Reported Decision : [1999] 17 ACLC 1558 New South Wales Supreme Court CITATION : Fedorovitch v St Aubins Pty Ltd (No 2) [1999] NSWSC 776 CURRENT JURISDICTION : Equity FILE NUMBER(S) : 5152/97 HEARING DATE(S) : 21/07/99 JUDGMENT DATE : 21 July 1999 Serge Fedorovitch and Mary Fedorovitch (P) PARTIES : St Aubins Pty Ltd (D1) Robert Frederick King (D2) Christine Wendy Lopacinski (D3) JUDGMENT OF : Young J R D Wilson (P) COUNSEL : I E Davidson (D2) A Enright (D3) A W M Dickinson & Son (P) SOLICITORS : Teece Hodgson & Ward (D2) Jenny Bull & Company (D3) CATCHWORDS : Corporations [33]- Internal dispute- Oppression- Home unit company- Remedy- Who should buy out whom- How shares valued- No element of compensation may be added- How capital gains tax dealt with. Valuation [24]- Shares- Home unit company- Whether capital gains tax relevant ACTS CITED : Corporations Law ss 246AA, 246AA(2), 246AA(2)(e) (UK) Companies Act 1948 s 210 Re A Company; Ex parte Shooter [1990] BCLC 384 Re Bodaibo Pty Ltd (1992) 6ACSR 509 Re Brenfield Squash Racquets Club Ltd [1996] 2 BCLC 184 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 Joondalup Gates Pty Ltd v Minister for Lands (1996) 33 ATR 327 CASES CITED : Kontos v Roads and Traffic Authority (1992) 75 LGRA 218 Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 10 ACSR 606 O'Neill v Phillips [1991] 1 WLR 1092 Provan v HCL Real Estate Ltd (1992) 24 ATR 238 Russellan Pty Ltd v Roads and Traffic Authority (1992) 75 LGRA 263 Wilton-Davies v Kirk [1998] 1 BCLC 274 DECISION : See para 43 THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG, J WEDNESDAY 21 JULY 1999 5152/97 - FEDOROVITCH & ANOR V ST AUBINS PTY LTD & ORS (NO 2) JUDGMENT 1 HIS HONOUR: On 14 May this year I gave reasons for judgment in an oppression suit which arose out of a relatively small series of incidents and then mushroomed. I came to the view that there had been oppression and that relief should be given. I then stood the matter over for valuations of the relevant property to be obtained. The company concerned is a home unit company and its only business is to hold a block of four units at Waverton and to permit the shareholders to occupy one each. 2 Normally the court gives the minimum relief that is appropriate to neutralise the oppression. In this case that relief would have been along the lines of forbidding the second defendant, Mr King, to be chairman, and perhaps to permit the plaintiffs or Mrs Henrietta Lopacinski to be the chairman with a casting vote. However, neither side wished me to take that course. 3 Accordingly, it comes down to a question of ordering the plaintiffs to sell their shares, as would be acceptable to the first and second defendants, or ordering the second defendant's shares to be sold to the third defendant, Dr Christine Lopacinski, as the third defendant suggests would be appropriate. 4 Mr Enright, who appeared for the third defendant, points to the fact that s 246AA of the Corporations Law is a very wide section and gives the court ample scope for moulding the remedy in the appropriate way. That is certainly true and that approach has commended itself to some of the cases, for instance in Re Bodaibo Pty Ltd (1992) 6 ACSR 509 Vincent J remarked that the provisions of the predecessor of s 246AA have been drafted in the widest form in order to accommodate the almost limitless variety of circumstances that might arise. 5 However, the court must bear a few things in mind when making an order under this section. The first is that the section is fairly common in the Common Law world and the approach to the section has been relatively uniform. It is important in the public interest that that uniform approach continue to be followed, so that shareholders and their legal advisers and accountants will be able to advise them. 6 Secondly, there is no express provision in s 246AA for compensation to be payable in respect of an oppressive act. It is possible that one can imply that into the general words "make such order or orders as it thinks fit" in s 246AA(2), but it is significant that no court, as far as I am aware, has ever made such an order. This fits in, I think, with the general policy of the Law, which I will come to shortly. 7 The third matter is that the courts, particularly the courts in England, have consistently maintained the approach that if a reasonable offer is made by the defendant then ordinarily at that stage the defendant will be entitled to have the petition struck out. The most recent and authoritative in this line is O'Neill v Phillips [1999] 1 WLR 1092, 1107. 8 The section which is now s 246AA first appeared in the 1948 English Companies Act as s 210. Its purpose was to protect the minority, who, without such protection, were in a situation where their capital had been invested in a project which was being employed oppressively against them, yet they could not recover their capital because it was locked into the venture. The aim, accordingly, was either to stop the oppression within the company or else to wind the company up so that the venture's capital could be released. 