholders does not on its own necessarily establish oppression: McMillan v Toledo Enterprises International Pty Ltd (1995) 18 ACSR 603 at 614; Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd above at [89]; Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104; (2011) ACSR 121 at [199]. Exclusion from a legitimate expectation of participation in a company's management may be oppressive, when combined with a failure to make a reasonable offer to buy the plaintiff's shares: O'Neill v Phillips [1999] 2 All ER 961; [1999] 1 WLR 1092 at 1104; Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342; (2009) 71 ACSR 343 at [109]-[110]; Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152 per Austin J at [42]. On the other hand, in Tomanovic v Global Mortgage Equity Corporation Pty Ltd above, the Court of Appeal held that oppression was established where the parties had agreed but failed to implement an arrangement for separation of their respective interests so that the value of one party's equity was locked in the companies, the income attributable to that equity had ceased, there was no ready prospect that that party could sell that equity to anyone else for fair value and the resumption of cooperation between the parties was not possible.
The principles applicable to a claim for oppression were summarised by Austin J in Tomanovic v Argyle HQ Pty Ltd above at [39], and the Court of Appeal noted the parties did not challenge that summary of the applicable principles in Tomanovic v Global Mortgage Equity Corporation Pty Ltd above at [140]. His Honour observed that:
"(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 (1988) 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 (1988) 28 ACSR 688, at 741; [1998] NSWSC 413 …"
The Defendants submit, and I accept, that the existence of irreconcilable differences, without unfair conduct on the part of the other party, is not sufficient to establish a claim in oppression: O'Neill v Phillips above. The Defendants also draw attention to the decision in Nassar v Innovative Precasters Group Pty Ltd above, which seems to me to have a close analogy with the present facts, where the Court held that, even where a company was formed on the basis that shareholders would participate in management and irreconcilable differences subsequently developed, oppression may not be established where the majority acts reasonably in affording an opportunity for a negotiated exit from the business to the minority (at [96], [110]-[111]; see also Belgiorno-Zegna v Exben Pty Ltd [2000] NSWSC 884; (2000) 35 ACSR 305 at [139]. The Defendants also submit that the removal of a director, associated with a minority interest, may not amount to oppression where any expectation of ongoing participation in management has been displaced by the differences between the parties: Nassar v Innovative Precasters Group Pty Limited above at [96], [111], [117]-[119]; Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd above at [85]-[90], [175]; Re Ledir Enterprises Pty Ltd above at [185], [188].
I have also borne in mind the observation in Tomanovic v Global Mortgage Equity Corporation Pty Ltd above that each case has to be considered on its own facts and circumstances, and by reference to the conduct as a whole. While I will address each of the matters on which the Plaintiffs rely in turn, I bear in mind that I must also have regard to their collective impact.
In written closing submissions, Mr Morahan submitted that the calling of the general meeting in July 2015 by Mr Cooper to remove Mr Kirkpatrick from the boards of AAA and Kirco amounted to the "primary act of oppression" at issue in the proceedings. He submits that the decision to call the general meeting was Mr Cooper's and that Mr Prince had little idea of the detail of the disagreements between Messrs Cooper and Kirkpatrick. As I noted above, the Plaintiffs submit that the 2010 resolutions provided that no major decision relating to the companies would be made without a unanimous decision by the directors. The Plaintiffs submit that a decision to remove a director who was a founding director and had been involved in the foundation and development of the business was a major decision of both companies.
The Defendants respond to the claim for oppression on this basis by contending, as I also noted above, that the 2010 resolutions never became effective; or, even if they became effective, they were thereafter forgotten and ignored; Mr Cooper, as a director of the companies, was entitled to call the meetings, pursuant to the constitutions of AAA and Kirco, and the 2010 directors' resolutions, even if operative, do not prevent that course or prevent shareholders exercising their right to vote on such resolutions; and, if irreconcilable differences emerged between directors, it was not oppressive for one director to seek to remove another after other options had been explored, in order to restore proper corporate governance to the company. The Defendants submit that, on the present facts, the calling of those meetings did not amount to oppression where the relationship between Mr Kirkpatrick and Mr Cooper had broken down, there had been several failed attempts to negotiate a separation of the parties' interests and the existing position both excluded Mr Prince from participating in decisions at board level in AAA and created a deadlock in that entity.
