Aqua-Max Pty Ltd & Ors v MT Associates Pty Ltd & Ors [2001] VSCA 104

Aqua-Max Pty Ltd & Ors v MT Associates Pty Ltd & Ors [2001] VSCA 104 - VSCA 2001 case summary — Zoe

[63]

(a) Richard Rees unilaterally caused Aqua-Max not to pay MTA accounts in full from November 1991, notwithstanding that Sietel had sufficient assets to support the venture. (Although Westpac did not support the venture as at the end of 1991, NBA provided further funds to Sietel in 1992). This led to severe financial pressure on MTA members**.** On 11 March 1993 Rees again refused Trihey's request that MTA accounts be paid although told that Trihey was in "dire financial trouble".

(b) Richard Rees persisted (at least until late March 1992) in claiming that MTA had to provide extra funding beyond the 20 per cent required by the JVA. Rees threatened that otherwise the shareholding ratio would have to be changed to 90/10. He made the demands notwithstanding that he was told that there was no obligation on MTA to provide more than 20 per cent of extra funds. The threats were made, for example, in December 1991, on 11 February 1992 and on 25 March 1992. There was no basis for a 90/10 share adjustment.

(c) As at late March 1992 Richard Rees was seeking to persuade Trihey to agree to a pro rata share issue. (His Honour rejected Rees's claims that Trihey agreed on 9 March 1993 to the then proposed pro rata issue and that at the MTA shareholders' meeting on 27 March 1992 Trihey agreed that, when Sietel funding reached $3m, options to take up 2m. shares would be issued pro rata. His Honour found that this proposal was contrary to the JVA. Moreover, the loan account of Sietel exceeded $1.9m. at the end of August 1992 and therefore it would have had no difficulty in converting its loans to shares. But MTA would have been short by $380,000 had it sought to take up its proportion of the pro rata share issue.)

(d) Richard Rees threatened that Sietel would withdraw financial support for the project (which would have brought to an end Trihey's investment), although he had no intention that Sietel should withdraw support.

(e) Richard Rees inflated the Sietel loan account with Aqua-Max by unilaterally charging Aqua-Max:

(i) "substantial" amounts for

- office and administrative work supplied to Aqua-Max by Sietel

- rental

- insurance and leasing charges.

Although Trihey knew of the charges, he was not consulted about them and later disputed many of them.

(ii) compound interest on the loans. There was no agreement to that effect by MTA. The interest credited to Sietel by September 1992 was $400,000.

(f) Richard Rees caused Aqua-Max to repay the Sietel loan account in preference to the MTA loan account. His Honour found that there was an implied agreement that loans of Sietel and MTA would be repaid when Aqua-Max was in a financial position to do so and that this position was reached only in about October 1993. Rees, however, caused Aqua-Max to reduce the Sietel loan account from August 1992, that is, before it could properly do so, but in any event the loan account of MTA was not reduced. The following steps were taken by Rees:

- He caused in August 1992 two cheques received by Aqua-Max from the sale of units to be endorsed in favour of Sietel in reduction of its loan account, but nothing was paid to MTA.

- The project reached the stage of self-funding after September 1993, at which stage the loan account of Sietel was $4.2m.; it was reduced to $1.5m. by 30 September 1997, whereas the MTA loan account was not but should have been reduced.

- On 31 October 1993 Sietel paid $521,500 for its pro rata shares by means of a "round robin" transaction.

(g) Richard Rees sought to persuade Trihey to sign certain agreements (which would have destroyed MTA's interest in the venture). It was part of his attempt to destroy MTA's interest in the venture at a time when all the indications were that the project would be successful.

(h) On 12 February 1993 Richard Rees sought to pressure Trihey into signing false 1992 accounts (prepared under the supervision of Rees), which sought to make the issue of pro rata shares (480,000) a fait accompli.

(i) Richard Rees procured the appointment on 15 March 1993 of a third director to Aqua-Max (in order to be in a position to effect the share issue). He had been told on 11 March 1993 that Trihey opposed the issue of the 480,000 shares and that he (Rees) could not issue them on his own vote.

