A thousand miles from care 5

I have been inattentive on this blog to ongoing developments in the sorry case of the McLaughlins against the onetime home unit company Dungowan Manly Pty Limited.  Previous instalments are at 1, 2, 3, 4.

The company was the owner of a block of flats on the seafront at Manly.  Broadly speaking, the majority of shareholders of the company, spearheaded by one shareholder and director, proposed to resolve the problem of an aging company-title building by building penthouse extensions.  One of the flats, owned by the spearheader, was to be sacrificed for a car-stacker to meet the increased parking requirements.  This might have seemed very noble of him but he was to be compensated and did own a more than the one apartment.

The scheme was resisted by the MacLaughlins, who owned a flat contiguous (I think above) the car-stacker. Their flat would obviously also be severely affected.  They tried to stop it going ahead but in the end were left to bring various claims after the event.  Before Justice Ward they had a points victory which probably would not have paid for their costs.  Even then the company, still led by the spearheader, appealed.

My last post was in the wake of a victory (of sorts) by the McLaughlins in the Court of Appeal, in June 2012.  I concluded:

Yesterday the Court of Appeal handed down judgment which was unanimously in the McLaughlins’ favour: the appeal was dismissed and the cross-appeal upheld by increasing the damages under the statutory contract from $200,000 to $513,129.45 as at March 2010, plus interest.

It’s not clear to me right now how the McLaughlins will extract this money, given that the building has in the meantime been converted to strata title, but I think there was something in the fine print of that conversion which protected the McLaughlins in relation to that.

Famous last words!  As a commenter to that post reminded me, the fine print was in an undertaking given by the company in February 2010.  At that stage the hearing had been held and Justice Ward had reserved her decision.  The company was about to convert the flats to strata title and sell the building off to the new body corporate and each flat to the owners of the respective shares.  The McLaughlins wanted this stopped.  Rhetorically, they asked: if we win, how will the company be able to pay us?

The report of the case is McLaughlin v Dungowan Manly Pty Limited [2010] NSWSC 89 .  It is complicated but one point was that the McLaughlins said that if the shares were to be exchanged for strata title ownership of the respective flats, then not only should each shareholder undertake to contribute to any liability which the company might have when the music stopped, but also, that entitlement should be secured against each unit that was so transferred.

Justice Ward did not agree.  She thought that an undertaking by the company not to hand over the units to shareholders without an undertaking from each former shareholder to contribute would be enough. Her understanding of the effect of that undertaking is at [123].

I still cannot quite comprehend Justice Ward’s reasoning.  She acknowledged the risk that individual shareholders mike take the unit, sell it and then for whatever reason not be good for the money.  She seems to have assumed that the imminent delivery of her judgment would lead to an outbreak of justice all round.  It probably helped her reach this conclusion that she didn’t see the company’s liability to the McLaughlins as being particularly big.

In that, she was wrong, which is where our story begins.

Some of the detail is well recounted in a blog post on the topic by the redoubtable Dominique Hogan Doran.  All roads lead to Rome I guess, so I shouldn’t be surprised that her post uses the same two pictures I tracked down for  my first post on this topic.

First, for the sake of completeness, there was an unsuccessful application by the McLaughlins for indemnity costs. At this time the amount of interest was agreed so that the Court of Appeal’s judgment was finally $632,038.95 (inclusive of interest of $118,909.50): (Dungowan Manly Pty Ltd v McLaughlin (No 2) [2012] NSWCA 258. That is not the interesting part of the story.

Rather than attempt to collect the money from the “former” shareholders as Justice Ward had thought they would be by now (Pembroke J had found otherwise in a 2011 judgment: they were shareholders who formerly had rights attached to their shares to occupy units in the building), the directors of the company, whose chairman was the original spearheader, Rodney Garratt QC (of the Victorian Bar) put the company into voluntary administration.

Voluntary administration is a kind of half-way house where if the directors form the view that a company is insolvent the risk of the company being wound up can be averted if everybody (including creditors) can reach a deal.

The administrator endeavoured to collect funds from the shareholders by raising levies. Only one shareholder paid up. Mr Garratt disputed that the administrator was entitled to raise the levy and the remaining shareholders followed his lead.

The company was placed into liquidation. The liquidators had no funds to pursue the shareholders. All the company had left was the McLaughlins’ flat, which still belonged to the company in the now strata-titled building.

The McLaughlins fell out with their solicitors, Turner Freeman, over the amount and payment of legal fees.

