B J McAdam Pty Limited v Jax Tyres Pty Limited

Solicitor for the Second, Twelfth, Thirteenth and Fourteenth Defendants: DibbsBarker

Counsel for the Fourth, Fifth, Sixth and Tenth Defendants: M Ashhurst SC, J Knackstredt

Solicitor for the Fourth, Fifth, Sixth and Tenth Defendants: MacPherson + Kelley Lawyers

Counsel for the Eighth Defendant: JK Kirk SC, LT Livingston

Solicitor for the Eighth Defendant: Thompson Eslick Solicitors

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 402 of 2010

JAX FRANCHISING SYSTEMS PTY LIMITED ACN 060 109 891

JAX QUICKFIT FRANCHISING SYSTEMS PTY LIMITED ACN 112 050 058

JUDGE: PERRAM J DATE OF ORDER: 1 august 2012 WHERE MADE: SYDNEY

1. The parties bring in short minutes of order to give effect to these reasons within seven days.
2. On the undertaking previously proffered by the plaintiffs, the orders dated 6 June 2012 be extended until, but not beyond, 4:15 pm on 6 August 2012. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 402 of 2010

JAX FRANCHISING SYSTEMS PTY LIMITED ACN 060 109 891

JAX QUICKFIT FRANCHISING SYSTEMS PTY LIMITED ACN 112 050 058

JUDGE: PERRAM J DATE: 1 august 2012 PLACE: SYDNEY

I. Introduction 1 The present proceeding has as its subject matter what is sometimes referred to as an oppression suit. The productive business involved is the provision to the public of replacement tyres for motor vehicles, formerly under the name 'Jax Tyres' but now, following events to be described below, under a joint venture called 'JAXQuickfit'. The ownership structures for this venture are complex and are presently the subject of dispute. At the level of economics there appear to be three factions within the Jax side of JAXQuickfit. These (and their respective economic interests) are: (a) The Hurrell interests (as to 61.6%); (b) The Board interests (as to 5%); and (c) The McAdam interests (as to 33.4%). 2 Prior litigation between these warring factions was settled as long ago as 24 September 2003 by the execution by them of a document entitled '2003 Shareholders and Associated Parties Deed'. Its capacity to serve as an anti-inflammatory appears to have been somewhat limited. Matters appear once again to have become complex in 2004 when a decision was made to merge the business of Jax Tyres (owned by those three interests) with a similar business operating in Queensland and Victoria called Quickfit. It appears to have been accepted that the interests associated with the Jax Tyres business (that is, indirectly, the Hurrell, Board and McAdam interests) would hold 65% of the new merged business and that the Quickfit interests would hold the balance of 35%. 3 The instrument of merger was to be a unit trust known as the Jax Quickfit Franchising System Unit Trust which I will call the JQFS Unit Trust. Its trustee was a new business, Jax Quickfit Franchising Systems Pty Ltd (JQFS). Consistent with the ownership structure I have described 65% of the units in this trust were controlled by the interests who controlled the Jax Tyres business and 35% were controlled by the Quickfit interests. 4 In 2008, in circumstances which are controversial, a joint venture agreement was entered into. It too contemplated a venture between Jax Tyres and Quickfit in the proportion 65:35 but this time the joint venture was to be conducted, not through the vehicle of a unit trust, but instead through an unincorporated arrangement between a Jax Tyres entity, JFS, and Quickfit. 5 It is the subject matter of this joint venture which is controversial. The McAdam interests (who are the plaintiffs) contend that aspects of the business operations of the JQFS Unit Trust were impermissibly transferred to the joint venture operated by JFS and Quickfit. 6 Pausing there, it is difficult to see why this should matter. In both cases the Jax Tyres interests held 65% of the economic interests involved and that 65% interest was itself in turn effectively controlled as to 61.6 : 33.4 : 5.0 by the Hurrell, McAdam and Board interests. Put another way the respective parties' interests in both the 2004 and the 2008 joint venture arrangements were the same. 7 Nevertheless this appears to have exercised the McAdam interests to a significant degree. Proceedings of a very complicated kind have now been commenced by them in which, at their core, it is alleged that the Hurrell and Board interests have oppressed the McAdam interests. 8 The foregoing background is incomplete but it may at least serve to provide some context to the eight interlocutory applications which are now before the Court for resolution. These are: (a) various applications by the McAdam interests to bring derivative proceedings on behalf of various companies within the corporate structure; (b) an application by the McAdam interests to amend their pleadings; (c) an application by the McAdam interests to restrain JQFS from acting on a resolution which prevents board members directly contacting staff of the business; (d) an application by the McAdam interests to continue an interlocutory injunction previously granted by me restraining Jax Tyres, Mr Hurrell and Mr Board from declaring a dividend from an entity called Jax Tyres Pty Ltd ('Jax Tyres'); (e) an application by the trustee of the JQFS Unit Trust (JQFS) for the separate determination of certain questions; (f) an application by the Hurrell interests and also by the trustee of the JQFS Unit Trust (JQFS) for security for costs; (g) an application by the Board interests to set aside a subpoena issued at the request of the McAdam interests to Mr Board; and (h) a determination of the question of costs on an application to set aside a notice to produce. 9 It is convenient to deal with those issues in the above order.

