Advanced Communications Technologies Inc v Advanced Communications Technologies

Supreme Court of Victoria|2002-08-23|Before: HABERSBERGER J

INJUNCTION - Interlocutory - Balance of Convenience - Alleged breach of exclusive distribution agreement in North and South America by appointment of another distributor - Purported termination of distribution agreement for breach of obligation of good faith - Security for undertaking as to damages - Foreign plaintiff - Assets in jurisdiction.

By a summons dated 23 April 2002 ("the summons") the plaintiff, Advanced Communication Technologies Inc ("ADVC"), a company incorporated in the United States of America, sought interlocutory injunctions against the first defendant, Advanced Communications Technologies (Australia) Pty Ltd ("ACT"). Before I could deliver judgment on that application ("the first application"), certain events occurred ("the further dispute") which resulted in ADVC issuing a summons dated 8 May 2002 seeking a further interlocutory injunction and ACT approaching the Court seeking to be relieved from some of the existing interlocutory injunctions and undertakings ("the second application").

Three affidavits of ADVC's solicitor, Evan Anthony Stents, one sworn on 23 April 2002 and two on 26 April 2002, were filed in support of the first application. Two affidavits were filed in opposition, both sworn on 26 April 2002 by the Chief Financial Officer of ACT, Graeme William Shearer. There was substantial additional material filed in respect of the second application. ADVC relied on a further three affidavits by Mr Stents, sworn on 8, 13 and 14 May 2002 respectively; two affidavits of Randall Hobart Prouty, the Chairman of the Board of Directors of ADVC, sworn on 10 and 23 May 2002 respectively; two affidavits of Jason Webster, the Director of Corporate Communications of ADVC, sworn on 10 and 23 May 2002 respectively; an affidavit of Ronald Grant Green, a shareholder in ADVC, sworn on 23 May 2002; and an affidavit of a solicitor, Emily Jane Hudson, sworn 27 May 2002. Not to be outdone, ACT filed two affidavits of the second defendant, Roger Thomas May, both sworn on 27 May 2002; three affidavits of Steven Black, the Chief Operating Officer of ACT, one sworn on 8 and two on 24 May 2002; and an affidavit of Simon Cleary, the Vice President, Research and Development of ACT, sworn on 24 May 2002.

ADVC was formerly known as Media Forum International Inc. In March 1999 it merged with Advanced Communications Technologies Inc, a corporation registered in Nevada ("ACT Nevada"). In July 1999 the name of the merged entity was changed to its current name. The purpose of the merger was for the plaintiff to obtain from ACT Nevada its rights and interest in North and South America in something known as "SpectruCell" which was a new form of wireless technology being developed in Australia.

As a consequence of the merger the second defendant, Mr Roger May, acquired the majority of the shares in the capital of the plaintiff. Mr May was appointed a director and Executive Chairman and Chief Executive Officer of the plaintiff in March 1999. According to Mr Prouty, there are about 7,500 shareholders in ADVC, most of them non-institutional investors holding small parcels of shares.

It would appear that issues arose after the merger concerning ACT's ownership of the SpectruCell technology and ACT Nevada's rights to distribute the SpectruCell technology. Various agreements were drawn up, some of which were entered into by the parties and some were not, in circumstances which it is not necessary to examine in this judgment.

Suffice it to say that by a Licence and Distribution Agreement dated 5 July 2000 ("the Licence and Distribution Agreement"), ACT appointed ADVC to distribute "the wireless or terrestrial, multi-protocols communication network technology known as SpectruCell, incorporating the Software and related hardware performing part of the base station controller which processes and transmits mobile communications protocols such as AMPS, CDMA, TDMA, GSM, W-CDMA, UMTS, 3G & Voice IP" ("the Product") throughout the Exclusive Territory of the United States of America, the North American and South American continents.

Although the Licence and Distribution Agreement forms the basis of ADVC's claims in this proceeding, Mr Prouty on behalf of ADVC expressed certain reservations about it. In his affidavit sworn 23 May 2002, he pointed out that the Licence and Distribution Agreement had been signed by Mr May on behalf of ADVC and Mr Shearer on behalf of ACT. He said that it was received a few days before a Board meeting of ADVC on 14 July 2002 and that at that meeting concerns were expressed about its terms and Mr May's conflict in signing on behalf of ADVC an agreement with his company ACT. Mr Prouty said that the Licence and Distribution Agreement was affirmed by ADVC based upon Mr May's assurances that it:

(a) was only signed to have something in place temporarily, and

(b) would be renegotiated to take into account the concerns raised by the director of ADVC.

By an earlier agreement in writing dated 5 April 2000 ("the Share Purchase Agreement"), ADVC had agreed to purchase 200 ordinary shares in the capital of ACT, representing 20% of the issued and outstanding ordinary shares in the capital of ACT. The 200 ordinary shares were allotted to ADVC and it was registered as the holder of them. ADVC agreed to pay for the shares by issuing 5 million of its shares of common stock to ACT and paying US$7.5 million in three equal monthly instalments commencing on 31 May 2000, subject to the following clause of the Share Purchase Agreement:

"3(d) The parties acknowledge and agree that [ADVC] shall use its best efforts to raise the Cash Portion of the Purchase Price through a public or private offering of securities. [ACT] hereby agrees to extend the monthly installment payment deadlines, without interest, to allow [ADVC] to raise the Cash Portion of the Purchase Price. The parties acknowledge and agree that upon raising funds pursuant to a public or private offering of securities, [ADVC] shall only be obligated to transfer to [ACT] as part of the Cash Portion of the Purchase Price those funds remaining after deduction of reserves needed for current operations, working capital and the development and expansion of its operations and the operations of its subsidiaries, as determined by its Board of Directors."

By a Memorandum of Understanding dated 7 September 2000 between ADVC and ACT, the parties recorded their objective that ACT transfer to ADVC "all of the intellectual property rights in SpectruCell" so that ADVC might "take advantage of venture capital investors willing to invest in and commercialise SpectruCell in the USA market place, and globally." The proposed purchase price was US$125 million.