I have held above that the calling of the general meetings of AAA and Kirco was not contrary to the AAA 2010 resolution and the Kirco 2010 resolution. It does not seem to me that conduct was otherwise oppressive to, or unfairly prejudicial to, or unfairly discriminatory against the Plaintiffs, where Mr Kirkpatrick otherwise had no better entitlement to be a director of AAA or Kirco than, for example, Mr Prince. Mr Braham also submits, and I accept that, even if (contrary to my finding) the 2010 resolutions had been breached by the attempted removal of Mr Kirkpatrick as a director, that was not oppressive in the circumstances. It seems to me that events had developed to the point that it was plainly necessary that one or other of Messrs Cooper or Kirkpatrick be removed, or a new director appointed, given the extent of the breakdown in the relationship between Messrs Kirkpatrick and Cooper. Once that relationship had broken down, and it was plain that agreement would not be reached between Messrs Kirkpatrick and Cooper in respect of the management of AAA, leaving that company in a state of deadlock, Mr Kirkpatrick had no proper expectation that he should retain a permanent veto right in respect of any business decision of AAA, or that AAA should be forced into the position where its only alternative might, for example, be the appointment of a provisional liquidator.
It does not seem to me that the calling of the relevant general meeting to approve the relevant resolutions could, on any view, be contrary to the interests of the members of AAA and Kirco as a whole, for the reasons that I have set out above. It also does not seem to me that that conduct is oppressive to, unfair prejudicial to, or unfairly discriminatory against either Victory or Mr Kirkpatrick.
I will refer below to the fact that Mr Cooper, as well as Mr Kirkpatrick, advanced substantial funds to AAA and Kirco on an ongoing basis throughout the period prior to Mr Prince's investment in the companies. In those circumstances, it has not been established that it was oppressive to debit the expenditures made by Mr Kirkpatrick in respect of the Lygon Street property, for Mr Cooper's benefit, to Mr Cooper's loan account. I recognise that that course, by contrast with a reimbursement as expenditures were incurred, potentially reduced the cash resources then available in AAA. However, there is no evidence that that caused any detriment, despite their difficult financial position, where Messrs Cooper and Kirkpatrick continued to fund the companies over the period prior to Mr Prince's involvement. The position might, of course, have been different had material expenditures been made by Mr Cooper on the Lygon Street property without Mr Kirkpatrick's knowledge and charged to Mr Cooper's loan account, but that case was not established by the Plaintiffs. I am not satisfied that this matter, alone or with other matters, establishes a claim in oppression.
The personal expenditures on which the Plaintiffs relied to establish the relevant oppression were recorded in the companies' ledgers in a transparent manner, and Mr Kirkpatrick accepted in cross-examination that he had identified the expenditures as to which complaint is now made by extracting them from the information that Mr Cooper had provided to him on a contemporaneous basis, including in 2009 and 2010, as to Mr Cooper's loan account with the company (T138-139). Mr Kirkpatrick acknowledged in cross-examination that Mr Cooper had correctly recorded the transactions in the company's loan account (T141). Mr Dawson's further inquiries have not identified any personal expenditures of Mr Cooper which were not reflected in the relevant loan accounts, although Mr Kirkpatrick did not spend the time necessary to review Mr Dawson's report as to that matter and had not fully absorbed it (T142).
Mr Kirkpatrick was also sent an email dated 12 August 2010, attaching a document relating to the "square up" of his and Mr Kirkpatrick's respective loan positions, as part of Mr Prince's investment in the companies, although he does not recall going through the attachment to that email (T151). There was, in any event, little difference between the amount owed to Mr Cooper and Mr Kirkpatrick at that point (T152). Mr Kirkpatrick was not prepared to "agree" with the document in cross-examination, but his evidence raised no question as to its correctness (T152). A number of the expenditures which Mr Kirkpatrick now criticises as unauthorised had occurred prior to the "square up" of the loan accounts before Mr Prince invested in the companies, in August and September 2010 (Cooper 13.4.16 [140]-[144], Ex D1, Tabs 97-107). Mr Kirkpatrick appears to have accepted, in cross-examination, that such expenditures were addressed when those loan accounts were "squared up" at that time (T155).
