5.1 Court unwilling to reject
members' application for access to company records where
records may be important in subsequent proceedings
(By Holly Edwards, Blake Dawson
Waldron)
In the matter of Areva NC (Australia)
Pty Ltd v Summit Resources (Australia) Pty Ltd [2007] WASC
207, Supreme Court of Western Australia, Martin CJ, 3
September 2007
The full text of this judgment is
available at:
http://cclsr.law.unimelb.edu.au/judgments/states/wa/2007/september/2007wasc0207.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
(a)
Summary
This was an application by
Areva NC (Australia) Pty Ltd ("Areva"), as a member of Summit
Resources Limited ("Summit"), for access to records of Summit
and its subsidiary pursuant to sections 247A and 237 of the Corporations Act 2001 No. 50 (Cth) ("Act")
("First Proceedings").
Areva held 10.01 % of the
issued capital in Summit Resources Limited ("Summit"). Summit
and one of its subsidiaries were involved in legal proceedings
that they wished to settle ("SRA Proceedings"); however, Areva
wished to see the proceedings continue. When Summit and the
other parties to the proceedings announced that they would
settle, Areva issued separate proceedings seeking, inter alia,
termination of the settlement agreement ("Second
Proceedings").
Martin CJ granted Areva's
application in all but one category of documents sought to be
inspected, holding that the application was made in good faith
and for a proper purpose because Areva needed the information
in order to make its case in the Second
Proceedings.
(b)
Facts
The facts of
this case are lengthy but explanation of them is important in
the context of the outcome.
Summit's subsidiary,
Summit Resources (Australia) Pty Ltd ("SRA") was a party to a
joint venture with Mount Isa Uranium Pty Ltd ("MIU"), a
subsidiary of Valhalla Uranium Ltd ("Valhalla") which was
successfully taken over by Paladin Resources Ltd ("Paladin")
in October 2006. Prior to the takeover, Resolute Limited
("Resolute") owned the majority of capital in Valhalla.
In the meantime, in September 2006, SRA
commenced the SRA Proceedings against MIU and Resolute for
material breaches of the joint venture agreement. The
agreement provided that in the event of such an unremedied
breach, the non-defaulting party would be entitled to buy out
the defaulting party's 50% interest in the joint venture for
85% of the value of the interest of the defaulting party.
Subsequently, in February 2007, Paladin
announced a takeover bid for Summit. Certain events followed
which are not relevant for the purposes of this note, but by
May 2007, Areva had obtained a 10.01% stake in Summit.
Subsequently, on 1 June 2007, Paladin announced the successful
completion of the takeover of Summit, having acquired 81.82%
of its issued capital. Importantly, therefore, Paladin now
owned the companies on both sides of the joint venture (and
hence both sides of the SRA Proceedings).
On 1
August 2007, Areva issued the First Proceedings (which are the
subject of this note) seeking access to SRA and Summit's
records pursuant to sections 247A and 237 of the Act
2001.
On 3 August 2007, the parties announced
that they had entered into an agreement to settle the
proceedings and a memorandum of consent signed by the parties
to the SRA Proceedings was lodged with the court proposing to
make orders that the action be dismissed. Shortly after, Areva
advised the court that it would seek injunctive relief
restraining the extraction of orders dismissing or
discontinuing the SRA Proceedings.
Then, on 6
August 2007, Areva commenced the Second Proceedings seeking
leave to intervene in the SRA Proceedings pursuant to section
237 of the Act and to restrain SRA and MIU from entering into
any settlement arrangement without its consent. Areva also
sought orders to terminate the agreement to settle the SRA
Proceedings between SRA and MIU.
In the First
Proceedings, Areva relied on section 247A in respect of access
to Summit's books and records, given that Areva was a member
of Summit. In relation to the application for access to SRA's
records, Areva relied on section 247A(3), as it had sought
leave to intervene in the SRA Proceedings under section 237
and was therefore entitled to apply under section
247A.
Areva sought access to the following five
categories of documents:
- documents containing legal advice given to Summit and/or
SRA as to the merits of the SRA Proceedings.
- documents containing any consideration by Summit or SRA,
and their boards and committees, of (inter alia) legal
advice as to the merits of the SRA Proceedings and other
factors in the decision making process in arriving at a
decision to enter into a settlement agreement of the SRA
Proceedings.
- documents containing instructions given to or matters
considered by Summit's legal counsel in relation to
preparation of legal advice.
- documents discovered in the SRA Proceedings (including
by non-parties) which are or copies of which are in SRA's
solicitors possession.
- correspondence passing between any combination of
Summit, SRA, MIU and Paladin in relation to the SRA
Proceedings.
In its arguments, Summit and
SRA argued that Areva's application to intervene under section
237 would not succeed and therefore the application under
section 247A could not be in the requisite good faith and for
a proper purpose. Summit and SRA contended:
- that Areva would not be able to overcome the rebuttable
presumption in section 237(3) that the grant of leave is not
in the best interests of the company; and
- that the settlement between the parties pursuant to the
SRA Proceedings had already successfully discharged SRA's
claims against Resolute and MIU.
(c)
Decision The court found as
follows:
- In response to Summit and SRA's first contention, the
court reasoned: ". as one of the purposes for which access
to books and records may be granted under section 247A is
for assessing and advancing an application under section
237, it would be quite wrong to deny an applicant access
because of a conclusion that the application under section
237 had no reasonably prospect of success, unless it was
clear beyond argument.". For this reason, the court held
that SRA and Summit's submissions in relation to the
rebuttable presumption under section 237(3) could be
"readily dismissed" because the documents sought were
integral to the decision to settle the SRA Proceedings and
that it was "impossible to say that those documents could
not affect the assessment of the strength of Areva's
application under section 237".
- In response to Summit and SRA's second contention, the
court was less certain because if the SRA proceedings had
been discharged and released, it could not be said that
Areva's application to intervene could be in the best
interest of SRA.
However, Areva argued that if such a
contention was used to argue for the futility of its
application under section 237, based on the information
garnered from access to the books and records, it might
counter the argument by seeking injunctive relief under
section 1324 to restrain MIU and Resolute (as beneficiaries
of the settlement agreement) from relying on that agreement
due to a breach of section 208 of the Act. Section 208
controls the circumstances in which a public company may
give a financial benefit to a related party (in this case,
the financial benefit would be the settlement between MIU
and Summit, which, due to their common parent (Paladin)
would be deemed to be related).
After lengthy
reasoning the court held, again, that because the documents
sought by Areva could bear upon Areva's assessment of whether
Summit had breached section 208, it was not appropriate to
allow the application to be defeated
Ultimately,
Martin CJ was satisfied that Areva's application was made in
good faith and for a proper purpose and accordingly allowed
Areva access to the first 4 categories of documents,
questioning the breadth of the fifth category.
5.2 ASIC officers safer from
tort of malicious prosecution (By Cherie
Canning, Mallesons Stephen Jaques)
Chapel Road
Pty Ltd v Australian Securities and Investments Commission
[2007] NSWSC 975, Supreme Court of New South Wales, Howie J,
31 August 2007
The full text of this judgment is
available at:
http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2007/august/2007nswsc975.htmor
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
(a) Summary This
case considers the appropriateness of applying the tort of
malicious prosecution to a decision of an Australian
Securities & Investments Commission ("ASIC") delegate to
revoke a securities dealer's licence under section 187 of the
Corporations Law (now repealed). The AAT set aside the
delegate's decision to revoke the licence and instead directed
that the licence be reinstated with additional conditions
attached. The three key points made were that:
- the decision by the ASIC delegate to revoke the licence
was not a "proceeding" for the purposes of the tort of
malicious prosecution;
- the tort of malicious prosecution is available to a
company if it suffers injury as a result of proceedings
brought against it; and
- a decision to reinstate a licence with extra conditions
was not sufficient to establish that the proceedings were
terminated in Chapel Road's favour, a necessary element to
establish the tort.
The case also considers the
importance of ASIC providing an opportunity to meet the case
made against the company. Whilst the failure to provide a
hearing before ASIC's delegate would not, without more, be
sufficient to render the decision of ASIC to revoke the
licence invalid or unauthorised, it was a relevant
consideration in the court holding that an arguable case of
misfeasance in public office was made
out.
(b) Facts
Chapel Road held a securities dealer's licence
subject to nine conditions. It had been granted that licence
in 1996. In September 2000, ASIC became concerned, as a result
of surveillance and other material that Chapel Road was in
breach of the conditions of the licence.
On 27 November 2000, ASIC gave Chapel Road
notice under section 837 of the Corporations Law stating that
it was concerned that the company had breached some of the
conditions attached to its licence. The notice provided Chapel
Road with the date for a hearing to take place before a
delegate of ASIC in order to determine whether any action
should be taken in respect of the licence. It also gave notice
of the company's right to appear, give evidence and make
submissions at the hearing. The date appointed for the hearing
was 21 December 2000. Those proceedings were adjourned to
enable the material relied upon by ASIC to be given to the
company and then arrangements were to be made for the matter
to be continued by either evidence at a hearing or written
submissions. There was some misunderstanding, and Chapel Road
supplied written submissions to ASIC without taking the
opportunity to have the hearing reconvened.
On 26
April 2001, ASIC's delegate determined that Chapel Road's
licence should be revoked acting on his view that the company
would not conduct its business efficiently, honestly and
fairly.
Chapel Road sought a review of the
decision by way of appeal to the Administrative Appeals
Tribunal ("AAT"). The Tribunal set aside the decision to
revoke the licence and remitted the matter back to ASIC with
the direction that Chapel Road's securities dealer's licence
be reinstated subject to appropriate
conditions.
Chapel Road brought a claim against
ASIC for malicious prosecution and misfeasance in public
office, seeking damages amounting to $5,700,00.00 for loss of
business as a result of the action taken by ASIC and $180,000
for expenses incurred in defending itself before ASIC and the
AAT.
Associate Justice Harrison found that the
claims brought against ASIC were hopeless and struck out the
statement of claim. Chapel Road appealed this
decision.
