In the matter of MSU Management Pty Ltd - Urusoglu v MSU Management Pty Ltd & ors

Judgment

1. [1]

   HER HONOUR : In these proceedings, claims are made by two members of the Urusoglu family (Elif and her brother Mahir) and by a company controlled by Mahir (MSU Earthworks & Heavy Haulage Pty Ltd) against a finance broker and erstwhile family friend (Scott Brennan) in relation to matters relating to a company (the first defendant, MSU Management Pty Ltd) formerly controlled by Elif but now controlled by Mr Brennan. (Without any disrespect, I will refer to the members of the Urusoglu family, including Elif and Mahir's father Huseyin, by their first names. Both Mahir and Huseyin were also referred to on occasion in the evidence before me by Anglicised names - Mike and Sam, respectively - but for consistency I will refer to them by their given names.)

2. [2]

   Elif's principal claim is for the rectification of the company's share register so as to regain the legal ownership of the shares in MSU Management (to which it is said she is in equity entitled) and thus to regain control of the company. She also seeks damages in her own right for breach of contract or alternatively relief on behalf of the company (relying upon an alleged contravention by Mr Brennan of ss 181 and 182 of the Corporations Act 2001 (Cth)) in relation to the use by Mr Brennan of moneys drawn from the company funds, while he was a director, for his personal expenditure. In the alternative, Elif seeks damages (in the pleading claimed in the sum of $680,000 but in the course of closing submissions put at a lesser sum - in the order of $250,000, or lesser still, $179,000) plus interest by way of relief for the alleged oppression of her interest as a former member of the company or in lieu of specific performance of the alleged agreement on the part of Mr Brennan to transfer back to her the shares in MSU Management.

3. [3]

   Elif's claims broadly rest on the establishment of an alleged agreement on the part of Mr Brennan either to hold on her behalf or to transfer back to her (after obtaining the financing necessary to enable the company to purchase a property in Mt Vernon) the shares in MSU Management.

4. [4]

   Mahir's claim (and that of his company) is in the alternative to that brought by Elif. Counsel for the plaintiffs, Mr Jacobs, confirmed that this claim is pressed only if Elif does not obtain the relief sought by her. In that event, Mahir and his company seek restitution for the alleged unjust enrichment on the part of the defendants in retaining the benefit of subdivision works said to have been carried out at their request and/or freely accepted by them (those works having been carried out by or at the expense of Mahir or his company) or alternatively as damages for deceit. Mahir's claim is nevertheless said to hinge on the existence of the agreement on which Elif claims (T 388).

5. [5]

   The nub of the dispute is as to what agreement was reached in 2008 in relation to the purchase by MSU Management of land at Mt Vernon which one or more of the Urusoglu family wanted to retain for the construction of their family home (but also for use as a display home in order to promote a wall panel product - WIPS - created or developed by Mahir and apparently patented by him or by an entity associated with him).

6. [6]

   In essence (though there seemed to be various iterations of the alleged agreement on which the principal claim is based, to which I will refer in more detail shortly), the Urusoglu claim is that Huseyin and Mahir (acting on behalf of Elif) entered into an agreement with Mr Brennan, the intent of which was to enable the purchase and development of the Mt Vernon land with the benefit of mortgage finance to be arranged by Mr Brennan and that, following the subdivision of the land into two blocks, one block of land (the front block) was to be the Urusoglu family home. It is said that the agency relationship between Huseyin/Mahir and Elif can be inferred from the fact that Elif (somewhat inconsistently with her protestations of independence) left the conduct of the affairs of MSU Management to her father and brother.

7. [7]

   The land in question had been acquired by Huseyin in 2004. Following his voluntary entry into bankruptcy in late 2007, the land was put up for auction by Permanent Custodians in the exercise of its powers as mortgagee in possession. It was acquired at auction on 5 July 2008 by MSU Management and remains in the ownership of that company (the land having been subdivided into two lots in early 2009). As part (or on Elif's evidence in breach) of the arrangements between the parties for the financing of the acquisition of the land, the shares in MSU Management were transferred to Mr Brennan in 2008 pursuant to a share transfer form dated 16 June 2008 but registered on about 28 July 2008 after the auction sale.