(j) Richard Rees procured two issues of shares by Aqua-Max to Sietel which amounted to oppressive or unfair behaviour as against MTA. That conduct began in about March 1993.

(i) In early 1993 Richard Rees effectively laid the ground work for the pro rata share issue on the pretext that it was being done to overcome the problem arising from the draft 1992 accounts, which showed that Aqua-Max was trading at a loss and had a shareholders' funds deficiency.

On 26 March 1993 the Sietel board (at the behest of Rees) resolved, in effect, to protect its proportionate interest in Aqua-Max in accordance with the JVA in view of its disproportionate provision of funds to the venture. Later that day, at the Aqua-Max board meeting which Trihey did not attend, Richard Rees reported that Sietel would not accept a subordination of its loan but would agree to a pro rata share issue provided that Sietel received its formula share entitlement before any pro rata issue. The Aqua-Max board then resolved to issue formula shares.

(ii) The Aqua-Max board meeting on 6 April 1993 which Trihey did not attend resolved to issue 1,062 formula shares purportedly in accordance with clause 7(5) of the JVA, but Richard Rees misapplied the formula. This changed the shareholding ratio to 87/13 in favour of Sietel. It was entitled to a lesser number of shares and "the issue of those shares was oppressive and unfairly discriminatory and prejudicial to MTA". His Honour re-calculated the entitlement of Sietel as 219 shares.

(iii) Richard Rees procured the issue of about 600,000 shares in Aqua-Max to Sietel. (Rees knew that MTA could not afford to take up its proportion of the issue and that therefore, upon Sietel's taking up both entitlements, the shareholding of MTA in Aqua-Max would be minimal.) The shares were eventually issued in November 1993, but the process commenced early in 1993. The shares were issued for the sole purpose of benefiting Sietel at the expense of MTA and for the purpose of destroying its interest in Aqua-Max. It was in breach of the JVA (and the expectations of the parties to the JVA), and the resolution of the Aqua-Max directors to issue those shares was for an improper purpose and not for the benefit of Aqua-Max. The improper purpose was to benefit Sietel and to destroy MTA's interest in Aqua-Max. Moreover, Sietel and Cook's used their voting power as shareholders of Aqua-Max, in resolving on 15 October 1993 to ratify the offer, for an improper purpose and contrary to the JVA and the expectations of the parties to it. "Their" conduct "in achieving what they did through board resolutions and shareholders' resolutions was oppressive, (etc.)". His Honour rejected the claim of Richard Rees that the shares were issued to avoid the 1992 accounts being qualified. The auditor had told the directors at the meeting of 26 March 1993 (as recorded in the Foo memorandum) that he would certify the accounts if Sietel supported Aqua-Max for the next 12 months. The draft accounts of February 1993 showed that Sietel was providing and continuing to provide financial support and Sietel in fact continued to do so. Hence there was no need to issue those shares for that purpose. The delay in implementing the pro rata share issue pursuant to the resolution of 6 April 1993 until November 1993 was tactical, that is, because of the presence of litigation and the parties' discussing settlement. Discussions broke down in August 1993 and Rees gave instructions to implement the pro rata share issue. This also contradicted the case of Sietel that the share issue was necessary because of the auditor's concern over the 1992 accounts.

(k) Richard Rees procured the transfer of one share in Aqua-Max from Sietel to Cook's in order to have a quorum at the shareholders' meetings since MTA refused to attend and Sietel was the only other shareholder. (Unless there was a quorum, Richard Rees could not procure the relevant resolutions for the purpose of issuing the shares.)

(l) Richard Rees procured the Aqua-Max board on 28 September 1993 to resolve that Trihey had vacated the office of director of Aqua-Max and that Lillie be appointed in his place.

