FEDERAL COURT OF AUSTRALIA

Harding Investments Pty Ltd v PMP Shareholdings Pty Ltd (No 2)

[2011] FCA 567

FEDERAL COURT OF AUSTRALIA

Harding Investments Pty Ltd v PMP Shareholding Pty Ltd (No 2) [2011] FCA 567

CORRIGENDUM

1.    In the “Parties” section on the front page of the Reasons for Judgment “Lotic Pty Ltd (ACN 116 609 851)” should be removed.

2.    In the “Parties” section on the first page of the Orders “Lotic Pty Ltd (ACN 116 609 851)” should be removed.

3.    In the “Parties” section on the first page of the Reasons for Judgment “Lotic Pty Ltd (ACN 116 609 851)” should be removed.

4.    In paragraph 1 of the Reasons for Judgment, in the second line, the words “the Fifth Respondent” should be removed.

Associate:

Dated:    22 July 2011

THE COURT DECLARES THAT:

1.    The Second, Third, Fourth and Fifth Respondents breached the Business Succession Agreement executed on 27 February 2006 by terminating Mr Harding, the Second Applicant, as a director and employee of Lotic Pty Ltd (ACN 116 609 851) (Lotic).

2.    The First and Third Respondents contravened s 232 of the Corporations Act 2001 (Cth).

AND THE COURT ORDERS THAT:

3.    PMP Shareholdings Pty Ltd (ACN 118 155 856) (the First Respondent) and Jashtra Holdings Pty Ltd (ACN 118 130 233) (the Third Respondent) purchase the shares in Lotic held by the First Applicant, Harding Investments Pty Ltd (ACN 118 130 402) (Harding Investments), in accordance with the following procedure:

3.1    By 4:00pm on 10 June 2011, the parties file and serve an outline of submissions of no more than five pages, identifying the date for fixing the value of the shares in Lotic held by Harding Investments that should be struck and the reasons for choosing that date;

3.2    An independent registered company auditor (the independent person) nominated by the President (for time being) of the Institute of Chartered Accountants inspect the books of Lotic, which in his or her opinion, may yield information pertaining to the formation of an opinion as to the value of Lotic and the value of Harding Investments’ shares in it;

3.3    If in the opinion of the independent person, it is necessary to do so for the purpose of the valuation, the independent person is appointed to restate the accounts for any period;

3.4    The independent person is appointed by the parties to proceed to value Lotic and the shares in it;

3.5    The independent person must not charge a fee in excess of $45,000 (GST inclusive) subject to review by the Court;

3.6    The fees charged by the independent person, in the first instance, are payable by the shareholders in Lotic in proportion to their individual shareholding;

3.7    Each party is entitled to provide a submission of not more than 10 pages to the independent person on or before 30 June 2011;

3.8    The independent person provide the valuation referred to above by no later than 14 July 2011; and

3.9    The matter be listed for further hearing to consider the question of value by no later than 22 July 2011.

4.    The Respondents pay the Applicants’ costs of the proceeding up to and including the date of this judgment, such costs to be taxed in default of agreement.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1    The First Applicant, Harding Investments Pty Ltd (as trustee of the S & J Harding Family Trust) (Harding Investments), is one of three shareholders in Lotic Pty Ltd, the Fifth Respondent (Lotic) (previously called PMP Environmental Pty Ltd). The Second Applicant, Steven John Harding (Harding), was an employee and director of Lotic.

2    On 8 September 2010, the Applicants filed this proceeding in the Fast Track List. These reasons for decision are concerned with the principal claim for oppression commenced by Harding Investments against the other two shareholders in Lotic, PMP Shareholdings Pty Ltd as trustee of the PMP Family Trust (the First Respondent) and Jashtra Holdings Pty Ltd as trustee of the P & C Dick Family Trust (the Third Respondent). Donald Stewart Gordon, the Second Respondent, is the principal of PMP Shareholdings. Paul Robert Dick, the Fourth Respondent, is the principal of Jashtra. I will refer to PMP Shareholdings, Gordon, Jashtra and Dick collectively as the Respondents.

3    For the reasons that follow, the appropriate relief, pursuant to s 233(1)(d) of the Corporations Act 2001 (Cth) (Corporations Act), is to order PMP Shareholdings and Jashstra to purchase the shares held by Harding Investments in Lotic.

4    These reasons for decision first consider the relevant legal principles, then deal with the facts in chronological order and, finally, address the question of appropriate relief.

RELEVANT LEGAL PRINCIPLES

5    Section 232 of the Corporations Act provides:

The Court may make an order under section 233 if:

(a)    the conduct of the company’s affairs; or

(b)    an actual or proposed act or omission by or behalf of a company; or

(c)    a resolution, or a proposed resolution, of members or a class of members of a company;

is either:

(d)    contrary to the interests of the members as a whole; or

(e)    oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.

6    The “company’s affairs” in ss 232 and 233 include, amongst other things, “transactions and dealings” and “the internal management and proceedings” of the company: ss 53(a) and (c) of the Corporations Act. In the present case, the conduct that is alleged to be “oppressive to, unfairly prejudicial to, or unfairly discriminatory against” Harding Investments was the exclusion of Harding from the management of Lotic.

