New South Wales Supreme Court CITATION : O'Donnell v Wychbury Pty Ltd [2010] NSWSC 1245 HEARING DATE(S) : 26 October 2010 JUDGMENT DATE : 28 October 2010 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Palmer J DECISION : Judgment for Defendant. CATCHWORDS : CORPORATIONS – COMPANY TITLE – CLASS RIGHTS - whether regulations made under Company's Constitution restricting access to certain areas in company title residential building were "for" the efficient conduct of the building as a whole – whether regulations valid. CATEGORY : Principal judgment CASES CITED : Crumpton v Morrine Hall Pty Ltd [1965] NSWR 240 PARTIES : Anthony James O'Donnell (Plaintiff) Wychbury Pty Ltd (Defendant) FILE NUMBER(S) : SC 2009/289453 COUNSEL : D.L. Cook (Plaintiff) D.H. Murr SC, D.E. Perrignon (Defendant) SOLICITORS : Michael Rogers & Co (Plaintiff) Makinson & d'Apice (Defendant) 2009/289453 O'Donnell v Wychbury Pty Ltd JUDGMENT 28 October, 2010 Introduction 1 The Defendant is a company which owns a block of home units at Potts Point known as "Wychbury". Title to units in Wychbury is held under what is known as "company title", i.e., the owners of the units have rights of exclusive occupancy of their units by reason of ownership of designated parcels of shares in the capital of the Defendant. 2 The Plaintiff, Mr O'Donnell, is a co-owner of a parcel of shares in the Defendant which gives him the right to exclusive occupancy of a unit known as 501. 3 In March 2009, the directors of the Defendant made a regulation, said to be authorised under the Defendant's Constitution, which regulates use by owners and occupiers of units in Wychbury of two rooftop terraces on the east and west sides of the building. 4 Mr O'Donnell filed an Originating Process, and later an Amended Statement of Claim, seeking to have the regulation set aside on a variety of different grounds, including oppression within the meaning of s 232 of the Corporations Act 2001 (Cth), breach of contract, injustice within the meaning of the Contracts Review Act 1980 (NSW), breach of fiduciary duty, voidness for uncertainty, and invalidity under the Constitution of the Defendant. At the commencement of the hearing, Mr D.L. Cook of Counsel, who appears for Mr O'Donnell, abandoned all grounds of attack save the last, i.e., invalidity under the Defendant's Constitution. If I may say so in the light of the evidence which has been filed, Mr Cook was quite right in the course which he took. 5 Accordingly, the issues for determination are very narrow and depend upon the construction of the Defendant's Constitution in the light of facts not in dispute. The Defendant's broad summary of the issues, which I accept, is as follows:– whether Mr O'Donnell's right to use and occupy unit 501 under clause 5 of the Defendant's Constitution included a right to unfettered access to the rooftop terraces;– whether Regulations 8.1(e) and (h) made by the Defendant on 11 March 2009 affected or altered any right of Mr O'Donnell under clause 5 of the Defendant's Constitution;– whether a resolution passed by the Defendant at an Extraordinary General Meeting on 11 January 2010 was effective to validate the making of Regulations 8.1(e) and (h).The relevant facts 6 Wychbury is a nine storey block of units in Manning Street, Potts Point, containing eighteen residential apartments. It was built in the 1930s in the Art Deco style and has characteristics with some heritage significance. The residential units are located on the ground floor and levels one to eight. Access to the units on the upper floors is via a staircase and a lift which runs through a central lift shaft. Above the staircase and the lift shaft respectively are two rooms known as the cold water storage tank room and the lift motor room, which together form the ninth storey of the building. 7 On the eighth floor are two uncovered rooftop terraces, known as the east terrace (approximately 16m2 in area) and the west terrace (approximately 12m2 in area). The terraces are on either side of the ninth storey of the building containing the tank room and the lift motor room. One cannot pass directly from one terrace to the other: access to the terraces is obtained only from the lift foyer on the eighth floor. The two units on the eighth floor have small windows giving onto the terraces but there is no access from those units to the terraces. 8 As appears from the photographs and plans in evidence, the east and west terraces are small and were intended essentially as service areas. There is a galvanised steel step ladder on the east terrace which leads to an open steel mesh landing on a steel frame, which provides access to the tank room. The steel mesh landing is supported by steel posts. The east terrace also has a small uncovered clothes line and a disused room which was formerly a laundry. The laundry contains a toilet which is connected to the water supply but the toilet is neither cleaned nor maintained. Access to the laundry is gained only via the east terrace. 9 From the photographs, it appears that various service pipes and vents are located on the east terrace. At the top of the steel stairs giving access to the tank room there is one light which gives limited light for that room. It does not provide bright illumination over the whole east terrace. Access to the tank room is confined to tradesmen. 