Aushome Developments Pty Ltd v Ausline Group Pty Ltd

LEGISLATION CITED : Corporations Act 2001 (Cth) ss 232 & 233

CASES CITED : Campbell v BackOffice Investments Pty Ltd [2008] NSWCA 95 Smith Martis Cork & Rajan Pty Ltd v Benjamin Corp Pty Ltd (2004) 207 ALR 136

Aushome Developments Pty Limited (P) PARTIES : Ausline Group Pty Limited (D1) Jianbo Yu (D2)

COUNSEL : J O Anderson (P) R Washington (Ds)

SOLICITORS : F C Bryant Thomas & Co (P) Benjamin & Khoury (Ds)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EXPEDITION LIST

4735/09 Aushome Developments Pty Limited v Ausline Group Pty Limited & anor JUDGMENT (ex tempore) 1 HIS HONOUR: On 28 September 2009, the plaintiff Aushome Developments Pty Ltd instituted proceedings for the winding up on the just and equitable ground, or for oppression, of the first defendant Ausline Group Pty Ltd - in which it holds one-third of the shares and the second defendant Jianbo Yu is the other shareholder and director - and/or an order pursuant to Corporations Act, s 233, for the purchase of the plaintiff's shares in Ausline. 2 On 1 October 2009, an application for an interlocutory injunction came before the court in circumstances where Ausline, which is the registered proprietor of strata units at 8 to 10 Lachlan Street, Liverpool, had contracted to sell the ten or so residual units that remain unsold (the others already having been sold) in one line to Infinity One Investment Pty Ltd. Aushome alleged that the residual units were being sold to Infinity One at an undervalue, and that completion of the sales would frustrate or jeopardise the remedies which it might obtain, if successful, in the substantive proceedings. Then the defendants consented to an order that they not deal with the units the subject of the application, in accordance with the terms of paragraphs 4 and 5 of the summons, until further order of the court; liberty to apply on two days notice was reserved. 3 Subsequently, the purchaser Infinity One has served a notice to complete, which expires tomorrow, 11 December 2009. On 1 December 2009, the defendants filed an application, by notice of motion, to dissolve the injunction restraining them from completing the sales, but providing for the proceeds to be paid into their solicitors' trust account and retained there until further order of the court. That application first came before the court on 3 December, when directions were made to prepare it for hearing today, and it is that application that now falls for determination. 4 It is not in issue on the present application, and I accept, that Aushome has a seriously arguable case for the final relief which it claims in the substantive proceedings. For present purposes, I am prepared to assume that there is a strongly arguable case for final relief - that is to say, that it is strongly arguable that Aushome will be able to establish oppression for the purposes of the (CTH) Corporations Act 2001, s 232, and obtain either a winding up order or an order for the purchase of its shares in Ausline on that basis. 5 However, it is significant that Aushome does not seek, in the substantive proceedings, any order declaring void or voidable the contracts for sale of the residual units that are the subject of the present injunction; so much is evident not only from the terms of the summons, but also from the fact that Infinity One would be a necessary party to any such application yet has not been joined. Although Aushome has pointed to an apparent relationship between Infinity One and Ausline, it has not, on the present application, advanced any argument that those contracts could or should be regarded as void or voidable. Nor has it advanced any argument that the notice to complete served by Infinity One under those contracts is not valid and effective. 6 Accordingly, while there is a seriously arguable claim for final relief, it is not apparent that there is any, let alone a seriously arguable, claim, for a final injunction to similar effect to the interlocutory injunction. For this reason, Aushome sought to support the interlocutory injunction not as a conventional interlocutory injunction, but on the basis that it was in the nature of a Mareva order. 