United Rural Enterprises v Lopmand [2003] NSWSC 405

Reported Decision : (2003) 45 ACSR 271

New South Wales Supreme Court

CITATION : United Rural Enterprises v Lopmand [2003] NSWSC 405 HEARING DATE(S) : 27 March 2003 JUDGMENT DATE : 27 March 2003 JURISDICTION: Equity JUDGMENT OF : Campbell J DECISION : Inspection of books and records ordered. Declaration that affairs of corporation conducted in a manner unfairly prejudicial to member, and further consideration of what relief should follow stood over

CATCHWORDS : CORPORATIONS - inspection of books and records - form of order - CORPORATIONS - oppression - exclusion of member from participation in affairs - significance of whether member deprived of rights it was seeking to enforce - appropriate form of order in oppression cases LEGISLATION CITED : Corporations Act 2001 Fexuto v Bosnjak Holdings Pty Limited (No 2) (1998) 29 ACSR 290 CASES CITED : Martin v Australian Squash Club Pty Limited (1996) 14 ACLC 452 Tinios v French Caledonia Travel Service Pty Ltd (1994) 13 ACSR 658 United Rural Enterprises v Lopmand [2002] NSWSC 1178 United Rural Enterprises Pty Limited (Plaintiff) PARTIES : Lopmand Pty Limited (First Defendant) Tracey John Lake (Second Defendant) FILE NUMBER(S) : SC 4039/99 COUNSEL : M Cashion SC; J White (Plaintiff) B DeBuse (Defendants) SOLICITORS : Kemp Strang (Plaintiff) McCooe Raves & Poole (Defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST

CAMPBELL J

THURSDAY 27 MARCH 2003

4039/99 UNITED RURAL ENTERPRISES PTY LIMITED V LOPMAND PTY LIMITED & ORS JUDGMENT – Ex tempore HIS HONOUR: Terms of Order for Inspection of Documents 1 The first matter which arises for decision today, concerns the terms upon which an order under s 247A of the Corporations Act 2001 should be made. On 20 March, I gave reasons why I held it appropriate that there should be such an order. The parties were directed to bring in short minutes of order. They have brought in widely differing drafts. 2 The draft of the cross defendant is the one which proceeds on the basis that inspection should take place by an accountant, but not by Mr Lake personally. It sets out a procedure whereby Mr Lake's interests are to have the opportunity to nominate three accountants, and Mr Lindsay Owen's interests are to choose one of them, who can make the inspection. 3 It is proposed that the inspection be allowed of profit and loss statements of Painten, balance sheets of Painten and journals of Painten for the last few years. It is proposed that the accountant should be required to use the information only for the purpose of forming an opinion as to the value of the Lopmand-Painten share, communicating that opinion on the basis of it to the applicant, and as well letting Painten know what opinion the accountant has formed and the basis for it. 4 The form of orders recognises that the initial scope of examination of the books, being confined to profit and loss statements, balance sheet and journals, is a very limited one, and that if an accountant considers that further documents are required to enable him to for am opinion, he can request Painten to produce those further documents and if that request is not complied with within a certain time frame, the matter can come back to court. The form of these orders is based, in large measure, on the form of orders which were appropriate in Tinios v French Caledonia Travel Service Pty Ltd (1994) 13 ACSR 658. 5 By contrast, Mr Lake's interests propose a much looser regime. They propose that Mr Lake himself, and an accountant chosen by Mr Lake, be able to inspect the books, and that Mr Lake compile a list of documents inspected at the time, and also be permitted to make copies of documents. 6 It seems to me that it is appropriate that Mr Lake should be involved in the inspection. Notwithstanding the submission put by Mr Lindsay Owen's interests, it seems to me that Mr Lake does have a legitimate need to inspect. There are matters which are relevant to the value of shares in a company which are not necessarily ones which would emerge from an accountant's inspection. Experience in the courts shows that the basis upon which accountants set about valuing shares in companies often has a measure of artificiality behind it, and is not necessarily the way in which businessmen go about valuing things. 7 The nature of Painten is, it seems to me, quite different to the nature of the company involved in Tinios. A travel agency has complicated financial records, arising from numerous transactions of numerous clients. Painten is a company which operates as the owner of one piece of real estate, and a landlord of that real estate. Its business is much simpler. Further, it is not possible to know in advance just what books and records Painten presently has, which might bear on the value of the shares. 8 It seems to me that it is appropriate that the order should be made in general terms, so far as the records to be inspected are concerned. 9 It does not seem to me that it is appropriate that a copy of any opinion which might be obtained by an accountant should be provided to Painten. One of the reasons why Mr Lake's interests have a legitimate interest in finding out the value of their shares is so that they are able to negotiate concerning the value of that share, for the purpose of working out what its security value might be. 10 The basis upon which I decide that it is appropriate that the order should be made is that the ground in s 247A(1) has been made out. The way in which s 247A(1) works is that the court is empowered to make an order authorising the applicant to inspect the books of the company, if the court is "satisfied that the applicant is acting in good faith and that the inspection is to be made for a proper purpose." 11 That is to say, the question of the purpose of the inspection is something which falls to be dealt with at the time the court decides to make an order, and it is not a necessary requirement that there be some limitation of purpose in the terms of the order itself. In these circumstances, when I am satisfied that there is a proper purpose for the inspection to be made, no further limitation should be made upon it. So I make an order in accordance with the document entitled Form of S.247A Order, which I initial and date today's date. In so deciding, I am acting contrary to what I indicated at paragraph [37] of my judgment of 20 March 2003. However, on further consideration I see potential difficulties in implementation of the order if its terms permit inspection to be made only for a particular purpose. Oppression Reconsidered 12 The next matter which falls for consideration today is whether, in light of the fact now known that Lopmand was a shareholder in Painten continually from, relevantly, May 1998 to now, the reasons which I gave in my judgment of 12 December 2002 (United Rural Enterprises v Lopmand [2002] NSWSC 1178) concerning whether there had been oppression are ones which continue to hold good. The only appropriate way of doing that, it seems to me, is to start again, rather than to try to modify the reasons I previously gave, to take account of the situation now known to exist. 13 The basis on which Mr DeBuse makes the application is that Painten has been operated as a company wholly owned by the Lindsay Owen interests between November 2000 and now. Mr Lake attended the annual general meeting of the company in May of 1988 and, in the circumstances, which I have outlined in my earlier judgment at paragraph [121], opposed the adoption of various resolutions. At that time, the Board effectively came under the control of interests associated with Mr Lindsay Owen, although Mr Lake remained a director until he resigned following the November 2000 settlement agreement. 14 I have set out the relevant provisions of the Corporations Act 2001 in paragraph [128] of my earlier judgment. 15 The basis upon which the application is put forward includes several different factors. One of them is that it is submitted that there was inadequate consideration of whether the company ought have a dividend policy. It is clear that the company, in fact, did not pay dividends. I would infer that Mr Lindsay Owen, during the period from at least November 2000, took the attitude that he was able to deal with the company as he chose, and that it was not necessary for any consideration to be given to any interests of Lopmand. However, the question of why it was that this happened, and whether it has actually resulted in conduct which is oppressive to unfairly prejudicial to or unfairly discriminatory against a member, was not gone into in any detail at the trial. The focus of the case that was presented at the trial was on the way in which Lopmand had been cut out from any participation in the affairs of the company, through receiving notice of meetings, through receiving reports, and through receiving accounts. 16 I would feel that it was going beyond the proper boundaries of a reconsideration of reasons already given, such as I am now engaged in, to rely upon factors which were not clearly part of the case being presented at the original trial. 17 Another basis upon which the claim is put today is that there were some loans made by Painten to an entity connected with Mr Lindsay Owen. That much seems true, but the evidence simply did not examine when those loans were made, the terms on which they were made, or the circumstances of their being made. This is another example where, it seems to me, the argument today goes beyond the scope of the case, which was presented at the trial. 