BETWEEN : AWARD HOLDINGS PTY LTD (ACN 009 230 719)

Interlocutory injunction - Validity of a notice pursuant to the Articles of Association of a company - Turns on own facts

Plaintiffs : Mr S Owen-Conway QC & Mr T R Stephenson

American Cyanamid Co v Ethicon Limited [1975] AC 396-408

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1 WHITE AUJ : The plaintiffs are each the holder of five issued shares and the first defendant is the holder of 35 issued shares in Margaret River Vines Pty Ltd ("the Company"). There are three other shareholders, each with one issued share in the Company. Article 22A of the Articles of Association of the Company provides in relevant part:

"(1) This Article shall govern the sale of shares by and between members of the company and shall be given such fair large and liberal interpretation as to best attain the object and purpose that any member or trustee in bankruptcy or personal representative of any member desiring to sell or transfer any or all of the shares held by him shall first offer them for sale in accordance with and upon the conditions set forth hereinafter.

(2) Except where the transfer is made pursuant to subclauses (8) and (9) in this Article every member or trustee in bankruptcy who may desire to sell or transfer any shares and every personal representative of a deceased member who may desire to sell or transfer any share or shares of the deceased (hereinafter called 'the proposing transferor') shall give notice in writing (hereinafter called 'a transfer notice') to the company that he desires to transfer the same. Such transfer notice shall specify the sum he considers to be the fair value thereof and shall (subject as is hereinafter provided) constitute the company his agent for the sale of shares to any member or members of the company or other persons nominated by the directors at the sum so fixed.

(3) The secretary of the company shall immediately upon receipt of the transfer notice for so long as Fairmont Nominees Pty Ltd (ACN 050 161 629) ("Fairmont") shall be a member of the company send a notice advising Fairmont of the number of shares for sale and naming a day (being twenty eight (28) days after the date of dispatch of the written notice to Fairmont) on or before which Fairmont may by notice in writing to the company exercise the right to acquire such share or portion of such shares and if Fairmont does not exercise the right within such time it shall be deemed to have declined it. After the receipt of a reply from Fairmont that it does not wish to purchase all of the shares or the expiry of the said period of twenty eight (28) days the said shares which are not acquired by Fairmont shall be offered to each of the other members of the company other than the proposing transferor at the same price and shall be allocated to any member willing to purchase the same within a further period of twenty eight (28) days after the date of dispatch by the company of written notice to those other members. If more than one member wishes to purchase the share or shares then the secretary of the company shall draw lots to determine which member shall be entitled to purchase the same. If no member is willing to take all or any of the said shares then the shares not purchased by the members may be allocated within a further twenty eight (28) days to such person or persons selected by the directors who are willing to purchase the same.

(6) If the company shall not with the space of three (3) months after being served with a transfer notice find a member or other person whom the directors are prepared to register as a shareholder willing to purchase the shares and give notice to the proposing transferor as provided in this article, the proposing transferor shall at any time within the next two (2) calendar months afterwards be a liberty to sell and transfer the shares to any person at a price not lower than the value specified in the transfer notice. If the proposing transferor does not complete the sale and transfer of the shares for this price within the said two (2) calendar months the shares shall again be offered to Fairmont and the other members pursuant to article 22A(3) before they can be sold by the proposing transferor to any third party."

(Sub-clauses 8 and 9 are not of relevance herein).

2 The first defendant wishes to dispose of its 35 shares in the Company. It gave notice to the Company of this wish, as a result of which a transfer notice was addressed to the other shareholders, including the plaintiffs, in the following terms:

"Margaret River Vines Pty Ltd

ACN 081 964 249

Registered office: 1st Floor, 6 Kings Park Road, West Perth WA 6005

Notice to Shareholders Pursuant to article 22A of the Constitution dated 23 March 2001

Margaret River Vines Pty Ltd ("the Company") advises that it has received notice from a member that it wishes to sell all of its shares in the Company and, in accordance with article 22A of the Consitution (sic) notice is hereby given to members.

A member wishing to purchase the shares for the terms as offered must advise the Secretary of the Company in writing to the company at its registered office within the time specified in article 22A being 28 days after the date of dispatch of this notice. Pursuant to sub-clause (4) of clause 22A, the tranferor (sic) is not required to sell a part only of the shares offered.