II. Application to bring derivative proceedings 10 The McAdam interests initially sought leave to bring proceedings on behalf of four entities: (i) Jax Tyres Investments Pty Ltd ('JTI'); (ii) Jax Franchising Systems Pty Ltd; (iii) Jax Tyres; and (iv) Jax Finance Pty Ltd. 11 Each of these gives rise to different issues.

(a) Derivative claims on behalf of Jax Tyres Investments Pty Ltd 12 JTI is the trustee of the Jax Franchising Australia Unit Trust ('the JFA Unit Trust'). It is through the JFA Unit Trust that the Jax Tyres business holds 65% of the units in the JQFS Unit Trust. In turn the units in the JFA Unit Trust are held 66.6 : 33.4 : 5.0 by the Hurrell, McAdam and Board interests. 13 The McAdam interests say that the original merger of the Jax Tyres business and Quickfit was effected through a business operated by the JQFS Unit Trust. The concept was that over time the stores owned or franchised by the parties would be rolled into the JQFS Unit Trust. 14 They say that in 2008 a joint venture agreement was entered into which, on its proper construction was only to apply to those parts of the business which had not yet been rolled into the JQFS Unit Trust. This matters, according to them, because moneys have been paid out of the business conducted by the JQFS Unit Trust to the joint venture erected by the 2008 agreement which do not belong to it, i.e., the business of the JQFS Unit Trust is being impermissibly handled by the 2008 joint venture. 15 A variant of this argument concedes that the 2008 agreement permitted this to occur but that entry into that agreement was, itself, a breach of trust. 16 The proposed derivative suit is one brought on behalf of the trustee of the JFA Unit Trust (through which the Jax Tyres interests hold 65% of the JQFS Unit Trust). 17 It is in its capacity as a beneficiary of the JQFS Unit Trust that the proposed derivative suit on its behalf is put forward. The idea is to sue: the trustee (JQFS) for parting with trust property; Mr Hurrell for assisting JQFS in parting with that property; the 2008 joint venture (for receiving the trust property); and an entity associated with Mr Hurrell for receiving trust property. 18 The problem with this suit is, as I have already foreshadowed above at [6], that the ownership structure of the 2008 joint venture is effectively the same as the ownership structure of the JQFS Unit Trust. In both cases the Jax Tyres interests hold 65% and the Quickfit interests 35%. 19 The only difference between the two situations is that: (a) the 2008 joint venture is an unincorporated one between the JF Unit Trust and Quickfit (in ratio 65:35); and (b) the original merger was/is conducted by the JQFS Unit Trust operated (in ratio 65:35) by the JFA Unit Trust and Quickfit. 20 Since the ownership of the JFA Unit Trust and the JF Unit Trust is effectively the same it is difficult to see what the problem is. More importantly, it is difficult to detect the utility in permitting such a litigious venture to go forward. 21 When I taxed Mr Street SC, with whom Mr Hogan-Doran of counsel appeared for the McAdam interests, with this observation his response was to observe: (a) the McAdam interests held 33.34% of the JF Unit Trust but 33.40% of the JFA Unit Trust so that there was a slight difference in the magnitude of the interests; (b) Mr Marcus McAdam was a director of the trustee of the JQFS Unit Trust but not of the trustee of the JF Unit Trust; (c) there were potential income tax, capital gains tax and stamp duty consequences flowing from the question of who owned and operated the business; and (d) the holder of the business was, in point of fact, different. 22 After lunch on the first day, proposition (a) was withdrawn it being accepted the unit holding was the same and that the submission had arisen from an erroneous diagramme. The McAdam interests held 33.4% of Jax's share under either arrangement. 23 I do not see the relevance of proposition (b) from the perspective of the question of utility. It may be relevant to an issue of oppression but we are here concerned with breach of trust allegations. Although (c) was advanced I was not taken to any evidence about it. I do not accept that being told I should not proceed on the basis that there were no issues about such matters discharges the onus borne by those seeking to bring derivative proceedings. Although a pleading was articulated (and, indeed, revised on the second day of the hearing) it pointedly made no mention of this topic. 24 I accept (d) but do not see what it adds. 25 On the second day financial records were tendered which it was submitted showed that the distributions flowing from the JF Unit Trust were not the same as those flowing from the JFA Unit Trust. These records did not show that the distributions were not in the ratio 61.6 : 33.4 : 5.00. Rather, they showed only that not all of the income had been distributed. As Mr Harding, for the Board interests, observed this was perhaps not entirely surprising since the records did not purport to be for the entire financial year. 26 I am left therefore with the impression, not dispelled by the manner in which the matter was pursued before me, that the proposed derivative suit to be brought on behalf of the trustee of the JFA Unit Trust is pointless and would benefit no-one. That is a sufficient reason to refuse leave. 27 Initially a further derivative claim on behalf of JTI (the trustee of the JFA Unit Trust) was proposed (in relation to an attempted disposal by Quickfit of its interest in the 2008 joint venture) but I did not apprehend this ultimately to be pressed.

