Supreme Court New South Wales

• Medium Neutral Citation: In the matter of Nevada Pty Limited ACN 000 079 247 [2011] NSWSC 1499
• Hearing dates: 27 October 2011
• Decision date: 09 December 2011
• Jurisdiction: Equity Division - Corporations List
• Before: Ball J

Decision

See paragraphs 61 and 62 of this judgment.

• Catchwords: CORPORATIONS - interpretation of company's constitution - whether levy struck by directors within power - construe constitution as business document. CORPORATIONS - class rights - home unit company title - whether proposed development affects class rights. WORDS & PHRASES - meaning of "service or maintenance charges"
• Legislation Cited: Corporations Act 2001 (Cth)
• Cases Cited: Holmes v Keyes [1959] Ch 199; Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144; (2006) 156 FCR 1; National Roads and Motorists' Association Ltd v Parkin [2004] NSWCA 153; (2004) 60 NSWLR 224; Wilson v Meudon Pty Ltd [2005] NSWCA 448
• Texts Cited: RP Austin & IM Ramsay, Ford's Principles of Corporations Law, 14th ed, (2010), Butterworths
• Category: Principal judgment
• Parties: Pamela Mary Cartwright (First Plaintiff); Janet Elaine Haynes Colling (Second Plaintiff); Elizabeth Ann Dix (Third Plaintiff); Dale Rose Edwards (Fourth Plaintiff); Peter David Gardiner (Fifth Plaintiff); Renata Gombac (Sixth Plaintiff); Gayle Minka Lambert (Seventh Plaintiff); Gwyneth Hope McConnell (Eighth Plaintiff); Ronald Tobias Patrick Shields (Ninth Plaintiff); Violet Lorraine Shields (Tenth Plaintiff); Ross Campbell Small (Eleventh Plaintiff); Alice Eilzabeth Dieckhaus Waugh (Twelfth Plaintiff); Nevada Pty Limited (Defendant)
• Representation: Mr D H Murr SC / Mr D C Price (Plaintiffs); Ms D Hogan-Doran / Mr T M Glover (Defendant); Makinson & D'Apice (Plaintiffs); Audax Legal Pty Limited (Defendant)
• File Number(s): 2010/423587

Judgment

Introduction

1 "Nevada" is a company title apartment building in Darling Point consisting of 35 units. The building was built during 1949 and 1950 and is owned by the defendant, Nevada Pty Limited. There are 7 units on each floor. The building is an irregular shape. Two parts of it jut out in a westerly direction from the main part of the building which runs in a north-south direction, creating a courtyard which is enclosed on the east side by the main part of the building and on the north and south sides by those parts that jut out. The west side of the courtyard opens onto the front garden of the building. The building has not been maintained as well as it ought to have been and it now requires substantial work. In addition, on 17 September 2010, the Woollahra Municipal Council issued a mandatory fire safety work order, which was subsequently amended on 7 January 2011. The estimated costs of complying with the order and carrying out necessary repairs and maintenance work was originally thought to be in the order of $5.5 million, although it is now estimated to be $4 million.

2 In 2009, the board of the company started to investigate how to raise funds to pay for the repair and maintenance work. The scheme it proposed involved selling rights to a developer to construct 3 additional apartments in a new 3 storey stack located at the northern end of the building which would also jut out into the garden, creating a second courtyard bounded by the building on the east, south and north sides and opening onto the garden on the west, and a penthouse apartment on top of the existing building. The scheme also involved the construction of a new car park. There is a dispute about how firm and how advanced that scheme is, which I will come to. In any event, it was necessary before the scheme could be implemented to obtain development approval from the Council. Preparation of the relevant development application itself involved substantial costs. On 8 September 2010, the directors of the company passed a resolution purportedly pursuant to art 24 of the company's constitution raising a "levy" of $500,000 to be used in part at least to progress the DA. The plaintiffs claim that that resolution is void. They also claim that the proposed development would interfere with the class rights of a number of them and they seek declarations to that effect and injunctions preventing the board from pursuing the proposed development. In addition, the plaintiffs seek declarations that they were wrongly excluded from the company's extraordinary general meeting held on 24 October 2011 (on the basis that they had not paid the levy) and that, as a result, any resolutions passed at that meeting were void. In response, the company says that the levy was valid and that the declarations and injunctions sought by the plaintiffs are premature or are unnecessary having regard to undertakings the company has given in points of defence it filed in the proceedings on 30 August 2011.

Background Facts

3 The company began to address its current financial problems in 2009. The directors held an information evening for shareholders on 5 May 2009 during which there was an extensive PowerPoint presentation outlining the company's current problems. A further information session was held for shareholders on 1 December 2009. One of the points mentioned in the material presented to shareholders at that time was that:

We need to review what other assets we have someone would want to buy from us, we have significant under utilised space in a sought after location.

It appears that various ideas were canvassed at the meeting including further development on the site.

4 There was a meeting of directors on 23 February 2010. At that meeting, there was discussion about the company's financial position and the fact that it had "very limited resources". The board also discussed the need to "recapitalise the company". The minutes record that:

The Board acknowledged that the Company will need to develop a master plan for how better to utilise the assets to raise capital

The minutes went on to record that the following resolution was put forward:

The Board agreed it needed to understand what was possible in terms of options regarding the spare common space on our site. Understanding what council will allow is not an area the Board is familiar with. A town planner is best placed to give advice on the options for development of some of the common space in a bid to recapitalise the company.