8. [8]

   It is alleged that Mr Brennan's refusal to transfer the shares back to Elif is in breach of the above agreement. It is further alleged that, in breach of an implied term of the agreement on the part of Mr Brennan (to do nothing within his power to diminish or destroy the benefit to Elif of the agreement), Mr Brennan has diverted (from funds obtained through the later refinancing in 2009 of the initial loan arrangements pursuant to which the land was acquired) funds of the company to his own personal use. (Although initially pleaded as a diversion of funds in the order of $300,000, by the time of the hearing what was claimed as funds utilised for personal expenses was in the order of $179,000.)

9. [9]

   The alternative unjust enrichment claim arises in respect of the work carried out for the construction of a concrete access road (sometimes described, 'absurdly' in the words of one of the Urusoglu relatives, Mr Mesut Kanli, as a driveway) through the land (to satisfy one of the conditions of the development consent for subdivision) and the provision of landscaping and other services, such as water services, to the land. It is alleged that this work was carried out at the express request of Mr Brennan or, alternatively, that the benefit of the work was freely accepted by Mr Brennan (or MSU Management), and that the work was provided upon the mistaken belief that the shares in MSU Management would be transferred back to Elif (such that the Urusoglu family would obtain the benefit of this work).

10. [10]

    Further, it is alleged that the making of the alleged agreement constituted a representation that Mr Brennan would reconvey the shares (on which representation Mahir and his company allegedly relied in carrying on the works in question) and that Mr Brennan had no honest intention of so doing - this being relied upon for the claim for damages in deceit.

11. [11]

    Mr Brennan denies the agreement as pleaded but does admit that an agreement was made in relation to the land in question. That agreement, in summary, is alleged to have been that Mr Brennan would arrange the funding for the acquisition of the Mt Vernon land; that Mr Brennan would acquire the property (it being agreed that he would do so through the corporate vehicle, MSU Management); that the Urusoglu family would carry out the subdivision work at their own cost; and that on completion of the subdivision the front block would be sold to a person or entity nominated by Huseyin at a fair market price (with the logical consequence that the back block, and any profit thereon, to be retained by Mr Brennan through his ownership of the shares in MSU Management). It is said that it was never a term of this agreement that Mr Brennan would re-convey the shares to Elif.

12. [12]

    Mr Brennan says that after the subdivision was completed Huseyin nominated a newly incorporated company controlled and owned by his brother-in-law (Mr Kanli) to acquire the front block. A Contract for Sale of Land was entered into on 9 February 2009 in respect of the front block, with Sebat Pty Ltd (Mr Kanli's company) as purchaser (for the sum of $850,000) and MSU Management as vendor. No deposit was paid as required by the contract (according to the Urusoglu witnesses, it was agreed that Mr Kanli's contribution to the cost of the subdivision works would be treated as the deposit). That contract was in due course terminated for breach. The land in question remains occupied by Mahir and remains burdened by an equitable mortgage in favour of Trimac (as well as securing the lending by NAB/Homeside). MSU Management seeks an order for possession in respect of the land and mesne profits for the period of its occupation by Mahir.

13. [13]

    By way of reply, filed by leave at the close of the hearing but foreshadowed during the course of the hearing, it is contended by Elif and Mahir that (in the event that the agreement is found to be as asserted by the defendants and not as asserted by the plaintiffs) on the facts pleaded in paragraph 5(vii) of the Defence to the Amended Statement of Claim (i.e. the termination of the Sebat Contract of Sale on or about 9 March 2009) there has been a frustration of the contract Mr Brennan says he entered into with Huseyin. In those circumstances, the plaintiffs seek practical restitution as between the parties. It is said that such restitution requires the recoupment of the benefit of the works carried out on the land and that one way this benefit may be valued is by reference to the benefit of the company funds Mr Brennan used for personal expenses since becoming a director (on the basis that those funds were only made possible though a refinancing that occurred on the basis of the subdivision that had been effected). Issues

14. [14]

    The issues for determination are broadly as follows: (i) What was the agreement pursuant to which the Mt Vernon land was acquired in the name of MSU Management and Elif's shares in that company were transferred to Mr Brennan (it being neither party's case that there was no agreement at all in relation to the transfer of the shares)? (ii) If the agreement was as the plaintiffs contend (and Mr Brennan is in breach of that agreement by having refused to re-convey the shares in MSU Management to Elif), what relief should be granted (and is Elif entitled to damages for breach of an implied obligation by Mr Brennan not to diminish the benefit to her of the agreement to re-convey the shares)? (iii) Alternatively, has Elif established an entitlement to relief on the basis of oppression and/or is she entitled to claim damages in the name of MSU Management for funds diverted from the company to Mr Brennan's personal use? (iv) If the agreement was as Mr Brennan contends, did the termination of the Sebat Contract of Sale amount to frustration of the agreement and, if so, should practical restitution be ordered and what would it comprise? (v) Has Mahir established an entitlement to damages for deceit?