7    What then are the relevant principles?

8    In John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A’Asia) Pty Ltd (1991) 6 ACSR 63 at 65 to 67, Young J summarised the principles relevant to the present case as follows:

A.    …

B.    Traditionally in an application under s 320 the plaintiff must establish that he or she has been oppressed as a member, not in some other capacity, such as in the capacity of a director: see for example Re H R Harmer Ltd [1959] 1 WLR 62. …

C.    …

D.    It is oppressive for a member of a board of directors using his or her tactical skills to secure an advantage, at least beyond a certain limit. This is so whether the director concerned is in the majority or in the minority: McWilliam v L J R McWilliam Estate Pty Ltd (1990) 20 NSWLR 703; 2 ACSR 757 but see Re Bright Pine Mills Pty Ltd [1969] VR 1002 at 1011 and Re Spargos Mining NL (1990) 3 ACSR 1 at 45.

E.    A majority shareholder is not under any obligation to choose as a representative director the most suitable person for the position. A majority shareholder may appoint his friend or a person whom he might reasonably expect usually to vote in a certain way: Harmer’s case at 82 and 90.

F.    “If a person, relying on majority control in point of voting power, dispenses with the proper procedure for producing the result he desires to achieve, and simply insists on this or that being done or omitted, his conduct is oppressive because it deprives the minority of shareholders of their right as members of the company to have its affairs conducted in accordance with its articles of association”: Harmer’s case at 84.

G.    The mere subordination of the wishes of the minority by the exercise of the voting power of the majority is not of itself oppressive: Harmer’s case at 87.

H.    It is not oppressive for those in control of a company to insist upon the adoption of a policy on a matter of business on which there are legitimate differences of opinion: Re Broadcasting Station 2GB Pty Ltd [1964-5] NSWR 1648.

I.    Oppression is something done against a person’s will and in his despite. It is not something done with the acquiescence or consent, and still less is something done with his cooperation: Irvin & Johnson Ltd v Oelofes Fisheries Ltd (1954) 1 South African Law Reports 231 at 243.

…

L.    The acts of oppression must result from “some overbearing act or attitude on the part of the oppressor”: Re Jermyn Street Turkish Baths Ltd [1971] 1 WLR 1042 at 1060; Re Tivoli Freeholds Ltd [1972] VR 445 at 453

…

N.    “The mere fact that a member of a company has lost confidence in the manner in which a company’s affairs are conducted does not lead to the conclusion that he is oppressed; nor can resentment at being outvoted; nor mere dissatisfaction with or disapproval of the conduct of the company’s affairs, whether on grounds relating to policy or to efficiency, however well founded. Those who are alleged to have acted oppressively must be shown to have acted at least unfairly towards those who claim to have been oppressed”: Re Five Minute Car Wash at 751.

O.    Courts must be slow to interfere with the responsibility of management of a company committed to its board of directors. The mere fact that decisions made adversely affect the applicant is insufficient. It should normally be shown that there is a lack of good faith or that no reasonable board could have come to the decision reached: Re Broadcasting Station 2GB at 1662; Wayde v NSW Rugby League Ltd (1985) 61 ALR 225.

P.    In Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704, I said that the critical test is commercial unfairness. However, I agree with the comment of Patterson Ednie & Ford in their third edition at para 320/18, that circumstances could arise where unfairness within the meaning of the section might result from conduct which amounts to unfairness which is not necessarily of a commercial nature. An example appears to be Re Stewarts (Brixton) Ltd [1985] BCLC 4.

9    In Dynasty Pty Ltd v Coombs (1995) 59 FCR 122, the Court said at 130 that the predecessor of s 232 was concerned with “commercial unfairness” (citing Wayde v New South Wales Rugby League Ltd (1985) 59 ALJR 798). The Court then went on to adopt the test propounded by Young J in Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704, which provides that the Court should ask:

… whether objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair.

10    Finally, reference should be made to Campbell v Backoffice (2009) 238 CLR 304 at 360 where the Court said:

The facts found at trial showed that Mr Campbell excluded Mr Weeks from participation in the management of Healthy Water despite the agreement recorded in both the shareholders agreement and each of the services agreements that he and Mr Campbell were to be joint managing directors. Under an earlier form of companies legislation dealing with oppression of members, wrongful exclusion from participation in the management of the company was held in In re H R Harmer Ltd (188) to be a species of oppressive conduct.

Section 232 should not be read more narrowly. Wrongful exclusion from management may be form of oppression. It is not to be supposed that the only conduct of a company’s affairs that is to be classified as “oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member” is conduct of the company’s affairs that is otherwise lawful. The fact that Mr Campbell’s conduct was said to constitute breach of his or Sentinel’s contractual obligations under the shareholders agreement, or the procuring of a breach by Healthy Water of its obligations under the services agreement with Backoffice, does not preclude engagement of the oppression provisions. Neither is it to be supposed that there cannot be oppression on the part of one who thinks that he or she is acting rightly (189). It is therefore not to the point to examine Mr Campbell’s motives for acting as he did.

