APIR Systems Limited v Donald Financial Enterprises Pty Ltd - [2008] FCA 1448 - FCA 2008 case summary — Zoe

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APIR Systems Limited v Donald Financial Enterprises Pty Ltd

[2008] FCA 1448

Federal Court of Australia|2008-09-23|Before: Edmonds J, Foster J

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Source facts

Court

Federal Court of Australia

Decision date

2008-09-23

Before

Edmonds J, Foster J

Source

Original judgment source is linked above.

Judgment (38 paragraphs)

[1]

The present application 1 The appellants have applied by way of Notice of Motion for a stay of final orders made by Edmonds J on 30 July 2008 pending the hearing of their appeal from those orders. 2 The orders which his Honour made on 30 July 2008 were in the following terms: THE COURT DECLARES THAT: 1. The Share Subscription Deed between the first respondent, the applicant and the first cross-respondent dated 23 January 2004 is void ab initio. THE COURT ORDERS THAT: 2. The first respondent forthwith refunds to the applicant the subscription price of the 200,000 shares in the first respondent for which the applicant applied and subscribed. 3. If the first respondent is unable for any reason beyond its control or otherwise fails to comply with order 2 in full, the second and third respondents jointly and each of them severally, refund to the applicant the subscription price of the shares in order 2 and to the extent of the shortfall. 4. Upon full payment to the applicant of the subscription price of the shares in order 2, the applicant deliver to the first respondent a properly executed instrument or instruments of transfer of such shares in registrable form in favour of such transferee or transferees, and if more than one in such respective numbers, as the first respondent directs. 5. The second and third respondents jointly and each of them severally, forthwith refund to the applicant the purchase price of the 81,904 shares in the first respondent purchased by the applicant from shareholders in the first respondent in exchange for a properly executed instrument or instruments of transfer of the shares in registrable form in favour of such transferee or transferees, and if more than one in such respective numbers, as the first respondent directs. 6. The first, second and third respondents jointly and each of them severally pay interest to the applicant pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth) on the sum of the subscription price in order 2 and the purchase price in order 5 from 28 January 2004 to 30 July 2008 at the rate or rates applied by the Supreme Court of New South Wales during this period. 7. The first, second and third respondents pay the applicant's costs of the application; and the fourth, fifth and sixth respondents' costs of defending the application. 8. The cross-claimant pay the first and second cross-respondents' costs of defending the cross-claim. 9. The cross-claim be dismissed. 3 The appellants were the respondents in the proceedings before Edmonds J. 4 By Notice of Motion filed on 5 August 2008, the appellants applied for various orders including an order in the following terms: An order that the orders made on 30 July 2008, and any variation thereof arising out of this Notice of Motion, be stayed pending the Respondents lodging a Notice of Appeal within 21 days of 30 July 2008. 5 On 13 August 2008 his Honour declined to grant the stay sought in that Notice of Motion, principally on the ground that no Notice of Appeal had been filed as at 13 August 2008. 6 On 20 August 2008 the appellants renewed their application for a stay. His Honour refused that application on that day. 7 Between 13 August 2008 and 20 August 2008, namely on 19 August 2008, the appellants filed a Notice of Appeal. On 22 August 2008, the appellants filed an Amended Notice of Appeal. 8 The present Notice of Motion was filed on 21 August 2008. 9 No party has submitted that the refusal by Edmonds J on two separate occasions to grant a stay of his Honour's final orders has any particular significance for the present application. The application has been fully argued on its merits and I propose to deal with it upon the basis that his Honour's refusals to order a stay have no particular bearing upon the present application.

[2]