Details of the offer are as follows:

Transferor: Fairmont Nominees Pty Ltd

Number of shares: 35

Price: $950,000 cash, subject to:

- the purchaser agreeing to purchase Lot 5, Caves Road for the price of $1,350,000 from Monteath Vineyard Management Pty Ltd as trustee for the Caves Road Vineyard Trust;

- the purchaser agreeing to establish, within a period of three years from the date of purchase, a vineyard on Lot 5, Caves Road of an area of at least 16 hectares or such lesser area as is determined viable by an independent viticultural consultant;

- the purchaser agreeing to engage Professional Services (WA) Pty Ltd ("PSWA") as property manager for the sum of $185,000 per annum plus 1,000 cases of wine (of a label acceptable to PSWA) for a minimum period of five years;

- the purchaser agreeing to purchase 50% of Monteath Vineyard Management Pty Ltd ("MVM") for the sum of $85,000 cash plus an undertaking to meet any cash flow shortfall experienced by MVM in the undertaking of its business as Manager of the Cale's Ridge Estate vineyard;

- the purchaser agreeing to appoint MVM to establish and manage the proposed vineyard on Lot 5 Caves Road;

- the purchaser agreeing to MVM engaging PSWA as project manager of the Cale's Ridge Estate vineyard and the proposed Lot 5 vineyard;

- the Company agreeing to allow the purchaser security over Lot 2, Palandri Road in respect of borrowings in relation to the $950,000 purchase price subject to agreement to progressively reduce the principal to fully amortise over a maximum of 10 years.

Settlement: In full within 14 days of acceptance.

(Signature)

Bruce John Monteath

Secretary"

3 In the indorsement to the writ of summons and in affidavits filed in support of their application for an injunction restraining the first defendant until the trial of this action from selling its shares in the Company without the approval of the Court, the plaintiffs allege, inter alia, that, prior to their subscribing for shares in the Company, it was represented to them that, although they would be minority shareholders, they would in effect control the Board as, so long as the plaintiffs were shareholders, their respective representatives, Norbert Radny and Keith Huxtable, would be directors and the only other director would be Bruce Monteath. The first defendant denies the alleged representation.

4 There are problems in relation to this allegation, apart from the inherent improbability that a majority shareholder would give control of the Board to minority shareholders. The Memorandum and Articles of Association of the Company provide, in Article 57 that: "Until otherwise determined by a general meeting the number of directors shall not be less than one nor more than seven."

5 In a letter written on behalf of the plaintiffs by their solicitor on 9 April 2001, (Ex IBM15 to Mr Murie's affidavit of 25 June 2001, the statement appears at 163:

"Also, we remind you of express representations made by Mr Bruce Monteath and/or his agents or servants to our clients that our clients would be entitled to be directors of (the Company) so long as they were members of (the Company). In reliance on this and other representations our clients invested in (the Company). If there is any attempt to resile from this representation our clients will use all legal means available to them to protect their rights."

6 I understand that that representation, which differs materially from that now relied upon by the plaintiffs, is not denied by the first defendant.

7 Although the plaintiffs acquired their shares in June 1998, it seems that Messrs Radny and Huxtable did not become directors of the Company until June 1999.

8 The plaintiffs allege that in about June 2000, Mr Monteath represented to Norbert Radny on behalf of the plaintiffs that, because Mr Monteath would frequently be absent from Western Australia, on business unrelated to that of the Company, his wife, the second defendant, should be appointed a director of the Company so that financial matters could be attended to by the Company in his absence. It is said that, in reliance on that representation, the plaintiffs "allowed the second defendant to be appointed a director of the Company" on 19 June 2000. Significantly, she was not appointed as an alternate director to Mr Monteath. Nor is it alleged that there was any representation that the second defendant would act only in the absence of Mr Monteath. The plaintiffs agreed to the appointment of Mrs Monteath as a director.

9 The plaintiffs' allegations in relation to equitable estoppel as to the constitution of the Board of directors of the Company are not persuasive and there is evidence pointing away from those allegations, with little in support. Nor am I persuaded that there is substance in the plaintiffs' case as to oppression. The plaintiffs suggest that, for some reason, the first defendant wishes to dispose of its shares to persons other than the plaintiffs. I do not think any evidence has been adduced in support of that allegation.

10 In my opinion, while I do not attempt to make any firm finding in relation to the aforegoing allegations by the plaintiffs, as the outcome may well depend upon matters of credibility, the plaintiffs' case in respect thereof is not strong.

11 Of greater significance in the present proceedings, in my opinion, is the question of the validity of the Notice purportedly given pursuant to Article 22A.

12 The parties have at all times regarded that article as conferring upon each of the members of the Company a right to acquire the shares of another shareholder wishing to dispose of his shares.

13 Purporting to act in pursuance of par (2) of Article 22A, the first defendant gave a transfer notice to the Company of its wish to sell its shares and I have set out above the terms stated in that notice.

14 Par (2) of the Article requires that a transfer notice shall "specify the sum which he considers to be the fair value" of the relevant shares to be offered for sale, "and shall (subject as hereinafter provided) constitute the Company his agent for the sale of shares to any member or members of the Company or other person or persons nominated by the directors at the sum so fixed."

" ...the proposing transferor shall at any time within the next two (2) calendar months afterwards be at liberty to sell and transfer the shares to any person "at a price not lower than the value specified in the transfer notice."

16 (In both paragraphs above I have added the stress.)

17 It is apparent that the transfer notice on which the first defendant seeks to rely does not specify any sum as the fair value of the shares sought to be sold and that therein no sum is fixed. Nor is there a price stated at which the shares could be bought by the plaintiffs.