11    Against that background, I turn to the facts.

BACKGROUND

12    Before dealing with the facts in chronological order, a number of matters should be noted. First, the facts are largely not in dispute. Secondly, the Respondents conceded that:

… the accumulated conduct complained [of] without more must be justified as:

(a)    being necessary for the good of the company;

(b)    in good faith;

(c)    commercially justified;

(d)    to pursue the objects of the company: John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A’Asia) P/L (1991) 6 ACSR 63, (1991) 9 ACLC 1372 at 1376.

As will become apparent, the concessions address the effect of the decisions, rather than the manner in which the decisions were made.

13    Gordon Services Pty Ltd, trading as Poly Membrane and Pipe (Gordon Services), was involved in the management of large-scale water and waste-water building and development projects. It was Gordon’s family company – Gordon and his brother were shareholders. In 2005, Harding was an engineer and employee of the company. Dick was another employee. Gordon wanted his brother to cease involvement in the company. He required capital to enable this to occur. Capital was also required because the business was expanding. Gordon agreed that Harding and Dick should invest in the business.

14    As a result of discussions between Harding, Gordon and Dick it appeared that the future growth of the business would be served by the incorporation of a new entity in which each of the three men would be one “pillar” of the business. The business conducted by Gordon Services was valued $1.2 million for the purposes of transfer of the business to a new entity.

15    On 19 January 2006, PMP Environmental was incorporated. Its initial share issue was 1.2 million shares at $1.00 per share which were held:

1.    252,000 by Harding Investments as trustee of the S & J Harding Family Trust;

2.    888,000 by Gordon Services as trustee of the Gordon Family Trust; and

3.    60,000 by Jashtra as trustee of the P & C Dick Family Trust.

16    At the time of incorporation of PMP Environmental, Harding, Gordon and Dick agreed that there should be a shareholders’ agreement which reflected the terms upon which they would agree to invest in PMP Environmental. Accordingly, on 27 February 2006 a shareholders’ agreement (described as a “Business Succession Agreement” (BSA)) was executed by Harding and Harding Investments for the S & J Harding Family Trust, Gordon and Gordon Services for the Gordon Family Trust, Dick and Jashtra for the P & C Dick Family Trust and PMP Environmental. Gordon Services, Harding Investments and Jashtra were defined as the “Shareholders”. Gordon, Harding and Dick were defined as the “Directors” and the “Principals”. The BSA recorded that PMP Environmental was the proprietor of the “Business”.

17    The BSA provided that:

1.    the Shareholders “shall maintain the Board [defined collectively as “the Principals in their respective capacities as representatives of the Shareholders”] comprising all of the Principals”: cll 17.1, 37.7, 37.34 and 37.39;

2.    the Directors (defined as Gordon, Harding and Dick) shall each be employed by Lotic in “the Business” (defined as “plumbing, fabrication, construction and engineering”), a requirement that was expressed to be only capable of variation by “a resolution of an Absolute Majority of the Shareholders”: cl 4;

3.    unless and until an Absolute Majority (defined as “the Shareholders holding between them not less than 75% of the capital” in PMP Environmental) of the Shareholders resolve to the contrary, no interest shall be paid by PMP Environmental on any loan advanced by a Shareholder to PMP Environmental: cll 10.3 and 37.1; and

4.    all questions relating to PMP Environmental are to be decided by a Majority (defined as “a simple majority in number or value”) unless:

4.1    the capital is contributed in unequal shares in which case all matters shall be decided by an Absolute Majority of the Shareholders; or

4.2    a question involves a Major Decision in which case any such matter shall be decided by an Absolute Majority of Shareholders.

See cll 4.7, 37.1 and 37.22.

The phrase “Major Decision” is defined in cl 37.21 and includes “the reduction of the then current salary paid to the Directors”: cl 37.21.2.

18    At some date prior to 2 July 2007, the shares held by Gordon Services were transferred to PMP Shareholdings, a company associated with Gordon. Gordon Services is not a party to these proceedings. There was no evidence that the parties turned their mind to Gordon Services’ obligations under the BSA. However, no party suggested that the Respondents were no longer bound by the BSA.

19    On 2 July 2007, a shareholders meeting was attended by Gordon, Harding and Dick at which it was resolved that PMP Shareholdings would sell a further 33% of PMP Environmental to equalise the shareholdings in PMP Environmental. The minutes further recorded that:

… [Jashtra] will rise from 10.8% to 33.33% for a payment of $270,364.00 today.

… (Harding Investments) will rise from 22.69% to 33.33% for a payment of $127,763.00 today.

PMP Environmental will lend the $398,127.00 to … Dick & … Harding by way of loan accounts. [Dick] & [Harding] will pay interest monthly to PMP Shareholdings on the $398,127.00 based on standard commercial bank interest rates.

[Dick] & [Harding] will be required to repay the $398,127.00 loan by 30 June 2009. If the loan is not repaid or renegotiated at this time the shares will be sold to PMP Shareholdings … for the same $398,127.00.

20    From that time, 400,000 of the shares in PMP Environmental were held by each of Harding Investments as trustee of the S & J Harding Family Trust, PMP Shareholdings as trustee of the PMP Family Trust and Jashtra as trustee of the P & C Dick Family Trust.