The minutes also record that the board resolved (unanimously) to:

Engage a town planner informally for now to understand our options regarding the footprint of Nevada with respect to garaging options, the multi-space roof, ground floor of our building and the roof of Nevada itself.

5 There was a further board meeting on 22 March 2010. It appears that there was some discussion at that board meeting of the "town planner and architect ideas for releasing value". The minutes record in relation to various matters that were discussed:

The Board agreed that all this material must come together in one plan that can be actioned. The plan must provide resources to the company, address the risks identified and put in place for the company a higher quality governance and management frameworks

6 The company entered into an agreement with Tobias Partners on 6 May 2010 to provide architectural services. At some stage the company also engaged other advisors, including lawyers, to give advice on governance issues, tax issues including GST and issues concerning the responsibility of the directors.

7 The agreement with Tobias Partners describes the services to be provided by them as:

Provision of architectural services in the form of a [sic] initial consultancy to explore design options to increase parking and explore other possibilities at The Property, that may assist the company in raising capital. These may also include various options that result in additional apartments on the site.

The terms of that agreement had been approved by the Board on 27 April 2010. Tobias Partners estimated their fees to be in the range of $50,000 to $60,000 plus GST.

8 Tobias Partners arranged a Council inspection of the building on 10 May 2010 and Ms Kelly, Nevada's chairperson, met with the Council representative during the course of the inspection. It is not entirely clear how the Council inspection came about or precisely what happened immediately following the inspection. However, it appears that the Council representative expressed concern about the state of the building and, on 18 May 2010, Ms Kelly sent an email to Mr Scott Kitching at the Council in which she said:

... the Board will work on a master plan with council to ensure the building complies with building codes and addresses OH&S issues ...

9 On 5 July 2010, Mr Richards of Tobias Partners sent Ms Kelly an email attaching schematic floor plans and other sketches showing a proposal for a ground level car park, 3 additional units at the northern end of the building (which would replace the existing single storey car park) and a penthouse. Attached to this judgment as annexure A is a copy of a plan showing the proposed location of the 3 storey stack containing the 3 additional apartments.

10 There was a board meeting on 27 July 2010. At that meeting, Ms Kelly reported on her discussions with the Council and the fact that Council had indicated that two options were available. One was for the Council to serve orders. The other was for the board to work "with Council toward an integrated outcome ie. a master plan approach". The minutes go on to say:

... in principle the Directors support a "master-plan" approach as this option gives us the greatest flexibility and say with Council, it also gives us some control of the process. ...

 

11 Despite what is recorded in those minutes, on 20 August 2010, Council gave notice of intention to give a fire order. Ms Kelly corresponded with Mr Gardiner, one of the shareholders, concerning that notice. In her correspondence, Ms Kelly indicated that one option that was available was:

Sell Company assets such as parts of the building - the master plan approach

The notice of the intention to give a fire order required the work to be carried out in 3 stages. It was proposed in the notice that the last stage of the work would be completed within 360 days.

12 Following receipt of the notice, the board held an emergency meeting on 31 August 2010 to which a number of other shareholders were invited. The board agreed to appoint Structural Project Management (Australia) Pty Ltd ( SPMA ) "to undertake a full building remediation audit and fire safety audit and to do full costings for both". The minutes record:

The Board agreed its view is:

Adopt a Master Plan which would raise some funds and upgrade the amenities and most importantly remediate the building to make it safe for occupants, especially in relation to electrics, balustrades, fire safety etc.

This Master Plan would include:

Working on adopting a new Constitution that is compliant with current company legislation and regulations and takes into account case law on company title entities (but assets sales and development and building works are not dependent on obtaining a new Constitution).

Appoint or re-appoint all advisors and suppliers as soon as possible and check that those advisors and suppliers have adequate insurance

Forthwith build 43 car spaces on Nevada's property and plan to sell them for market value (indicative approximate value of $100,000.00 each, plus GST, to be advised).

Seek development approval from Council to build additional apartments on Nevada property that will then be sold to return appropriate net sale or development proceeds to Nevada Pty Ltd. ...

Contract with a property developer or developer manager interested in building additional apartments and execute a Development Agreement (since Nevada does not have the expertise or insurance to be the developer).

Adopt levies over time payable by all Shareholders sufficient for the shortfall in order to implement the Master Plan, assuring compliance with council orders and maintaining solvency in accordance with prudent governance standards.

The Directors acknowledged in this review that Nevada must raise further capital. The Directors agreed that they would prefer to minimise the amount payable by the Shareholders by levies. The Board also acknowledged that an adoption of the Master Plan would reduce the aggregate levies payable by all Shareholders considerably.

The minutes go on to record that the Board resolved "as a single resolution" that:

1 The Chair is authorised and directed to represent the Company in key negotiations with Council ,..

2 The Board adopts a Master Plan as set out in the attachment to meet its financial obligations to make the Building Compliant [that is, compliant with "Council fire regulations and all related building, health and safety requirements"]; and

3 Amendments to the Master Plan may be made in accordance with directions to be given by the Board from time to time but in any case no amendment may be made which would adversely impact on any commitment to Council without Council's prior consent; and

4 This resolution specifically authorises and directs the sale of the Company's assets which will permit the construction of a car park in accordance with the Master Plan and the sale of car park spaces to generate the required funds: and

...

7 The Board immediately raise a levy in the aggregate amount of $500,000 payable by each Shareholder by 30 th November 2010 ...