15. [6]

    Are Mahir and his company entitled to relief on the basis of their unjust enrichment claim and, if so, in what amount does their claim in quantum meruit sound? (vii) On its separate claim, is MSU Management entitled to an order for possession of the Mt Vernon land and for mesne profits?

16. [15]

    Pressed at the close of the hearing to articulate the damages claimed by Elif, Mr Jacobs said that, if the shares are returned to Elif, then the amount claimed by her is $179,000 plus interest (being the amount of the company funds used for personal expenses of Mr Brennan) but that, if the shares are not returned to Elif, then what is sought is the amount of $250,000 plus interest (being the value of the land, as evidenced by the purchase price stipulated in the Sebat contract - $850,000 - less the amount outstanding on the existing mortgage over the front block - $600,000 - and assuming the Trimac loan over the land had been extinguished).

17. [16]

    Therefore, when considering the relief claimed, I note that the amount quantified in the pleadings at $300,000 is now said to be $179,000 and the $680,000 claimed elsewhere in the pleading is now claimed as $250,000.

18. [17]

    Mahir's alternative quantum meruit claim is in the order of $350,000 (a sum of $347,000 being the amount appearing in an invoice rendered by his company, MSU Earthworks, in December 2008 for the subdivision works. That sum includes a component referable to an invoice for $90,000 on the letterhead of All Concrete Constructions Pty Ltd, the authenticity of which invoice is in dispute. Conceding that there might be some difficulty in establishing the figure of $350,000, it is nevertheless submitted by Mr Jacobs that at least $250,000 in value has been shown to have been conferred by reference to the works (that comprised of $130,000 from Mr Kanli, concrete supplied by Western Suburbs Concrete for approximately $30,000 and the disputed invoice of $90,000). Summary

19. [18]

    In summary, for the reasons set out below, my views on the above issues are as follows. (i) What was the parties' agreement?

20. [19]

    The plaintiffs (Elif, Mahir and his company, MSU Earthworks) have not established on the balance of probabilities that there was an agreement in the terms for which they contend. On the whole, I find Mr Brennan's version of events to be the more credible. I find that the agreement reached between Huseyin and Mahir (on behalf of Elif) in relation to the acquisition of the Mt Vernon land was for Mr Brennan to arrange finance for its purchase by MSU Management; for the shares in, and control of, MSU Management to be transferred to Mr Brennan; for the subdivision of the land at the cost of Mahir (or the extended Urusoglu family); and for the transfer of the front block, at a fair market price, to Huseyin's nominee after completion of the subdivision.

21. [20]

    In particular, I find that there was no promise by Mr Brennan not to register the share transfers and no obligation on the part of Mr Brennan to transfer the shares in MSU Management back to Elif.

22. [21]

    The consequence of this is that (subject to the obligation to transfer the front block to Huseyin's nominee) Mr Brennan is entitled through the shares in MSU Management to any profit from the sale of the respective blocks of land.

23. [2]

    Relief for Elif if agreement in relation to shares were established

24. [22]

    On my finding in (i) above, this issue does not arise. Had it arisen, I would have been inclined to the view that the appropriate relief depended on the content of Mr Brennan's obligation in relation to the shares. If his obligation was to hold the share transfer form and not to register it, then I would have been of the view that the appropriate remedy was to rectify the register. Had I been of the view that Mr Brennan was entitled to register the share transfer but was thereafter obliged to transfer back to Elif the shares, then I would have considered the appropriate relief to be to order the transfer by Mr Brennan back to Elif of the shares he holds in MSU Management (or damages for failure to do so).

