Federal Court of Australia
Passey v South American Trading Company Pty Ltd as trustee for the Gardner Family Trust No 4 [2022] FCA 295
ORDERS
DATE OF ORDER: |
THE COURT ORDERS THAT:
1. The plaintiff’s claim is dismissed.
2. By 4 April 2022, the parties shall file and serve submissions as to the appropriate costs orders to be made (limited to 5 pages).
3. By 8 April 2022, the parties shall file and serve any submissions in reply to the submissions filed pursuant to order 2 (limited to 5 pages).
THE COURT NOTES THAT:
1. The parties are not required to provide further submissions about the costs orders to be made in relation to the dismissal of the proceeding against the former first, second and third defendants.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
DOWNES J:
[1] | |
[29] | |
[42] | |
[75] | |
[76] | |
[89] | |
[89] | |
[92] | |
[102] | |
[114] | |
[114] | |
[118] | |
[132] | |
Conduct in relation to the failure to cause Ms Passey to become a party to the Company’s shareholders’ agreement | [149] |
Conduct in relation to failure to offer to buy Ms Passey’s shares | [157] |
Conduct in relation to payment of fees to Mr Gardner and Mr Darren Wallis | [166] |
[169] | |
Whether Mr Gardner and Mr Darren Wallis were required to vacate their positions | [182] |
[195] | |
Conduct in relation to payment of legal fees of directors and other shareholders | [196] |
[205] | |
[212] | |
[225] |
1 Ms Talitha Passey, a 25.5% shareholder in the seventh defendant (the Company), seeks orders under s 233 of the Corporations Act 2001 (Cth) (Act) to remedy alleged oppression, unfair prejudice and unfair discrimination and conduct which she alleges is contrary to the interests of the members as a whole.
2 The Company is a franchisor for the franchise known as “Smith & Sons Renovations & Extensions”. The Company operates a business in the residential construction industry in Australia and New Zealand, providing a range of renovation and extension services.
3 The Company was founded by Mr Greg Gardner, who also founded G J Gardner Homes (G J Gardner Homes). G J Gardner Homes is a well-known and reputable construction company.
4 In a shareholders’ agreement entered in 2009, to which the Company and all of its (then) directors and shareholders were parties, the parties to that agreement expressed an intention to expand the Company’s business internationally. The Company later expanded its franchise operations into Canada, and has financed a related company in Canada to enable it to set up its business and continue to operate.
5 Ms Passey received a copy of the shareholders’ agreement on 5 October 2017, which was a year before she became a shareholder. She agreed that one of the objects of the Company was to expand its franchise brand internationally and that, in furtherance of that object, a decision was made to expand into Canada. Ms Passey also agreed that the decision to expand into Canada was done with the goal of improving the image, brand and value of, the Company and that improving the brand is a benefit to the Company.
6 In this proceeding, Ms Passey complains about the loans which had been made to the company in Canada, including loans made prior to when she became a shareholder and for two years after that date, to which she raised no objection.
7 The shareholders’ agreement entered in 2009 also provided that two of its directors would not initially “draw a wage” from the Company but would be paid in accordance with a clause which was agreed upon by all directors and shareholders at that time.
8 In this proceeding, Ms Passey complains about the quantum of fees paid to these two directors in 2017 and 2018 (being before she became a shareholder in October 2018) as well as 2020 and 2021. Although she claims that the fees are excessive, Ms Passey does not contend that the payments have not been made in accordance with the shareholders’ agreement.
9 In 2015, the Company entered into another shareholders’ agreement in relation to another Australian company. Pursuant to that agreement, it agreed to loan money to another company which was set up in Australia to be a franchisor for the provision of services relating to commercial fitouts. That agreement also had the consent of all of the directors and shareholders of the Company at the time that it was entered. Ms Passey was provided with a copy of this shareholders’ agreement in October 2017.
10 In this proceeding, Ms Passey complains about the loans which had been made by the Company to this Australian company, including loans made prior to when she became a shareholder and for two years after that date, to which she raised no objection.
11 In 2015, Mr Corey Passey, Ms Passey’s ex-husband and a former director of the Company, arranged for the Company to borrow funds and then to distribute some of those funds to the Company’s shareholders, including a family trust entity connected with Mr and Ms Passey. That distribution was recorded as a loan in the Company’s books, and dividends which were declared by the Company in subsequent years were effected by recording a reduction in the shareholder loans, rather than by paying any funds to shareholders directly. This was in accordance with an agreement of all of the shareholders at that time.
12 In this proceeding, Ms Passey complains about the Company’s conduct around allocating 80% of the loan to her shareholding and not paying declared dividends to her, although all dividends were later paid to her by no later than January 2021 and there is no evidence that the same conduct will occur again.
13 In October 2018, Ms Passey became a shareholder of the Company as part of a matrimonial property settlement with Mr Passey. This was pursuant to a consent order of the Family Court of Australia.
14 The shareholders’ agreement for the Company required that the transferor (being the family trust entity) cause Ms Passey to enter a deed to become bound by that agreement, but no deed was entered.
15 After becoming a shareholder, Ms Passey did not play any active role in the business operated by the Company. Nor did she make any request to become a party to the shareholders’ agreement.
16 Ms Passey first complained about the affairs of the Company in around mid-2020, when she learned through the Company’s accountant, Mr Daniel Hill, that 80% of the shareholder loan had been allocated to her shares and that dividends which had been declared by the Company would be applied in reduction of this loan (as was the case with the other shareholders).
17 During the second half of 2020, lawyers for the parties sought to settle the dispute by negotiating the terms of Ms Passey’s exit from the Company.
18 During these negotiations, the Company expressed a willingness to have an independent third party value Ms Passey’s shares, and to enter into a binding share sale agreement in which the purchase price would be determined by the valuation. The Company also proposed that the payment of the disputed dividends be included in the transaction and be paid on completion of the purchase of the shares.
19 The negotiations reached the stage that the parties were exchanging a version of a written agreement with tracked changes.
20 During the negotiations and likely in an attempt to exert pressure on the Company, Ms Passey raised complaints for the first time about other matters to do with the affairs of the Company and some of those complaints have found their way into the statement of claim in this proceeding.
21 The belated complaints by Ms Passey were rejected by the Company which offered to enter into an agreement with Ms Passey to acquire her shares, failing which it stated that Ms Passey could sell her shares to a third party subject to the defendants agreeing to the proposed incoming shareholder.
22 Ms Passey did not attempt to sell her shares to a third party which she could have done (according to her the oral evidence of her expert at the trial). Instead, by an originating application filed on 18 December 2020, Ms Passey commenced these proceedings.
23 In her originating application as filed, Ms Passey sought declarations that the directors of the Company have acted in contravention of ss 180, 181 and 182 of the Act and equitable damages “for loss arising from the aforementioned breach of duty”. The claim for this relief was dismissed during the trial, which dismissal was not opposed, and there is an outstanding issue of the appropriate costs order.
24 By her originating application, Ms Passey also seeks:
3. An order in terms of Section 233(1)(d) of the Act that the Shareholders purchase the shares of the Applicant in the Company at fair market value.
4. In the alternative, an order in terms of Section 233(1)(e) of the Act that the shares of the Applicant in the Company be purchased by the Company by way of a reduction in share capital.
5. In the further alternative, an order that the Company be wound up pursuant to the following provisions of the Act:
(a) section 233(1)(a) on the grounds set out in sub-sections 232(a), (d) and (e) of the Act; and/or
(b) section 461(1) on the grounds set out in sub-section 461(1)(e), (f), (g) and (k) of the Act.
6. An order pursuant to sub-section 472(1) of the Act, a registered liquidator be appointed to the Company.
25 During closing submissions, it was made plain that Ms Passey seeks nothing less than an order compelling the other shareholders or the Company to buy her shares.
26 Further, by her closing submissions, Ms Passey maintained her claim for an order that the Company be wound up, although her counsel conceded that the Company was solvent and that third parties (such as employees and franchisees) would be prejudiced by such an order. Such an order did not appear to be seriously pressed.
27 By her statement of claim filed on 14 October 2021, Ms Passey maintains her complaint about the previous failure to pay dividends to her, although that failure was rectified. She also makes other complaints including about the loans being made to related companies, that she was not invited to become a party to the shareholders’ agreement, that no offer has been made to acquire her shares pursuant to that agreement and about the quantum of fees paid to two directors in 2017, 2018, 2020 and 2021. Ms Passey also complains that the Company has paid all of the defendants’ legal costs associated with this dispute.
28 For the reasons below, the claim by Ms Passey will be dismissed.
29 Section 232 of the Act provides that the Court may make an order under s 233 of the Act if the conduct of the company’s affairs, or an actual or proposed act or omission by or on behalf of the company, or a resolution or proposed resolution of the members or a class of members of the company, is contrary to the interests of the members as a whole (s 232(d)) or is oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity (s 232(e)).
30 The ‘affairs’ of a body corporate are described broadly, including for the purpose of s 232 and s 233, in s 53 of the Act. Those affairs include the formation, membership, business, transactions and dealings, property, profits and liabilities of the company (s 53(a)); the internal management of the body (s 53(c)); the ownership of shares in the body (s 53(e)); the powers of persons to exercise voting rights (s 53(f)); and the circumstances of the acquisition or disposal of shares in the body (s 53(h)): Hylepin Pty Ltd v Doshay Pty Ltd (2021) 156 ACSR 562; [2021] FCAFC 201 at [123] (Hylepin (FC)). It was not in dispute that all of the allegations made in the statement of claim fall within the scope of the affairs of the Company within the meaning of s 232 of the Act.
31 The task of deciding whether there has been conduct “contrary to the interests of the members as a whole” involves an objective assessment of whether the conduct adheres to accepted standards of corporate behaviour or is in accordance with how reasonable directors would act in attending to the affairs of the company: see Allways Resources Holdings Pty Ltd v Samgris Resources Pty Ltd (2017) 121 ACSR 1; [2017] QSC 74 at [24]; also Hylepin Pty Ltd v Doshay Pty Ltd (2020) 148 ACSR 30; [2020] FCA 1370 at [26] (Hylepin (SJ)).
32 The expression “oppressive to, unfairly prejudicial to, or unfairly discriminatory against” is a compound expression, meaning that it does not involve separate tests for the elements within it: see Hillam v Ample Source International Ltd (No 2) (2012) 202 FCR 336; [2012] FCAFC 73 at [4].
33 The essential focus under s 232(e) of the Act is on whether there has been commercial unfairness in the conduct of the affairs of the company: see Hylepin (SJ) at [24]:
The phrase “oppressive to, unfairly prejudicial to, or unfairly discriminatory against” in 232(e) is … concerned with conduct that involves “commercial unfairness”, or “a departure from the standards of fair dealing, or where a decision has been made so as to impose a disadvantage, disability or burden on the plaintiff that, according to ordinary standards of reasonableness and fair dealing, is unfair”: Re Ledir Enterprises Pty Ltd (2013) 96 ACSR 1; [2013] NSWSC 1332 at [178] per Black J. Whether there has been “unfairness” in the requisite sense is to be judged objectively: Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459 at 472-473… per Brennan J. The relevant test is “whether reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other, would have decided that it was unfair to make that decision” (Wayde at CLR 472-473; ALR 234-235; ACLR 96 per Brennan J) or 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”: Catalano v Managing Australia Destinations Pty Ltd (2014) 314 ALR 62; [2014] FCAFC 55 at [9].
34 This summary of principles was not challenged on appeal in Hylepin (FC) at [131], which stated at [126] that “the section requires proof of oppression or proof of unfairness. Proof of mere prejudice to or discrimination against a member is insufficient to attract the court’s jurisdiction to intervene”.