(b) Derivative claims on behalf of the trustee of the JF Unit Trust (JFS) 28 Two such claims were advanced in the McAdam interests' written submissions but on the final form of the proposed pleading were no longer pressed.

(c) Derivative claims on behalf of Jax Tyres Pty Ltd 29 Although it is not altogether clear it appears that until about 2007 Jax Tyres Pty Ltd was a trading entity. After 2007 this seems to have ended. Unlike the other parts of the Jax Tyres business the share capital of Jax Tyres is divided 51.66 : 33.34 : 15.00 as between the Hurrell, McAdam and Board interests, although this difference is not material. 30 Five complaints are made on Jax Tyres' behalf. They are all, in effect, allegations of self-dealing against Mr Hurrell or interests associated with him. First, it is said that over a number of years ending in 2009 Mr Hurrell permitted Jax Tyres to extend credit to an entity associated with him without charging any interest thereon. Further, so it is said, no steps have been taken to recover that this money. 31 Secondly, it is alleged that since 2007 Mr Hurrell has caused Jax Tyres to pay him $650,000 purportedly by way of wages, allowances and superannuation. In addition, it is said an amount of $221,748 has been accrued in its accounts as unpaid leave. 32 Thirdly, complaint is made about a loan advanced by Mr Hurrell to Jax Tyres in relation to an employee share ownership plan on which interest is accruing at 15%. Here the complaint is a failure to retire the debt and/or locate alternate funding for Jax Tyres. 33 Fourthly, it is said that the Hurrell interests leased certain properties to Jax Tyres at what were inflated rents. 34 Finally, it is alleged that Mr Hurrell caused Jax Tyres to pay $6.1 million to Jax Finance which was not due. 35 The submission of the Hurrell interests was that this derivative claim against them by Jax Tyres should not be permitted because: (a) the application was not in the best interests of Jax Tyres; (b) it was not in the best interests of Jax Tyres for the McAdam interests to be permitted to bring the claim on Jax Tyres' behalf; (c) the proposed application was not in good faith; and (d) the proposed proceeding was brought for a collateral purpose. 36 One begins with the observation that proposed claims by Jax Tyres are viable in the sense that there is material before me which suggests the existence of the claims and the claims are legally coherent and not apparently without utility. I did not apprehend the contrary to be submitted. 37 During the course of the hearing all of the plaintiffs jointly and severally undertook to indemnify Jax Tyres against any costs exposure it might incur if leave were granted to bring a proceeding on its behalf. Evidence was placed before me which indicated that the total pool of assets available to the plaintiffs was about $2.1 million so that prima facie this undertaking was valuable. The defendants sought to diminish that conclusion by bringing to account the liabilities the plaintiffs would incur if they were unsuccessful together with the liabilities to their own attornies. A figure in the vicinity of $2.1 million was posited. From this it was said that there needed to be a deduction for the value of the McAdams' interests in the JFA Unit Trust. This was because should the plaintiffs fail to prove that the business of the 2008 joint venture did not belong to the JQFS Unit Trust then that holding would be without value. 38 I am not sure the material allows me to draw that conclusion. I was left with the impression at the hearing that the JQFS Unit Trust was operational and had staff (I deal with those staff in relation to an injunction below). I am not sure how this is consistent with the units held in the JQFS Unit Trust by the JFA Unit Trust being valueless. In any event, at least in relation to the claim bought on Jax Tyres' behalf this is not connected to the question of whether the business is owned by the 2008 joint venture or the JFQS Unit Trust. Additionally, I have not granted leave for that claim to be pursued. In those circumstances, I accept that the plaintiffs have adequately protected Jax Tyres from the consequences of an adverse costs order: cf. Robash Pty Ltd (ACN 008 975 773) v Gladstone Pacific Nickel Pty Ltd (2011) 86 ACSR 432; [2011] NSWSC 1235 at [57] per Ball J. 39 As Ball J observed in that case, other factors can be involved too. Since Jax Tyres no longer conducts business I do not regard the litigation as disrupting its affairs. On the other hand, the recoveries it may obtain are substantial. I do not think that there is an alternative procedure whereby the same result may be obtained. 40 Nor do I think that I ought to accept that the proposed proceeding is being brought for the collateral purpose of harming the Hurrell interests as part of a larger dispute between, on the one hand, the Hurrell and Board interests, and, on the other, the McAdam interests. In particular, I do not accept in this case that there is any relevant failure on the McAdam interests' part to do equity by repaying distributions already received - a submission having no meaning in the case of Jax Tyres. Nor do I accept that this is an attempt to force the Hurrell interests to buy out the McAdam interests. It will follow for largely similar reasons that I do not accept the submission that it is not in the interests of Jax Tyres for B J McAdam Pty Ltd to bring the proposed proceedings. 41 In principle, therefore, I accept that B J McAdam Pty Ltd should be granted leave to pursue proceedings in the name of Jax Tyres against Mr Hurrell and Valnock. Although it is now permissible to bring a derivative suit with other claims in one proceeding I do not think that having such a claim in the same document is useful in a case with as many parties as the present case has. I will grant leave to B J McAdam Pty Ltd to bring a claim in the name of Jax Tyres against Mr Hurrell and Valnock in the form of the pleading at [103]-[131] of the current proposed pleading. This is to be done in a separate document entitled 'Points of Claim - Derivative suit by B J McAdam Pty Ltd on behalf of Jax Tyres Pty Ltd'.