Mr Cooper fairly accepted in cross-examination that he did not have an agreement with Mr Kirkpatrick to permit the loan account to be used for personal purposes (T349). Mr Kirkpatrick places significant emphasis on a submission that monies were used by Mr Cooper for personal purposes at a time that AAA was under financial pressure. While there is force in that proposition, it does not outweigh the fact that Mr Cooper had nonetheless made substantial contributions by way of loan funds to the business; the relevant personal expenses were not material amounts, by comparison with the commitments of the business as a whole; and those payments took place several years ago.
There was also some attention in the affidavit evidence, and in cross-examination, to whether Mr Cooper or Mr Kirkpatrick contributed larger amounts by loan funds over the relevant period. In particular, Mr Kirkpatrick sought to establish that Mr Cooper's cash contribution of $54,100 in the financial year ended 30 June 2013, after deducting withdrawals of $36,500, resulted in a net contribution for the financial year ended 30 June 2013 of $17,500 and that Mr Kirkpatrick had contributed $22,500 in that financial year, and Mr Cooper agreed as to the calculation of respective contributions in the 2013 year in cross-examination (T243). However, this submission is limited to part of the relevant period. As Mr Braham pointed out in closing submissions, an examination of Messrs Cooper and Kirkpatrick's contributions over a longer period (Ex D1, Tab 68) indicates that the extent to which one or other of them had made greater contributions by way of loans varied from time to time over the period (T418). It is sufficient to recognise that each of Messrs Cooper and Kirkpatrick had advanced significant funds over the relevant period.
The Plaintiffs also complained of the consolidation of loans made by Mr Cooper and Mr Kirkpatrick, so that they have been treated as repayable by the Kirco Investment Syndicate. Mr Cooper had disclosed the steps that were taken in respect of the consolidation of the loan accounts with AAA to Mr Kirkpatrick in a timely way (Ex D1, Tab 62), and Mr Kirkpatrick accepted in cross-examination that he and his wife would have looked carefully at the loan accounts provided to him in January 2009 which disclosed that matter (T137). The transactions appear to have been to AAA's advantage, so far as they reduced its liabilities and to the advantage of Messrs Kirkpatrick and Cooper, since the Kirco Investment Syndicate had sufficient funds available to meet those liabilities; and caused no disadvantage to the Kirco Investment Syndicate or its creditors, given the funds available to it. I recognise that Mr Kirkpatrick was not prepared to accept that proposition in cross-examination, at least in any clear way, but that may again reflect a lack of understanding of the relevant transactions rather than a refusal to accept the obvious.
The Defendants point out, and I accept, that personal expenditure does not, where properly debited to a loan account within a proprietary company, necessarily amount to oppression: Grace v Grace [2012] NSWSC 976 at [160]-[162]. There is, in this case, none of the elements of concealment of personal expenditure that gave rise to oppression in, for example, Re Amazon Pest Control Pty Ltd [2012] NSWSC 1568 at [10]-[11]. I am not satisfied that these matters support the oppression claim, alone or in combination with other matters.
The Plaintiffs also complain of work undertaken by Mr Cooper for PDF, which Mr Cooper asserts was for the benefit of AAA. It is plainly arguable that, with hindsight, the business judgment involved in determining whether AAA should provide assistance to PDF was not to AAA's advantage. However, that matter is not capable of supporting a claim in oppression, because Mr Cooper was not in fact paid for that work by AAA over Mr Kirkpatrick's objection to such payment (T186).
