Solicitors:
Clayton Utz (Plaintiffs)
Piper Alderman (Defendants)
Herbert Smith Freehills (Network Investment Holdings Ltd)
File Number(s): 2014/305920
[2]
Stay application
The Plaintiffs, the Deed Administrators of Nexus Energy Ltd (subject to deed of company arrangement) ("Nexus"), sought an order under s 444GA of the Corporations Act 2001 (Cth) that they be granted leave to transfer all of the existing shares in Nexus from each shareholder recorded in the register to another entity, SGH Energy (No 2) Pty Ltd ("SGH2"), in accordance with a deed of company arrangement dated 22 August 2014.
I have, this morning, made an order granting leave of the kind sought. I stayed that order, until 4pm today, adopting a similar approach to that which was adopted by Barrett J (as his Honour then was) in Re Centro Properties Ltd (in its capacity as responsible entity of Centro Property Trust) [2011] NSWSC 1481 to allow the defendant shareholders ("Shareholders") the opportunity to consider the summary of my judgment which I had made available in writing, to determine whether to make any application for a stay, and, depending on the outcome of that application, to approach the Court of Appeal if they considered it necessary to do so.
Having taken some time to consider the summary of my judgment, the Shareholders have indicated that they propose to bring an appeal against that judgment and have sought a stay, or orders restraining the Plaintiffs from acting in accordance with the judgment, pending that appeal. They have made clear that, at least at the present, no undertaking as to damages is offered in support of that application, and I will need to determine the application on that basis.
A preliminary question arises, which was addressed by Mr Andronos who appears with Mr Holmes for the Plaintiffs, as to whether the order sought by the Shareholders is truly a stay or is in fact in the nature of injunctive relief. It seems to me that the order sought is strictly speaking an injunction, or so close to an injunction as to be not substantively distinguishable from it. As Mr Andronos points out, an issue of a similar kind was considered by Barrett J in Re Centro Properties Ltd above, where his Honour had to consider the position where the Court had granted approval of a scheme of arrangement, following a second meeting of creditors, and the effect of lodgement of that approval with ASIC would be that the scheme of arrangement would take effect. In that case, what was required was not a stay of the orders but that some step be taken which would prevent the orders from taking effect. Mr Andronos points out, and I accept, that there is no real question of execution of my judgment in this matter. The effect of the order which I have made is that, subject to the entry of that order, and the Plaintiff's taking the other necessary steps to give effect to it, which would include at least perfecting an approval which they have presently obtained from ASIC, on an in principle basis, then they would be entitled to bring about the transfer of shares which the leave they have been granted permits.
Accordingly, what the Shareholders require is not merely some form of stay of execution or enforcement of the judgment, but some form of order that will prevent the Plaintiffs taking the steps that the order made by the Court would otherwise authorise them to take. Whether that is properly characterised as an injunction in form, it seems to me to operate analogously to an injunction, so far as it would restrain the Plaintiffs from taking a step which that order would otherwise authorise them to take. I proceed on the basis that, of course, and it was not contended to the contrary in this application, that order is treated as operative, notwithstanding that an appeal may be brought against it and it may ultimately be set aside, unless and until it is set aside.
It is nonetheless helpful to have regard to the principles applicable to the grant of a stay of an order of a court at first instance, since it is likely that at least those principles would need to be satisfied in order to grant some form of order preventing the implementation of the transfer of the shares. Those principles were summarised by the Court of Appeal in Alexander v Cambridge Credit Corporation Ltd (Recs Apptd) (1985) 2 NSWLR 685 at 694-695 as follows:
"It is not necessary for the grant of a stay that special or exceptional circumstances should be made out. It is sufficient that the applicant…demonstrates a reason or appropriate case to warrant the exercise of discretion in his favour…The Court has a discretion whether or not to grant the stay and, if so, as to the terms that would be fair.
In the exercise of its discretion, the Court will weigh considerations such as the balance of convenience and the competing rights of the parties…two further principles can be mentioned. The first is that where there is a risk that the appeal will prove abortive if the appellant succeeds and a stay is not granted, courts will normally exercise their discretion in favour of granting a stay…where it is apparent that unless a stay is granted, an appeal will be rendered nugatory, this will be a substantial factor in favour of the grant of a stay."
That statement has subsequently been applied in many cases, including by the Court of Appeal in Kalifair Pty Limited v Digi-Tech (Australia) Ltd [2002] NSWCA 383; (2002) 55 NSWLR 737 at [741] and, recently, by Ball J in Traderight (NSW) Pty Limited v Bank of Queensland Limited [2014] NSWSC 733 at [54].