(d) Derivative Proceedings on behalf of Jax Finance against Mr Hurrell and Vakofa 42 In this claim it is suggested that Mr Hurrell caused Jax Finance to pay sums of money to various persons which was not owed by it. These were: (a) $27,418 to Vakofa (an entity associated with Mr Hurrell); (b) $550,000 to a Mr Anderson; (c) $89,528 to Mr Hurrell; (d) $140,000 in satisfaction of personal debts owed by Mr Hurrell; and (e) $140,332 to a Mr Nesbitt, which was not applied in reduction of any debt owed to Mr Nesbitt. 43 The evidence in support of this was contained at p 206 of the application book. This was part of an affidavit by Mr McAdam. It was in these terms: 145. Of the money paid by Jax Tyres to Jax Finance, only part of that money was used to meet creditors of Jax Finance (or Jax Tyres). Firestone and Pirelli were repaid as was Merim. However, Leckband was not repaid at all, and there was an overpayment of at least $1,394,215.00 divided as follows: (a) an amount of $754,687.00 to Vakofa being $27,418.00 in excess of the debt owed by Jax Finance to Vakofa; (b) an amount of $550,000.00 to Ray Anderson who was not a creditor of Jax Finance. This was a payment by Mr Hurrell to Mr Anderson to settle and outstanding personal debt of Mr Hurrell to Mr Anderson which arose as a result of Mr Hurrell purchasing Mr Anderson's shares in Jax Tyres; (c) a further $89,528.00 to Mr Hurrell who was not a creditor of Jax Finance; (d) a further $140,000.00 in payment of personal debts owing to the McAdam interests by the Hurrell interests; (e) a payment of $140,322,00 to Mr Nesbit, a friend of Mr Hurrell, which was not applied in reduction of any debt owed by Jax Finance to Mr Nesbit. The above payments were not ratified by the shareholders of Jax Tyres or Jax Finance. 44 This is assertion and I am not prepared to act upon it for the purposes of s 237 (nor, I should add, was I taken to it in written or oral submissions). I decline to grant leave to pursue this.

(e) Derivative suit on behalf of JFS 45 In the final version of the proposed application the proposed derivative suit on behalf of JFS does not appear to be pursued. 46 It follows that there should only be a grant of leave under s 237 in respect of Jax Tyres. That will be on the terms indicated. On the question of costs, the plaintiffs have succeeded on one derivative claim, failed on two and abandoned the remainder during the hearing. They should pay of the defendants' costs.

III. Amendment of Pleadings 47 The proposed amended pleading is inextricably inter-twined with the derivative actions. It will need to be redrawn with the derivative actions excised. On that basis it is quite apparent that leave cannot be granted to file the current form of the proposed pleading. In their written and oral submissions the defendants criticised the pleading. Although I do not propose to give advice to those advising the plaintiffs I should say that, by and large, many of these criticisms appeared to be well-founded. I would reserve the costs associated with this application.