Again, Mr Prouty on behalf of ADVC expressed reservations about the way in which the Memorandum of Understanding had come into existence. He said that a few minutes prior to a meeting of the Board of Directors of ADVC on 10 September 2001, Mr May presented to them the Memorandum of Understanding, which he had signed on behalf of ADVC. Mr May asked the Board to ratify the Memorandum of Understanding. The directors expressed concern about this process, in particular about their inability to ascertain whether the nominated price was fair. Eventually, after much discussion, the Board passed a resolution approving of the purchase set out in the Memorandum of Understanding subject to the conditions contained therein and subject to the Board of Directors and shareholders approving the final terms of a formal agreement.

On 30 November 2001, Mr May was removed from his position as Executive Chairman and Chief Executive Officer of ADVC. He resigned as a director of ADVC on 14 March 2002. He remained a director and chairman of ACT. Mr May's company Global Communications Pty Ltd ("Global Communications") owns 70% of the shares in ACT. Evidence was put before me which showed that ACT and Mr May had been selling down their shareholding in ADVC. However, Mr May said that he had not sold any of his shareholding in ADVC since 30 November 2001. He said that in late 1999, some of his shareholding had been gifted to friends, family and business associates. At 31 March 2002, ACT held 10% of the shares in ADVC and Mr May approximately 9%.

In late 2001, ACT was in a precarious financial situation. By letter dated 11 December 2001, Mr Shearer on behalf of ACT sought further funding from ADVC by payment of the balance outstanding for the 200 shares. ACT claimed that the amount then payable was approximately US$3.4 million, whereas ADVC said that only US$1.79 million was due at some time in the future when the cash was not needed for its own "current operations." In his letter, Mr Shearer said that ACT would accept payment of the lesser figure "on a without prejudice basis." He emphasised that ACT required "a significant contribution" from ADVC "immediately and over the next two months to meet payroll, ongoing expenses as well as significant creditor payments." The spreadsheets attached to the letter revealed that ACT's creditors totalled over $7 million, including over $3 million owed to RMIT and over $1 million to the Australian Tax Office.

In the dispute which then arose between ADVC and ACT, ACT allegedly threatened to exercise a lien over, or to forfeit, the 200 shares. This threat resulted in this proceeding being commenced. ADVC applied for an interlocutory injunction to restrain ACT taking action against the 200 shares. After several adjourned hearings, on 20 February 2002, ACT gave an undertaking to the Court that until the hearing and determination of the proceeding, it would:

"refrain from (whether by itself or by its employees, agents, attorneys, or any of them or otherwise) transferring, dealing with, charging, diminishing, mortgaging, assigning or disposing of the 200 shares in the capital of the first defendant registered in the name of the plaintiff."

On 26 March 2002, ACT issued a press release stating that ACT was acquiring an equity interest in EntrePort Corporation ("ENP") and establishing an operational base in the USA through its link with ENP. The press release continued:

"ENP will provide [ACT] with an experienced corporate management team to assist in establishing an operational base for [ACT] in the USA, especially in regard to marketing assistance for the implementation and distribution of the SpectruCell technology. Perhaps most importantly it will enable ACT to supply the locally based support for organisation involved in the distribution of SpectruCell, and several evolving strategic relationships."

ENP also issued a press release on 26 March 2002 which stated, in part, that under the terms of the proposed transaction ENP would "issue shares of its common stock representing approximately 90% of the fully-diluted shares" to ACT and that ACT would deliver 240 shares "representing approximately 20% of the issued and outstanding ordinary stock" to ENP. It further stated that ENP would change its name to "Advanced Communications USA Inc."

These two press releases caused ADVC to be concerned that ACT and ENP had entered into, or were about to enter into, an agreement which appeared to breach ADVC's exclusive right to distribute the SpectruCell technology in the United States of America granted to it by ACT under the Licence and Distribution Agreement and that the delivery of the 240 shares had breached, or would breach, the Constitution of ACT which gave certain pre-emptive rights to existing shareholders, including ADVC, in respect of the issue and transfer of shares.

Subsequently, ADVC obtained access to the text of an Acquisition Agreement between ENP and ACT apparently made in March 2002. In the Recitals to that Agreement it is stated, in part:

"Whereas, ACT is in the process of finalizing a contract with a major US Based carrier for the implementation of a field trial of the Spectracell [sic] technology, and an extensive joint venture relationship with one of the largest semi-conductor companies in the USA to market Spectracell [sic], and involved in several other potential relationships with US based companies; and Whereas, ACT now plans to locate and establish a base of operations in the United States for the continued development, marketing and distribution of the SpectruCell product in the USA and Canada. Such base of operations will involve the establishment of engineering facilities, research and development, sales, marketing and distribution; and Whereas, ACT plans to make the US based operating company the worldwide headquarters for the continued development and global distribution of the SpectruCell technology."

The Acquisition Agreement provided, in part, that ACT made a number of representations, including clause 6(d) which stated as follows:

"CAPITALIZATION. The authorised capital stock of ACT consists of 1,000,000 shares of common stock, par value $1.00 per share and 200 shares of preferred stock. As of the date of this Agreement, ACT has 1,000 shares of common stock issued and outstanding [and] 200 shares of preferred stock issued and outstanding. No shares have otherwise been registered under Australian laws ..."

On behalf of ACT, Mr Shearer, in his affidavits of 26 April 2002, denied that the recitals referred to above indicated a breach of the Distribution Agreement. He said that they simply stated that ACT sought to locate and establish a base of operations in the USA for the continued development of the Product "of which the plaintiff is an integral part of the basis of those operations". Mr Shearer maintained that ACT at all times intended "to honour" the Licence and Distribution Agreement. He said ACT was not seeking to appoint ENP as a distributor in competition with ADVC and in breach of ACT's obligations under the Distribution Agreement. Mr Shearer continued:

"The role of the [ENP] transaction is for [ACT] to acquire a currently operational business and management team that will become [ACT's] US office and US base of operations to assist with the further development of SpectruCell with [ACT's] US based technical development partners. Upon completion of the SpectruCell product, this office may also be used to assist licence distributors, globally with the marketing of the SpectruCell product. At the conclusion of the transaction [ACT] will own 90% of the stock of [ENP] and the name will be changed to reflect its ownership by [ACT]."

In respect of the allegation about ACT breaching its Constitution, Mr Shearer referred to a letter dated 16 April 2002 from ACT's solicitors, Phillips Fox, to ADVC's solicitors, Minter Ellison. That letter stated, in part:

"Our clients [sic] have instructed that it has neither issued or [sic] transferred shares in ACT to [ENP]. Further, ACT has advised that if the Agreement contemplates any such allocation or transfer of shares to [ENP] that it intends to fully comply with the rules of the Constitution."