Mr Kirkpatrick also complains of three payments made to Mero, which was controlled by Mr Cooper. It is common ground that there was no specific agreement between Messrs Kirkpatrick and Cooper that Mero should have a loan account in AAA (Kirkpatrick 26.2.16 [13]-[14]; T335, 337). The Plaintiffs submit that Mr Cooper "intermingled" the finances of Mero and AAA without Mr Kirkpatrick's knowledge. The evidence does not establish that proposition, but rather that Mero advanced funds to AAA from time to time, particularly in order to address short term cash flow issues of AAA, which were generally repaid within a short period. Where both Messrs Kirkpatrick and Cooper were advancing funds to AAA, it seems to me that little turns on the proposition that Mr Cooper did so, on occasion, through a corporate entity, Mero. The bank statements record that, in respect of each of the payments to Mero, there was a corresponding and contemporaneous payment by it (Ex D1, Tab 111), so that the transactions had no substantive economic impact on AAA. The third and largest of those amounts, in respect of $30,000, was explained by Mr Cooper as a banking error, and was also promptly repaid to AAA.
A complaint is also made that customers of Mero, in respect of its Melbourne mini-storage business, had paid storage fees into AAA's bank account. Mr Cooper accepted that had occurred with one or two customers, because Mero had used a similar form of storage agreement to AAA's storage agreement, and Mr Cooper had neglected to alter the bank account details in that agreement (T337-338). Mr Cooper's evidence was that one particular client did not alter the regular debit he had set up, although he was requested to do so, to insert the correct account information for Mero (T338). There is again no suggestion that this matter was not properly addressed in AAA's accounts.
Mr Morahan fairly conceded in closing oral submissions that the Plaintiffs had thought that the issue in respect of Mero was a "big point at the beginning of the case" and that "it turned out not to be such a big point", although he nonetheless identified the Plaintiffs' continuing concern as to the suggested intermingling of the finances of AAA and Mero (T408). These matters, alone or together with the other matters on which the Plaintiffs rely, do not amount to oppression, still less to the level of oppression that might justify the relief sought by the Plaintiffs.
Mr Cooper also refers to that email, which was dated 24 March 2009, in his affidavit evidence (Ex D1, Tab 96, p 703). There is no evidence of any contemporaneous dispute as to the position taken by Mr Cooper in that email. Mr Kirkpatrick accepted in cross-examination that he received the email, although he maintained his position that the parties' agreement extended to accountancy work, and his evidence was that he took issue with the position by phone since he "barely used email" (T134). I accept that Mr Kirkpatrick rarely used email in the earlier period. However, I am not persuaded by his evidence that he took issue with this position by telephone, given the issues as to his credit to which I have referred above.
It is, however, plain that Mr Cooper was transparent as to the charges which he and his accountancy firm had applied in respect of accountancy work, communicating them, for example, in an email dated 4 August 2009 (Ex D1, Tab 98). That email attached work in progress records for Cooper & Associates which showed Mr Cooper's rate at $50 per hour and charges at a rate of $78 per hour for his staff (Ex D1, Tab 98). In cross-examination, Mr Kirkpatrick claimed that he complained about this at the time, orally rather than in writing (T136). I am also not persuaded by that evidence, given the issues as to his credit to which I have referred above.
Mr Cooper's evidence is that there was an agreed rate for directors' time. He denies that there was an agreement relating to the rate that Cooper & Associates would charge for accounting services, although he accepts that he charged for accounting services at the lower rate "in order to assist the business financially" while claiming that this was not intended to continue indefinitely (Cooper 13.4.16 [130]). His evidence is that there was no such agreement for staff charges for professional or administrative work (Cooper 13.4.16 [131]). In fact, Mr Cooper generally (with the two immaterial exceptions noted below) recorded his time at the agreed rate, although time for his staff was charged at a higher rate.
Mr Dawson identified seven invoices paid to Cooper & Associates, in the amount of $17,442.43 inclusive of GST and identifies a "potential" overcharge of $7,879.30 inclusive of GST (Ex P1, [40]-[41]). Mr Dawson's report discloses only two occasions where Mr Cooper's personal work was charged at a higher rate than $25 an hour or $50 an hour, on one occasion where the total charge is for half an hour at $210 an hour and on another where the total charge is for 15 minutes at $240 per hour. Mr Dawson's calculation of the "potential" overcharge was also based in an instruction that the agreed rates were $25 per hour for most of the work charged, and Mr Kirkpatrick accepted in cross examination that the relevant rate as agreed would in fact have been $50 per hour (T133). The Defendants point out that, if Mr Dawson's calculation is redone on that basis, and charging Mr Cooper's employees at their usual (and hardly exorbitant) rates of about $78 per hour, the total overpayment in relation to Mr Cooper's time is approximately $165. Mr Dawson also speculated that the value of hours worked by Mr Cooper or his staff may have been inflated; no such allegation is made in the proceedings, and there is no evidence to support it, and I disregard that speculation.