The proceedings before Edmonds J 10 The proceedings before Edmonds J concerned the acquisition by the respondent (which was the applicant below) of two parcels of shares in the first appellant (APIR). The first parcel of 200,000 shares was allotted by APIR to the respondent. The other parcel of 81,904 shares was purchased by the respondent from the second and third appellants (Messrs Broso and Riley) who were existing shareholders in APIR. The acquisition price in the case of both parcels was $2.65 per share. Thus, the allotment consideration was $530,000 and the purchase price in respect of the second parcel of shares was $217,045.60. 11 The allotment consideration of $530,000 was paid to APIR on 23 January 2004. The purchase price in respect of the balance of the shares acquired, viz $217,045.60, was paid a day or two after 23 January 2004. 12 At trial, the respondent contended that it had been misled and deceived by the appellants during the course of the negotiations which led to its acquisition of shares in APIR. It claimed relief pursuant to ss 1041E, 1041H, 1041I, 1325(1) and 1325(5) of the Corporations Act 2001 (Cth); ss 12DA and 12GM of the Australian Securities and Investment Commission Act 2001 (Cth) and ss 82 and 87 of the Trade Practices Act 1974 (Cth). 13 The respondent had acquired the shares which were allotted to it pursuant to a document styled Share Subscription Deed dated 23 January 2004, the parties to which were the respondent, APIR and Mr Sharp, who was the principal of the respondent at all relevant times and the person who negotiated the transactions on behalf of the respondent. It would appear that the shares which were purchased from Messrs Broso and Riley were acquired pursuant to a separate transaction. 14 In substance, at trial, the respondent sought confirmation of its attempted rescission of the Share Subscription Deed ab initio or an order declaring void the Share Subscription Deed ab initio and orders requiring the refund of all sums paid by it to APIR, Mr Broso and Mr Riley. The respondent also sought interest on the sums paid by it and costs. Interest was claimed for the period from the date of payment in 2004 until the date the relevant funds are repaid. 15 Although the respondent claimed damages in the alternative, it is quite clear that its primary claim for relief was to reverse the transactions whereby it acquired shares in APIR and to obtain a full refund of the amounts which it paid for those shares plus interest. 16 The essence of the case propounded by the respondent at trial was that APIR and the individual appellants did not disclose to Mr Sharp the existence of two sets of Heads of Agreement. Under the arrangements embodied in those Heads of Agreement, Messrs Broso and Riley, who were and are Executive Directors of APIR, were entitled to receive as part of their remuneration at least 100,000 shares each in APIR at no cost to either of them. His Honour held that the appellants' failure to disclose the existence and terms of these arrangements was material. His Honour also held that the respondent would not have acquired the two parcels of shares to which I have referred had these matters been revealed to Mr Sharp during the negotiations which he had with the appellants. Mr Sharp had been told that a total of 50,000 shares was to be allotted to Messrs Broso and Riley but had not been told of the full entitlements which those men had secured from APIR. 17 His Honour held as follows (Donald Financial Enterprises Pty Ltd v APIR Systems Ltd [2008] FCA 1112 at [190]): In the present case, while the number of shares that might be issued in discharge of the completion payment under the second heads of agreement has a floor - 100,000 for each executive director - it has no ceiling, so that the number of shares that might be issued is potentially unlimited depending on the value of the APIR shares at the relevant time. In context, such an event, post acquisition, is a cause inherent in the thing itself - the second heads of agreement - and not extrinsic or independent of it, and should be taken into account in any assessment of the real value of the shares at the time of acquisition. This makes any assessment of loss or damage, other than for the full subscription/purchase price, exceedingly difficult, if not impossible. 18 His Honour went on to hold that the most appropriate remedy to be granted to the respondent was an order avoiding the share purchase transactions with consequential orders requiring a full refund of all moneys paid to APIR and to Messrs Broso and Riley pursuant to those transactions together with interest thereon. 19 There were many subsidiary issues dealt with by his Honour in his Reasons, findings in respect of which underpin his Honour's ultimate conclusions. Necessarily involved in his Honour's factual findings were findings as to the credit of the main witnesses who gave evidence at the trial. It is not necessary for me to traverse the detail of his Honour's findings concerning the important witnesses at the trial. It is sufficient for present purposes for me to observe that, in general terms, his Honour found Mr Sharp, the principal witness for the respondent, to be a reliable and truthful witness whereas his Honour had serious reservations about the evidence of Mr Riley and Mr Broso. 20 APIR also brought a cross-claim against the respondent and against Mr Sharp. His Honour dismissed the cross-claim. There has been no appeal in respect of his Honour's conclusions on the cross-claim.