Although Mr Shearer referred in his affidavit to 1,000 issued and outstanding ordinary shares in the capital of ACT, no explanation was given about the reference in the Acquisition Agreement to "200 shares of preferred stock issued and outstanding" in addition to the 1,000 ordinary shares. Nor did the wording of the Acquisition Agreement clarify matters because clause 2(d) provided that:

"ACT or its shareholders shall forward to Cutler Law Group in escrow an aggregate of 240 shares of common stock of ACT ... representing approximately 20% of the issued and outstanding common stock of ACT, to be delivered to ENP at the closing ..."

The hearing of the first application took place on 26 April 2002. Mr Bornstein of counsel, who appeared for ACT, announced that he had instructions to undertake to the Court that ACT would abide by the terms of both the Licence and Distribution Agreement and its Constitution. This was not satisfactory to Mr Keen, who appeared for ADVC, because the parties clearly disagreed about what this required. He sought a wide ranging injunction specifically directed at restraining ACT from appointing ENP or any other person to distribute, market or sell the Product in the Exclusive Territory (paragraph 1 of the summons), from granting any licence to ENP or any other person to use or sell the Product in the Exclusive Territory (paragraph 2 of the summons), from itself distributing the Product in the Exclusive Territory (paragraph 3 of the summons) and from authorising the transfer of any share in its capital to any person (paragraph 4 of the summons).

Mr Keen submitted that ADVC's primary claim, so far as the application was concerned, was for specific performance of the Licence and Distribution Agreement, and in particular the plaintiff's exclusive right to market and distribute the SpectruCell Technology within the USA and the North and South American continents. He submitted that there was a serious question to be tried as to whether ACT had threatened to breach, or had in fact breached, that exclusive right of ADVC by entering into the Acquisition Agreement with ENP and accordingly sought an interlocutory injunction restraining ACT from appointing ENP or any other person to distribute, market or sell the Product in the Exclusive Territory.

Mr Bornstein submitted that there was no evidence of a present threat by ACT to breach the Licence and Distribution Agreement, particularly given Mr Shearer's sworn statements. He submitted that there was nothing in the Acquisition Agreement itself appointing ENP as ACT's distributor. He also submitted that the wording of the injunctions sought by ADVC was too broad. In particular, he objected to the use of the word "market" which, he submitted, meant different things to different people and which, he pointed out, was not mentioned in the appointment clause. Clause 3.1 of the Licence and Distribution Agreement only appointed ADVC to distribute the Product and, by clause 3.2, ACT agreed not to appoint any other person to distribute the Product in the Exclusive Territory, without the prior written consent of ADVC.

In response, Mr Keen drew my attention to the precise wording of the Licence and Distribution Agreement which required ADVC to use "its best endeavours ... to promote and market the Product ..." (clause 6.1.1), "to inform ACT of any matter which may affect or assist the promotion and marketing of the Product in the Territory" (clause 6.1.5) and "to furnish to ACT ... any information sought by ACT regarding the promotion and distribution of the Product in the Territory" (clause 6.1.7). He submitted that this showed that "promotion and marketing" was part of ADVC's exclusive duties in the Exclusive Territory. Therefore, there was no reason to delete the word "market" from the proposed form of injunction. Moreover, Mr Keen submitted that ACT had not answered ADVC's concerns raised by the references in the recitals to the Acquisition Agreement to ACT being involved in "marketing and distribution" activities either itself or in joint venture relationships with other companies in the USA and Canada.

ADVC also sought an interlocutory injunction restraining ACT from:

"(a) granting any licence to EntrePort or any other person: (i) to reproduce, advertise and publicise the names, photographs and likenesses of any authors, producers, creators or other persons associated with the development or production of the Product; (ii) to display the Product to any prospective purchaser of the Product for end use, in the Exclusive Territory; (b) granting any licence to any person who purchases the Product in the Exclusive Territory for end use ('End User') to use the Software in conjunction with the Product, except at the request of the plaintiff; (c) granting any licence to EntrePort or any other person to: (i) use the Software; (ii) sub-licence the use of the Software to an End User; (iii) reproduce the Software for the purpose of sub-licensing the use of the Software to an End User, in conjunction with the Product for or in relation to the Exclusive Territory, except to the plaintiff; (d) delivering any promotional material about the Product to EntrePort or any other person (except the plaintiff) to assist EntrePort or any other person in the distribution of the Product in the Exclusive Territory; (e) selling, supplying or otherwise providing in any manner whatsoever Product to EntrePort or any other person, except the plaintiff, for use in any manner whatsoever in the Exclusive Territory."

Mr Keen submitted that this injunction was required in order to provide additional protection for ADVC pending the final hearing, particularly if ACT had already appointed another distributor of the Product in the Exclusive Territory. This would prevent ACT from assisting that distributor to perform its obligations under the appointment. It was not clear on the material before the Court whether or not ENP, for example, had been appointed a distributor. Mr Keen submitted that the specific restraints sought came from the terms of the Licence and Distribution Agreement. Thus, paragraph 2(a)(i) of the summons came from clause 3.3.1 of the Licence and Distribution Agreement, paragraph 2(a)(ii) from clause 3.3.2, paragraph 2(b) from clause 4.1, paragraph 2(c) from clause 4.2, paragraph 2(d) from clause 5.1 and paragraph 2(e) from clause 5.2.

Mr Bornstein again submitted that this injunction was unjustified and unnecessary. He further submitted that it went beyond ADVC's undoubted right of exclusivity in distributing the Product in the Exclusive Territory. There was nothing in the Licence and Distribution Agreement, he submitted, which prevented ACT from itself promoting the Product, or appointing some other person to promote the Product, in the Exclusive Territory.

This led into the next area of dispute which was whether ADVC was entitled to an interlocutory injunction restraining ACT from itself marketing, distributing or selling the Product in the Exclusive Territory. In particular, this involved the question of whether or not the Licence and Distribution Agreement extended to military applications of the technology. It appeared that ADVC and ACT were both negotiating with Lockheed Martin Corporation ("Lockheed Martin") and were each maintaining that the other should not be involved in those negotiations. ADVC argued that ACT had no right itself to distribute the Product in any form in the Exclusive Territory. ACT argued that it had the right to market the Product anywhere in the world and that, in any event, the Licence and Distribution Agreement did not extend to cover military applications because military applications involved a different, yet to be finally developed, technology. ACT said that it wanted to be able to deal directly with Lockheed Martin so that it could incorporate the new technology in tenders for US military contracts.