It is ultimately not necessary to determine whether an agreement existed to the effect claimed by Mr Kirkpatrick or there was merely a practice between the parties to that effect. In either case, I am not satisfied that that agreement extended beyond time charged by Mr Cooper or Mr Kirkpatrick personally to others associated with them who were providing services to the companies. I also do not find it necessary to determine whether Mr Kirkpatrick's evidence that he later contended that any work done by Cooper & Associates had to be done at the agreed rate should be accepted (T136), because a later contention to that effect would not establish an agreement to that effect. It does not seem to me that these matters, alone or together with the other matters on which the Plaintiffs rely, amount to oppression, still less to the level of oppression that might justify the relief sought by the Plaintiffs.
Mr Connolly accepted that, sensibly enough, he had given advice about the risks of litigation, the cost of litigation and the risk of an adverse costs order, although he did not recall whether he had also given advice about the risk of an order for security for costs against AAA, although it was possible that he had done so (T228). He had also provided information to his instructing solicitor as to potential adverse costs orders in the proceedings (T228). That solicitor had conveyed that information to Mr Kirkpatrick and Mr Cooper (Ex D1, Tab 19). That information indicated that AAA might face a costs order of between $160,000 and $286,200 in respect of an adverse result (T229). Mr Connolly considered that the loss suffered by AAA had not been adequately quantified and the prospects in respect of recovering loss were less clear than the prospects in respect of liability (T229). Again, that provides little assistance to the Plaintiffs, so far as they attack the decision not to commence the proceedings.
Mr Cooper's evidence is that he did not believe that it was in AAA's best interests to pursue the claim against Belmorta, given the likely cost of the litigation, the likelihood that AAA would be required to put up substantial security for costs, the time that would be involved in prosecuting the proceedings and the amount of work involved, and concerns as to the possibility that AAA would be unsuccessful or would be unable to enforce its judgment even if it were successful (Cooper 13.4.16 [70]-[79]). Mr Cooper's evidence in cross-examination was that he was concerned as to the risk, which seemed to me to have been realistic, that the amount expended on the Belmorta proceedings would have exceeded the recovery from them; that he was concerned with difficulties of enforcement, where Belmorta was the trustee of a superannuation fund; and he was also concerned that AAA did not have the money to fund the proceedings, and he did not have, and did not believe that Mr Kirkpatrick had, the necessary funds to fund the proceedings (T362).
It is common ground that, on 30 October 2015, Messrs Cooper and Prince agreed with Mr Kirkpatrick that AAA could commence proceedings against Belmorta and its executive director on certain conditions, and it did so without serving those proceedings. However, the solicitor acting for Mr Kirkpatrick then sought to amend those proceedings, shortly after they had been commenced in the Federal Court of Australia, and thereby lost the ability to defer service of the proceedings. The proceedings were then struck out where they were not served.
