(1) Albarran v Envirostar;

(1) Mr M.J. Cohen - Plaintiff Mr R.F. Margo SC - First Defendant COUNSEL : Ms E. Clark (Solicitor) - Second Defendant (2) Mr T.J. Hancock - Plaintiff Mr R.F. Margo SC - First Defendant Ms E. Clark (Solicitor) - Second Defendant (1) McCabe Terrill - Plaintiff Morgan Lewis Alter - First Defendant SOLICITORS : Clayton Utz - Second Defendant (2) Dibbs Barker Gosling - Plaintiff Morgan Lewis Alter - First Defendant Clayton Utz - Second Defendant CATCHWORDS : CORPORATIONS - shares - allotment - subscription moneys arguably not paid - "holding lock" imposed by company to prevent transfer of shares - serious question to be tried as to whether "holding lock" justified - ASX listing rules - shares now held by transferees of allottee - balance of convenience favours retention of "holding lock" pending trial LEGISLATION CITED : Corporations Act 2001 (Cth) Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 76 ALJR 1 Barnes v Addy (1874) 9 Ch App 244 Businessworld Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499 Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 CASES CITED : Films Rover International Ltd v Cannon Film Sales Ltd [1986] 3 All ER 722 French v Chapple [2000] NSWSC 1240 Quancorp Pty Ltd v MacDonald (1999) 32 ACSR 50 State of Queensland v Australian Telecommunications Commission (1985) 59 ALJR 562 Wentworth v Wentworth (unreported, NSWSC, Hodgson J, 12 June 1997) Zytan Nominees Pty Ltd v Laverton Gold NL [1998] 1 WAR 227 DECISION : Interlocutory mandatory injunctions refused.

• 14 - IN THE SUPREME COURT REVISED OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

1332/02 - RICHARD ALBARRAN & GEOFFREY McDONALD AS LIQUIDATOR OF INTERNOVA TRAVEL PTY LTD (IN LIQ) v ENVIROSTAR ENERGY LTD & ANOR 1333/02- KIZOZ PTY LTD v ENVIROSTAR ENERGY LTD & ANOR JUDGMENT 1 In each of these proceedings, there is before the court an application for relief by way of interlocutory mandatory injunction. It is desirable to deal with the facts and background in some detail before outlining the relief sought. 2 Envirostar Energy Limited, ("EEL"), now the first defendant in both these proceedings, is a company which has been admitted to the official list of the Australian Stock Exchange Limited. Its shares are the subject of official quotation. On or some time after 28 September 2001, EEL issued 2,748,769 shares in its capital to Financial Options Group Inc Pty Ltd (or "FOGI") which, as a result of orders made by me on Wednesday morning, 20 February 2002, is the second defendant in each proceeding. The agreed issue price of those 2,748,769 shares was $1 million. The shares later came to be part of a larger parcel of 6,385,132 shares in EEL held by FOGI, the balance of 3,636,363 being shares acquired by FOGI as transferee from a company associated with a director of EEL. 3 On 22 October 2001, FOGI transferred all 6,385,132 shares to Internova Travel Pty Ltd ("Internova"), a company which had been established to acquire the Traveland business from the administrators of Ansett. Internova (now in liquidation) is, by its liquidators, the plaintiff in proceedings 1332/02. A few days afterwards, Internova sought a loan from Kizoz Pty Ltd, the plaintiff in proceedings 1333/02. On 31 October 2001 a loan arrangement, evidenced by letter, was entered into between Internova and Kizoz whereby Kizoz lent $1 million to Internova which in turn transferred 3,333,333 EEL shares to Kizoz by way of security. For the purposes of that transaction, Kizoz made certain enquiries of Internova about its ownership of the EEL shares and, it appears, was shown the transfer executed by FOGI in favour of Internova and given confirmation by the EEL share registrars of Internova's being the registered holder. The 3,333,333 shares transferred by Internova were registered in Kizoz's name on 8 November 2001. 4 Immediately after these events, therefore, Kizoz was the registered holder of 3,333,333 shares in the capital of EEL and Internova was the registered holder of the residue of the parcel it had acquired from FOGI, that residue being, on my calculations, 3,049,799 shares. 5 Each of Internova and Kizoz later sold parcels of shares in what I infer to have been the ordinary course of trading on the stock market maintained and operated by Australian Stock Exchange Limited. In the period 27 November to 19 December 2001, Internova, by then in the hands of administrators, sold in relatively small parcels, separately traded, an aggregate of 910,232 shares for a total of $416,969.19. A further sale effected through the stock market on 9 January 2002 could not be settled because a holding lock had recently been placed on Internova's shareholding in EEL by EEL itself. In the case of Kizoz, sales were effected in several separate trades in the period 18 to 28 December 2001 in respect of 268,600 shares. Kizoz attempted to sell further shares on 16 and 17 January 2002, but the sales could not be completed because of a holding lock effected by EEL in respect of the shares held by Kizoz. Notice of the holding lock had been given to Kizoz by EEL on 2 January 2002. 