Question 1
84 Aughton is not entitled to recover legal costs from Empire on the basis of clause 3(v) of its memorandum or on the basis of any of Articles 4-6, 25, 29-31 or 40 of its articles of association for the following reasons.
85 Clause 3(v) of the memorandum of association empowers Aughton to employ solicitors in relation to the conduct of its business, but it says nothing about how those costs must be allocated as between shareholders.
86 Article 3(g) has relevance in these proceedings only insofar as the legal costs and disbursements incurred by Aughton result in indebtedness of Empire to Aughton under other provisions of its constitution or the general law. Aughton did not commence any Court action to recover unpaid levies and interest and there was no completed share forfeiture procedure conducted by Aughton. Accordingly, Article 3(g) (and Article 38) operate only if Empire owed an obligation under the general law for the legal costs which Aughton has applied against Empire's name in the owner's ledger or which it claims in respect of invoices provided to its lawyers by email on 7 and 9 August 2017.
87 Properly construed, Article 5 relates to levies for expenses incurred under Article 4 and levied under Article 6 - levies which Article 4 requires in express terms to be apportioned between all shareholders by reference to the number of shares held. Under Article 5, those levies are to be notified to shareholders and become a debt due and payable 14 days after notification and the debt is expressly said to be recoverable by Court action. Article 6 confers power on the directors to determine that the levies be paid by instalments or periodical payments.
88 There is no power under any of Articles 4-6 for the directors to determine that all of a particular expense incurred under Article 4 be paid by a particular shareholder and not be treated as a shared expense in proportion to the shareholding. In the absence of evidence of a mechanism by which the directors have determined a levy in any year and of notice being given to the shareholder that a levy is payable, there is no basis for Aughton to claim payment in respect of any amount which is recorded in an owner's ledger as a levy. So much is clear from the language of Article 25 concerning what must be proved on the trial of an action for money due on any call or levy.
89 These is nothing in Aughton's articles of association which provides for the keeping of an owner's ledger or which accords it any status in establishing what amount is owed by a shareholder to Aughton, albeit that is an appropriate way of keeping track of amounts which Aughton believes are owing to and received by it.
90 Although Aughton relies on the bolded language in Article 8, the forfeiture procedure prescribed by that article was not used and, in my view, the language to which Aughton refers does not advance its argument. I note that any "notice referred to in Article 3(g)" is plainly a reference to work required to be done by a local or statutory authority, not the circumstance envisaged by the bolded words in Article 3(g).
91 As Aughton has not pursued any recovery action for a levy, its reliance on the bolded language in Article 25 above does not advance its argument.
92 Aughton's reliance on Articles 29 and 40 as a basis for recovery of legal costs is wholly misplaced when the forfeiture procedure under Articles 29-31 has not been conducted and no enforcement action has been taken for unpaid levies as envisaged in Article 5. Any notice given under Articles 29 does not stand alone. Articles 29 and 30 must be read together, requiring a notice of demand for the payment of unpaid levies, accrued interest and expenses incurred by Aughton by reason of the non-payment under Article 29, and the specification of a day, not less than 14 days from the date of the notice, on or before which payment must be made and stating that shares in respect of which there has been failure to comply will be liable to be forfeited, as required by Article 30. Accordingly, the issue of a notice under both of those Articles is only the first step in the forfeiture procedure. Article 31 requires a directors' resolution to have been passed forfeiting the shares. That did not happen.
93 The only notice of possible forfeiture which appears to reflect the requirements of Articles 29 and 30 was that in the 14 February 2017 letter and it was withdrawn before the directors took any of the necessary steps under Article 31 to forfeit the Shares. Aughton conceded, for the first time at the hearing, that the "Article 30 Certificate" issued on 5 June 2017 does not meet the requirements of Articles 29 and 30: T: 1-3.
94 I accept the plaintiffs' submission that Article 40 relies wholly on Article 39 for its operation because Article 40 provides for the "nett proceeds of any such sale" to be applied in satisfaction of the costs of "such sale". That is a clear reference back to the enforcement of the lien under Article 38 by way of the sale of shares subject to it "in such manner as the Directors think fit" where relevant notices have been served on the member and default has been made in compliance with the notice in full, as required by Article 39. Those Articles relate to sale by Aughton of forfeited shares. Accordingly, Article 40 cannot be called in aid of Aughton's claim for recovering legal costs incurred by it after 27 February 2017 out of the Fund established on 14 July 2017 at settlement of the sale of the Shares.