(c) Decision
(i) Malicious
prosecution At first instance the
Associate Justice made the following finding in dismissing the
malicious prosecution claim:
- It was arguable that the tort of malicious prosecution
was applicable to administrative decisions, so this was not
a basis to dismiss the claim for malicious prosecution at an
interlocutory stage.
- It was arguable that the decision by the AAT involved a
"favourable termination of the prosecution" in the company's
favour, so this was not a basis to dismiss the claim for
malicious prosecution.
- It was, however, not open for a company to maintain such
a claim or to be eligible to the types of damages available
in tort of malicious prosecution, and so the claim was
hopeless.
All these findings were dealt with on
appeal; it was held that the claim of malicious prosecution
was correctly struck out, but on a different basis to that at
first instance.
(ii) The nature of the
proceedings to which the tort
relates The appeal in relation to the
claim for malicious prosecution was disallowed on the basis it
was not a proceeding for the purpose of the
tort.
There was no dispute that on the present
law a claim based upon malicious prosecution does not arise
from administrative proceedings. Despite this, at first
instance, the fact that these facts related to an ASIC
delegate's decision to revoke a dealer's licence under section
826(1) of the Corporations Law were not held to be a basis for
striking out the claim. At first instance, the Associate
Justice found there was some suggestion that the law might
develop to allow the tort to apply to administrative decisions
and consequently the development of the law "should not be
stifled at an interlocutory stage" by striking out the claim
on this basis.
Howie J was critical of the
reasoning not to dismiss the claim on the basis that the tort
of malicious prosecution might one day extend to
administrative decisions. He found that for this reasoning to
be valid there had to be some "reasonable possibility" that,
even though the established law did not permit the plaintiff's
action at the present time, there might, within the life of
the proceedings, be a change to that effect. In these
circumstances, he found no evidence that this was the case.
Moreover, he could see no "reasonable prospect in the
foreseeable future" that the law would change to such a degree
as to permit a claim of malicious prosecution to be brought
against a decision such as was made against ASIC under the
provisions of the Corporations Law.
The issue was
also raised at the appeal as to whether the decision made by
the ASIC delegate could be considered to be a proceeding.
Howie J did not accept that these circumstances fell within
the traditional concept of a proceeding for the purposes of
the tort of malicious prosecution. Howie J supported the
traditional concept of a proceeding as the 'invocation of
jurisdiction of the court by process other than a writ'
(Herbert Berry Associates Ltd v Inland Revenue Commission
[1978] 1 All ER 161 or an application by a suitor to a court
in its civil jurisdiction for its intervention or action
(Cheney v Spooner (1929) 41 CLR 532). Notwithstanding that,
the company in the circumstances before the court, was
entitled to have a hearing in relation to the decision and to
give evidence before the decision maker. There was no
compulsion on the company to attend or to take action in
respect of the decision being made.
(iii) Standing of the
plaintiff At first instance, the claim
for malicious prosecution was struck out on the basis that it
was not open for a company to maintain such a claim or to be
eligible to the types of damages available under the tort of
malicious prosecution.
On appeal, it was held
that there was "no good reason why in policy or principle a
company cannot seek damages for malicious prosecution if it
suffers injury as a result of proceedings brought against it
for some breach of the Corporations Law or otherwise."
Accordingly, this was not a basis upon which the claim could
be struck out.
(iv) Favourable
termination of the proceedings To
successfully bring a claim for malicious prosecution, it must
be established that the proceedings were terminated in the
plaintiff's favour. Howie J held by analogy to criminal
proceedings that, by the AAT directing the securities licence
be reinstated subject to appropriate conditions, the
conviction was confirmed but the sentence varied. Accordingly,
it could not be argued that the proceedings before ASIC were
terminated favourably to Chapel Road, given that in effect the
terms of the decision found that at least some of the
allegations brought by ASIC justified some change in the terms
of the licence so as to impose more obligations than had
previously been the case.
(v) Misfeasance
in public office Chapel Road also
appealed on the grounds that the claim of misfeasance in
public office was wrongly struck out. The issue was whether,
on the pleadings, there was an invalid or an unauthorised act
by ASIC that would support this cause of action. At first
instance, her Honour found that there was none and that ASIC
had acted in accordance with the power vested in it by the
relevant provisions of the Corporations Law.
On
appeal, it was held that the Associate Justice did not
properly deal with the claim for misfeasance in public office.
The Associate Justice interpreted this claim as relating to a
lack of procedural fairness due to the absence of a hearing.
On appeal, it was held that the allegation really related to a
lack of procedural fairness on the basis that the result of
the proceedings had been contrived at by ASIC in the manner in
which the whole of the investigation and procedure had been
conducted and that ASIC acted in that way in order to harm the
company by depriving it of its licence so that it could not
operate its business. Relevant factors were that no hearing
was convened for Chapel Road to respond to ASIC's case and
ASIC commissioned three compliance reports in respect of the
company's business in March 2000, August 2000 and November
2000 which were withheld from the company until 21 December
2000.
With difficulty, as the pleadings were
poorly drafted, the court held that an arguable case of
misfeasance in public office was made out, although there
would likely be real difficulties in proving the allegation.
The statement of claim was struck out, but Chapel Road was
given leave to replead the cause of action in misfeasance in
public office.
5.3 Can the power to make asset
preservation orders be implied from the powers conferred under
section 1323 of the Corporations Act? (By
Justin Fox and Chrystal Dare, Corrs Chambers
Westgarth)
ASIC v Oliver Banovec (No 2) [2007]
NSWSC 961, New South Wales Supreme Court, White J, 31 August
2007
The full text of this judgment is available
at:
http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2007/august/2007nswsc961.htmor
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp (a)
Summary ASIC was carrying out
investigations into possible breaches of the
Corporations Act 2001 No. 50 (Cth) by the
defendant, Oliver Banovec, in his role as director of Capital
Securitisation Ltd ("CSL"). ASIC sought asset preservation
orders and an order restraining the defendant from coming
within 100 metres of an Australian point of overseas departure
under subsection 1323(1) of the Corporations Act. White J held
that subsection 1323(1) does not confer the implied powers
necessary to make the orders sought by
ASIC.
(b) Facts
The defendant in this case, Oliver Banovec, was
a director of CSL, a company being wound up. ASIC was
investigating whether the defendant breached the financial
services provisions set out in Chapter 7 of the Corporations
Act, the fundraising provisions set out in Chapter 6 of the
Corporations Act, or his director's duties. In addition,
ASIC's investigation sought to determine whether the defendant
engaged in false or misleading conduct in relation to raising
funds from lenders to or investors in CSL.
ASIC sought orders under section 1323(1) of the
Corporations Act, that the defendant be restrained from:
- dealing or disposing with moneys held for clients, or
property acquired from moneys received by him from clients;
- dealing with or disposing of any of his assets other
than to pay ordinary living expenses up to $3,000 per week
or costs reasonably incurred; and
- coming within 100 metres of an Australian point of
overseas departure.
Subsections 1323(1)(d) to (k) of
the Corporations Act set out specific orders which can be made
by the court where an investigation is being carried out under
the Corporations Act in relation to an act or omission by the
defendant that may constitute a contravention of the Act and
the court considers it necessary or desirable to make one of
those orders for the purpose of protecting the interests of a
person to whom the defendant may be liable to make monetary
compensation, or to account for financial products or other
property. On 16 May 2007 in Australian Securities &
Investments Commission v Oliver Banovec [2007] NSWSC 610,
White J made certain limited orders in respect of the
defendant but raised doubts as to whether the court has power
under section 1323(1) to grant the more expansive orders
sought by ASIC above.
(c)
Decision The court noted that the
orders sought by ASIC do not fall within the express terms of
the orders which the court is empowered to make under
subsections 1323(1)(d)-(k).
In submitting that
the court did have power to grant the orders requested, ASIC
noted that the power conferred under subsection 1323(1)(h) to
appoint a receiver and therefore to interfere with a relevant
person's property was a greater power than the asset
preservation orders sought. ASIC submitted that the grant of
the greater power imported the grant of the lesser. ASIC
emphasised that the purpose of the express powers granted in
paragraphs (d)-(k) of section 1323 of the Corporations Act is
to protect aggrieved persons from being left without any form
of recompense. ASIC therefore submitted that the express
powers should be understood to set the outside limits of the
power, giving rise to an implied ancillary or incidental power
to make orders preventing the dissipation of assets within the
jurisdiction. ASIC also maintained that if the express powers
set out in subsection 1323(1) were not accompanied by asset
preservation orders in this case, the purpose of the section
would be undermined.
ASIC further submitted that
the courts have, for many years, granted asset preservation
relief in section 1323 proceedings. Examples drawn upon
included: ASIC v Burke [2000] NSWSC 694, ASIC v Adler (2001)
38 ACSR 266, ASIC v Rajnoch [2003] QSC 46, ASIC v Michalik
(2004) 211 ALR 285, and ASIC v Burnard [2006] NSWSC
611.
The defendant, however, submitted that the
legislature had set out clear parameters of section 1323 by
drafting detailed provisions in paragraphs (d) to (k). In
addition, counsel for the defendant flagged the possibility of
section 1323 operating oppressively if non-express powers were
to be imported.
White J agreed with
ASIC that in the aforementioned cases of Australian Securities
and Investments Commission v Burnard and Australian Securities
and Investments Commission v Rajnoch it was assumed that
section 1323 "empowered the court to make an asset
preservation order to restrain a relevant person from dealing
with his or her assets within the
jurisdiction.
In addition, White J held that
where there is an express conferral of power by a statute, an
implication will usually arise that the power to do that which
might fairly be regarded as incidental to, or consequential
upon, what is expressly authorised is also conferred. In
ascertaining what might fairly be regarded as incidental to or
consequential upon the express powers granted in subsection
1323(1), the section should be read in light of its overriding
purpose: to secure the interests of aggrieved persons that the
property of relevant persons is not dissipated or removed
until their claims are determined.
White J
felt however that the orders requested by ASIC were not merely
incidental to powers already conferred in subsections
1323(1)(d)-(k). Instead, White J concluded that allowing
ASIC's orders would require the implication of a power to give
effect to the overall purpose of section 1323, not to give
effect to the purpose of express powers therein.