(m) Richard Rees dealt with Sietel and Aqua-Max as if he owned them beneficially and could do with them what he liked. He was responsible for the decisions of the board of each company with little regard for minority shareholders. Thus (in addition to the above actions of Rees, which demonstrated his use of his dominance and control over the affairs of Sietel and Aqua-Max in order to achieve his ends), he:

(i) unilaterally procured Sietel to forego a debt of $600,000 owed by Aqua-Max to it in 1993;

(ii) unilaterally procured Sietel to reduce the rent payable by Aqua-Max;

(iii) did what he liked with respect to records, minutes and accounts; for example, the draft accounts for the 1992 year were false;

(iv) caused resolutions that were passed to be ignored, for example, the resolution of 6 April 1993 for the issue of pro rata shares was not implemented until November 1993; the delay in the implementation of that resolution was tactical;

(v) coerced Trihey into signing the 1991 accounts of Aqua-Max; he told him if he did not sign he would not be paid.

The judge's views on credibility

[73]

The appellants did not, either in their notice of appeal or in submissions, take serious issue with the legal propositions upon which the judge had relied. In the notice of appeal, however, the appellants claimed that the judge had erred in holding that the relationship between Sietel and the respondents was governed in whole or in part by the expectations and understandings of the parties not circumscribed by legal or equitable rights and obligations and not supported by the JVA. The appellants contended that the judge had erred in identifying certain expectations and understandings of the parties which were inconsistent with the terms of the JVA. The appellants' written and oral submissions focused on two principal findings of the trial judge as to specific conduct in which Sietel and its representatives had engaged, first the formula issue and secondly the pro rata issue. The appellants submitted that the judge erred in finding that these two share issues had amounted to conduct which was oppressive, unfairly prejudicial to or unfairly discriminatory against MTA. As to the formula issue the appellants submitted that, on its proper construction and using the figures adopted by the trial judge, the formula in the JVA entitles Sietel to at least the number of shares issued to it pursuant to the formula issue. The submission continued that even if his Honour's construction of the formula was correct, allowance should nonetheless have been made for accrued but unpaid interest, being compound interest. A third submission as to the formula issue was that in any event, even if there had been error in construing and applying the JVA formula, any such error was incapable of constituting oppression. It was submitted that Richard Rees construed and applied the formula in a way that a reasonable director could readily have done; and that on an objective test the approach adopted was not oppressive or unfair and therefore that the findings of the judge that the formula issue was motivated by self-interest and involved a breach of the fiduciary duties of Richard and Delwyn Rees and was thereby vitiated was not open on the evidence. As to the pro rata issue the appellants submitted that the finding that it was motivated by an improper purpose was not reasonably open. In respect of the judge's treatment of oppression and unfairness generally the appellants submitted that the judge had given too wide an operation to the concepts of legitimate expectations and understandings of the parties, had identified expectations and understandings which were inconsistent with the terms of the JVA and to the extent that either or both of the findings of oppression and unfairness drew support from other findings as to the credit of witnesses these also were tainted by error and should be set aside.

[113]

This criticism of the judge's findings mistakes, we think, the purport of his Honour's reasoning. Richard Rees's decision that Sietel forgo this debt owed by Aqua-Max in 1993 was mentioned by his Honour in the context of Rees's failure to refer that decision to the shareholders of Sietel. The respondents had submitted at trial that the decision to credit the sum of $600,000 in favour of Aqua-Max was actually made in August, or backdated to before 31 August partly to meet promises which had been made by the directors of Aqua-Max in March to Tawil, to ensure that Tawil as auditor would pass Aqua-Max's accounts without qualification. The evidence given by Richard Rees on this issue was in several respects open to question, not least because, in his very lengthy affidavit of 10 February 1998, he had sworn that in August 1993 amounts totalling $600,000 were credited by Sietel in Aqua-Max's favour, "i.e. were deleted from the loan account because Aqua-Max was doing so badly it appeared it would not be able to ever pay the debt." His Honour would have been given cause to question this evidence in light of the fact that as far back as 1991 approval in principle had been given by all relevant authorities for a five-star energy rating gas hot water storage unit, and that by 30 November 1991 in the operations of Aqua-Max, as his Honour found, "all systems were go". The production line had been installed and was then in use. His Honour found that the project was then proceeding efficiently and as expeditiously as possible with every confidence that it would be successful. In August and September 1992, Aqua-Max received its first income from the project, in cheques totalling $494,547. Trihey and Richard Rees endorsed these cheques to Sietel as part repayment of its loans. Counsel for the appellants put to us during oral submissions that, by late in 1993, Aqua-Max was becoming profitable. In any event, even if Aqua-Max could have been described as being in a precarious state late in 1993, his Honour was, we think, perfectly entitled to express surprise at Rees's evidence, and to use this event as an example of his being responsible for decisions made by the board of Sietel with little regard for minority shareholders.