It seems to me clear that the Shareholders have demonstrated a reason or appropriate case to warrant the exercise of a discretion in their favour, if the balance of convenience could be satisfied, and the rights of the parties affected by it are protected. I reach that conclusion because, first, Mr Newlinds, who appears with Ms Wright for the Shareholders, draws attention to the fact that issues of law are raised by any appeal from my judgment, and it seems to me that the question of the operation of s 444GA of the Corporations Act, so far as the transfer of shares to third parties without consideration is concerned, is one that could well warrant the attention of an appellate court. In my summary of judgment, I referred to a number of judgments at first instance which adopt a particular approach in respect of the section, but it is possible that other approaches could be adopted and, in particular, the Shareholders contended, in the proceedings before me, for an approach which gave greater weight to the proprietary rights of shareholders in their shares, or to the amount which a third party might be prepared to pay to acquire them, if it were not otherwise able to do so by the exercise of rights under the section, or to their ability to negotiate with such a party, than the authorities to which I have referred have done.
Second, Mr Newlinds identified a number of factual matters that might be raised in an appeal. It is not necessary to recite those matters, but it could not be suggested that, in a case of some complexity, there was not an arguable case in respect of those matters collectively, such that an appellate court might take a different view from the view that I have taken in respect of them. Mr Newlinds did not seek to put that proposition any more strongly than an arguable case, but it seems to me that he did not need to do so for the purposes of this application.
The second question which arises in a stay application is whether, unless a stay, or in this case some form of restraint were granted, the appeal is likely to be rendered nugatory. It seems to me that there is a substantial risk that would occur, although Mr Newlinds contended that was by no means certain. It seems to me there is a significant possibility that, to put it colloquially, once the shares were transferred, it would be at least difficult to unscramble the egg. I note, however, as I observed, that Mr Newlinds reserved the alternative possibility, which would reduce the strength of the case for a stay. I will, however, proceed on the basis that there is at least a significant risk that, once the Deed Administrators had implemented a transfer of the shares, there would be real difficulties in giving practical effect to an appellate decision setting aside my judgment.
The real question seems to me to be, in the present circumstances, the balance of convenience, and the competing rights of the parties, which raise issues of complexity. The case involves, as Mr Andronos points out, a position that is similar to that which was considered by Brereton J in AT Air Group Pty Ltd v Siewert (No 4) [2014] NSWSC 1186 where the grant of the stay, at least without an undertaking as to damages, has the capacity to cause real detriment to the party which has a judgment in its favour, and in this case also to third parties, whereas the withholding of a stay has the capacity to cause real detriment to the Shareholders, so far as it may make their obtaining relief on any appeal more difficult.
The difficulties that arise in respect of the balance of convenience, and the protection of the parties' respective rights are in two areas. First, the Deed Administrators point to the risk of prejudice to Nexus, and rely on Mr Preston's affidavit dated 24 December 2014 in that regard. Mr Preston notes that, as has been the case throughout much of this hearing, Nexus is operating under funding that has been extended, albeit on successive occasions, for relatively short periods, now to 31 December 2014. Whether that funding will be extended beyond that date seems to me to be unknowable. I accepted the Deed Administrator's evidence in the substantive hearing that it was a likely result of a refusal of leave to transfer the shares that Nexus would pass into liquidation. It does not follow that that would occur if a shorter delay now arose pending an appeal. Plainly, the calculus involved for Network Investment Holdings Ltd ("NIH"), as lender to Nexus, in determining whether to decline further funding and allow Nexus to be placed into liquidation, where it has a judgment which is consistent with its commercial interests, is different from that which would be involved where a judgment prevented a transfer of the shares to SGH 2.
I therefore do not infer that it is a necessary, or even likely, consequence that NIH would decline further funding and allow Nexus to be placed into liquidation if it were possible for an appeal to be determined within a short period. However, that is by no means decisive of this matter, for two reasons. First, the Court must recognise that any anticipation of that question is no more than an anticipation and it is always possible that that anticipation is incorrect. The period involved will be affected by matters such as the court vacation and the commitments of the Court of Appeal, and there must be at least some risk that NIH would, in fact, not be prepared to extend its funding to the time at which any appeal can be listed. Ultimately, these are all matters of speculation, and I can make no forecast of what would in fact occur.
Second, the Deed Administrators also point to the fact that Nexus has commitments which it needs to make during December, and Mr Andronos indicates on instructions that those commitments remain to be made in the short remaining working period within December, and also to further commitments during January 2015, and to commercial damage which will arise from not making those commitments.
Third, Mr Preston points to the risk involved for directors of subsidiaries, whose directors and officers liability cover has been currently extended on a month by month basis to December 2014. Again, the question whether that cover would be further extended is unknowable on the evidence before me.
