Burbank Trading Pty Ltd v Allmere Pty Ltd [2009] VSCA 82

Burbank Trading Pty Ltd v Allmere Pty Ltd [2009] VSCA 82 - VSCA 2009 case summary — Zoe

[39]

The Carpet Call business was established in Queensland in 1975. Carpet Call was incorporated on 31 March 1978. Carpet Call is now the largest retailer of floor coverings in Australia. It sells a range of floor coverings and brands in carpet, cork, vinyl, rugs, timber and laminate. In addition to its retail business, it wholesales floor coverings to its network of Solomons Carpets franchise stores.
The Carpet Call business was originally wholly-owned by Burbank, a company controlled by Mr James Leslie ('Jim') Smith. However, in 1996, the business needed money to purchase the Solomons Carpets business. To facilitate the purchase, Shaw Industries Australia Pty Ltd ('Shaw') lent Carpet Call $2.55 million. In return, Shaw was given an option over 50% of the equity in Carpet Call. These arrangements were contained in the shareholders agreement between Burbank, Shaw and Carpet Call dated 7 February 1997.
Shaw was a wholly-owned subsidiary of Shaw Industries Inc ('Shaw USA'), a large American carpet manufacturer. Shaw USA supplied its carpets to retailers in Australia, including Carpet Call. When Shaw exercised its option to buy 50% of the equity in Carpet Call, it nominated Allmere to hold the shares on its behalf.
On 19 May 1997, Carpet Call, Burbank, Shaw and Allmere executed a deed of adoption, by which Allmere agreed to be bound by the terms of the shareholders agreement as if it were originally a party to that agreement.
In 2000, Feltex Carpets Limited ('Feltex') acquired Shaw, which was re-named Feltex Australia Pty Ltd ('Feltex Australia'), and thereby gained control of Allmere's shares in Carpet Call. Feltex manufactured carpets in New Zealand, and also supplied its carpets to Carpet Call and other retailers in Australia.
At all relevant times, Feltex Australia was a wholly-owned subsidiary of Feltex Australia Holdings Pty Ltd ('Feltex Australia Holdings'), which in turn was a wholly-owned subsidiary of Feltex.
The current shareholders of Allmere are Russell Martin and Michael Feeney, who do not hold those shares beneficially. They hold the shares on trust for Feltex Australia. Mr Feeney was a director of Feltex Australia and Feltex Australia Holdings. Both Mr Martin and Mr Feeney have been directors of Carpet Call.
The current directors of Carpet Call are Jim Smith, Barry Cook and Michael Feeney. Messrs Smith and Cook are Burbank's nominees to the Carpet Call board. Mr Feeney is Allmere's nominee.[3]

[40]

In a letter to Burbank dated 25 May 2006, Peter Thomas, the then managing director of Feltex, outlined a process of Feltex's 'proposed sale of its interest in Carpet Call'. At this time, Feltex proposed to call for expressions of interest from prospective buyers of its interest in Carpet Call.
By a letter to Feltex dated 8 June 2006, Godfrey Hirst offered to purchase the assets and undertakings of Feltex and its subsidiaries for NZ$135 million, on the assumption that Feltex had a 'consolidated net working capital position for the business of NZ$80 million.' The offer expressly excluded Allmere's shares in Carpet Call, which, the letter noted, Feltex valued at NZ$10 million. Feltex did not accept the offer.
By a letter to Feltex dated 17 July 2006, Godfrey Hirst made another offer to purchase all of Feltex's assets and undertakings for NZ$136 million, on the same assumption on which the 8 June offer was made. The offer now included all of the issued shares in Allmere. Allmere's only asset was its shareholding in Carpet Call, so the effect of this revised offer was to add Feltex's interest in Carpet Call into the deal. There is no dispute that had Feltex accepted this offer, Allmere would have been deemed to have given an offer notice in respect of the whole of its shares in Carpet Call, and the pre-emption procedure under clause 10.2 would have been engaged. However, Feltex did not accept the offer.
On 21 September 2006, Simon Wallace-Smith and Tim Norman were appointed as administrators of Allmere under Part 5.3A of the Corporations Act 2001 ('Corporations Act'). On the same date, administrators were also appointed to Feltex Australia and Feltex Australia Holdings.
The following day, ANZ Banking Group Ltd ('the ANZ') appointed receivers and managers to Feltex, Feltex Australia Holdings and Feltex Australia ('the Feltex receivers'), but not to Allmere, as the ANZ had no security over Allmere or its assets.
At a meeting with Allmere's administrators on 26 September 2006, Mr Smith was told that the administrators intended to offer for sale Allmere's shares in Carpet Call. That was confirmed in writing to Burbank on the same day.
On 28 September 2006, Michael Humphris and Laurence Fitzgerald replaced the original administrators appointed to Allmere, Feltex Australia Holdings and Feltex Australia. Mr Fitzgerald was the administrator with the principal role for our purposes.
On the same day, by a letter to the Feltex receivers, Godfrey Hirst made an offer to buy all of the assets and undertaking (with certain exclusions) of the Feltex group. The consideration included a cash payment of A$122 million and a payment of A$500,000 towards the Feltex receivers' fees. The offer specifically included Allmere's shares in Carpet Call. In relation to those shares, the letter proposed:

[57]