35 The Full Court in Hylepin (FC) also observed at [128] that:
It was noted that mismanagement alone does not constitute oppression, and a court is concerned ‘to avoid an unwarranted assumption of the responsibility for management of the company’: Wayde at CLR 467; ALR 231; ACLR 92 (Mason ACJ, Wilson, Deane and Dawson JJ).
36 In Catalano v Managing Australia Destinations Pty Ltd (2014) 314 ALR 62; [2014] FCAFC 55 at [9], it was observed that:
The test of unfairness requires an objective assessment of the conduct in question with regard to the particular context in which the conduct occurs. The question is whether objectively in the eyes of the commercial bystander there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair. As the test is objective, whether or not the conduct is oppressive will not depend upon the motives for what was done. It is the effect of the acts that is material.
(citations omitted)
37 The Full Court also observed the following in Wilmar Sugar Australia Limited v Mackay Sugar Limited (2017) 120 ACSR 1; [2017] FCAFC 40 at [73]:
While the test is objective, in the sense that the purpose or motive of the decision-maker cannot be determinative, purpose or motive may nevertheless be relevant. For example, if the decision-maker was motivated to make a decision to achieve some particular unfairness against a member, that fact might enable it to be concluded more readily that the effect of the decision is as the decision-maker intended (namely, unfair).
38 In this case, no allegation is made in the statement of claim that any of the defendants acted with any particular purpose or motive. Such a matter should have been pleaded in order to give the defendants fair notice of the case to be made against them at the trial.
39 In Hylepin (FC), the Full Court considered whether a course of conduct could amount to oppression, even if individual acts do not, and stated as follows:
[133] It can be accepted that findings as to oppressive conduct may be founded on a whole course of conduct. In Aqua-Max, the Court of Appeal observed that:
[61] …There are numerous cases which look to the effect (including the cumulative effect of all the various pieces of unfairness) independently of the question whether the alleged oppressor's actions are legal or comply with the article of association …
[134] Where a course of conduct is relied upon, it is appropriate to have an overview. In John J Starr (Real Estate), Young J said at 72 that:
Although in this sort of case one needs to have an overview, and sometimes a series of a relatively minor matters can add up to oppressive conduct, I think the way to deal with the evidence is … to deal with each of the 16 counts and then draw the various threads together.
…
[136] We accept, however, that depending on the circumstances, an accumulation of conduct, even where none of the separate matters of conduct is found to be oppressive, may have that result.
40 In this case, the statement of claim pleads each set of facts as falling within either s 232(e) or both ss 232(d) and (e), but does not plead that all of the alleged conduct taken together falls within those sections of the Act. Notwithstanding this, the separate allegations in the statement of claim have also been considered in these reasons as constituting a course of conduct. The defendants’ written closing submissions contemplate that the conduct will be considered collectively as well as individually and so there is no prejudice to them in this regard.
41 In Exton v Extons Pty Ltd (2017) 53 VR 520; [2017] VSC 14, Sifris J observed at [39] that:
From a review of the authorities the better view is that s 232(d) is separate and distinct from s 232(e) and that a breach may not necessarily involve commercial unfairness. The Court is required to examine all of the relevant facts and circumstances in order to determine whether the conduct under scrutiny is in the best interests of the company as a whole, apart from its members. In this context breaches of duty (whether statutory or fiduciary) by directors and officers may well be conduct that is not in the best interests of the company as a whole. Whether breaches of duty in a small family company, where there is an overwhelming identity of interest between shareholders and directors, fall within the sections is a related matter. There is authority … to the effect that where there is consent or ratification of such conduct, it may, in context and in the circumstances, not be contrary to the interests of members as a whole or indeed unfair.
(emphasis added)
42 The Company is a relatively small, private entity which operates within the residential construction industry as the franchisor of the Smith & Sons franchise within Australia and New Zealand. It was described by Mr Peter Haley, the expert called by the Company at trial, as “not a big business at all”.
43 The Company was established in 2006 by Mr Gardner, Mr Darren Wallis and Mr Passey. At that time, Mr Passey and Ms Passey were married.
44 Cortal Pty Ltd as trustee for the Passey Family Trust (Passey Family Trust) was one of the original shareholders of the Company along with the fourth, fifth and sixth defendants. These shareholders executed a shareholders’ agreement on around 1 November 2009 which was also executed by Mr Passey, the Passey Family Trust, the Company and others.
45 Mr Leigh Wallis became a director of the Company in 2011.
46 Total Fitouts Corp Pty Ltd was incorporated in Australia on 11 October 2013 for the purposes of operating a similar business to that of the Company, but in relation to commercial fitouts. Shortly after its incorporation, its shareholders entered into a shareholders’ agreement dated 15 October 2013. The parties to that agreement included Mr Passey, the Passey Family Trust, the Company and another company called Total Fitouts Group Pty Ltd. In addition, Mr Darren Wallis, Mr Leigh Wallis, Mr Gardner and Mr Jeremy Dyer were also parties. It is common ground on the pleadings that the fourth, fifth and sixth defendants were also parties.
47 Pursuant to that agreement, the Passey Family Trust was allocated shares in both Total Fitouts Corp Pty Ltd and Total Fitouts Group Pty Ltd, and the directors included Mr Passey. The Company agreed to advance funds to Total Fitouts Corp Pty Ltd pursuant to that agreement, and subsequently did so.
48 On 15 June 2015, the Company obtained a loan from the Australia and New Zealand Banking Group Limited for $350,000.
49 In July 2015, the Company advanced some of the funds out of the proceeds of the ANZ Loan to each of its shareholders as loans pursuant to Division 7A of the Income Tax Assessment Act 1936 (Cth) including the amount of $60,000 to the Passey Family Trust. At some stage between this advance and prior to 30 June 2016, Ms Passey received the sum of $22,857 as income from the Passey Family Trust which was derived from the payment made to it of $60,000.
50 On 30 July 2015, the shareholders signed loan agreements with the Company which included an agreement to pay interest and make certain minimum repayments and with a term of seven years. The shareholders also agreed on this date that, instead of dividends being paid pursuant to their respective shareholdings in the Company, any declared dividends would be applied to reduce the outstanding amount of the loans.
51 For the financial years of 2016 (and, indeed, until 2019) and in accordance with the agreement reached between the shareholders, the dividends declared by the Company were applied to reduce the amounts owing by each of the shareholders pursuant to their loans.
52 On 26 August 2016, Ms Passey sent an email to Mr Hill, copied to Mr Passey, thanking him for documents (which appear to have been attached to an email of 12 August 2016) and stating:
… I would also like to see the full financials for these companies and any others that you may have. Could you please explain the adjustments that have been made in the smith and sons statement, in particular the consulting fees and wages.
53 On 8 September 2016, Mr Hill sent an email to Ms Passey in response, attaching the financial statements and tax returns for the Company and Total Fitouts Corp Pty Ltd for 2014 – 2016, and noting in the covering email that the 2016 figures are draft figures only.
54 It is common ground that the Company entered into a loan agreement on or around 3 November 2016 with a company incorporated in British Columbia, Canada called Smith & Sons Remodeling Experts Canada Inc (which the parties and witnesses called the Canadian Company during the trial, and so I will adopt the same terminology). The Company agreed to advance funds to the Canadian Company pursuant to that agreement.
55 An Australian company called Smith & Sons Remodeling Experts Canada Pty Ltd owns 80% of the shares in the Canadian Company. Ms Passy’s counsel called this company the Australian Canadian Company and I will adopt the same terminology.
56 In 2016 and with the consent of all of its members, the Company commenced to advance funds to the Canadian Company on an unsecured and interest free basis. It has advanced various amounts over a period of approximately five years, with only a small sum being repaid to date. These advances were approved by the directors, some of whom have experience in setting up businesses overseas. Both Mr Darren Wallis and Mr Leigh Wallis gave uncontradicted evidence at trial which justified the continued advances for commercial reasons and which was to the effect that it appeared that advances to the same level would no longer be required.
57 Mr Leigh Wallis replaced Mr Passey as Chief Executive Officer of the Company in 2017.
58 On 5 October 2017, Mr Hill sent an email to Mr Passey and Ms Passey which attached certain documents showing his calculations of the share value in the Company and in Total Fitouts Corp Pty Ltd, taking into account profit and loss statements for the 2016 and 2017 financial years. The email also attached the signed shareholders’ agreements for each of those companies.
59 Mr Passey ceased to be a director of the Company in November 2017.
60 On 29 January 2018, in response to a request for this information dated 22 January 2018, Mr Hill sent an email to Ms Passey attaching the financial statements and tax returns for the Company, Total Fitouts Corp Pty Ltd and the Passey Family Trust.
61 On 31 January 2018, Mr Darren Wallis sent an email to Ms Passey offering to pay the Passey Family Trust “$300,000 payable as $100,000 over 3 years (paid Monthly)” for its shares in the Company. Mr Wallis referred to the Company being in a “cash flow issue” and noted that “GJ will loan [the Company] when needed to ensure [the offer] is paid”.
62 Ms Passey replied to Mr Wallis’ offer on 6 February 2018:
Hi Darren, Leigh and Jeremy
Just wanted to clarify that the shares for both Smith and Sons and Total Fitouts are still held by Cortal Pty Ltd in the The Passey Family Trust of which Corey is the sole director. However, I have a court order that states that he is not authorised to sell, transfer or otherwise deal in the shares unless I have approved the such. Corey & I have come to an agreement (which is soon to be transferred into Consent Orders) that I will receive either 80% of the shares to retain or 80% of the share sale proceeds if we are made an agreeable offer. Also just to clarify, we are able to negotiate & agree on a sale price of the shares before consent orders are issued and I have released Corey to negotiate the sale of his percentage of the shares if he wishes to do so. I hope this clears up things up a bit.
63 On 7 February 2018, Mr Darren Wallis stated that the offer of 31 January was open until 4.00 pm on 9 February 2018. Ms Passey replied to this email at 1.50pm on 8 February 2018 confirming an “in principle acceptance of the offer however there are some pertinent details” that she wanted to negotiate with Mr Wallis.
64 On 14 February 2018, after a meeting between them on 12 February 2018, Mr Darren Wallis sent an email to Ms Passey with another offer to purchase 24% of the shares in the Company for $300,000 payable by an initial instalment of $70,000 and thereafter $10,000 per month until the sum was paid.
65 On 23 March 2018, Mr Darren Wallis sent a follow up email asking how the settlement was progressing between Ms Passey and Mr Passey. Ms Passey requested additional time.
66 On 27 March 2018, Mr Darren Wallis sent an email to Ms Passey confirming that the solicitors would “hold fire” for two weeks being 10 April 2018. On 8 April 2018, Ms Passey emailed Mr Wallis that she was in contact with her lawyer and her lawyer is “starting the documents on [12 April 2018]”.
67 On 3 May 2018, Mr Wallis sent an email to Ms Passey requesting an update as he was “about to start the budgeting process with GJ”. Ms Passey did not respond to this email.
68 In about June 2018, Mr Darren Wallis called Ms Passey and informed her that the Company was withdrawing the 14 February 2018 offer.
69 On 10 August 2018, a consent order was made by the Family Court which contained the following orders:
6. That within thirty (30) days of the date of these orders, the Respondent in his capacity as the Director of Cortal Pty Ltd ACN 127 410 119 as trustee for the Passey Family Trust transfer to the Applicant 48 ordinary shares in Smith and Sons Renovations & Extensions (Aust) Pty Ltd ACN 119 427 119 and the said shares shall thereafter be the sole and separate property of the Applicant.
7. That within thirty (30) days of the date of these orders the Respondent in his capacity as the Director of Cortal Pty Ltd ACN 127 410 119 as trustee for the Passey Family Trust transfer to the Applicant sixteen (16) ordinary shares in Total Fitouts Group Pty Ltd ACN 166 219 932 and the said shares shall thereafter be the sole and separate property of the Applicant.