[148]

(a) Sub-clauses (1) and (2) of clause 7 require Sietel to provide loans of up to $1m to Aqua-Max secured by a first ranking mortgage debenture in favour of Sietel or its nominees at commercial lending rates. The loans are to be made in three stages. $50,000 is to be provided for each of stages A and B and the balance is to be made available thereafter subject to certain progress being made in the development of the venture.

(b) Sub-clause (3) provides that, if $50,000 proves to be insufficient funding for the purposes of stage A or stage B, additional funds (not exceeding $50,000 per stage) "shall be provided" by Sietel and MTA by way of loans in proportion to their respective shareholdings in the company. It seems, given the events that have occurred, that the parties rolled together stages A and B and, in the circumstances, treated Sietel and MTA as being required to contribute $80,000 and $20,000 respectively.

(c) Sub-clause (4) deals with the provision of yet further loan funds to Aqua-Max. It provides that such additional funds will be sought from external sources but, should they not be forthcoming from them, they "will be contributed by the parties in proportion to their [respective] shareholdings ...".

(d) Sub-clause (5) provides that, where either of the parties has contributed "a greater proportion of loan funds than it is required to contribute because the other of them fails to contribute its due proportion, their respective shareholdings in [Aqua-Max] shall be adjusted in accordance with the formula set out in the schedule."

The schedule is in the following terms:

"FORMULA

Sn = St x X

Y

where:

Sn = additional shares to be offered at par to shareholder following injection of funds.

St = total number of shares of Aqua on issue at the commencement date.

X = additional loan funds provided by shareholder in excess of his commitment under Clause 7(2), (3) and (4).

Y = total loan funds advanced by share holder under the agreement at the date when this formula is applied."

[151]

The calculations were apparently made shortly after the directors' meeting of 25 March 1992 and were based on the assumption that Sietel's loan account with Aqua-Max was or was soon to be in the order of $3m. They were tendered in evidence as Exhibit RR93 to his affidavit which was sworn 10 February 1998. The first page of that exhibit reproduces the formula in typed form; it also contains his handwritten notations and calculations. For reasons which will become apparent shortly, they demonstrate that, in making his calculations, Richard Rees had scant regard to the terms of clause 7, and in particular, to the terms of clause 7(5) and the formula. It is not surprising that the appellants did not seek to defend these calculations before his Honour or on appeal. It is apparent from Sietel's loan account with Aqua-Max as at 26 February 1992, which was tabled at the directors' meeting of 25 March 1992 (part of Exhibit RR 93) and which Richard Rees used to determine the amount of Sietel's contributions to Aqua-Max, that leasing charges incurred by Sietel relating to equipment used by Aqua-Max were treated as loans by Sietel to Aqua-Max. It is relevant to note that Rees took those charges into account as part of Sietel's contributions under clause 7 notwithstanding that, as he well knew, they were challenged by Trihey. For some reason which has not been explained by Rees in his evidence and which is not apparent from his notes, notwithstanding that he took Sietel's total contributions under clause 7 as totalling some $3m, he assumed for the purposes of his calculations that the total funds advanced by Sietel, namely, "Y" in the formula, amounted only to $1m. He also seems to have assumed that "X" was $2.1m (presumably being the sum of $0.1m which he apparently took to be the amount contributed by Sietel and MTA in respect of stages A and B and the $2m which was contributed by Sietel as additional funds). On that basis he applied the formula to reach the conclusion that Sietel was entitled to 4,200 formula shares (2,000x Click here for Picture ), which would bring its total shareholding in Aqua-Max to 5,800 shares, although in his notes he incorrectly showed that total as 6,800 shares (being 91.9 per cent of the total). It is obvious that the calculations are riddled with serious and blatant errors which invalidated his conclusion as to Sietel's formula share entitlement and which demonstrate that, in making his calculations, he effectively disregarded the provisions of clause 7, including the wording of the formula.

