McLaughlin v Dungowan Manly Pty Limited [2010] NSWSC 89 (18 February 2010)

Last Updated: 18 February 2010

NEW SOUTH WALES SUPREME COURT

CITATION:
McLaughlin v Dungowan Manly Pty Limited [2010] NSWSC 89


JURISDICTION:
Equity Division

FILE NUMBER(S):
2006/258866

HEARING DATE(S):
10 February 2010

JUDGMENT DATE:
18 February 2010

PARTIES:
Patrick David McLaughlin (First Plaintiff)
Jennifer Therese McLaughlin (Second Plaintiff)
Dungowan Manly Pty Limited (Defendant)

JUDGMENT OF:
Ward J

LOWER COURT JURISDICTION:
Not Applicable

LOWER COURT FILE NUMBER(S):
Not Applicable

LOWER COURT JUDICIAL OFFICER:
Not Applicable



COUNSEL:
Mr S Burchett (Plaintiffs)
Mr D Priestley (Defendant)

SOLICITORS:
Turner Freeman (Plaintiffs)
Pikes (Defendant)


CATCHWORDS:
PRACTICE AND PROCEDURE – application for leave to re-open before hearing is concluded and delivery of final judgment – principles relevant to grant of leave to re-open – plaintiff seeking to tender further evidence coming into existence after conclusion of proceedings – leave granted to re-open and submit further evidence – INJUNCTIONS – principles concerning when an injunction of the kind referred to as a Mareva order should be made – requirement of prima facie cause of action and real risk of frustration of judgment – not necessary to show an intention to frustrate – no Mareva order made – balance of convenience in favour of defendant

LEGISLATION CITED:


CATEGORY:
Procedural and other rulings

CASES CITED:
ASIC v Rich [2006] NSWSC 826
Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 CLR 380
Hadid v Lenfest Communications Inc (1996) FCR 446
Idonz Pty Limited v National Capital Development Commission (1986) 13 FCR 70
Inspector General in Bankruptcy v Bradshaw [2006] FCA 22
Jackson v Sterling Industries [1987] HCA 23; (1987) 162 CLR 612
Kizbeau Pty Limited v W G & B Pty Limited (1995) HCA 4; (1995) 184 CLR 281
National Australia Bank Limited v Bond Brewing Holdings Ltd [1990] HCA 10; (1990) 169 CLR 271
Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319
Smith v New South Wales Bar Association [No 2] [1992] HCA 36; (1992) 176 CLR 256
Telstra Corporation Limited v Australian Competition & Consumer Commission [2008] FCA 1436
Urban Transport Authority of NSW v Nweiser (1991) 28 NSWLR 471
Vaughan v Bongiorno [2007] NSWSC 1398

TEXTS CITED:


DECISION:
Application to re-open granted. Notice of motion otherwise dismissed.



JUDGMENT:

- 45 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WARD J

THURSDAY 18 FEBRUARY 2010

2006/258866 PATRICK DAVID MCLAUGHLIN & ANOR V DUNGOWAN MANLY PTY LIMITED

JUDGMENT – notice of motion

1 Before me for hearing on 12 February 2010 was an application brought by notice of motion filed 9 February 2010 by the plaintiffs, Mr and Mrs McLaughlin, seeking relief in two main respects: first, leave to reopen and tender further evidence in the proceedings which I heard late last year and on which I have reserved judgment and, secondly, interlocutory relief restraining the defendant and its directors from taking certain steps in relation to matters related to the project which was the underlying focus of the proceedings before me last year.

2 On the hearing of the McLaughlins’ application, their Counsel (Mr Burchett) sought to extend the proposed tender of documents in the proceedings (if leave to re-open is given) beyond the evidence referred to in the plaintiffs’ notice of motion (which was limited to two letters issued by the defendant to shareholders on 4 and 25 January 2010 respectively) to include all the evidence tendered on the motion before me, including the documents annexed to the affidavit read by the defendant on this application of the defendant’s solicitor.

3 I should note that in the notice of motion an order was also sought that, within seven days, the defendant, by its proper officer, file and serve an affidavit identifying any former shareholders with whom it has already exchanged strata titles for share certificates, when it did so, the terms of such exchanges and any undertakings or securities received from those former shareholders. I was not addressed separately in relation to this aspect of the motion and I have not dealt with it in these reasons, as it seemed to me that the urgency in the determination of the present application lies in the interlocutory relief which has been sought. If some form of preliminary discovery is sought for other proceedings in relation to which information of this kind would be relevant then the application can be renewed in that context. However, it did not seem to me that the information sought to be provided by way of this affidavit would be of relevance to the issues to be determined by me in the proceedings now sought to be re-opened, nor does it arise at this stage in light of my finding on the injunction application.

History of the proceedings

4 By way of general background to this application, Mr and Mrs McLaughlin, in proceedings which I heard towards the end of last year and on which I have reserved judgment, have sought relief in relation to what they allege was a breach of the contract constituted by the company’s articles and/or oppressive conduct in the affairs of the defendant company, in relation to a property development in which the company has been for some time engaged. In the alternative, leave is sought to commence a derivative suit in the name of the company against its directors for alleged breach of duty in relation to matters associated with the project.

5 The defendant was incorporated in 1957 as a “company title” home unit company with the objects, inter alia, of acquiring, managing and conducting a home unit building in Manly known as Dungowan Flats. Shareholders of the company have entitlements, among other things, to occupy designated home units within the building. The dispute between the McLaughlins and the company, which has subsisted from at least 2000 onwards, relates to the steps which the company has taken over that period in relation to the redevelopment of Dungowan Flats. The evidence before me in the proceedings was that the board had concluded that repairs were urgently needed to the building, due to concrete spalling and water penetration problems, and had sought a way to finance the repairs through an extensive redevelopment of the building. The redevelopment has been completed and strata titles have been issued in relation to the respective units in the building, although due to the requirements of its financier the company has not until recently been in a position to release those titles to shareholders in exchange for the surrender of their shares. It now proposes to do so, subject to certain conditions. What is now clear is that, for various reasons, the redevelopment is not likely to produce anything more than a nominal profit (if that) for the shareholders.

6 The McLaughlins have consistently opposed the redevelopment and have been vocal in their criticism of the conduct (and motivation) of at least some of the directors in pursuing the redevelopment. It seems fair to say that they believe that the redevelopment has involved a scheme by certain of the directors to make a personal profit from the redevelopment at the expense of other shareholders and this seems to have coloured their reaction to various of the proposals now put forward by the company.

7 Nevertheless (and accepting that there were some aspects of the manner in which the redevelopment was pursued which do, to my mind, give rise to concerns), on the evidence before me it seems clear that there was a need for repairs to be carried out to the building and, in hindsight, that those repairs required a considerable injection of funds which the company did not have. I think that the evidence also reveals that there was an attempt by the board to structure the redevelopment in such a way that the cost of the repairs could be funded to the maximum extent by borrowings procured in anticipation of profits from the sale of new units to be built as part of the redevelopment. Both in the hearing before me and on this motion, it is said for the company that the decisions made by the board in relation to the project are business matters in which the court should not interfere.

8 Prior to the hearing of the matter by me, two applications for interlocutory orders had already unsuccessfully been brought by the McLaughlins against the company: the first, in September 2006, seeking to restrain the defendant from “acting upon the purported passing” of certain resolutions at a meeting of the company’s members on 9 September 2006 and from doing certain things in pursuance of those resolutions; the second, in March 2007, seeking to restrain the defendant from taking action to forfeit and sell the McLaughlins’ shares or otherwise rely on the non-payment by them of a levy which had been served on them in January 2007 in relation to certain costs or anticipated costs relating to the development.

9 Those interlocutory applications having been unsuccessful, the redevelopment proceeded. The construction of the new units is complete and a strata plan has been registered for the building. In the context of the current application, it is relevant to note that the project, from its inception, contemplated the application for the land to be the subject of such a strata title subdivision and for shareholders, after registration of a plan of subdivision, to surrender their shares in the company in return for the release to them of the strata title corresponding to the units to which their shareholding under the company’s articles gave them rights of occupation.

10 The proceedings were heard by me on 21-28 September, 9 October and 5 November 2009. At the close of final addresses on 5 November 2009, leave was given for the defendant to file further submissions in relation to one aspect of the relief which had been sought by the McLaughlins, namely a compulsory purchase order in respect of their shares. Pursuant to those directions, supplementary submissions were served by Counsel for the defendant (Mr Priestley) on 9 November 2009, following which Mr Burchett forwarded submissions in reply to supplement the brief oral submissions he had made in reply on 5 November 2009 (as had been the subject of leave given by me at the close of the hearing). Mr Priestley (by letter dated 12 November 2009) objected to those submissions in reply to the extent (undisclosed) to which they were not properly submissions in reply. Through my associate, I indicated that I considered it incumbent on Counsel to identify those portions of the reply submissions to which objection had been raised in this way and indicated my preparedness to relist the matter for further submissions, in response to which Mr Priestley forwarded a letter dated 20 November 2009 identifying the relevant paragraphs to which he objected. Mr Burchett then forwarded further written submissions (on 25 November 2009) responding to the correspondence from Mr Priestley of 12 and 20 November 2009. Mr Priestley objected to these further submissions on the basis that they were forwarded without his consent and without leave having been obtained. Since then (mercifully) the exchange of submissions, and complaints about submissions, has ceased and I was in the process of writing my reasons for judgment in the main proceedings when the matter was listed again on the McLaughlins’ present notice of motion.

