Frauenstein v Farinha [2009] FCA 55 (6 February 2009)

Last Updated: 6 February 2009

FEDERAL COURT OF AUSTRALIA

Frauenstein v Farinha [2009] FCA 55

CARL FRAUENSTEIN & ANOR v TOBIAS FARINHA & ORS

NSD 2135 of 2006

EMMETT J
6 FEBRUARY 2009
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 2135 of 2006

BETWEEN:

CARL FRAUENSTEIN First Plaintiff CARPE DIEM INITIATIVES PTY LTD ACN 091 071 359 Second Plaintiff

AND:

TOBIAS FARINHA First Defendant MIGUEL FARINHA Second Defendant MARCO ZAGATO Third Defendant SAN MARCO BONDI JUNCTION PTY LTD ACN 108 118 878 Fourth Defendant SAN MARCO PICCOLO PTY LTD ACN 109 829 665 Fifth Defendant SAN MARCO WORLD SQUARE PTY LTD ACN 109 408 620 Sixth Defendant COCKLE BAY SAN MARCO PTY LTD ACN 084 902 545 Seventh Defendant EQUAL 54 LTD ACN 063 125 477 Eighth Defendant JAMES PANAGOPOULOS Ninth Defendant TOBY BONDI JUNCTION PTY LTD ACN 109 904 396 Tenth Defendant MARCO BONDI JUNCTION PTY LTD ACN 110 713 981 Eleventh Defendant MIGUEL BONDI JUNCTION PTY LTD ACN 110 714 013 Twelfth Defendant CINE SAN MARCO PTY LTD ACN 087 777 357 Thirteenth Defendant ANDREW ALAN JOHNSON Fourteenth Defendant

JUDGE:	EMMETT J
DATE:	6 FEBRUARY 2009
PLACE:	SYDNEY

FURTHER REASONS

1. On 10 December 2007, I published my conclusions concerning a number of issues in this proceeding (see Frauenstein v Farinha [2007] FCA 1953). In these present reasons, terms have the same meanings in those reasons as I assigned to them in my earlier reasons of 10 December 2007. For convenience, I have set out those defined terms in Schedule 1 to these reasons.
2. One of the conclusions that I reached was that the affairs of each of Bondi Junction, Piccolo and World Square have been conducted oppressively to, unfairly prejudicially to and unfairly discriminatorally against, Carl as a shareholder in each of those companies. I concluded that, since the Farinhas controlled the majority of the share capital of those three companies, it would be appropriate to require the Farinhas, or entities associated with them, to purchase Carl’s shares in the three companies. I indicated that I would fix a time for further hearing to determine the price at which Carl’s shares should be purchased and by whom. At that stage, I did not consider that it was appropriate to make any order as to costs. However, it now appears that, after considerable negotiation concerning mechanisms for determining the price at which shares in the three companies should be purchased, the Farinhas and Carl are still at loggerheads and are unable to enter into sensible discussions to resolve the outstanding issues.
3. Further, circumstances have now changed somewhat. Included in the changed circumstances is a change in the status of the three companies; Bondi Junction is now subject to a deed of company arrangement, Piccolo is subject to a creditors’ voluntary winding up and World Square is being wound up by the Court. At least in relation to World Square, therefore, any purported transfer by Carl of shares in World Square would be void, by the operation of s 468A(1) of the Corporations Act. Further, none of the three companies is now represented in the proceeding. However, the Farinhas continue to be represented, although there has been a change in their solicitors.
4. In the light of the changed circumstances, Carl now asks the Court to make orders under s 233(1) of the Corporations Act that the Farinhas pay to him a sum of money by way of compensation for the loss he has suffered by reason of the conduct described in detail in my earlier reasons. Carl asserts that the Farinhas benefited from their control of Bondi Junction, Piccolo and World Square to his detriment. He says that, by reason of their failure to cause each of the three companies to keep proper books and records under s 286 of the Corporations Act, the Farinhas are unable to establish that the three companies would not, but for the conduct about which Carl complains, have been profitable.
5. The orders now claimed by Carl, whether pursuant to a buy out order or otherwise, are for the Farinhas personally to pay Carl the sum of $1,400,000, being the amount paid in connection with the proposed purchase by Equal 54 of a 30% interest in World Square by the issuing of 300 shares to Equal 54. In addition, Carl seeks orders that the Farinhas personally pay to him an amount of money to reflect the moneys wrongfully paid by Bondi Junction and Piccolo to the Farinhas or entities controlled by them.
6. Such orders are not claimed expressly in the current form of Carl’s Originating Process, being the Fifth Further Amended Originating Process filed on 25 July 2007. At this stage, no application has been made on behalf of Carl for leave to amend the originating process again in the light of the changed circumstances to which I have referred.
7. Relevantly, for present purposes, Carl claims identical orders in relation to each of Bondi Junction, Piccolo and World Square. The orders claimed in relation to Bondi Junction are as follows:

8. An order that an inquiry be held as to:
(a) the value of the shares in Bondi Junction but for the conduct of the Farinhas in contravention of s 232 of [the Corporations Act]; and
(b) the current value of the shares in Bondi Junction.