[161]

We entertain no doubt that the judge was right on this point. Clause 7(1) spoke of the provision by Sietel of loan funds of up to $1m. by way of loan secured by a debenture at commercial lending rates. There is a dispute between the parties about whether Sietel was entitled to compound interest, but that question need not be considered for present purposes, since we think it clear that interest was not to be taken into account in arriving at either X or Y in the application of the formula. The appellants argue that accrued but unpaid interest "fits readily within the definition of a loan". But the question is whether interest forms part of "loan funds" within the meaning of that expression in the formula where X and Y are defined. Those definitions throw one back to the expression "loan funds" which appears in several places in clause 7 itself. Clause 7 speaks of the provision of loan funds and it is, as we have said, an unnatural use of language to treat as part of the loan funds provided the interest payable in respect of the loan. Especially is it unnatural to speak of the accruing of interest as the provision of loan funds "in stages", to use the words of clause 7(2). Moreover, clause 7, in fixing its limit of $1m. and in dealing with the provision of that amount in stages, shows that the interest at commercial lending rates which is to be paid is not to be taken into account in calculating how much has been provided in loan funds. If the view put forward by the appellants were to be accepted, the situation could readily arise in which it would be difficult to say whether the initial advance provided for by clause 7(2)(a), the further advance provided for by clause 7(2)(b) and the advance of the balance provided for by clause 7(2)(c) had already been made. If Sietel advanced initially $40,000, would it be able to say that, notwithstanding that stage A in fact required more money, it was not obliged to advance an additional $10,000 because of the probability or certainty that, as a result of the accruing of interest, the amount of the "loan funds" already provided by it would grow from $40,000 to $50,000? It seems to be the consequence of the appellants' submission that at a given point of time it will be able to resist a request for the provision of further loan funds on the ground that what it has already done will, or will probably, at some time in the future discharge its obligation to advance a specified sum. Such an approach does not make commercial sense and we entertain no doubt that clause 7, in speaking of "loan funds", "funding" and "additional funds", is concerned with actual advances.

[176]

It is apparent that, since the formula has been effectively incorporated into clause 7, the meaning of its relevant provisions must be determined having regard to the terms and operation of the substantive clause. Clause 7 reflects the recognition by the parties that Aqua-Max will require loan funds for the purpose of financing the development phase of the joint venture and that such funding will come, at least in large part, from the parties. It also reflects their recognition of the inequality of their respective abilities to provide loan funds for the venture. It seems clear enough that it was assumed that Sietel had by far the greater ability to provide such funding either from its own resources or indirectly. Thus, the broad scheme of the clause is to require the parties (by clause 7(1), (2) and (3)) to provide a minimum amount by way of loan funds - whereby Sietel would contribute the lion's share of up to $1.08m and MTA up to $20,000 - and to facilitate (by clause 7(4) and (5)) additional funding beyond the minimum loans either from outside sources or, if it be provided by the parties, in proportion to their shareholdings. But there is also a recognition by the clause that, if the additional funds come from the parties, one of them - more likely MTA - might not be able to match the contribution of the other - Sietel - and that, to the extent that the shortfall assumed by the larger provider - Sietel - that would come at a "price", namely, a dimunition in MTA's shareholding in Aqua-Max and a corresponding increase in Sietel's stake in the company in accordance with a formula. It seems that the parties intentionally did not provide by clause 7 that the extra shares would be issued in respect of all additional funds made by a party in excess of its obligations under clause 7(4). They could have said so in the JVA, but they did not do so. Instead, they limited the entitlement to additional shares to such funds as have been provided by one party because the other did not make its due contribution. It seems likely that such a restriction on the further share issue was imposed to avoid the possibility of Sietel gaining a significantly greater proportion of the shareholdings in Aqua-Max merely by providing substantial loan funding which, in relative terms, it could well afford to do, particularly if it saw that course was advantageous to its interests.