10 There is no lighting on the west terrace. There is a water pump located there which has no housing and is exposed and there is also an uncovered clothes line. 11 The floors of both the east and the west terrace are made of a green applied bitumen membrane with a gritty surface. The membrane is not designed or suitable for heavy traffic but only for occasional traffic. It is susceptible to cracking and could easily be punctured by either a small heel on a shoe or normal pedestrian activity. The unchallenged evidence is that if the membrane were to crack or puncture, it could prove difficult to find the crack and repair it, because water has a tendency to track from the point of entry. 12 The east terrace looks southwards towards Kings Cross. The west terrace looks towards the west and south-west with distant views of the city. Part of the Harbour Bridge can be glimpsed from the west terrace. It is obvious from the photographs and the plans that the terraces were not designed as recreational areas for the use of all occupants of Wychbury. 13 In 2007 the directors of the Defendant commissioned a report as to rectification work required for the building. Subsequently, considerable work was carried out which required access to the terraces being closed off while the work was completed. 14 On 11 March 2009 the Board of the Defendant resolved to amend the existing Regulations pursuant to Article 158 of the Defendant's Constitution. Article 158 relevantly provides: "The Directors may from time to time make regulations for the efficient economic and orderly conduct as a block or residential units of the building known as 'Wychbury' and a copy of such regulations and of any amendments from time to time thereto shall be forwarded to every shareholder. Such regulations shall have effect as if they had been incorporated in and formed part of these Articles." 15 Regulation 8.1, as amended by the March 2009 resolution, now provides: "Common Areas A Shareholder or Occupier must: (a) only use the Common Area and equipment situated there for its intended purpose; (b) notify the Board if there is any damage to or a defect in the Common Area or equipment situated there; (c) compensate the Corporation for any damage to the Common Area caused by a Shareholder, Occupier or any of their invitees; (d) not store any items in the laundry, rooftop or other Common Area, with the exception of the storage room located on the ground floor. (e) access to the east and west roof terrace areas is to be restricted for the use of the services located there, and for the use of the drying facilities. These areas will be open from 8am to 8pm, seven days a week. The doors will be locked at all other times. Prohibited from these areas will be: any item with a sharp point such as a chair, a table or high heel shoes. any form of glassware furniture of any kind any storage of personal property any storage of pot plants any other object which may damage the floor covering. (f) Access to the access ladder and platform to the lift motor room and tank room is prohibited, except for authorised service personnel. (g) interference with the operation of the access doors to the roof terrace areas including propping the door open is prohibited. (h) social functions, social gatherings, parties are prohibited on roof terrace areas." Mr O'Donnell's complaint in these proceedings is directed only to paragraphs (e) and (h). 16 The Board's reasons for amending Regulation 8.1 are given by the Chairman, Mr Colangelo, in paragraph 19 of his affidavit. Mr Colangelo was not required for cross examination. Paragraph 19 is as follows: "There were a number of factors taken into account by myself and my fellow directors in introducing the restrictions referred to in this sub-paragraph including: (a) Safety My fellow directors and I were concerned for the safety of occupants and guests using the terraces at night time. We discussed and took into account the risk of unsupervised children being on the terraces at night, and the possibility that a child may climb over the wall of the terrace and fall nine stories [sic] below. The wall at the perimeter of the terraces is approximately 1 metre high. It has no wire or other safety device on top of it to prevent a child (or anyone else) climbing on it. Similarly, my fellow directors and I discussed and were concerned about the possibility of occupants and guests injuring themselves after the consumption of alcohol by sitting atop one of the perimeter walls or otherwise falling on the terrace. Alcohol is more likely to be consumed at night than during the day, and my fellow directors and I were concerned that occupants and guests may be adversely affected by alcohol at night and cause serious injury or death to themselves or others. We also considered that there was a risk of people using the terrace leaving bottles on the parapet wall and inadvertently knocking them off, posing a risk of injury to people below. (b) Lighting There is very little lighting on the terraces. The East Terrace has one light at the top of the stairs which provides limited light for the water tank room. The water tank room is only used for the purposes of tradesmen. The East Terrace otherwise has no lighting. The West Terrace has no lighting at all. My fellow directors and I were concerned that the absence of lighting would increase the risk of injury to occupants or guests using the terraces at night. (c) Waterproofing considerations My fellow directors and I were concerned not to cause any further damage to the membrane. There had been water leakage through the membrane to apartments below. Damage to the membrane could prove very expensive and difficult to fix, because of the potential difficulty in identifying the point of entry of water. We considered it in the best interests of shareholders that the risk of damage be minimised by restricting access to the Terraces after 8.00 p.m. The