…
16. That unless otherwise specified in these orders and except for the purposes of enforcing the payment of any money under these or any subsequent orders:
...
(e) Each party be solely liable for and indemnify the other against any liability encumbering any item of property to which that party is entitled pursuant to these orders; and
…
NOTATIONS
1. In the event the Respondent in his capacity as the Director of Cortal Pty Ltd as trustee of the Passey Family Trust enters into an agreement for the sale of the shares in Total Fitouts Group Pty Ltd prior to these orders being made, then in lieu of the transfer of shares to the Applicant in paragraph 7 above, a distribution of $80,000 shall instead be made to the Applicant from the Passey Family Trust.
70 This order was made to reflect a property settlement between Mr and Ms Passey who had obtained a divorce.
71 Mr Passey sold the shares in Total Fitouts Group Pty Ltd prior to the consent order being made and so Ms Passey received $80,000 in lieu of shares in that company.
72 After Ms Passey became the registered owner of 48 shares in the Company on 30 October 2018, Mr Hill effected a book entry transferring 80% of the loan balance owing by the Passey Family Trust to the Company to Ms Passey’s shares.
73 On 30 June 2019, the Company declared an unfranked dividend for the 188 shares in the Company in the amount of $154,000. On 30 June 2020, the Company declared an unfranked dividend for the 188 shares in the Company of $60,276. The declared dividends were applied to reduce the loan which was now recorded against Ms Passey’s loan. This was also done in relation to the other shareholders – that is, no amount was paid to any shareholder. Rather, the amount was applied as a book entry to reduce the loan recorded as being owed by each of the shareholders.
74 Complaint was made by Ms Passey about the non-payment to her of the dividends. Between July 2020 and December 2020, the parties engaged in unsuccessful negotiations, including through their respective solicitors, for the purposes of having Ms Passey exit the Company, and these proceedings were then commenced.
75 Having regard to the pleadings, the following issues arise:
(1) was the conduct of the directors in relation to the non-payment of dividends to Ms Passey for 2019 and 2020 financial years oppressive to, unfairly prejudicial to or unfairly discriminatory against her?
(2) was the entry by the Company into agreements in 2015 (Total Fitouts Corp Pty Ltd) and 2016 (Canadian Company), and the provision of loans to those companies pursuant to those agreements, contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to or unfairly discriminatory against Ms Passey?
(3) was the failure to cause Ms Passey to become a party to the shareholders’ agreement or offer to buy her shares at a price of $1,847,807.14 oppressive to, unfairly prejudicial to or unfairly discriminatory against her?
(4) was the Company’s payment of fees to Mr Gardner and Mr Darren Wallis in 2017 – 2021 (other than 2019) contrary to the interests of the Company’s members as a whole and oppressive to, unfairly prejudicial to or unfairly discriminatory against Ms Passey?
(5) was the payment of the defendants’ legal fees in relation to the dispute with Ms Passey contrary to the interests of the Company’s members as a whole and oppressive to, unfairly prejudicial to or unfairly discriminatory against Ms Passey?
(6) does the conduct, if established and considered on a cumulative basis, constitute oppression?
(7) what, if any, relief should be granted?
Conduct in relation to non-payment of dividends
76 The following is a summary of key facts relating to this claim which are either common ground or were not controversial:
(1) on 15 June 2015, the Company obtained a loan from ANZ for $350,000;
(2) each of the shareholders of the Company as at July 2015 agreed to take a loan from the Company on the condition it would be pursuant to Division 7A of the Income Tax Assessment Act;
(3) between 21 and 24 July 2015, each of the shareholders, including the Passey Family Trust, received a cash injection from the loan received from ANZ;
(4) Ms Passey's income in the 2016 financial year included a distribution from the Passey Family Trust of $22,857;
(5) Ms Passey was aware of the shareholder loan because, on 28 March 2018, Mr Hill raised the shareholder loan issue with Ms Passey, asking her in an email of that date, “What happens to the Shareholder loan between Passey Trust and Smith and Sons? I suggest you discuss this with Darren”;
(6) on 20 April 2018, Ms Passey sent an email to Mr Hill in response which stated:
Thanks for highlighting those couple of concerns for me. In relation to the shareholders loan, I will discuss this with Darren. I will ask that Smith and Sons officially forgive this debt as part of our share sale agreement.
(7) on 30 October 2018, Ms Passey became a shareholder of the Company;
(8) in the course of preparing the 2019 financials for the Company, Mr Hill manually adjusted the loans as recorded in the financial records of the Company by transferring 80% of the loan owed by the Passey Family Trust to Ms Passey, being $77,946.22. This was on the basis that Ms Passey had acquired 80% of the shares previously held by the Passey Family Trust in the Company;
(9) when Mr Hill made this adjustment, he did not do it at the direction of either Mr Darren Wallis or Mr Leigh Wallis, but based on his own understanding and how he had done it with other clients;
(10) on 30 June 2019, the Company declared an unfranked dividend for the 188 shares in the Company of $154,000;
(11) it was Mr Hill’s understanding that any dividends declared were to be offset against the loans to the shareholders;
(12) in March 2020, Ms Passey sent Mr Hill a copy of the order of the Family Court;
(13) prior to receipt of the Family Court order, Mr Hill understood that Ms Passey was personally liable for the loan to the Passey Family Trust but that understanding changed when he read the order;
(14) on 30 June 2020, Mr Hill sent an email to Mr Darren Wallis and Mr Leigh Wallis attaching an extract from the Family Court order and which stated, “the court order says that the shares are to transfer over to Talitha but the liabilities (shareholder loan) remain in the Passey family trust. When is a good time to meet up to discuss what this means and what to do going forward”;
(15) later on 30 June 2020, Mr Darren Wallis responded to Mr Hill’s email, copied to Mr Leigh Wallis, stating, “I think this is a bit more complicated than that, and we may need legal advice, as the Div 7A loans are usually linked with a shareholding, so very hard to just cancel in effect”;
(16) on 30 June 2020, the Company declared an unfranked dividend for the 188 shares in the Company of $60,276;
(17) by its solicitors’ letter of 8 October 2020, the Company offered to pay the dividends to Ms Passey in addition to the purchase price for her shares (with such price to be determined by an independent valuer);
(18) the directors caused the Company to make its first payment to Ms Passey of dividends by 4 November 2020, and Ms Passey was paid all of the dividends claimed by her by January 2021;
(19) Ms Passey accepts that she has now been paid the dividends owing to her;
(20) after the initial cash injection in July 2015, no shareholder has received any monetary dividends from the Company other than Ms Passey;
(21) the loan to Ms Passey is no longer recorded against her shares in the Company’s financial records.
77 Ms Passey’s pleaded position in this proceeding is that she was entitled to be paid certain dividends as a result of the declarations dated 30 June 2019 and 30 June 2020. Her statement of claim alleges that, instead of paying her these dividends, the directors asserted that her entitlement would be offset against the loan owed by the Passey Family Trust and then only paid her $20,619.15 after demands were made by her lawyers with the majority of her dividend entitlement being paid after this proceeding was commenced.
78 Although Ms Passey accepts through her counsel that “no remedy flows directly from this ground of oppression”, it is submitted on her behalf that this conduct should be regarded as part of an overall course of conduct.
79 Reliance is placed in Ms Passey’s submissions on the difference between the evidence of Mr Darren Wallis and Mr Hill, and the Court is urged to accept the evidence of Mr Hill.
80 Mr Darren Wallis gave evidence that Mr Hill’s original advice to him had been that the loan obligation stayed with the shares (which advice Mr Wallis believed) but then Mr Hill changed his mind, he “changed his tune”. Because of this, Mr Wallis said that he was not sure exactly what to believe, it’s “obviously more complicated” and “I thought we would probably need some … further advice or something”. Mr Darren Wallis was not challenged on this evidence. The evidence which he gave about this matter was given in a frank and direct manner, and he appeared to be giving evidence of his genuine recollection.
81 By contrast, Mr Hill gave brief evidence that his email of 30 June 2020 was the first time that he had advised Mr Darren Wallis and Mr Leigh Wallis on this issue.
82 Having regard to the manner in which Mr Darren Wallis gave evidence about the advice given by Mr Hill prior to his opinion changing, and that the advice said to have been given by Mr Hill coincided with the view which Mr Hill actually held until he saw the Family Court order, it is likely that Mr Hill did advise Mr Darren Wallis in the way stated by Mr Wallis at trial and that he has forgotten that he did so. Further, the fact that Mr Hill did not give the same evidence as Mr Darren Wallis does not mean that Mr Wallis’ evidence should not be accepted.
83 In any event, it is not apparent what Ms Passey seeks to make of this difference in the evidence between these witnesses unless it is in support of a submission that the directors acted with a particular motivation. That issue will now be addressed.
84 By her submissions, Ms Passey complains that the directors did not accept the advice of Mr Hill dated 30 June 2020 and maintained a position even by their defence in this proceeding that Ms Passey was not owed dividends by pleading that there was a lien over the shares, which conduct was therefore unfair. It is submitted that:
On a charitable view to the respondents, they simply misunderstood the way loans and liens work. The better view though is that they either deliberately adopted their position, or wilfully shut their eyes to the obvious because they had other motivations for not paying the applicant her dividend. While proving motive is not necessary to succeed in an oppression action, the applicant submits that it is relevant, both to the gravity of the conduct at the time and the remedy to be crafted.
(emphasis added)
85 Ms Passey then relies upon the following evidence to support this submission:
a) Mr Darren Wallis being a qualified accountant and having a law degree. For him to assert that he did not know how the particular loan worked because it was an exotic ‘Div 7A loan’ should not be accepted.
b) Both Mr Darren Wallis and Mr Leigh Wallis said in cross-examination that they thought it was unfair that Ms Passey should receive a cash dividend when none of the other shareholders had. Mr Leigh Wallis went even further, saying:
I think it’s fairly natural not to want to give other people money when it’s – you know, like, that’s normal in business, I think. Like, you know, she had her hand out for money and we didn’t think it was right. So I think it’s only natural that we should oppose it.
This attitude of course overlooks the fact that the other shareholders received a cash payment back in 2015 which they were never going to have to repay to the Company by virtue of the Div 7A arrangements.
c) Mr Leigh Wallis writing in an email on 1 July 2020 that ‘there is no cash available for a dividend’ and ‘there is [no] way the company can pay cash out as dividends’.
d) Mr Leigh Wallis writing in the same email that ‘if the current loan to the Passey Family Trust is written off then all shareholders will have to inject significant funds to keep the liquidity of the business going.’
(footnotes omitted)
86 However, it is not open to find that the defendants deliberately adopted the position which they did, or “wilfully shut their eyes to the obvious”, in a manner which was “oppressive to, unfairly prejudicial to, or unfairly discriminatory against” Ms Passey because:
(1) such a case was not pleaded, and nor was such a case put to these witnesses under cross-examination. It is unfair for Ms Passey to advance such a case in closing submissions particularly as the defendants did not have an opportunity to be heard in relation to it;
(2) the facts relied upon to justify the submission are insufficient to lead to the claimed inference in any event;
(3) advice had been given by Mr Hill, who then changed his opinion after he read the consent order. Mr Darren Wallis held a valid concern about this change of position and wanted further advice, which is not unreasonable or commercially unfair, especially as the Company had cash flow issues and no other shareholder was receiving a dividend by way of transfer of funds;
(4) the Company’s previous lawyers engaged with Ms Passey’s lawyers in negotiations to buy Ms Passey’s shares and to seek to resolve the dispute about the non-payment of the dividends. This was a reasonable and commercially justifiable step to take in the circumstances, especially as Ms Passey had shown no interest in being involved in the Company and she had previously accepted an offer to sell the shares “in principle”;
(5) the current lawyers for the Company prepared and filed a defence in this proceeding on 8 November 2021 which pleaded that Ms Passey was not entitled to be paid the dividends because of a lien which had arisen pursuant to the constitution of the Company. No application was brought by Ms Passey to strike out this part of the defence or to seek summary judgment, which tells against any finding that it was or ought to have been “obvious” to the directors that the dividends were payable to Ms Passey. In the circumstances, Ms Passey appears to have accepted that the position was at least arguable;
(6) the evidence does not indicate that the directors of the Company were motivated to make a decision to achieve some particular unfairness against Ms Passey.