[183]

It was contended on behalf of the respondents that the issue of 1,062 formula shares, which increased Sietel's holding in Aqua-Max to 87 per cent of the issued shares and correspondingly reduced that of MTA to 13 per cent, amounted to conduct which was oppressive and unfair and prejudicial to MTA contrary to s.260 of the Law. The appellants say that, even if the judge was right in all respects in the view he took of the effect of clause 7 and the formula, he erred in characterising the making of the formula share issue as oppression or unfair conduct falling within s.260. The question whether the judge erred in this respect will not affect the outcome of the appeal with which we are presently concerned. For in the first place, even if the formula share issue, considered by itself, did not offend against s.260 and was in addition not something that could be used by the respondents together with other matters in support of their case under s.260, that share issue would still have to be set aside as unlawful under the general law, by which we mean the law without regard to s.260. If the judge was right in all respects in his interpretation of clause 7 and the formula, there was no defence to a claim that the share issue should be set aside and the share register rectified. The allegations and the prayer for relief in the statement of claim in the second proceeding are sufficient to found the claim to have the formula share issue set aside independently of s.260. The appellants do not suggest otherwise and do not suggest that there is any defence to such a claim once the view taken by the judge on the questions of construction of clause 7 is accepted. Indeed, the appellants might conceivably turn out to be worse off if the formula share issue was dealt with under the general law as opposed to s.260, since it might perhaps be suggested that the appropriate order under the general law was the setting aside of the share issue without substituting for it another issue - of a smaller number of shares - that might properly have been but was in fact not made.

[194]

Next the appellants submitted that his Honour had misconstrued the joint venture agreement in various ways. A number of specific errors were asserted. It was argued that the JVA contained no term prohibiting further share issues, rather it provided for the proportionate shareholdings to be maintained, subject to the application of the formula. In so far as his Honour identified a term prohibiting a pro rata share issue until the project no longer required funding, it was submitted there was error. Secondly it was argued that the JVA did not require Sietel to lend more than $1,000,000 (alternatively $1,080,000) to Aqua-Max and his Honour erred in finding otherwise, or in finding that a term was implied that Sietel was obliged to fund the project beyond these limits, irrespective of any contribution by MTA. A related contention was that his Honour erred in concluding that Sietel's obligation to fund the project was subject to no fixed limit, regardless of MTA's contribution. The argument was that the JVA revealed parallel obligations to contribute funds in proportionate amounts. Next it was argued that the JVA did not require Aqua-Max to pay the full amount of disputed claims made by MTA, or require Sietel to fund Aqua-Max to do so. There was, it was submitted, no obligation on Aqua-Max to pay the full amounts claimed by MTA, which were genuinely in dispute. Then it was submitted that the JVA did not contain any term prohibiting or restricting the repayment of loans to a party advanced beyond the required proportion in respect of that party; and that the identification of such a term led the trial judge wrongly to find that in repaying part of its loan to Sietel in August 1992, Aqua-Max had breached the JVA. Next it was argued that the JVA did not prohibit Aqua-Max from granting Sietel security in respect of additional loans. Finally it was said that the JVA contained no term prohibiting the transfer of shares to third persons. His Honour had, it was argued, erred in implying terms in respect of the provision of security or preventing such transfers to third persons. Each of these errors, so it was said, infected the judge's assessment of the expectations and understandings of the parties to the JVA, and therefore the finding that the two share issues were oppressive and unfairly discriminatory.