9. An order pursuant to s 233 of [the Corporation Act] that... the Farinhas purchase [Carl’s] shares in Bondi Junction.

...

13. Further or in the alternative, an order for compensation pursuant to s 233 of [the Corporation Act].
    

The same relief is claimed in respect of Piccolo in paragraphs 30, 31 and 35 and in respect of World Square in paragraphs 62, 63 and 67. In so far as Carl claims an order against the Farinhas personally that does not involve the purchase of his shares in the three companies. Only paragraph 13 in relation to Bondi Junction, replicated in paragraph 35 and 67 in relation to Piccolo and World Square, purports to claim compensation pursuant to s 233 of the Corporations Act. Those paragraphs do not specify against whom the relief is claimed, nor do they specify for whose benefit that relief is claimed.

8. At this stage, I have not been asked to consider the possibility of orders being made that the Farinhas personally pay compensation to the three companies in respect of any breaches of duty or other obligations owed by them to the three companies. Such relief, of course, would be of only limited benefit to Carl, since there appear to be significant creditors of the three companies whose claims may exceed the assets of the three companies available to meet them. At this stage I have been asked to consider only the limited question of whether s 233 authorises an order requiring a non member of a company to purchase shares in the company or to pay compensation in circumstances where purchase may not be possible by reason of the winding up of the company.
9. Carl points to the fact that the Farinhas wrongfully caused each of the three companies to pay monies to them or to entities controlled by them and, in the case of World Square, wrongfully diluted Carl’s shareholding by the allotment of shares to Equal 54. He asserts that the Farinhas have wrongfully distributed moneys that should otherwise have been available for distribution to the shareholders of the three companies by way of dividend or return of capital. He says that, therefore, he is entitled to be paid by the Farinhas an appropriate proportion of the amount of money equivalent to that which the Farinhas wrongfully paid out to themselves or to entities associated with them.
10. Significantly, Carl asks that orders be made against the Farinhas personally, notwithstanding that none of them has ever been a member of any of the three companies. I assume that the reason for this is that he expects the shareholders in the three companies who are associated with the Farinhas would be unable to pay any relevant amount. The Farinhas oppose any order’s being made against them personally.
11. The Farinhas, without opposition from Carl, have now asked the Court to express an opinion as to whether or not the Court has power to make the orders now claimed by Carl. The Farinhas frankly acknowledge that, if the Court determines that there is no power to make the orders against them personally, they will play no further part in the proceeding. On the other hand, if the Court concludes that there is power to make the orders now claimed, they will seek to adduce further evidence concerning the value, at relevant times, of Carl’s shares in the three companies.
12. If the prerequisites of s 232 are satisfied, s 233(1)(d) of the Corporations Act expressly authorises the Court to make an order for the purchase of shares in a company by any member of the company, or by any person to whom a share in the company has been transmitted. In addition, s 233(1)(e) expressly authorises an order for the purchase of shares in a company, with an appropriate reduction of the company’s share capital. In addition, s 233(1)(j) authorises the Court to make an order requiring a person to do a specified act. That provision is very broad in authorising an order requiring a person to do a specified act. Further, the language of the introductory part of s 233(1) makes clear that the relief that can be granted by the Court is not limited to the matters expressly referred to in that section. Nevertheless, the Farinhas contend that the specific language used in s 233(1) demonstrates an intention on the part of the legislature to limit in some way the kinds of orders that might be made by the Court under s 233.
13. The legislative predecessors of ss 232 and 233 were introduced in the United Kingdom in 1948 as a means of giving an aggrieved shareholder a remedy when winding up on the just and equitable ground would be too harsh. The provisions then introduced enabled orders by which oppression could be brought to an end, with the shareholder remaining a shareholder, or through the shareholder’s being bought out as a shareholder in order to grant a remedy. Those provisions are to bring an end to the oppression; the discretion conferred by s 233 should be exercised with a view to ending the oppression. Thus, while a buy out order may have the effect of compensating the shareholder’s loss, historically, that was not the object and aim of the exercise of the discretion. The object and aim was to separate the oppressor and the oppressed. Accordingly, there may be no occasion for making an order if the oppression has otherwise been brought to an end, unless for example, that end was a consequence of the conduct complained of, such that the conduct resulted in the destruction of the business of the company (see Campbell v BackOffice Investments Pty Limited [2008] NSWCA 95; (2008) 66 ACSR 359 at [120]- [123]; see also Webb v Stanfield [1991] 1 Qd R 593 at 598-600).
14. Section 233 is a remedial provision designed to empower the Court to mould relief that is appropriate in circumstances where the provisions of s 232 are satisfied. The relief must be appropriate to overcome the consequences of relevant conduct, being either conduct contrary to the interests of the members as a whole or conduct oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members. The object of s 233 is to confer on the Court a wide discretion to do what is considered fair and equitable, in all the circumstances of the case, in order to put right and cure, for the future, any unfair prejudice that a member has suffered in relation to the conduct of the affairs of the company (Re Bird Precision Bellows Limited [1986] 1 Ch 658 at 669). That would include an order for purchase at a price equal to the value that the shares would have had, but for the relevant conduct. An order requiring the purchase of shares at a value that they would have had but for the conduct may give to the oppressed shareholder what is, in effect, money compensation for the injury done to that shareholder. However, the discretion to do so is well exercised in making an oppressor give compensation to those who have suffered at the hands of the oppressor (Scottish Cooperative Wholesale Society Limited v Meyer [1959] AC 324 at 369).
15. As I have already indicated, the directors of the three companies no longer control them. Bondi Junction is controlled by administrators and Piccolo and World Square are controlled by liquidators. The appointment of administrators to Bondi Junction and the winding up of Piccolo and World Square has effectively ended the oppression. However, there may be a question as to whether the destruction of the businesses of those companies resulted from the conduct complained of by Carl. That is not a matter that has been explored in the proceeding to date. Whether it is possible to explore it has not yet been ventilated.
16. As I have said, none of the Farinhas has ever been a member of any of the three companies although they were directors at relevant times and have been responsible for the conduct which I have found constituted oppression. Cockle Bay, which is associated with the Farinhas, was a member of Bondi Junction and Piccolo. Ciné, which is also associated with the Farinhas, was a member of World Square. Cockle Bay provided administrative services to the three companies and purportedly made charges to the three companies in respect of those services. I have found that such changes were not properly made to the three companies. On the other hand, I have made no finding as to whether Cockle Bay would be entitled to some remuneration, and if so what, for any services provided by it to the three companies.
17. I do not consider that it is inappropriate, at this stage, to speculate as to the orders that might be made. However, I consider that, while it may be unlikely that orders would be made, the possibility of orders being made against the Farinhas personally cannot be excluded. The appropriate orders would be moulded after further examination of the precise connection and relationship between the Farinhas personally and Cockle Bay and Ciné. That would entail examination of the extent, if any, to which the Farinhas personally derived any benefit, through their interest in Cockle Bay or Ciné, from the underestimating of revenues earned by the three businesses or the improper charging of management fees, consulting fees, administration expenses and training costs that have been charged to the three businesses. It would also entail an examination of the benefit, if any, derived by the Farinhas personally from the payments made by Mr Panagopoulos, or entities associated with him, in connection with the purported allotment of shares to Equal 54.
18. A further aspect that would require examination is the appropriateness of orders requiring compensation to be provided to the three companies in respect of any loss occasioned by the conduct that constituted oppression. That is not necessarily relief presently pressed by Carl, but the question of loss suffered by the three companies as a result of the conduct complained of is a question intimately involved in any examination of the value of Carl’s shares in the three companies at any relevant time.
19. In summary, while I would not, at this stage, be prepared to make any order against the Farinhas personally, I do not propose to rule that out as a possibility. The precise nature and terms of any order will depend upon detailed examination of such further evidence as the parties wish to adduce along the lines foreshadowed in my earlier reasons and during the course of the earlier conduct of the proceeding. I propose to direct the parties, after they have had an opportunity of considering these reasons, to bring in short minutes of directions for the further conduct of the proceeding.
    