95 Although aspects of the language used in Article 38 have a long history in model articles of association provided in Table A of now superseded legislation governing companies in Australia and the United Kingdom, it is not a model of clarity. In my view, it must be read in the context in which it appears under the heading "FORFEITURE AND LIEN". Its work is primarily concerned with protecting the right of Aughton to recoup "debts liabilities and engagements" of shareholders upon the sale of forfeited shares in pursuit of payment of unpaid calls, levies and interest which have been properly made in accordance with the articles of association.
96 It is therefore necessary for Aughton to establish how any or all of the legal costs the subject of the invoices provided to the plaintiffs in August 2017 came to be a debt, liability or engagement of Empire to Aughton for the purposes of Article 38.
97 Unless the forfeiture procedure has been gone through, or recovery action has been taken as envisaged by Articles 3(g), 5 and 25, there is nothing in Aughton's articles of association which establishes any liability of an individual shareholder to Aughton for legal costs incurred by Aughton absent an express or implied undertaking by a shareholder to pay a cost incurred by Aughton. Otherwise, such costs must be shared between all of the shareholders.
98 I do not agree with the concession made by the plaintiffs that there is any general law obligation imposed on a shareholder of Aughton to pay legal costs incurred in recovery of unpaid levies and accrued interest in the context of company title. I prefer the view expressed by Hodgson JA in Dimitriou at [34] that, apart from s 80 of the Strata Schemes Management Act 1996, recovery of expenses (including legal costs) would depend upon obtaining an order for costs made by a court hearing a relevant proceeding for recovery of unpaid contributions. Aughton operates under company title so that s 80 of the Strata Schemes Management Act 1996 (or any statutory successor) could not apply to it. Unless a Court has awarded costs for recovery action, any right of Aughton to be paid legal costs depends upon there being some provision in Aughton's constitution or other agreement between Aughton and its shareholder which creates the obligation.
99 While I do not accept that there is a general law liability of the kind conceded by the plaintiffs, there are other relevant factors to take into account in this case.
100 First, I accept Aughton's argument that it is appropriate to take into account that Aughton acted on the representation in the 22 February 2017 letter (see [7] above) that Aughton would be "paid in full in a relatively short timeframe" (of around three months) if Aughton withdrew the notice of forfeiture in the 24 February 2017 letter and gave the requested undertakings. In my view, that representation should be understood as an "engagement" of Empire with Aughton within Article 38 in relation to the payment of about $53,361.65 representing "outstanding strata levies, interest and legal fees" claimed in the letter dated 14 February 2017 to which it might be entitled upon forfeiture of the Shares. Having regard to the fact that Mr Weston was then Ms Ridge's trustee in bankruptcy and was proposing to become Empire's liquidator, that "engagement" would not be taken by a reasonable person to be unqualified; it would be taken to relate to levies and interest properly charged and legal costs which were reasonable in amount and reasonably incurred. That issue might not have loomed large as at 22 February 2017, but it was appropriate that it did so from 2 June 2017 in light of the much larger amount claimed in the Article 30 Notice.
101 Second, this case was run on the basis of the plaintiffs' concession that Empire was liable to pay Aughton's legal costs up until Mr Weston's appointment as liquidator on 27 February 2017 in an amount of $14,610, and that, having regard to the statement of issues, the correctness of the amount of unpaid levies and interest paid on 14 July 2017 at settlement of the sale of the Shares was effectively conceded.
102 Third, in the course of the hearing, the plaintiffs' accepted that that concession should extend to the amounts of $868.45 and $6,600 identified as being for senior counsel's fees as set out in the Schedule, even though no invoices were produced for those amounts. They did not concede that they should pay the amount of $1,447.40 in the Schedule as at 1 April 2017 and also referred to in the owner's ledger as being for "legal expenses" for which no invoice was provided, or for any amounts claimed in invoices dated on and from 31 May 2017 or in respect of the period after 27 February 2017 (subject to the next matter referred to below).
103 Fourth, the plaintiffs also conceded that, at general law, Aughton would be entitled to recover a small amount of legal costs related to the discharge of its lien, including tasks required to facilitate the settlement of the sale of the Shares, but not an amount as great as $6,930 claimed in invoice 5754226 dated 15 August 2017. I am inclined to accept that a reasonable person would understand what was said in the 22 February 2017 letter to extend to amounts in the usual range for legal costs relating to the discharge of Aughton's lien and consenting to the transfer of the Shares.