11 These are my reasons on that notice of motion.

Evidence on motion

12 On the present notice of motion, the McLaughlins rely on an affidavit sworn 29 January 2010 by their solicitor, Mr Porman, and a subsequent affidavit of Mr Porman sworn on 12 February 2010. Tendered was a small bundle of documents, mainly consisting of correspondence, in relation to the proposed notice of motion, and, ultimately, Mr Burchett also relied upon the annexures to an 11 February 2010 affidavit of the solicitor for the defendant (Ms Probert), that affidavit having been read by the defendant on this motion. There was no further evidence on the motion, other than a notice to produce tendered by Mr Burchett, which had been issued shortly before the hearing of the motion (by my leave but subject to the defendant’s right to object thereto) seeking, among other things, copies of the company’s 2008/2009 accounts. There was no production in answer to that notice to produce (to which Mr Priestley objected both on the basis of relevance and the short time period within which to answer the notice). I was informed that there were no accounts yet prepared in answer to the first paragraph of the notice.

Circumstances of this application

13 The evidence now sought to be tendered goes largely to the company’s current position in relation to the borrowings and costs of the development and the steps proposed to be taken (or in the course of being taken) by the company in relation to the release of strata titles to, and surrender of shares by, the various shareholders.

14 The evidence before me at the hearing was that the development (which has been consistently opposed by the McLaughlins) had been financed by a substantial loan facility taken out with St George Bank (in the order of $20 million). The development involved the conversion of the building from a three storey building to a six storey building, with the conversion of two ground floor units into a car stacker on the ground floor, and the creation of an additional number of units, including two penthouses. Compensation in a fixed amount was agreed to be payable to the owners of the two ground floor units (a matter to which the McLaughlins have strenuously taken issue). There were pre-sales of a number of the new units but not of the two penthouses. The penthouses have not yet been sold. The delay in finalising the sale of the two new penthouses (which it had been contemplated would occur by mid 2009) meant that, as at the close of the hearing, the financial outcome of the project was not known. Different estimates (some rosier than others) of the final outcome were proffered by directors of the company and its consultants (that again being a matter of complaint by the McLaughlins) but as at the conclusion of the hearing the state of the evidence was that the prospects of anything more than a nominal profit for shareholders from the development at the end of the day were not great – it seemed likely to me, rather, to be more of an issue as to how large the overall loss would be.

15 Unbeknownst to the McLaughlins, and not made known to the court, on 16 September 2009 (just prior to the commencement of the hearing on 21 September 2009), the builder engaged on the project, Southern Cross Constructions, issued a statutory demand for a debt of $421,000. (The existence of a debt owing to Southern Cross would not have been a surprise to anyone, but the action taken by it in relation to the debt was.) Winding up proceedings were commenced by Southern Cross on 20 October 2009 (after the close of the hearing before me but nevertheless before final addresses had taken place). There was no disclosure to the court of the events which had transpired, notwithstanding that it must have been clear to the defendant that they were regarded (at least by the McLaughlins) as directly relevant to the calculation of their damages and hence to the quantum of the relief the court was being asked to consider.

16 In November 2009, a deed was entered into between the defendant and Southern Cross for the repayment of the moneys owing to Southern Cross by instalments, secured by a mortgage over the titles of the units. (Although it seems there had been some dispute by the company as to whether it received the statutory demand at its registered office on 16 September, this deed contained a recital that it had been served on that date.)

17 On 18 December 2009, the ATO was substituted as a creditor in the winding up proceedings, which were then stood over by the court to 25 February 2010.

18 A temporary finance facility was procured from St George Bank in December last year, which I am told expires on 28 February 2010. Hence, the urgency of the application before me.

19 Faced with this situation, the defendant wrote to shareholders, including the McLaughlins, on 4 January 2010. This is the first of the letters which the McLaughlins now seek leave to tender in the proceedings.

4 January 2010 letter

20 In this letter, shareholders were advised that the board thought it best to resolve the project finally and to sell the penthouses as soon as possible; that the bank had estimated the company’s debt to it, as at 28 February 2010, at $8.6 million (which the bank was prepared to apportion as to $3 million against the penthouses and as to $5.1 million against the renovated units) and that the bank was willing to consider lending $3.5 million against the penthouses for three years. The letter stated:

In addition to repaying the debt apportioned against the renovated units, the company must also pay its outstanding GST debt of $1.1 million, the balance owing to Southern Cross of $300,000 and the amount of $950,000 for each of the two ground floor units lost to the car stackers. All these amounts must be paid in February 2010. Taking account of the money held by the company ($150,000) and due to it for the second half of the special levy struck in January 2007, for variations to individual units in the building works, from the sale of the two surplus car spaces, and for outstanding interest owed, the net amount which the company would have to raise by an additional levy in February 2010 is $7.132 million if the penthouses are not sold. (my emphasis)

21 The entry by the company into the obligation to pay $1,900,000 in total in respect to the units converted to allow for the car stackers is a matter of which the McLaughlins have made much complaint (not least because half of that amount is due to the chairman of the board – Mr Garratt QC, to whom a $250,000 payment was or is also to be made as a recognition of his efforts in relation to the project).

22 The company’s letter to the shareholders of 4 January 2010 expressed the opinion (not shared by the McLaughlins) that the apportionment of the debt as against the respective units was in the company’s interests in order to enable the company to release individual strata titles if the individual share of the apportioned debt against the renovated units was paid. It was said that this would be in the company’s interests because shareholders would be in a position to apply to finance the (proposed) new special levy amount in respect of their unit(s) on the security of their strata title(s) or now to sell the units. The letter stated:

To obtain the release from the company of the strata title for your unit(s) you will need to enter into an agreement with the company under which you agree to surrender your shares for cancellation, and provide the share certificate. The company would agree to release the strata title, on payment of your additional levy amount and any other amount for which your stand or would stand as security at this time. The company would agree to refund any surplus due to shareholders once all receivables are in and debts have been paid; the shareholder would agree to pay his or her share of any shortfall – though none is expected – at that time. (my emphasis)

23 According to the letter, the net effect of what the board was proposing was that shareholders could finance their share of the (proposed) additional levy through St George Bank or by selling their units; all project debts would be paid off; and the shareholders would take title to their strata units. The letter stated:

The board is fully aware of the burden of the additional levy which will be struck so that the necessary payments can be made in February 2010. The board considers, however, that there is no alternative to the course proposed. Unless payment is received, the ATO and Southern Cross have indicated that they will wind up the company, and St George has indicated that it would commence realising its securities, which would mean a forced sale of units. The board would much prefer to sell the two penthouses for higher prices, and would have done so, if good prices had been offered. ... If shareholders do not pay the special amount due in the individual case, the practical certainty is that the bank will enforce its security against the individual unit in the coming months. (my emphasis)

24 The letter also reported on the status of these proceedings and stated that “the moneys got in” by the new special levy to pay for the ground floor units which had made way for the car stackers “will not be paid out until the court’s decision is known, and then only in conformity with it”.

25 The McLaughlins perceive the proposal contained in the 4 January 2010 as one “reinstating the abandoned threat” in the company’s letter dated 16 January 2008 (TB 1785) to reduce the company’s capital and leave them as “the only shareholder left in the company”.” I consider the import of this letter later in these reasons.

26 It was asserted by the McLaughlins, in their response (issued through their lawyers) to the company’s letter, that what was being proposed would undermine any judgment of the court in favour of the McLaughlins. An undertaking was sought from the company not to deliver any titles to shareholders pending delivery and satisfaction of judgment “or that any shareholder who seeks to have their share certificate exchanged for release for their individual strata title will be required to undertake to contribute any shortfall of the company for any money it may owe to our clients as a result of any orders made in the court proceedings including any order for costs related to those proceedings.” (This is relevant when regard is had to the arrangements the company has indicated it will put in place in relation to the proposed share surrenders since it will be seen that the company has acceded, in effect, to that demand.) An undertaking was also sought (and in due course given by the company) that the defendant not seek to enforce any non-payment of the proposed levy (at all if there were to be a judgment in the McLaughlins’ favour or otherwise until at least 30 days after the judgment was handed down) (letter dated 21 January 2010).