6 I should digress briefly to say what a holding lock is. It is a mechanism provided for in the SCH business rules which are recognised in the Corporations Act 2001 (Cth) as governing transfer, settlement and registration in respect of securities traded through the automated system administered by the Australian Stock Exchange and known as CHESS. "Holding lock" is defined in those rules as: "A facility that prevents securities from being deducted from or entered into a holding pursuant to a transfer or conversion." 7 Companies whose securities are listed for quotation on the stock market of the Australian Stock Exchange are permitted by the Exchange's listing rules to apply a holding lock (and thus to preclude transfer of a particular shareholding) only in certain narrowly defined circumstances. Otherwise, the listing rules do not allow any restriction on transfer of listed shares since free transferability is of the essence of the stock market system. That free transferability is reinforced by s.1109L of the Corporations Act. 8 It is not disputed that EEL caused a holding lock to be applied to the shareholdings of Internova and Kizoz. This, as I have said, occurred early in January 2002. EEL notified the Stock Exchange of the holding lock on, I think, 11 January 2002. 9 To understand why EEL caused the holding lock to be applied it is necessary to go to certain contested areas of fact. The consideration for the issue of the 2,748,769 shares by EEL to FOGI was intended by EEL to be a cash subscription of $1 million. Mr Johnstone, a director of FOGI, said in evidence that this was satisfied by FOGI's crediting the sum of $1 million to EEL's account with FOGI in the sense of increasing, by $1 million, the total amount for which FOGI acknowledged itself to be indebted to EEL in accordance with a treasury management arrangement between the two companies. The terms of any such indebtedness was the subject of conflicting evidence. 10 EEL, on the other hand, says that its account with FOGI was operated in such a way that the account only ever reflected EEL's portion of funds actually deposited into a bank account maintained by FOGI with Hong Kong & Shanghai Banking Corporation in which FOGI held funds entrusted to it in cash by its clients, including EEL. On this approach, a mere entry in the periodic statements of account sent by FOGI to EEL to reflect EEL's participation in that bank account did not, without movement of cash into that bank account, amount to payment by FOGI to EEL. The exact significance and nature of these money management arrangements will, no doubt, be a major issue at the trial. For present purposes EEL says, in short, that FOGI never paid or otherwise satisfied the subscription moneys for the 2,748,769 shares. 11 An added element of EEL's contentions in this area is that FOGI expressly represented to it that $1 million had been deposited into the Hong Kong & Shanghai Bank account which lay behind EEL's treasury management account with FOGI. This contention is based on evidence of a course of conduct in relation to notification or confirmation by FOGI of those deposits which did involve physical passing of cash, plus evidence to the effect that the notification or confirmation about the $1 million in question was in the same form, even though there was no such physical passing of cash. Misrepresentation by FOGI and reliance on it by EEL are thus live issues. 12 I come now to a second area of disputed facts, namely, the transaction between FOGI and Internova. There seems little doubt that that transaction was undertaken for the purpose of bolstering Internova's balance sheet with a view to meeting certain regulatory needs related to the regulation of travel agents. Mr Johnstone who, at the relevant time, was a director of Internova as well as FOGI, testified that the consideration for the transfer of 6,385,132 EEL shares by FOGI to Internova was a sum of $1 (being the sole consideration recorded on the instrument of transfer), plus the allotment of a substantial number of shares in Internova itself, with the result, one imagines, that Internova's balance sheet reflected the 6,385,132 EEL shares as an asset (they were then trading at something like 50 cents) and showed a corresponding increase in Internova's share capital. But these new Internova shares were not issued to the transferor FOGI, Mr Johnstone said; rather, they were issued supposedly at Internova's request and direction to a newly formed Samoan company with a share capital consisting of two bearer shares which, he said, were and are owned by FOGI, even though he does not know who holds the bearer certificates. As I have said, the relevant share transfer does not reflect this additional consideration of an allotment of Internova