9 Since its original appearance in the Act, the section has been reframed to allow other remedies, so that today the prime remedy is a buy-out by one side of the other. Essentially, however, the aim still is to permit the minority to free its capital, even though it has locked its capital into a venture. The reason for this is that it is unfair that the capital should continue to be locked up if the circumstances are indicative of oppression. Accordingly, the prime thrust of the section is to either make the venture work so that the capital is properly employed, or to allow the capital to be removed. It is not for punishment or compensation or for making the profit that ought to have been made had the venture been successful. 10 Although no-one has ever voiced it, it seems to me that this essentially is the reason for the adoption of the rule that ordinarily the proper order is that the oppressor buy out the oppressed. This is in line with the policy that if a reasonable offer is made to buy out the oppressed the petition will be struck out because all that the minority can really insist on is either the venture should proceed in accordance with what was understood or that he or she should get back the capital invested. 11 A general rule was formulated most succinctly by Judge Weeks QC in Wilton-Davies v Kirk [1998] 1 BCLC 274, 277. In that case both sides had equal shareholdings and his Honour said: "If there had been great disparity of holding I would have formed a prima facie view that the majority should, as usually occurs, buy out the minority ... ". 12 I considered that decision and the other English decisions at some length in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688, 743, where I said, quoting Wilton-Davies' case and omitting reference to authority: "The ordinary order is that the majority buy out the minority ... . There have been orders made that the majority sell their shares to the minority, but this has been considered to be exceptional ... " 13 I then said: "Ordinarily, the court will not order an oppressed plaintiff to sell his shares against his will. It may [be that the court will] allow the plaintiff to elect to continue to live under the defendant's regime or sell his shares to the majority at valuation." 14 In the present case, as I have indicated, the proposal by the first and second defendants is that they should buy the plaintiffs' shares. The proposal by the plaintiffs and the third defendant is that the third defendant should buy the second defendant's shares at valuation. 15 The second defendant does not want to sell his shares. He says his unit has been his home for the last seventeen years and he does not want to sell. 16 The first plaintiff says that he would prefer not to sell. He says that it is an investment unit which he has purchased to enjoy quite a good income and in due course was hoping to pass the property to his grandson by his will, though, of course, that purpose may change as time goes on. He is prepared to sell, but is certainly an unwilling vendor, and he is also concerned about the capital gains tax that will be payable on a sale. 17 As to capital gains tax, I have been given some figures and I can estimate others in such a way as to be close to the mark without having to send the case back for further evidence. 18 If the value of the plaintiffs' shares is $340,000, the capital gains tax payable by the plaintiffs will be approximately $41,000. If the value is $300,000, it will be $20,000, with approximately $5,000 extra tax for every $10,000 value above $300,000. The plaintiffs say that they should not have to pay that capital gains tax and an order should be made adjusting the value of the shares so that in effect the oppressor pays for a sale which he has forced by his conduct. 19 The first decision to be made is who should buy and who should sell. 20 I have set out what is, on the authorities, the general principle that is to be followed. Mr Enright has submitted that the court is not bound to do that and that submission is, of course, correct but, as I have said, it is appropriate to follow the general course of authority unless there is some special reason not to. 21 Mr Enright says that this is a special case. He says there is no case in the reports that any of us have been able to find where a home unit company has been the subject of an oppression suit. It is a particular class of company in which the owners or occupiers need to work fairly closely together. None of the parties really want to sell, though on the other hand none of them are sufficiently interested in coming to some management compromise which would allow them to retain their property and to live together. 