25 January 2010 letter

27 The second letter to shareholders referred to in the motion, and sought now to be tendered in the proceedings, was dated 25 January 2010. The letter reported that, at its meeting on 16 January 2010, the board had struck a levy of $5.63 million “so that the company can pay off its indebtedness to the Australian Tax Office, to Southern Cross Constructions (NSW) Pty Limited, to St George Bank Limited and finalise the compensation payable by the company for the resumption of the two former rear ground floor flats in the building” (“the company debt”). (The McLaughlins take issue with the fact that there is no reference here to any potential judgment amount or to their or the company’s costs of the proceedings.) The levy notice issued in January requires Mr and Mrs McLaughlin to pay the sum of $263,357.59 by 26 February 2010, their proportionate cost of the total building repairs thus amounting, it is said, to somewhere over $400,000.

28 This letter also refers to some contention between the company and Southern Cross as to whether the statutory demand (which Southern Cross contended had been posted to the company’s registered address) had in fact been received by the company (although as noted above, the deed entered into with Southern Cross itself acknowledges the issue of the statutory demand of 16 September 2009).

29 The letter noted that several (unidentified) shareholders had already retained agents to sell the strata units to which they would be entitled by paying their levy and surrendering their shares and that others (also unidentified) were arranging finance in order to take their strata titles. It enclosed a pro forma agreement, which it was said would permit shareholders to surrender their shares and to take strata title as a means of finalising their connection with the renovation project and financing the payment due from them.

Pro forma agreement to surrender shares

30 Relevantly, the pro forma agreement recited that the shareholder was indebted to the company as set out in item 5 of the schedule and otherwise was not indebted or liable to the company on any account and the company was not indebted or liable to the shareholder on any account.

31 Clause 5 recorded that, save as provided in the agreement, from completion neither party was to be liable or indebted to the other on any account in connection with the former relationship of shareholder and company or arising from their dealings pursuant to that relationship and either party could on completion rely on the agreement as a bar to any such claim.

32 Clause 6 provided:

That save as provided in clause 7 the sole debt and liability which either party may have to the other following completion will on the basis of reconciliation of all assets and liabilities to the company as at 28 February 2010, which reconciliation shall take place once sales of the penthouses have been completed, and which reconciliation shall be performed on the basis that:

(a) no liability is included in respect of the Company Debt [that being defined as the indebtedness to the ATO, to Southern Cross, to St George Bank and for the compensation in respect of the resumption of the two former rear units] save by reason that either penthouse is sold for less than a price of $3 million or by reason that the sale of either penthouse is not completed by 31 May 2010;

(b) an amount is allowed by way of a liability sufficient to cover the company’s expected administrative expenses;

(c) no asset is included in respect of:

(i) any estate of interest in land the subject of Strata Plan 81784;

(ii) any unpaid levy payable to the company by any members;

(iii) any unpaid debt owing to the company by a member for or in respect of variations carried out in the course of the renovation of the building for the purchase of car parking space. (my emphasis)

33 The clause further provided that if, on the said reconciliation, the assets of the company exceeded its liabilities the company was obliged to pay the surplus to the persons who were its members and liable to pay the levy struck on 16 January 2010 in the proportions in which they were obliged to pay that levy; and that if, on such reconciliation, the liabilities of the company exceeded its assets then the shareholder was obliged to pay to the company the proportion of the excess which corresponds with the proportion of the fees struck by the company on 16 January 2010 which the shareholder was obliged to pay.

Subsequent correspondence

34 By letter dated 27 January 2010, the lawyers acting for the company indicated that the company was prepared to undertake not itself to enforce the special levy due from the McLaughlins without giving seven days’ notice and that “the company is also prepared to allow the plaintiffs to sell the strata unit which corresponds with their share block on the basis that the proceeds of sale are held by St George Bank in an interest bearing account and are not released without the company’s written consent”. It suggested that a final resolution of the plaintiffs’ interests in respect of the shares was possible without either a settlement or final judgment. As is apparent from this application, the McLaughlins do not agree.

35 By letter dated 1 February 2010, the company’s lawyers advised the McLaughlins’ lawyers that “the proposed agreement between the company and the shareholders allows shareholders to pay their share and to take title. It leaves the shareholders with a residual asset or liability on the taking of a final account as at 28 February 2010 when the sale of the penthouses has been completed. Any debts or liabilities between the company and your clients will be taken into account in that reconciliation”. (My emphasis)

36 Further, the letter invited any drafting alterations in order to ensure that the mechanism provided by clause 6 would pick up all remaining debts and liabilities, including any liability in respect of court orders.

37 By that stage, the McLaughlins lawyers had apparently indicated what relief was proposed to be sought if agreement could not be reached on the terms on which the surrenders of shares would take place and had demanded (further to the undertakings initially sought) both the creation of an equitable charge over the titles so released and consent to lodgement of a caveat in their favour over those titles.

38 What the company was ultimately not prepared to accept was the creation by it of security in favour of the McLaughlins over all of the strata units of the original shareholders, asserting that the McLaughlins had no right to any such security and that it was not a proper purpose of an application for interlocutory relief to seek security in that way.

39 The letter of 1 February also asserted that the McLaughlins were not in a position to offer the usual undertaking as to damages in respect of the orders which they had indicated would be sought and that they had not offered such an undertaking. (Although no such undertaking was formally offered on the hearing before me of the application for interlocutory relief, I note from other correspondence that the McLaughlins’ lawyers have asserted their clients’ preparedness to offer such an undertaking and I have proceeded on the assumption that if interlocutory relief were otherwise appropriate to be granted, they would accept as a condition thereof that such an undertaking be provided. As to whether an undertaking by the McLaughlins would be of value, the McLaughlins’ lawyers have pointed to the value of the unit in the building in respect of which the McLaughlins have rights under the articles and for which a strata title has now issued and remains held by the company’s financier.)

40 The position of the McLaughlins’ lawyers was that the proposed agreement removed the company’s “security” over its shares and replaced this with no more than a personal obligation to meet a final accounting of debts as at 28 February 2010. It was said that the notice of motion of the McLaughlins sought the preservation of the company’s security by preventing the disposal of valuable assets of the company for a substantial undervalue, threatening the ability of the company to meet any judgment delivered in the McLaughlins’ favour. It was also asserted that if leave were to be granted for derivative proceedings to be brought in the name of the company, then the proposed stripping of its assets would prevent the McLaughlins from obtaining “their rightful indemnity for the costs of such proceedings from the company”.

41 That letter stated “our clients have offered undertakings as to damages previously and remain prepared to do so”. It maintained that such an undertaking would be “secured” by reference to the value of the McLaughlins’ shares.

42 The McLaughlins’ solicitors requested certain amendments to the draft agreement. Some of these were acceptable to the company. In particular, the company was prepared to accept the following additional clauses:

7(b) This agreement does not displace or otherwise affect any debt or liability of the company or any shareholder, the subject of the action in any proceeding to bring which on the behalf of the company leave is granted in the action or any debt or liability, which may arise from any judgment in the action, including any judgment on appeal.

7(c) This agreement does not displace or otherwise affect any obligation of the shareholder to contribute to the company’s costs and expenses of the action or any appeal or the costs and expenses of compliance of any judgment in the action or on appeal or its costs and expenses of the proceedings (including any appeal), to bring which leave is granted in the action, by way of levy or otherwise under the company’s constitution.

43 However, as indicated above, what the defendant did not agree to was the insertion of a clause in the agreement which would oblige it to take a charge over any strata title for with the satisfaction of any debt, liability, cost or obligation as set out in paragraphs 7(b) and 7(c) (even though this was contemplated to rank after any mortgage created by the shareholder to secure payment of the amount of the shareholder’s “net indebtedness”) or to the lodgement of a caveat against the title of any strata unit.

44 I turn then to the two main aspects of the motion.

(i) Leave to Re-open

45 In Urban Transport Authority of NSW v Nweiser (1991) 28 NSWLR 471 at 478D, Clarke JA said:

The principle which should guide the court in determining whether to grant an application for leave to re-open is whether the interests of justice are better served by allowing or rejecting the application as the case may be. No doubt it is relevant to take account of a number of matters such as likely prejudice to the party resisting the application and the reasons why the evidence was not led in the first place, but there is not, in my opinion, any hard and fast rule which requires the court to reject an application where the decision not call [sic] the witness in the party's case was a deliberate one. ... Where, for instance, a decision was based on tactical grounds it may be difficult to resist the conclusion that the interests of justice were better served by the rejection of the application. But even in that circumstance there may be cases in which it is felt that the client whose application it is should not have to suffer for his or her counsel's deliberate decision. Where the decision is not made for tactical reasons and is based on a mistaken apprehension of the law or the facts the case is more appropriately to be considered as one in which the application has resulted from an error by counsel. (my emphasis)

46 This guiding principle has been followed in various decisions of this and other courts and is well-established. A distinction is, however, drawn between the situation where an application to re-open is made after the delivery of judgment (which is not the case here) and one where there was an application made to re-open before the hearing is concluded (as is the case here); and between the considerations which may bear on a decision to re-open and the processes involved in reconsideration once a case has been re-opened.

