Warwick George Malouf v John George Malouf & Anor [2005] NSWSC 9

New South Wales Supreme Court

CITATION : Warwick George Malouf v John George Malouf & Anor [2005] NSWSC 9

HEARING DATE(S) : 09.08.04; 10.08.04; 11.08.04; 12.08.04; 13.08.04

JUDGMENT DATE : 3 February 2005

JUDGMENT OF : Nicholas J

DECISION : Para 87

CATCHWORDS : Agreement for sale of shares in family company - whether representations as to profits were fraudulently understated - whether plaintiff induced to sell shareholding at undervalue - whether claim for damages established

Briginshaw v Briginshaw (1938) 60 CLR 336 CASES CITED : Watson v Foxman (1995) 49 NSWLR 315

Warwick George Malouf - Plaintiff PARTIES : John George Malouf - First Defendant Osmal (Holdings) Pty Limited - Second Defendant

FILE NUMBER(S) : SC 1477/01

W G Malouf - In person COUNSEL : S Finch SC/J Stephenson - Defendants

W G Malouf - In person SOLICITORS : Phillips Fox - Defendants

LOWER COURT JURISDICTION :

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

Nicholas J

3 February 2005

1477/01 Warwick George Malouf v John George Malouf & Anor JUDGMENT Introduction 1 His Honour: These proceedings arise from a dispute concerning an agreement made on 21 February 1995 (the agreement) between Warwick George Strauss Malouf (the Plaintiff) as seller and John George Malouf (John), the First Defendant, and Pamela Mary Malouf (Pamela) as buyers under which the Plaintiff sold his shares in Osmal (Holdings) Pty Limited (Holdings) to the buyers for the price of $1,262,500.00. 2 At the hearing the Plaintiff was self-represented. Mr S Finch SC and Mr J Stephenson of counsel appeared for John and Holdings. 3 At all relevant times Holdings was the registered proprietor of a warehouse and office buildings at No. 586 Crown Street, Surry Hills which is known as Osmal House. Osmal Products Pty Limited (Products) is its wholly owned subsidiary carrying on business at Osmal House as an importer and wholesaler of garments, including mens and boys shirts, shorts and pyjamas. Garments are imported primarily from China and India and are supplied to major variety and department stores including Coles Myer Limited and Lowes Manhattan Pty Limited. 4 The Plaintiff is the brother of John and Pamela, and was a shareholder in Holdings from 1955 until 21 February 1995. His shareholding was of 22.79% of the total issued shares and consisted of 716 "B class shares", 25 "C class shares", 25 "F class shares" and 2,000 "H class shares". He held no "A" class shares, and was not a director of Holdings. He had not been paid a dividend since 1974. 5 Pursuant to cl 3(a) of the Articles of Association of Holdings only the holders of "A" class shares are entitled to attend and vote at meetings of the company. Clause 3(b) provides that each class of shares entitles the holder only to such dividend as the directors shall determine and in such proportions as the directors shall fix. Clause 3(c) provides that the directors may determine that a dividend be paid to the holders of any one or more class or classes of shares to the exclusion of the holders of any other class or classes of shares. The articles impose a restriction on the transfer of shares to the effect that none may be transferred without the approval of the directors and must be made available to existing members in the first instance. 6 John is, and at all relevant times has been, the managing director and company secretary of, and a shareholder in, Holdings. 7 By his further amended statement of claim filed 27 December 2002 the Plaintiff claims that as a result of fraudulent misrepresentations made by John at a meeting on 16 February 1995 he entered into the agreement of 21 February 1995 to sell his shares in Holdings for a price to which he would not have agreed had the misrepresentations not been made. 8 Relevantly, the further amended statement of claim pleads the following: "11A Certain information supplied by the defendants to the plaintiff, and certain representations made by the defendants to the plaintiff, prior to and on 16 February 1995 was, as the defendants knew, false and misleading and deceptively and fraudulently so, and were intended by the defendants to be relied on by the plaintiff, so as to induce the plaintiff to sell his shares in the second defendant for less than the true and fair value of the plaintiff's shares in the second defendant. The plaintiff relied on the said information and representations and suffered loss and damage. (A) Particulars of the said information and representations at common law; (i) the 1994 operating profit represented to be $850,000 was knowingly false and fraudulently understated; (ii) the 1994 operating profit represented to be $850,000 included inter alia suppression of the full sales figures; (iii) the 1995 net profit represented to be nil or near to nil was knowingly false and fraudulently understated". 9 The Plaintiff's claim is for damages in the amount of $2,068,337.00 which is the difference between the amount received as the agreed sale price and the amount he claims he should have received as the true and fair value for his shares, namely the sum of $3,330,837.00. He also claims interest pursuant to s 94 Supreme Court Act 1970 (NSW). 