White J understood ASIC's contention to be that
Parliament had inadvertently failed to deal with the
possibility of dissipation of assets in the jurisdiction,
consideration of which is necessary to fulfil the purpose of
the section in securing the interests of aggrieved
persons.
In responding to the suggestion that the
court should infer the power to make the requested orders on
the basis of Parliamentary oversight, White J drew on the
three conditions expressed by Lord Diplock in Wentworth
Securities Ltd v Jones [1980] AC 74. That is, in order
for the necessary power to be imputed into the section, the
"mischief" that the Act sought to remedy must be clear, it
must be apparent that those drafting the section had
unintentionally overlooked the issue, and it must be possible
to determine with certainty the additional words which should
have originally been included by those drafting the section
and approved by Parliament. White J held that, despite the
purpose of the provision being clear, any inadvertence on the
part of those drafting the section is not evident. Nor is
certainty as to which terms might have been inserted to confer
the relevant power to make an order prohibiting or restricting
a relevant person's dealing with his or her assets in the
jurisdiction.
In addition, White J held that the
power under subsection 1323(1)(k) does not allow the order
sought by ASIC preventing the defendant from coming within a
specified distance of an Australian point of departure. White
J found that while subsection 1323(1)(k) confers the power to
prohibit a relevant person from leaving the jurisdiction, it
should not limit a person's right to travel within the
jurisdiction, albeit in the vicinity of a point of departure.
White J also held that the court's inherent
jurisdiction under section 23 of the
Supreme Court Act 1970 No. 52 (NSW) should not
be extended to the making of an asset preservation order in
the circumstances of this case where frustration or abuse of
the court's process is not evident.
5.4 Time limits for company
administrations(By Adrian Poon, Blake Dawson
Waldron)
Hayes, in the matter of Estate Property
Group Limited (Administrators Appointed) [2007] FCA 1329,
Federal Court of Australia, Gyles J, 29 August
2007
The full text of this judgment is available
at:
http://cclsr.law.unimelb.edu.au/judgments/states/federal/2007/august/2007fca1329.htmor
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
(a) Summary On
15 June 2007 the court made orders extending the
convening period for the meeting of creditors required to be
held under section 439A of the
Corporations Act 2001 No. 50 (Cth) (Act) to
midnight 23 July 2007 in relation to a number of
companies of the Estate Property Group (Group), together with
other ancillary orders on the application of the
administrators of the companies in the Group (Administrators).
On 12 June 2007, in a related application
concerning Australian Capital Reserve Limited (Administrators
Appointed) (ACR), the court made orders extending the
"decision period" provided for by section 441A(1)(b) of
the Act to the last day of the convening period for a number
of companies in the Group (Australian Capital Reserve Limited
(Administrators Appointed) v High Tower Investments Pty
Limited (Administrators Appointed); in the matter of High
Tower Investments Pty Limited (Administrators Appointed)
[2007] FCA 1028).
On 13 July 2007 the
convening period for the second meeting of creditors of those
companies was further extended to midnight on 31 August
2007, pursuant to section 447A(1) of the Act, which
provides the court with discretionary powers to make orders in
relation to company administrations.
In its
reasons for these decisions, the court considered the
Parliamentary intention of maintaining tight time limits in
company administrations and canvassed the key recommendations
from the Parliamentary Joint Committee on Corporations and
Financial Services Report, 'Corporate Insolvency Laws: a
Stocktake', June 2004 (Joint Committee Report), the
Corporations and Markets Advisory Committee Report,
'Rehabilitating large and complex enterprises in financial
difficulties', October 2004 (CAMAC Report), and the
Explanatory Memorandum to the
Corporations Amendment (Insolvency) Bill 2007
(Explanatory Memorandum).
(b)
Facts The Administrators of the Group
had principal responsibility for the preparation of proposals
in relation to various companies which may be divided into
three groups: (i) Estate Constructions of Australia Pty
Limited ACN 083 789 137 (Administrators
Appointed), GC Condo Pty Limited (Administrators
Appointed) ACN 123 133 013, which are the
construction companies; (ii) Mayshine Pty Limited
(Administrators Appointed) ACN 065 856 144, Sam
Pogson Constructions Pty Limited (Administrators Appointed)
ACN 050 288 394 and Seajazz Pty Limited
(Administrators Appointed) ACN 069 288 204,
known as the Mayshine companies; and (iii) the remaining 21
companies within the Group known as the EPG
subsidiaries.
(i) The construction
companies In relation to the
construction companies, the Administrators proposed to arrange
for a deed of company arrangement that would enable the
construction companies to come out of voluntary administration
and be sold to a third party and, thus, maintain its builder's
licences.
(ii) The Mayshine
companies The Mayshine companies are the
ultimate holding companies for the EPG subsidiaries and the
construction companies, and are owned by the directors of the
Group. They are not borrowers from ACR. At the time of
the hearing, the Administrators had not had an opportunity to
properly investigate those companies to determine a
recommendation to creditors.
(iii) EPG
subsidiaries Within the EPG
subsidiaries, there are 15 entities which have developments
which are either completed, in the process of being developed
or own properties which have not yet been developed.
There are six subsidiaries which do not carry on business,
have no external creditors and are classified as
dormant. The Administrators proposed that a deed of
company arrangement be put forward to cover the EPG
subsidiaries and it was envisaged that there would be a
pooling arrangement.
(iv) Situation as at
the time of hearing The Administrators
had taken advice from a property agent on a property by
property basis as to the current status of each property and
the options available for realisation of them. After
negotiations with each of the first mortgagee lenders and the
Administrators of ACR, a strategy had been agreed on a
property by property basis. Interim funding had been
arranged in relation to major project construction work.
There had been a confidential initial approach to the
Administrators by a substantial company prior to the hearing
that had the potential to affect the recommendation to
creditors.
(c)
Decision In its decision, the court
considered the key recommendations of the Joint Committee
Report, the CAMAC Report and the Explanatory
Memorandum.
(i) Joint Committee
Report Chapter 5 of the Joint
Committee Report compared the voluntary administration
procedures of the Australian regime against the United States
Chapter 11 procedure. The Joint Committee preferred
the voluntary administration procedures and noted that
"whilst both regimes impose a moratorium on creditors' claims,
the voluntary administration regime places tighter timeframes
to minimise the inconvenience and prejudice to creditors
through the abridgement of their propriety rights and rights
accrued under freedom of contract".
In
Chapter 6, the Joint Committee contemplated the rights of
creditors including the provisions concerning creditors'
meetings. The Joint Committee considered submissions that the
timeframe for the second meeting limited the ability of the
administrator to carry out a proper investigation of the
company's affairs, having noted the court's power to extend
the convening period under section 439A(6) and pursuant
to section 447A of the Act. The Joint Committee
recommended that "the period for holding the second meeting of
creditors be extended to 25 business days with a new convening
period of 20 business days. The adjournment period is to
remain at 60 days".
(ii) CAMAC
Report
The court gave consideration to the
CAMAC Report, which recommended that "the periods for holding
the first and major meetings of creditors should be
incrementally increased (namely, for the first meeting within
8 business days, and for the major meeting within 25 business
days, of the appointment of the administrator), and the
administrator should be permitted to hold the major meeting
before the end of the convening period." The CAMAC
Report also recommended that "the court should have a specific
power, on application by the administrator, to override the
statutory timetable and to substitute a specific and
comprehensive timetable for a particular
administration".
(iii) Explanatory
Memorandum
The court then considered the
Explanatory Memorandum, which observed that "[t]he setting of
tight time frames and milestones for completion of the various
tasks in an administration is an important feature of the
voluntary administration procedure." The Explanatory
Memorandum noted that on the one hand, it is beneficial for
stakeholders that the process be conducted promptly as it
avoids the delays, abuses and expense that may occur if a much
longer or restricted time frame is allowed. However, it
also noted that on the other hand, a limited extension of the
period of time for holding the statutory meetings may increase
creditors' opportunities to participate, and allow
administrators more time to conduct an examination of the
company's financial circumstances and consider the best
options for its future.
(iv)
Orders The court granted the order for
further extension of the convening period of the second
creditors meeting. It noted the importance of the
flexibility provided by section 447A of the Act, in light of
the key recommendations of the Joint Committee Report, the
CAMAC Report and the Explanatory Memorandum. The court
held that there was a strong case for a further extension,
principally the amount of work that had been done, the real
possibility of deeds of company arrangement being proposed,
the support of secured lenders including the administrators of
ACR and the lack of opposition following wide dissemination of
the proposals.
5.5 Schemes of arrangement:
fairness and proper purpose(By Tom McGregor,
Mallesons Stephen Jaques)
Re Mincom Ltd [No 3]
[2007] QSC 207, Supreme Court of Queensland, Fryberg J, 22
August 2007
The full text of this judgment is
available at:
http://cclsr.law.unimelb.edu.au/judgments/states/qld/2007/august/2007qsc207.htmor
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp (a)
Summary This decision analysed the
court's discretionary powers in relation to approval of
schemes of arrangement for the acquisition of shares in a
company pursuant to section 411(4)(b) of the
Corporations Act 2001 No. 50 (Cth) (the
Act). The most significant implications arising from
this decision include:
- The court's general discretion to approve an arrangement
under section 411(4)(b) will be based on the fairness of the
scheme and whether it has been proposed for a proper
purpose.
- An arrangement is likely to be fair to members in
circumstances where consideration is offered at a premium to
the current share price, is endorsed by independent experts
and overwhelmingly supported by outgoing shareholders at a
meeting of the members.
- An intention to avoid the operation of any provision of
Ch 6 of the Act may be considered for the purposes of
determining whether a scheme has been proposed for a proper
purpose, even if ASIC has issued a statement of no objection
to the scheme proceeding.
- A scheme implemented to achieve certainty of timing and
avoid potential offer period extensions arising under
section 650C of the Act can amount to an intent to avoid Ch
6.
- However, such a purpose will not be improper and will
not taint scheme approval provided the scheme makes
commercial sense, its terms are fair to shareholders and has
received their support, and the risk of serious adverse
consequences to any member is minimal.