47 In Smith v New South Wales Bar Association [No 2] [1992] HCA 36; (1992) 176 CLR 256; (1992) ALR 55; (1992) 66 ALJR 605 at 608-609, their Honours Brennan, Dawson, Toohey and Gaudron JJ said:

If an application is made to re-open on the basis that new or additional evidence is available, it will be relevant, at that stage, to enquire why the evidence was not called at the hearing. If there was a deliberate decision not to call it, ordinarily that will tell decisively against the application.

48 It is not suggested that the evidence now sought to be tendered was available to the McLaughlins at the time of the hearing. (The letters advising the shareholders of the company’s financial position were not even in existence until after the hearing.) Further, although it is clear from the material tendered on this motion that the company became aware of the matters which have now affected its financial position before the conclusion of the hearing – and, in the case of the statutory demand, seemingly even before the commencement of the hearing – there is no suggestion that the McLaughlins were aware of this. Therefore, there cannot be said to have been any deliberate decision on the part of the McLaughlins not to call such evidence.

49 Their Honours in Smith went on to say (at ALR 61 – 62):

But assuming that that hurdle is passed [as I am satisfied is the case here], different considerations may apply depending on whether the case is simply one in which the hearing is complete ... or one in which reasons for judgment have been delivered. It is difficult to see why, in the former situation [where, as here, the hearing is complete but reasons for judgment have not yet been delivered] the primary consideration should not be that of embarrassment or prejudice to the other side. As suggested by Sheppard J in Joyce v GIO. ... in the latter situation the appeal rules relating to fresh evidence may provide a useful guide as to the manner in which the discretion to re-open should be exercised. But those considerations bearing on re-opening are not decisive of the question whether, a matter having been re-opened by reason of error, further evidence can be called. (My emphasis)

Not every case involving error will invite further evidence: it will depend entirely on the issue that is opened up. If the issue is one that invites further evidence, then, prima facie and subject to the ordinary rules of evidence, that evidence should be allowed. We say prima facie because there may be situations in which the particular evidence involved would cause embarrassment or prejudice such that, in the circumstances, it would be unfair to allow it.

50 In Inspector General in Bankruptcy v Bradshaw [2006] FCA 22, Kenny J (at [24]), reiterated that the principle enunciated by Clarke JA in Nweiser (at 478) is the overriding principle in this regard, noted that, broadly speaking, the authorities had indicated there were four recognised classes of case in which a court might grant leave to reopen although those classes overlapped and were not exhaustive; those being where there is fresh evidence; where there has been inadvertent error; where there has been a mistaken apprehension of facts; and where there has been a mistaken apprehension of the law. The current application falls squarely within the first of those categories.

51 It has not been suggested by Mr Priestley that any embarrassment or prejudice will be suffered if the fresh evidence is now admitted in the proceedings. His objection is based squarely on relevance.

52 In Telstra Corporation Limited v Australian Competition & Consumer Commission [2008] FCA 1436, Lindgren J, also having noted that the ultimate question for the court is whether it is in the interests of justice for the further evidence to be admitted, considered a motion for leave to re-open the hearing in circumstances where evidence came into existence some 13 days after the last day of the hearing. His Honour said at [209]:

The particular criterion relevant to the present circumstances is whether it is probable to the required degree that the additional evidence will affect the result. There is not a single formulation in the cases as to the degree of probability required. In Australasian Meat Industry Employees’ Union (WA Branch); ex parte Ferguson (1986) 67 ALR 491, Toohey J said (at 493-494):

In situations where a hearing has concluded but judgment has been reserved and not delivered, it has been said that fresh evidence should be admitted only when it is so material that the interests of justice require it; the evidence is believed would most probably affect the result; ... [my emphasis]

In Daniel, RD Nicholson J stated (at 269) that it must be shown that the new evidence, if accepted, would "most certainly affect the result" (my emphasis).

53 His Honour referred (at [210]) to Idonz Pty Limited v National Capital Development Commission (1986) 13 FCR 70 where the court refused an application by the respondents to an appeal to re-open the hearing of an appeal to allow them to call fresh evidence, one reason for which being that the evidence had been available when the appeal was heard but other reasons being that the evidence would be complex, contested and not appropriate for consideration by an appellate court and would have added little probative value to the material already before the court and would have related only to the possible exercise of discretion against the appellant if it were otherwise successful in its appeal.

54 While noting the submission that the public interest in the finality of litigation is something which tells against a grant of leave to re-open, Lindgren J was, however, prepared in the Telstra case to grant leave to re-open to put the particular documents into evidence even though he considered that the documents should be accorded no weight (being of the view that the only purpose that could be served by admitting the additional evidence would be to provide a further and alternative discretionary basis to support his decision and that he would not have been obliged to address that further and alter his discretionary basis even had the documents been tendered during the course of the hearing).

55 In ASIC v Rich [2006] NSWSC 826, Austin J (at [18]) set out the considerations relevant to be taken into account on the exercise of the court’s discretion to give leave for further evidence to be adduced after a party had closed its case, but there in the context of an application made while the hearing itself was still on foot. Those factors again included the degree of relevance and probative value of the evidence sought to be adduced and its potential to involve an undue waste of time.

56 Turning to the evidence here sought to be tendered, as noted above there is no doubt that it would not have been possible for it to be tendered by the McLaughlins during the hearing. There was no suggestion that the admission of this evidence would lead to any further evidence being sought to be tendered by the defendant, or any further submissions being made, hence there is no potential for it to waste time. The question then is simply whether it has sufficient relevance and probative value (or it is otherwise in the interests of justice) that it should be admitted.

57 The new evidence which is sought to be tendered, if leave to re-open is granted, relates in substance to the financial position of the company and, in particular the likely final outcome of the project (and the steps proposed to be taken by the company to avoid liquidation while the financial wash-up of the project is completed).

58 It is submitted by Mr Burchett that this evidence goes both to the question of assessment of damages and to the continuation of the oppressive conduct of which complaint was made in the main proceedings and “the incompetence or preferential conduct of the directors against whom leave to bring proceedings in the name of the company is sought”.

Assessment of damages

59 As to the first way in which the fresh evidence is said to be relevant, Mr Burchett relies upon Kizbeau Pty Limited v W G & B Pty Limited (1995) HCA 4; (1995) 184 CLR 281 (at 293) where the High Court, considering the assessment of damages arising from the purchase of a business as the result of a misleading statement, held that account should be taken of relevant events that occurred after the purchase of the business in determining its value at the date of the purchase. Their Honours in that case observed that courts frequently assess value or damages on the basis that “where facts are available they are to be preferred to prophecies” even though those facts occur after the date at which the value or damages would be assessed (at [23]).

60 It is said that the evidence establishes that the McLaughlins’ estimate of the final allocation of their proportion of the costs of the project (and their schedule of capital loss attached to their submissions in chief, which quantified the capital loss in the value of their shares at $275,871.56), based on the evidence available at the trial, was understated by at least $104,085.22. After the new levy is taken into account, the total cost to the McLaughlins of the renovation works, as at the end of February 2010, it is said, would be at least $422,732.45.

61 The relevance of this evidence to the assessment of damages is disputed, largely because there is a dispute between the parties as to how any such loss is properly to be valued.

62 Mr Burchett says the starting point in the calculation of damages is the value of the unit at the time of the commencement of the project, from which there is to be an assessment of how that is improved or reduced by reason of the project. He submits that the fresh evidence shows that the estimates of how the value would be reduced (in terms of the cost of the project) have substantially underestimated the reduction in the value of the unit, taking into account the costs actually incurred in the works. (Mr Burchett says that this would also affect the amount for which the shares should be bought back if the relief granted were for a compulsory purchase order.)

63 Mr Priestley, on the other hand, submits that there is no relevance in the fresh evidence because any loss could be assessed only by reference to the financial position in which the McLaughlins are now, compared to the financial position in which they would have been but for the breach of contract and/or oppressive conduct. He submitted (as he did at the hearing) that the financial evidence relating to the outcome of the project cannot, of itself, establish this (hence the additional evidence now sought to be tendered has no probative value). Mr Priestley’s contention is that without evidence as to what would be the position if the building had remained totally undeveloped or if minor repairs had been carried, no assessment of damages can be made.

64 Further, as a matter going to the court’s discretion to re-open, Mr Priestley submitted that leave should not be given on the basis that the McLaughlins had been prepared to have the matter listed, heard and concluded knowing that this would be at a time before all the accounting for the project was complete and knowing that it would not be until some time in 2010 that a final adjustment would be (and therefore, having been prepared to have damages assessed on the basis of the evidence as at the time of the hearing then there should be no need now to re-open to adduce further evidence). In response to this, Mr Burchett submitted that, as a practical matter, the plaintiffs were not in a position to make a conscious decision to have the matter proceed to trial in advance of the final financial position being made available since that was dependent on the court’s listing of the matter (and he further noted that there had been an expectation that the results of the project would have been determined some time ago).