shares to a party other than the transferor 13 Let me return to the holding lock. EEL maintains that default by FOGI in payment of the consideration for issue of the shares in the first place so taints or undermines the allotment that, one way or another, it is entitled to have it cancelled. EEL's assertions in correspondence have varied from time to time, but its fully formulated position as put at the hearing of the interlocutory applications is that it is entitled, under article 15 of its constitution, to a lien on the shares issued to FOGI and that the protection of such a lien is one of the specific and narrowly defined purposes for which the Stock Exchange listing rules allow a listed company to impose a holding lock. 14 The second part of this proposition must be regarded as uncontroversial. After laying down the general rule of free transferability, listing rule 8.10.1 says: "However, the entity may apply, or ask SCH to apply, a holding lock to prevent a proper SCH transfer, or refuse to register a paper-based transfer, in any of the following circumstances: (a) The entity has a lien on the securities under rule 6.13." 15 Listing rule 6.13 in turn provides that an entity must not have a lien on securities except in narrowly defined circumstances, including where "Any unpaid call or instalment is due but unpaid on those securities." 16 Internova and Kizoz say that the present situation cannot possibly be one of such lien. As I have said, the relevant provision of EEL's constitution is article 15: "The company has a first and paramount lien on every partly paid share for ... all due and unpaid calls and instalments in respect of that share." 17 There is no definition of "partly paid share" but EEL argues, by analogy with the Corporations Act's definition of "fully paid share" as "a share on which no amount remains unpaid", that a share on which any amount remains unpaid, including the whole amount, falls, by default, into the category of "partly paid share", there being, on this approach, no room for a third category of "unpaid share" or perhaps "fully unpaid share". Internova and Kizoz dispute this analysis in numerous ways. They also point to the fact that EEL itself has, on various occasions, represented the shares issued to FOGI to be fully paid shares. 18 There is in evidence a letter of 11 October 2001 from EEL's company secretary to FOGI which begins: "We are pleased to enclose the statement of transactions which records the issue of 2,748,769 fully paid ordinary shares in the capital of Envirostar Energy Limited to Financial Options Group Pty Ltd." 19 The accompanying statement of transactions or holding statement issued by EEL's share registrars refers to the shares as "Ordinary FP", the abbreviation FP obviously standing for fully paid. In an announcement to the Stock Exchange on 22 October 2001 notifying receipt of a substantial shareholding notice from FOGI, EEL again referred to the shares as fully paid ordinary shares. A return of allotment (form 207) dated 5 October 2001 lodged by EEL with ASIC referred to the issue of the relevant number of shares and in the space for inclusion of "Amount unpaid (if any) per share" there appears "Nil". Holding statements issued to Internova and Kizoz also represent the shares to be fully paid. 20 In these circumstances, say the plaintiffs, EEL is estopped from asserting, as against them, that any shares they hold are unpaid so as to attract the operation of article 15 and, therefore, to allow a holding lock to be imposed to protect a lien arising under that article, even if EEL's interpretation of the constitution and its interaction with the listing rules is correct, which the plaintiffs strenuously argue is not the case. The estoppel for which the plaintiffs contend is framed in various ways, including by analogy with estoppel by certificate in today's uncertificated system. They point in particular to the following passage in the speech of Lord Cairns LC in Burkinshaw v Nicolls (1878) 3 App Cas 1004: "My Lords, as the Master of the Rolls said in the Court below, it would paralyze the whole of the dealings with shares in public companies if, a share being dealt with in the ordinary course of business, dealt with in the market with the representation upon it, by the company, that the whole amount of the share was paid, the person who so took it was to be obliged to disregard the assertion of the company, and, before he could obtain a title, must go and satisfy himself that the assertion was true, and that the money had been actually paid. In the first place, as a matter of business, we know that the affairs of mankind could not be conducted if that were necessary; but in the next place, even if such a person were minded to make the investigation, he would be absolutely without the means of making it - it would be impossible for him to obtain accurate information as to whether this state of things was true or not."