In mid 2013 the liquidators applied to the court for directions as to what to do with the unit.  They wanted to pay themselves out of it (or more likely part of the proceeds of its sale).  The McLaughlins made a cross claim against the liquidator to say that the flat, at least, belonged to them.  Turner Freeman made a claim for security which it had over the flat – actually it went so far as to say it owned the flat.

The McLaughlins ran out of money.  By now acting for themselves, they sought to amend their claim further. In June 2014 (it took that long) it ended up in the corporations list before Justice Black. By then Turner Freeman were threatening to bankrupt the McLaughlins.

Justice Black summarised the position between the McLaughlins, the company and the shareholders  as follows (at [15]):

In summary, and subject of course to any submissions that might be made by any parties who are later joined to the proposed Amended Cross Claim, it might seem that shareholders in the Company had acknowledged, in the share surrender agreements, the Company’s entitlement to levy them for the amounts necessary to meet the amount of a judgment and costs in favour of Mr and Mrs McLaughlin; the Company had relied on that acknowledgement in resisting injunctive relief restraining entry into the share surrender agreements and a Judge of this Court had drawn attention to the importance of that acknowledgement and the need for shareholders to understand their obligations under it in her judgment declining such an injunction; the Court of Appeal had awarded damages and costs in favour of Mr and Mrs McLaughlin; none (or possibly one) of the Company’s shareholders have paid the amounts levied under the share surrender agreements and the Company’s chairman has contended that they have no obligation to pay those levies; the liquidators may have taken some steps, but he has not yet taken proceedings to recover the levies under the share surrender agreements; and the Company has not satisfied the judgment against it where it has disposed of the units in the block (other than Mr and Mrs McLaughlin’s unit) to its shareholders and they have not put it in funds to satisfy that judgment.

In the face of the opposition of other parties, Justice Black allowed McLaughlins to make some of the amendments they proposed on certain conditions. He also took the opportunity to suggest to Turner Freeman that it might not be in Turner Freeman’s interests to bankrupt the McLaughlins for the time being.

That did not mean that it was a plain run home for the McLaughlins. They wanted to bring claims on behalf of the company against the shareholders for the levies because the liquidator wasn’t doing it.  Such claims are called derivative claims.  First you need to get the leave of the court to do this, which meant there had to be another hearing before they could go ahead.

In September there was a diversion when Turner Freeman attempted to transfer proceedings in which the McLaughlins’ former barrister was suing Turner Freeman for his fees from the District Court (where the barrister, Mr Burchett, had brought them) to the Supreme Court to be heard with all the other claims: In the matter of Dungowan Manly Pty Ltd (in liquidation) [2014] NSWSC 1398.

Justice Black noted that this would have the practical advantage to Turner Freeman of avoiding Turner Freeman becoming liable to Mr Burchett in the District Court before any claim in the Supreme Court was determined, but rejected the application on the basis that the facts were not sufficiently in common.

My summary: it wouldn’t be fair to Mr Burchett to oblige him to get involved or stand by in court for the long arguments between all the parties involved in the company side of the dispute, and nor would it be fair to the parties other than Turner Freeman in the company dispute for them to have to stand by in the argument between Turner Freeman and Mr Burchett. Black did suggest that if there was a prospect the Supreme Court case could be determined quickly, it might be in Mr Burchett’s interests to wait and see in the District Court.

After a hearing in October, at the beginning of December Justice Black granted leave to the McLaughlins to bring a claim on behalf of the company against 4 of the shareholders who had not paid the requisite levies (two were companies, Loafer and Garmin, controlled by Mr Garratt QC) and otherwise to amend their claim.

You mustn’t think this was a mere formality. The shareholders fought it. See In the matter of Dungowan Manly Pty Ltd (in liquidation) [2014] NSWSC 1721. Some of the claims proposed by the McLaughlins were not permitted to go ahead.

Directions were also made to have the matter heard in March – which is about as soon as would be possible to fix a hearing as at the beginning of December.

The hearing took place over 5 days in March.

Dramatically, on the eve of the hearing the liquidator was still proposing to cut a deal with the shareholders, though it turned out he’d only actually been talking to the four shareholders who were parties to the proceedings who did not have the authority to bind the other shareholders. Such a deal (which was opposed by the McLaughlins and Turner Freeman) required the approval of the court. Justice Brereton dismissed the application. The liquidator and the shareholders wanted to adjourn the trial to try and rope in all of the shareholders to an agreement which they could then try to get approved, but Justice Black wasn’t prepared to give them that adjournment. One can assume that he wasn’t prepared to countenance losing the hearing time and putting the McLaughlins (and Turner Freeman and Mr Burchett in turn) to further delay.