87 Taken as a whole and regarded objectively, the conduct of the directors of the Company surrounding the failure to pay to Ms Passey her share of the declared dividends was not so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair.
88 Accordingly, Ms Passey has failed to demonstrate that the conduct of the directors relating to the non-payment of dividends to her was oppressive to, unfairly prejudicial to, or unfairly discriminatory against, her as alleged.
Conduct in relation to loan to Total Fitouts Corp Pty Ltd
89 Ms Passey alleges that the provision of the loan to Total Fitouts Corp Pty Ltd has decreased the assets of the Company and has provided financial benefits to companies in which the directors have a financial interest to the detriment of the value of Ms Passey’s shareholding in the Company.
90 During closing submissions, counsel for Ms Passey submitted that the assets of the Company were decreased because the loan was unrecoverable “but I can’t press that submission as hard as I can with respect to the Canadian loan”. It was also submitted that Ms Passey derives no benefit from the loan and that the detriment to Ms Passey’s shareholding “would be whether or not the loan was unrecoverable”. It was submitted that:
[there] would be a decrease in the assets of the company, which would, therefore, decrease the value of my client’s shareholdings. But in order to show it’s a decrease in the assets of the company I would need to show that that loan was unrecoverable.
91 Counsel for Ms Passey accepted that if the loan to Total Fitouts Corp Pty Ltd was not found to be unrecoverable, then it would not be to the detriment of the value of Ms Passey’s shareholding in the Company.
92 Total Fitouts Corp Pty Ltd was incorporated on 11 October 2013. Shortly after its incorporation, its shareholders entered into a shareholders’ agreement dated 15 October 2013.
93 Business was defined in the shareholders’ agreement as the Business of franchising commercial fitouts under the Total Fitouts Corp Pty Ltd brand.
94 The recitals to that agreement stated:
A. The parties to this shareholders agreement have agreed that Total Fitouts Corp Pty Ltd conduct the Business.
…
C. The shareholders have created (or will create) Total Fitouts Corp Pty Ltd and enter into this agreement as a means of regulating their relationship as shareholders.
D. The shareholders have created (or will create) Total Fitouts Group Pty Ltd.
E. Total Fitouts Corp Pty Ltd has been (or will be) granted an exclusive license by Total Fitouts Group Pty Ltd to operate the business as Franchisor in Australia, New Zealand, the USA, and elsewhere.
…
G. The shareholders have entered into this Agreement to record their aims and objectives in relation to Total Fitouts Corp Pty Ltd and to provide for the operation and administration of Total Fitouts Corp Pty Ltd.
95 Clause 11.2 provided:
[The Company] agree to fund the initial start up of Total Fitouts. The amount is at [the Company’s] discretion and will be assessed monthly. Any amount funded or advanced to Total Fitouts Corp or Total Fitouts Group will be classified as a loan and repayable prior to any dividends being paid out.
96 Clause 8.9 (the second one) provided:
Prior to the payment of Dividends by Total Fitouts Corp, Total Fitouts Corp must first repay any outstanding loans to [the Company], related companies or other companies associated with any of the directors or shareholders of Total Fitouts Corp.
97 Mr Leigh Wallis gave evidence that the Company has loaned funds to Total Fitouts Corp Pty Ltd since its incorporation in October 2013. He gave evidence that the loans were to support the establishment and ongoing business of Total Fitouts Corp Pty Ltd and to ensure its success. He expressed the opinion that the loans were recoverable.
98 Mr Darren Wallis gave evidence that the loans to Total Fitouts Corp Pty Ltd were interest free and were not secured. He agreed that there was no cross-branding between Total Fitouts Corp Pty Ltd and the Company, but also gave uncontradicted evidence that there was a “lot of benefit” to Total Fitouts Corp Pty Ltd from the Company and “vice versa”. He said that “behind the scenes” there was “a hell of a lot of crossover”.
99 Under cross-examination, Ms Passey agreed that she was aware that the Company was supporting the “Total Fitout business” financially before she became a shareholder. Indeed, she agreed that she had known this since August 2016. She also knew that the Company was making loans to Total Fitouts Corp Pty Ltd which were utilised for the establishment and payment of ongoing expenses of that company. Such concessions are supported by the following evidence:
(1) on 12 August 2016, Mr Hill sent various documents by email to Mr and Ms Passey to assist them with “the marriage split”. The covering email stated, “I have consolidated all the Total Fitout entities into a 3 year analysis. You can see the business has made losses for the last 3 years and is being funded by [the Company]. Let me know if you have any questions or need any further information”. One of the documents sent to Mr and Ms Passey was a list of the companies in which the Passey Family Trust held shares. The list included both Total Fitouts Corp Pty Ltd and Total Fitouts Group Pty Ltd;
(2) by email from Mr Hill dated 8 September 2016, Ms Passey was sent 2014 – 2016 financials for Total Fitouts Corp Pty Ltd and the Company (although the 2016 financials were in draft only). Each of the financial statements showed a loan from the Company to Total Fitouts Corp Pty Ltd;
(3) on 5 October 2017, Mr Hill sent an email to Mr and Ms Passey which attached a copy of the shareholders’ agreement for Total Fitouts Corp Pty Ltd, to which the Company was a party;
(4) by email dated 29 January 2018, Ms Passey was sent the 2017 financials and tax returns for, amongst others, Total Fitouts Corp Pty Ltd. The attachments included reference to an unsecured loan from the Company in the amount of $101,175. The same unsecured loan was reflected in the financial statements of the Company which were also attached to this email;
(5) Ms Passey became a shareholder of the Company in October 2018, at which time the outstanding balance of the loan owed by Total Fitouts Corp Pty Ltd was $127,323.09.
100 On 20 August 2021, Mr Dyer sent an email to Mr Leigh Wallis and Mr Darren Wallis proposing that Total Fitouts Corp Pty Ltd start to repay the loan at $5,000 a month.
101 As at September 2021, the amount of $110,323.09 was owing on this loan.
102 The Company committed to provide funding to Total Fitouts Corp Pty Ltd some five years before Ms Passey became a shareholder of the Company. This commitment was contained in a shareholders’ agreement to which all of the (then) members of the Company were parties, and pursuant to which all members derived a benefit, namely a shareholding in Total Fitouts Corp Pty Ltd.
103 At some stage after August 2016, the Passey Family Trust ceased to be a shareholder of Total Fitouts Corp Pty Ltd and Mr Passey ceased to be a director.
104 Ms Passey, who was legally represented, consented to an order pursuant to which she became a shareholder of the Company in October 2018 with prior notice of the shareholders’ agreement dated 15 October 2013, the Company’s commitment to provide funding pursuant to that agreement, the identity of the shareholders in Total Fitouts Corp Pty Ltd and the quantum of the unsecured loans which had been made by the Company to Total Fitouts Corp Pty Ltd, which loans had increased over time since 2014. She also accepted $80,000 in lieu of shares in Total Fitouts Group Pty Ltd, being the company which granted the license to Total Fitouts Corp Pty Ltd to operate its business as referred to in the shareholders’ agreement dated 15 October 2013.
105 The overall net asset position of the Company did not change by reason of this loan and it remains due and owing.
106 There is no cogent evidence to indicate that the loan to Total Fitouts Corp Pty Ltd will not eventually be repaid or that it is “unrecoverable”. To the contrary, repayments have been made in the past and there has been a commitment by Mr Dyer (one of the directors) to repay the loan to the Company by a set amount each month. There is no evidence to indicate that such a commitment was not genuine or would not be maintained. Indeed, since Ms Passey became a shareholder, the amount of the outstanding loan balance has been reduced by the net amount of $17,000.
107 In light of these matters, counsel for Ms Passey submitted that the Court “can take a more optimistic view of the repayment of this loan”. Such a view is taken.
108 In the circumstances, the premise of Ms Passey’s complaint in relation to the loan to Total Fitouts Corp Pty Ltd has not been established. In particular, it has not been established that the loan is “unrecoverable” which, according to the submissions of counsel for Ms Passey, has the consequence that the assets of the Company have not been decreased and the loans are not to the detriment of the value of Ms Passey’s shareholding in the Company. That conclusion is, on its own, a sufficient basis to reject this aspect of Ms Passey’s case.
109 It is also a relevant factor that Ms Passey seeks to complain about the conduct of the Company in entering into a legal commitment to provide a loan to a related company, and in making advances to that company, in circumstances where that commitment was made prior to the date on which she became a shareholder and with the support of the entirety of its members. At the time that the commitment was made, there were only four shareholders and each of those shareholders was associated with a director. There was therefore an “overwhelming identity of interest between shareholders and directors” and “consent or ratification” of the kind described in Exton v Extons Pty Ltd. Further, all advances which were later made (at least prior to October 2018) occurred with the consent and support of all of the members of the Company. Finally, Ms Passey chose to become a shareholder of the Company on notice of this commitment, and of advances made pursuant to this commitment. After becoming a shareholder, no complaint was made by Ms Passey about this loan until 23 October 2020.
110 With these matters in mind and assessed objectively, the conduct of the Company at the time of making the legal commitment to loan money to Total Fitouts Corp Pty Ltd was not so unfair that reasonable directors who consider the matter would not have thought the decision fair. That is because all of the shareholders at that time supported the decision and each obtained a shareholding in Total Fitouts Corp Pty Ltd. The conduct of entering the shareholders’ agreement in 2013, and advancing funds pursuant to it prior to October 2018, could not have been unfair to Ms Passey because she was not a shareholder when that conduct occurred. Further, in all of the circumstances and having regard to the unanimous support of its directors and shareholders, the entry by the Company into the shareholders’ agreement in 2013, and the advancement of funds pursuant to that agreement prior to October 2018, adheres to accepted standard of corporate behaviour.
111 Further and assessed objectively, the conduct of the Company in continuing to advance funds to Total Fitouts Corp Pty Ltd after Ms Passey became a shareholder was not commercially unfair. Ms Passey was aware of the existence of the loan and of the approximate outstanding balance but did not complain about the loan until two years after she became a shareholder. Further, the overall balance of the loan has been reduced since Ms Passey became a shareholder. Further, there were “behind the scenes” operational benefits in supporting the operations of Total Fitouts Corp Pty Ltd which tend to justify the continued financial support. Finally, had the Company ceased to advance further funds to Total Fitouts Corp Pty Ltd when Ms Passey became a shareholder, then it may be inferred from the fact that the Company provided ongoing financial support that there is at least some prospect, if not a likely prospect, that Total Fitouts Corp Pty Ltd would have ceased its business operations. This would have had the result that the loan to Total Fitouts Corp Pty Ltd might not have been repaid, either in full or at all. The continued advances after October 2018 were therefore commercially justifiable for this reason.
112 While it is correct that, unlike the other shareholders, Ms Passey has no financial interest in Total Fitouts Corp Pty Ltd, “mere prejudice to or discrimination against” Ms Passey is “insufficient to attract the court’s jurisdiction to intervene”, especially having regard to all of the relevant circumstances: Hylepin (FC) at [126].