[30]

The submissions of the parties 35 In the first part of his submissions, Mr DMJ Bennett QC, who appeared for the appellants with Mr MJ Heath, addressed the strength of the appellants' appeal. Mr Bennett placed particular reliance upon three Grounds of Appeal in order to justify his further submission that the appeal had reasonable (or, at the very least, reasonably arguable) prospects of success. 36 His first point was that the learned trial judge had approached the question of relief upon the basis that the correct principle to apply in the present case was to look at awarding expectation damages rather than reliance damages and that, in the circumstances of the present case, the approach said to have been taken by his Honour was incorrect in principle. 37 Mr Bennett pointed to [188] of his Honour's Reasons which was in the following terms: There is no doubt that when DFE entered into the SSD on 23 January 2004 and paid the sum of $530,000 to APIR in subscribing for 200,000 shares in APIR, it suffered a loss measured by reference to the difference between what it paid in ignorance of the existence of the second heads of agreement and what it, as a rational investor, would have paid, if anything, in the knowledge of the existence of the second heads of agreement; or what was described in HTW Valuers, at [36], by reference to authority, as the 'real value' or 'fair value' or 'what would have been a fair price to be paid … in the circumstances … at the time of the purchase'. Similarly, for the 81,904 shares in APIR it purchased from existing shareholders for the sum of $217,045.60. 38 It was this passage which was submitted by Mr Bennett to reveal the error which his Honour is said to have made. 39 Mr Bennett then submitted that, contrary to his Honour's express findings concerning non-disclosure, there had in fact been some attempt to disclose the critical information when a folder of documents called the 'due diligence folder' was offered to Mr Sharp but not taken and looked at by him. His Honour held that Mr Sharp was probably offered access to some folder or bundle of documents but that, at the time those documents were offered, they were misdescribed causing Mr Sharp not to pay any regard to them. Mr Bennett submitted that these findings needed to be taken into account in favour of the appellants when the Court came to consider the non-disclosure case propounded by the respondent. 40 The third submission made by Mr Bennett in this part of his submissions concerned interest and costs. 41 On 27 March 2007, the solicitors for the appellants wrote a letter to the then solicitors for the respondent in which they made an open offer. The letter was in the following terms: OPEN OFFER TO PURCHASE APIR SYSTEMS LIMITED SHARES

[34]

We look forward to receiving your client's response within the timelines set forth in this letter. 42 The offer contained in this letter was rejected. Mr Bennett submitted that it was rejected on irrational and unreasonable grounds. Mr Bennett submitted that, when the terms of the offer contained in this letter are properly understood in the context in which the offer was made, it should have had a significant bearing on the way in which his Honour approached the respondent's claim for interest and also the question of costs. The appellants' case on appeal will be that, having regard to the terms of this letter, no interest should have been awarded against them and costs should have been awarded in their favour rather than against them. 43 Mr Bennett then made various submissions directed to the terms of any stay that might be ordered. During the course of those submissions, Mr Bennett repeatedly put that, if the appellants were deprived of control of both the shares and the amounts which his Honour ordered to be refunded (excluding interest), the appellants would be unable to raise sufficient funds to cover the interest which they have been ordered to pay and would eventually be deprived of their opportunity to conduct the appeal. Further, Mr Bennett made clear that the appellants would be content with a stay merely in relation to interest and costs. He also accepted that, in the event (as appears highly likely) the shares are transferred to an entity which is not a party to the present litigation, it may well prove impossible for the appellants to return the shares to the respondent or to procure a return of the shares in the event that the appellants are successful in their appeal. Mr Bennett suggested that such an outcome was really only a problem for the appellants and need not concern the respondent. 44 Mr Bromwich, who appeared for the respondent, submitted that no stay should be granted. 45 Mr Bromwich submitted that, consistent with the correct approach to stay applications pending an appeal, the appellants must demonstrate a reason to warrant the exercise of the discretion to order a stay in their favour. In this context, the Court exercises a broad discretion. 46 Mr Bromwich relied upon Philip Morris (Australia) Ltd v Nixon [1999] FCA 1281. In that case, a Full Court of this Court held at [17]: The general principles governing an application for a stay pending the determination of an appeal or application for leave to appeal are not in doubt. The party seeking a stay must demonstrate a reason, or an appropriate case, to warrant the exercise of a discretion in his or her favour. This requirement is not satisfied by the mere filing of an appeal or an application for leave to appeal: Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 (CA), at 694. The Court has a discretion whether or not to grant the stay, and if so, as to the terms that will be fair. In the exercise of the Court's discretion, it weighs consideration such as the balance of convenience and the competing rights of the parties, in particular whether prejudice will be caused by reason of the grant or withholding of a stay: Alexander, at 694; Jennings Constructions Ltd v Burgundy Royale Investments Pty Ltd (1986) 161 CLR 681 (Brennan J), at 685. Within this framework, the Court exercises a broad discretion, and the party seeking a stay does not have to establish "special" circumstances: Powerflex Services Pty Ltd v Data Access Corporation (1996) 67 FCR 65 (FC), at 66, per Burchett J. In general, a party which has succeeded at the trial is entitled to the benefit of a judgment and thus to commence with the presumption that the judgment is correct: Powerflex, at 66. The question on the present application is how these principles apply to the unusual circumstances of the present case. 47 Mr Bromwich also placed reliance upon Alexander v Cambridge Credit Corp Ltd (1985) 2 NSWLR 685 in support of two particular submissions made by him as follows: (a) a stay will be granted if, unless it is granted, the appeal will be nugatory - there is no basis for that conclusion in this case; (b) although courts will not generally speculate about the appellant's prospects of success, this does not prevent some preliminary assessment about whether the applicant for the stay has an arguable case, a consideration which is protective of the judgment creditor where it may be plain that an appeal has been lodged without any real prospect of success and simply in the hope that of gaining a respite against immediate execution upon judgment. Mr Bromwich submitted that the appellants had poor prospects of success on appeal. 48 Mr Bromwich also directed some attention to the financial position of APIR. He submitted that the financial position of APIR was not such as to give confidence that it was going to be, or remain, in a position to meet the requirements of his Honour's orders.