At the end of the hearing of the first application, I indicated that I was prepared to grant ADVC some immediate limited relief but that I wanted to consider my decision on the broader application. I held that there was a serious question to be tried as to whether ACT had, by entering into the Acquisition Agreement with ENP, breached or threatened to breach the exclusive right of ADVC to distribute the Product in the Exclusive Territory. The content of the press releases suggested to me that it was arguable that ENP's role was to be more than an operational base for ACT in the USA. In my opinion, the balance of convenience favoured restraining ACT from appointing ENP to distribute the Product in the Exclusive Territory. However, I was not prepared, at that stage, to include the word "market" in the wording of the injunction, given Mr Bornstein's submission on this point, which I wished to consider further. During the course of these discussions, Mr Bornstein agreed to give an undertaking on behalf of ACT that:

"the first defendant has not appointed, and will not appoint until the determination of the plaintiff's summons filed on 23 April 2002 or further order, any person to distribute the Product (as defined hereafter) in the Exclusive Territory (as defined hereafter), other than the plaintiff."

"Until the determination of the plaintiff's summons filed on 23 April 2002 or further order, the first defendant, whether by itself or by its officers, employees, agents, attorneys, or any of them or otherwise, be restrained from appointing or agreeing to appoint in any way whatsoever EntrePort Corporation or any other person to distribute, sell, supply, offer to sell or supply or otherwise deal in or with the wireless or terrestrial, multi-protocols communication network technology known as Spectrucell ('Product') (incorporating the software which enables the Product to perform to its specifications, consisting of a set of instructions or statements in machine readable medium, and any enhancement or modification of that software ('Software') and related hardware performing part of the base station controller which processes and transmits mobile communications protocols such as AMPS, CDMA, TDMA, GSM, W-CDMA, UMTS, 3G & Voice IP) in the United States of America, the North American and South American Continents ('Exclusive Territory') without the prior written consent of the plaintiff."

Having considered the matter further, it seems to me that ADVC is entitled to have the word "market" included in the wording of the above injunction. I am now satisfied that "marketing" the Product in the Exclusive Territory was part of ADVC's duties under the Licence and Distribution Agreement. Accordingly, it follows that the above injunction should also include a restraint on ACT appointing ENP or any other person to "market" the Product in the Exclusive Territory. I am also satisfied that it is appropriate to grant the interlocutory injunctions referred to in paragraph 24 above in order to provide additional protection for ADVC. Finally, I have reached the conclusion that ADVC is entitled to an interlocutory injunction restraining ACT from itself marketing, distributing or selling the Product in the Exclusive Territory. In my opinion, the balance of convenience favours allowing ADVC to operate in the Exclusive Territory without any interference or disruption from ACT, pending the resolution of the proper construction of the Licence and Distribution agreement. Whether this should extend to military applications of the technology is dealt with below. It is important to note that the above conclusions are subject to the outcome of the second application involving the further dispute.

The remaining issue in dispute between the parties in the first application was the allegation that ACT had breached, or was threatening to breach, its Constitution in respect of the 240 shares promised by ACT to ENP. Mr Keen submitted that if the 240 shares had been transferred by ACT to ENP, or if it were proposed that that course be followed, then ACT had breached or would breach clause 13.2.2 of its Constitution. That clause provides as follows:

"Before the Directors authorise transfer of any share or shares the share or shares must first have been offered to all other shareholders at a price which represents a fair market price of the shares and a period of twenty-one days allowed to elapse. In the event of a dispute concerning whether or not the price proposed is a fair market price, the President of the Institute of Valuers and Land Economists or the equivalent of such person at the time of the dispute shall upon the request of the person seeking to sell the shares or the person seeking to acquire the shares be asked to nominate a person who shall determine a fair market price for the shares and the determination of such person shall be final and binding upon all Members of the Company."

Mr Bornstein stated that he had no instructions on this matter other than that ACT intended to comply with its Constitution. He pointed out that the directors of ACT could issue and allot the 240 shares to ENP (clauses 1.2.1 and 7.1 of the Constitution). He noted that clause 7.4 gave existing shareholders certain pre-emptive rights because it provided as follows:

"Before the Company may issue shares of a particular class the Directors must first offer them to the existing holders of shares of that class. As far as may be practicable the number of shares offered to each shareholder must be in proportion to the number of shares of that class that each shareholder already holds."

However, he submitted that this was of little importance because under clause 7.7 of the Constitution:

"The Company may by resolution passed at a general meeting authorise the Directors to make a particular issue of shares without complying with Rule 7.4."

Mr Keen submitted that there must be some restriction read into clause 7.7 as otherwise it would totally negate the protection afforded by clause 7.4. In the end, however, he stated that if ACT acted under clause 7.7, ADVC's remedy would probably be by way of an oppression application. He therefore confined his application to a transfer of shares in breach of clause 13.2.2

During the course of these discussions, Mr Bornstein also undertook on behalf of ACT that:

"until the determination of the plaintiff's summons filed on 23 April 2002 or further order, the first defendant and the second defendant will not register or in any manner authorise or approve any transfer of shares in the capital of the first defendant to EntrePort Corporation or any other person unless Rule 13.2.2 of the Constitution of the first defendant has been complied with or otherwise satisfied."

This enabled me to have some time to consider the arguments advanced about this aspect of the first application.

I have now reached the conclusion that the unexplained situation involving the 240 shares promised by ACT to ENP does justify the tentative view that ACT had breached, or was threatening to breach, clause 13.2.2 of its Constitution by transferring the 240 shares to ENP without first offering them "to all other shareholders at a price which represents a fair market price of the shares." In all the circumstances, I consider that it is appropriate to grant ADVC the injunction it seeks in respect of the transfer to ENP of any shares in ACT. This conclusion is not affected by the outcome of the second application.