25. [23]

    In either case, I consider that any relief involving the reinstatement of Elif as a member of the company would have needed to be conditional on the reimbursement to Mr Brennan of any interest or other payments made by him or on his behalf in relation to the land over the period from July 2008 and to the procuring of a release in respect of any liability he or his wife have or may continue to have under guarantees given in connection with the financing of the acquisition or development of the Mt Vernon land.

26. [24]

    As to the re-financing of the initial loan facilities obtained in that regard, and the use by Mr Brennan of funds derived from that refinancing for his personal use, had I found that the agreement was as contended for by Elif, then any claim for damages suffered for breach of an implied obligation not to diminish the benefit to Elif of the reconveyance of the shares would be referable to the loss of value in the shares which was not established. I would have therefore been inclined to think that the appropriate remedy would be to order Mr Brennan to reimburse to the company the sum of $179,000 (plus interest) being the amount drawn from the company funds to his personal use (in the absence of evidence from Mr Brennan that he was entitled to do so). (iii) Oppression/derivative claim

27. [25]

    I am not satisfied that Elif, as a former member of the company, has established any oppression in relation to the circumstances in which she was removed as a member and director of the company and hence has not established any entitlement to relief under s 234 of the Corporations Act .

28. [26]

    As to the question of any breach by Mr Brennan of his duties as a director of MSU Management by reason either of his conduct (after Elif ceased to be a shareholder) in not paying down the so-called Trimac loan at an earlier time or in drawing down company funds for his personal use, those issues do not arise on the suit of Elif (since I am not satisfied that she has any entitlement to the shares of the company). Had the issue arisen, then it would have been necessary to consider Elif's application for leave to bring a derivative suit in the name of the company (problematic in that it could be assumed that if Elif were the sole director and shareholder then there would be no basis for thinking that the company would not itself prosecute the claim and because it was not explained how the overlap between Elif's personal claim for damages and the cause of action asserted on behalf of the company would be addressed in the context of what whether it would be in the best interests of the company to bring the claim). I am inclined to think that the requirements for leave to bring a derivative suit in those circumstances were not satisfied.

29. [27]

    In passing I note that I would not have been satisfied that the evidence before me enabled me to form a conclusion (had it been necessary) that the delayed repayment of the Trimac loan was a breach of director's duties since I was not privy to all of the circumstances in which that loan was not paid down (there having been, I was told, litigation last year in relation to that loan) and the commercial prudence or otherwise of deferring repayment in the anticipation of a sale of one or both of the blocks is something that seems to me to fall within the realms of a business judgment that I am simply not in a position on the evidence to assess. However, I accept that the evidence would have allowed the conclusion that there was a serious question to be tried on that issue.

30. [28]

    As to the payment by Mr Brennan from company funds of personal expenses, it was suggested that this could legitimately have been effected by way of a loan account with the company or as a payment at the direction of Mr Brennan of directors' fees. However, in the absence of evidence as to those issues, a payment out by Mr Brennan of company funds for personal expenses would prima facie seem to be in breach of his duties as a director and there would have been a serious question to be tried also on that issue.

31. [29]

    In light of the finding in (i) above, I can usefully take the matter no further (other than to note that had Elif succeeded on her principal claim in relation to rectification of the shares, and been reappointed as sole director it would then have been open to her in the name of the company to pursue claims for breach of director's duties against Mr Brennan, if so advised, and hence there would not seem to be a need for leave to bring a derivative suit). (iv) Frustration

32. [30]

    I am not satisfied that the termination of the Sebat Contract of Sale operated to frustrate the agreement that I have found was reached in relation to the transaction (namely that the front block would be subdivided at Mahir or the Urusoglu family's expense and sold at a fair market price to Huseyin's nominee).

33. [31]

    The front block remains in the ownership of MSU Management. I am not satisfied that the agreement has become impossible of performance. (It seems to me that there is a reasonable argument that, the sale to Sebat having fallen through, it remained open at least for a reasonable time after termination of the Sebat contract for Huseyin to nominate another purchaser of the land for fair market value.) Nor am I satisfied that performance of the contract has become a radically different thing, so as to give rise as a matter of law to frustration of the contract. The performance by Mahir of his obligations to carry out the subdivision works may not have had the outcome Mahir desired but his performance of the subdivision works was always to be in circumstances where the benefit hoped to be achieved was dependent on Huseyin's nominee being able and willing to complete the contract.