113 For these reasons, Ms Passey has failed to demonstrate that the provision of the loan to Total Fitouts Corp Pty Ltd was oppressive to, unfairly prejudicial to, or unfairly discriminatory against, her as alleged. Nor was this conduct contrary to the interests of the members as a whole because, assessed objectively, it is in accordance with how reasonable directors would act in attending to the affairs of the Company.
Conduct in relation to loan to the Canadian Company
Ms Passey’s contentions
114 Ms Passey complains about the loan agreement entered by the Company with the Canadian Company in 2016, being an agreement which was entered prior to the date on which she became a shareholder and which was entered with the consent and approval of all of the Company’s (then) shareholders. She complains that the entry into the agreement as well as the making of advances pursuant to that agreement falls within ss 232(d) and 232(e) of the Act.
115 Ms Passey complains that the loan is unsecured and interest free, and that the directors of the Company have a financial interest in the Canadian Company because, through their corporate entities, they own the shares in the Australian Canadian Company which, in turn, owns 80% of the shares in the Canadian Company.
116 During closing submissions, counsel for Ms Passey submitted that the assets of the Company were decreased because the loan to the Canadian Company was unrecoverable. It was also submitted that Ms Passey derives no benefit from the loan as she is not a shareholder in the Australian Canadian Company and that the detriment to Ms Passey’s shareholding “would be whether or not the loan was unrecoverable”.
117 It was submitted that, having regard to the “history of the repayments”, a finding should be made that “this loan is never going to be paid back”. It was submitted that it was “just a matter of looking at a loan balance over a number of years against the profit and loss statement over a number of years” which made it “clear that the Canadian Company has no prospect of paying back this loan”.
Relevant facts
118 In the recitals to the shareholders’ agreement for the Company dated 1 November 2009, it was stated that it was the parties’ intention to expand internationally as well. It was further stated that, “When expanding internationally the parties intends [sic] to start a new company to control the international franchise operations. The directors and shareholders which will be the same as the then current holdings in [the Company]”.
119 The Canadian Company was formed following a former franchisee (Mr Peterson) moving to Canada and expressing an interest in working with the Smith & Sons brand in around April 2015. The then directors of the Company (which included Mr Passey) agreed that it was important that the Smith & Sons brand grow internationally as this would improve the image, brand and value of Smith & Sons.
120 On 10 February 2016, the Australian Canadian Company was registered. The directors of the Company were all appointed directors of this company along with Mr Peterson, but new companies were set up by those directors to become shareholders.
121 On 12 August 2016, Mr Hill sent a document by email to Ms Passey which identified that Cortal OSIT Pty Ltd as trustee of the Passey Overseas Investment Trust owned a 20% shareholding in the Australian Canadian Company as well as units in the Smith & Sons Remodeling Experts Canada Unit Trust. Ms Passey agreed that she was aware of that shareholding and unit holding from 12 August 2016, and that she did not seek to have any of those shares or units transferred to her as part of her negotiations with Mr Passey.
122 In November 2016, Ms Passey sent an email to her husband which asked for certain information to give to their accountant including, in relation to “SMITH AND SONS”:
*how many franchisors and ‘ees are currently operating in Australia, in New Zealand and in the USA and Canada?
123 This email shows that Ms Passey was aware that the Company was engaged in franchise operations in Canada by no later than November 2016. Under cross-examination, Ms Passey accepted that the decision to have operations in Canada was a decision made by the directors with experience in expansion of franchises overseas. That they had such experience is also demonstrated by other evidence. For example, G J Gardner Homes (of which Mr Darren Wallis and Mr Gardner are directors) has operated franchises in New Zealand, the USA, Germany and South Africa.
124 Ms Passey received a copy of the shareholders’ agreement of the Company on 5 October 2017 from Mr Hill. She agreed that one of the objects of the Company was to expand its franchise brand internationally and, in furtherance of that object, a decision was made to expand into Canada. Ms Passey conceded that the decision to expand into Canada was done with the goal of improving the image, brand and value of Smith & Sons, and that improving the brand is a benefit to the Company.
125 This accorded with the evidence of Mr Leigh Wallis, who gave evidence that:
Like, certainly, Canada, for us, was a spearhead. Canada, for us, was proof to all our other master franchisees and franchisees that Smith & Sons could – the brand name – this brand name could work anywhere in the world. And so Canada was a spearhead for that.
126 Mr Darren Wallis gave the following evidence about the reasons for the Company lending money to the Canadian Company:
When Cory set it up with us, like, we set it up, we did an initial loan and we knew, at that time, everyone was aware that we were going to – you had to inject funds into that company to get it going over there. That’s what – you know, I’ve set a few companies up overseas with, you know, for Australian companies and that’s what you do. You set up an … offshore company because it’s much easier to operate in that country with their own set of regulations and everything. You loan the money from the mothership to get it, you know, going and then, you know, eventually – and sometimes it can take years – they repay back to the mothership but it’s like – it has got to be – that’s the only way you – that’s the best way both tax and, you know, logistic-wise to do it and I’ve done it several times.
127 When Mr Darren Wallis was challenged about the amount which had been advanced to the Canadian Company and the apparent financial difficulties which the Canadian Company was experiencing, he gave this evidence:
So the pattern is that the more the Canadian company loses, the more money Smith & Sons loans it?---Doesn’t that make sense, yes?
Well - - -?---There’s a short – obviously, if you lose money, there’s a shortfall of X number of dollars, so someone has got to put up the X number of dollars. So that’s what you do when you’re setting up a new company. If it loses 20, you’ve got to put in 20 to keep it going, and if it – so I – I’m not sure what – what you want me to answer, but, yes, that’s probably the loan balance and that sounds about right and that’s probably what we’ve invested, and I think we’re now at the turning point with the six to eight franchisees, and I think Canada has actually started to pay back a small amount of money.
…
And then in the five years that this loan had been on foot between Smith & Sons and the Canadian Company, the Canadian Company had paid back – you said some money, I can tell you how much it is. It’s $985. Do you agree with that?---I’m not sure of the exact figure, because I haven’t come to the accounts, yet, but Leigh said it’s starting to and it looks like it’s going to start paying it back, but that’s what - - -
Well - - -?---It takes time. You can’t set up a company overseas and expect to get dividends back the next year. It takes some time to do it, and then – I mean, my American company lost money for quite a few years. I’m still putting money over there sometimes.
…
If money is starting to come back, that means we’ve stemmed the bleeding and money is starting to come back, so that’s probably a good sign.
128 Mr Leigh Wallis gave this evidence about the level of advances to the Canadian Company:
THE WITNESS: … I was just going to say if you look at the loan, S&S Canada transactions, yes, the company has been at a loss but if you look at the entry, page 2 of 3 of that, which is page 469, on 6 November 2020, if you follow that across, Mr Hogg, you will see an entry there for $5003.89.
MR HOGG: Yes?---Now – and see how that’s in the right-hand column next to it as well?
Yes?---So, basically, apart from wages, November 2020 was the last time we ever pumped any extra money pretty much into Canada. So if you look at that, since November 2020, we have – apart from wages, we haven’t had to loan any more money to that company. As you can see before that we were loaning a stack. So what we’re saying is: yes, it’s still at a loss, I know it is, however, you can see that the financial position of the company is getting better and we – we would say that in a year or so Canada will be running by itself and apart from what it’s paying back now, it will pay back more …
129 Mr Leigh Wallis gave further unchallenged evidence about the operations of the Canadian Company to the effect that, when the Canadian Company commenced operations, it operated the master franchise model. He said that they identified flaws in that model, and so changed to a different model, which had an impact on the profits of the Canadian Company. Mr Leigh Wallis then gave evidence that:
We totally expected this kind of P&L out of Canada because all of a sudden we had to come up with this money from somewhere to support the Canadian operation because of the change of model. And if you look at the overall amount of money, let’s say – let’s say – four years, let’s say it’s 500 grand, that’s hardly a wage per year. So I can’t see – you know, if you learn business, you understand that it takes time to set up businesses and this is what’s happening. It’s taking time to set up business. We don’t consider franchise agreements of five years, right? You know, at five years, they’ve just sort of hit their straps. So I think once we change model this P&L was totally expected and as more franchisees came on, as I’ve – as I’ve demonstrated, we’re not loaning as much money to Canada any more, sure, the P&L is not great, but it will improve and Max has told me this week some time that, you know, the – he’s actually chipping away. It’s not 169,000 in debt. It’s less than that. So, I mean, look, with all due respect, you don’t understand the business and you don’t understand Max and what I’m saying is this business will be here in 10, 20, 30 and 40, 50 years, and I’m not concerned about that P&L. And, I mean, that’s my arse on the line to my fellow directors but I am not troubled by that at all. And if you understand how it all works, I think you would well understand how Canada will perform.
130 By email dated 29 January 2018 from Mr Hill, Ms Passey was sent the 2017 financials for the Company which recorded an unsecured loan to “S & S Canada”. Ms Passey gave evidence that Mr Hill had been responsive to her requests for information and when she had sought information, he had provided it. Mr Hill’s evidence was to similar effect; that, whenever Ms Passey requested any information, “it has always been provided in a very timely manner”. His evidence was that, if Ms Passey asked for books and records of the Company, he sought the directors’ approval before giving any information but “there was never a time that it was not allowed to be given”.
131 As at 10 September 2021, being the month before Ms Passey first complained about this loan, the Company had advanced the amount of $592,645 to the Canadian Company.
Consideration
132 In 2009, the Company, along with all of its then members, expressed an intention to expand internationally. In 2015, an opportunity to expand the franchise operations into Canada presented itself, and the directors and members took up the opportunity, with all of the directors obtaining an indirect interest in the majority shareholder of the company which would be operating in Canada (being the Canadian Company). The directors took up the opportunity because they wanted to improve the image, brand and value of the Company. Their conduct was commercially justifiable for this reason. This had the support of all of the (then) members of the Company. At the time this conduct occurred, there were only four shareholders and each of those shareholders was associated with a director. There was therefore an “overwhelming identity of interest between shareholders and directors” and “consent or ratification” of the kind described in Exton v Extons Pty Ltd.
133 Ms Passey, who was legally represented, consented to an order pursuant to which she became a shareholder of the Company in October 2018 with prior notice of:
(1) the shareholders’ agreement dated 1 November 2009, and the expressed intention in that agreement of the Company, its directors and the other shareholders to expand internationally;
(2) the fact that the Company had decided to expand its operations into Canada;
(3) the fact that the decision to expand into Canada was done with the goal of improving the image, brand and value of Smith & Sons, and that improving the brand was of value to the Company;
(4) that the Company had made an unsecured loan in relation to the operations in Canada;
(5) the existence of the Australian Canadian Company;
(6) that Cortal OSIT Pty Ltd as trustee of the Passey Overseas Investment Trust owned shares in the Australian Canadian Company and units in the Smith & Sons Remodeling Experts Canada Unit Trust (according to Mr Hill’s document entitled “Passey Business Ownership”);
(7) the fact that she (Ms Passey) would not have an interest in the Australian Canadian Company when she became a shareholder of the Company.
134 This means that Ms Passey seeks to complain about the conduct of the Company in entering into a legal commitment to provide a loan to a related company, and in making advances to that company, in circumstances where that commitment was made prior to the date on which she became a shareholder and with the support of the entirety of its members. Further, all advances which were later made occurred with the consent and support of all of the members of the Company. Finally, Ms Passey chose to become a shareholder of the Company on notice of this commitment, and of advances made pursuant to this commitment. After becoming a shareholder, no complaint was made by Ms Passey about this loan until 23 October 2020.
135 The overall net asset position of the Company did not change by reason of the loans made to the Canadian Company. However, Ms Passey contends that the loans are not recoverable and therefore the assets of the Company have been decreased.