six prohibitions set out in the dot points in Regulation 8.1(e) were all introduced so as to minimise the risk of damage to the membrane and any ongoing occupational health and safety issues in relation to it. (d) Privacy and occupant amenity Apartment 801 is located adjacent to the East Terrace. That apartment has kitchen and bathroom windows directly overlooking the East Terrace. Apartment 802 is adjacent to the West Terrace, and its bathroom and kitchen windows also open directly onto the West Terrace. The privacy of occupants of those apartments would be compromised by other occupants or guests using the terraces particularly at night or early in the morning when the occupants of Apartments 801 and 802 are more likely to be using their shower and bathroom facilities. Both apartments 801 and 802 have no air conditioning, and rely on cross-ventilation from open windows for air. My fellow directors and I were concerned at the lack of visual and acoustic privacy that would be suffered by the occupants of units 801 and 802 if people used the Terraces at night, particularly when taking a shower and using the toilet." 17 Mr O'Donnell says that denial of access to the terraces between 8pm and 8am is a denial of his use of the amenity of the building and a denial of his rights as a holder of shares entitling him to occupy unit 501. He gives the following unchallenged evidence in his affidavit: "10. From December 2003 to July 2003, [Unit 501] was tenanted. From June 2003 to December 2005, the apartment was owner occupied. During this period, I regularly used the Western and Eastern Terraces for both recreational and utility purposes. On varied and some special occasions, I utilised either one or the other Terraces. Laundry facilities within the apartment were limited, and to some extent, inadequate. The Terraces and the Laundry provided facilities including access to external clothes lines and internal drying facilities (in the Laundry). 11. [Unit 501] does not include an external balcony. On various occasions the Rooftop Terraces provided pleasant surroundings for recreational use. I recall on many occasions showing family members and friends each of the Terraces and the impressive views. I also recall using the Terraces as an alternative to the confines of the apartment during extreme weather conditions. Each Terrace provides a quite [sic] place for private discussion, smoking outside the confines of the apartment and an escape for quiet contemplation. I recall sharing the Western Terrace with other shareholders to view Sydney's New Years Eve fireworks display. 12. I do not recall many occasions when I utilised the Terraces and the Laundry within the hours of 8am to 8pm. My working hours usually restricted my use of the Terraces and the Laundry to times after 9pm and prior to 6am from Monday to Friday. There were occasions when I used both the Terraces and the Laundry within the hours of 8am and 8pm however use was normally limited to weekends and public holidays." The extent of Mr O'Donnell's rights as a shareholder 18 Article 5 of the Defendant's Constitution provides, so far as is relevant: "The owner or owners for the time being of each group of shares the Serial Numbers of which appear in the second column hereunder shall be entitled to the exclusive right subject to these Articles to use and occupy the Home Unit, the number of which appears opposite such Serial Numbers respectively in the third column hereunder, in the building known as 'Wychbury' … together with the right to use in common with all others similarly entitled the pathways entrance halls elevators stairs and passageways in the building and rooms in common use." 19 Mr Murr SC, who appears with Mr D. Perrignon of Counsel for the Defendant, readily concedes that Mr O'Donnell's group of shares entitling him to exclusive occupancy of unit 501 constitutes a class of shares separate from the other groups or classes of shares conferring rights of occupation in respect of the other units in the building: Crumpton v Morrine Hall Pty Ltd [1965] NSWR 240. 20 Article 60 of the Constitution relevantly provides: "All or any of the rights and privileges attached to any of the shares in the Company whether of the same or of different classes may (subject to the provisions of Section 164 of the Companies Act) be modified abrogated or altered in any way with the sanction of a resolution passed by a majority in number of the holders of at least three-fourths of the issued shares or where the shares are divided into different classes of a three-fourths majority in number of the holders of the issued shares in each of the classes affected at a meeting or meetings convened for the purpose …" 21 Mr Cook submits, and Mr Murr readily concedes, that the rights attaching to Mr O'Donnell's class of shares cannot be altered without compliance with Article 60. However, Mr Murr says that Article 60 is of no relevance as Regulations 8.1(e) and (h) do not "modify, abrogate or alter" any of the rights or privileges attached to Mr O'Donnell's class of shares. 22 Mr Murr submits that: – Article 5 gives a right to Mr O'Donnell to use in common with all other shareholders only "the pathways entrance halls elevators stairs and passageways in the building and rooms in common use" ; – Article 5 does not confer a right to general and unfettered use of every part of the terraces because "terraces" are not within the areas described; – the disused laundry is a "room in common use" and a direct path from the doorway on the east terrace to the laundry is a "pathway" within Article 5 but the rights attaching to Mr O'Donnell's shares to use these common areas, like his right to exclusive use of unit 501, are "subject to these Articles" and, in particular to the Regulations which may be made under Article 158. 