21 Internova and Kizoz also say that rights to have the holding lock removed accrue to them because of EEL's breach of the listing rules in keeping it in place. I confess to some difficulty with the abstract proposition, implicit in the decisions in Zytan Nominees Pty Ltd v Laverton Gold NL [1988] 1 WAR 227 and Quancorp Pty Ltd v MacDonald (1999) 32 ACSR 50, that every company on the official list of the Australian Stock Exchange is always under a contractual obligation to its shareholders to comply with the stock exchange listing rules: see (1999) 73 ALJ 726. In the present case, however, the proposition is supported by reference to a clear provision in EEL's constitution. Article 178 is expressed to apply "If the Company has been admitted to the Official List of the ASX". Among the stipulations it causes to apply is the following: "Notwithstanding anything contained in this Constitution, if the Listing Rules prohibit an act being done, the act shall not be done." 22 On the basis contended for by the plaintiffs that imposition and maintenance of the holding lock involve contravention of the listing rules, the effect of this provision of the constitution, they say, is to cause EEL to be in breach, as against them, of the statutory contract which the constitution represents by virtue of s.140 of the Corporations Act. 23 Added to this is a clear possibility that the plaintiffs are properly to be regarded, for the purposes of s.777 of the Corporations Act, as "persons aggrieved" by EEL's failure to remove the holding lock affecting their shares, so that any breach of the listing rules involved in EEL's maintaining the holding lock may be asserted by the plaintiffs as a basis for seeking an order under that section that the holding lock be removed. 24 After that perhaps overlong statement of background, I come to the interlocutory relief sought by the plaintiffs. I can deal quickly with the order which each seeks to restrain EEL from taking action to convene and conduct a meeting of its members with a view to corporate action to cancel shares held by the relevant plaintiff. Such an order is already in place in each proceeding and EEL does not oppose its continuation until trial. 25 That leaves, as the principal order sought by each plaintiff at this stage, an interlocutory order compelling EEL to remove the holding lock on the basis that any proceeds thereafter derived from sales of the freed shares will be placed into an appropriate stakeholder account with a bank to await the outcome of the proceedings. In the case of Internova, there is also sought an order in the nature of advice and direction to the liquidators that they may sell shares so freed. 26 The relief sought is thus in the nature of an interlocutory mandatory injunction and I must first consider the question of serious issue to be tried. At trial, the core issue will be the plaintiffs' rights, as against EEL, to full and undisturbed ownership of their shares. Various formulations of the serious question to be tried inquiry may be found in the cases. In Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 76 ALJR 1, Gleeson CJ quoted the test as stated by Mason ACJ in Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148, namely, whether "… there is a serious question to be tried or … the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief." 27 Callinan J said: "In my opinion, the correct test is whether the applicant can demonstrate either a reasonably arguable case on both the facts and the law, or that there is a serious question to be tried. These tests it seems to me are to the same effect." 28 Whatever formulation one adopts of the serious question to be tried aspect, I think there is a serious question to be tried here. The view I have formed at this stage is that the case made for Internova and Kizoz in attacking the propositions by reference to which EEL seeks to justify the holding lock is a plausible one. Indeed, I consider it more than plausible. Based on the facts, as shown so far, and the competing contentions about the constitution and the stock exchange rules it is, in my view, a strong case. To that extent, therefore, the plaintiffs have made out their entitlement to interlocutory relief subject to the balance of convenience and any disentitling factors. 29 I turn then to the balance of convenience noting, as I do so, that the effect of an order made as sought by each plaintiff will be, in a real sense, to disturb the status quo (rather than to maintain it pending trial) and to grant at the interlocutory stage what is, in reality, a substantial measure of final relief. This might well call into operation considerations concerning the likely outcome at trial more stringent than those which would otherwise apply. Such a possibility is suggested by the judgment of Gibbs CJ in State of Queensland v Australian Telecommunications Commission (1985) 59 ALJR 562 but not necessarily regarded as real by Gummow J in Businessworld Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499. It is probably unnecessary to pursue this, since the real task of the court upon an interlocutory application such as this seems to me best viewed as being to steer the course which appears to "carry the lower risk of injustice": Films Rover International Ltd v Cannon Film Sales Ltd [1986] 3 All ER 722. 