136 As to this, Ms Passey submits that the Court should form its own opinion as to the financial position of the Canadian Company by reference to its own unaided interpretation of limited financial records and a consideration of the advances made to that company and the lack of repayments by it. However, this evidence is insufficient to assess the financial position of the Canadian Company. This is especially so in circumstances where it is a foreign company which has established and has been operating a new business overseas for approximately five years for the purposes of offering franchises in the residential construction sphere, all of which indicates that expert evidence is required for such an assessment to be made.
137 Further, the formation of such an opinion by the Court would require the rejection of the evidence given by Mr Darren Wallis and Mr Leigh Wallis, who are experienced and successful in this type of business operations and (at least in the case of Mr Darren Wallis) have set up businesses overseas previously. In particular, Mr Leigh Wallis expressed the opinion that the loans are recoverable. These directors consider that the advances to date have been justified and they are not troubled by the fact that the Canadian Company has suffered losses.
138 For these reasons, the evidence adduced by Ms Passey is insufficient to demonstrate that “this loan is never going to be paid back” or that it is “unrecoverable” as Ms Passey submits.
139 The particular experience of the directors in this case in setting up new businesses overseas highlights the relevance of the statement by Brennan J (as his Honour then was) in Wayde v New South Wales Rugby League Limited [1985] HCA 68; (1985) 180 CLR 459 at 473 as follows:
The court must determine whether reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other, would have decided that it was unfair to make that decision.
(emphasis added)
140 With this test in mind and considered objectively, the conduct of the Company in relation to its decision to advance a loan to the Canadian Company in 2016 was not so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair. The decision made in 2015 to set up the Canadian Company, and the decision made in 2016 to provide it with financial support, were each made for sound commercial reasons by directors who had, amongst them, special skills and knowledge in relation to setting up businesses overseas. These decisions also had, at the time, the support of all of the directors and members of the Company who no doubt saw it as a realisation of their previously expressed intention to expand internationally.
141 Further and considered objectively, the directors’ conduct in continuing to advance funds to the Canadian Company after Ms Passey became a shareholder of the Company in October 2018 was not so unfair that reasonable directors who possessed the special skills of the Company’s directors and who considered the matter would not have thought the conduct or decision fair. That conclusion is reached for the following reasons.
142 First, by the time that Ms Passey became a shareholder, the Company had already made the decision to expand and to financially support its overseas counterpart. By its subsequent conduct, it was following through on its existing decision to provide financial support to the Canadian Company.
143 Second, based on the knowledge and opinions of its experienced directors, the Company had a sound commercial basis to believe that its investment would bear fruit in due course, including through a positive impact on its image and branding and repayment of the loan.
144 Third, there is no proper basis on the evidence to conclude that the Company continued to invest in the Canadian Company with no expectation of being repaid, or that its loans are unrecoverable such that the assets of the Company have been decreased, or there is detriment to the value Ms Passey’s shareholding.
145 Fourth, Ms Passey became a shareholder of the Company with actual knowledge of the expansion into Canada. She had the ability to discover such further information as she needed about this expansion. She did not seek to obtain any interest in the Australian Canadian Company in her negotiations with Mr Passey. She was aware of the existence of the loan but did not complain about it until two years after she became a shareholder.
146 Fifth, while it is correct that, unlike the directors, Ms Passey has no financial interest in the Canadian Company, more is needed for the Court to intervene than “mere prejudice or discrimination against” Ms Passey, as observed above, especially having regard to all of the relevant circumstances: Hylepin (FC) at [126].
147 Finally, it may be inferred from the ongoing financial support provided to it that, had the Company ceased to advance further funds to the Canadian Company when Ms Passey became a shareholder, then there was at least some prospect, if not a likely prospect, that the Canadian Company would have ceased it business operations. This would have had the result that the loan to the Canadian Company would not have been repaid, either in full or at all. The continued advances after October 2018 were therefore commercially justifiable for this reason.
148 For the same reasons, Ms Passey has also failed to demonstrate that the provision of the loan to the Canadian Company was contrary to the interests of the members as a whole because, assessed objectively, it is in accordance with how reasonable directors would act in attending to the affairs of the Company.
Conduct in relation to the failure to cause Ms Passey to become a party to the Company’s shareholders’ agreement
149 Clause 11.5 of the shareholders’ agreement dated 1 November 2009 is pleaded in the statement of claim. It states as follows:
Should any registered share holder intend to sell or transfer all or part of his shares in Smith & Sons then as a condition of such sale the transferor shall require that the transferee enter into an agreement by way of deed whereby the transferee agrees to be bound by the terms and conditions of this agreement as if he was an original party thereto.
150 The shares acquired by Ms Passey were transferred to her by Cortal Pty Ltd as trustee for the Passey Family Trust, which was a party to the shareholders’ agreement.
151 Clause 11.5 imposed an obligation upon the transferor to require Ms Passey to enter into an agreement by way of deed pursuant to which she agreed to be bound by the terms of the shareholders’ agreement.
152 No obligation was imposed on the directors or the remaining defendants by this clause.
153 Further, Ms Passey did not seek to become a party to the shareholders’ agreement even though she had been provided with a copy of it prior to becoming a shareholder. There is no evidence that, had she asked to become a party, that request would have been refused.
154 No real explanation was provided in Ms Passey’s submissions as to why this aspect of her pleaded claim should succeed. Had Ms Passey become a party to the agreement, there was no obligation upon the other shareholders to buy her shares either at all or at any particular price (for example). This is addressed further in more detail below.
155 In the circumstances, the failure by the directors or any of the defendants to ask Ms Passey to become a party to the shareholders’ agreement was not commercially unfair, in that, assessed objectively, it was not so unfair that reasonable directors who consider the matter would not have thought the decision fair.
156 For these reasons, the pleaded claim that the failure by the directors to cause Ms Passey to become a party to the shareholders’ agreement dated 1 November 2009 is oppressive to, unfairly prejudicial to, or unfairly discriminatory against, Ms Passey has not been established and therefore fails.
Conduct in relation to failure to offer to buy Ms Passey’s shares
157 By the statement of claim, Ms Passey pleads clause 8.3 of the shareholders’ agreement dated 1 November 2009 which contains a formula for calculating the price of her shares and alleges that, if that formula had been applied to her shareholding, the purchase price for her shares would have been $1,847,807.14.
158 Clause 8 provided as follows:
PART 8 – SALE OF SHARES/UNITS
Should any of the shareholders in Smith & Sons or any other trust or entity which is related under this agreement, wish to sell or transfer all or part of their units, the following shall apply:-
8.1 Sale of All Shares/Units
The registered shareholder will be required to sell or transfer all shares and units in all related trusts, companies and other entities in which the share holder has any beneficial interest under this agreement. This includes, but is not limited to, all units/shares in:-
i) Smith & Sons Renovations & Extensions Pty Ltd;
ii) Smith & Sons Renovations & Extensions (Aust) Pty Ltd.
Should other trusts, companies or other entities be formed as part of this agreement, all units, shares and beneficial interests will be subject to this Part 8.
8.2 Options to Purchase
(a) Upon the registered shareholder indicating they wish to sell or transfer their units, shares and beneficial interests, they must first offer (in writing) to sell all their units/shares/beneficial interests (pursuant to Part 8.1 herein) to the remaining registered unit/share holders collectively, who shall have an option to purchase the same.
Such option to be exercised within sixty (60) days of receipt of such written notice of sale. All remaining registered share holders must confirm they have received such written notice of sale within the specified time. Should such option be exercised and the offer of sale accepted by the remaining registered share holders collectively, the shares shall be transferred to the remaining registered share holders collectively, simultaneously upon payment thereof.
(b) Should the existing registered share holders fail to collectively exercise their option within the appropriate time, then the registered share holder wishing to sell or transfer all or part of their shares shall then offer in writing their shares for sale to the registered share holders individually, who shall have the option to purchase same, such option to be exercised within twenty-one (21) days of receipt of such written notice of sale. Should such option be exercised and the offer of sale is accepted by any individual registered unit/share holder, the shares shall be transferred to the registered share holder simultaneously upon payment thereof.
(c) Should two or more registered share holders wish to purchase the same shares being offered for sale then the shares shall be sold for the highest price or in accordance with Part 8.3, whichever the registered share holder effecting the sale in their absolute discretion shall decide.
(d) Should any individual registered share holder fail to exercise their option within the appropriate time, then the registered share holder wishing to sell or transfer all or part of their shares shall have the right to offer the units/shares to any third party PROVIDED that all existing registered share holders approve of any their [sic] party on a basis of a majority of seventy-five (75%) of the existing shares, such approval not to be unreasonably withheld.
8.3 Calculation of Sale Price
Should the sale or transfer of units/shares be effected in accordance with Part 8.2, the sale price shall be calculated as follows:-
i. Total Gross Income from all trusts, companies or other entities for the preceding two years, divided by two (2) to give an average gross income for the preceding two (2) years.
ii. Multiply this by the share holder’s share in the trusts/companies.
iii. Then multiply this by five (5).
This gives the total sale figure.
Eg: Total Gross Income from Smith & Sons for preceding two years + any other Company setup as a Franchisor in other countries or states.
= total Gross Income for preceding two years
÷ this by two
= average income for preceding two years
x this by either 31% or 5% (or whatever the share holders share in the trusts/companies OR voting right percentages in the trusts/companies)
= semi total, then
x this figure by five
= total sale (payout) figure
159 However, even if Ms Passey had been a party to the shareholders’ agreement and even if the purchase price for her shares pursuant to the formula in clause 8.3 was $1,847,807.14, then, on the proper construction of clause 8:
(1) there was no obligation on any of the directors, the Company or its members to acquire, or to offer to acquire, Ms Passey’s shares;
(2) the formula in clause 8.3 only applied in circumstances where clause 8.2(c) applied, and there was no evidence (and nor was it pleaded) that clause 8.2(c) applied in this case.
160 By her closing submissions, Ms Passey submits that the failure to make her an offer for her shares using the methodology in the shareholders’ agreement was unreasonable, but without explaining why that is so. It is therefore difficult to understand and accept this submission especially in light of the proper construction of clause 8.3 as set out above.
161 For these reasons, the pleaded claim that the failure by the directors, the Company or its members to offer to purchase Ms Passey’s shares at or around $1,847,807.14 is oppressive to, unfairly prejudicial to, or unfairly discriminatory against, Ms Passey has not been established and is rejected.
162 After the conclusion of the evidence and the receipt of the closing submissions from the defendants, the closing submissions for Ms Passey advanced these propositions:
[86] The failure to make a reasonable offer to buy the plaintiff’s shares is one factor that can be looked at to determine whether oppression is made out overall.
[87] A reasonable offer would be one that is at market value and in proportion to the plaintiff’s shareholding. At no time before the applicant commenced this proceeding have any of the respondents offered to buy the applicant’s shares at a reasonable price.
(footnotes omitted)
163 A chronology of various facts relating to offers made to acquire Ms Passey’s shares (which extends beyond that which is pleaded) is then set out in the submissions.
164 This appears to be a belated attempt to advance a different case to the one which is pleaded as being a ground on which oppression is sought to be made out. If that is correct, then, as it was not pleaded and as the defendants have not had the opportunity to be heard on this case, Ms Passey will not be permitted to advance it.
165 If it is not advanced as a basis on which to find oppression, then its relevance to the substantive claim is not apparent. While offers have been made to buy Ms Passey’s shares at various times, there was no obligation for any offer to be made and Ms Passey could have sought to sell her shares to a third party (being something which was made plain by the letter from the defendants’ solicitors dated 17 December 2020).
Conduct in relation to payment of fees to Mr Gardner and Mr Darren Wallis
166 By her statement of claim, Ms Passey complains about consulting fees paid to Mr Gardner and Mr Darren Wallis in 2017, 2018, 2020 and 2021 on two primary bases:
(1) the fees were excessive in circumstances where Mr Gardner has not had any involvement or input into the Company’s operations since 2016 and Mr Darren Wallis has had minimal involvement and input into the Company’s operations;
(2) the fees should not have been paid because Mr Gardner and Mr Darren Wallis were required to vacate their positions as directors of the Company upon being paid these consulting fees.