22 There are instances in the authorities where the majority has been ordered to sell its shareholding. The only reported authorities are the decision of Harman J in Re A Company; Ex Parte Shooter [1990] BCLC 384 and the decision of Rattee J in Re Brenfield Squash Racquets Club Ltd [1996] 2 BCLC 184. 23 In the first of those cases the company ran a football club. The shares were of nominal value. The real power in holding the shares was the voting power and control. The oppression was the repeated failure to hold annual meetings and to lay proper accounts before the members, and the order that was made at p 395 was to order the controlling shareholder to cease to be the controlling shareholder in the club. That was a very exceptional case and little can be done, even by analogy, to relate it to the present case. 24 I find the decision in Brenfield a little hard to understand, but it would seem that one of the factors which triggered the decision was the fact that the pre-emption provision in the shareholders' agreement had already been triggered. In spite of the submissions of Mr Enright and, indeed, the submissions of Mr Wilson for the plaintiffs, I do not think that the present situation is so exceptional that I should depart from the general approach. This approach is consistent with the whole policy of s 246AA that what the oppressed is entitled to is to be released from the company if he finds that because of the opponent's oppression he or she can no longer have their capital invested in it. 25 Accordingly, the proper order is that at his option, to be exercised within, say, twenty-eight days, the second defendant or his nominee must purchase the plaintiffs' shares in the capital of the first defendant at a value to be fixed by the court. 26 The next question is what is the value of the shares. 27 The court has received the evidence of two land valuers, Mr Carroll, on behalf of the first and second defendants, and Mr O'Neill, on behalf of the plaintiffs. Neither valued the shares. Both made the assumption that the value of the property which the company owned was the sum total of the value of the four flats. A moment's thought can see that this is not necessarily a correct assumption, because we just do not know whether the site is being used to its maximum advantage. It may be, for instance, as apparently is the case with other units in the same street that multi-storey blocks are permitted which have some harbour views and if there is a harbour view the value of the unit increases. Both valuers have merely approached the problem by valuing each of the existing units in the existing building. However, that being the approach I really have to act on that sort of evidence, unsatisfactory though it is. 28 Mr O'Neill puts the value of unit 4, which the plaintiffs own, as about $340,000. Mr Carroll puts it nearer $300,000. Both have common comparable sales, though Mr Carroll has a greater list of comparable sales than Mr O'Neill. 29 Looking at the comparable sales, first I think I should on Mr Carroll's evidence, which I accept, make a discount as against the sale of a strata title unit for the fact that this unit is held under company title. Again I take into consideration the difference between a unit with a harbour view and one with a harbour glimpse. On this basis, it would seem to me that the value of unit 4 is nearer $300,000 than $340,000. The comparable sales really seem to me to work out at somewhere between $305,000 and $310,000 when one makes the adjustments. Accordingly, I will find that the fair value is $310,000. 30 The next issue is whether having found that price I should add on another $25,000 for capital gains tax and also a further amount because Mr and Mrs Fedorovitch have to pay the legal costs of selling the existing unit and the legal costs and stamp duty of buying a replacement unit. At the moment I will adopt $20,000 as that cost. 31 So far as capital gains tax is concerned, there is no direct authority. In compensation cases the general attitude appears to be that the tax is not part of the compensation; see for instance Joondalup Gates Pty Ltd v Minister for Lands (1996) 33 ATR 327, a decision of Parker J of the Western Australia Supreme Court with assessors sitting as the Western Australia Compensation Court, and see also Russellan Pty Ltd v Roads and Traffic Authority (1992) 75 LGRA 263. 32 However, I believe the case that comes closest to the present is the decision of Rolfe J in Provan v HCL Real Estate Ltd (1992) 24 ATR 238. In that case the plaintiff was awarded damages for breach of fiduciary duty, he would have to pay capital gains tax on that award and Rolfe J held that it was proper that the defendant pay the tax as part of the damages. 33 Mr Davidson for the first and second defendants, submits that Provan's case is distinguishable because that was a case of damages, whereas the present does not involve any compensatory factor, it is merely a case of valuing shares. 