(b)
Facts Mincom Ltd (Mincom)
was an unlisted public company. Until March 2007, its
constitution imposed considerable restrictions on the
transferability of its shares which caused Mincom's share
price to be valued at a price much lower than it would
otherwise have been had the shares been freely
transferable. Mincom's history involved various
unsuccessful attempts by its directors to create a situation
of liquidity, including a failed initial public
offering.
Mincom since proposed to enter
into a scheme of arrangement with EAM Software Finance Pty Ltd
(EAM) whereby EAM would acquire 100% of the share capital in
Mincom (Scheme). Under the arrangement, the shareholders
of Mincom would receive $8.77 cash consideration, representing
a premium of 188% on the weighted average share
price.
Pursuant to section 411(1), the court
authorised the distribution of a Scheme explanatory statement
(Statement) and ordered the convening of a members' meeting to
consider the Scheme proposal. A second court order
authorised the distribution of a supplementary
Statement. At the members' meeting, over 98% of all
votes cast approved the Scheme.
At a second
hearing, Mincom applied to the court to approve the
Scheme. ASIC produced a written statement to the court
stating that it had no objection to the Scheme. This
note reviews Fryberg J's discretionary considerations in
approving the Scheme at this hearing.
(c) Decision
(i) Failure to register Scheme booklet
prior to dispatch: section 412(6) It was
alleged that Mincom breached section 412(6) of the Act.
Section 412(6) prescribes that a party to a scheme of
arrangement must not send out an explanatory statement to
affected parties unless the statement is first registered with
ASIC.
Mincom dispatched its Statement to
its members immediately following court approval, being at a
time after the closure of ASIC offices and prior to
registration of the Statement.
The court
found that although Mincom's actions breached section 412(6),
it did not have the effect of invalidating the dispatch.
Non-compliance amounted to a procedural irregularity within
the meaning of section 1322(1)(b) of the Act. Although
deliberate, there was no evidence that any prejudice was
suffered from the irregularity and no moral turpitude attached
to it.
(ii) Discretion to authorise
scheme of arrangement: section
411(4)(b) In addition to obtaining
member approval for a scheme of arrangement, section 411(4)(b)
of the Act also requires that the scheme be approved by the
court. It was observed in Re Permanent Trustee Co Ltd
[2002] NSWSC 1177 that there is no exhaustive list of criteria
of which the court must be satisfied before granting approval
of a scheme. However, it is necessary to assess any
arrangement as a whole to determine if its provisions are fair
and whether it has been proposed for an improper
purpose.
(iii) Fairness of
consideration Given the attractive
premium to be paid to Mincom shareholders under the Scheme and
the undervaluation of Mincom's historical share price, the
court found that the offer was prima facie fair. This
determination was supported by an independent assessment which
concluded that the Scheme was in the best interests of
shareholders. In addition, the court noted:
when properly informed shareholders vote to
support a cash offer in such overwhelming numbers, there is
very little scope for a court to determine that the
arrangement embodying the offer is fundamentally
unfair.
As such, it was not necessary for the
court to satisfy itself that no better scheme could have been
devised, but merely that no superior offer was proposed.
Mincom's history involved various failed attempts by the
directors to create mechanisms by which members could realise
the true value of their shares. The Scheme provided a
fair means by which this end could legitimately be
achieved.
(iv) Fairness to
shareholder-borrowers A clause of the
Scheme was also questioned for its unfair effect on
shareholder-borrowers. This particular clause operated
such that each shareholder warranted that their transferred
securities would be free from all encumbrances (Relevant
Provision).
The court examined
the Relevant Provision and found that while it was
commercially commonsense to protect the position of the
purchaser, it could potentially trigger a breach of a
shareholder's loan agreement with a financier. However,
it was found that there was no practical way to build into the
Scheme any mechanism to protect shareholders in the wide
variety of circumstances which might govern their
borrowings. Such concerns, it was found, had been
substantially dealt with by disclosure to shareholders in the
supplementary Statement. In practical terms, the
Relevant Provision did not create any additional liability but
instead extended the range of persons who could claim in
respect of an existing liability.
Accordingly, the court resolved that the
Relevant Provision was not "onerous, unreasonable nor
calculated to catapult unsuspecting shareholders into a state
of breach of warranty."
(v) Scheme
proposed for improper purpose:
relevance Under section 411(17) of the
Act, the court must not approve a scheme unless:
- satisfied that the scheme has not been proposed for the
purpose of enabling someone to avoid the operation of any
one of the provisions of Ch 6 of the Act (Avoiding Purpose);
or
- ASIC has issued a statement that it has no objection to
the scheme proceeding.
According to Re Advance Bank
Australia Ltd (1997) 138 FLR 281, satisfaction of one of the
above conditions precludes the court from withholding approval
under the other. In Mincom's case, ASIC provided a
statement of no objection to the Scheme. As such, the
court was not obliged to withhold approval under section
411(17) even if satisfied that the Scheme was proposed for an
Avoiding Purpose.
However, the court determined
that the existence of an Avoiding Purpose may still be taken
into account in the exercise of its general discretion under
section 411(4)(b). This is particularly the case where
ASIC's decision to issue a statement of no objection is not
based on whether an Avoiding Purpose exists. Indeed,
ASIC's own policy statement states that:
the basic question ASIC will consider is whether
shareholders will be adversely affected by the takeover, not
whether the purpose of the scheme is to avoid making the
acquisition under Ch 6.
The court proceeded on
this basis and found that it is sufficient if any one of those
proposing the arrangement (being either Mincom or EAM) is
involved in the Avoiding Purpose. Relying on Re ACM Gold
Ltd (1992) 107 ALR 359, it was noted that the Avoiding Purpose
need not be the exclusive or dominant purpose for entering
into an arrangement, provided it amounts to a significant or
substantial purpose.
(vi) Evidence of
improper purpose Evidence from Mincom
and EAM suggested that a Ch 5 scheme of arrangement was
adopted in preference to a Ch 6 takeover for a variety of
reasons. Principally, these reasons included that a
scheme provided a comparatively certain and slightly shorter
timetable, was easier to negotiate with financiers and was an
agreed mechanism more likely to be approved by Mincom
shareholders.
Of the parties' multiplicity of
purposes, the court characterised the main purpose of adopting
a scheme over a takeover as being centred around efficiency
and certainty of timing. Whereas under section 650C of
the Act a Ch 6 takeover bidder may extend the offer period at
any time before the end of the period, an equivalent mechanism
is not available under a Ch 5 scheme of arrangement. In
this regard, Fryberg J stated:
"On the face of things,
a purpose of both companies in selecting an arrangement rather
than a takeover was to avoid the operation of that section
(650C)."
In response, EAM cited Re International
Goldfields Ltd [2003] WASC 86 which related to a scheme chosen
(in favour of a takeover) for its greater level of
certainty. The court in that case accepted that there
existed rational and legitimate commercial reasons for
adopting the proposed scheme and there was no reason to
conclude that the arrangement was proposed for the purpose of
avoiding the operation of Ch 6. However, the court found
that in contrast to Re International Goldfields Ltd where no
particular provision of Ch 6 was identified as one which might
be the subject of an Avoiding Purpose, Mincom and EAM's
evidence suggested an overt intent to avoid the uncertainty of
offer period extensions arising under section
650C.
(vii) Evaluation of the
purposeThe court found that Mincom's and
EAM's purpose was to achieve certainty of timing and
efficiencies through the avoidance of section 650C. In
this respect, this was a significant motivating factor for the
parties and amounted to an Avoiding Purpose.
Regardless, the court determined that the prima
facie existence of an Avoiding Purpose was not a critical
factor to the exercise of its discretion under section
411(4)(b). Indeed, even if the Scheme was proposed to
enable EAM to avoid the operation of one or more of the
provisions of Ch 6, any public interest in discouraging such
conduct was far outweighed by the matters which supported the
application. In this regard, those matters supporting
the Scheme included that:
- the Scheme made commercial sense;
- it was fair and reasonable as between the shareholders
and had received their overwhelming support;
- the risk of serious adverse consequences to any
shareholder was relatively low; and
- ASIC had produced a statement that it had no objection
to the arrangement.
The order of the court was that
the Scheme be endorsed subject to the amendments sought.
5.6 Are section 266(4) or
section 1322(4)(d) of the Corporations Act available to extend
the time to further lodge notice of a
charge?(By Kathryn Finlayson, Minter
Ellison)
Community Life Limited v Kilmory
Developments Pty Limited [2007] NSWSC 943, Supreme Court of
New South Wales, Hammerschlag J, 16 August
2007
The full text of this judgment is available
at:
http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2007/august/2007nswsc943.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
(a)
Summary Section 266(4) was not available
as there was no failure to lodge a notice in respect of a
charge.
Section 1322(4)(d) was not
available for two reasons:
- the section presupposed that the act had not occurred or
had occurred late when in fact the notification of the
charge had occurred within time; and
- the substance of the plaintiff's claim was that it
wished to eradicate the effect of it having given notice of
the discharge and the section could not bring about that
result.
(b) Facts
Under
a loan facility agreement dated 6 June 2006, the plaintiff
lent $3,000,000 to McLean Property Investments Pty Ltd.
The loan was due to be repaid on 6 August 2006 but the
agreement was subsequently varied to extend the time for
repayment.
As part of the variation of the
agreement, the plaintiff took a fixed and floating charge over
the defendant's assets on 24 October 2006. That charge
was registered with the Australian Securities and Investments
Commission as required by section 263(1) of the Corporations Act 2001 No. 50 (Cth) (Act) and
was entered on the Australian Register of Company Charges on
25 October 2006.
On 20 November 2006, an agent of
the defendant requested the plaintiff to release the charge on
the basis that the defendant would pay the plaintiff $190,000
in cash and provide the plaintiff with a second mortgage over
a property it owned at Point Piper.
On 22
November 2006, the defendant banked $40,000 into the
plaintiff's bank account.