Although para 2 of the motion refers to an attachment, there was in fact none.

13 Shortly after that meeting, the company sent an undated letter to the Council which was signed by all 5 directors. That letter said in part:

In terms of a path forward the Board would be keen to sit down with the relevant parties from council to talk through a proposed approach. The Board has been working on a master plan that would offer significant advantages if implemented and also offers a way to fund the works required. Given the large costs involved this is of particular importance to a number of residents. The Board would be very keen to discuss this in depth with Council at your earliest convenience.

14 Subsequently, on 1 September 2010, SPMA sent a letter to the Council. A draft of that letter was sent to Ms Kelly, and it can be inferred that she approved its contents. In the letter, SPMA describes the proposal to build a car park, 3 additional apartments at the northern end of the building and a penthouse apartment. The letter states:

... The Company is committed to the development and have past [sic] a resolution to proceed with the design development.

The architects have advised us that they can have a DA lodged by the end of April 2011. Prior to this milestone the Company has agreed to carry out essential service works to protect the building and the occupants. It is obviously preferable not to carry out works that will within three (3) years be demolished as part of redevelopment works.

15 On 2 September 2010, Ms Kelly met the Council with representatives of SPMA and Tobias Partners. At that meeting, Ms Kelly asked whether some of the work in stages 1 and 2 could be pushed back to stage 3. Ms Kelly reported back on the meeting to other board members by email dated 6 September 2010. In that email, she said:

Council said they would consider this and were understanding of the works we were proposing to do and the importance of doing things once and not duplicating costs.

16 There was a further board meeting on 8 September 2010. At that meeting the board unanimously passed the following resolution:

Immediate special levies to be struck in line with shareholders shareholdings by 30 th November 2010. This levy is to fund the implementation of fire orders from council and the professional fees related to this work. In addition this levy will fund professional fees to further develop a master plan to get to DA stage in order the Company can raise funds and significantly improve the amenity of our building.

17 Sometime after that meeting, Ms Kelly on behalf of the board sent a circular to shareholders enclosing the minutes of that meeting and the previous two. The circular said:

... These are very defining minutes for Nevada and so I encourage everyone to read them.

The circular stated that preliminary costing for the work was $5.5 million and went on to describe the effect of the resolutions passed by the board with respect to funding. In relation to the master plan, the circular said that the board had agreed to:

Adopt the "Master Plan" to give shareholders substantial timing benefits in terms of implementing Council Orders, improve the amenity of the building (hence the value of our shares) and substantially and materially aid funding of all works by third parties (thus minimising the amount of funds shareholders have to give)

18 The final fire orders were issued on 21 September 2010. They required stage 1 works to be completed within 120 days, stage 2 within 180 days and stage 3 within 1095 days - that is, by 16 March 2013. In a letter subsequently written by the Council on 12 November 2010, the Council explained that it had agreed to the variations as the result of representations made to it at the meeting on 17 September 2010. The letter said:

That the timeframes should be amended from a one year timeframe to three years for certain terms within the Fire Order to encapsulate the proposed upgrade of the premises. It is unusual for Council to grant an extension of time of more than one year. The extension of time was granted as a result of the acceptance of the management plan presented to Council by Nevada Pty Ltd.

19 There were further presentations to shareholders on 6 and 7 October 2010 in relation to the fire orders. The presentations were made by SPMA and Tobias Partners. The material that formed part of the presentation estimated that the total cost of complying with the fire order and other remediation work was approximately $4.6 million plus GST and before allowing for any contingencies.

20 The company gave notice of the special levy by notice dated 26 October 2010. The notice stated:

The funds raised by the levies will be used only for meeting maintenance and repair costs, urgent works to meet Council's Fire Order, expert's fees to work on the Order and to continue the necessary work on developing the detail of the Master Plan, associated costs, recurring charges and existing bills.

The notice also stated:

We are not raising funds by selling any Company assets at the current time. That will only be considered much later, as part of a well considered Master Plan which has been developed with expert advisers and taking all legal, financial, regulatory and shareholder interest into account.

21 On 27 October 2010, Tobias Partners received a report from aSquare Planning suggesting that there would be difficulties in obtaining development approval for the construction of the additional apartments, penthouse and car park. That report concluded:

The existing building fails to comply with major core controls. As such, the proposal is only likely to receive the support of Council if we demonstrate full compliance with relevant objectives and no (as opposed to minimal) adverse impacts on adjoining properties. Any development should also demonstrate improvements in areas such as streetscape, sustainability and energy efficiency, parking, open space and landscaping.

22 The plaintiffs between them own shares which entitle them to occupy 10 units. They commenced these proceedings on 22 December 2010. Shortly before or shortly after the proceedings were commenced, the board, in response to a notice the plaintiffs had distributed to some shareholders, sent a notice to all shareholders. The notice said:

The Master Plan is only one option the Board is investigating to mitigate the cost to shareholders bearing in mind that all Directors are shareholders as well.

The notice also said that the board had found means of reducing the cost of the necessary fire and maintenance work to approximately $4 million.

23 There was a meeting of the board on 27 June 2011. At that meeting, it was resolved to strike two special levies - one to cover legal costs and the other to cover maintenance costs. The legal levy was imposed on all shareholders, but the board agreed to suspend payment by the plaintiffs pending the outcome of the proceedings. The maintenance levy, which is payable over 8 quarters, was for a total of $2.5 million. The minutes of the meeting state that the levy was for the following items:

Professional Fees: e.g., engineers, project managers, administration of projects, private certifier, architects for DA for egress from the back stair and DA fees (necessary to complete work for fire orders).