65 In addition, Mr Priestley submits that it is an abuse of process, in effect, for the plaintiffs to seek to tender, as evidence in the main proceedings, evidence which was adduced before me only for the purposes of a motion brought to re-open the proceedings in respect of a much more limited class of evidence.

66 In that regard, when the decision was made to adduce the evidence annexed to Ms Probert’s affidavit, the defendant’s representatives must surely have had in mind that the plaintiffs might also seek to make use of this evidence in the proceedings if they were re-opened. There is nothing to suggest that a spurious application to re-open the hearing (seeking to tender two letters) was made in an attempt to flush out a raft of other material which would not otherwise have been available to the plaintiffs and of which they appear not to have known. In any event, I consider that to the extent that the defendant apparently chose not to make certain of this evidence available during the hearing, it should not be open to the defendant now to complain if material relating to the current position of the company is sought to be tendered notwithstanding the purpose for which the defendant put this before the court.

67 In relation to the relevance of the financial information which has now become available, I am not prepared at this stage to say that it can have no potential relevance to the assessment of damages, even if I find that the information available in relation to the comparative position of the McLaughlins had this particular development not proceeded is not readily ascertainable. Nor can I exclude the possibility that the final outcome of the project would be a factor relevant to take into account in assessing what relief should lie if the claim of oppression is made out.

68 Further, although I accept that there is force in the submission made by Mr Priestley on the issue of relevance, I am troubled by the fact that information going to the financial position of the company, which was apparently available during the hearing (such as the existence of a statutory demand and the commencement of winding up proceedings), was not made known to the plaintiffs or to the court at that stage. Whether or not the defendant considers that information of this kind had probative value, there can have been no doubt in the mind of the defendant and its advisers that the plaintiffs contended that it was highly relevant. In those circumstances, where there is any possibility that this information will be relevant and may have probative value in assessing the quantum of any damages recoverable by the plaintiffs, I consider that it should be admitted and I am prepared to give leave to re-open the proceedings for that purpose.

69 I note that it was submitted by Mr Burchett that, the proceedings still being on foot even though the hearing had been completed, there was an ongoing obligation to discover the fresh financial information. In that regard, he handed up (as an aide memoire) a compilation of the discovery categories. I do not think it is necessary to determine this issue, since I am minded in any event to give leave to re-open the proceedings in order to admit this evidence.

70 As to the discretionary issue raised by Mr Priestley to which I adverted above, I do not think that the plaintiffs should be regarded as having made an election once and for all that the evidence on which their damages would be determined should be limited to that available at the hearing (leaving aside for the moment the fact that some of this information was available at the hearing but not produced) even if, pending delivery of a reserved judgment on the matter, fresh evidence might arise.

Alleged continuation of oppression

71 In light of the above, it is not strictly necessary for me to address the second basis on which the evidence is said to be relevant, namely that it manifested a continuation of the oppressive conduct of the affairs of the company or further breaches of directors’ duties.

72 This was put in a number of ways. It was said that an extrapolation of the figures disclosed in the document which is Annexure A to Mr Porman’s 29 January 2010 affidavit reveals that the net debts of members of the defendant other than the McLaughlins were allowed by the board to accumulate (both in respect of unpaid levies and in sums expended for their personal benefit) to at least $4.58 million. In that regard, the evidence before the court already indicates that not all of the project levies had been required to be paid by other shareholders and that there were arrangements with some shareholders in relation to variations to their units which were to be paid for in due course. I doubt that the further information adds greatly to the factual position already established in this regard.

73 It is further said that at the time of the hearing, undisclosed by the defendant, its financial position had been allowed to deteriorate to the position that it was the subject of a winding up proceeding by the builder for a debt of some $300,000 and that, subsequent to the hearing, its financial position remains so precarious that it is the subject of winding up proceedings by a substituted creditor. Mr Burchett stressed that the debts claimed by Southern Cross and the ATO (and conceded by the company) were in each case substantially less than the amount he says was incurred for the personal benefit of members other than the plaintiffs. Again, I doubt that this adds greatly to the factual position in relation either to oppression or to the basis on which leave is sought to commence a derivative suit for breach of directors’ duties. If the relevance sought to be placed on this is that the directors have allowed substantial debts to be incurred and to remain outstanding while some members have benefited from the project to a greater extent than others evidence of that kind is already before the court.

74 It is submitted that the proposed course of conduct (ie the release of strata titles in return for a surrender of shares) is to the detriment of the defendant and its members generally, and oppressive of the McLaughlins in particular, in that the amount of the levy (for payment of which it is proposed to distribute titles to and release the members) is substantially less than the likely value of the members’ units under the “Landsbury” Valuation which was in evidence at the hearing (TB 773) and thereby the proposal to release strata units (referred to in the correspondence now sought to be tendered) would substantially reduce the capital of the defendant; and that the proposed reduction of capital endangers the defendant’s ability to pay any amount to the McLaughlins or to pay any liabilities of the defendant not included in the board’s calculation of the levy, such that the McLaughlins may be left to satisfy any other liabilities including to themselves and bear the costs of any proceedings for which leave is granted.

75 The difficulty I have with this argument is that it seems to be predicated on fresh acts of oppression, not the subject of the claim in the hearing before me. The proposal for strata title subdivision has been well known since the inception of the project, as was the proposal that members bear a portion of the overall costs of the project (offset by any profits) but end up with a separate title to their unit. If the manner in which this is now proposed to be achieved constitutes a fresh act of oppression, it does not seem to me that that is something in issue before me on the pleadings as they currently stand. If it is said (as I apprehend it was) that this is simply a further manifestation of the oppressive conduct on which the McLaughlins relied in the hearing before me, then the relevance of it seems to me to be marginal at best.

76 Mr Burchett points to the fact that it is proposed that the defendant will retain either the two penthouse units or their proceeds of sale, upon a mortgage of $3.5 million, leaving a net asset value of $2.5 million and that the schedule prepared by one of the directors (which appears at annexure F to Ms Probert’s affidavit) shows an “intended balance” refundable to members of somewhere between $10,449 to $12,449 but no allowance for legal fees of the defendant or the McLaughlins or any payment to them or to Mr Garratt. I doubt that this can be described as an “intended” balance. It seems no more than Mr Cannen’s estimate as to the likely balance it is based may well prove to be incomplete. Again, this seems to be a complaint as to the manner in which the strata title process is now being completed, not something going to the oppressive conduct, if any, which has already occurred and which is the subject of the claim before me. The evidence before me already establishes that there is little likelihood of a substantial profit to shareholders.

77 It is said that the schedule prepared by one of the board members, Mr Cannen, is inconsistent with Mr Garratt’s letter of January 2010 as to the extent of members’ liabilities by disclosing the expense of selling the units as $720,000 to $768,000 and including further previously undisclosed debts of $1.8 million. As indicated above, the inconsistency between the various directors’ or consultants’ past estimates is already in evidence and I am not convinced that further inconsistencies in the calculation of profits/losses take the matter much further.

78 Emphasis was placed by Mr Burchett on the fact that the material shows that the board has once again asserted to the members that the position in which it had put the defendant left the board no alternative (this time put on the basis that it is necessary if the company is to avoid liquidation) than to approve the proposed course of conduct. Again, this seems to be pointing to fresh complaints, not evidence going to the conduct of which complaint was made in the proceedings.

79 It is said that this evidence goes to show that the board is treating the McLaughlins in a discriminatory fashion, by insisting on obtaining security for any actual or contingent liability of the McLaughlins over their unit (by requiring the whole of the proceeds of any sale of the unit, despite the satisfaction of the new levy, to be held in trust by the St George Bank and not be released without the defendant’s consent pending the completion of the litigation). Even if that be the case, and I do not accept that on the evidence there is necessarily a serious question to be tried as to the unfairness of any discrimination in this regard, it does not go to what has already occurred and was the subject of the hearing before me. However oppressive the manner in which the affairs of the company may now be being conducted, if complaint is to be made of those after the hearing, then as a matter of procedural fairness it would be necessary for the pleadings to be amended to plead that conduct and for the defendant to have an opportunity to respond thereto, to adduce evidence and to make submissions in that regard.