As previously stated, before I was in a position to deliver judgment in respect of the first application, events took an unusual turn. On 30 April 2002, Mr Jason Webster, the Manager of Corporate Communications at ADVC sent an email to Mr Tom Howitt of Australon Limited ("Australon"). It is not necessary to set out the email in full. Its flavour can be gauged from the following quotations:

"What would you say to a plan whereby [ADVC] or RMIT [a substantial creditor of ACT] (possibly in conjunction) force [ACT] into bankruptcy potentially allowing Australon to purchase both the stock and SpectruCell for around $7 million. ... Please let me know what you think as we are ready to act and have resources such as Minter Ellison's bankruptcy team and friendly administrators such as Stockford available."

Australon was a company in which Mr May's company Global Communications held a 70% interest. Not surprisingly, Mr Webster's email was therefore quickly brought to the attention of ACT, in fact on the day it was sent.

On 7 May 2002, ACT served a Notice of Breach, and shortly thereafter a Termination Notice, on ADVC. The Notice of Breach read as follows:

"1. Advanced Communications Technologies (Australia) Pty Ltd (ACN 086 856 617) ('ACT') and Advanced Communications Technologies Inc ('ADVC') are parties to a Licence and Distribution Agreement made on 7 May 2000 ('the Agreement'). 2. Pursuant to the Agreement, ACT appointed, on the terms and conditions of the Agreement, ADVC to distribute the Product (as defined in the Agreement) in the Territory (as defined in the Agreement). 3. Pursuant to the terms of the Agreement, ADVC, amongst other things, is required to use its best endeavours to: '6.1.6 - to act in good faith at all times towards ACT and provide assistance and co-operation as practicable on request by ACT; 6.1.9 - to consult on an ongoing basis with ACT with respect to significant aspects of the distribution of the product.' TAKE NOTICE: 1. ADVC has breached the provisions of clause 6.1.6 and 6.1.9 of the Agreement in that it has failed to act in good faith toward ACT by, inter alia, seeking to force ACT into bankruptcy in order to obtain the total rights to the 'SpectruCell' technology and further has failed to discuss with ACT details of communications and proposed contracts with Lockheed Martin. 2. As the breach of clause 6.1.6 of the Agreement is incapable of being rectified, ACT intends to exercise its rights to terminate the Agreement after 9.15 am Tuesday, 7 May 2002 (California time). 3. This Notice is without prejudice to the rights of ACT to rely on any other breach by ADVC of the Agreement."

"1. Advanced Communications Technologies (Australia) Pty Ltd (ACN 086 856 617) ('ACT') and Advanced Communications Technologies Inc ('ADVC') are parties to a Licence and Distribution Agreement made on 7 May 2000 ('the Agreement'). 2. By Notice dated 7 May 2002 ('the Notice'), ACT notified ADVC of a breach of the Agreement and of ACT's intention to terminate the Agreement. 3. The breaches specified in the Notice have not been rectified. 4. In accordance with clause 17.1.2 of the Agreement, ACT hereby immediately terminates the Agreement."

In his affidavit sworn 8 May 2002, Mr Black, the Chief Operating Officer of ACT, said that, from a reading of Mr Webster's email, it was apparent that ADVC was "endeavouring to affect the financial position of ACT contrary to its obligations and responsibilities under the Licence and Distribution Agreement." Accordingly, he said, ACT terminated the Licence and Distribution Agreement based on the failure of ADVC to act in good faith pursuant to clauses 6.1.6 and 6.1.9. Mr Keen criticised this statement because, he submitted, Mr Black knew when he made it that Mr Howitt had already indicated that Australon would not be taking up Mr Webster's suggestion.

On 8 May 2002, an urgent application was made to me by ADVC to restrain ACT from acting upon or taking any further steps in reliance upon these Notices. Pending full argument on the application, I made the following order:

"Until 4.15 p.m. on Tuesday, 14 May 2002 or further order, the first defendant, whether by itself or by its officers, employees, agents, attorneys, or any of them or otherwise, be restrained from acting upon or taking any further steps in reliance upon the document entitled 'notice of breach' dated 7 May 2002 from the first defendant or the document entitled 'termination notice' dated 7 May 2002 from the first defendant each sent to the plaintiff (a copy of which forms part of exhibit 'EAS-40' referred to in the affidavit of Evan Anthony Stents sworn on 8 May 2002 filed herein) including without limiting the generality of the foregoing from itself distributing, selling or supplying or offering to sell or supply in any manner whatsoever or otherwise deal in or with the wireless or terrestrial, multi-protocols communication network technology known as SpectruCell ('Product') (incorporating the software which enables the Product to perform to its specifications, consisting of a set of instructions or statements in machine readable medium, and any enhancement or modification of that software ('Software') and related hardware performing part of the base station controller which processes and transmits mobile communications protocols such as AMPS, CDMA, TDMA, GSM,

W-CDMA, UMTS, 3G & Voice IP) in the United States of America, the North American and South American Continents ('Exclusive Territory') without the prior written consent of the plaintiff."

The operation of this order was subsequently extended to 27 May 2002 following an outbreak of a rash of subpoenas and notices to produce.

In his affidavit sworn 10 May 2002, Mr Webster explained that he had been employed by ACT between November 2000 and December 2001 as the Manager of Corporate Communications and that he then became the Director of Corporate Communications at ADVC. He said that based on his involvement with both companies, he formed the view that "Mr May's conduct was ruining the prospects of both companies" and that he thought ADVC might be better able to protect its investment in ACT and "its rights to market and distribute SpectruCell" if ACT went into bankruptcy and some type of administrator was appointed. Mr Webster said that, apart from mentioning his idea of sounding out Australon about the possibility of forcing ACT into bankruptcy to Mr Gary Ivaska, the former Chief Executive Officer of ADVC on 29 April 2002, he did not discuss his idea with any ADVC director or officer and did not request permission from any ADVC director or officer to approach Australon with his idea. If Australon had responded favourably to his email he intended to bring it to the attention of the Board of Directors of ADVC for its consideration. Mr Ivaska's employment with ADVC was formally terminated on 30 April 2002, but he had been replaced as Chief Executive Officer of ADVC in March 2002. His response to Mr Webster was said to be: "Sounds interesting. Nothing to do with me. Good luck."