Fire Upgrade and related drag along works including make good and pipe replacement - gas and water and potentially sewage

Rectification of long term compliance issues and OH&S issues

Exterior maintenance to fix our building - new windows, painting, rendering, concrete cancer

Contingency of 10% for the above categories (this is very conservative)

The minutes also state that:

NO Development Application (DA) is being considered by the board at this time in regards to investigating our options to reduce levies.

And the actual resolution was expressed in these terms:

Resolved to strike a maintenance special levy two in respect of work associated with the implementation of the fire orders, essential compliance works and associated professional fees related to the implementation of the fire orders, payable as follows ...

24 The plaintiffs have not paid the special levy struck on 8 September 2010. It appears that they have paid the due instalments of the special levy struck on 27 June 2011.

25 On 23 September 2011, the board gave notice of a special general meeting of the company on 24 October 2011. For the most part, that meeting did not deal with matters which are relevant to the issues in these proceedings. However, one of the resolutions put forward was

That the Members support the Directors investigating viable options to source funds in order to reduce levies .

The explanatory notes to that resolution state that the resolution has no legal effect and that "It does not seek approval for any particular option, project or expense." The plaintiffs were not permitted to participate in the meeting. They were excluded under art 74 of the company's constitution, which provides:

No member shall be entitled to be present or to vote either personally or by attorney or proxy or as attorney or proxy for another member at any general meeting or upon any poll or be reckoned in a quorum or to exercise any privilege as a member unless all calls or other money due and payable in respect of any share of which he is the holder have been paid.

No evidence was led of what actually occurred at the meeting.

The company's constitution

26 The company's constitution is contained in memorandum and articles of association. Article 4 provides that the basis on which the company was established was to acquire the land on which the building is situated and to erect on that land "a building containing 35 home units in accordance with plans and specifications approved by the Council of the Municipality of Woollahra and may also by its board acquire further similar or other properties either in addition to or in substitution for the first mentioned property".

27 Article 22 provides that subject to art 23 (which is not relevant) and art 24 the holder of each group of shares specified in the table contained in that article is entitled "to the absolute and exclusive use of the home unit contained in [Nevada]" that is identified in the table and set out opposite to the relevant group of shares. Although no plans are attached to the articles, there were detailed plans showing the layout and location of each unit in the building at the time the company was incorporated, and the parties agree that those plans identify the units referred to in art 22.

28 Article 24 provides:

The holder of any such group of shares shall pay to the Company from time to time such amount as the Directors may from time to time decide for the purpose of providing for service or maintenance charges and rates, taxes, insurance and repairs, and without prejudice to the generality of the foregoing, for repayment of such holder's proportion of principal sums interest and other money secured by first and second mortgages given by the Company to The Mutual Life and Citizens Assurance Co. Ltd., and shall indemnity [sic] that Company against that proportion. In this Article the expression "such holder's proportion" means the proportion which the number of shares held by such holder bears to the total number of shares issued by the Company as at 1 st June ,1951.

29 Articles 46 (which, in part, repeats art 6) and 47 permit the company to raise new capital. Those articles provide:

46. The Company in general meeting may from time to time increase the capital of the Company by the issue of new shares.

47. Such new shares shall be of such aggregate amount divided into shares of such denominations and shall be issued for such consideration on such terms and conditions and with such preference or priority as regards dividends or in the distribution of assets or otherwise over other shares of any class whether then already issued or not or as shares to be deferred to any other shares with regard to dividends or in the distribution of assets and with any special or without any right of voting as the general meeting resolving upon the creation thereof shall direct and if no direction be given as the Directors shall determine.

30 The company receives a small amount of income from renting out car spaces in the existing car park. Apart from that income, the only means by which it can raise additional funds (apart from borrowing) is by levies under art 24 or by issuing new shares under arts 46 and 47.

31 Articles 109 and 110 give the directors broad powers, including the power to borrow (but only up to a limit of 5,000 pounds without approval from a general meeting) (art 110(i)), to institute or defend court proceedings (art 110(o)) and "to sell, let exchange or otherwise dispose of absolutely or conditionally all or any part of the property privileges and undertakings of the Company" (art 110(q)).

32 Article 113 requires the directors to cause accounts to be kept of the assets and liabilities of the company and art 117 requires those accounts to be audited annually.

The issues

33 There are three issues in this case. The first is whether the levy imposed by the board on 8 September 2010 was valid. The second is whether the plaintiffs' class rights will be infringed by the proposed development. The third is what relief, if any, the court should grant having regard to what has happened.

Was the levy struck on 8 September 2010 valid?

34 The answer to this question depends on the correct construction of art 24 and, in particular, whether it authorises the board to impose a levy to "fund professional fees to further develop a master plan to get to DA stage in order the company can raise funds and significantly improve the amenity of our building". The company appears to accept that, if art 24 did not authorise the directors to impose a levy for that purpose then the resolution passed on 8 September 2010 was invalid, even if the levy struck at that time was also to raise funds for purposes which do fall within the scope of art 24.