21    Each of Harding, Dick and Gordon were directors of PMP Environmental in accordance with cl 17.1 of the BSA, and each was also employed by PMP Environmental – Harding as Managing Director and Chief Executive Officer, Gordon as the estimator and Dick as Construction Manager.

22    PMP Environmental performed well. The company grew. More staff were hired and the size of the jobs on which the company tendered increased. Larger offices were required. Ultimately, new premises in South Melbourne were leased. The decisions to relocate the offices of the business to South Melbourne and to hire additional staff were taken with the involvement of all three directors.

23    Board meetings were usually held monthly or bi-monthly. Typically, each director participated and included items of business to be discussed at the meeting. An agenda and minutes of the meetings were prepared. Of course, there were informal meetings between the directors. However, each director distinguished between informal meetings and board meetings.

24    On 2 October 2009, the directors resolved to change the name of the company from PMP Environmental to Lotic.

25    In late 2009, at the height of the global financial crisis, Lotic’s financial performance declined. The company failed to secure three tenders simultaneously. Cashflow became “tight”. Understandably, there was concern about the financial security of the business, including concern amongst the directors. Harding prepared a proposal for each director to inject further capital into the business to assist with cashflow. The directors went without wages.

26    In or around late 2009 to early 2010, the relationship between Harding, Dick and Gordon appears to have commenced to break down. The Applicants contend that it was from this time that PMP Shareholdings and Jashtra, by their representatives, Gordon and Dick, engaged in conduct that was “oppressive to, unfairly prejudicial to, or unfairly discriminatory against [Harding Investments], a member” of Lotic, within the meaning of s 232(e) of the Corporations Act. The conduct alleged to have constituted “oppression” for these purposes includes the following.

(a)    January 2010 – Decision to relocate business offices and sack staff

27    On about 15 January 2010, Gordon and Dick held a meeting without notice. Harding was not invited to attend and did not attend. At this meeting, Gordon and Dick decided (without the involvement of Harding) to (i) close the South Melbourne offices and move the business premises of Lotic back to Lilydale, and (ii) terminate the employment of several staff. This decision was also made without consultation with or the involvement of a fourth director, Mr David Cassidy. Mr Cassidy resigned as a director on 12 March 2010. He was not called to give evidence.

28    Harding’s unchallenged evidence was that, on the morning of Monday 18 January 2010, he was pulled aside by Gordon and Dick and told about the meeting that was held on 15 January at which Gordon and Dick had decided to relocate the company’s offices from South Melbourne to Lilydale, effective as soon as possible. Harding’s further unchallenged evidence was that he was taken “entirely by surprise” that the decision had been made and was going to be put into effect:

1.    without any consultation with him;

2.    without his involvement in the decision as Managing Director / CEO;

3.    without any opportunity to discuss or consider the costs of breaking the lease; and

4.    without any cost / benefit analysis.

29    Harding asked Gordon and Dick whether it was financially worthwhile to break the lease which still had six months to run. Harding gave evidence that either Gordon or Dick said it was worthwhile. Harding then said to both Gordon and Dick that Lilydale was a long way from where he lived. His unchallenged evidence was that Dick responded that if the move went ahead, Harding should work in the office two days per week, work from home two days per week and spend one day attending client or site meetings. Gordon did not disagree.

30    In the same meeting, Gordon then said that he and Dick had also decided on the previous Friday that some staff needed to be sacked. Harding’s unchallenged evidence was that he was shocked and did not know how to respond. Again, the decision had been made and was to be put into effect:

1.    without any consultation with him;

2.    without his involvement in the decision as Managing Director / CEO;

3.    without any opportunity to discuss or consider the costs of terminating the staff; and

4.    without any cost / benefit analysis.

31    Harding then said that if Gordon and Dick were of the view that staff needed to be sacked, he would do an analysis of who it should be and make a decision later that week. Gordon disagreed and said that there was no time for that and that they were going to be sacking people that day. Gordon asked Harding who he wanted to start with. Gordon then informed Harding that he was to sack a named process engineer, a named draftsman, the company’s bookkeeper and the receptionist. Harding did not agree with the decision to terminate staff. He persuaded Gordon and Dick not to terminate the receptionist because of the impact this would have on others’ workloads if both she and the bookkeeper were sacked.

32    The next day, on 19 January 2010, Harding again raised with Gordon and Dick the decision to leave the South Melbourne premises in an immediate rush. He said that if there was a good business case to move immediately, he wanted to see the figures. Dick said that the savings would be about $10,000 per week and that Harding could see the spreadsheet showing the savings. After the move back to Lilydale, Harding subsequently asked for and received the spreadsheet.

33    As is apparent, Harding was not invited to participate in these decisions, and despite objecting and asking for time to consider the proposals when told about the decisions, no subsequent meeting or discussion took place. The decision to break the lease resulted in a complaint being issued against Lotic in the Magistrates Court on 22 April 2010. The payout to the landlord was said to be $27,000. The evidence did not disclose whether this amount was in fact paid.