30 Adopting that approach, the central questions here are, first, who should bear the risk of movement in the EEL share price while these proceedings remain unresolved and, second, who should bear the risk that shares in EEL will be cancelled or forfeited. The second matter arises because, as I see it, if Internova and Kizoz were both to sell their shares to third parties buying on the stock market, those shares would effectively pass beyond the practical reach of any action towards cancellation or forfeiture of shares which EEL might seek to take. The buyers would be outside the reach of any vitiating factors that might be asserted against Internova and Kizoz, added to which the fungible nature of listed securities would make it impossible to track particular shares through successive transferees. 31 Submissions on EEL's behalf outline a possibility of simple forfeiture of shares for nonpayment of moneys due (as already outlined) or a possible case against FOGI on the basis of a misrepresentation that $1 million in cash had been deposited by FOGI in a bank account for EEL's benefit on account of the subscription moneys - a misrepresentation, it would presumably be said, that was intended by FOGI to induce EEL to become party to the contract to issue the shares to FOGI. If that case were made out, EEL might well assert a claim to avoid the allotment subject, of course, to rights enjoyed by subsequent purchasers. 32 There are clear questions about the bona fides of the transaction between FOGI and Internova. These, coupled with the fact that there were directors common to FOGI and to Internova and it was two of those directors who acted for FOGI in what might well turn out to be a deception practised upon EEL, mean that Internova might not enjoy the protections of a bona fide purchase for value without notice. 33 When it comes to Kizoz, the possibility of denial of those protections is more problematic, but cannot be regarded as negligible. There is evidence that Mr Jenkins, the Kizoz director who acted for it in its dealings in relation to the EEL shares, was suspicious because Mr Johnstone wanted to conclude a loan for such a large sum so quickly, added to which Mr Jenkins was made aware that the shares were in the process of being transferred by FOGI to Internova and that this was part of a balance sheet strengthening exercise. There is evidence to suggest that he saw the transfer in which the consideration was stated to be $1, which might well have been enough to put him on notice of the possibility that the transfer was contrary to the interests of FOGI and, therefore, in breach of the fiduciary duties owed to FOGI by its directors involved in that transfer. A claim against Kizoz based on Barnes v Addy (1874) 9 Ch App 244 is conceivable. 34 It is not necessary for me to decide whether there is a serious question to be tried on these issues. It is sufficient to say that they are not fanciful and that they may, therefore, be taken into account in determining where the balance of convenience lies. Such case as EEL may have for seeking to set aside the allotment will become less valuable to it as shares progressively find their way into the hands of unidentified and genuine buyers on the stock market. The effect of that dissipation is probably the major burden to which EEL can point on the balance of convenience. Its ongoing detriment, if the shares do pass beyond any claims to avoid the allotment, will be that it has to service forever capital of which it never obtained the benefit. 35 Internova is in liquidation, as is FOGI. It is likely that the liquidators of Internova would wish to take steps to sell the shares reasonably promptly if they were free to do so. That emphasises the risks to EEL to which I have just referred. 36 I then consider the burden or detriment the plaintiffs will suffer if the interlocutory relief is refused. They will not be able to sell shares until the issues in contention have been determined. While they will thus be denied the ability to turn the shares into cash at the rates obtainable from time to time on the stock market, they will not be denied the other benefits of share ownership or, of course, the intrinsic value of the shares, whatever it may be. Their obvious risk is that they will eventually sell for less than they could have achieved had they been free to do so sooner and that, as well, they will incur costs in tiding themselves over until the freedom to sell arises. 