35 According to the plaintiffs, art 24 and, in particular, the phrase "service or maintenance charges" should be construed narrowly. That is because the power conferred by art 24 is unusual in a company's constitution, no limit is placed on the amount that may be levied and the consequences of non-compliance are severe, since under art 40 failure to pay the levy may lead a shareholder to forfeit his or her shares. The plaintiffs also submitted that articles of association should be interpreted more strictly than a normal commercial contract because of their special nature and, in particular, the fact that the persons they bind are likely to change over time and third parties are likely to rely on them. The plaintiffs submit that, interpreted in that way, the expression "service or maintenance charges" should be interpreted as a composite expression denoting charges of a particular type, or at least that "service" should be interpreted as referring to services that would normally be provided to an apartment building, such as electricity, water, gas, sewerage, garbage removal and the like. Implicit in the plaintiffs' submission is the proposition that an amount can only be raised under art 24 if it is to be used to pay a charge or cost of the type identified in the article. The defendant appears to accept that construction. The defendant did not suggest, for example, that the levy was permitted by art 24 because the purpose of the levy was to provide for maintenance charges indirectly by raising money to fund a development, the profits from which could be used to pay the maintenance charges, and that that was sufficient for the levy to be raised in accordance with art 24.

36 In my opinion, there are a number of difficulties with the plaintiffs' submission.

37 First, I do not accept that there is a principle that terms used in a company's constitution should be interpreted more strictly than terms used in a commercial contract. The general principle is stated in RP Austin & IM Ramsay, Ford's Principles of Corporations Law, 14th ed, (2010), Butterworths at [6.080] in these terms:

In the interpretation of constitutions courts approach them as business documents. ... In addition, the corporate constitution is to be interpreted so as to give it business efficacy: Rayfield v Hands [1960] Ch 1; [1958] 2 All ER 194. Where provisions are ambiguous a construction which produces reasonable business efficacy is preferred over one which produces an unreasonable result ...

The authors refer to a number of cases in support of this last proposition, including Holmes v Keyes [1959] Ch 199 and National Roads and Motorists' Association Ltd v Parkin [2004] NSWCA 153; (2004) 60 NSWLR 224. In the former case, which was cited with approval in the latter (at [68] per Ipp JA with whom Santow and Bryson JJA agreed), Jenkins LJ said (at 215):

I think that the articles of association of the company should be regarded as a business document and should be construed so as to give them reasonable business efficacy, where a construction tending to that result is admissible on the language of the articles, in preference to a result which would or might prove unworkable.

38 There is a principle, the precise scope of which remains in some doubt, that the court should not have regard to surrounding circumstances in interpreting the constitution of a company, as it may do in interpreting a normal business contract: see Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144; (2006) 156 FCR 1 at [56] per Weinberg J; National Roads and Motorists' Association Ltd v Parkin [2004] NSWCA 153; (2004) 60 NSWLR 224 at [4] per Santow JA. However, neither party in this case sought to interpret art 24 by reference to extrinsic circumstances. Each party's submissions depended on the words used and the context in which they appeared.

39 Second, I do not think that it is possible to treat "service or maintenance" as a composite expression describing particular types of charge. "Service or maintenance" is not a term of art. Nor do the two disjuncts readily identify a set of charges that are best described by that composite phrase. Sometimes, two words separated by a disjunct can be regarded as a composite phrase because each word is an explanation of the other. So, for example, in the phrase "One or more of the middlemen or mesne lessees", the words "middlemen or mesne" is a composite phrase referring to intermediate lessees. But in this case the two words on their natural meaning refer to quite different things. In those circumstances, it is more appropriate to read the phrase "service or maintenance charges" distributively as a reference to service charges and to maintenance charges. That conclusion is supported by the use of the disjunction, in contrast to the later uses of the conjunction in the phrase "service or maintenance charges and rates, taxes, insurance and repairs". By using the word "or" the draftsperson was seeking to make it clear that service charges and maintenance charges were separate things.

40 Third, the word "service" can have a narrow meaning. It is sometimes used to refer to the physical services supplied to a building - which is the meaning the plaintiffs seek to give it. Moreover, reading the word "charges" distributively, the expression "service charges" is not normally used to refer to professional fees. But the provision of professional services is undoubtedly a service and the fees payable for those services are undoubtedly a charge so that it does not involve any great stretch of language to read the expression "service charges" in this context as meaning charges incurred for services obtained for in connection with conducting the business of the company, including professional fees incurred for that purpose.

41 Fourth, I do not accept the reasons the plaintiffs give for interpreting the expression "service charges" narrowly, and there are other reasons for interpreting the expression broadly. Although it may be unusual to include an article such as art 24 in the constitution of a company running an ordinary business, a provision such as art 24 is essential in the constitution of a company established to provide residential accommodation for its shareholders, since such a company is bound to have significant expenses and no or limited sources of income. It was open at the time the company adopted the articles of association for the shareholders to place a limit on the board's authority to raise levies under art 24, as they did in the case of the power to borrow. However, the fact that they chose not to do so does not provide a reason for giving the article a narrower interpretation than it otherwise might have. That is particularly so when, apart from the possibility of raising additional capital and the small income the company receives from renting out car spaces, there is no other means for it to pay expenses incurred in the conduct of its business. The statutory and common law duties imposed on the directors still impose substantial restrictions on them in exercising the power conferred by art 24.