104 The parties were given leave to provide further written submissions in relation to the costs incurred by Aughton in the period from 27 February 2017 up to 14 July 2017 which were properly referable to the settlement of the sale of the Shares and the discharge of its lien, and not referable to these proceedings commenced on 28 June 2017. I accept the plaintiffs' submission that Aughton's written submissions (comprising 10 pages with 39 pages of attachments) exceeded the leave given by the Court.
105 Aughton says that its legal costs, including counsels' fees, up to 14 February 2017 were $20,924.20 (inclusive of GST and disbursements), comprising $11,024 (inclusive of GST) billed by Smith Partners, $6,600 (inclusive of GST) for services provided by Raoul Wilson SC and $3,300 for services provided by Mr Locke. No invoices have been provided to support the claims for counsels' fees, although counsel for the plaintiffs conceded that the account for $6,600 and an account for $868.85 listed on the owner's ledger at [17] above for counsel's fees as at 14 October 2016 should be accounted for. At [27], Aughton's written submissions state:
Mr CP Locke's fees from the commencement of the proceedings on 26 April 2017 totalled $5115.00. This amount is reflected in the SPL invoice to Aughton Flats Pty Ltd and Mr Locke's fees have been apportioned between the periods pre and post 14 February 2017.
106 I take this submission to explain how $3,300 of Mr Locke's fees should be attributed to the period before Mr Weston's appointment as Empire's liquidator. In this regard, I note that:
(1) No invoices for counsels' fees are in evidence, although it may be inferred from invoice 5688389 dated 31 May 2017 for the period from 7 March to 8 June 2017 that Mr Locke issued an invoice around 11 May 2017 for $5,115. That would (normally) imply that the work was done by Mr Locke in that period.
(2) Smith Partners' invoice 5637101 dated 14 February 2017 and invoice 5639226 dated 7 March 2017 indicate that Mr Locke was briefed in about mid-July 2016, he appears to have been involved with a brief to senior counsel up until early February 2017 and to have been involved in advising concerning correspondence with SLF Lawyers from 14 February 2017 up to 20 February 2017.
I accept that the amount of $5,115 relates to Mr Locke's fees, and that a reasonable proportion of them may relate to the period up to Mr Weston's appointment as liquidator of Empire. Invoice 5688389 dated 31 May 2017 indicates that Mr Locke's brief was updated on 14 April 2017, and he was involved in giving advice concerning correspondence with HWL Ebsworth Lawyers in late April 2017; nonetheless it appears likely that much of the work related to the period up to 27 February 2017. However, there is no detail of the work done by Mr Locke and that explanation was only given outside the scope of submissions which Aughton was given leave to make. Had that explanation been offered earlier and justified by evidence, it might be that it would have been accepted by the plaintiffs as an amount recoverable by Aughton consistent with the concession it made in relation to the amount of $14,610.20 in this Court and in the context of the settlement offers it made up to and including on 26 October 2017. In my view, it should not now be accepted.
107 Aughton claims that the representation in the 22 February 2017 letter extends to include fees incurred after 14 February 2017 in an amount of $25,850 (inclusive of GST) and $1,815 in counsel fees.
108 In light of matters addressed above, it is uncontroversial that the amount of $3,894, the subject of invoice 5639226 dated 7 March 2017, is accepted as payable by the plaintiffs. Thus, in respect of the period up to 27 February 2017 it appears that, consistent with the principles which the plaintiffs accepted at the hearing and the concessions then made, amounts of $14,610.20 in fees payable to Smith Partners and $7,468.45 in senior counsel's fees should be paid to Aughton out of the Fund, albeit that there are no invoices from counsel in evidence and Aughton was not a party to the hearings which occurred on 22 and 27 February 2017 resulting in orders being made as sought by Mr Weston. As noted below, the plaintiffs are also prepared to concede that an amount up to $1,000 may have been properly incurred in Smith Partners acting on the settlement of the sale of the Shares and the discharge of its lien, a submission which I accept.
109 Having regard to the submissions put in the unsigned written submissions filed by Aughton after the hearing, it is necessary to say the following.