80 Finally, it is said that the defendant has (again) failed to provide the members or the McLaughlins with proper information upon which to assess the proposed course of action put to them, and has relevantly failed to provide accounts for the 2008-2009 year. (The 2008/9 accounts were the subject of the notice to produce served on the defendant, to which objection was taken but in any event the answer was there were no accounts to produce.) It is said that no statement has been provided of what debts the defendant has, other than those targeted by the new levy, or as to which members owe the substantial amount disclosed (by extrapolation from the figures) to the company and whether and how it can be paid. It is submitted that the bare assertion that the company cannot obtain alternative finance cannot be accepted without explanation in light of the very substantial value of the building currently available as security. A complaint was also made as to the priority said to have been given by the board to the marketing of one of the shareholders’ units over the defendant’s own unit. These matters all go to conduct after the conclusion of the hearing, as to which I make the same comment as noted above. Further, as I apprehend it, the defendant contends that these matters all go to an impermissible attempt for the court to second-guess the business decisions of the directions.

81 Mr Burchett’s argument on this second basis of relevance seems to be that evidence of allegedly oppressive conduct after the hearing is relevant to the matters before me in the hearing because it shows in hindsight that the signs or indications of oppression which were before the court at the hearing have since become manifest. This seems to be a submission that, insofar as complaint was made as to the likely effect of what was occurring, regard should now be had to evidence to show that this was in fact what had occurred.

82 In relation to the asserted relevance of this material to the oppression/breach of directors’ duties allegations, Mr Priestley pointed to the fact that the facts sought to be established by tender of this evidence (apart from the final accounting for the project, which he says cannot be relevant in the absence of the other half of the financial loss equation – as noted above) relate to matters post the date of the hearing and cannot be relevant to whether there was oppression/breach of duty by the directors prior to the hearing. Other than in relation to the assessment of damages issue, I agree with Mr Priestley’s submission.

83 There were other assertions made by Mr Burchett in relation to the relevance of the evidence in similar vein – he submitted that the evidence showed that the benefit that at least one member had arranged to take out of the company (Mr Brown) is greater than had previously been thought; that the (so-called) “reticence” of Mr Garratt as to whether or not he would have any obligation to make contribution of further levies for his converted ground floor unit had now been confirmed by the fact the levies now issued did not include the former units holders (and hence it is said that Mr Garratt has ‘avoided’ some $240,000 in levies and therefore the cost to the company of his unit being converted for the purposes of the development is closer to $1.2 million than the $950,000 to be paid for his unit); and it is said that as the new levy reduces the value of the McLaughlins’ unit to $400,000 Mr Garratt is in a position three times better than that of the plaintiffs. The thrust of these complaints (in essence that the McLaughlins have received or will receive a lesser benefit out of the redevelopment than others or that Mr Garratt has obtained a greater benefit by being excluded from levies in respect of the unit he gave up for the sake of the project) goes to matters which were already the subject of submissions in the hearing before me. The actual quantum now placed on the differential between the benefit to the McLaughlins and to the other members does not seem to me to add much to this.

84 In any event, having determined that the evidence should be admitted as being potentially relevant to the damages assessment, it can be relied upon for any matter in the proceeding to which it is relevant. Accordingly, whether or not Mr Burchett’s submissions as to relevance on the oppression/breach of directors’ duty aspect of the matter should be given weight are matters to be addressed in my final judgment in these proceedings. For present purposes, I simply note that the evidence will be admitted for whatever relevance and weight it may ultimately bear.

(ii) Interlocutory injunction

85 The second aspect of the motion is the application for interlocutory relief. The relief sought is as set out in order 3 of the notice of motion as follows:

3. Until further order of the Court or until any judgment against the defendant is satisfied in full, or, if there is an award in favour of the defendant, for at least 28 days after such judgment is handed down, the defendant by itself and its directors be restrained from:

(a) delivering any strata titles to its real property known as Dungowan Manly to its current or former shareholders or anyone on their behalf or exchanging share certificates for strata titles without obtaining undertakings secured against such titles (in a form acceptable to the plaintiffs and/or the Court) by those shareholders to contribute to any shortfall of the defendant for any money it may be ordered to pay the plaintiffs as a result of these proceedings including any order for costs.

(b) enforcing any levy for the cost of its development of the Dungowan building or satisfaction of its borrowings for that purpose against the plaintiffs

(c) completing the purchase by it of its own shares from its director, Mr. Garratt QC or its former director, Mr. Heyworth or any entity associated with them

(d) making any payment to or for the benefit of its director, Rodney Garratt, other than in reimbursement of expenses regularly incurred in the normal course of the business of the defendant.

86 It is submitted by Mr Burchett that there is a serious question to be tried as to:

(a) oppression (such that the relief of the buy out of the McLaughlins may be ordered);

(b) the validity or enforceability of any levy to pay St George or the costs of the project (it is said that the undertaking offered by the company not to enforce the levy without seven days’ notice would appear to concede this point);

(c) the validity of the buy back of the directors’ shares or liability of the directors for the benefit of it (it is said that Mr Garratt’s letter insofar as it says this part of the new levies will be retained until the outcome of the proceedings is know, appears to concede this point);

(d) the validity of the gratuity agreed to be paid to Mr Garratt or liability to Mr Garratt for that benefit under the Act; and

(e) the entitlement of the McLaughlins to costs of the proceedings.

87 In response, Mr Priestley notes (fairly in my view) that all the issues so identified by Mr Burchett are matters on which the evidence is already before the court and on which judgment has been reserved.

88 In that regard, while logically it seems to follow that there was a serious question to be tried on the various breach of contract/oppression/derivative suit claims (since I was not able at this stage, nor was I asked, summarily to dismiss them on the basis of the material already before me), that simply places the real test on the balance of convenience point. While I have formed certain views as to the claims which I heard, I have not concluded my reasons for judgment and it is not appropriate that I comment further on this interlocutory application on the plaintiffs’ overall prospects of success.

89 However, the allegation of conduct designed to frustrate or undermine the effectiveness of any judgment in the McLaughlins’ favour or which is likely to have that effect is a new allegation and one (perhaps not surprisingly) which is not pleaded on the case before me. (I say “perhaps” not surprisingly, because in fact the possibility of this situation arising was one which was at all times within the contemplation of the plaintiffs since the redevelopment project was one that involved the strata title conversion of the units yet no steps have been taken to restrain the release of titles before now.) The fact that this is taking place at this stage is apparently due to the pressing financial situation in which the company now finds itself.

90 The submission which seemed to be made by Mr Burchett was that the defendant had embarked on a deliberate course of apportioning the loan facility between the renovated units and penthouse units, and acting in order to avoid the liquidation of the company, in order to frustrate the judgment of the court. He relies on inferences to be drawn from matters such as the fact that the loan facility which was put in place on 18 December 2009 was only a short term loan facility and that at the 16 January board meeting there was consideration of relatively mundane matters, as indicating a lack of urgency or concern on the part of the company. It seems to be suggested that the company is somehow manufacturing the situation in which it says it is under threat of liquidation and that, if it wanted to, it could easily take other steps to avoid this happening.

91 I do not accept that I should draw that inference. I cannot place much weight on the circumstance that a short term facility was entered into (or surmise as to what further facility might be available) where I do not know what negotiations may have taken place with the bank. The fact is that there are winding up proceedings on foot. Winding up is regarded as a drastic remedy for any solvent company. I think I can take judicial note of the fact that if the company were to be wound up there is a risk that assets would be sold at less than their optimum value and that liquidators’ fees would be incurred. I am not prepared to assume that the directors of this company are blasé about the possibility of a winding up or that it would necessarily be in the interests of shareholders as a whole. Nor do I think that the fact that other matters were recorded in the minutes of the January board meeting as having been discussed should lead me to infer that the directors are not concerned at the financial position of the company.

92 It was suggested by Mr Burchett that if the building in its renovated state was worth $30 million (as had been valued) and the company debt was in the order of one-third of that, then the suggestion that another $1.1 million could not be raised to pay off the ATO was not feasible. I do not see that I should speculate on the ability of the company to raise funds elsewhere or that I should embark on second-guessing the business decisions of the directors. I accept that the evidence discloses a real risk that the company will be wound up if the proposed means of satisfying the existing debt cannot be implemented.

93 It was said by Mr Burchett that if the defendant wished to come before the court and say that it did not intend to frustrate the judgment it could have had a director expose himself to cross-examination. I do not think it is to the point to say that the directors could have come to court to explain the position.

94 It was further said that an inference could be drawn (from the fact that Mr Garratt had said in 2008 that the purpose of strata titling the units in the context of these proceedings remaining on foot would be that the plaintiffs will be the only members of the company with all the debts of the company to be satisfied out of the assets including any amount in the proceedings) that this is exactly what is now proposed to take place.

95 Mr Garratt’s letter of 16 January 2008 included the following:

The distinct possibility arises that you may be the only shareholder left in the Company. In that event, the remaining assets of the Company would be any net payment due to you and a strata title to unit 4. Your litigation against the Company would remain unresolved. In that case, the board would probably put the Company into liquidation. You could continue to fight out your claims against the Company. The liquidator would have the remaining assets of the Company to defray the costs of the liquidator and of the liquidator's staff of the winding up, including the costs of the litigation. If necessary, the liquidator could sell unit 4 to defray those costs.