IV. Security for costs 48 The Hurrell interests and the trustee of the JQFS Unit Trust seek to have the corporate plaintiffs put up security for costs. By the time of the hearing the individual plaintiffs had agreed to be responsible for the costs of the corporate defendants. To the extent that the defendants relied upon the notion that those who stood to benefit from the litigation were seeking to hide behind the corporate veil this goes some way to redressing that issue. 49 It may be that the value of this security is ultimately deficient. I would not, however, be minded to order any further security. The proceedings were commenced in 2010 and the present application was only brought in the last few months. It was said that there had been no relevant delay because much of the last two years had been spent on the plaintiffs adjusting their pleading or by the eighth defendant obtaining judicial advice. I do not accept either of these as being a satisfactory explanation for the delay in bringing the application. The plaintiffs are entitled to the costs of this application.

V. Injunction in relation to Resolution 6 50 On 22 March 2012 the directors of JQFS passed the following resolution: f) Resolution on lines of communication/information requests for Board Members on - Operational issues and Litigation issues. EM stated in light of the litigation ALL requests for information must be directed through EM for both operational and litigation matters, and must be in writing. i. Vote 1. For - IH/RC/EM/JDB 2. Against - MM 3. Abstain - Nil EM continued and stated that it was also inappropriate for any Director to go direct to any persons including Andrew Skyring and Geoff Glover seeking information. 51 The reference to 'MM' is to Mr Marcus McAdam. He is not a plaintiff. On 3 May 2012 Mr McAdam rang Mr Skyring to request a meeting to discuss operational issues relating to Jax Quickfit. Mr Skyring did not answer, so Mr McAdam left a message. On a follow-up call the next day, Mr Skyring agreed to a meeting but later changed his mind following a discussion with the Chairman of JQFS, Mr Enzo Mastroianni ('EM' above). 52 The plaintiffs seek an injunction to prevent JQFS from giving effect to this resolution. It was said in their written submissions plainly to be beyond power. I do not, however, need to resolve that question. What is involved is an interlocutory injunction and accordingly the plaintiffs must establish that the balance of convenience favours the granting of relief. 53 Relevant to that issue are, so it seems to me, the fact that Mr McAdam does not appear to have asked Mr Mastroianni for the information he wishes to obtain from Mr Skyring. It is far from obvious that there is any problem at all. Further, it requires very little reflection to grasp that an entity with warring factions of shareholders involved in litigation with each other might wish to protect its staff from the blandishments of the various warring factions. In that last regard it might be noted that Mr Mastroianni is not a member of any of the disputant factions. 54 I reject the application which was of no merit. The plaintiffs must pay the costs of JQFS.