42 Moreover, art 24 must be interpreted as covering some professional fees. Mr Murr SC, who appeared for the plaintiffs, accepted that the article covered professional fees that were, for example, incidental to maintenance work - such as engineering and architect's fees. But, it is difficult to see why it is preferable to read the article as impliedly covering fees of that type rather than simply treating the expression "service fees" as covering all fees for services that the company incurs in connection with its business. In addition, the company may incur other professional fees that are not incurred in connection with maintenance or repairs or the payment of rates and taxes, which it is hard to believe were not intended to be covered by art 24. For example, in this case the directors quite properly obtained advice on bringing the company's financial and administrative systems up to date and advice on their duties as directors, particularly in relation to issues of insolvency. The directors also obtained administrative assistance from companies who specialise in providing services of that type. Charges for those services must have been intended to be covered by the expression "service ... charges". Similarly, art 110(o) gives the directors power to commence or defend proceedings, art 113 required the directors to cause accounts to be kept and art 117 required those accounts to be audited. It must have been intended that the directors would be able to fund the legal and accounting costs of commencing or defending proceedings and having accounts prepared and audited. Given that the power to commence and defend proceedings is given to the directors, it could not have been intended that the costs of those proceedings would be funded through the raising of additional capital. Nor could it have been intended that the annual costs of preparing accounts and having them audited would be met by raising additional capital. What must have been intended was that those costs would be treated as service charges.

43 Finally, some support for a broad interpretation of art 24 is to be found in the second limb of the article itself which states that "without limiting the generality of the foregoing" the directors had power under art 24 to raise funds to repay moneys secured by two mortgages. If art 24 was intended to be limited in the way contended for by the plaintiffs, it is difficult to see why it was necessary to make it clear that the "generality" of the article was not to be taken to be limited by the fact that the directors also had power to raise money under the article to repay money secured by the mortgages.

44 Given this interpretation of art 24, was the levy struck by the board on 8 September 2010 valid? In my opinion, it was. The purpose of the levy was to pay for maintenance work, including maintenance work required by the fire order together with professional fees incidental to that work and professional fees incidental to running the company and raising funds to meet the costs of carrying out that work. That was a purpose that fell within the scope of art 24.

45 Given this finding, the plaintiffs were properly excluded from the 24 October 2011 Extraordinary General Meeting and the resolutions passed at that meeting are valid.

Would the proposed development interfere with the plaintiffs' class rights?

46 There is no dispute that the shares entitling a shareholder to the exclusive occupation of a particular unit in a building constitute a separate class of shares within the meaning of Part 2F.2 of the Corporations Act 2001 (Cth) (the Act ) and that consequently the rights attaching to those shares can only be altered by a special resolution of the company and a special resolution of members holding the relevant class of shares in accordance with s 246B(2) of the Act: see Wilson v Meudon Pty Ltd [2005] NSWCA 448.

47 The plaintiffs say that the class rights of the ninth and tenth plaintiffs, Mr and Mrs Shields (who occupy unit 105), the eleventh plaintiff, Mr Small (who occupies unit 102) and the twelfth plaintiff, Ms Waugh (who occupies unit 106) would be breached by the proposed new car park because, as a result of the construction of that car park, their units, which are currently on the first floor, would become ground floor units, opening onto a garden located on the roof of the car park. The plaintiffs say that the class rights of the first plaintiff, Ms Cartwright (who occupies unit 301), the seventh plaintiff, Ms Lambert (who occupies unit 302) and Mr Small would be breached by the proposed new stack because their views and access to light would be affected. It is not alleged that the proposed penthouse interfered with the class rights of any shareholder.

48 The defendant makes a number of responses to the submission that the class rights of some of the plaintiffs will be affected if the proposed development went ahead. Three are directed at establishing that, in that event, the class rights of the relevant plaintiffs would not be affected. First, it is said that those plaintiffs are not entitled to exercise any class rights that they might have had because they have not paid the levy struck on 8 September 2010. Second, it is said that the proposed development does not affect the class rights attaching to any of the shares because the proposed development does not affect the structure or layout of the relevant units. Third, it is said that, even if the second point is wrong, the building of the northern stack would not affect the class rights attaching to the shares that entitle the holders to occupy units 102 and 302.

49 In my opinion, the first submission can be put to one side. There is no question that a holder of shares who fails to pay a levy struck under art 24 is not entitled to exercise the rights attaching to the relevant shares. However, in this case there is a dispute about whether the relevant levy was payable; and there can be no doubt that that dispute is a genuine one. Moreover, there is no evidence to suggest that the plaintiffs will not comply with whatever order the court ultimately makes in relation to the payment of the levy. Consequently, the fact that the levy has not been paid to date does not seem to me to provide a reason for not granting relief that the court would otherwise be prepared to grant, although, depending on the nature of that relief, it may need to be conditional on the payment of the outstanding levies.

50 The defendant's second submission depends on distinguishing the Court of Appeal's decision in Wilson v Meudon Pty Ltd [2005] NSWCA 448. That case, like the present one, concerned a company title apartment block. The question in that case was whether the extension of a penthouse to occupy part of a roof garden above the plaintiff's unit involved a breach of the class rights attaching to the plaintiff's shares. The Court of Appeal held that it did. In reaching that conclusion, Bryson JA described the class rights attaching to the relevant shares very broadly. Hodgson JA (with whom Handley JA on this aspect agreed) preferred to state the rights more narrowly in these terms:

[13] ... In my opinion, the relevant rights are the exclusive right to use and enjoy the identified home unit, and rights constitutive of that right. The exclusive right to use and enjoy the identified home unit includes, in my opinion, the right to use the home unit with the characteristics indicated by the plan, including its situation indicated on the relevant plan in a building of the character indicated by the relevant plan. In my opinion, that right will be varied by alterations to the building, even if they are not alterations to the home unit itself, if those alterations materially alter the characteristics of the home unit as indicated by the plan, for example by altering its situation in the building or the character of the building; but that right will not, in my opinion, be varied by alterations to the building or to the rights of other unit holders that do not affect the right to use the home unit in question by materially altering the unit's characteristics.