The likely course of events has been sketched out so that:

(a) any legitimate objection to it may be made and addressed in good time;

(b) the pointlessness of continuing your litigation can again be stressed. Continuing the litigation will only, it seems, reduce the value of your investment in the Company further. It should not adversely affect the other shareholders further.

In the board's view, your litigation should be discontinued, and certainly before further costs are incurred.

96 It seems to me that whether or not an implicit threat can be read into the position which was portrayed in this letter, the fact is that the company has given the McLaughlins the ability to surrender their shares (on terms not dissimilar to those available to all other shareholders). I do not think that any inference can be drawn from the statements made in this letter, that the steps now being taken have been done in order to frustrate any judgment of the court.

97 Mr Priestley submits that unless there is evidence that the company is deliberately undertaking the process of going to strata title to frustrate the judgment, there is no jurisdiction to make the interlocutory orders sought. However, Mr Burchett says that it is not necessary for him to show any deliberate intent in that regard.

98 The question whether relief will be available to prevent a party from taking steps to frustrate a potential judgment of the court does not depend on there being a deliberate intent for that to occur, it being sufficient only that such a result would occur from their disposal: Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 CLR 380 (per Gaudron, McHugh, Gummow and Callinan JJ) (at [26]) endorsing the opinion expressed by Mason CJ, Brennan and Deane JJ in the High Court of Australia in National Australia Bank Limited v Bond Brewing Holdings Ltd [1990] HCA 10; (1990) 169 CLR 271 (at 277) which described as mistaken any proposition that Mareva relief could only be obtained against the defendant to an action if there was a positive intention to frustrate any judgment.

99 In Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 (at 321 – 322), Gleeson CJ in a passage followed in Cardile v LED Builders Pty Ltd and Frigo v Culhaci [1998] NSWCA 88) said:

“The remedy [of a Mareva injunction to restrain dissipation or disposal of assets] is discretionary, but it has been held that, in addition to any other considerations that may be relevant in the circumstances of a particular case, as a general rule a plaintiff will need to establish, first, a prima facie cause of action against the defendant, and secondly, a danger that, by reason of the defendant’s absconding, or of assets being removed out of the jurisdiction or disposed of within the jurisdiction or otherwise dealt with in some fashion, the plaintiff, if he succeeds, will not be able to have his judgment satisfied.”

100 His Honour referred to a number of authorities both in England and in Australia, noting that there the test was formulated in terms such as the “danger of money being taken out of jurisdiction”, “a danger of default if assets are removed from the jurisdiction”, “a real cause to apprehend” that a person may be deprived of a remedy, “risk, real risk”, “risk demonstrated by solid evidence” and the like. His Honour noted that there is “important guidance” to be found in the consideration “of the nature and purpose of the remedy in question.” (At 324).

101 Meagher JA (at [22]), in Patterson, expressed this as being whether there was “some risk of a dispersal by the defendant of his assets so as to defeat the value of the plaintiff’s victory if he ultimately wins.”

102 In Jackson v Sterling Industries [1987] HCA 23; (1987) 162 CLR 612, Wilson and Dawson JJ emphasised that orders of this kind “must be necessary to prevent the abuse of the process of the court”, though noting the difficulty in ascertaining the circumstances in which such an order should be made.

103 Lehane J in the Federal Court of Australia in Hadid v Lenfest Communications Inc (1996) FCR 446, observed that:

“In my view, whatever precisely a real risk may be in this context, it is something greater than a risk which is in turn greater merely than de minimis. In a sense, of course, there is always a real risk that a corporation which owns an asset will sell it and, if the owner is a foreigner, there must in a sense always be a real risk that the proceeds will be taken out of the jurisdiction; but it is perfectly clear that it is not in every case where a foreign respondent has assets within the jurisdiction that there will be held to be a real risk of disposal, removal and, I suppose, dissipation so as to enliven the jurisdiction to grant Mareva relief.” (At 448).

104 In Frigo v Culhaci, the Court of Appeal said (at [8]):

“A plaintiff must establish, by evidence and not assertion, that there is a real danger that, by reason of the defendant absconding or removing assets out of the jurisdiction or disposing of assets within the jurisdiction, the plaintiff will not be able to have the judgment satisfied if successful in the proceedings. There has been much debate as to the precise degree of risk which must be shown: see generally Patterson. What is clear is that mere assertions that the defendant is likely to put assets beyond the plaintiffs reach will not be enough: Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft mbH & Co KG [19 8411 All ER 398; Patterson.

The evidence relied upon at the contested hearing fell far short. The admissions in the ‘without prejudice’ correspondence should have been ignored. The sale of an encumbered home unit at a figure above market value does not, standing alone, imply disposal of assets in order to defeat a prospective judgment, even where the purchaser is a close relative. Even if, which is doubtful, the appellant’s suspension of work in the building contract could have been regarded as evidence of financial difficulties, it was not argued below that it had such effect. More importantly, that alone is not enough. A mareva injunction is not designed to stop a person from sliding into insolvency.” (my emphasis)

105 The relevant passage in the judgment of Mustill J in the Ninemia case at 606 - 607 was as follows:

“It is not enough for the plaintiff to assert a risk that the assets will be dissipated. He must demonstrate this by solid evidence. This evidence may take a number of different forms. It may consist of direct evidence that the defendant has previously acted in a way which shows that his probity is not to be relied on. Or the plaintiff may show what type of company the defendant is (where it is incorporated, what are its corporate structure and assets, and so on) so as to raise an inference that the company is not to be relied on. Or, again, the plaintiff may be able to found his case on the fact that inquiries about the characteristics of the defendant have led to a blank wall. Precisely what form the evidence may take will depend on the particular circumstances of the case. But the evidence must always be there. Mere proof that the company is incorporated abroad, accompanied by the allegation that there are no reachable assets in the United Kingdom apart from those which it is sought to enjoin, will not be enough.”

106 In Patterson, Gleeson CJ (at 325) rejected as appropriate tests that sought to impose some form of burden or onus of proof in the nature of “more than usual likelihood” that assets were to be dissipated. Likewise, Gleeson CJ rejected any test as to whether the likelihood of dissipation of assets had been established “upon the balance of probabilities”, for reasons which are discussed. In Vaughan v Bongiorno [2007] NSWSC 1398, Hamilton J, at [7], has described the degree of proof needed to establish the second requirement for the Mareva injunction as being an “apprehension of dispersal of assets”.

107 In Cardile v LED, the High Court approved (at [51]) what was said with particular respect to Mareva relief by the NSWCA (Mason P, Sheller JA, Sheppard AJA) in Frigo v Culhaci:

"[A Mareva order] is a drastic remedy which should not be granted lightly. ...

A [Mareva order] is an interlocutory order which, if granted, imposes a severe restriction upon a defendant's right to deal with his or her assets. It is granted at the suit of a plaintiff whose status as a creditor is in dispute and who need not be a secured creditor. Its purpose is to preserve the status quo, not to change it in favour of the plaintiff. The function of the order is not to 'provide a plaintiff with security in advance for a judgment that he hopes to obtain and that he fears might not be satisfied; nor is it to improve the position of the plaintiff in the event of the defendant's insolvency'. ...

108 Is there a real risk that company assets are being disposed of in such a way as would frustrate any judgment in the McLaughlins’ favour? There is little doubt that the course the directors are seeking to put into place will result in the underlying assets of the company (in terms of the units which relate to those of the shares surrendered in accordance with the proposed arrangement) being transferred to the outgoing shareholders. In return, the company’s debt will be correspondingly reduced and, as part of the arrangements with shareholders, the company is to obtain a contractual right to payment of a proportionate share of any excess of liabilities over assets. Will this have the result of frustrating the plaintiffs from obtaining the benefit of a judgment? From a practical point of view it may be that it makes enforcement of a judgment more complicated. However, while the shareholders remain as members of the company, in order for the company to obtain funds to pay any judgment debt the company would need to raise a levy on shareholders and only then would that give rise under the articles to a lien over the shares, which would rank after the company’s secured creditors. The company presently has no “security” in a technical sense. What the company is proposing will permit the company’s debt to be reduced and still maintain the ability for the company (or a subsequent liquidator) to pursue individual shareholders for any shortfall in funds to meet its liabilities, which it accepts will include any liability to shareholders.

109 Mr Burchett conceded that, as the situation stands at present, the units are only available to the company “indirectly through the methods of the articles” to meet any obligations the company has. Nevertheless, he asserts that the company should be required to give the plaintiffs security which they presently do not have in respect of any judgment debt.

110 In oral submissions, it was put by Mr Burchett that the company was effectively proposing to shed a substantial amount of its assets. It was suggested that there was discrimination insofar as the company was refusing to allow the McLaughlins to have their title free of any encumbrance and insisting that if their unit were to be sold then the proceeds of sale should be held in a trust account until the determination of this litigation, hence that the defendant wished to maintain security against the plaintiffs but to give up that security in relation to all of the other unit holders.