VI. Injunction to restrain the payment of a dividend 55 On 6 June 2012 I granted an urgent injunction restraining Jax Tyres, Mr Hurrell and Mr Board from declaring any dividend from Jax Tyres: B J McAdam Pty Limited v Jax Tyres Pty Limited [2012] FCA 600. That injunction was to expire at the determination of the present application. I extended it at the end of the hearing pending delivery of judgment. 56 The basic issue is whether any dividend, which would otherwise be payable to the McAdam interests in the event of Jax Tyres declaring a dividend, may be set off against what is said to be a pre-existing loan. There is a debate between the parties as to the operation of cl 4.14(c) of the JT Shareholders Agreement in that regard. An application such as the present does not provide an appropriate occasion for its resolution. 57 Despite that, I think that the injunction earlier granted by me should be discharged. The fact is that B J McAdam is perfectly capable of pursuing Jax Tyres for a monetary remedy if Jax Tyres declares a dividend and then purports to set off the loan monies. I do not see why damages would not be an adequate remedy. 58 The plaintiffs contended that the financial position of Jax Tyres was precarious so that doubt existed as to its capacity to meet any further judgment. The defendants submitted that Jax Tyres had an income stream in excess of $180,000 per annum from licence fees and cash in the bank of over $200,000. I accept this. Further, the financial statements suggest net shareholders' equity of over $3 million. If it transpires that Jax Tyres is not entitled to set-off the dividend against the loan amount, then I do not foresee any difficulties for the plaintiffs in recovering the dividend. 59 It was said that this loan account operated as a species of oppression but even so this does not show that a remedy in damages does not lie. 60 Accordingly, I will discharge the injunction. I will leave it in place for a short period to preserve any appellate remedies. Costs should be costs in the cause.

VII. SEPARATE QUESTIONS 61 The trustee of the JQFS Unit Trust sought the determination, as a preliminary issue, of the questions related to the controversy as to who was entitled presently to operate the business. This was opposed by a number of the other parties. As I have already concluded that leave should not be granted to pursue the derivative suits which would resolve the issue it is difficult to identify the utility of the proposed course. In any event, quite apart from that problem, the opposition of the other parties would make the pursuit of preliminary questions inappropriate, at least in this case. Costs should be costs in the cause.

VIII. Costs on the Notice to Produce 62 As part of the security for costs hearing a notice to produce was issued to the plaintiff in relation to their financial affairs. The plaintiffs applied to set this aside. By the hearing, however, they had provided most, but not all, of what was sought by it. The application to set aside was not pursued but the question of costs remained. 63 Essentially there has been some compromise on both sides. There should be no order as to costs: Re The Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 at 625 per McHugh J.

iX. Whether the subpoena should be set aside 64 The plaintiffs have issued a subpoena to JFS and Mr Board. JFS and Mr Board now contend that it should be set aside as constituting a fishing expedition. 65 One of the submissions made on behalf of the Board interests was that the subpoena served no genuine forensic purpose. This was said to be underscored by the fact that pleadings were not closed. For the plaintiffs it was said that documents were for a legitimate forensic purpose. 66 I am inclined to think that his subpoena is premature. Until defences have been filed one cannot know what the issues are. It may be that what is sought by the subpoena is ultimately legitimate but that cannot be determined at present. 67 The subpoena should be set aside. The plaintiffs must bear the costs.

X. Relief 68 The parties are to bring in short minutes of order within seven days. On the previous undertaking by the plaintiffs I extend the orders made by me on 6 June 2012 to, but not beyond, 4:15 pm on 6 August 2012. I certify that the preceding sixty-eight (68) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.