23 Mr Cook does not concede that the whole of the terraces is not within the "right to use in common" conferred by Article 5. He says (but I do not accept) that the description of particular areas in that Article is really a general way of describing all areas in the building which are in common use, including the terraces. However, Mr Cook does concede that the rights attaching to Mr O'Donnell's shares to use common areas (however they may be identified) are subject to any Regulations which may be properly made under Article 158. Accordingly, Mr Cook concedes – in my opinion, quite correctly – that this case really turns on whether Regulations 8.1(e) and (h) were made "for the efficient economic and orderly conduct" of Wychbury as a whole. Mr Murr agrees that this is the primary question. The purpose of Regulations 8.1(e) and (h) 24 Mr Cook submits that a Regulation made under Article 158 is "for" the efficient conduct of Wychbury as a whole if it can be seen to be "necessary for" such conduct. He says that Regulations 8.1(e) and (h) are not necessary because the concerns of the directors which they seek to address are unrealistic, or unreasonable or do not involve the conduct of the building as a whole. 25 In the last category is the concern of directors for the privacy of units 801 and 802 – the only two units in the building which are on the same level as the terraces. 26 Mr Murr submits that the amenity and privacy of two units in the building can impact upon "the efficient economic and orderly conduct" of the whole block. He gives some examples in his submissions but I must take account of the fact that Mr Colangelo gives no evidence as to how the privacy concerns of the residents of units 801 and 802 affect, as a matter of reality, the conduct of the whole building. I cannot therefore accept that a regulation concerned to ensure privacy of units 801 and 802 is one which is "for" the conduct of Wychbury as a whole. 27 However, Mr Cook does not, and could not, submit that the other three areas of concern which, according to paragraph 19 of Mr Colangelo's affidavit, motivated the directors to pass Regulations 8.1(e) and (h) do not concern the conduct of the whole building. The first two directly involve the safety of the occupants of Wychbury and their guests and they relate to public liability risk and insurance, with which all shareholders are directly concerned as they must contribute to insurance premiums to cover such risks or else face the possibility that the Defendant company and, indirectly, all its shareholders, will be called upon to meet any uninsured liability if a risk eventuates. 28 The third area of concern relates to possible damage to the external fabric and the interior of the building and to the expense of rectification work, to which all shareholders would have to contribute. 29 However, Mr Cook says that Regulations 8.1(e) and (h) are not "necessary" because other means are available to alleviate those concerns without causing inconvenience or loss of amenity to Mr O'Donnell. He does not say that the Regulations are so unreasonable that no reasonable directors in the position of the Board of the Defendant could have decided as they did, so that the passing of the Regulations must have been motivated by an extraneous and improper purpose. Mr Cook gives various examples of what might have been done, with the co-operation of Mr O'Donnell and others, to address the directors' concerns without going to the length of locking the gates giving access to the terraces between 8pm and 8am. 30 Mr Murr responds that: – Article 158 does not require that a regulation be "necessary" for the conduct of the building; – rather, the regulation must be "for" the conduct of the building – that is, on its face, it must be directed to achieving that purpose; – if a regulation is directed to the conduct of the building as a whole – as are Regulations 8.1(e) and (h) – then the Court will not usurp the judgment and experience of the directors in making such regulations simply on the basis that other terms and conditions might have been found which could have caused Mr O'Donnell less inconvenience; – the Court will only interfere with the decision of the directors if it is shown to be an abuse of power, and Mr Cook does not make such a submission. Conclusion 31 In my opinion, Mr Murr's submissions are correct and I adopt them. Accordingly, I conclude that: – Article 5 does not confer on Mr O'Donnell the right to use the whole of the terraces for recreational purposes; – Article 5 does not confer on Mr O'Donnell the right to use either terrace for the drying of washing on the external, uncovered clothes lines; – Article 5 does confer the right to use the disused laundry for clothes drying and the right to gain access to the laundry via the east terrace; – that right is subject to the Board's right to make regulations under Article 158; – Regulations 8.1(e) and (h) are regulations made "for" the efficient, economic and orderly conduct of Wychbury as a whole; – no other ground of invalidity having been put forward, Regulations 8.1(e) and (h) are valid. Because of these conclusions, it is unnecessary to discuss the consequences of the resolution passed at the Extraordinary General Meeting on 11 January 2010. 32 There will be judgment for the Defendant on the Amended Statement of Claim. I will hear the parties as to costs. – oOo – 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.