As the Defendants point out, a court should ordinarily exercise considerable caution in second-guessing a director's decision in respect of a business decision such as whether to commence proceedings: Re S & D International Pty Ltd (No 4) [2010] VSC 388; (2010) 79 ACSR 595 at [282]-[283]. In any event, it seems to me that Mr Cooper's reservations in respect of the proceedings against Belmorta and its director, and his withdrawing his support for those proceedings, have not been shown to be contrary to AAA's interests, because it has not been established that those proceedings, and the significant costs that would be incurred in conducting them and the significant risk of costs that would be incurred if they were unsuccessful, were in AAA's interest. There is no evidence that allows a finding that AAA could have recovered substantial damages against Belmorta or its executive director, sufficient to warrant the continuance of proceedings against them, or indeed that AAA had the capacity to fund those proceedings to completion or to provide such security for costs as might have been ordered in respect of the proceedings. It seems to me that Mr Cooper was rightly concerned as to whether the returns from the proceedings would justify the costs and risks attached to their continuance and, even if that concern was not objectively justified, it was well within a permissible range of business judgment on the part of the directors and shareholders in AAA. The Plaintiffs' claim for oppression is not established, merely because Mr Kirkpatrick or Victory were prepared to assume a higher level of risk in respect of the conduct of those proceedings than Mr Cooper. The Defendants also rightly point out that, to the extent that Mr Kirkpatrick considered that the proposed proceedings were in AAA's best interests, and Mr Cooper did not support them, it was open to Mr Kirkpatrick to seek the court's leave to bring a derivative action on behalf of AAA in accordance with s 237 of the Corporations Act. The Defendants point out that Mr Kirkpatrick was aware of, but chose not to take, that course (Cooper 13.4.16 [78(c)]; Ex D1, Tab 23).
The order sought in paragraph 11 of the Amended Statement of Claim that AAA prosecute the Belmorta proceedings was not pressed and plainly cannot be granted, as those proceedings have been struck out by the Federal Court and it is common ground that the applicable limitations period has expired. I am not satisfied that this matter, alone or with other matters, supports the claim for relief for oppression.
By email dated 11 December 2012, Mr Cooper advised Messrs Kirkpatrick and Mr Prince that Mr Prince had paid rent on the 216 Wyndham Street premises for the past three months and suggested that Messrs Cooper and Kirkpatrick each contribute half of that rent for the next couple of months (Ex D1, Tab 13). Mr Kirkpatrick accepted in cross-examination that he received this email and did not complain about that matter (T181).
By email dated 6 January 2014 (Ex D1, Tab 90), Mr Cooper sent Mr Kirkpatrick information for Mr Kirkpatrick's accountant, Mr Poole, and referred to the treatment of the $136,000 contributed by Mr Prince as follows:
"Because of the extra $136,000 that [Mr Prince] contributed, we also had to each contribute the same amount from our respective loan accounts. The amount is represented in Kirco Property Trust as follows:
Additional units 120,000
Loan advance 16,000."
Mr Kirkpatrick accepted in cross-examination that he had received the email, although he left it to his wife to send it to Mr Poole without his having read it and that his wife would have sent that information direct to his accountant and he would not have read the detail (T181). Mr Kirkpatrick denied, in cross-examination, that the arrangements in that email reflected an agreement between Mr Cooper and Mr Prince, in September 2012, where it was agreed that Mr Cooper would approach Mr Prince for the advance of further money (T182). The amounts referred to in that email and the attached information were treated in the same manner by Mr Poole in his accounting of the position as to the Kirco Property Trust in identifying Mr Kirkpatrick's financial position in evidence in these proceedings (Poole 22.9.15 [3]).
Notwithstanding the information provided to him in January 2014, Mr Kirkpatrick's evidence is that he first became aware of the contribution by Mr Prince of $136,000 on 9 January 2015, from a further email from Mr Cooper referring to that contribution (Kirkpatrick 26.2.16, Annexure "A").
First, the Plaintiffs allege (ASOC [39(y)]) that Mr Cooper issued units in the Kirco Investment Trust without authority and contrary to Kirco's constitution, thereby altering the interests and rights of Kirco's members. The Plaintiffs submit that the contribution of loan funds by Mr Prince was contrary to the constitutions of AAA and Kirco which required a board resolution for monies to be borrowed by AAA and Kirco. Both Messrs Kirkpatrick and Cooper had been advancing loan funds to AAA, without such a board resolution, over the whole of the relevant period. I accept that the amount advanced by Mr Kirkpatrick was, as Mr Morahan submits, in a somewhat different territory because it appears initially to have been advanced as a short term loan on which interest would be paid, although it was not in fact repaid on that basis. That distinction does not seem to me to be sufficient to require an insistence on corporate formality, in respect of the loan arrangement, when no other loans had been treated in that manner.