34 Mr Davidson puts that either as a matter of jurisdiction or alternatively a matter of discretion, the court can only value the shares by taking the market value plus adjustments for the fact that the majority's conduct has lessened the value that they otherwise would have (see eg Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 10 ACSR 606), or alternatively where the oppressed has been forced to sell at the bottom of the market (see Re Bodaibo Pty Ltd (supra)). 35 I am not at all convinced that there is no jurisdiction to value the shares otherwise. The order set out in s 246AA(2)(e) leaves it completely open as to what the purchase price should be. However, I do not believe that the proper approach to the section is to include in it any element of compensation. Although one can adjust the price for the conduct of the oppressor, or perhaps in the way Vincent J approached the matter in Bodaibo, one cannot or should not give compensation under the guise of an enhanced purchase price. 36 Accordingly, I do not consider that I can add to the value of the shares a factor for capital gains tax. 37 If I had been able to do that, the question would be whether I should have allowed the whole of the capital gains tax or only a proportion. Whenever the Fedorovitchs sell this unit they will have to pay capital gains tax. The unit was bought as an investment unit. Although there is no current intention to sell, it may well be that circumstances will force a sale in the next ten years, and there may have to be tax payable when the property is realised in the estate. Accordingly, all that is really happening by the capital gains tax being paid now is that it is being paid ahead of time. Had I allowed capital gains tax I would have reduced the amount by two-thirds to compensate for those factors, and so on the figures that I have worked out would have allowed something like $9,000. 38 I think the other head is also a matter for compensation and not for adding on to the value of the shares. Mr Wilson submits that in cases like Kontos v Roads and Traffic Authority (1992) 75 LGRA 218 the expenses of acquiring a substitute property were allowed, but that is distinguishable on the basis that that is a compensation case rather than the present, which is not a compensation case. 39 Accordingly, the fair value of the shares is $310,000. 40 That only leaves the question of costs. In my reasons of 14 May I said that my inclination was that indemnity costs should be payable because the whole of the problem had come about through Mr King's reaction to a series of minor incidents. I have now heard Mr Davidson of counsel. He submits that not all the main points originally made by the plaintiffs were pressed at the trial. He also puts that the late involvement of Dr Lopacinski as a party last Monday has wasted costs. 41 Dealing with that last matter first, I really think that one of the Lopacinskis should have been a party from the beginning, but I do think that the costs this week have not really been the fault of the first and second defendants and that after 14 May everyone should bear their own costs, especially in view of the way in which the plaintiffs and the third defendant have failed in their main submissions. 42 However, despite what Mr Davidson said, I still believe that the proper order for costs up to 14 May is that the second defendant should pay the plaintiffs' costs on the indemnity basis. The exhibits may be returned. [There was a short adjournment whilst counsel considered the form of order in the light of these reasons] 43 I make the following orders and declarations: 1. Make a declaration in terms of paras 1 and 2 of the summons filed 17 December 1997. 2. Make a declaration that in the circumstances which have occurred, the first defendant has conducted its affairs in a manner that is oppressive to the plaintiffs within the meaning of s 246AA of the Corporations Law. 3. Note that the plaintiffs are to place their shareholding in the capital of the first defendant for sale by public auction with a reserve of $310,000, or alternatively sell by private treaty at not less than that figure, with contracts to be exchanged no later than 21 October 1999. 4. Order that in the event that the plaintiffs have not so sold their property by 21 October 1999 I order the second defendant to purchase the said shares for the sum of $310,000, completion to take place no later than 21 November 1999. 5. Reserve further consideration generally and in particular should there be any problems about the purchaser from the plaintiffs having difficulties in becoming registered as the owner of the shares. 6. Order the second defendant to pay the plaintiffs' costs of the proceedings on the indemnity basis up to and including 14 May 1999. I make no order for costs after 14 May 1999 until today. Further costs are reserved. 7. Order that the exhibits be returned. *************** Last Modified: 08/02/1999 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.