34    The Respondents addressed the two decisions separately. In relation to the decision to relocate the business premises, the Respondents submitted that the decision was not one which required a board meeting but, if it did, the decision only required a simple Majority (see cl 4.7), not an Absolute Majority under the BSA. There are a number of answers to these contentions. As noted above (see [17(4)] above), cl 4.7 of the BSA provides that “[a]ll questions relating to the Company shall be decided by a Majority of votes of the Shareholders” (defined as a simple majority in number or value) unless, inter alia, the question “involves a Major Decision in which case any such matter shall be decided by a resolution of an Absolute Majority of the Shareholders”: cll 4.7, 37.1 and 37.22. I accept that the relocation of the premises back to Lilydale did not fall within the definition of a “Major Decision” under the BSA because the ‘Premises’ referred to in the BSA was already defined as 2 Melba Avenue, Lilydale. However, that does not address the failure of Gordon and Dick to comply with cl 17 of the BSA. Given the serious nature of the issues raised, it is to be expected that Gordon and Dick would have given notice of the need to convene a board meeting (providing notice to Harding and Cassidy) to deal with both issues – the immediate surrender of the South Melbourne lease and the immediate termination of staff. As cl 17 provides, not only was proper notice required but also “such other materials and/or information appropriate and proper to transact the Business of the Meeting”. None of that was before the meeting on 18 January. The decisions had been made on 15 January and delivered up as a fait accompli.

35    Given the views I have formed about the manner in which the decision was made, it is strictly unnecessary to address the Respondents’ contention that the decision was commercially justified. However, it is appropriate that I say something about the commercial aspects of the decision. The lease was due to expire in June 2010. Lotic told the landlord in January 2010 it would only pay 50% of the rent due to “straightened financial circumstances” but would continue to pay the rent for another six months after the term had expired until the company had satisfied the lease obligations. The landlord did not respond well and threatened to lock them out of the premises. The Respondents submitted that paying rent on one premises was better than paying for two. The fundamental problem with this decision at the time it was made was that Lotic was obliged to make the full lease payments until the end of the lease, a fact conceded by Gordon and Dick. Not only did they concede as much, but they had informed the landlord that they would make up the shortfall after they left the premises. In those circumstances, a decision to leave the South Melbourne premises immediately in the absence of any further negotiation with the landlord is, at the very least, surprising. In assessing this decision (and the decision in relation to the termination of staff), what in fact happened (from a commercial perspective) after the decision was made is not relevant to the question of whether or not this conduct was “oppressive to, unfairly prejudicial to, or unfairly discriminatory against [Harding Investments], a member” of Lotic. Put another way, it is not appropriate for the Respondents to seek to commercially justify a decision by reference to facts that happened months after the event and where there is no evidence to suggest that these facts were considered by Gordon and Dick at the time the decision was made.

(b)    February 2010

36    In February 2010, Harding’s unchallenged evidence was that Gordon usurped Harding’s role as CEO by making day-to-day financial management decisions, countermanding directions given by Harding and denying him access to information. The Respondents do not dispute these facts. Indeed, Gordon accepted in cross examination that he decided what creditors were to be paid and when, and directed Joe D’Souza, the finance manager (D’Souza), to disregard directions given by Harding. The Respondents submitted that Harding’s demands for information, contemporaneous financial justification for decision making and demands for notice to be given of meetings were “unworkable, excessive, unreasonable, counterproductive and not always bona fide” and that Gordon merely instructed staff to undertake the jobs they were employed to perform and decline to be “distracted by requests” from Harding that “interfered with the due performance of the[ir] functions”. These latter submissions were unsupported by evidence and, for the reasons identified earlier, should be rejected.

37    On 23 or 24 February 2010, Gordon and Dick held a further directors’ meeting, without due notice, at which meeting a resolution was passed to selectively reduce Harding’s emoluments from Lotic. The Respondents did not substantively address this complaint in their written submissions and, despite being afforded an opportunity to do so, did not do so in their oral submissions. Not only was the manner in which the meeting was called contrary to cl 17 of the BSA, the purported decision itself failed to comply with cl 4.7. Why? Because a decision to reduce the then current salary paid to the directors was a “Major Decision”: see cl 37.21.2. Any “Major Decision” required an Absolute Majority. The decision was made without the necessary Absolute Majority. Again, the fact that due to financial constraints Gordon and Dick were unable to increase their salaries is irrelevant to the manner in which the meeting was called and the fact that the decision was made.

(c)    March 2010

38    In March 2010, Gordon refused to reimburse Harding for expenses whilst on company business in India, disabled Harding’s mobile phone access, and did not pay him wages whilst he was away on company business. Gordon does not dispute these facts. In relation to the expenses claimed by Harding whilst in India, Gordon’s evidence was that he refused to authorise reimbursement of the expenses because Harding had “reneged” on an “agreement”. The “agreement” was never adequately explained.

