A thousand miles from care 1

“Company title” is a form of multiple ownership which has largely been superseded by the strata title legislation of the 1960s. Its distinguishing feature is that members of a company own shares in a company which owns a property. Each share gives an entitlement to the shareholder to occupy a specific area of the property, as well as, usually, some ancillary rights in relation to what in strata title law is known as the common property. Running and maintenance costs of the property are met by levies on the members.

The other distinguishing feature of company title, compared to strata title but common to all private (as opposed to public and listed) companies, is that shares are not freely transferable. One reason for this, quite understandable where people are going to be living in a building together, is that you might want to make sure that your fellow occupants are suitable neighbours. A second reason, which relates more to the general situation for private companies, is that you might want to be sure that your fellow-investors and -enterprisers are people you can get along with for the purposes of running the building. Of course, you can never tell how people will turn out later, but that needn’t stop you from trying.

Despite the renowned snootiness of company title buildings in Darling Point full of pastoral family widows when considering prospective neighbours and fellow-residents, it may be that the second reason is the more important. This is the first instalment of a series of posts about one company title block of units which illustrates that point.

Dungowan is an apartment block opposite the beach at Manly. It was built in 1919 and turned into a company title block in the 1950s.

In 2002 an application was made to Manly Council to redevelop the building. The proposal was to demolish the rear half of the building, containing 11 of the 22 flats, and build an eight-storey tower, as illustrated at the top of this post. The bottom four storeys of the rear tower would be “substantially match” what was there before, except that one unit would be removed in order in order to create 18 underground parking spaces in place of the existing 2 spaces. The upper four stories would contain 8 new units. A new lift would be built. In the end, in place of 22 units and 2 parking spaces there would be 29 units and 18 parking spaces. Sale of the new units would finance the project and enable needed remediation of structural defects in the building. Council staff recommended approval of the application but council refused it on 4 November 2002.

The applicant appealed to the Land and Environment Court on 3 December 2002 and amended plans were lodged on 14 April 2003. The plan below comes shows sight lines from the beach to the proposed new elevation.

Amongst others, Mr Garratt, chairman of the board of directors of Dungowan Manly Pty Ltd, presented evidence about the difficulties faced by the shareholders and the need to redevelop the property. Ms Candida Ashford of unit 20, Dungowan, gave evidence in support of the proposal.

Amongst those who gave evidence in opposition to the proposal were Ms E Maxwell, unit 23, Dungowan; Mr D Schaefer, unit 23, Dungowan [although there were 22 units there was no unit 13]; and Mr D McLaughlin, 45/507 Elizabeth Street, Surry Hills (owner with his wife of unit 4 in Dungowan).

The main controversy was the bulk and radical extent of the proposed renovation. Those supporting it said that the development needed to be done to fund the much-needed repairs to the fabric of the building. Here is a snippet of the judgment of the Land and Environment Court (Commissioners Nott and Tuot):

Ms Ashford’s unit 20

81. One of the units we inspected, unit 20 is owned by Ms Ashford, who gave evidence in favour of the proposed development. Her letter dated 21 August 2003 describes the problems with her unit:

I write in order to give you my account of structural problems that I have encountered living in Dungowan.
I have been a shareholder of Dungowan Manly Pty Ltd for approximately 7 years.
During this time I have resided in Unit 20 and have had to carry out many repairs and renovations to my unit.
Some problems are recurrent, apparently due to the poor structural condition of the building:
– Continuing water penetration into the northern and front walls.
– Rising of floor tiles in the rear area of my apartment due to disintegration of underlying concrete slab.
– The air vent and surrounding masonry in the front bedroom fell out at 4:00 am one morning.
– The concrete ceiling in the front sun room recently collapsed over an area of two or more square meters at 1.00 am with large concrete and metal pieces falling onto the furniture, fittings and floor below it, which led to further cracking and deterioration.
– The concrete ceiling in the front bedroom has a number of continuous cracks extending the full width of the room and forms a discontinuous and uneven surface.
– Finally, the northern wall of the kitchen is continuously disintegrating leaving masonry debris on and in adjacent cupboards.
I trust this is of assistance.