18 I return then to the matters which were at the centre of the oppression case, as it was presented at the trial. I have set out, in my earlier reasons for judgment, the rights which arise from depositing a share certificate with a lender as security for a debt. Nothing that has been put to me today persuades me to change any of that account of the law. The mistaken premise upon which my original judgment concerning oppression was made, namely, that Lindsay Owen Holdings Pty Limited had become the registered owner of the share was a factor which, in a way which was not articulated in the judgment, was relevant in the conclusion I came to. 19 The fact that Mr Lindsay Owen had, as I thought, taken the step of becoming, through Lindsay Owen Holdings Pty Limited, the registered holder of that share justified a conclusion that he was seeking to exercise the maximum legal control he could over that company. That was a factor in why I regarded the fact that URE was entitled to become registered, and to exercise those rights which, as it seemed to me at the time, Lindsay Owen Holdings Pty Limited had actually exercised, was a reason there was no oppression. On the facts as they appeared to me at the time, it was simply a case that the wrong Lindsay Owen company had been put on the register. 20 Now that it is known that Lopmand was the registered holder all along, the basis for that reasoning has, it seems to me, gone. Rather, what one has is the situation that Lopmand has been the registered holder, and has, for a period of years, not been accorded the legal rights to which a member of a company is entitled. It is true, as Mr Cashion of Senior Counsel urges upon me, that the rights which Lopmand had were circumscribed by virtue of the fact that there was a mortgage over the shares. That circumscription is something which was commercially quite important. However, given the evident failure of the Lindsay Owen interests to actually become registered, I cannot proceed on the basis that it is likely that the full extent of the legal rights of URE would, necessarily, have been exercised. It seems to me that the very fact that Lopmand has been denied the rights of a member is something which is in itself something which is a long way along the road to a conclusion that the conduct of the company's affairs has been unfairly prejudicial to a member. 21 Of course, the mere fact that a member has not exercised, or been accorded, the formal rights that the Corporations Act gives him is not necessarily enough to establish that there has been a ground for the making of an order under s 232. Mr Cashion instances the possibility that a shareholder could say that he does not wish to receive any of the information which companies are usually obliged to send out. These days, listed corporations make assiduous efforts to encourage their members to dispense with those rights. However, nothing like that has happened in the present case. 22 It is necessary to look in some detail at the events in the time between 1998 and the present, in deciding whether there has been a breach of s 232. It appears that, from May 1998 until November 2000, there was no particular claim by Mr Lake to assert any rights in relation to the company. When a claim is made that a person has suffered unfair prejudice or oppression because of the failure to receive the information that the Corporations Act enables a member to receive, it is a matter of some importance as to whether that person has been actually making a claim to be entitled to that information: Martin v Australian Squash Club Pty Limited (1996) 14 ACLC 452. In the present case, after the settlement agreement was reached in November 2000, there was a period during which it was not clear whether the settlement agreement would be carried through completely. By November 2001 it was clear that Mr Lake's interests had not paid the $150,000 due under the settlement agreement. By the time a cross-claim in these proceedings filed 26 July 2002, and indeed a little earlier, when a hearing before Barrett J was aborted so as to enable this claim to be brought, it has been clear that one of the claims which Lopmand has been making is that it has ownership of the Lopmand Painten share. 23 In circumstances where there has been that sort of a claim to ownership, and when the rights of membership which Lopmand in fact had have been ignored, it seems to me that the ground has been made out to say that there has been conduct which is unfairly prejudicial or unfairly discriminatory against a member. I so declare. 24 In Fexuto v Bosnjak Holdings Pty Limited (No 2) (1998) 29 ACSR 290, at 299-300 Young J (as his Honour then was) considered the appropriate form of relief when an oppression case had been made out. The relief which the court can grant is discretionary, and depending upon numerous factual matters. For the reasons which his Honour gave, there is an appropriate analogy between this situation, and the situation where a plaintiff must elect between an account of profits and damages in an intellectual property case. It is appropriate, it seems to me, to make a declaration that the affairs of Painten have been conducted in a manner unfairly prejudicial to Lopmand, and to stand over any consideration of what relief should follow from that course. 25 Mr Cashion SC submits that the step of giving further consideration to what relief is appropriate ought not be taken. He submits that the acts of oppression are ones which are past, that Lopmand is likely to cease to be a member very soon, and that the inspection order which has been made itself goes a long way towards providing appropriate relief against the unfair prejudice which has been found. 26 That submission is in the nature of a summary judgment application, so far as relief goes. While, ultimately, the submissions which he makes might be ones which prevail, it is not clear at this stage that it is inevitable that they will. For that reason I stand over any question of the appropriate relief. I grant liberty to either party to restore the matter before me on seven days' notice, initially for the purpose of mention, the mention to set a timetable for whatever steps might be needed to decide the question of relief. 27 Mr DeBuse contemplates the possibility that some sort of application for stay might be made in relation to the monetary judgment. If any such application is to be made then I grant liberty for it to be made on three days' notice. Costs 28 A further question has arisen concerning what costs consequences arise from the judgment I have given. On 28 February 2003 I disposed of the costs of the proceedings by making an order that the first defendant and second defendant pay the plaintiff's costs of the claim and that the cross-defendants pay fifty per cent of the cross-claimant's costs of the cross-claim. That order, which appears in paragraph 8 of some short minutes of order which I adopted, is one which Mr DeBuse submits should now be changed. He submits that the effect of the judgment just given is that the cross-claimant has had a greater measure of success on the cross-claim than appeared on 28 February this year. Mr Cashion SC submits that, notwithstanding the declaration that there has been conduct unfairly prejudicial, the fifty per cent division of costs remains an appropriate one. Further, he says, that the costs of today were in substance ones occasioned by the failure to tender the share register in the first place, and that the appropriate order for today's costs is that there be no order as to costs. 29 There has been a greater measure of success of the cross-claimants, in the relief which they have sought in the cross-claim than appeared to be the case on 28 February. However, that success is not complete. Further, for the reasons which I gave on 20 March 2003, today's hearing of the matter of 20 March 2003, arises from the false basis upon which the judgment concerning oppression was originally made. I make no order concerning the costs of today's hearing. I modify paragraph 8 of the short minutes of order which I adopted on 28 February 2003 so that it reads: "8. Orders that the first defendant and the second defendant pay the plaintiff's costs of the claim and that the cross-defendants pay seventy-five per cent of the cross-claimant's costs of the cross-claim up to and including 28 February 2003." 30 I stay the judgment in favour of the plaintiff until 5 p.m. Friday 4 April 2003. 31 I stay the order for inspection until 5 p.m. 4 April 2003. **********