On 24 November 2006,
the defendant granted the plaintiff a mortgage over the Point
Piper property and the plaintiff lodged a caveat pending
obtaining consent of the first mortgagee to the registration
of the mortgage.
On 27 November 2007, the
plaintiff lodged a notification of discharge of the charge
with the Australian Securities and Investments Commission on
the prescribed Form 312.
Neither the balance of
the $190,000 nor the loan have been paid. McLean
Property Investments Pty Ltd has had a liquidator
appointed.
The main issue before the Supreme
Court was whether section 266(4) or section 1322(4)(d) of the
Act were available to the plaintiff to extend the time to
further lodge notice of a charge.
In the
alternative, the plaintiff claimed that the Register could be
rectified by the charge being re-registered under either
section 274 or section 1322(4)(b) of the
Act.
(c) Decision
His Honour Justice Hammerschlag held that
section 266(4) was not available to assist the plaintiff as
there was no failure to lodge a notice in respect of a
charge.
His Honour considered but did not
decide whether section 1322(4) had any operation in relation
to an application to extend the time within which to notify a
charge given the presence in the Act of section 266(4), a
provision which dealt specifically with that subject.
Although Justice Hammerschlag doubted that section 1322(4)
would be available to the plaintiff where section 266(4) did
not assist, his Honour proceeded on the basis that the section
would be available if its requirements were met.
Justice Hammerschlag considered that the
requirements of section 1322(4)(d) were not met for two
reasons. First, the section presupposed that the act had
not occurred or had occurred late. In fact, the
notification of the charge had occurred within time.
Second, the substance of the plaintiff's claim was that it
wished to eradicate the effect of it having given notice of
the discharge and the section could not bring about that
result.
His Honour also indicated that, even if
section 1322(4)(d) was available, he would decline to grant
the relief sought as the proper characterisation of what had
occurred between the parties was that there was an agreement
between the parties which was fully performed by the plaintiff
but only partly performed by the defendant. In those
circumstances, the requirements of section 1322(6)(c) were not
satisfied as any re-registration of the charge could not be
said to be without substantial injustice to any
person.
In relation to the plaintiff's
alternative claims, Justice Hammerschlag considered that the
circumstances of the matter were such that the plaintiff was
precluded from seeking rectification of the Register.
His Honour was not satisfied that, even if either section 274
or section 1322(4)(b) was available to the plaintiff, it would
be just and equitable or that there was an omission or
misstatement in the Register.
5.7 Option exercised after
insolvency can still give rise to
set-off
(By Kristy Zander, Senior
Associate, Clayton Utz)
JLF Bakeries Pty Limited
(In Liquidation) v Baker's Delight Holdings Limited, [2007]
NSWSC 894, Supreme Court of New South Wales, White J, 15
August 2007
The full text of this judgment is
available at:
http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2007/august/2007nswsc894.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
(a)
Summary
Baker's Delight was entitled to
set-off an amount payable by it as a result of the exercise of
an option to purchase an insolvent franchisee's property,
against amounts owing to it by the insolvent franchisee.
Set-off was available notwithstanding that the exercise of the
option did not occur until after the franchisee entered into
voluntary administration.
(b)
Facts
The plaintiff was a franchisee of
a Baker's Delight bakery franchise. Under the franchise
agreement, Baker's Delight was entitled to exercise an option
to purchase the franchise's fixtures, fittings, plant and
equipment ("Fittings"), if the franchise agreement was
terminated. If the option was exercised, ownership of
the Fittings would immediately pass to Baker's Delight, whilst
the full purchase price was not payable for a further 60
days.
The franchisee went into voluntary
administration and thereafter creditors' voluntary
liquidation. Two days after the appointment of the
voluntary administrator, Baker's Delight terminated the
franchise agreement and shortly thereafter exercised its
option to purchase the Fittings.
Baker's Delight
was a substantial creditor of the franchisee. Baker's
Delight sought to set-off the amount owed by it for the
Fittings against the debt owed to it by the franchisee.
The debt owed to Baker's Delight was significantly larger than
the amount owed by Baker's Delight for the
Fittings.
Section 553C of the Corporations Act 2001 No. 50 (Cth) ("Act")
provides for the set-off of mutual debts, credits and dealings
between an insolvent company and a creditor. The
"relevant date" for determining the existence of mutual debts
and credits capable of set-off was, in this case, the date of
appointment of the voluntary administrator to the
franchisee.
The question for consideration was
whether Baker's Delight was entitled to set off the amount
owed by it for the Fittings against the pre-administration
debt, in circumstances where the option to purchase the
Fittings was not exercised until after the commencement of the
voluntary administration (and thus after the "relevant date"
for the purpose of section 553C of the
Act).
(c) Decision
The court held that Baker's Delight was
entitled to set off the amount owed by it for the Fittings
against the pre-administration debt owed to it by the
franchisee, pursuant to section 553C of the
Act.
(i) Existence of liability at the
relevant date
The option granted to
Baker's Delight to purchase the Fittings, contained in the
franchise agreement, was characterised by the court as a
conditional contract, rather than an irrevocable offer.
That is, the option was characterised as an agreement by the
franchisee to sell the Fittings to Baker's Delight if two
conditions were satisfied: the termination of the franchise
agreement and notice of exercise of the option by Baker's
Delight.
The effect of this
characterisation of the option was that the conditional
contract was held to have been entered into, and a contingent
debt to have arisen, upon entry into the franchise agreement
by the parties.
The court held that, at the
relevant date, there existed a contingent liability on the
part of Baker's Delight to pay whatever price was ultimately
determined to be payable for the Fittings. The existence
of that contingent liability at the relevant date meant that
it could be set off against the debt owed by the franchisee to
Baker's Delight, pursuant to section 553C of the Act
(following Hiley v People's Prudential Assurance Co Limited
(In Liquidation) (1938) 60 CLR 468).
(ii)
Notice of insolvency
The franchisee
submitted, pursuant to section 553C(2) of the Act, that
Baker's Delight was not entitled to claim the benefit of a
set-off because Baker's Delight had notice of the franchisee's
insolvency at the time it received credit from the
franchisee. The franchisee claimed that Baker's Delight
"received credit" when it exercised the option, because the
purchase price for the Fittings was not payable for a further
60 days. At that time, to the knowledge of Baker's
Delight, the franchisee had entered into voluntary
administration and had ceased trading.
The court
held that the time that Baker's Delight exercised the option
was not "the time of receiving credit" within the meaning of
section 553C(2) of the Act. Rather, credit was given by
the franchisee and received by Baker's Delight at the time of
entry into the franchise agreement, although that credit was
given and received contingently on the termination of the
franchise agreement and exercise of the option. At the
time of entry into the franchise agreement, Baker's Delight
did not have notice of the franchisee's
insolvency.
In reaching that conclusion, his
Honour applied the reasoning in Old Style Confections Pty
Limited v Microbyte Investments Pty Limited (In Liquidation)
[1995] 2 VR 457 and Shirlaw v Lewis (1993) 10 ACSR
288.
(iii) Purposive construction of
section 553C
In constructing section
553C, his Honour had regard to the purpose of the section,
namely to avoid the injustice of a situation where a
liquidator can demand payment in full from a creditor although
the creditor will not receive payment of the larger debt owed
to it, arising from the same dealings. Having regard to
that purpose, his Honour held that section 553C should be
given its widest possible scope. His Honour also noted
that the purpose of the limitation in section 553C(2) is to
exclude a right of set-off where a creditor had notice of the
company's insolvency or where it manipulated the right of
set-off, after notice of insolvency, to avoid
payment.
5.8 Freezing orders obtained
against directors of an insolvent company being investigated
by ASIC
(By Sabrina Ng and Felicity Harrison,
Corrs Chambers Westgarth)
In the matter of ASIC v
Krecichwost [2007] NSWSC 948, New South Wales Supreme Court,
McDougall J, 14 August 2007
The full text of this
judgment is available at:
http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2007/august/2007nswsc948.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
(a)
Summary
This case involved an
application by ASIC under section 1323 of the Corporations Act 2001 No. 50 (Cth) (Act) for
the appointment of receivers, or alternatively freezing
orders, to preserve the assets of two directors of an
insolvent company. The two directors were, at the time
of the application, the subject of investigations in relation
to possible insolvent trading by ASIC. The court, in
attempting to balance all parties considerations, made the
requested freezing orders on the basis that those orders were
a less intrusive means of protecting the persons aggrieved by
the company's insolvency.
(b)
Facts
Fincorp Group Holdings Pty Limited
(Fincorp) collapsed in March 2007 and administrators were
appointed. Total losses were estimated at about $114
million, with thousands of people losing all or half of their
investments.
At the time of the
application, ASIC investigations were underway in relation
into a number of matters involving Fincorp, including the
possibility of insolvent trading since mid 2006. It was
alleged that since the time of possible insolvency, Fincorp
continued to raised funds from the public to the amount of
$110 million.
During the hearing, the court was advised of the
administrators' preliminary assessment that there was a
possible claim against the directors (and shadow directors) of
Fincorp for insolvent trading. The investigations were
only in the initial stages and it would take some time to
fully understand the complex nature of Fincorp's
affairs. Of particular interest to the matters before
the court was the limited evidence that the directors may have
transferred their interests in property to their wives.
(c)
Decision
Section 1323 of the Act gives
the court the discretionary power to prohibit payment or
transfer of money, financial products or other property, or
alternatively make an order appointing a receiver. The
discretionary consideration is whether the order is "necessary
or desirable" to protect the interests of an aggrieved
person. Relevantly, in this case, an aggrieved person
would be persons who suffered loss through the collapse of
Fincorp.
The operation of section 1323 is
enlivened in circumstances where an investigation is being
carried out by ASIC, or a prosecution, civil proceedings or
investigation has been commenced under the Act.
Accordingly, McDougall J found that it could arise even absent
strong evidence of dissipation of assets and a reasonably
persuasive case against the director concerned.
However, his Honour acknowledged that these
would usually be important discretionary factors for the court
to take into consideration. They would need to be
balanced against ASIC's public interest role to investigate
Australia's financial system.