The court was not convinced that the proposed development was the only economic solution to the predicament which the company owning the building was in: some less ambitious proposal could meet the costs of repairing the fabric of the building. The application was knocked back.

A fresh proposal was put forward. By December 2005 it was sufficiently advanced to put before the members of the company. The proposal involved, in broad terms, using the space occupied by units 22 and 23 at the rear of the ground floor as part of the new (underground) parking spaces and the construction of several new flats above the existing building, with the object of selling the additional flats and parking facilities (or, at least, issuing shares carrying rights to those new areas) to defray the cost of the extension and refurbishment. This last aspect was one which required changes to the constitution to the company.

Tenants and shareholders moved out of the building to permit this work to begin. The repairs to the existing building were estimated to cost $6 million and the total cost of works was estimated to be $18 million.

On 9 September 2006 (presumably notice was given some time in August), the following resolutions were passed at a meeting of shareholders:

[1] “That the Company adopt the proposed amendments to Article 3 of the Articles of Association.”
[2] “Subject to the board’s satisfaction with the construction and finance agreements, the Company enter into the agreements for, and implement, the re-development of Dungowan as Mr Bartrop had proposed.”
[3] “That the shareholders approved $950,000 as the amount for the Company might buy back the shares to unit 22 and as the amount for which the Company might buy back the shares to unit 23, payable on completion of the project.”
[4] “That an allowance of $250,000 be paid to Mr Garratt, on completion of the project, for his work in relation to the project.”

Mr Bartrop was a consultant who had advised about the proposal. Mr Garratt, it will be recalled, was a director, and in fact the chairman of directors. Any payment of a fee to him required the approval of the members of the company because directors cannot normally enter into business arrangements with themselves on behalf of a company without such approval because of the risk of their acting in their own interest rather than the company when they do so.

The McLaughlins (remember them? they were the owners of flat 4) were the only shareholders who voted against these motions. They promptly went to court – this time the Supreme Court. They sought an injunction to prevent the company acting on the resolution. They said that:

there is a serious question to be tried on several matters of deficiency regarding the resolutions. …first, that there has been (or is to be) an abridgement or variation of their rights such as to trigger the operation of the constitution requiring unanimous or class consent. Second, …that the statutory requirements for the passing of a special resolution were not observed so that resolution 1 (purporting to alter the constitution) is ineffective….third …that the materials given to members in advance of and for the purposes of the meeting were deficient in such a way as to invalidate the decisions purportedly made.

To get an injunction they needed to say that there was a serious question to be tried and if the company was not stopped in its tracks the harm which might be done to them could not be remedied by just paying money in damages later. Of course, in such cases, the respondent to an application always says “But what about the harm which will be done to us if we can’t go ahead?” The weighing of these competing considerations is called “the balance of convenience.”

Justice Barrett, the judge who is in charge of the Supreme Court’s companies list, knocked the McLaughlins back. He found that there was a serious question to be tried, but the balance of convenience went against them.