167 The statement of claim pleads that the payment of these fees has had the consequence that the assets of the Company have been decreased and financial benefits have been provided to Mr Gardner and Mr Darren Wallis to the detriment of the value of Ms Passey’s shareholding in the Company. It is alleged that this is contrary to the interests of the Company’s members as a whole and, in the premises, is oppressive to, unfairly prejudicial to, or unfairly discriminatory against Ms Passey.
168 For the following reasons, these claims are also rejected.
169 Mr Gardner devised the idea of setting up the Company. In about 2005, he had an idea to start a company that provided renovations and extensions to residences, and franchising that business. He insisted that the name of the company be “Smith & Sons”. He had a “hands-on role” in starting the Company. He approved start-up funding for the Company through G J Gardner Homes and approved further funding subsequently to enable it to operate. With his extensive knowledge and experience, he played a role in setting up the optimal business structure, marketing strategy and day-to-day operations of the Company’s business. Mr Gardner was used by the Company as a drawcard for potential franchisees who, I accept, were more likely to sign up if Mr Gardner was seen as being associated with the Company. In the “first few years” of the Company’s operations, Mr Gardner invested a minimum of 10 hours per week in the establishment, operation and running of the business. This included attending state and franchise meetings. He also spoke at conferences of franchisees. He has not attended conferences in the last three or four years. In the last five to seven years, Mr Gardner has “stepped back a bit”.
170 Mr Darren Wallis was also involved in the operations of the business of the Company since its inception including meeting with potential and current franchisees, setting up software and operations systems, arranging funding and obtaining loans on behalf of the Company, participating in board discussions and marketing and business development strategies, paying the Company’s creditors and making decisions with respect to the Company. He currently helps with numerous matters to do with the Company “nearly every day” such as strategic issues, franchisees, books and finances. He also speaks to Mr Leigh Wallis (the current CEO) every day.
171 Mr Leigh Wallis gave evidence that the Company has adopted all of the systems, methods and techniques (amongst other things) developed by Mr Gardner and Mr Darren Wallis which are utilised by G J Gardner Homes and that Mr Darren Wallis provides an oversight role to the Company.
172 Mr Darren Wallis gave evidence that the fees which were paid to himself and Mr Gardner were “set up from the very, very start [when] we set the original shareholders agreement up”, they put in the effort and expertise upfront, got it going and “we’re not going to take a dime” but “once you get to a certain level”, then they would get consultancy fees while continuing to work in the business. He said that they had been asked to put their consulting fees on hold “a couple of times” and they agreed to it to help the business out. He said that half of the consulting fees for 2018 were “written off” and all was written off in 2019 and then, in 2021, some of that was invoiced in arrears “so if you average it out it works out right, because it has to work out with the formula”.
173 There was no challenge to the evidence of Mr Darren Wallis that the fees had been calculated and paid in accordance with the shareholders’ agreement.
174 Further, the commitment by the Company to pay these fees was made in 1 November 2009 when the shareholders’ agreement was signed by it as well as all of its members and directors. They are legitimate business expenses of the Company. Relevantly, the shareholders’ agreement contained these clauses (4.1 and 4.3):
PART 4 – REMUNERATION
4.1 Salaries to Gardner and Wallis
Gardner and Wallis shall not initially draw a wage from Smith & Sons. They will only receive a salary as agreed in 4.3 below.
…
4.3 Increase in Salary
Once Passey’s salary has reached $100,000-00 per annum and Leigh’s salary has reached $80,000 per annum then any increase in salary from time to time shall also be paid to Wallis and Gardner, or a nominated entity by them, for their input as directors. Any increase will be the same across all four shareholders. Any increase in salary to be paid after Passey’s salary has reached $100,000-00 and Leigh’s salary has reached $80,000 must be agreed upon by all shareholders.
175 Clause 5.3 of the shareholders’ agreement provided as follows:
PART 5 – DUTIES AND OBLIGATIONS
…
5.3 Performance
All directors of Smith & Sons shall carry out their duties effectively and efficiently and Passey and Leigh shall devote their full energies and attention to the running of the business. Gardner and Wallis will be active directors but will not necessarily be involved in the day to day running of the business.
(emphasis added)
176 Ms Passey, who was legally represented, consented to an order pursuant to which she became a shareholder of the Company in October 2018 with prior notice of clauses 4.1, 4.3 and 5.3 of the shareholders’ agreement, and the obligation assumed by the Company pursuant to clause 4.3, which obligation had the consent of all of the shareholders at that time at the time that it was assumed.
177 Notwithstanding this, Ms Passey submits that, as to Mr Gardner’s share of the consulting fees, the fees paid to him for 2017, 2018, 2020 and 2021 are excessive having regard to his evidence that:
(1) his involvement in drafting contracts was limited to having certain clauses he was concerned about inserted;
(2) the structure he adopted for the Company was the same structure he had used in G J Gardner Homes;
(3) he has not spoken at conferences for the Company for five to seven years;
(4) he has not attended conferences for the Company for the last three or four years;
(5) he met with franchisees at Mr Passey’s direction, but Mr Passey has not been involved in the business since 2017.
178 Ms Passey submitted that Mr Gardner’s involvement in the Company is at best negligible and at worst non-existent; that paying him consulting fees in the amounts he has received is oppressive, not only to her but to all the shareholders and that the Court does not need expert evidence on the market rate of consultant remuneration to make that finding.
179 By her closing submissions, Ms Passey accepts that Mr Darren Wallis does continue to have some involvement in the Company, but submits that he does not work for it full time. Ms Passey refers to his evidence that “I don’t work for anyone full time” and submits that the emails that Mr Darren Wallis has sent between 2017 and 2020 are “minimal” and “usually very brief”. Ms Passey submits that Mr Darren Wallis’ curriculum vitae also shows that he is involved in a number of other businesses and concludes that the consultancy fees he has received are also excessive given the level of involvement he has in the business.
180 However, Ms Passey’s submissions do not grapple with the following matters which tell against a finding that the fees paid for the 2017, 2018, 2020 and 2021 years were “excessive”:
(1) Mr Gardner and Mr Darren Wallis were not paid anything for their initial work in setting up the Company. This work included, for example, Mr Gardner spending a minimum of 10 hours per week in the establishment, operation and running of the business of the Company. There was no evidence as to the number of years that they were not paid anything, being in circumstances where they took a risk that they would never be paid at all for this work. Now that the Company has achieved moderate success, and the triggers for payment under the shareholders’ agreement have arisen, complaint is made about the quantum of the fees paid more recently but without regard to the unpaid work done previously;
(2) Mr Gardner and Mr Darren Wallis have performed the work which they did for the Company, since at least 1 November 2009, on the agreed basis that they would not be initially paid (clause 4.1) but they would be paid in accordance with the shareholders’ agreement in due course (clauses 4.1 and 4.3). Without their work, the business of the Company would not exist and Ms Passey, who has never made any contribution to the business of the Company, would have no shareholding of any value. For this reason, it cannot be concluded that the payment of these fees provided financial benefits to Mr Gardner and Mr Darren Wallis to the detriment of the value of Ms Passey’s shares, as that ignores the overall contribution of these directors to the Company. Further and for the same reasons, payments made by the Company pursuant to its contractual obligations is not contrary to the interests of its members as a whole;
(3) more is needed by way of evidence than bare assertion that the fees paid to these directors are excessive. This is especially as each of these directors is very experienced and is a valuable resource for the Company in terms of a knowledge base and, in the case of Mr Gardner in particular, as a drawcard for franchisees. This means that quantification of hours worked or identification of precise task performed are not the only considerations. Further, each of these directors agreed not to issue invoices for their fees when the Company was having financial issues and so the quantum of the fees for any particular year (such as 2021) needs to take into account that some of these fees relate to earlier periods when no fees were paid;
(4) it was agreed expressly that these directors would not be involved in the day to day running of the business. The Company also made a legal commitment to pay these fees to these directors. When that legal commitment was made, it had the consent of all of the members of the Company, each of which was associated with a director. There was therefore an “overwhelming identity of interest between shareholders and directors” and “consent or ratification” of the kind described in Exton v Extons Pty Ltd.
181 In the circumstances, it is not open on the evidence to find that the fees paid to Mr Gardner and Mr Darren Wallis for the 2017, 2018, 2020 and 2021 years were “excessive” because Ms Passey has not established her pleaded case and her claim does not take into account all of the relevant circumstances, including the legal obligation assumed by the Company prior to her becoming a shareholder.
Whether Mr Gardner and Mr Darren Wallis were required to vacate their positions
182 Clause 21.3 of the constitution of the Company provides that the directors will be entitled to be paid the remuneration determined by the Company in general meeting.
183 Clause 21.6(g) of the constitution provides that:
Vacation of director’s office
The office of a director becomes vacant if:
…
(g) the director holds any other office of profit under the Company, except that of managing director, without the consent of the Company in general meeting.
(emphasis added)
184 Ms Passey alleges that no general meeting has been held where consent was provided to Mr Gardner and Mr Darren Wallis holding the office of consultant and being paid consultant fees and, in the premises and having regard to the constitution, they were required to vacate their positions as directors upon being paid the consultancy fees. However, that allegation has not been established for the following reasons.
185 By her submissions, Ms Passey appears to accept that the words “any other office of profit” in clause 21.6(g) is a reference to an office other than the office of director. I agree with that construction. That is because, if directors are to be paid remuneration in their role as a director, clause 21.3 applies. In this context, the word “other” in clause 21.6(g) means that, if a director hold an “office of profit” other than the office of director, then clause 21.6(g) applies.
186 Ms Passey contends that Mr Gardner and Mr Wallis are being paid as consultants and that this is an “office of profit” within clause 21.6(g). However, clause 4.3 of the shareholders’ agreement (as cited above) makes plain that the payments to be made to Mr Gardner and Mr Wallis are by reason of their status as directors. It refers to the payments to be made to them “for their input as directors”.
187 This means that, on the proper construction of the constitution and having regard to the expressed and agreed basis of the payments to Mr Gardner and Mr Wallis pursuant to clause 4.3 of the shareholders’ agreement, these directors do not hold any “other office of profit” within the meaning of clause 21.6(g) of the constitution. Rather, they have been paid fees by reason of their status as directors.
188 This has the consequence that clause 21.3 of the constitution applies and these directors were entitled to be paid remuneration as determined by the Company in general meeting.
189 However, a general meeting was not held in or about November 2009 for the purposes of approving the payments pursuant to clause 4.3 of the shareholders’ agreement.
190 Notwithstanding that there was no general meeting as required by clause 21.3, it is significant that the shareholders’ agreement dated 1 November 2009 was entered into by all of the shareholders of the Company. By the agreement, the commitment then made by the Company to make the proposed payments to Mr Darren Wallis and Mr Gardner had the unanimous consent of its shareholders. In these circumstances, it is difficult to envisage what more could have been achieved by holding a general meeting to approve the proposed remuneration to these directors. Any such general meeting, if held, would have undoubtedly resulted in approval of the payment of the proposed remuneration. At best for Ms Passey, there has been technical non-compliance with the constitution.
191 Further, at the time that the shareholders’ agreement was entered and all shareholders consented to the remuneration being paid, there were only four shareholders and each of those shareholders was associated with a director. There was therefore an “overwhelming identity of interest between shareholders and directors” and “consent or ratification” of the kind described in Exton v Extons Pty Ltd. This tells against a finding that there has been oppression or conduct which is contrary to the interests of the members as a whole.