110 It was submitted that Aughton was entitled to legal fees charged by Smith Partners for dealing with correspondence after 27 February 2017 in relation to the purported sale of the Shares to Mr Mouhanna while Empire was deregistered and Ms Ridge had lost office as a director of Empire due to her bankruptcy and the related borrowing by Commonwealth Bank. I regard these submissions as being outside of the scope of the leave given to the parties at the end of the hearing. Nevertheless, I will address them. For reasons previously given, in my view, the words "in circumstances where your client will be paid in full in a relatively short period of time" in the 22 February 2017 letter (see [7] above) relates to the amounts claimed in the 14 February 2017 letter giving notice of intended forfeiture of the Shares if Empire did not pay $53,461.65 by 28 February 2017.
111 I accept that there might be thought to be some unfairness if costs incurred in relation to the claims of Mr Mouhanna to be the proper transferee of the Shares and of the Commonwealth Bank as mortgagee after 27 February 2017 are not for Empire's account (because the costs would then need to be shared between all shareholders under Articles 4-6, to the extent that Aughton does not dispute them). However, I do not think that such expenses were incurred by Aughton in relation to the recovery of interest or levies so that they would not normally be recoverable by enforcement of rights under Aughton's articles of association on forfeiture or under the lien unless Empire made an express or implied undertaking to Aughton to pay them. In respect of the period to 27 February 2017, I accept that the 22 February 2017 letter made such an undertaking for the reasons explained at the hearing, but I do not accept that it extended to any such costs after that date.
112 This might be seen as a gap in Aughton's articles of association which should be addressed by amendment.
113 There is a claim for costs of addressing queries raised by prospective purchasers of the Shares on the basis that those queries should have been addressed by Mr Weston or his lawyers. I do not accept that these are costs for which Aughton would be entitled to claim reimbursement from the holder of the Shares in the absence of an express or implied undertaking by the shareholder to pay for that service, and I do not accept that the letter of 22 February 2017 is such an express undertaking.
114 For the period from 18 May 2017 to 2 June 2017, Aughton's submissions claim legal costs in an aggregate amount of $3,680 which are said to relate to settlement of the contract for the sale of the Shares. These appear to be derived from invoice 5688389 dated 31 May 2017. Both in the submissions and in correspondence between SLF Lawyers and Smith Partners, Bronwyn Smith claims that it was necessary for the work to be performed as Aughton had been named as a party to the contract and this should not have been done, such that Aughton should be entitled to its costs on an indemnity basis. Aughton notes that a mortgagee usually only charges a small amount on discharge of a mortgage because it requires little work, while the inclusion of Aughton in the contract of sale required much greater work.
115 The plaintiffs note that the amount of $3,680 includes two claims, one for a "conference with client in client's offices re executing contract" (2.40 units for an amount of $960) on 31 May 2017 and another for a "conference with client re contract" (2.10 units for $840) the next day. The plaintiffs say that these amounts are duplicated, there is no requirement for the solicitor to attend on the client for execution of the contract, the other amounts claimed are excessive; this is a simple transaction which required Aughton only to sign the contract, hand over the shares certificate and receive payment. They say there should be no need for counsel's advice on these issues. Nevertheless, the plaintiffs are prepared to concede that some proportion of this amount up to $1,000 might have been properly incurred. Although these comments were made in relation to items on invoice 5688389, which the plaintiffs say came within the leave granted by the Court, I take the concession to relate to all of the claims made in the submissions in relation to the period after 27 February 2017.
116 Aughton's submission cannot be accepted as a rational justification for the amounts claimed in the period from 18 May to 2 June 2017. There is only one clause in the contract which refers to Aughton and no obligations are undertaken by Aughton under the contract: see [13] above. Whether or not it is usual practice to include the company as a party to the contract for sale of shares in a company title scheme, it is clear from only a brief perusal of the contract that it raises no issues for Aughton, which remained free to give or withhold its consent to transfer of the Shares and under which it was not required to perform any obligation: that should require a very brief explanation to the client. This legal service would justify only a small fee from an experienced conveyancer, and it is difficult to understand why the contract would have required advice of counsel.
117 It is notable that the invoice numbered 5688389 dated 31 May 2017 relates to a period from 7 March to 8 June 2017 and contains the following entries for 8 June 2017:
08-06-2017 Telephone attendance on City Agents advising matter settled 0.10 40.00
08-06-2017 Telephone attendance on Client advising matter has settled 0.20 80.00
08.06-2017 Draft letter to Client enclosing cheque 0.10 40.00