24 For reasons I have explained, there are only two things of immediate relevance that are, in a legal sense, arguably achieved by the four resolutions. One is the alteration of the constitution to create additional share groupings referable to the additional flats that may be constructed. That, of itself, does not involve any invasions of any right of the plaintiffs. The second is the decision of the members to pay Mr Garratt an “allowance” of $250,000 “on completion of the project”. The plaintiffs incur no immediate prejudice from that resolution, even if it may eventually be found to be invalid, given that any payment will be made only on completion of a very substantial program of building and refurbishment that has not yet even begun.
25 My task here is to weigh up the comparative injury that will arise from the granting or withholding of the interlocutory injunction, seeking out the major risk of damage and, in particular, of any irreparable damage. The parties approached the interlocutory hearing on the footing that grant of the interlocutory injunction would prevent commencement of the building work. It is relevant to point out, in that respect, that all holders of shares have been told that they must vacate and have their tenants vacate by 30 September. In a circular of 14 July 2006, the chairman said that all was on track to commence work in September 2006. In a circular of 8 August 2006, he gave notice that work would start on 1 October 2006 and that the building had to be vacated by 30 September 2006. The plaintiffs have in fact complied with this requirement and their tenants have departed. They have not taken steps to re-let. All other occupants have also left or are about to do so. As a result, as the defendant points out, the building is in need of security measures and, as it were, a point of no return has been reached on the road to redevelopment.
26 In reality, and as I have explained, commencement and undertaking of the redevelopment is not something that is dependent on the validity of any of the resolutions. I should develop that point. The redevelopment could continue whether or not resolution 1 has been validly passed. There is nothing in the company’s constitution to require that any new units be associated by share groups or to prevent their being let as a commercial and profit-making venture by the company. Indeed, clause 3(14) of the memorandum of association (to the extent still relevant since conferral upon all companies of the capacity of a natural person) contemplates that the company may “let on lease … the whole or any part of the real and person property of the Company …”. The validity of the alterations to article 3 would become a live issue only if and when the company was about to issue any of the new groups of shares to which it relates. That point must be quite some way off, even though some steps towards marketing of new units are apparently in train. The company could not, consistently with the article, actually issue the shares unless and until the physical property referred to in the article existed. Until that point, the definition of the right attached to each new share group would have no meaning because the descriptions refer to parts of a building.
27 Resolution 2, as I have said, is not essential to the redevelopment which, under the constitution, lies within the province of the board of directors. The concept of “acting upon” resolution 2 – the thing sought to be restrained – is therefore meaningless in legal terms. Resolution 3 is also concerned with the future and something that “might” happen “upon completion of the project”. There can be no “acting upon” this resolution, in any event, except pursuant to a share buy-back or reduction of capital approved by separate decision in the future. Nor does resolution 4 present any imminent prospect of its being “acted upon”, given that the approval relates to the making of a payment “on completion of the project”. A project involving $18 million is going to take quite some time to complete.
28 The only immediate matter of prejudice to which the plaintiffs point is the supposed denial of the right of user (or letting) that is a necessary consequence of the need for their flat to be vacant during the building work. That right, arising from a provision of the constitution, is contractual in nature by reason of s.140 of the Corporations Act. If it will, in reality (and upon a proper construction of the articles), be denied by the company’s insisting on vacant possession for a period to carry out refurbishment works, there will presumably be a remedy in damages and, particularly in light of the fact that the plaintiffs’ flat has apparently been tenanted, there is no reason to think either that damages would not be an adequate remedy or that there would be difficulties with quantification.
29 In summary, while there is a serious question to be tried as to the validity of resolution 1 as a special resolution and as to the adequacy of materials given to shareholders for decision-making purposes (and thus as to the validity of all four resolutions), none of the resolutions presents prospects of immediate hardship or irremediable prejudice to the plaintiffs. The question of the validity of the resolutions can be left to be dealt with at a final hearing without apparent hardship to the plaintiffs in the meantime, particularly in light of the long time that will necessarily elapse before “completion of the project” occurs. To the extent that the plaintiffs’ real complaint is about exclusion from their flat, it is not of itself a product of the resolutions and such invasion of their rights as it might ultimately be found to entail is of such a nature as to be adequately compensable by damages. For the defendant, however, an order forcing it to halt the development project (if that is what the interlocutory injunction would really do) will entail particular hardship of a financial nature, bearing in mind that contractors are ready to start, work is due to commence within a few days and the building is now largely, if not completely, uninhabited. That hardship would be shared by the shareholders, none of whom (except for the plaintiffs) appears to have any complaint about what is happening and what is proposed.

Round 1 to the company, led by Mr Garratt. Ms Ashford, owner of unit 20, would also doubtless have been pleased that her numerous anxieties over the fabric of her apartment could now be set at rest. The project was to go ahead.

But why did both sides seem so certain that whether it could go ahead depended on being able to act on the resolutions, when the judge thought it did not? Could it have something to do with how the project was to be funded? We know that in the end it was to be funded by the issue or sale of additional shares, but that would only be at the end of a project which was to take some years. Builders are not usually prepared to wait so long.

It’s all too much for me to condense into a single post. If you’re impatient, you can jump forward a bit here, but meanwhile, on this blog, you’ll have to wait for the next awful episode.