192 An additional relevant matter is that, prior to becoming a shareholder, Ms Passey was aware that consulting fees were being paid. Mr Passey informed her in 2008 that Mr Gardner and Mr Darren Wallis were going to be paid consultancy fees once the Company was making enough money to raise his salary as CEO. She also specifically asked Mr Hill for information about the consultancy fees in August 2016. Ms Passey then became a shareholder in late 2018. By the time she became a shareholder, the fees for the 2017 and 2018 years had been paid but no complaint was made by her about this at this time. No fees were paid in 2019 but they were paid in 2020. The first occasion that Ms Passey complained about the fees being paid to Mr Gardner and Mr Darren Wallis was in the course of these proceedings. Further, complaint was made by her in circumstances where, on her own evidence, she was not aware of what they did to justify the payment of the fees. However, also on her own evidence and that of Mr Hill, Ms Passey could have asked at any time and would likely have been provided with the answer.
193 Prior to Ms Passey’s complaint being made in this proceeding, the payment of the fees to Mr Gardner and Mr Darren Wallis, and their continued role as directors, had either the express consent of all of the shareholders of the Company or, for more than two years after October 2018, the implicit consent of Ms Passey and the express consent of the other shareholders. In these circumstances, it is not unfair for the Company to comply with its contractual obligations where the contract was entered with the consent of all of the shareholders at the time in the circumstances described above. Nor is it contrary to the interests of the members as a whole to do so.
194 For these reasons, Ms Passey has failed to establish that the payment of the fees to Mr Darren Wallis and Mr Gardner “should not have occurred” because they “were required to vacate their positions” as is pleaded in the statement of claim.
195 Taking into account all of these circumstances and assessed objectively, the payment of the fees to Mr Gardner and Mr Darren Wallis in the 2017, 2018, 2020 and 2021 years was not so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair. Further and for the same reasons, such conduct is in accordance with how reasonable directors would act in attending to the affairs of the Company.
Conduct in relation to payment of legal fees of directors and other shareholders
196 This proceeding was brought by Ms Passey against the directors of the Company (who were the first, second and third defendants) and the other shareholders (being the fourth, fifth and sixth defendants) as well as the Company (seventh defendant).
197 By the originating application, Ms Passey sought declaratory relief and equitable damages against the directors. However, no leave of the Court was ever obtained to bring the proceedings against the directors and the statement of claim did not plead any cause of action which would give rise to the relief sought against the directors. Although the claim against the directors was dismissed during the trial, it is unlikely that the directors having the same legal representation as the Company, with the Company bearing those costs, added to the Company’s legal costs to any significant degree because no case was ever pleaded against them.
198 As to the other shareholders, the relief sought by Ms Passey is limited to seeking an order that they purchase her shares at fair market value. The only substantive allegations relating to the shareholders in the statement of claim related to an offer which was made to acquire Ms Passey’s shares (paragraph 44) and an offer that they did not make (paragraph 45), neither of which were controversial allegations. It is therefore unlikely that the shareholders having the same legal representation as the Company, with the Company bearing those costs, added to the Company’s legal costs to any significant degree.
199 The statement of claim pleads the amount which has been spent by the Company to its solicitors since 1 July 2020 but there is no adequate basis pleaded or established on the evidence to show that the Company would not have incurred most, if not all, of those legal costs in relation to this dispute or in defending this proceeding in any event. Nor is there any evidence adduced about the amount by which the Company’s legal costs were increased because it paid the costs of all of the defendants. Without such evidence, it is difficult to assess the impact on the members of the Company or the nature of any prejudice to Ms Passey.
200 To justify her claim, Ms Passey submits that it is the other shareholders of the Company against whom the “primary relief is sought” and that they should bear the majority of the costs of the proceeding, not the Company. However, other than a costs order, only one of the remaining four orders which are sought by Ms Passey is directed at the other shareholders, being a compulsory buyout order.
201 In circumstances where a compulsory buyout order is sought against existing shareholders, the Company has an interest in relation to such relief. As stated in Power v Ekstein (2010) 77 ACSR 302; [2010] NSWSC 137 at [119]:
It seems to me that an application for a compulsory purchase order against a corporate defendant brings the company’s interests into play and it can no longer be said that the dispute is purely between shareholders. The company (that is, the body of members as a whole) has an interest in resisting a compulsory purchase order; ensuring that the burden of the order, if made, falls fairly on all relevant defendants; and making sure that the terms of any such order as to matters such as valuation of the shares are fair in the company’s interests …
202 In short, the Company has an interest in relation to all of the substantive relief which is being sought by Ms Passey at present.
203 In all of the circumstances, Ms Passey has failed to establish that the Company’s payment of the legal costs associated with the dispute the subject of this proceeding is contrary to the interests of the members as a whole or is oppressive to, unfairly prejudicial to, or unfairly discriminatory against, her.
204 That is because the decision by the directors to cause the Company to pay all of the defendants’ legal costs was not so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair. This is especially as the Company had an interest in the relief being sought against the shareholders and the balance of the remaining relief seeks substantive orders against the Company itself, including an order that it be wound up. Further, such conduct is in accordance with how reasonable directors would act in attending to the affairs of the Company.
Does the cumulative conduct constitute oppression?
205 In the case of the loans to Total Fitouts Corp Pty Ltd and the Canadian Company, Ms Passey has failed to establish the case advanced by her, which was premised on a finding that these loans are unrecoverable.
206 In the case of the fees paid to Mr Gardner and Mr Darren Wallis, Ms Passey has failed to establish her pleaded case including, in particular, that the fees were excessive.
207 Ms Passey has otherwise advanced a claim in relation to the previous non-payment of dividends to her, which non-payment has been rectified and there is no evidence to suggest that there will be a repetition of this conduct.
208 Ms Passey has also advanced a claim that she was not invited to become a party to the shareholders’ agreement (but did not herself ask to be a party) and that no offer has been made to acquire her shares in accordance with the formula in that agreement (when there was no obligation on any defendant to make such an offer). Ms Passey could have, but chose not to, attempt to sell her shares to a third party.
209 Ms Passey brings proceedings against the directors of the Company but does not progress them, and then complains that the Company has paid their legal fees. She also complains that the Company has paid the legal fees of the other shareholders when the Company has an interest in the relief sought against those shareholders.
210 Ms Passey’s case has failed in relation to each and every allegation made by her. She has failed to adduce adequate evidence in relation to some claims and otherwise failed to address critical facts which impact upon the ultimate findings sought by her. Ms Passey’s case takes no account of her own conduct including her own willingness to become a shareholder of a company which had previously made various arrangements and entered into transactions of which she had notice and which had the unanimous consent of all of the shareholders at the time. Ms Passey’s case takes no account of her own lack of complaint or objection to the conduct of the Company’s affairs for a period of more than two years after she became a shareholder.
211 For these reasons, the alleged conduct, even when considered cumulatively, is not contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, Ms Passey.
Whether any relief ought to be granted
212 It follows that, as Ms Passey has failed to establish any of her claims, she is not entitled to the primary relief which is sought by her, being that her shares be compulsorily acquired by either the other shareholders or by the Company.
213 For the same reasons, no winding up order will be made as sought by Ms Passey.
214 The parties have requested that a finding be made as to the price which would have been fixed for the acquisition of Ms Passey’s shares even if Ms Passey’s claim is dismissed. The difficulty with doing this is that the purpose of granting a remedy between parties in an oppression case is “to compensate the oppressed shareholder for the oppression which has taken place”: Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd (2004) 207 ALR 136; [2004] FCAFC 153, [72]. As stated by Derrington J in BAM Property Group Pty Ltd as trustee for BAM Property Trust v Imoda Group Holdings Pty Ltd [2019] FCA 1192 at [89]:
… In cases where the relief to be granted is the compulsory purchase of shares, that object [of compensation] is achieved by the Court having a wide discretion to fix a price that “represents a fair value in all the circumstances”: Smith Martis Cork (145-146 [70]-[72]). That does not necessitate fixing a price only by reference to ordinary valuation principles: Smith Martis Cork (146 [73]-[78]) and Re Bird Precision Bellows Ltd [1986] 1 Ch 658, 669. The question is to identify the price which should be paid in the circumstances.
215 Notwithstanding this and subject to one matter, the parties appear to have agreed as to the price which should be fixed in any event.
216 Although Ms Passey called Mr Darren Van Zyl as an expert witness at the trial, the closing submissions for Ms Passey make this submission:
If the Court finds there has been no oppressive conduct, the applicant suggests her shares should be valued using the respondents’ expert Mr Peter Haley’s calculations under the ‘Scenario B’ column of the set out in the joint expert report. Mr Haley’s method assumes the consulting fees and staffing costs are legitimate expenses and the loans to Smith & Sons Canada Inc and Total Fitouts Corp are fully recoverable.
(footnote omitted)
217 The amount identified in the Scenario B column in the joint expert report as being Mr Haley’s valuation is $275,377.
218 The closing submissions for the defendants make this submission:
In fixing a price for Passey’s shares that “represents a fair value in all of the circumstances” the Respondents submit that the Court would adopt the valuation of Passey's shares of Mr Haley namely $275,377 as at 30 September 2021.
(footnote omitted)
219 This means that Mr Haley’s valuation, which both parties accept should be adopted if his assumptions are found to be established (which was the case), is $275,377.
220 Had the parties not been in agreement about which value to adopt, and had I been persuaded to order that there be a compulsory buyout of Ms Passey’s shares, I would have adopted the valuation by Mr Haley of $275,377 for the purposes of fixing a price for Ms Passey’s shares for the same reasons as submitted by the parties.
221 An additional reason for adopting Mr Haley’s valuation is that the assumptions underlying Mr Van Zyl’s valuation were not established. Further, for reasons which are not the fault of Mr Van Zyl, numerous appendices to his expert report were not adduced into evidence. This included his letter of instructions, index to brief and other information which was relied upon by Mr Van Zyl in forming his opinions. In addition, Mr Van Zyl did not speak to the directors of the Company about various matters, which he considered had an impact on his opinions. These matters necessarily reduced the weight to be attached to his opinions to the extent that they conflicted with that of Mr Haley.
222 It is relevant that Mr Van Zyl’s valuation based on the same assumptions was only approximately $5,000 more than that of Mr Haley, being $280,546. With two independent experts coming to a valuation which is almost identical and notwithstanding the underlying problems with Mr Van Zyl’s expert evidence, this provides further support for acceptance of Mr Haley’s valuation of $275,377.
223 Ms Passey also submits that:
If the Court finds that the seventh respondent’s anticipated increase in wages expenses is reasonable, it is submitted then that it should also increase the total income. An increase in wages expenses of $352,000 including superannuation is approximately 20 percent of the total operating costs of $1,510.921 calculated by Mr Haley or $1,517,990 calculated by Mr Van Zyl. This 20 percent increase should therefore also be added to the Total Income figure at the top of the table on Trial Bundle p 2063.
(footnotes omitted)
224 However, an increase in wages costs will not necessarily increase revenue to the business, either at all or in the manner submitted by Ms Passey. Neither expert adjusted their valuation based on such reasoning. For this reason, the adjustment to the “Total Income figure” as proposed by Ms Passey will not be made.
CONCLUSION
225 Ms Passey’s claims against the first to third defendants (being the directors) were dismissed during the trial.
226 Ms Passey has failed in her claim against the fourth to seventh defendants (being the other shareholders and the Company).
227 I will hear the parties as to costs. I will defer consideration of the appropriate costs order in relation to the first to third defendants and address the issue of costs in relation to all of the defendants at the same time after hearing further from the parties.
I certify that the preceding two hundred and twenty-seven (227) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Downes. |
QUD 396 of 2020 | |
SMITH & SONS RENOVATIONS & EXTENSIONS (AUST) PTY LTD ACN 119 427 119 |