Second, the Plaintiffs allege (ASOC [39(bb)]) that Mr Cooper caused the loan of $136,000 from Mr Prince to AAA to be applied without a resolution of the members of AAA and/or Kirco at a general meeting. The Defendants respond that this complaint disregards the reality of how decisions relating to these companies were made. They rely on Mr Kirkpatrick's evidence in cross-examination that the companies' proceedings were conducted and decisions made by telephone or email rather than by formal signed resolutions (T93-95). That proposition would not be an answer to lack of authority unless it were also shown that Messrs Kirkpatrick and Prince had expressly or impliedly authorised the treatment of the monies contributed by Mr Prince. It seems to me that the communications to which I have referred above establish that Mr Kirkpatrick was advised of and did not take issue with the treatment of the funds contributed by Mr Prince, even if that reflects the fact that he did not personally pay attention to the issue, but sent the relevant information to his accountant.
Mr Braham submitted, and I accept that, the subsequent capitalisation of a substantial part of the amount lent by Mr Prince, by which $120,000 was converted to units in the Kirco Property Trust was to the advantage of AAA and its shareholders, so far as it improved AAA's balance sheet and removed an interest obligation that might potentially otherwise have arisen in respect of Mr Prince. As I noted above, at the time that loan obligation was converted to equity, the amounts of other debts owed to a company associated with Mr Cooper and Victory were also converted to equity in the Kirco Property Trust, so that the matter did not involve any inequality of treatment between the unitholders. Given the informality of the conduct of the companies' affairs generally, and the absence of any real disadvantage in the manner in which the funds made available by Mr Prince were treated, it seems to me that Mr Kirkpatrick's failure to take issue with the proposed treatment of these funds when he was advised of it either constitutes implied authority for that treatment or, at least, excludes any element of oppression in that treatment.
The Plaintiffs also allege (ASOC [39(cc)]) that Mr Cooper retained all or part of the contribution by Mr Prince in the trust account of Cooper & Associates, depriving AAA of the ability to earn interest on those funds or reduce liabilities by the payment of creditors or reduce the interest paid on bank overdrafts and gained an advantage for himself and caused detriment to AAA. Mr Cooper's evidence (Cooper 13.4.16 [157]) in respect of this issue is that that the advance of $136,000 by Mr Prince was made up of ten payments made between September 2012 and March 2013, three of which were transferred directly by Mr Prince to AAA, and that the other payments were made to Cooper & Associates' account. Mr Cooper's evidence is that, apart from the final amount of $7,000, those payments were transferred by Mr Cooper to AAA.
Mr Cooper's evidence is that, by error, he failed to identify the last payment of $7,000, until May 2014 when he was preparing AAA's accounts for the 2013 financial year, and then notified Mr Prince of that error. Mr Cooper's evidence is that he then corrected that error by debiting his loan account in that amount (Cooper 29.8.16, Annexure "D", T328, 329, 334). That error was potentially to Mr Cooper's or his firm's advantage; however, as Mr Cooper observed in cross-examination, Mr Cooper and interests associated with him continued to advance additional monies to AAA (T334), which substituted for the amount of $7,000 that his firm had retained. In any event, the amount involved is not sufficient, alone or with other matters, to support the relief claimed by the Plaintiffs.
A further error was identified in the course of Mr Cooper's cross-examination, namely that a contribution made by Mr Kirkpatrick of $5,000 into AAA on 11 June 2014 had been incorrectly treated as a contribution by Mr Cooper by crediting that contribution to Mr Cooper's loan account (Ex P2, 79). Mr Cooper acknowledged that error in cross-examination (T345) and accepted that it needed to be corrected (T346). Again, that matter does not seem to me to be sufficiently material to warrant the relief sought by the Plaintiffs, in itself or in combination with other matters.
I am not persuaded that these matters, alone or with other matters, supports the claim in oppression or the relief sought by the Plaintiffs.
Mr Morahan also submitted that:
"This is a difficult matter where the oppressed party does not have the expertise or the powers to investigate properly what has occurred in this complicated corporate structure without the assistance of the Court."