[14] Thus, in my opinion, it would alter the characteristics of a home unit, and thereby vary the rights to attach to the class of shares associated with the unit, if (for example) all other floors in the building were altered from home units to commercial premises, or if lift access to the floor of the home unit as shown on the plan was taken away. On the other hand, in my opinion, it would not alter the characteristics of the home unit, and thereby vary the rights attached to the class of shares associated with it, if there was merely a re-arrangement of the layout of units on other floors, that did not impact either on the character of the building or the unit's situation within it; or if the lift was merely modified or replaced.

51 The defendant submits that the approach taken by Hodgson JA turned on the fact that in that case the right conferred on the shareholders was a right to "use and enjoy " the home unit that their shares gave them a right to occupy and that art 6 of the company's constitution in that case stated that "such home unit shall be available subject to these Articles for his or her or their exclusive use and enjoyment " within the area shown on the attached plan together with "the right to use in common with all others similarly entitled to pathways entrance halls elevators stairs and passageways in the building and in rooms in common use". It is said that critical to the approach adopted by Hodgson JA is the fact that the articles conferred a right of "enjoyment" of the relevant unit and rights over common areas.

52 In my opinion, there is no merit in this submission. Nothing that Hodgson JA said turned on the use of the word "enjoy" or on the right to use common areas. A right to exclusive occupation of a home unit is a right in the relevant sense to enjoy that occupation. The class rights arise from the right to occupy a unit having particular characteristics. What Hodgson JA sought to do in the paragraphs I have quoted is to identify the characteristics that could be said to attach to that unit. Whether those characteristics could be described as being "enjoyed" or not does not affect the nature of the rights attaching to the right of occupation that arises from ownership of the relevant shares. In addition, nothing Hodgson JA said turned on the right to use common areas. That right could not affect the characteristics that are said to attach to occupation of a particular unit.

53 As to the defendant's third submission, the defendant accepts that if Wilson v Meudon Pty Ltd cannot be distinguished, then it would be a material alteration of the characteristics of units 102, 105 and 106 if they became ground floor rather than first floor units as consequence of the car park being built. The defendant also accepts that there would be a material alteration to the characteristics of unit 301 if the northern stack were built in accordance with the plans prepared by Tobias Partners because those plans would involve a west facing window and north facing windows and glass doors being removed and replaced with solid walls. However, the defendant does not accept that there would be a material alteration to the characteristics of units 102 and 302 if the northern stack were built. Units 102 and 302 occupy the northern wing of the building which juts out into the garden. Consequently, at present they have views over the courtyard (facing south), and views looking north and west. The view looking north is obscured by the building next door, although that building is some distance away. If the northern stack were built the northern windows of units 102 and 302 would face directly onto the new building, which would be three storeys high and in close proximity to that part of the northern face of the northern wing of the existing building which juts out into the garden. The defendant submits that that would not involve a material alteration to the characteristics of the units 102 and 302 because there would be no alteration in the characteristics of the units themselves or to their situation in the building or to the character of the building.

54 I do not accept that submission. The units themselves, of course, will not move. But their location relative to other units that comprise the building will be materially altered because, instead of having unimpeded northerly views to the boundary of the land occupied by the building, they will face directly onto units that comprise part of the building. The views and privacy they enjoy will be affected substantially. In addition, although there was no evidence concerning the precise effect that the northern stack would have on their access to light, I think that, having regard to the proximity of the proposed building, it can be inferred that there would be some effect.

What orders should be made?

55 The defendant has been successful in relation to the validity of the levy struck on 8 September 2010. The plaintiffs are not entitled to any relief in respect of that aspect of their case.

56 Ms Hogan-Doran, who appeared for the defendant, also submitted that it is unnecessary for the court to grant any relief in relation to the plaintiffs' case based on their class rights. First, Ms Hogan-Doran submitted that there is no imminent threat that the northern stack, penthouse and car park will be built. Second, she submitted that there would only be a breach of the plaintiffs' class rights if the building work proceeded without the defendant complying with the requirements of Part 2F.2 of the Act, and there is no threat that that is what the defendant intends to do. Third, Ms Hogan-Doran relies on undertakings the company has given in its points of defence filed on 30 August 2011. By those points of defence, the company undertakes, among other things, not to decide that the holders of any group of shares shall pay the company money to fund the proposed development and not to use any of the money raised for that purpose. The company also undertakes to those plaintiffs whose class rights it accepts would be affected by the proposed development (that is, Ms Cartwright, Mr and Mrs Shields, Mr Small and Ms Waugh) not to contract with a third party authorising commencement of construction of that part of the proposed development said to interfere with the relevant class rights without obtaining the affirmative vote of the relevant plaintiff or plaintiffs in favour of that construction.