Mr Prouty denied, in his affidavit sworn 10 May 2002, that he or any director of ADVC authorised or in any way approved of Mr Webster sending the email to Mr Howitt. None of the directors of ADVC had any prior knowledge of the email. Mr Prouty did, however, clearly state that the directors of ADVC had discussed amongst themselves what effect an insolvency administration would have on ACT when they learnt that RMIT had served a statutory demand on ACT. He also stated that he had openly discussed with officers of ACT, ADVC's view that Mr May's conduct was prejudicial to its interests and that it therefore wanted some independent person appointed to control ACT. He denied, however, that ADVC had taken any step to force ACT into any form of insolvency administration.

This denial was repeated by Mr Prouty in his affidavit sworn 23 May 2002. He also stated that there had been open discussions between ADVC and ACT and "arrangements in place for sometime" for ADVC to purchase the SpectruCell technology from ACT. This had culminated in the appointment of the accountants, Stockford Limited ("Stockford"), to undertake a due diligence of ACT for the purpose of ADVC acquiring the SpectruCell technology. Mr Prouty said that because of the increasing concerns by ADVC over the financial position of ACT, Stockford was also briefed by ADVC to ascertain as best it could the financial position of ACT and to provide general advice to ADVC on the insolvency process in Australia. This led to discussions about the possible appointment of an administrator and negotiations over various ways of resolving the financial difficulties confronting the parties. The due diligence investigation has never taken place because agreement could not be reached about the terms of a confidentiality agreement to be entered into by the parties.

However, in his first affidavit sworn 24 May 2002, Mr Black referred to a number of items of correspondence between representatives of ADVC, ACT, Australon and Stockford. Based on this correspondence, Black asserted as follows:

"In my opinion the strategy and plan of [ADVC] was to restrict funding to [ACT] and the SpectruCell Project from a date to be ascertained but evidently prior to 11 December 2001 based on the correspondence exhibited. The purpose of restricting funding to [ACT] appears to be an attempt to force [ACT] into administration to facilitate the purchase by an entity of the intellectual property, assets and selected liabilities of [ACT] and the SpectruCell project at a reduced price. ... The assertion by [ACT] that [ADVC] has conspired to place [ACT] into administration is in my opinion strengthened by the involvement of Australon Ltd. ... In my opinion the documentation reveals that Allen Roberts was holding secret talks with Randall Prouty and declined to inform [ACT] of those discussions even when directly requested ... This policy of holding secret talks and working on a proposal to put [ACT] into administration/liquidation appears to have been reversed when [ACT] found out about the conduct of Australon and [ADVC]."

The hearing of the second application took place on 27 May 2002. The issues before the Court on this occasion were whether there should be an interlocutory injunction restraining ACT from acting upon or taking any further steps in reliance upon the Termination Notice it had sent on 7 May 2002; what effect the purported termination of the Licence and Distribution Agreement by ACT had on the matters raised in the first application and insofar as it remained relevant, further argument on the question of whether the Licence and Distribution Agreement included military applications or uses of the technology. A subsidiary issue raised by ACT was whether the undertaking as to damages, which would have to be given by ADVC if any injunctive relief were to be granted, would give any protection to ACT, because of the poor financial position of ADVC.

The issues calling for my determination were considerably reduced because Mr Burnside QC, who appeared with Mr Gronow for ACT on this occasion, accepted that there were at least two serious questions to be tried. One serious question was whether the Licence and Distribution Agreement had been brought to an end either by virtue of the two Notices operating according to the tenor of the provisions of the Licence and Distribution Agreement they referred to, or because of a repudiation by the conduct of ADVC which had been accepted by ACT by it serving the Notice terminating the Licence and Distribution Agreement. The other serious question was whether the Licence and Distribution Agreement was applicable to military application of the product. Mr Burnside submitted that the Court was not in a position to form even a tentative view about which side was likely to prevail on either of the serious questions.

Mr Keen, who again appeared for ADVC, invited the Court, in his written outline of submissions, to declare that the Termination Notice served by ACT on 7 May 2002 did not validly terminate the Licence and Distribution Agreement and advanced detailed arguments in support of this conclusion. However, at the end of the day, I did not understand him to be submitting other than that the question of the validity of the Termination Notice was a serious question to be tried and that ADVC had a strong case in this respect. Therefore, I do not need to examine the lengthy submissions about the invalidity of the two Notices served by ACT. In any event, I accept Mr Burnside's submission that, at this stage, I can only form tentative views about the likely outcomes of these complicated and difficult issues. This conclusion also means that I am not required to embark upon a consideration of the various discussions between ADVC and ACT, Australon, and the firm of accountants, Stockfords, with respect to the financial position of ACT and the future ownership of the SpectruCell technology. Also, I do not need to decide, at this stage, whether the sending of the email by Mr Webster was simply a frolic of his own or was a part of the conspiracy between ADVC and others in which ACT now alleges ADVC was engaged.

Although Mr Keen submitted that there were other serious questions to be tried, it is unnecessary for me to consider them, given Mr Burnside's concession that the first limb of a successful application for an interlocutory injunction had been satisfied.[1]

The question thus became one of where the balance of convenience lay. Mr Keen's main submission was that the interlocutory injunction was necessary in order to preserve for ADVC the ability to argue at the trial that it was entitled to a decree of specific performance of the Licence and Distribution Agreement.[2] Alternatively, he submitted that a Court might grant at the trial an injunction restraining breach by ACT of a negative stipulation, such as, not itself to market or distribute, or to appoint another person to market or distribute, the Product in the Exclusive Territory.[3] But unless ACT was prevented from acting upon the Termination Notice pending the trial, there would be no Licence and Distribution Agreement in existence at the trial and these questions would never arise. Thus, Mr Keen submitted, the balance of convenience clearly favoured the grant of an interlocutory injunction.

Mr Keen also submitted that it was no answer to say that ADVC could accept the repudiation of the Licence and Distribution Agreement and sue for damages. He submitted that the proper test in those circumstances was not whether damages would provide ADVC with an adequate remedy, but whether it was just, in all the circumstances, that it should be confined to its remedy in damages. Again, without an interlocutory injunction, this question would not arise at the trial.

In any event, Mr Keen submitted that damages would not be an adequate remedy because there were doubts about the solvency of ACT and there would be severe difficulties in calculating what loss ADVC had suffered, as a result of the termination of the Licence and Distribution Agreement prior to ACT supplying any product to ADVC and the terms upon which ACT appointed the new distributor possibly being completely different to the terms of the Licence and Distribution Agreement.