McDougall J
recognized the intrusive nature of the orders available under
section 1323, in particular the appointment of
receivers. His Honour highlighted that the legislature
intended for drastic remedies to be available to protect the
interests of aggrieved persons and that the "necessary or
desirable" aspect of the discretion required looking to the
needs of those persons, rather than the drastic nature of the
remedy.
In reaching his decision, McDougall J was
satisfied by the evidence before him that the general
circumstances made it desirable, in the interests of aggrieved
persons, to make an order under section 1323, even though he
acknowledged that the risk of disposal of assets was
low. The decision was influenced by the relatively early
stage of the investigations into a complex collapse in
conjunction with the short duration for which the order was
sought.
Although section 1323 does not expressly
authorize a freezing order over assets, McDougall J accepted
that the court had jurisdiction to make such an order on the
basis that a freezing order is deemed an "alternative or
lesser order" to the appointment of a
receiver.
5.9 The termination of deeds of
company arrangements under section 445D of the Corporations
Act
(By Trent Duffield, DLA Phillips
Fox)
Mondello Farms Pty Ltd v Annatom Pty Ltd (subject
to deed of company arrangement) [2007] SASC 296, Supreme Court
of South Australia, Layton J, 10 August 2007
The
full text of this judgement is available at:
http://cclsr.law.unimelb.edu.au/judgments/states/sa/2007/august/2007sasc296.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
(a)
Summary
The Supreme Court of South
Australia found that the plaintiff ("Mondello") was a creditor
of Annatom by way of an interim costs order that had been
issued by the court in a breach of contract dispute.
Other creditors that had entered into a deed of company
arrangement had been misled by not being informed of
Mondello's status as a creditor and the breach of contract
litigation between Mondello and Annatom that was
ongoing. The court held that effect could not be given
to the deed of company arrangement without
injustice.
(b)
Facts
Annatom was subject to a deed of
company arrangement ("the Deed") to which Mondello was not a
party. Mondello claimed to been a creditor of Annatom by
reason that an interim costs order had been issued in favour
of Mondello against Annatom concerning proceedings that
Mondello had instituted against Annatom for alleged breach of
contract ("the Mondello litigation").
Mondello
further claimed that it was a contingent creditor pending the
final outcome of those proceedings.
Mondello
sought termination of the Deed under section 445D of the Corporations Act 2001 No. 50 (Cth) ("the Act")
claiming that the creditors of Annatom that were party to the
Deed had been misled at a creditors' meeting by not being
advised of the costs order in favour of Mondello and that, by
not having reference to the Mondello litigation after having
been made aware of it subsequent to the meeting, the
Administrator's section 439A(4) Report contained material
omissions.
Mondello claimed that effect could
not be given to the Deed without injustice or undue
delay.
(c)
Decision
(i) Was Mondello a
creditor?
In the judgment, Layton J
cited Olsson J in Powell v Fryer (2001) 159 FLR 433 holding
that a "debt is simply an obligation of one party to pay a sum
of money to another. The obligation may be present, absolute,
or contingent".
Layton J determined that it was
reasonable to conclude that continuing to engage in litigation
and becoming liable to pay adverse costs orders, when there
were reasonable grounds to suspect that Annatom would not be
able to meet such obligations was "incurring a debt" for the
purposes of section 588G(1) of the Act. Therefore,
Mondello had status as a creditor.
(ii)
Is information false or misleading under section 445D(1)(a)
and (b)?
In determining whether
information or an omission is false or misleading under
section 445D an objective test is to be applied. Layton
J confirmed that it is not relevant if information did not
actually mislead or deceive anyone and it is also not relevant
whether or not anyone intended the information to be false or
misleading.
His Honour held that whether
or not information was false or misleading must be judged at
the time of the hearing and not on the basis of information
available at the time of giving the information.
(iii) Were the creditors' party to the
Deed mislead under section 445D?
Layton
J determined that representatives of Annatom had misled the
Administrator and therefore the creditors by not informing
them of the Mondello litigation at the creditors
meeting. His Honour further determined that information
which was received by the Administrator subsequent to the
meeting should have been passed on the creditors and that this
failure to pass on information led to the creditors being
mislead.
Layton J held that the Mondello
litigation was reasonably expected to be material to a
sufficient number of creditors to the Deed and would affect
their decision to enter the Deed. His Honour emphasised
in his judgment that it was not necessary for the information
or omission to be material to all creditors.
(iv) The role of the
Administrator
Layton J noted that in
some circumstances, in discharging their duties, an
Administrator may be required to make certain inquiries beyond
their statutory duties to investigate prescribed under section
438A of the Act. Whilst it was acknowledged that the
Administrator had very little funds available with which to
undertake a full investigation in the first instance, once it
became aware of the Modello litigation (however so it became
aware), it had an obligation to investigate the nature and
scope of that litigation.
Layton J
considered that the obligation to investigate extended to
certain loan arrangements that had been entered into between
Annatom and a number of the creditors that were party to the
deed, some of whom were related companies. Given that
these loan arrangements may not have been at arms length and
they had a material impact on the availability of funds for
distribution to other creditors, the Administrator was obliged
to investigate them. The omission in the Administrator's
Report concerning the loan arrangements (and their terms)
between the related entities was a material omission and
therefore a breach of section 445D(1)(c).
(v) Orders
Layton
J held that the deed should be terminated for the various
reasons set out in his judgment.
5.10
Best endeavours,
delegation of responsibility, negligence and damages in
underwriting and sponsoring an IPO
(By Chris
Munro, Freehills)
OzEcom v Hudson Investment
Group [2007] NSWSC 719, New South Wales Supreme Court,
McDougall J, 3 August 2007
The full text of this judgment
is available at:
http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2007/august/2007nswsc719.htmor
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp(a)
Summary
Hudson Investment agreed to underwrite
an initial public offering (IPO) of shares in OzEcom. In doing
so, Hudson Investment agreed to use its best endeavours to
undertake the listing of OzEcom and also achieve the spread of
shareholders required by the ASX Listing Rules. Hudson
Investment enlisted its subsidiary, Hudson Securities, to act
as sponsoring broker because it had the requisite
licence. The IPO did not raise the amount of funds
desired by OzEcom nor achieve the spread required by the
Listing Rules.
McDougall J held that Hudson Investment
breached its obligation to use best endeavours to secure the
spread of shareholders. It was also held that Hudson
Securities breached its duty of care owed to
OzEcom.
OzEcom was deemed entitled to pursue a claim
for judgment for damages, to be assessed in respect of wasted
expenses incurred in reliance upon Hudson Investment's
contractual obligations or as referable to Hudson Securities'
breach of duty of care. Each of Hudson Investment and Hudson
Securities were held liable for one half of any damages to be
awarded.
(b)
Facts OzEcom wished to raise $10m by way
of an IPO. It engaged Hudson Investment as underwriter. Hudson
Investment mandated its subsidiary, Hudson Securities, to act
as broker.
OzEcom and Hudson Investment entered into an
underwriting agreement. Hudson Investment agreed to use its
best endeavours to procure the minimum number of shareholder
spread as required by the Listing Rules, and also to subscribe
at an agreed price for all shares not taken up by the public
at the closing date of the IPO. This obligation to subscribe
for the shortfall shares was conditional on OzEcom presenting
Hudson Investment with a shortfall notice, as well as a
closing certificate, approved by all directors of OzEcom and
signed by at least 2 directors.
The shortfall
notice and closing certificate had to be presented by OzEcom
to Hudson Investment by 10am one business day after the
Closing Date for the offer in order to crystallise Hudson
Investment's obligation to underwrite the offer.
The
closing date, as specified in the underwriting agreement, for
the offer was fixed by reference to the Registration Date,
that being the last day for registration of the prospectus by
ASIC. OzEcom could vary the timetable for the offer by giving
written notice to Hudson Investment.
Subscriptions for
the offer fell well short of the capital raising sought by
OzEcom. The closing date of the offer was determined by
McDougall J to be 6 September 1999.
However, each of OzEcom, Hudson Investment and Hudson
Securities arguably proceeded to act as though the offer
remained open to the public up to at least 27 September
1999.
A shortfall notice and closing certificate were
not presented to Hudson Investment until 30 September
1999.
(c) Decision
(i)
Was there an agreed extension of time to the closing date
under the underwriting agreement?
OzEcom
relied on both correspondence and conversations to support a
case of ad hoc agreements to extend the closing date and
therefore keep the IPO open.
It was conceded
that the parties conducted their affairs on the basis that
Hudson Investment's underwriting obligations were in force
beyond the closing date; however it was very difficult to
spell out any agreement to that effect. McDougall J held that
it did not appear that the parties sufficiently turned their
mind to the extension of the closing dDate with respect to the
underwriting agreement, and therefore there was no 'extension
agreement' supported by the facts.
(ii) Could
OzEcom rely on estoppel by representation to support the
extension of the closing date?
McDougall J
held there was no evidence of reliance on any representation
made by Hudson Investment. The only evidence relating to
reliance on a representation came from Ms Sylvester, to whom
the alleged representation was not made
directly.
(iii) Did Hudson Investment waive the
requirement that the presentation of the shortfall notice and
closing certificate be within one business day of the Closing
Date?
As outlined above, McDougall J
considered the closing date to be 6 September 1999. It was
held that, once time expired without the delivery of a
shortfall notice and closing certificate, the underwriting
obligation simply lapsed, rendering Hudson Investment unable
to waive the requirement. Further, the closing certificate
presented to Hudson Investment was not approved by the board
in the manner required by the underwriting agreement.
McDougall J concluded that Hudson Investment did not waive the
requirement that it be presented with a closing certificate in
the correct form by accepting delivery of it.
(iv) Is it a sufficient use of best endeavours
if the delegator believes that the delegate has the capacity
and will to do what is required to satisfy the
obligation?