39    Harding gave evidence that he had put in place a payment plan with the Australian Taxation Office (the ATO) in relation to Lotic’s PAYG liabilities. Harding’s evidence is that in March 2010, Gordon caused Lotic to breach that payment plan by failing or refusing to honour the terms of that plan and directing that other creditors receive payment in priority to the ATO. That decision was made by Gordon without reference to Harding. It had serious consequences. Lotic and the directors personally became liable for the debt and were issued with director penalty notices. The evidence disclosed that the finance manager, D’Souza, was then required to negotiate further with the ATO. The Respondents raised two matters by way of reply. First, that the director penalty notice did not relate to Lotic. That contention is contrary to the letter D’Souza sent to the ATO on 10 June 2010 on Lotic letterhead. Secondly, that it was a temporary problem rectified by D’Souza and there was no evidence of financial loss to either Harding or Harding Investments. That second contention is no answer to the complaint. It does not address the manner in which the decision was made.

40    In March 2010, another event occurred about which Harding complains. It concerns the withdrawal by Gordon of $127,763.00 from Lotic’s account without any reference to Harding and at a time of serious cashflow difficulties. The Respondents do not dispute the withdrawal but submitted that the transfer was not evidence of oppressive conduct. It is common ground that Gordon made the decision unilaterally. The Respondents’ answer to this complaint was to submit that the funds were withdrawn because they represented consideration of $127,763.00 passing to PMP Shareholdings for the sale by that company to Harding Investments of shares in Lotic. Even if that is correct, it is no answer to the fact that the funds were paid by Harding to Lotic in reduction of his loan account in accordance with the agreement reached in July 2007: see [19] above. At the time of the repayment by Harding to Lotic, the funds were with Lotic, not PMP Shareholdings. What arrangement PMP Shareholdings had with Lotic was never disclosed. It was never suggested that it was an arrangement that permitted Gordon, as a director of Lotic, to withdraw company funds to reduce his personal home loan account (or for any other personal purpose) without reference to the other directors and principals of Lotic.

(d)    April 2010

41    On 1 April 2010, matters came to a head. Gordon called a meeting without notice. Harding attended the meeting. Gordon produced pre-prepared Minutes of Meeting, to which Dick assented, removing Harding from his position as Managing Director and CEO. The parties no longer trusted each other. Gordon did not trust Harding in his role as CEO. Gordon was also unhappy about and had grown tired of the fact that Harding disagreed with suggestions and required analytical justification for decisions. The Respondents contend that the decision to remove Harding was commercially justified because it secured Lotic’s survival. There are at least two answers to that contention. First, commercial justification is no answer to the manner in which the decision was made (cf [35] above). Secondly, for the reasons stated earlier, it is impermissible for the Respondents to seek to commercially justify a decision by reference to facts that happened months after the event and where there is no evidence to suggest these facts were considered by Gordon and Dick at the time the decision was made. Finally, the Respondents’ submission that although the document was headed “Minutes of Meeting”, it was more properly described as an agenda, is rejected.

42    Later that month, on 23 April 2010, Harding received notification that as early as 12 April, Gordon and Dick had resolved to implement an earlier decision to increase their wages so that they were equal to Harding’s wage. No notice was given to Harding. He was excluded from the decision making process. Even though the amount was not able to be paid immediately, Gordon and Dick made the decision (as was recognised by them) that this would be in their long term financial interests – a type of “back pay”. The matters raised by the Respondents do not address the manner in which the decision was made: see [37] above.

(e)    May 2010

43    In late May 2010, Gordon and Dick resolved to terminate the engagement of Lotic’s external accountants (Matthew Steer) and engage different ones (TWF). The three directors had previously discussed the change. However, the actual decision to implement the change was made by Gordon and Dick. Harding was told about the decision after it had been made. The Respondents submitted that the conduct was not oppressive because Lotic’s former accountants (TWF) were re-engaged and the decision was commercially justified. Harding accepts that TWF were cheaper than Matthew Steer and that the reason for engaging Matthew Steer – international work – no longer existed. The difficulty for the Respondents is the manner in which Gordon and Dick made the decision – no notice of the meeting was given to Harding. In fact, he was not even invited to the meeting – rather, he was simply “told” by Gordon and Dick what decision had already been made.

(f)    June 2010

44    We then jump to June 2010. On 23 June 2010, Gordon withdrew $90,000.00 from Lotic’s account without any notice to or resolution of the directors at a time of serious cashflow difficulties. The withdrawal was made without reference to Harding. The Respondents do not dispute this contention. Instead, they submitted that:

The Applicant cross examined Mr Gordon to the effect that he regarded Lotic as his private family enterprise and was running it accordingly without regard to others (sic) interests. The considerable care of (sic) attention he was paying in the substantial cash injections he made is consistent with this and contrasts sharply with that of Mr Harding.

[Gordon] had $426,677 lent (sic) to the company during the critical period of February 2010 to July, 2010 … He had further provided a performance guarantee of $190,000 requiring him to sell an investment property … Total financial assistance: $616,677.

Mr Gordon gave evidence that the funds he was injecting were to pay wages and creditors. …

By putting so much personal wealth on the line for the company Mr Gordon preserves the prospects of a return on the Lotic Investment to [Harding Investments] …

None of the matters raised by the Respondents provide any answer to the unilateral withdrawal of $90,000 by Gordon. The withdrawal was unauthorised. No notice was given to anyone.