7 To my mind, it is a highly significant consideration on the present application that the contracts, completion of which is sought to be restrained, are not themselves impugned in the substantive proceedings. Moreover, unless the order sought by the defendants on this application is made, Ausline will be forced into default under its contracts with Infinity One, with the consequence that it may be exposed to a suit for specific performance, and/or a claim for damages for breach of contract. On the other hand, if the orders sought by the defendants are made, then the proceeds of sale will be paid into their solicitors' trust account and preserved there pending further order of the court or the determination of the proceedings. That applies not only to Aushome's notional one-third share of the proceeds (according to the respective capital contributions of the parties), but also to the second defendant's notional two-thirds share. That means that there will be held in the solicitors' trust account a fund, substantially greater than that to which Aushome has a prima facie claim, out of which any adjustment that might be required in favour of Aushome, if it is ultimately established that the sales are at an undervalue, can be made. 8 The evidence, as summarised in Mr Anderson's submissions for Aushome, suggests that the proceeds of the sales will be about $282,000 less than the value of the units as assessed by Mr Phillips, the valuer retained on behalf of Aushome. The evidence provides some explanation for such a discrepancy, in that it appears that the sales to Infinity One have not incurred agents' commission, which otherwise might amount to $30,000 per unit, and also attract a discount because they are of all the residual units in one line. But assuming that there is such a discrepancy as suggested in Aushome's submissions, then Aushome would arguably be entitled to one-third of the amount of the undervalue, or $94,000. 9 It was further submitted on behalf of Aushome that there had already been unexplained and at least arguably inappropriate and oppressive premature distributions of funds from Ausline to or in the interest of the second defendant, amounting to some $1,040,000. Assuming that to be so, and assuming that Aushome should have received one-third of such distributions, that would mean that there might need to be a further adjustment in Aushome's favour of $346,666 out of the remaining available proceeds. 10 When that amount is added to the adjustment on account of the undervalue, the total potential adjustment in Aushome's favour is about $440,000. The total proceeds of the sales subject to the current injunction will be in the order of $2,040,000. After allowing for Aushome's prima facie one-third entitlement of $680,000, the balance of $1,360,000 is more than ample to cover all the adjustments which might arguable have to be made in favour of Aushome, at least so far as the evidence currently reveals the position. 11 It was submitted, however, at least at one point, that it would not be open to the court to make such adjustments when calculating a purchase price for Aushome's shares for the purposes of the (Cth) Corporations Act 2001, s 232 and s 233. In particular, it was suggested the recent decision of the Court of Appeal in Campbell v BackOffice Investments Pty Ltd [2008] NSWCA 95, was to that effect. When that suggestion was advanced I found it surprising, because it ran contrary to my understanding of a well-established line of authority that when determining a purchase price for the purpose of a compulsory buyout order under the oppression power, one always took into account the oppressive conduct, with a view to fixing a fair value in all the circumstances so that the oppressed party would receive a sum which reflected the value which his or shares ought to have had, had the oppressive conduct not taken place. 12 In Smith Martis Cork & Rajan Pty Ltd v Benjamin Corp Pty Ltd (2004) 207 ALR 136, the Full Court of the Federal Court of Australia (Wilcox, Marshall, Jacobson JJ) summarised the authorities in this territory as follows:

[ 70 ] The authorities make it clear that once the discretion conferred by s 233 of the Act has been enlivened by a finding of oppression under s 232, the court has a wide discretion as to both the appropriate remedy and, if it orders compulsory purchase of shares, as to the mode of valuation of the shares. The authorities are set out in a recent decision of Campbell J in United Rural Enterprises Pty Ltd v Lopmand Pty Ltd (2003) 47 ACSR 514 ( United Rural Enterprises ) at [34] - [38].

[ 71 ] If the court considers it is appropriate to make an order that the other members purchase the shares of the oppressed shareholder, its task is to fix a price that represents a fair value in all the circumstances: see Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60 at 102 (von Doussa J) and on appeal Dynasty at FCR 143 (Spender, O'Loughlin and Branson JJ).

[ 72 ] As Davies JA observed in Shirim Pty Ltd v Fesena Pty Ltd [2002] NSWSC 10; BC200200074 ( Shirim ) at [12], the purpose of an order that the oppressor purchase the shares at a fair price is to compensate the oppressed shareholder for the oppression which has taken place. His Honour noted that this principle has been regarded as established ever since the decision of the House of Lords in Scottish Co-operative Wholesale Ltd v Meyer [1959] AC 324; [1958] 3 All ER 66.

[ 73 ] Davies JA in Shirim at [13] and Campbell J in United Rural Enterprises at [35], both referred to a passage from the judgment of Oliver LJ in Re Bird Precision Bellows Ltd [1986] 1 Ch 658 at 669. There, his Lordship specifically rejected a submission that the determination of the price was to be arrived at only by ordinary valuation principles.

[74] As the Full Court said in Dynasty at FCR 146, it is not just a question of value; it is a matter of fixing a price that should be paid.

[ 75 ] In United Rural Enterprises at [36] Campbell J observed that s 233(1)(d) of the Act does not specify the price for which the purchase of shares can be ordered and it says nothing about the basis on which the price is to be calculated. As his Honour noted, the only restriction on the way in which the price may be calculated is that it must be a proper exercise of judicial discretion.

[ 76 ] Other authorities which refer to the width of the discretion include Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 at [3]-[5] (Spigelman CJ) and E S Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1994) 15 ACSR 536 at 540 (Young J).

[ 77 ] Even if there is an agreement between the parties, as for example in the statutory contract contained in the constitution or articles of association, as to the way in which the shares are to be valued, the court is free to override the agreement if it makes a finding of oppression: see Dynasty at FCR [146].

13 In Campbell v BackOffice Investments Pty Ltd, Young JA said:

[463] I must now turn to the question of the valuation of the BackOffice share for the purpose of fixing a buy back price.

[464] The price on the authorities must be a "fair price". A basic requirement for determining the price is that it must be fair on the facts of the particular case: see Re London School of Electronics Limited [1986] Ch 211; Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60, 102 (on appeal (1995) 13 ACLC 1290).

[465] What is a "fair price" has been discussed in the authorities, but is still a relatively flexible concept. In E S Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1994) 15 ACSR 536 at 540, I said: 'The flavour of the judgments in the company oppression cases is that in looking to the fair value one most look at all the circumstances of the case and seek to put the oppressed in the same position as nearly as can be as if there had been no oppression, erring, if there is to be any erring, on the side of the oppressed'.

14 In my view, the law, in this respect is quite clear: in striking a price at which an oppressed shareholder's shares are to be purchased by the corporation or by the oppressing shareholders, the court does so on the basis that the oppressed party should receive a price reflecting the assumed circumstance that no oppressive conduct had taken place. Accordingly, in this case, assuming that it is ultimately established that the sales to Infinity One are at an undervalue, and/or that there have been inappropriate premature distributions of capital to the majority shareholder, and that a "buyout order" under the oppression power is appropriate, then the court will strike a price on the basis that a fair value for Aushome's shares is one calculated as if the residual units had been sold at full value, and as if no premature distribution had taken place - in other words, reversing the effect of the allegedly oppressive dealings. The mathematical calculations described above show that the proceeds of sale of the units in question will be more than ample to permit that to take place. 15 In any event, in circumstances where no basis for impugning the sales to Infinity One has been advanced let alone established, even on an interlocutory basis, it is difficult to see how continuation of the injunction could be supported, having regard to the principle that the court should not lightly interfere with the rights of third parties by restraining one party from completing a contract with a third party. 16 Accordingly, although there is a seriously arguable case for the final relief claimed in the summons, there is no sufficiently arguable case for a final injunction having an effect similar to the interlocutory injunction. If viewed according to Mareva principles, Aushome's claim for final relief will not be jeopardised if the orders sought by the defendants dissolving that injunction are made, because the proceeds of sale that will be preserved will be ample to make any necessary adjustment in favour of Aushome. In any event, the Court would not lightly restrain completion of a contract with a third party which is not impugned. The defendants are entitled to the relief sought in their notice of motion. 17 I make orders in accordance with paragraphs 1 to 7 inclusive of the Notice of Motion filed 1 December 2009. I order that the plaintiff pay the defendants' costs of the motion.

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