111 Even if there is a serious question to be tried as to whether the conduct now proposed amounts to further oppression (or fresh oppression) of the plaintiffs, as noted above this is not what has been pleaded in the proceedings before me. Further, it seems to me that the company has acted responsibly in seeking to meet the concerns raised by the plaintiffs’ legal representatives in relation to the documentation of arrangements for the release of shares.

112 I do not accept that I should draw the inference that the implementation of this process of releasing strata titles is that this is in order to frustrate the ability of the plaintiffs to enforce a judgment. I do not consider that I can draw the inference that what is presently planned is a scheme to prevent the plaintiffs from having the benefits of any judgment, nor do I see any basis on which the plaintiffs should assert an entitlement to improve their security position in that regard.

113 However, I accept that the issue is not whether there is a demonstration of intention on the part of the defendant to deprive the plaintiffs of access to assets but rather whether there is a real risk that the judgment would be frustrated as a result of the defendant’s conduct as a result of their disposal. It is clear that what the company is planning to do, in order to enable its debts to be paid down and to avoid a winding up at this stage, will involve the dissipation of some of its assets. I do not accept that there is a real risk that this will prevent the plaintiffs enforcing any judgment debt, though it may make the practicality of this more difficult. Assuming, however, that it was likely to have that effect, would the balance of convenience lie in favour of an interlocutory injunction to restrain this?

114 As to balance of convenience, it is submitted by Mr Burchett that this lies heavily in favour of the McLaughlins in that:

(a) the defendant’s conduct is intended to or to have the effect of frustrating any judgment may give in favour of the McLaughlins;

(b) the defendant has failed to adduce cogent evidence in explaining the position of prejudice it claims to be in, such as what steps it has taken to obtain finance for its obligations.

(c) the defendant has failed to adduce any evidence from any members as to any difficulty raising finance on the security of his shares entitling the members to occupy the newly refurbished units at a considerable value in order to discharge the encumbrance on them;

(d) the defendant’s board has “again hidden behind its solicitor in adducing evidence in the proceedings upon which it cannot be practically cross-examined”;

(e) a winding up of the defendant is unlikely to have the disastrous consequences of the members claimed in any event and it appears that the board intends to wind up the company. (It is submitted that it would be of advantage to all concerned to have an independent person in control of the company to resolve the last steps of the development and deal with the entitlements between the plaintiffs and defendant. It is further submitted that the levy, having been struck, is recoverable by a liquidator and the liquidator could be more relied upon to recover the large debts of the members than the board which has allowed them to accumulate.)

115 The evidence put before me indicates that if the levy is unable to be met then there is a real risk that the winding up application in relation to the company will proceed and in those circumstances that the bank will proceed to enforce its security. There will then be a sale process not in the orderly context contemplated by the directors but as part of the winding of the company. It seems to me that there must be a risk that the interests of the shareholders as a whole will be prejudiced if the company is unable to realise the best price for the units which it is seeking and which it has been seeking to sell in accordance with advice as to the state of the real estate market over that period.

116 As against this, it is submitted by Mr Priestley that the risk to the plaintiffs is simply that the titles will be released and that they will be left to a personal claim against the company, including to compel the company to enforce any rights that the company has against individual shareholders who have entered into agreements in relation to the surrender of their shares.

117 In circumstances where the company appears to be seeking to put in place arrangements to preserve the ability of the plaintiffs to enforce any judgment which they may obtain and having regard to the fact that an order in the nature of the injunction sought is a remedy which should not be granted lightly, I am not minded to grant interlocutory relief. I think the balance of convenience lies squarely on the defendant in relation to this application.

118 It seems that this is a situation where what the plaintiffs are seeking is not to preserve the status quo so much as to change the status quo in their favour – to do what it was said in Frigo v Culhaci by the Court of Appeal was not the purpose of an order of this kind:

The function of the order is not to:

“provide a plaintiff with security in advance for a judgment that he hopes to obtain and that he fears might not be satisfied; nor is it to improve the position of the plaintiff in the event of the defendant’s insolvency. ”

119 Insofar as it is suggested that the proposed conduct will leave the McLaughlin in the position that they are then only members of company, with debts and no assets from to pay those debts and that this was what had been threatened in 2008, it seems to me that the arrangements make it very clear that it is open to the McLaughlins to take a course of action which is open to all other shareholders (namely to sell or to refinance the units for the purposes of meeting the levy on the property and by entering into a release to obtain their strata title). The McLaughlins appear to have been treated more favourably in one respect insofar as there has been an undertaking not to enforce the levy served on them without seven days’ notice.

120 Insofar as the requirement that moneys be placed into a trust account is concerned, this seems to have been put forward in response to complaints by the McLaughlins in relation to the proposed agreement. In any event it does not seem to me that it is unfair for the company to seek to be in a position to maintain a position whereby any extant costs orders are able to be met at the end of the day as a basis for retaining the proceeds pending the outcome of the litigation. Although this may operate to tie up the McLaughlins’ moneys for some period of time it should be a short period in light of my intention to deliver judgment on the proceedings in the near future.

121 Mr Burchett’s claim that the scheme was for the winding up of the company in order to put it in the position where it would be unable to survive any further one way or the other and would not be able to pay anything to his clients and would not be able to support an indemnity for costs of any proceedings which might be brought against the directors, a scheme which it is said appeared to have been in the pipeline for a long time, seems to me to disregard the fact that the project from the start involved the release of the strata titles to shareholders.

122 I do not accept the proposition that simply because winding up was always part of the proposal in relation to the company, the court should not be concerned that this may result from the grant of the relief now sought by the McLaughlins, with potentially disadvantageous results for the shareholders as a whole.

123 It seems to me that the decisive factor on the balance of convenience point is that the company has been prepared to put in place arrangements pursuant to which a judgment debt can be met by calls upon the former members in due course if necessary. Criticism was made of the proposed agreement insofar as the operative parts contemplated a completion date of 28 February and there was no provision for the payment of costs of the company in relation to the proceedings or for any liability for the proceedings. However, the company has expressly acknowledged to the McLaughlins, and has openly submitted to the court, that liabilities in these proceedings are to be included as liabilities of the company on a reconciliation process as contemplated by the agreement.

124 It must be incumbent in my view, on the company and its directors, to ensure that all shareholders entering into the share surrender agreements understand that this is the position and are bound to accept responsibility for any share of any judgment debt/costs attributable to their proportionate share of the company’s shareholding which they held before the surrender of their shares.

125 Mr Burchett acknowledged that what his clients wanted was the practical security that the company would be able to raise money on the ‘security’ it now has over the shares which the company is now proposing to give up – a situation he contrasted with the position he said the company wanted to maintain against his clients by retaining any proceeds of sale in trust or having them remain as shareholders.

126 In summary Mr Priestley submits that it is not open on the evidence on this application to say that the defendant is going to strata title the property for the purpose of frustrating the judgment. I accept that, but in any event I consider that the McLaughlins’ position is protected to a large extent by the fact that the company is nevertheless prepared to obtain undertakings from departing members; that there will be a reconciliation of liabilities and that former members will remain liable to meet any claim made in that regard. It seems to me that the acknowledgement of the debt and the undertaking leaves the plaintiffs in very close to the position in which they presently stand and I consider it significant that this is what was first demanded by their lawyers from the company. The company has acceded to that demand. It should not be exposed to the threat of a forced winding up where there are arrangements it has or proposes to put in place which should protect the plaintiffs to a very large extent.

127 In terms of the balance of convenience, Mr Priestley contends that the risk to the plaintiffs is simply that in the period until judgment is delivered all shareholders may have sold and will not be good for their undertakings back to the company against which there is the risk that if the company is not allowed to transfer the titles to everyone it is submitted that there will be such difficulty in refinancing that this will lead to the winding up of the company. The distinction between an orderly voluntary winding up (compared to something over which the directors and members have no control) is relied upon by the defendant as pointing to a refusal to grant relief.

128 As indicated above, I consider that at least some of the risks pointed to by the plaintiffs in seeking interlocutory relief can be addressed by the expeditious delivery of my judgment in the overall proceedings. I will ensure that this occurs before 28 February 2010 and if at all possible next week.

Orders

129 For the reasons set out above, I give leave for the hearing to be re-opened in order to tender the defendant’s letters of 4 and 25 January 2010 and the material otherwise tendered on this application. That evidence will be formally marked as an Exhibit in the proceedings.

130 Other than in relation to the re-opening of the proceedings, I dismiss the plaintiffs’ notice of motion.

131 As it seems to me that there has been a partial success on both sides on this application, it seems to me that the appropriate order in relation to costs would be that the costs be in the cause. Unless the parties wish to address me otherwise, I will so order.

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LAST UPDATED:
18 February 2010