45    Then, seven days later, on 30 June 2010, Gordon paid himself a further $9,285 from Lotic funds without any notice to or resolution of the directors. This payment constituted alleged interest on loans made by Gordon to the company. Gordon calculated the amount and ordered D’Souza to pay that amount to him. The payment was made without reference to Harding. The Respondents do not dispute this contention. Instead, they submitted that it was a contradiction to describe the “tiny interest payment” as antithetical to the interests of Harding Investments. Again, none of the matters raised by the Respondents provide any answer to the unilateral charging and then withdrawal of $9,285 by Gordon. Both were unauthorised. No notice was given to Harding. And, for the record, in the circumstances, I do not regard $9,285 as a “tiny interest payment”.

(g)    July 2010

46    On about 9 July 2010, Gordon directed D’Souza to pay Gordon and Dick, but not Harding, $28,500.00 as salary. At the time the decision was made, Gordon anticipated a $50,000 profit from the NVIRP project. The decision was made without reference to Harding. The amount was never paid. The Respondents submitted that it was a contradiction to classify what was merely a book entry as “antithetical to the interests of [Harding Investments] in the context of such significant … financial support [by Gordon]”. Again, none of the matters raised by the Respondents provide any answer to the complaint: see also [37] above.

47    Matters worsened in July. On 12 July 2010, Gordon and Dick decided to terminate Harding as a director and employee of Lotic. Harding was not present and was not invited to the meeting. At that meeting, Gordon said that, put simply, he and Dick decided that it was time for them and Harding to part ways. Gordon and Dick were aware at that time of the terms of the BSA. They knew of Harding Investments’ entitlement to have Harding as a director in Lotic. Moreover, they knew that Harding could only be lawfully removed by Absolute Majority: see [17(2)] above.

48    That night, the Respondents emailed Harding giving him notice that a meeting had been convened for 9:00am on 13 July 2010 at Lotic’s offices “to consider the following resolutions proposed by Paul and Don that Lotic terminate the employment of … Harding with up to six months full pay in lieu of notice: and that [Harding] be removed as a director of Lotic”. A copy of the minutes of the last Board meeting, balance sheet and profit and loss were attached. The meeting was then deferred until 3:00pm on 13 July because the notice of meeting was inaccurate. On 13 July, Gordon and Dick marched Harding out of the building. From that time, Harding ceased as a director of Lotic.

49    The Respondents sought to justify the dismissal on the grounds that the acts were “good for the company”. Whether the “acts” were good for the company ignores at least two of the Applicants’ principal complaints – that it was not open for Gordon and Dick to unilaterally ignore the provisions of the BSA which required that the company “maintain” a board comprising each of Gordon, Dick and Harding as representatives of the shareholders, and that each “Director” be employed by Lotic in “the Business”, the latter being a requirement that was expressed to be only capable of variation by “a resolution of an Absolute Majority of the Shareholders”: cl 4.

50    From July 2010 to the present date, Harding has not been a director or employee of Lotic. As a result, Harding and Harding Investments have continued to be effectively excluded from the continued management of and control of Lotic. Gordon saw Harding’s attempts to be reinstated as a director as “just part of the game”. The problem was that it was not a game – it was a contractual right.

ANALYSIS

51    As a preliminary matter, the Applicants have standing to seek relief under ss 232 and 233 of the Corporations Act. Harding Investments is a “member” for the purposes of s 234 of the Corporations Act. Further, because Harding is Harding Investments’ Principal and representative in Lotic (as expressly acknowledged by the BSA), the harm suffered by Harding (as set out in the foregoing paragraphs) was also, therefore, suffered by Harding Investments. On this basis, I reject the Respondents’ submissions to the contrary.

52    Harding Investments submitted, and I accept, that for the reasons set out above, the conduct of PMP Shareholdings and Jashtra (through their principals, Gordon and Dick respectively), contravened s 232 of the Corporations Act. The conduct of Gordon and Dick in excluding Harding from the management of Lotic was so unfair that no reasonable director could have considered it fair: see [27] to [50]. The exclusions were wrongful and oppressive. They defeated the purpose of Harding Investments’ entitlement to have Harding on the board of Lotic as its representative. Moreover, it was contrary to the express terms of the BSA. I reject the contention that cl 47 of Lotic’s Constitution overrides or cancels out the BSA. The conduct was “oppressive to, unfairly prejudicial to, or unfairly discriminatory against” Harding Investments. As the High Court said in Campbell v Backoffice at 360, the fact that Gordon and Dick believed they were acting rightly cannot and does not prevent that finding. Further, it is not to the point to examine Gordon and Dick’s motives for acting as they did. As a result, it is not relevant to determine whether the Respondents’ submissions concerning Harding’s conduct and competence as a CEO have any substance, as the conclusions the Respondents would have the Court reach in relation to those matters do not, in this case, bear upon the question of whether or not the conduct of PMP Shareholdings and Jashtra (through Gordon and Dick) was oppressive conduct within the meaning of s 232 of the Corporations Act.