It does seem to me that there is at least a significant risk to Nexus arising from these matters if an order restraining the implementation of the arrangements were made and continued in effect for several weeks, or longer, without an undertaking as to damages in place. It should be recognised, however, that the risk extends beyond a risk to Nexus, because it is plain from the evidence that was before me in the substantive hearing that third party interests are affected, including the interests of noteholders other than NIH, trade creditors and the (admittedly, few) employees of Nexus, albeit they are small in number, who would potentially be adversely affected by a liquidation of Nexus.
Absent an undertaking as to damages, an order in the nature of a stay or injunctive relief leaves those parties to bear the risk of liquidation without any protection against that risk. I recognise that the Shareholders contend, of course, as they have contended throughout the hearing, that NIH's position that it would allow Nexus to pass into liquidation is simply a bluff, and, in effect, that it does not mean it and has never meant it. That contention does not, however, assist the Shareholders in this application. The Court is simply not in a position to assess whether NIH's position has that character, and the difficulty is that the risk that it does not would be borne not only by Nexus but by third parties, in the absence of an undertaking as to damages given by the Shareholders. In those circumstances, it might be put, as Mr Newlinds fairly acknowledged, that, if the Shareholders have confidence in that position, then it is they and not third parties who should bear the risk that they are wrong in that assessment. The way in which that risk can be shifted to them is, subject to the availability of assets to meet an undertaking as to damages, by the offer of an undertaking as to damages.
For all these reasons, it seems to me that, within the language of Alexander v Cambridge Credit Corporation above, there might potentially be a reason or appropriate case to warrant the exercise of a discretion in favour of the Shareholders to stay or otherwise restrain the implementation of my orders had an undertaking as to damages been given, which would have protected Nexus and third parties against the adverse consequences of the inability to transfer the shares and implement the deed of company arrangement.
The factors supporting that are, as I have noted, the arguable prospects of an appeal and the possibility that the egg cannot be unscrambled once the shares are transferred. However, I am comfortably satisfied that, absent an undertaking as to damages, the risks to which Nexus and third parties would be exposed by a further deferral of the implementation of the deed of company arrangement and the transfer of shares which is an essential part of it, are real, although it is unknowable whether they will ultimately come home. In those circumstances, it seems to me that the balance of convenience does not favour the grant of a stay, or any form of injunctive relief, in balancing the competing rights of the parties, without an undertaking as to damages. Where no such undertaking is offered, the application for a stay or analogous relief should be dismissed.
I note, however, for completeness, that I had this morning, as I noted above, stayed the orders, which I have made, to 4pm today. I will hear the parties as to whether that language is sufficient to preserve any right which the Shareholders may have as to approach the Court of Appeal, or whether the Deed Administrators would be prepared to undertake, to avoid the complexities of any further and more complex order, simply not to act upon the orders that I have made until 4pm today. There may be little practical disadvantage in such an undertaking, where further matters may need to be resolved with the Australian Securities and Investments Commission in any event.
[3]
Orders
Subsequent to the delivery of my judgment, Mr Newlinds fairly and frankly disclosed that he did not have instructions which would involve an application to the Court of Appeal today or any further application today that would warrant the maintenance of the stay, which I had granted earlier this morning to 4pm today.
I had also delivered a summary of judgment this morning, which had contained references to matters which were likely to be confidential, having been drawn from evidence that had been admitted on a confidential basis, where Nexus in turn owes contractual obligations of confidentiality to third parties. The parties have agreed between them certain redactions to the summary of judgment that I have delivered, which may be made so as to allow that summary of judgment to be circulated more widely to persons interested in the proceedings, including, for example, Shareholders who have not executed confidentiality undertakings, or persons, to whom Mr McHugh, who appeared for NIH, referred, who are associated with NIH but not officers of that company. It seems to me that the approach which the parties have adopted is a sensible one. The material which they propose to redact is all material which, on its face, appears to have elements of commercial confidentiality about it. I will add a further note to that effect to my orders.
I therefore make the following orders, and reserve the question of costs which is likely to be best dealt with in the context of the proceedings as a whole:
The application by the defendant shareholders for a stay, or other restraint on the implementation of the order made in my judgment, be dismissed.
Vacate the stay until 4pm today made in my order earlier this morning.
Costs be reserved.
Note that the parties have agreed certain redactions to the summary of judgment issued this morning which will allow it to be circulated more widely to persons interested in the judgment and note that the parties are not constrained from circulating the judgment, in a redacted form to those persons notwithstanding that they have not signed any confidentiality undertakings or would not have otherwise have been entitled to access the summary of judgment in its original form.
These orders be entered forthwith.
[4]
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Decision last updated: 13 February 2015