Hudson Investment, as the party
bound to use best endeavours to secure the shareholder spread,
delegated the relevant task to Hudson Securities. McDougall J
was inclined to believe that, where a particular obligation is
cast on a party to a contract, that party cannot simply rely
on the fact of delegation to satisfy that obligation. However,
he also considered that where it was known that the party
accepting the obligation did not have the relevant licence to
perform the obligation and that it proposed to delegate the
performance of the obligation, different considerations may
arise. Nevertheless, as a director of Hudson Investment, Mr
Sutton, was personally involved in activities undertaken by
Hudson Securities, McDougall J felt there was no need to
determine the issue in this case.
(v) Did
Hudson Investment use its best endeavours to secure the
shareholder spread?
McDougall J outlined the
following as applicable principles to the analysis of 'best
endeavours':
- An obligation to use best endeavours to achieve an
outcome is neither an unqualified obligation to achieve that
outcome nor a warranty that it will be achieved;
- The content of the obligation to use 'best endeavours'
must be measured having regard to the contract as a whole
and to the factual context in which the best endeavours fall
to be exerted;
- In ascertaining whether best endeavours have been
exerted, the court should have regard to the qualifications,
abilities and responsibilities of the person obliged to
exert them;
- Stipulation of an obligation to use 'best endeavours'
necessarily carries with it an understanding that the
outcome, towards the achievement of which the best
endeavours are to be directed, may not in fact be achieved.
As McDougall J did not support the argument that
Hudson Investment could delegate its obligation to use best
endeavours to Hudson Securities, his Honour grouped the
actions of Hudson Investment and Hudson Securities together.
McDougall J determined that Hudson Investment did not comply
with its obligation to use best endeavours to achieve the
requisite spread, for the following reasons:
- there was no evidence of any systematic process of
planning or management on the part of Hudson Securities to
promote and sell the IPO;
- there was no evidence that Hudson Securities or Hudson
Investment followed up, in any detailed way, a list of
prospective investors given to it by OzEcom, nor references
in that list to other brokers as prospective investors;
- there was no evidence of any attempts made by advisers
within Hudson Securities to promote the IPO to their
individual clients; and
- Hudson Investment rejected the offer of assistance from
a subunderwriter.
(vi) Did Hudson Securities
owe OzEcom a duty of care? If so, what was the scope of that
duty? Did Hudson Securities breach its duty of
care?McDougall J held that Hudson Securities
owed OzEcom a duty of care for the following reasons:
- Hudson Securities assumed the responsibility for the
performance of Hudson Investment's obligations in relation
to the spread;
- OzEcom (and Hudson Investment) knew that Hudson
Securities would do so;
- OzEcom relied on Hudson Securities' assumption of
responsibility; and
- Hudson Securities knew that OzEcom would so rely on
it.
As the assumption of responsibility was a key
factor in the conclusion that Hudson Securities owed OzEcom a
duty of care, McDougall J assessed the scope of the duty owed
by reference to the responsibility assumed. It was therefore
determined that Hudson Securities was required to use its best
endeavours to achieve the shareholder spread.
For the
same reasons McDougall J held that Hudson Investment did not
use its best endeavours to secure the requisite spread of
shareholders, Hudson Securities was found to have breached the
duty of care it owed to OzEcom.
(vii)
DamagesOzEcom put its claim for damages 3
different ways. Firstly, it argued that it should receive the
loss of the full amount of the capital raising. Secondly, it
argued it should receive the shortfall from the offer, and
thirdly, it argued that it should receive the wasted expenses
of the capital raising.
McDougall J, citing
Adelaide Petroleum NL v Poisedon Ltd (1990) 98 ALR 431,
rejected the first two heads of damages on the basis that the
failure to raise capital did not of itself result in a loss to
the company of the capital sum foregone. OzEcom would have had
a claim for the loss of use of that capital, however this was
not pleaded.
With respect to the third head of damages
pleaded, McDougall J relied on the decision of McRae v
Commonwealth Disposals Commission (1951) 84 CLR 377 to
conclude that the wasted expenditure should be recoverable to
the extent it was incurred on the faith of Hudson Investment's
promise to use its best endeavours to achieve the necessary
spread. In the case of Hudson Securities, the claim would be
limited by reference to the date of inception of the duty of
care.
McDougall reserved judgment on the amount of
wasted expenditure claimable, leaving it to OzEcom to
determine whether it wished to pursue a claim based on his
decision.
5.11 Affidavits and exhibits in
applications to set aside statutory
demands (By Chris Brown, Clayton
Utz)
Tatlers.com.au Pty Ltd v Davis [2007] NSWSC 835,
Supreme Court of New South Wales, White J, 3 August
2007
The full text of this judgment is available
at:
http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2007/august/2007nswsc835.htmor
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp (a)
Summary This was a section 459G
application to set aside a statutory demand. The
statutory demand related to the unpaid balance of a judgment
debt owed jointly and severally by the plaintiff company and
its sole director, Ms Fletcher.
The court had to
consider several issues. Firstly, the court found that
the company's failure to serve the exhibits to the supporting
affidavit within the 21 day period was not fatal to the
application. It was held that the requirement to serve a
supporting affidavit did not extend to requiring the exhibits
to the affidavit to be served within the 21 day
period.
Secondly, the court was asked to
determine whether the creditor's failure to file and serve an
accompanying affidavit with the statutory demand was grounds
to set aside the statutory demand. The court stated that
the company could not rely on this ground as it had failed to
raise it in the affidavit accompanying the application and had
failed to exhibit the statutory demand to the accompanying
affidavit.
Finally, the company claimed the
existence of off-setting claims resulting from debts owed by
the creditor to the company and a separate debt owed to Ms
Fletcher individually. The court held that the company's
debt to the company was a valid off-setting claim.
However, the company could not rely on the debt owed to Ms
Fletcher as an off-setting amount as she was not a party to
the proceeding.
(b)
Facts The defendant creditor served a
statutory demand on the plaintiff company in relation to the
unpaid balance of a judgment debt. The judgment debt was
owed jointly and severally by the company and its sole
director, Ms Fletcher. The company applied to set aside
the statutory demand pursuant to section 459G of the
Corporations Act 2001 No. 50 (Cth) ("the
Act").
The company had paid over half of the
judgment debt but left an unpaid balance equal to the costs
incurred by the company in an earlier proceeding against the
creditor plus the costs incurred by Ms Fletcher in a
proceeding involving her and the creditor. The company
submitted that if the statutory demand was not set aside, the
costs awarded in Ms Fletcher and the company's favour should
be set-off against the debt the subject of the statutory
demand so as to reduce the amount of the statutory
demand.
The application to set aside the
statutory demand and the accompanying affidavit were filed and
served within the 21 day period prescribed by section 459G(3)
of the Act. However, the exhibits to the affidavit were
served on the creditor after the 21 day period had
expired.
(c) Decision The
issues to be decided by the court were as follows:
- whether the application to set aside the statutory
demand had been improperly brought due to the exhibits to
the supporting affidavit not being served on the defendant
within 21 days of the service of the statutory demand;
- whether the statutory demand should be set aside because
it was not accompanied by an affidavit; and
- whether there was a valid offsetting claim in favour of
the plaintiff in regards to the costs owed by the defendant
to both the plaintiff and the sole director.
Each of
these issues is discussed further
below.
(i) Failure to serve
exhibits Section 459G(3) states that a
copy of the application to set aside the statutory demand and
a copy of the supporting affidavit are to be served on the
creditor within 21 days of service of the statutory
demand. The creditor, relying on Kortz Ltd v Data
Acquisition Pty Ltd (2006) 155 FCR 556, argued that because
section 459G(3) requires any exhibits to the affidavit to be
served within 21 days, the company's failure to serve the
exhibits within the 21 day period should result in the
application being found to be invalid.
The court
disagreed with the decision in Kortz and held that the
reference to "affidavit" in section 459G does not extend to
exhibits to an affidavit. Whilst the court acknowledged
that a defendant to a section 459G application is entitled to
understand the case to which it must respond, that could be
addressed by ordinary pre-trial procedures to ensure
procedural fairness and it is not, in the court's view, the
purpose of section 459G that the defendant be apprised within
the 21 day period of the material relied upon by the
plaintiff. It was held that allowing exhibits to the
supporting affidavit to be served after the expiry of the 21
day period is not at odds with the purpose of section 459G
and, in any event, the court stated that there was "nothing
ambiguous about the word "affidavit" in section 459G(3) to be
resolved by recourse to legislative purpose".
The
court highlighted that it is well recognised that a plaintiff
is entitled to file and serve further affidavit material in
support of the grounds raised in the initial affidavit
accompanying the application (see Graywinter Properties Pty
Ltd v Gas & Fuel Corporation Superannuation Fund (1986) 70
FCR 452). The supporting affidavit essentially takes the
form of a pleading and whilst new grounds cannot be later
raised, the grounds relied upon in the supporting affidavit
can be the subject of further affidavits filed after the
expiry of the 21 day period.
(ii) No
accompanying affidavit to the statutory
demand Section 459E requires that a
statutory demand is accompanied by an affidavit which verifies
the debt, unless the debt is a judgment debt. Whilst the
subject debt in this case was a judgment debt, it was for the
unpaid balance of the judgment rather than the full
amount. The plaintiff submitted that the statutory
demand should be set aside due to the failure of the creditor
to file and serve an affidavit with the statutory
demand. The company relied on Anderson Formrite Pty Ltd
v CASC Hire Pty Ltd (2005) 147 FCR 379, in which the Federal
Court of Australia held that in circumstances where the
statutory demand is issued for an amount that is different
from the judgment debt, the creditor cannot rely on section
459E(3) and therefore an affidavit must accompany the
statutory demand.
The court refused to consider
this ground for setting aside the statutory demand as the
company had failed to raise the ground in the affidavit
accompanying the application. It had also failed to
exhibit the statutory demand to the affidavit filed in support
of the application.
The company submitted
that because the creditor was aware of the terms of the
statutory demand and the fact that no affidavit accompanied
the statutory demand, an inference could be made that it was
open for the company to pursue the argument that the statutory
demand should be set aside due to the absence of an
accompanying affidavit.
The court rejected this
submission and referred to the principle established in
Graywinter that a ground to be relied upon by a plaintiff in
an application to set aside a statutory demand must be raised
in the supporting affidavit. As the ground was not
raised by the company in the supporting affidavit and the
statutory demand was not referred to in or exhibited to the
supporting affidavit, the company could not rely on it at the
hearing of the application.