Mr Burnside submitted that the status quo sought to be preserved by ADVC was unusual in that ADVC had no business on foot yet and had not performed any of its obligations under the Licence and Distribution Agreement to market and distribute the product because it did not have any promotional material to work with or indeed any product, as it was still at least a year away from completion. Any performance was, therefore, still in the future. Mr Burnside said that this meant that, if the Licence and Distribution Agreement were terminated, ADVC could pursue other lines of business without suffering any disadvantage pending the trial, given that ACT had undertaken to keep an account of any sales made.

The main thrust of Mr Burnside's submission was that an order for specific performance of the Licence and Distribution Agreement was most unlikely to be granted at trial and therefore that there was no prejudice to ADVC in not granting an interlocutory injunction. He submitted that the licence granted to ADVC was a mere contractual licence not coupled with, or granted in aid of, an interest in property. As such, he said, it was revocable at any time at the will of ACT even if there was an express or implied provision not to revoke. Therefore, if the Licence and Distribution Agreement had been wrongfully terminated, which ACT denied, damages were the appropriate remedy because the termination was effective even if wrongful.[4]

There were other reasons why specific performance was said to be unlikely to be granted at trial. One was because the Licence and Distribution Agreement did not spell out with any certainty the financial arrangements between the parties. The "Commission" which ADVC was entitled to retain was said to mean:

"an amount to be agreed between the parties, having regard to industry standards after the final pricing for the Product is established."

Another reason was that, according to Mr Burnside, the relationship between the parties now was such as to make a continued commercial relationship unthinkable. He submitted that the parties had clearly fallen out, and that because of ADVC's past conduct, ACT no longer trusted or wished to deal with it.

I have reached the conclusion that, in all the circumstances, the balance of convenience favours restraining ACT from acting on or relying upon the Notice of Termination. Whilst I recognise the strength of Mr Burnside's submissions in respect of the likely orders to be made at trial, it seems to me that it would be quite unfair to ADVC, at this stage, to restrict its possible relief at trial to a claim for damages only, which will be the inevitable result if no interlocutory injunction is granted. The opportunity for a range of relief is the status quo which deserves preservation by the interlocutory injunction. Further, given the fact that the Product is apparently still some time from completion ("12 to 18 months from the final product stage", according to Mr May's first affidavit sworn 27 May 2002), I do not consider that there should be insuperable difficulties in the parties co-existing pending the trial. After all, there is a very real concurrence of interest between them. It is in both of their interests to see that the proper promotion and marketing steps are taken in the Exclusive Territory pending the Product becoming available for distribution.

This means that, subject to the question of the worth of the undertaking as to damages, there should be orders for the interlocutory injunctions which I have decided are appropriate in respect of the first application as well as an interlocutory injunction restraining ACT from acting upon or taking any further steps in reliance upon the Termination Notice.

I turn then to the question of whether the undertaking as to damages which would have to be given by ADVC is worthless because of the poor financial position of ADVC. Mr Burnside submitted that, as a foreign plaintiff without any assets in the jurisdiction, the onus was on ADVC to produce evidence as to its capacity to meet an undertaking for damages if called upon to do so.[5] He submitted that ADVC was clearly in an extremely poor financial position, and described the material exhibited to Mr Black's second affidavit sworn 24 May 2002 as showing that ADVC had "a deficiency of working capital, ... a deficiency of assets and ... a deficiency of shareholders' funds." ADVC seemed to be spending a lot of money without the possibility of any income for at least 12 months. Moreover, the US$30 million Equity line of Credit facility provided to ADVC by Cornell Capital Partners was insufficient because of the low share price of ADVC's shares. Whatever the precise financial position of ADVC I am satisfied that, apart from one matter, it would have been appropriate to require ADVC to provide security for its undertaking.

The saving grace for ADVC, in my opinion, is the 200 shares it holds in ACT. In response to Mr Keen's suggestion that these shares were sufficient assets within the jurisdiction for the purpose of supporting the undertaking as to damages, Mr Burnside submitted that, as the ownership of those shares was disputed and was one of the issues to be tried in the proceeding, it would be quite inappropriate for the shares to be relied on as security for the injunction. I do not agree with the premise of this submission. The dispute concerning the shares, as I understand it, is whether ACT was entitled to exercise a lien over those shares or forfeit and sell them because ADVC had not paid the outstanding balance due in respect of them. But in either case, after any exercise of the power, the net proceeds remaining after payment of the amount owed to the company belongs to the shareholder (see clauses 11.5 and 15.5 of the Constitution of ACT). Thus, the shares are assets of ADVC within the jurisdiction. What they might be worth is another question. However, it seems to me that ACT is only likely to suffer a loss, and therefore the undertaking as to damages is only likely to be called on, if the SpectruCell technology is successfully developed in the near future. In that event, the shares are likely to become extremely valuable, and although it is true that ACT may be entitled to deduct the $3.4 million it claims it is owed before ADVC has any rights to the proceeds of a sale of the shares, this should still leave a considerable amount securing ACT's possible enforcement of the undertaking as to damages. If the SpectruCell technology is not successfully developed, then it is difficult, in my opinion, to see what damages ACT might have suffered as a result of being restrained, pending the trial, from terminating the Licence and Distribution Agreement with ADVC.

In any event, I consider that ADVC should not be required to give security for its undertaking as to damages, on the ground that there are these 200 shares which it holds in ACT.

Military Applications of the SpectruCell Technology

The one remaining issue is whether the interlocutory injunctions should apply to military applications or uses of the SpectruCell technology. In his affidavit, Mr Cleary set out the technical basis for ACT's argument that the SpectruCell technology the subject of the Licence and Distribution Agreement was only commercial in use and had no relevance to military applications or uses. However, as Mr Burnside said, I am in no position at this stage to reach any conclusion on this issue. The only question I have to decide is where the balance of convenience lies.

In his affidavit sworn 23 May 2002, Mr Prouty referred to the earlier submission by ACT's counsel that the Licence and Distribution Agreement did not apply to military applications of the SpectruCell technology. He deposed that this position was inconsistent with the business plans produced by ACT and ADVC as well as other documents produced by ADVC "whilst Roger May had control" of it, and exhibited or quoted from documents supporting that claim. Mr Prouty also set out the history of ADVC's contact with Lockheed Martin regarding its interest in using the SpectruCell technology for a long term mission system project for the US military, including the fact that Lockheed Martin and ADVC had executed a confidentiality agreement, and that Lockheed Martin had told him that it would only deal with a United States registered corporation on this US military project.