[212]

In all these circumstances the respondents' submissions on the question of Trihey's supposed boycott should, we think, be accepted. The appellants ultimately contended that Trihey's boycott did not begin until after the meeting of 15 March 1993. After that meeting the Rees interests maintained that they had gained control of the board by the appointment of Delwyn Rees and no longer needed the presence of Trihey at board meetings or to sign the company's accounts. Indeed, in a letter dated 23 March 1993, Geoffrey Rees wrote to Bult that it was "now too late for Mr Trihey to question the terms and conditions for the provision of the equipment, premises, administration and finance facilities". Thereafter it was made very plain in correspondence between Trihey's solicitors and Geoffrey Rees's firm, Ward & Partners, that Trihey's legal advisers regarded the supposed meeting of 15 March 1993 as invalid and considered that any step taken or decision made by the newly constituted board of Aqua-Max would therefore be invalid, and that the proposed annual general meeting of 2 June 1993 would be invalid. In these circumstances, Aqua-Max, if the appointment of Delwyn Rees was valid, no longer required the presence of Trihey at board meetings or to sign the company's accounts. On the other hand, had Trihey attended board meetings thereafter, he would have run the risk that his presence and co-operation in the conduct of board meetings would have destroyed any prospects he might otherwise have had of a successful challenge to the appointment of Delwyn Rees as a director, the formula issue which was about to occur, the acceptance of the 1992 accounts of Aqua-Max or the resolution in these accounts of MTA's disputes with Sietel. The judge's findings of fact, which we think are impregnable on these issues, provide an adequate justification for Trihey's refusal from 15 March 1993 onwards to attend board meetings of Aqua-Max and for his refusal to participate in the conduct of Aqua-Max's affairs, to the extent to which this occurred.

[219]

A further difficulty with the appellants' contentions would arise if it were to be assumed that the board of Aqua-Max was accepting and acting upon the concern of its auditor as to the balance sheet deficiency and his supposedly principal anxiety that Aqua-Max should not trade whilst it was insolvent. If this concern did indeed lead the board to make the pro rata issue, it should have been acted upon without delay. No step was however taken to issue the additional shares for some six months, indeed not until after the close of the financial year in question, and it was then followed by the immediate repayment of the moneys raised in that allotment. By the time the allotment came to be made Sietel had, as at or about 31 August 1993, credited Aqua-Max with $600,000, in the various ways already mentioned, and by so doing reduced the loan account as at August 1993 from $4.216 million to $3.616 million. The 12 February 1993 draft accounts for Aqua-Max included a statement of support from Sietel for Aqua-Max, although the later signed accounts did not. The accounts for the following year also included a statement of support from Sietel for Aqua-Max. No evidence was given by Sietel's directors in relation to the giving of a statement of support in April 1993 as to any basis on which they would not have been prepared to do so. Sietel, as it happened, did continue to support Aqua-Max financially throughout the relevant period. In relation to the second point mentioned in paragraph [162] above, no evidence was given in the appellants' case of any calculations produced to or made by the board of Aqua-Max leading to the decision to allot 600,000 shares to shareholders, as against 1 million, 1½ million, 2 million or merely 400,000. Nor was any explanation given as to why Sietel subscribed only for 521,000 shares and failed to take up MTA's allotment of 78,000 when MTA failed to do so, if the full allotment of 600,000 shares was thought to be necessary to cure the balance sheet insolvency.

[224]