57 At the time the board passed the resolutions it did at the meeting on 31 August 2010 and 8 September 2010, there was a very real threat that the board would proceed to sell the rights to a developer to build the northern stack and penthouse and would proceed to build the new car park. Although the defendant maintained that there was doubt about what the "Master Plan" was and although there was no master plan attached to the minutes of the meeting held on 31 August 2010, there can be no real doubt that it included the proposal to build the northern stack, penthouse and new cark park in accordance with the diagrams prepared by Tobias Partners. The minutes of the meeting on 31 August 2010 specifically say that the Master Plan included the proposal to build 43 car spaces and sell them and to "[s]eek development approval from Council to build additional apartments on Nevada property". By then, the board had received schematic floor plans from Tobias Partners showing the proposed apartments; and it was plans substantially in that form that were presented to shareholders on 6 and 7 October 2010. The resolutions passed at the meeting on 31 August 2010 included resolutions that the board adopt the Master Plan and "authorises and directs the sale of the Company's assets which will permit the construction of a car park ...". These minutes together with the minutes of subsequent meetings were described in Ms Kelly's circular sent after the board meeting on 8 September 2010 as "very defining minutes". They must have been described in that way because Ms Kelly understood that the effect of the minutes was that the company intended to proceed with the development proposed by Tobias Partners. Similarly, SPMA's letter dated 1 September 2010 to the Council described the company as being "committed to the development" and it seems clear that it was that commitment that persuaded the Council to grant an unusual extension of three years in which to complete the work necessary to comply with the fire order.

58 The threat to proceed with the development continued for some time after the board meetings in August and September 2010; and if things had not changed, it would have been appropriate to grant the plaintiffs whose class rights would be affected injunctions to protect their interests. However, the threat appears to have receded over time, partly perhaps as a result of advice from aSquare Planning concerning the difficulties of obtaining development approval from Council to the proposal but also partly perhaps as a result of these proceedings. The circular giving notice of the levy struck on 8 September 2010 stated that "We are not raising funds by selling any Company assets at the current time" and went on to indicate that that would only occur much later after taking into account the interests of shareholders, among other things. The minutes of the board meeting at which it was agreed to raise a second maintenance levy specifically said that no development application was being considered by the board "at this time". By the resolution passed at that meeting, the board agreed to raise a further $2.5 million, and it seems clear that that money will be applied directly to the costs of complying with the fire order and carrying out necessary repairs and maintenance. That amount together with the levy of $500,000 that was previously struck represents 75 percent of the estimated cost of the required work. The notice calling the most recent general meeting said that the board was not seeking approval to any particular proposal.

59 The board has no doubt been faced with very difficult circumstances and has clearly put in an extraordinary amount of work to deal with the issues confronting it. There is no suggestion that it has not sought to act in the best interests of the company or that it has not sought to ensure that the company complies with its legal obligations as the board understood them to be. It is now far less certain that the board will proceed with any form of development and, if it decides to do so, what form that development will take. It seems clear both from the board's current attitude as disclosed in the evidence and the undertakings given in the points of defence that it has no intention of proceeding with a development in breach of the company's constitution. Having regard to those matters, there seems little utility in granting any injunctions.

60 There is, however, utility in granting declarations in favour of those plaintiffs whose class rights would be affected by the proposed development. Notwithstanding the undertakings given in the defence, the defendant submitted that none of the plaintiffs' class rights would be affected by the proposed development. In any event, it submitted that the class rights of Ms Lambert and Ms Small would not be affected by the building of the northern stack. I have rejected that submission. The relevant plaintiffs are entitled to declarations that make their rights clear in the event that the company decides to proceed with all or some part of the proposed development.

Orders

61 The orders I propose to make are:

(1) A declaration that each of the following group of shares, namely:

(a) Shares numbered 38354-43903, relating to unit 301, presently registered to the first plaintiff, Pamela Mary Cartwright;

(b) Shares numbered 84005-85004 and 103505-106704, relating to unit 102, presently registered to the eleventh plaintiff, Ross Campbell Small;

(c) Shares numbered 154405-158804, relating to unit 105, presently registered to the ninth plaintiff, Ronald Tobias Patrick Shields, and to the tenth plaintiff, Violet Lorraine Shields;

(d) Shares numbered 8754-13153, relating to unit 106, presently registered to the twelfth plaintiff, Alice Elizabeth Dieckhaus Waugh;

(e) Shares numbered 53954-59353, relating to unit 302, presently registered to the seventh plaintiff, Gayle Minka Lambert,

are shares in the defendant that constitute classes for the purposes of s 246B of the Corporations Act 2001.

(2) A declaration that the construction of the three-storey extension in accordance with, or approximately in accordance with, the plan annexed and marked "A" would breach the rights attached to the class of shares in paragraphs (1)(a), (1)(b) and (1)(e) above.

(3) A declaration that the construction of the proposed garage in accordance with, or approximately in accordance with, the plan annexed and marked "A" would breach the rights attached to the class of shares in paragraphs (1)(b), (1)(c) and (1)(d) above.

(4) A declaration that the defendant may carry out the construction referred to in paragraph (2) above and the construction referred to in paragraph (3) above only after complying with the procedure set out in s 246B(2) of the Conveyancing Act 1919 (NSW) in relation to each of the classes of shares in paragraph (1) above.

Since these orders are limited to declarations concerning the rights attaching to the relevant shares, there appears to be no reason to make them conditional in some way on the payment of the outstanding levies. I will, however, hear the parties on that issue before the orders are entered.

62 I will also hear the parties in relation to costs.

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Decision last updated: 09 December 2011