By letter dated 1 May 2002, Mr Black wrote to Mr Prouty and Mr Wil Roche, another director of ADVC, requesting ADVC to stop all contact with Lockheed Martin as its continued involvement was damaging or adversely affecting "this opportunity" for ACT to develop and supply a military product to Lockheed Martin in the Exclusive Territory. However, given that Mr May in his first affidavit sworn 27 May 2002 stated that "it is extremely difficult, if not impossible, for a foreign corporation to contract directly to [sic] a major US military supplier to develop a major component of the US military product" and that "it was the intention" of ACT to use ENP "to provide this contracting vehicle", I consider that the balance of convenience clearly favours extending the interlocutory injunctions so that they include military applications of the SpectruCell technology. It seems to me that it would be confusing and fraught with difficulty to allow ACT to use ENP as its agent in the Exclusive Territory for military but not commercial applications pending the trial. It is preferable, in my opinion, that all activity on behalf of ACT in the Exclusive Territory pending the trial be carried on by ADVC.

I record that after I reserved my decision on the second application I was advised by ACT's solicitors that their client went into voluntary administration on 18 July 2002. Nevertheless, the parties agreed that, although the proceeding, insofar as it related to ACT, was stayed pursuant to s.440D(1) of the Corporations Act 2001, I was still able to deliver judgment.

Subject to hearing from counsel the orders I would propose are as follows:

1. Until the hearing and determination of the proceeding or further order, the first defendant, whether by itself or by its officers, employees, agents, attorneys, or any of them or howsoever otherwise, be restrained from acting upon, implementing, giving effect to or taking any further steps in reliance upon the Termination Notice dated 7 May 2002 (a copy of which forms part of exhibit "EAS-40" referred to in the affidavit of Evan Anthony Stents sworn on 8 May 2002 and filed herein) which purported to terminate the Licence and Distribution Agreement made between the plaintiff and the first defendant and dated 5 July 2000.

2. Until the hearing and determination of the proceeding or further order, the first defendant, whether by itself or by its officers, employees, agents, attorneys, or any of them or howsoever otherwise, be restrained from appointing or agreeing to appoint in any way whatsoever EntrePort Corporation or any other person to market, distribute, sell, supply, offer to sell or supply or otherwise deal in or with the wireless or terrestrial, multi-protocols communication network technology known as SpectruCell ("Product") (incorporating the software which enables the Product to perform to its specifications, consisting of a set of instructions or statements in machine readable medium, and any enhancement or modification of that software ("Software") and related hardware performing part of the base station controller which processes and transmits mobile communications protocols such as AMPS, CDMA, TDMA, GSM, W-CDMA, UMTS, 3G & Voice IP, including any military applications or uses of the SpectruCell technology, in the United States of America, the North American and South American Continents ("Exclusive Territory") without the prior written consent of the plaintiff.

3. Until the hearing and determination of the proceeding or further order, the first defendant, whether by itself or by its officers, employees, agents, attorneys, or any of them or howsoever otherwise, be restrained from:

(a) granting any licence to EntrePort Corporation or any other person:

(i) to reproduce, advertise and publicise the names, photographs and likenesses of any authors, producers, creators or other persons associated with the development or production of the Product;

(ii) to display the Product to any prospective purchaser of the Product for end use,

(b) granting any licence to any person who purchases the Product in the Exclusive Territory for end use ("End User") to use the Software in conjunction with the Product, except at the request of the plaintiff;

(ii) sub-licence the use of the Software to an End User;

(iii) reproduce the Software for the purpose of sub-licensing the use of the Software to an End User,

in conjunction with the Product for or in relation to the Exclusive Territory, except to or at the request of the plaintiff;

(d) delivering any promotional material about the Product to EntrePort Corporation or any other person (except the plaintiff) to enable or otherwise assist EntrePort Corporation or any other person to market or distribute the Product in the Exclusive Territory;

(e) selling, supplying, offering to sell or supply or otherwise providing in any manner whatsoever Product to EntrePort Corporation or any other person (except the plaintiff) to enable or otherwise assist EntrePort Corporation or any such other person to market or distribute the Product in the Exclusive Territory.

4. Until the hearing and determination of the proceeding or further order, the first defendant, whether by itself or by its officers, employees, agents, attorneys, or any of them or howsoever otherwise, be restrained from itself marketing, distributing, selling, supplying, offering to sell or supply or otherwise dealing in or with the Product, including any military applications or uses of the SpectruCell technology, in the Exclusive Territory without the prior written consent of the plaintiff.

5. Until the hearing and determination of the proceeding or further order, the first defendant, whether by itself or by its officers (including the second defendant), employees, agents, attorneys, or any of them or howsoever otherwise, and the second defendant, be restrained from:

(a) registering any transfer of shares in the capital of the first defendant to EntrePort Corporation or any other person;

(b) entering in the Register of Members of the first defendant the name of EntrePort Corporation or any other person as transferee of a share in the capital of the first defendant;

(c) in any other manner authorising the transfer of any share in the capital of the first defendant to EntrePort Corporation or any other person,

unless Rule 13.2.2 of the Constitution of the first defendant has been complied with or otherwise satisfied.

6. The costs of and incidental to the plaintiff's summons filed 23 April 2002 and the plaintiff's summons filed 8 May 2002 be reserved.

The above interlocutory injunctions are, of course, subject to the plaintiff giving the usual undertaking as to damages.

[1] American Cyanamid Co v Ethicon Ltd [1975] UKHL 1; [1975] AC 396; Castlemaine Tooheys Ltd v South Australia [1986] HCA 58; (1986) 161 CLR 148

[2] Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349

[3] State Transport Authority v Apex Quarries Ltd [1988] VicRp 26; [1988] VR 187

[4] Cowell v Rosehill Racecourse Co Ltd [1937] HCA 17; (1937) 56 CLR 605 at 631 per Dixon J; Graham H Roberts Pty Ltd v Maurbeth Investments Pty Ltd [1974] 1 NSWLR 93 at 105-106 per Helsham J

[5] Hotline Communications Ltd v Hinkley, Unreported 24 March 1999 at [38] per Warren J

At a glance

Court

Decision date

Before

Source

Judgment (120 paragraphs)

Parties

Cases Cited (2)