I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

Associate:

Dated: 6 February 2009

Counsel for the Plaintiffs:	Mr A J McInerney
Solicitors for the Plaintiffs:	Foulsham & Geddes
Counsel for the First to Seventh and Tenth to Thirteenth Defendants:	Mr D L Cook
Solicitors for the First to Seventh and Tenth to Thirteenth Defendants:	Raj Lawyers

Date of Hearing:	2 and 19 December 2008
Date of Judgment:	6 February 2009

SCHEDULE 1

List of defined terms from Frauenstein v Farinha [2007] FCA 1953
Carl	Carl Frauenstein
Toby	Tobias Farinha
Miguel	Miguel Farinha
Marco	Marco Zagato
the Farinhas	Toby, Miguel and Marco jointly
the San Marco Group	corporate entities connected with the Farinhas
Bondi Junction	San Marco Bondi Junction Pty Limited
Piccolo	San Marco Piccolo Pty Limited
World Square	San Marco World Square Pty Limited
Toby Bondi Junction	Toby Bondi Junction Pty Limited
Marco Bondi Junction	Marco Bondi Junction Pty Limited
Miguel Bondi Junction	Miguel Bondi Junction Pty Limited
Carl Bondi Junction	Carl Bondi Junction Pty Limited
Cine	Cine San Marco Pty Limited
Carl World Square	Carl World Square Pty Limited
the Letter Agreement	the written agreement involving Carl, Toby and Marco dated 20 July 2005
Equal 54	Equal 54 Pty Limited
the Corporations Act	Corporations Act 2001 (Cth)
Carpe Diem	Carpe Diem Initiatives Pty Limited
Cockle Bay	Cockle Bay San Marco Pty Limited
ATO	Australian Taxation Office
Shadean	Shadean (World Square) Pty Limited