34. [32]

    In any event, I have concluded that the failure of Sebat to complete the 2009 contract was due to a decision by Huseyin (or in which he acquiesced) for his nominee not to proceed with that sale or an inability on the part of Huseyin to arrange the necessary finance for that to occur. I am satisfied that Sebat, in entering into the contract for sale, was doing so on behalf of Huseyin. Any frustration of the agreement by reason of the failure by Sebat to complete the contract in those circumstances seems to me to be self induced. (v) Damages for deceit?

35. [33]

    I am not satisfied that it has been established that Mr Brennan has any liability in tort for deceit. (vi) Mahir's alternative quantum meruit claim

36. [34]

    I am not satisfied that Mahir (or his company) has established a claim based on the unjust enrichment of Mr Brennan or MSU Management (and, even if there had been such a claim I could not be satisfied that the quantum of the benefit to be restored to Mahir or his company had been adequately established). (vii) Claim for possession

37. [35]

    In light of the above findings, MSU Management is entitled to an order for possession of the Mt Vernon land. I consider that it is also entitled to an order for mesne profits. I think it appropriate that the quantification of those profits be referred to a referee or to an Associate Justice but will hear submissions in relation to the most expeditious way of carrying out such an assessment. Facts

38. [36]

    Prior to his entry into bankruptcy, Huseyin had carried on business as a property developer. (According to Huseyin's evidence in the witness box, in explanation for his assertion that he did not care what happened to the Mt Vernon property after his bankruptcy, Huseyin said that he had been involved in millions of dollars worth of property development.) He was described by Counsel for the plaintiffs, Mr Jacobs, as an entrepreneur (and there was no suggestion to the contrary).

39. [37]

    Mr Brennan is a finance broker and had, over the years, arranged to procure finance for Huseyin for various property developments. Mr Brennan conceded that there had been a commercial relationship with Huseyin over the years and did not deny that he had derived commission or brokerage fees from his dealings with Huseyin. Though the precise quantum was not admitted, Mr Brennan accepts that he had received at least $120,000 in that regard. Nevertheless, the receipt of commissions seems to be only one side of the equation. Mr Brennan claims to have suffered considerable (and far more extensive) losses in at least one project in which he says he (and his colleagues) had invested funds (referred to as the Granville development), something not acknowledged either by Huseyin or by Mahir (other than that Huseyin said that "everybody" had lost in that project and appeared to acknowledge that Mr Brennan had been pressing him for repayment of money in respect of the project).

40. [38]

    It does not appear to be disputed that the two men and their families had had a social relationship for some time (though the extent of it may be in dispute). Both Elif and Mahir said that they had called Mr Brennan "Uncle". (Their trust in Mr Brennan, which I consider likely to have been overstated by both, was given as the explanation for Elif's preparedness to sign documents that she now says she knew were incorrect at the time and which she says her father's accountant had advised her at the time not to sign.)

41. [39]

    In around 2004/2005, Huseyin bought the land at Mr Vernon which is the subject of the claims in the present proceedings. At that time, the land had the benefit of a Development Consent for subdivision into two lots. One of the conditions of the subdivision consent was the creation of a 3.5m sealed driveway or access road along the boundary of the land. Mahir's evidence is that he carried out substantial work to clear the Mt Vernon land in 2006 (and he estimated that work to be worth around $300,000). Mahir's evidence in the witness box was that much of the work done prior to the events in question in 2008 (or at least the works in relation to the access road) was rendered worthless (and later had to be re-done) due to the delay occasioned by the mortgagee taking possession of the property (that arising by reference to the impact of the weather on the incomplete roadworks).

42. [40]

    Huseyin says that he wanted to build a family home on the Mt Vernon land and to do so by using an insulated wall panel system ("WIPS"). Mahir said that he had created or invented the idea of WIPS. He was enthusiastic and expansive in his description of it in the witness box, (as compared with his evidence in relation to other matters in which he displayed an attitude of distinct disinterest). Huseyin's plan was to live in the home but also to use it as a display home in order to demonstrate the features of the WIPS product. In the witness box, Huseyin emphasised that the only way that "they could all get back trading" was for the WIPS project to "get off the ground" (T 74) and that for that to happen it was necessary to have a display home to demonstrate the benefits of WIPS.