We think there is no substance in these arguments. We have already indicated our view that there may well be found an implication in the JVA that loan accounts should not be used to purchase shares in Aqua-Max without the consent of all parties to the JVA. That indeed seems to have been the very point being made by Trihey in the passage from his November 1993 affidavit quoted above, that Sietel was wrongly seeking to use its loan account for this purpose. The reference in early 1992 to the possibility of using the loan accounts to purchase shares in Aqua-Max was in a context in which the Sietel interests were applying a "financial squeeze" to Trihey and MTA and seeking already to reduce MTA's interest in Aqua-Max from 20 to 10%. When the board of Aqua-Max passed its resolution on 6 April 1993 permitting the shareholders to use their loan accounts to pay for the pro rata issue then contemplated, Trihey was not sent the minutes of this meeting and was given no notice of the contents of the resolution. The first draft of the notice which was to be sent from Aqua-Max to MTA offering shares under the pro rata issue included a reference to the right of shareholders to use their loan accounts to pay for these shares. But the notice that was actually sent to MTA made no reference to any such entitlement. No notice was, it seems, given to MTA that it was entitled to use the loan account to pay for the shares in the pro rata issue. Furthermore the evidence was that, by the time the pro rata issue came to be made, Aqua-Max was refusing to pay MTA's accounts and had already made a counter-claim against MTA for damages. The evidence of Richard Rees was that by this time the loan account of MTA had become a disputed account and, accordingly, any attempt by MTA to use its loan account would have been disputed by the board of Aqua-Max and the Sietel interests. In these circumstances it could not have been said on all the evidence that MTA had the wherewithal to take up its allotment under the pro rata issue, but had simply elected not to do so. MTA at the time had no available funds to pay for such an allotment. On all the evidence before the judge if MTA had sought to use its loan accounts to pay for the shares, the board or the Sietel interests would not have permitted MTA to do so. The Rees interests were well aware that MTA had no money, and Richard Rees had repeatedly refused to allow Aqua-Max to make the consultancy payments owing to MTA. Any right of MTA to use its loan account in payment for shares was entirely dependent upon the goodwill of the Rees interests. The judge several times in his judgment had commented upon the very poor financial situation of MTA and Trihey which plainly arose as the result of the failure of Aqua-Max to pay MTA and Trihey and the "financial squeeze" which had been applied, a situation which was part, as his Honour found, of the attempt by Delwyn and Richard Rees to destroy MTA. Furthermore MTA could not have subscribed for shares in the pro rata issue without in effect acknowledging the validity of the formula issue of shares.

[229]

The facts supporting the judge's finding of oppression included the following. Aqua-Max had not paid MTA and Malz's accounts since December 1991. In early 1992, having reached the view that the JVA worked against the interests of Sietel, Richard Rees had sought to change Sietel's percentage of the shares in Aqua-Max from 80 to 90%, had threatened to cut funding by Sietel to Aqua-Max, and had pressured Trihey to accept the proposal for the issue of 2,000,000 share options, knowing that Trihey was opposed to the proposals, and also that MTA could not afford to subscribe for 400,000 share options. Richard Rees had then pressured Trihey to sign the 1992 accounts of Aqua-Max which Trihey regarded as false and which claimed, inter alia, that 480,000 pro rata shares had been issued. In August or September of 1992, Rees had pressured Trihey into endorsing a cheque for $494,500 to Sietel, without using any of it to pay MTA's accounts. In August 1992 Rees had pressured Trihey to sign agreements for the purpose of destroying MTA's interest in the joint venture. By February 1993 the consequences of the financial pressure applied by the Rees interests to MTA had been that Croxford and Fiddler had left MTA and begun working as employees of Sietel in circumstances in which the consultancy fees due to them from their employment with MTA were paid in lump sums of $35,000 direct by Sietel to them. This was followed shortly afterwards by the 15 March 1993 meeting at which Delwyn Rees was appointed as a director. Then in April 1993 the formula issue was made under which Sietel received 1,062 shares in Aqua-Max, thus wrongfully increasing Sietel's percentage of the shareholding in Aqua-Max from 83% to 87%. Throughout 1993, Richard Rees had substantially excluded Trihey and his solicitors from participation in the affairs of Aqua-Max and had failed to provide information both as to board minutes and notes of meetings said to have occurred between Richard Rees and Trihey. Thereafter the deficiency in shareholders' funds had been used as an excuse to issue pro rata shares in Aqua-Max, knowing that MTA had no funds available itself to pay for such shares and in circumstances where MTA was not informed that it might be entitled to use its loan account with Aqua-Max to pay for such shares. In consequence MTA's shareholding in Aqua-Max had been reduced to 0.076 per cent of the total shareholding of the company.

At a glance

Court

Decision date

Before

Source

Judgment (318 paragraphs)

Parties