10 With regard to the conduct of the proceedings the following is noted. On 2 August 2004 the Plaintiff informed the court that the solicitors, Dennis & Company, were no longer instructed to act for him, and leave was granted to the solicitor, Mr Bruce Dennis, to file in court a notice of ceasing to act. The Defendants' case closed early in the afternoon of 13 August 2004 and there was no case in reply. The Plaintiff was then unable or unwilling to make any submissions of substance in support of his case and was directed to serve written submissions by 20 August 2004. Mr Finch SC then proceeded with oral submissions in elaboration of written submissions for the Defendants which had been provided to the court and to the Plaintiff. On 26 August 2004 the matter was next before the court when leave was given to the Plaintiff to tender, without objection, a handwritten post-it note being the original of Annexure C to his affidavit sworn 17 May 2002. 11 As no submissions had been received from the Plaintiff he was directed to provide them by 8 September 2004. On that date, time was extended at the Plaintiff's request until 15 September 2004. On 19 October 2004 the matter was before the court for the purpose of affording the Plaintiff to explain his failure to comply with the latest direction. He attended and was directed to provide submissions by 25 October 2004, and informed that after that date it was proposed to proceed to judgment irrespective of whether any were received from him. 12 On 17 December 2004, 31 January, and 1 February 2005 the court received from the Plaintiff written submissions by facsimile, a copy of which was sent to the Defendants' solicitors. The documents should remain in the court file. I have taken these submissions into account in preparing these reasons for judgment. Background 13 From at least 1991 the Plaintiff was in dispute with John and Holdings concerning the management and conduct of the companies and his entitlements as a shareholder. In particular, he alleged he was the victim of minority oppression, and threatened litigation unless satisfactory settlement, including the sale of his shares, could be reached. He retained Blake Dawson Waldron (BDW), solicitors, to act on these claims. 14 On 3 November 1992 the Plaintiff agreed with the Defendants, Enid Malouf (his mother) and Pamela that in consideration of certain payments to him he would surrender his rights of occupancy of offices in Osmal House and abandon any claim to any entitlement in the building or in the proceeds of sale thereof. 15 By BDW's letter of 23 December 1993 to John the Plaintiff alleged that he had been denied substantial dividends from the profits of Holdings. He demanded accounting, banking and other records of the companies and alleged impropriety in its conduct e.g. that wages were paid to non-existent employees; clothing stock was sold for cash which was not accounted for; personal expenses of family shareholders were paid for but not reimbursed. Demand was made that these practices cease and be explained, failing which litigation for appropriate relief was threatened. 16 The claims and allegations were denied in the letter from F C Bryant & Co (Bryant), Holdings' solicitors, to BDW of 21 January 1994. It was pointed out that the directors had no obligation to pay any dividend on the Plaintiff's shares. By separate letter of the same date to BDW they advised of the offer of John and Pamela to purchase the Plaintiff's shareholding for $200,000.00 and to procure the release of his loan accounts with the companies which, as at 30 June 1993, amounted to more than $300,000.00. The letter included the following: "Our clients have no need to acquire the shareholding and it has no substantial value to them, having regard to the restrictions affecting the shares under the Articles of Association. Their sole purpose in making the offer is to avoid the breakdown of family relationships which would arise from litigation. For the reasons set out in our accompanying letter it is considered that there is no substance to any claim of oppression but if your client prefers to test the matter by applying to the Court he should proceed on the assumption that the threat of doing so will not produce any higher offer". 17 In the letter to Bryant of 3 February 1994 BDW complained in strong terms of the failure to provide documents to which the Plaintiff claimed to be entitled to enable scrutiny of the companies' operations and suggested irregularities. The offer was rejected as baseless and made without regard to the value of his interest. A claim was foreshadowed " … about the apparent loan account discrepancies, the irregularities in the conduct of the directors that are recognised in your two letters and the misleading and deceptive conduct in breach of the Corporations Law". (Ex 2, p 132). 18 On 3 March 1994 Mr G S Ralph, of Gould Ralph Services Pty Limited, chartered accountants, provided his preliminary report to BDW on Holdings and Products. He recorded that Mr Ralph Goodman, the companies' auditor, had provided to him the audited financial statements of each company for the years ending 30 June 1987 to 30 June 1993 inclusive, and the minute books of each company. He provided his preliminary observations based on these documents and an indicative valuation of the company. He expressed the view " … that a reasonable capitalisation range for Products would be 6 to 10 times maintainable earnings after taxation". Using a mean of 8 times earnings he valued the company of $8,760,000.00. It was also his view that as the only real asset of Holdings was its investment in Products it should be considered to have no independent value, and valued it on a total equity basis at the same figure. A copy of his report was sent to the Plaintiff. 19 By the letter to Bryant dated 24 June 1994, BDW asserted that the accounting information provided was designed to mislead and deceive the Plaintiff as to the value of the group. Legal proceedings were threatened including the appointment of an administrator, the removal of John and Pamela from control, and an order excluding Bryant and Mr Goodman from further involvement with Holdings.