(iii)
Offsetting debts owed to company and
director The company argued that it was
entitled to set-off the costs owed by the creditor to Ms
Fletcher even though the company was not a party to the
proceedings in which it was ordered that Ms Fletcher's
costs be paid by the creditor. Whilst Ms Fletcher and
the company were jointly and severally liable to pay the
judgment debt which was the subject of the statutory demand,
the debt owed to Ms Fletcher by the creditor was owed to her
alone and she was not a party to the application to set aside
the statutory demand.
The court stated that "one
joint and several obligor who is sued alone cannot raise a
set-off to which his or her co-obligor is entitled". The
primary reason for this is that the "rights of contribution
between the co-obligors cannot be resolved". If, for
instance, the company had indemnified Ms Fletcher against any
liability in relation to the judgment debt, it would be unjust
to allow the company to rely on her personal off-setting
claim. Ms Fletcher would lose her right to collect the
costs awarded to her and would presumably have to turn to the
company for compensation. Accordingly, the company was
denied this off-setting claim.
The further
off-setting claim, in relation to the costs owed to the
company by the creditor, was allowed. The amount of the
statutory demand was adjusted accordingly.
5.12 Setting aside statutory
demand on basis of section 459J(1) of the Corporations
Act (By Pablo Fernandez, DLA Phillips
Fox)
Joadja Whiskey v Abraham [2007] NSWSC 860, New South
Wales Supreme Court,
Hammerschlag J, 26 July
2007
The full text of this judgment is available
at:
http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2007/july/2007nswsc860.htmor
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
(a) SummaryJoadja
Whiskey Co Pty Ltd (Joadja) brought proceedings under one of
sections 459H(1)(a), 459J(1)(a) or 459J(1)(b) of the
Corporations Act 2001 No. 50 (Cth) ("the Act")
to set aside a statutory demand served on it by Yael Abraham.
The Demand related to a judgment debt against Joadja and
another company in favour of Ms Abraham. The Demand was served
against both companies, which the court held was not
acceptable as section 459E(1) only allows for service on a
single company. As the Demand was incorrectly served, this
would have caused substantial injustice to Joadja if it were
not set aside.
Accordingly, Hammerschlag J ordered that
the Demand be set aside.
(b)
Facts Joadja brought proceedings under one of
sections 459H(1)(a), 459J(1)(a) or 459J(1)(b) of the Act
seeking an order to set aside a statutory demand ("Demand")
made on it by Ms Yael Abraham.
The Demand was
addressed to both Jasmman Pty Ltd ("Jasmman") and Joadja
claiming a debt of $22,500 plus interest.
The
debt the subject of the Demand flowed from the judgment Ms
Abraham obtained against Jasmman and Joadja in a suit for
unfair dismissal in the Industrial Relations Commission of
NSW.
Although it was clear that both Jasmman and
Joadja were the parties being sued, the cover page of the
judgment of the Commission reflected the sole respondent as
being Jasmman.
After the expiry of the 21 day
period allowed for payment of the demand, the Commissioner
published a second judgment correcting the initial judgment
and stating that the 'Respondent' was both Jasmman and Joadja.
(c) Decision
(i) Section 459H(1)(a) -
Genuine dispute Joadja submitted that
there was a genuine dispute about the existence of the debt
(section 459H(1)(a)) because judgment was not given against
Joadja (or at least, it was unclear whether judgment was so
given).
Hammerschlag J observed that there are
two well established principles:
- Rule 38 of the Industrial Relations Commission Rules
(1996) (NSW), known as the 'slip rule', allows corrections
to be made to the original judgment or order which
corrections are treated as being effective as from the date
of the original judgment or order. Therefore, the original
judgment was to be treated as having been made against both
Jasmman and Joadja together.
- Where there is a debt which is the subject of a judgment
of a court of competent jurisdiction, there cannot be a
genuine dispute between the parties with respect to it
within the meaning of that term in section 459H of the Act.
On this basis, his Honour concluded that there was
no genuine dispute about the existence of the debt as
contemplated by section 459H(1)(a).
(ii)
Section 459J - Setting aside demand on other
grounds Hammerschlag J noted that the
court's discretion under section 459J(1)(b) is a wide
one.
The terms of the original judgment were
unclear, and to an ordinary reader would have appeared more
likely to have been against Jasmman. This was sufficient for
the Demand to be set aside under
section459J(1)(b).
Furthermore, his Honour
observed that the Demand was addressed to both Joadja and
Jasmman. Under section 459E(1) of the Act a person may serve
on a company a demand. The prescribed form for doing so
(Form 509H) makes no provision for a demand to be addressed to
more than one company.
Hammerschlag J then
considered section 23 of the
Acts Interpretation Act 1901 No. 2 (Cth),
which provides:
"In any Act unless the contrary
intention appears:
(a)
.
(b) words in a singular
number include the plural and words in the plural number
include the singular"
His Honour held that
section 459E(1) of the Act and the prescribed form (Form 509H)
show a contrary intention and it is therefore not permissible
for a single statutory demand to be made on more than one
company. Following the relevant authorities, if the section
were read to allow plural recipients, a statutory demand could
be addressed to a multiplicity of debtors even though they
were not jointly liable.
His Honour therefore
held that this would cause substantial injustice within the
meaning of section 459J(1)(a) of the Act, unless the Demand
was set aside.
(iii) Defects in the
Demand The Demand contained a number of
defects in relation to the interest claimed. Hammerschlag J
considered that these defects in themselves were sufficient to
warrant setting aside the demand.
The Demand was
set aside. In light of Joadja's conduct in relation to the
matter, his Honour made no order as to costs.
5.13 Misuse of company funds
leads to breaches of directors' duties(By
Luke Raffin, Freehills)
Australian Securities and
Investments Commission v Warrenmang Limited [2007] FCA 973,
Federal Court of Australia, Gordon J, 29 June 2007
The
full text of this judgment is available at:
http://cclsr.law.unimelb.edu.au/judgments/states/federal/2007/june/2007fca973.htmor
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
(a) Summary By
misusing Warrenmang Limited's funds ("Warrenmnang"), Robert
Graeme Pritchard breached his duties as a director of the
company by failing to:
- exercise a proper degree of care and diligence;
- act in good faith in the best interests of Warrenmang
and act for a proper purpose; and
- refrain from improperly using his position to gain a
personal advantage or to cause detriment to the
company.
(b) Facts
On 5 December 2003, the company undertook an
initial public offering ("IPO") of shares. However, Warrenmang
was unable to raise the minimum subscription and the company
was not listed. Although more than $2.5 million was paid to
Warrenmang by 404 subscribers for approximately 7.34 million
shares, some of the investors were not repaid their
subscription monies. This was a contravention of sections 722
and 723 of the Corporations Act.
At least
$2,206,082.10 was received by Warrenmang as part of the IPO.
On 19 January 2004, Pritchard (who was then the
sole signatory of the Warrenmang Accounts) transferred almost
$600,000 from the Warrenmang Accounts into a personal account
held by Pritchard. Over the next two days, $291,885.75 was
withdrawn from that personal account and used partly to fund
the purchase of a house in Toorak in Pritchard's
name.
(c) Decision
(i) Breach of directors' duties
Her Honour found that the "identity of
interest" between the directors and shareholders meant that
the requirement to prevent self-interested dealing was "acute"
because:
- Warrenmang was registered as an unlisted public company
on 1 September 2003 with Pritchard holding 20 million of
20.82 million issued shares;
- although the company had three directors, Pritchard was
at all times the person in charge of Warrenmang's day to day
activities, including the maintenance of its financial
records - he was its controlling mind;
- Warrenmang raised substantial funds from hundreds of
subscribers as part of its IPO; and
- the subscription monies were received by Warrenmang and
deposited into the Warrenmang Accounts to which Mr Pritchard
was the sole signatory.
These circumstances impacted
considerably on the content of the duty to exercise reasonable
care and diligence that Pritchard owed to
Warrenmang.
Pritchard failed to ensure that
Warrenmang kept the subscription monies separately and to
ensure that the company returned the subscription monies
received from subscribers as soon as practicable. Furthermore,
he as sole signatory to the Warrenmang Accounts permitted
Warrenmang to pay $300,000 of those subscription monies to him
for his own personal benefit to assist with the purchase of a
family home. Gordon J found that this conduct was
"inexcusable" and "deliberate and [Pritchard] knew it was not
in the interests of Warrenmang".
Pritchard's
contravention of section 180(1) was "founded on jeopardy to
the interests of Warrenmang and, in the circumstances of the
case, also on jeopardy to the interests of investors as
potential creditors".
Moreover, Pritchard did
not exercise his powers and discharge his duties in good faith
in the best interests of Warrenmang and for a proper purpose.
He "abused his power, he permitted his personal interests and
those of Warrenmang to be placed in conflict and he
misappropriated a portion of trust monies for himself".
Pritchard abused his position for his own advantage to the
detriment of Warrenmang.
Her Honour emphasised
that every breach by a company of the Act does not necessarily
give rise to a breach of the directors' duties
provisions.
(ii) The Federal Court's
power to grant declarations Although
her Honour canvassed the complexities relating to the civil
and criminal process provisions in the Corporations Act,
particularly the possibility that ASIC may impede subsequent
criminal proceedings by first pursuing and securing a
declaration of contravention (without seeking a pecuniary
penalty order) under section 13137E of the Act, her Honour
deemed it "neither necessary nor appropriate to explore these
issues in the present case".
(iii)
Orders Pursuant to section 1317E of the
Act, her Honour made a declaration of contravention that
Pritchard contravened sections 180, 181 and 182 in that:
- he caused Warrenmang to contravene section 722 by
failing to cause the company to hold the application money
on trust failing and to return that application money as
soon as practicable; and
- he caused Warrenmang to contravene section 723 by
failing to cause the company to refund the application money
after the shares were not issued and he authorised payment
of $300,000 of that money to himself and used that money for
his own personal benefit.
There was no order as to
costs.
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