Judgment was handed down on 1 May 2015: In the matter of Dungowan Manly Pty Ltd (in liq) [“2015] NSWSC 491. Justice Black held (simplifying a lot here):

1. The shareholders had to pay to the company the levies (that is, the calls for funds to pay the McLaughlins’ costs) which the administrator had demanded of them.
2. The company had to give the McLaughlins the title to the flat.
3. The McLaughlins had to give a mortgage over the flat to Turner Freeman.
4. Other money the McLaughlins would receive in respect of their damages and costs would also be charged to Turner Freeman to pay their fees.
5. The liquidator[s] couldn’t carve some value out of the McLaughlins’ flat to cover their own expenses. They hadn’t shown they couldn’t raise this money later from the shareholders by further levies.

If it were a race, you might say the outcome of this round was:

  1. Turner Freeman – because they got an extensive security over what the McLaughlins eventually get.
  2. The liquidators (actually there is just one liquidator by now) – they will get paid eventually, though not at the expense of the McLaughlins’ interest in their flat. Actually on reflection that can’t really be right: the liquidator always wins. Maybe you could say it was equal first.
  3. The McLaughlins – if there is anything left over after Turner Freeman is paid.
  4. The shareholders – they have to cough up. It is likely to take a while to get that because Justice Ward’s decision back in February 2010 still means that there is no recourse against any property, which usually speeds things up. As far as I can make out, if not enough shareholders can be forced to pay up on the levies then the liquidators will have to raise fresh levies against the pursuable shareholders to plug the gap.If there was a belief (and there were assertions to this effect by Garratt QC to the McLaughlins) that the McLaughlins would be left with an empty shell to recover any damages from, that seems to have backfired. The former shareholders are still shareholders (an argument they used to their advantage in 2011 when the McLaughlins had endeavoured to take Mr Garratt at his word and seize control of the company to stop it appealing the first judgment). While an administrator or liquidator is appointed, shares cannot change hands. And a liquidator or even an administrator appointed by a liquidator may [slightly weasel word in the judgment] still impose levies on them either under the share surrender agreement under which they got their strata title (but did not, as it turned out, effectively surrender their shares) or (if an administrator) the articles of the company (see [46] and [62]). Of course that depends on the liquidator or any administrator taking those steps, but there is a good chance they will do so in order to cover their own expenses.

It may not be clear to a lay reader, but the quote from Justice Black in June 2014 is a summary of an outrageous situation. There was no security given in 2010 because the company said that the shareholders would pay but now they aren’t paying!

Judge outraged at predicament of self-represented party is a difficult position.  It drew forth little homilies to Justice Black from counsel for Mr Garratt’s companies which were shareholders about his Honour’s duty to refrain from giving undue sympathy or, more importantly, assistance, to the McLaughlins as unrepresented litigants.

The first was in the October 2014 hearing when the question of whether the McLaughlins should be allowed to conduct the company’s claim against the shareholders arose. It was repeated in the main hearing in March 2015. Maybe ground was being laid for another appeal, if possible. It received the following response in Justice Black’s judgment of 1 May(emphasis added):

4. I should address two other matters by way of introduction. In her written submissions, Ms Nolan repeated submissions that she had previously made at the hearing of Mr and Mrs McLaughlin’s application for leave to bring derivative proceedings as to the circumstances in which the Court should intervene to “assist” Mr and Mrs McLaughlin, as unrepresented litigants, in the conduct of these proceedings. I have been conscious of the principles to which she refers and I adopt, without repeating, the comments that I made in respect of their relevance to this application in my judgment delivered on 2 December 2014 ([2014] NSWSC 1721). I drew Mr and Mrs McLaughlin’s attention to the manner in which affidavit evidence would need to be led and documents tendered and identified several issues as to which it would be helpful to have submissions from all parties in the course of Mrs McLaughlin’s oral submissions.