Mr Braham submits, and I accept, that the Plaintiffs' reliance on Mr Kirkpatrick's lack of financial sophistication is undermined, to some extent, by the fact that Mr Kirkpatrick has been advised by an independent accountant, Mr Poole, since at least June 2010, and I have referred to Mr Poole's affidavit filed in the proceedings above. The Plaintiffs have also been legally represented throughout these proceedings and Mr Dawson has undertaken his investigation on their behalf and they have had access to his report. A second difficulty with that submission is that the characterisation of the Plaintiffs as the "oppressed party" depends upon what has occurred, and one cannot proceed on the basis of an assumption that the Plaintiffs are oppressed, in order to determine whether an investigation should be conducted as to whether they are oppressed. A third difficulty is that, as the Defendants point out, s 233 of the Corporations Act does not contain provision for the appointment of an investigator. I will address the question whether such an order should be made under s 241(1)(d) of the Corporations Act below.
The Defendants also point out that the Court retains a discretion whether to grant relief in an oppression claim, which should have regard to the overall circumstances: Re Ledir Enterprises Pty Ltd above at [214]-[215]. It is not necessary to address the exercise of such a discretion separately where I have not found that oppression was established in the relevant circumstances.
The third requirement under s 237 of the Corporations Act is that it is in the best interests of AAA and Kirco that Mr Kirkpatrick be granted leave. In Swansson v RA Pratt Properties Pty Ltd above, Palmer J noted that that paragraph required that the Court be satisfied that the proposed action actually is, on the balance of probabilities, in the company's best interests. In Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432, Ball J identified relevant matters including the prospects of success of the action; the likely costs of the action; the benefit to be gained by the action; and the likely consequences to the company if the action is unsuccessful. In Huang v Wang [2016] NSWCA 164; (2016) 114 ACSR 586, Bathurst CJ observed (at [59]) that, in the case of a solvent company, whether the proceedings are in the company's best interests will have regard to the interests of shareholders in that capacity, and a collateral benefit to a particular shareholder from bringing proceedings is irrelevant. I am not satisfied that the grant of such leave is in the best interests of the companies, where the issues that underlie the proposed derivative proceedings have been, or could have been, canvassed in these proceedings. It does not seem to me that it would be in the companies' interests to make such an order, or expose the companies to the cost of a further hearing as to substantially the same matters that have already been the subject of this hearing.
The next question is that there is a serious question to be tried. Whether there is a serious question to be tried requires the application of the same test as applied by the Court in determining whether to grant an interlocutory injunction: Swansson v RA Pratt Properties Pty Ltd above at [25]; Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763; (2010) 79 ACSR 293 at [147], upheld on appeal in MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367. In Re Gladstone Pacific Nickel Ltd above, Ball J summarised the test as to whether there is a serious question to be tried as follows (at [56]):
"The test of whether there is a serious question to be tried is the same as the test that is applied by the court in determining whether to grant an interlocutory injunction: Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 at [25] per Palmer J; Oates v Consolidated Capital Services Ltd [2009] NSWCA 183; (2009) 72 ACSR 506 at [164] per Campbell JA, with whom Spigelman CJ and Allsop P agreed. Consequently, the same relatively low threshold is applicable. It is not appropriate for the court to attempt to resolve disputed questions of fact. … Whether the court should attempt to resolve a disputed question of law will depend on the particular circumstances of the case, including whether the question is novel or difficult and whether it is susceptible of resolution on the present state of the evidence: Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 535 per McLelland J (as he then was). In answering the question whether there is a serious question to be tried, the court must obviously have regard to the material before it; and the material that is available may affect the result."
It is not possible to determine whether a serious question to be tried is established in the absence of a proper identification of the claims that the Plaintiffs seek leave to pursue. It is not necessary to do so where I am not satisfied that the grant of leave is in the companies' best interests for the reasons noted above.
The last requirement relates to the giving of notice before making the application, or the Court's satisfaction that it is appropriate to grant leave although such notice was not given. I would not have treated any failure to give such notice as preventing the grant of leave, if it were otherwise warranted, where the parties are plainly on notice of the relevant issues..
The Court must decline leave to bring a derivative action where the requirement that that action is in the companies' best interests is not satisfied, and I decline that leave on that basis.