18 In the course of his argument, Mr Giles submitted that the word "sum" (and, in relation to par (6), the word "price") should be construed liberally so as to include any conditions expressed in the transfer notice. I do not accept that submission. In my opinion, a transfer notice is required to state a specific amount of money for which the shares in question may be acquired. Conditions stipulated for by a proposed buyer can hardly be said to form part of a "sum" representing a fair value, nor is it easy to understand how it could be ascertained whether certain conditions which might be stipulated represent a price lower than other and different conditions, for the purposes of par (6) of the Article.

19 No doubt, the first defendant could have assessed a fair value of the conditions set out in the transfer notice and set out in the transfer notice the aggregate sum at which the other members of the Company could purchase the shares on offer.

20 Mr Giles has argued that, even if the transfer notice does not comply with the provisions of Article 22A, it is nevertheless valid by reason of the provisions of s 1322(2) of the Corporations Law. He submitted that there is no evidence of substantial injustice necessary to prevent automatic validation: s 1322(4).

21 If, however, the plaintiffs are entitled to acquire the shares for a sum which the first defendant assesses as being a fair value for the shares, and if the transfer notice does not afford them that opportunity, I have no doubt that the result amounts to a substantial injustice. I do not think that the provisions of the Corporations Law on which the first defendant relies act so as to deprive a member of what amounts in effect to a contractual right to acquire the relevant shares.

22 The first defendant argues that the two persons who stand behind the plaintiffs are in breach of their statutory and fiduciary duties in bringing the present application, in that they are preferring their own interests to those of the Company. It is said that the plaintiffs have had an opportunity to exercise their pre-emptive rights but have chosen not to do so.

23 At this stage, as it seems to me, the first defendant's problem stems from the defective nature of the transfer notice. It should be recognised that Article 22A does not confer a right of pre-emption in the ordinary sense. It is not necessary for the Article to operate that there should in fact be any offer to the intending transferor. It is enough that it wishes to dispose of its shares. In that case, it must stipulate the sum which the intending transferor considers to be the fair value of the shares. In my opinion, the transfer notice does not comply with the requirements of Article 22A.

24 If I am wrong in that view, there is nonetheless a serious question to be tried as to whether it does so comply.

25 The principles governing the grant of an interlocutory injunction are well settled. An applicant for such relief must satisfy the Court that the claim is not frivolous or vexatious - in other words that there is a serious question to be tried: Castlemaine Tooheys Limited v South Australia [1986] HCA 58; (1986) 161 CLR 148 at 153. If so, the Court must consider whether it would be just, in all the circumstances, to confine the plaintiff to the remedy of an award of damages. If damages would be an adequate remedy and the defendant would be able to pay such damages if awarded, the injunction will be refused: Evans Marshall & Co Ltd v Bertola SA (1973) 1 WLR 349.

26 If there is a serious question to be tried and damages would not be an appropriate remedy, the Court should go on to consider whether the balance of convenience lies in favour of the grant or refusal of the injunctive relief sought. This has been described as the balance of risk of doing an injustice to either party: Cayne v Global Natural Resources P/C (1984) 1 All ER 225, per Everleigh LJ, May LJ at 237.

27 In considering the balance of convenience, it is permissible to bear in mind the apparent strength or weakness of the applicant's case: Bullock & Ors v The Federated Furnishing Trade Society of Australasia & Ors (1985) ATPR 40-577 at 46,695.

28 The plaintiffs submit that, if the injunction sought is not granted, the result will be that:

"The right to control of the company, including, amongst other things, the pre-emptive rights presently enjoyed by the plaintiffs would be irretrievably and adversely affected by the transactions which the first defendant proposes to enter into. Here, damages would not be an appropriate remedy if the status quo is not preserved."

29 In Mr Murie's affidavit, the question of the adequacy of damages is dealt with, very briefly, in par 36, as follows:

"The plaintiffs assert that their pre-emptive rights to buy the shares of FN in MRV may be overborne and seek an injunction of this Honourable Court to restrain that form occurring. If the sale occurs their rights to buy the FN shares will be lost, and, in that event, there is no prospect than an award of damages to them will be an adequate remedy."

30 I have already indicated my view that the plaintiffs' claim to be entitled to control the company is not strong.

31 However, it does appear that the first defendant is in financial difficulties and, accordingly, that an award of damages against the first defendant might well prove irrecoverable.

32 In the circumstances, I consider that the plaintiffs have demonstrated that there are serious questions to be tried, particularly in relation to the validity of the transfer notice, and that, because of the financial position of the first defendant, it would not be appropriate to confine the plaintiffs to a claim for damages.

33 Subject to the provision by the plaintiffs of a suitable undertaking as to damages, the application for an interlocutory injunction in the terms set out in par 1 of the chamber summons will allowed.

34 I shall hear counsel as to the appropriate terms of the orders to be made to give effect to these reasons.