53    Before turning to consider the appropriate orders, it is necessary to consider that Lotic is now in administration. The Respondents submitted that the oppression must subsist at the time of the making of the order and that it does not now subsist because Lotic is in administration: Bessounian v Australian Wholesale Mortgages Pty Ltd [2007] NSWSC 35 at [6] and [7]. I reject that contention on two bases. First, at a factual level. The principal of Harding Investments has been, and continues to be, excluded from the management of the company and such exclusion was, and is, also contrary to the express terms of the BSA.

54    Secondly, as a matter of principle. Lotic executed a Deed of Company Arrangement and the directors resumed control of the company and remain in control. Lotic is still trading, with the same shareholders and just two directors despite being subject to the BSA. Lotic is in an entirely different position to a company in liquidation or provisional liquidation: see Campbell v Backoffice at [179], [180] and [182]. Moreover, as the High Court said in Campbell v Backoffice at [182]:

[T]he current form of the oppression provisions in Pt 2F.1 was introduced [Australia, House of Representatives, Corporate Law Economic Reform Program Bill 1998 (Cth), Explanatory Memorandum, p 34 [6.132]] with a view to making it clear that the Court may make orders even if the act, omission or conduct complained of has yet to occur or has ceased, it may very well be that the fact that there was no continuing oppression when this case came to trial does not entail that the Court had no power to make any of the orders for which s 233 provides. But that is a point that need not be decided.

55    The principal form of relief sought was an order for compulsory purchase of Harding Investments’ shares in Lotic by PMP Shareholdings and Jashtra: Campbell v Backoffice at [174] – [178]. In my view, such an order should be made. The Corporations Act does not identify the basis upon which the price for shares is to be fixed if an order for compulsory purchase is made. As the High Court said in Campbell v Backoffice at [178].

Although s 233(1)(d) gives the court power to make an order for the purchase of shares by a member, the Corporations Act is silent about the terms on which such a sale may be ordered. In particular, the Corporations Act does not identify the basis upon which the price for the shares is to be fixed if an order for compulsory purchase is made. Under earlier forms of the oppression provisions of companies legislation, orders were made for the compulsory sale of shares by one member to another at prices to be fixed according to various criteria. In some cases [footnote omitted] the price has been fixed at the value the shares would have had at the commencement of the proceedings but for the effect of the oppressive conduct. In other cases [footnote omitted] a date other than the date of commencement of the proceedings has been fixed. Again, there is no reason to give the present oppression provisions some narrower construction. In particular, the power given to the court by s 233(1)(d) should not be hedged about by implied limitations [footnote omitted]. …

56    In the present case, the parties’ submissions did not address the date of the valuation. In those circumstances, it is appropriate that each party file and serve an outline of submissions of no more than five pages identifying the date on which the value should be struck and the reasons for choosing that date.

ORDERS

57    For those reasons, the following declarations and orders are appropriate:

1.    a declaration that the Second, Third, Fourth and Fifth Respondents breached the Business Succession Agreement executed on 27 February 2006 by terminating Mr Harding, the Second Applicant, as a director and employee of Lotic Pty Ltd (ACN 116 609 851) (Lotic);

2.    a declaration that the First and Third Respondents contravened s 232 of the Corporations Act 2001 (Cth);

3.    an order that PMP Shareholdings Pty Ltd (ACN 118 155 856) (the First Respondent) and Jashtra Holdings Pty Ltd (ACN 118 130 233) (the Third Respondent) purchase the shares in Lotic held by the First Applicant, Harding Investments Pty Ltd (ACN 118 130 402) (Harding Investments), in accordance with the following procedure:

3.1    By 4:00pm on 10 June 2011, the parties file and serve an outline of submissions of no more than five pages, identifying the date for fixing the value of the shares in Lotic held by Harding Investments should be struck and the reasons for choosing that date;

3.2    An independent registered company auditor (the independent person) nominated by the President (for time being) of the Institute of Chartered Accountants inspect the books of Lotic, which in his or her opinion, may yield information pertaining to the formation of an opinion as to the value of Lotic and the value of Harding Investments’ shares in it;

3.3    If in the opinion of the independent person, it is necessary to do so for the purpose of the valuation, the independent person is appointed to restate the accounts for any period;

3.4    The independent person is appointed by the parties to proceed to value Lotic and the shares in it;

3.5    The independent person must not charge a fee in excess of $45,000 (GST inclusive) subject to review by the Court;

3.6    The fees charged by the independent person, in the first instance, are payable by the shareholders in Lotic in proportion to their individual shareholding;

3.7    Each party is entitled to provide a submission of not more than 10 pages to the independent person on or before 30 June 2011;

3.8    The independent person provide the valuation referred to above by no later than 14 July 2011; and

3.9    The matter be listed for further hearing to consider the question of value by no later than 22 July 2011;

4.    the Respondents pay the Applicants’ costs of the proceeding up to and including the date of this judgment, such costs to be taxed in default of agreement.

58    The Respondents sought an order that the costs they incurred in retaining a valuer should be paid by the Applicants. I reject that submission. As just foreshadowed, the Respondents will be entitled to make submissions to the independent person appointed in accordance with these orders and, to the extent they consider necessary, be entitled to use and rely upon the report they obtain.

Associate:

Dated:    27 May 2011