5. Second, Mrs McLaughlin’s submissions put Mr and Mrs McLaughlin’s position in respect of certain aspects of the conduct of the Company and its chairman with vigour and also made some criticisms of the liquidator’s approach to some issues. It was not entirely surprising that Mr and Mrs McLaughlin felt strongly as to those matters, in circumstances that the Company’s failure to meet a substantial judgment of this Court in their favour and its shareholders’ failure to meet the levies upon those shareholders had left Mr and Mrs McLaughlin facing bankruptcy proceedings brought against them by their former solicitors. An ordinary member of the community might well have regarded that position with concern. I do not accept the submission put by Ms Nolan that Mrs McLaughlin’s submissions in that respect were either scandalous or without evidentiary support, although it is has not been necessary for me to determine whether they should be accepted in order to decide this application and I do not express any view as to that matter. As I observed in the course of submissions, and as Mrs McLaughlin accepted, many of the matters to which she referred are more likely to arise as to the question of the basis of any order for costs and the persons against whom such an order would be made, and it may only be necessary to address them if agreement cannot be reached between the parties as to that question.

Final orders were handed down on 10 July 2015 after further argument on 23 June: In the matter of Dungowan Manly Pty Ltd (in liq) [2015] NSWSC 915. Nothing was conceded. For example, the liquidator had included interest when calculating the amount due under the levies.  Mr Garrett’s companies argued that they should not have to pay interest on the claims for the levies which the McLaughlins brought against them on behalf of the company because under the rules (regulations made for the conduct of proceedings) such claims are required to be included in the pleading and Mr and Mrs McLaughlin had neglected to include them.

One solution might have been to permit an amendment of the pleading. The McLaughlins would have needed to know how to make that application.

Justice Black took a different route. He noted that there were other sections of the relevant Act and the rules which would permit him to dispense with the requirement to comply with the relevant rule should the case so require, and that another rule expressly permits the court to give relief for matters which have not been sought in the pleading if the nature of the case so required. This was a discretion to be exercised in the interests of justice. He said (well, actually he wrote):

41. The factors relevant to the exercise of the discretion in this case include that, in the somewhat unusual circumstances of this case, Mr and Mrs McLaughlin were granted leave to represent the Company in bringing the claim against the Shareholders, where the Company’s shareholders’ failure to pay amounts levied by the administrators and subsequently the liquidator had left the liquidator unfunded to bring the claim, and prevented the Company paying amounts due to Mr and Mrs McLaughlin pursuant to the Court of Appeal’s judgment in their favour, creating difficulties for their funding of legal representation. It is not surprising that Mr and Mrs McLaughlin had a less than comprehensive understanding of the pleading requirements of the UCPR in respect of claims for interest. On the other hand, the principal of Loafer and Garmen is Mr Rodney Garrett QC, a Senior Counsel who practices in Victoria, and Loafer and Garmen were ably represented by Ms Nolan and by solicitors in these proceedings. Mr and Mrs Brown were also represented by Counsel and solicitors although their legal representatives were excused from attending the hearing at their request. As the liquidator points out, it cannot be sensibly suggested that Mr Garrett or the Shareholders’ legal representatives would have been unaware of the possibility that interest might be ordered against the Shareholders where they had the use of the unpaid levies for a substantial period or would have been unaware of the Court’s power to dispense with the UCPR in an appropriate case. I am comfortably satisfied that this is a proper case for the Court, by order, to dispense with the requirements of UCPR r 6.12 in respect of the pleading of a claim for interest by the Company and I do so.

This is still not over.  It is hard to see how the McLaughlins will ever get to keep their flat.  Because the company is in liquidation, the McLaughlins have to wait for the liquidator to collect the money and then make payments to them as creditors in the winding up. Turner Freeman will presumably first recover the money owed to it from sale of the flat – it does not need to wait until the McLaughlins receive any money from the company.

PS: by coincidence and google I saw that just on the day this post was published the liquidator has announced an intention to make a first distribution on 21 September 2015.

Postscript (2016)

The McLaughlins have received a little over $1 million of their admitted proof of debt of $1.332M but it looks as though they might only get at most another $50K or so.  It’s now down to liquidators scrapping over what’s left to pay their fees.   New liquidators have been appointed who achieved nothing but will be paid about $35K for that.  They do not intend to raise any further levies.  Everything seems to be spluttering to a halt.  See the decision of Justice Brereton: In the matter of Dungowan Manly Pty Limited [2016] NSWSC 1346.

 

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One Response to “A thousand miles from care 5”

  1. Andrew Says:

    I think this is the messiest case I have ever heard of. Now I understand why Victorian banks were reluctant to allow a form of mortgage on company share properties. I really feel for the McLaughlins and they have fought a good battle.

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