[36]

Consideration and conclusions 53 In my view, the appellants' prospects on appeal are weak. I express this view as a tentative or preliminary view and only for the purpose of giving appropriate weight to those prospects when considering the present application. 54 Further, I am not convinced that the Amended Notice of Appeal contains a ground of appeal which supports Mr Bennett's submission concerning his Honour's reasoning in respect of damages and relief generally. Ground 8 seems to raise a different point and no other ground of appeal seems apt to cover the matter. 55 In any event, I think that there is real difficulty with the proposition that his Honour approached his consideration of the appropriate relief to be granted in the present case upon the basis that, were damages to be awarded, those damages would be expectation damages. His Honour's remarks at [188] of his Reasons (Donald Financial Enterprises Pty Ltd v APIR Systems Ltd [2008] FCA 1112) have to be read in context and in light of the arguments advanced to his Honour by the appellants at trial. 56 It must be remembered that his Honour did not award damages to the respondent but, rather, reversed the transactions. His Honour did so because his Honour also held that any assessment of loss or damage which involved the respondent keeping the shares was "… exceedingly difficult, if not impossible" (see Donald Financial Enterprises Pty Ltd v APIR Systems Ltd [2008] FCA 1112 at [190]). 57 The second ground of appeal developed by Mr Bennett in his oral submissions depends upon the appellants persuading the Full Court of two propositions. First, they will have to demonstrate that, within the bundle of papers offered to Mr Sharp but declined by him, there was material which amounted to appropriate and sufficient disclosure of that which his Honour found had not been disclosed. Second, they will have to persuade the Full Court that Mr Sharp's decision not to look at the material tendered to him operated in some way to relieve the appellants from liability. Both of these propositions are problematic. 58 The final grounds of appeal developed by Mr Bennett in his oral submissions concerned his Honour's discretionary orders in respect of interest and costs. Much will turn upon the Full Court's evaluation of the letter dated 27 March 2007. The offer contained in that letter did not address the payment of interest or the costs of the proceedings. The offer was made on behalf of unidentified persons or entities who were not parties to the litigation. Mr Bennett submitted that the respondent could have accepted the offer and gone back to the Court to argue about interest and costs. In this way, Mr Bennett sought to advance an argument that the offer made constituted, in substance, a satisfactory (albeit informal) Calderbank offer. My present view is that this is an extremely difficult argument, based as it is on a somewhat strained interpretation of the letter. 59 In the remaining grounds of appeal, the appellants seek to overturn findings of fact made by his Honour. Many of these were based upon his Honour's assessment of witnesses' credit. 60 It is for the above reasons that I consider the appellants' prospects in the appeal to be weak. This factor is, of course, only one factor to be considered. 61 In the present case, there are several other factors which militate against the grant of any stay. 62 There is no evidence to suggest that, should the appellants prevail in the appeal, the respondent would be unable to refund to the appellants the total acquisition consideration, together with any other monies that may be recovered by it pursuant to his Honour's orders pending the determination of the appeal. No submission was made by the appellants to the effect that the respondent may not be able to refund all relevant sums in due course, if required. 63 Further, in the evidence adduced in support of the present application, the appellants' solicitor said that the appellants were willing and able to "… continue to tender the two cheques for the judgement sum to the [respondent] …" and that the appellants " … remain willing and able to continue to tender the judgement sum to the respondent …". In the submissions made on behalf of the appellants, both in writing and orally, the same sentiment was expressed. 64 What, then, is it about the prospect of the respondent enforcing his Honour's orders that is of real concern to the appellants? Apparently, they are content to refund to the respondent the whole of the acquisition consideration paid for the shares in 2004. They are even prepared to run the risk of the consequences of not being able to return the shares to the respondent should their appeal be successful in circumstances where those shares have been transferred to a third party which is not prepared to, and cannot be compelled to, return the shares. 