37 These burdens or detriments of the plaintiffs are purely financial. They will, in due course, be able to be quantified in money terms by way of a claim for damages. We are dealing here not with some unique commodity, but with shares in a listed company which are freely traded and available on a market, even though trading volumes in the past have not been great. 38 Whatever may be the outcome at trial, it can be expected that there will continue to be a readily available market-based calculation which will fairly reflect the plaintiffs' position. The proceedings as a whole present prospects that liability for damages will result: damages in favour of Internova and Kizoz for wrongful interference by EEL with their right to transfer their shares or damages in favour of EEL pursuant to the undertaking as to damages that Internova and Kizoz would necessarily give as the price of interlocutory relief. Any such undertaking given by Internova which is in liquidation has questions attached to it as to value and that too is a factor to be weighed in the balance in the Internova proceedings: Wentworth v Wentworth (unreported, NSWSC, Hodgson J, 12 June 1997); French v Chapple [2000] NSWSC 1240. The same does not apply, I hasten to say, to the Kizoz proceedings. 39 As to EEL's capacity to pay any damages, I have heard evidence from both its acting chairman and its secretary. It is fair to say that EEL has, as it has announced to the Stock Exchange, suffered something of a financial set-back through the insolvency of the FOGI group, members of which are indebted to EEL in substantial sums, I think of the order of some $4 million, which are probably not recoverable. It is also true that EEL has no present revenues, although it does have cash resources and has received financial support from the party which is constructing its power plant in Queensland, sufficient, it appears, to allow that plant to be completed and commissioned on schedule in the early part of the second half of this year. The evidence shows that arrangements are in place to market the output from that plant with the result that revenue flows are expected as soon as commissioning occurs or fairly soon thereafter. 40 Part of the evidence of the acting chairman was taken in camera. It is sufficient for me to say that it did not cast any doubt on the position I have described. 41 My overall view of the balance of convenience is that it is best that the present situation in which Internova and Kizoz are not able to transfer shares be left undisturbed pending final determination of the proceedings. Resolution in favour of Internova and Kizoz in their respective actions may, depending on movements in market prices, see EEL become liable to them in damages and I do think in this case that damages will be an adequate remedy. As I have said, we are dealing here with a readily tradeable commodity and in the final analysis any future adverse movements in market value are compensable by way of damages. 42 It is said by the plaintiffs that the risk of adverse price movements compared with the present market value or the market value over the immediate future should be minimised by a kind of stop-loss measure which permits the sale of shares but with the proceeds of sale being isolated in a frozen bank account held by a stakeholder in the way I have already mentioned. The countervailing consideration (which I consider to be of greater weight) is that an ability to sell, even on that basis, will contribute to the diffusion of share ownership and dissipation of holdings which works against the value of such rights as EEL may have to see the shares extinguished. 43 In proceedings 1332/02, I note that order 3 in the amended interlocutory process filed on 5 February 2002 is already in place and will continue. I decline to make orders 1 and 2. 44 In proceedings 1333/02, I note that order 1 in the amended interlocutory process also filed on 5 February 2002 is already in place and will continue. I decline to make orders 2, 3 and 4.

(Counsel addressed on costs.) 45 I note the compromise proposal contained in the letters of 5 February 2002 sent by EEL's solicitors to the respective solicitors for the plaintiffs. However, the balance of convenience considerations on which my decision turned (despite a strong finding for the plaintiffs on serious question to be tried) were by no means easy. The case was not at all an obvious one and for that reason I do not think that rejection of the compromise should be seen as unreasonable in the sense relevant to indemnity costs. The appropriate outcome is that EEL should in each proceeding have an order for costs of this interlocutory application on the party and party basis against the plaintiff. I so order. FOGI's costs of the contested application for joinder of it as a party to each proceeding will be costs in the cause.

Last Modified: 02/28/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.