65 The answer to the question which I posed in the preceding paragraph seems to be that the appellants want a stay in respect of the order for interest and possibly the order for costs made by his Honour. Until assessed, the order for costs cannot be enforced in any real sense. Assessment of those costs will, no doubt, take some months. Furthermore, the respondent will have to weigh up the wisdom of having the costs assessed whilst ever the appeal remains on foot. It seems to me that the appellants' real desire is to obtain temporary relief from having to pay the interest which his Honour ordered them to pay. 66 In support of their present stay application, the appellants submitted that they should not be deprived of both the principal sums paid for the shares and the shares themselves because that state of affairs would lead to their being unable to raise sufficient funds to pay all of the interest and costs which they have been ordered to pay. There was no evidence from the appellants to support this contention and I am not disposed to accept it in the absence of evidence. 67 Further, and in any event, if no stay at all is granted, the appellants would be free to on-sell or charge the shares once the orders for reversal made by his Honour were performed (something which the appellants have repeatedly said they are prepared to do) and the so-called difficulty in raising funds would disappear because the appellants would have control of the shares for that purpose. 68 In circumstances where the appellants are prepared to consummate the reversal of the share transactions of 2004 and take the risk on appeal in the event that they are successful that the shares cannot be returned to the respondent, the real focus of the present application has to be on his Honour's orders concerning interest and costs and whether or not the appellants have a sufficient basis for a stay in respect of those two matters. 69 His Honour's orders in respect of both interest and costs are discretionary orders. The reasons which his Honour gave for making the orders which he made in respect of interest and costs are not obviously wrong. The appellants' prospects of overturning those orders are weak. In my view, the appellants have not advanced any compelling reason or argument for staying his Honour's orders in respect of interest and costs. Unlike Kalifair 55 NSWLR 737, the evidence does not demonstrate that the appellants cannot pay the amounts reflected in the orders which his Honour made. The evidence does not support a conclusion that the appeal will be rendered nugatory if no stay is granted. There is no evidence to suggest that payments made by or on behalf of the appellants to the respondent in fulfilment of his Honour's orders will not be able to be refunded in the event that the appeal is successful. 70 Having regard to the fact that the appellants are quite content to take back the shares and refund to the respondent the principal sums which it paid to the appellants for the acquisition of the shares, there is no justification for a stay of the reversal orders in the present case. Once that conclusion is reached, it seems to me that there is no justification for a stay of his Honour's orders in respect of interest and costs. All of the factors considered above point to this conclusion. 71 Were I minded to grant a stay of his Honour's orders in respect of interest and costs, I would only consider doing so if adequate security were provided. But, since there is no suggestion that the respondent will not be able to restore all payments made to it in the event that the appeal is successful, I think that the Court's discretion to deprive the respondent of the fruits of its success at trial should not be exercised in the present case by granting a stay on condition that adequate security is provided. 72 The respondent expressed concerns in argument before me that, should the appeal be successful, it would wish to have the option of retaining the shares and not want to be left in the position where the question of what should happen to the shares is within the sole control of the appellants. Indeed, the respondent went so far as to submit that it should not have to execute share transfers pursuant to orders 2, 3, 4 and 5 of his Honour's orders until the appellants have paid to it the sums required to be paid pursuant to orders 2, 3, 4 and 5 as well as those sums required to be paid pursuant to orders 6 and 7 (which dealt with interest and costs). In my view, his Honour's orders do not permit such a stance to be adopted by the respondent. Further, in circumstances where the relief granted conforms to the relief sought and where there has been no appeal by the respondent against the orders made on 30 July 2008, the respondent's stance is untenable. 73 In my judgment, if the appellants' application for a stay is refused, the shadows at which the respondent has been boxing will disappear. 74 For all of the above reasons, the appellants' application for a stay will be dismissed with costs. I certify that the preceding seventy-four (74) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster.

APIR Systems Limited v Donald Financial Enterprises Pty Ltd

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