Allmere was not a party to the Feltex sale agreement.
Clause 23 of the Feltex sale agreement provided for the establishment of an escrow account for the $10million, which was described as the Carpet Call consideration. The Carpet Call consideration was to be kept in the escrow account pending completion of the proposed agreement between Allmere and the buyer of the Carpet Call shares. There would be an adjustment to the purchase price if the proposed agreement was not able to be completed within 150 days of the completion date for the Feltex sale agreement.
In a letter sent to Mr Fitzgerald on 24 October 2006, Burbank maintained the view that there had been a change in ultimate control of Allmere, by reason of the appointment of administrators. Burbank said that it seemed that what should happen next was the expert procedure under clause 10.3(d), but asked the administrator what he thought.
Burbank followed up its letter of 24 October 2006 with a letter to Mr Fitzgerald dated 3 November 2006. The administrators responded on 13 November 2006, saying that they did not regard there as having been any change in ultimate control. The administrators also said they saw nothing to be gained in appointing an expert, unless Burbank was prepared to submit an offer in excess of $10 million.
Burbank sent another letter to Mr Fitzgerald on 3 November 2006, concerning the offer notice. Burbank disputed that the offer notice was a proper one under the shareholders agreement, and asked for certain information to be provided.
In a letter to Mr Fitzgerald dated 14 November 2006, Burbank said that 'we would not approve [Godfrey Hirst] as a transferee of Allmere's shares', even if the offer notice was valid. It said there were 'numerous serious reasons' for refusing its approval, but did not give details of any such reasons. It asked Mr Fitzgerald to confirm that he did not wish to be involved in discussions about the appointment of an expert. There was no response to that letter.
On 17 November 2006, Mr Smith and Mr Michael Naphtali met with Mr Fitzgerald and his assistant, Mr Ahmed Bise, at the offices of Hindal Corporate, where Mr Naphtali worked. Mr Naphtali, a former Allmere-nominated director of Carpet Call, attended the meeting as an adviser to Mr Smith and Burbank. The dispute as to exactly what was said at the 17 November meeting and, in particular, whether Mr Smith disputed the price in the offer notice, will be considered later in these reasons.
In a letter to Burbank dated 27 November 2006, Mr Fitzgerald said that Allmere intended to transfer its shares in Carpet Call to Godfrey Hirst, as Burbank had not accepted the offer notice within 30 days. He sought confirmation of Burbank's approval of the proposed transfer by close of business on 30 November 2006.
In a letter to Burbank dated 15 December 2006, the lawyers for Allmere's administrators requested that Burbank state by 20 December 2006 whether it approved Godfrey Hirst as transferee of Allmere's shares, and that, if it did not approve, it provide its reasons for not approving.
Burbank responded on 20 December 2006. It declined to give reasons for refusing to approve Godfrey Hirst as transferee, asserting that reasons had already been given at the 17 November meeting. Burbank otherwise maintained its earlier attitude.
On 22 December 2006, Allmere commenced this proceeding.
Although a draft formal share sale agreement between Allmere (as seller), the Allmere administrators and Godfrey Hirst (as buyer) was prepared, it has not been executed.

[59]

Clause 1.1

'Insolvency Event' means:

(a) any resolution is passed or proposed or application is made to the Court or appointment is made or any other steps are taken for official management, receivership, administration, winding up, dissolution, provisional liquidation, assignment, compromise, arrangement or composition with any creditors (except any application or proceeding which is bona fide contested and is withdrawn or vacated within 30 days of it so being made or is made for the purpose of corporate restructure of amalgamation);

(b) being unable or taken under the Corporations Law to be unable to pay debts as and when they fall due;

'Offeree' means whichever of Burbank or Shaw is not the Transferring Party under clause 10.3;

'Offer Notice' means a notice under clause 10.3 by the Transferring Party to the Offeree;

'Sale Shares' means the number of Shares specified in an Offer Notice;

'Shares' mean shares in the capital of the Company from time to time issued;

'Transfer' means:

(a) transfer, assignment, sale, distribution, pledge or other disposition of Shares voluntarily or involuntarily, with or without consideration;

(b) the appointment of a receiver or other legal custodian of the property of a Party unless no Shares are included in the property subject to the appointment;

(c) the taking of possession by an encumbrancer or trustee of the property of any Party;

(d) declaration of trust;

but shall not include

(e) a bona fide mortgage, pledge, charge or other encumbrance given in accordance with Clause 9.

'Transferring Party' means a party to this agreement who Transfers or proposes to Transfer Shares which it then holds.

...

10.1 Neither Burbank nor Shaw may directly or indirectly Transfer or otherwise dispose of any legal or beneficial interest in Shares except in accordance with this clause.

10.2 If there shall be any change in ultimate control of either Burbank or Shaw, the respective party shall be taken to have given an Offer Notice in respect of the whole of its Shares at a price to be determined under paragraph 10.3(d). It is acknowledged that Mr Jim Smith controls Burbank, and that Shaw Industries Inc. of the United States controls Shaw.

10.3 (a) If Burbank or Shaw proposes to Transfer an interest in Shares, the Transferring party must send an Offer Notice to the Offeree. A Transfer of less than 10 per cent of the issued share capital is not permitted.

(b) The Offer Notice shall give details of the proposed Transfer including, but not restricted to:

(i) the number of Shares to be Transferred;

(ii) the terms and conditions of the Transfer including the consideration per Sale Share,

and shall contain a warranty that the Sale Shares are and will at completion be the sole legal and beneficial property of the Transferring Party.

(c) Upon receipt of the Offer Notice, the Offeree shall have 30 days within which to purchase the whole of the Sale Shares for the consideration and upon the terms and conditions disclosed in the Offer Notice.

(d) If the Offeree disputes the price the dispute shall be referred to an expert to be agreed or in default of agreement nominated by the President for the time being of the Institute of Chartered Accountants in Australia. The person shall be acting as an expert and not an arbitrator. His decision shall be final and binding. The parties must bear their own costs of submitting the dispute to the expert.

(e) Upon receipt of a notice of acceptance, the Transferring Party shall have 30 days from the date of the notice within which to deliver unencumbered title, and in particular to deliver:

(i) a certificate representing that number of the Shares covered by the Offer Notice; and

(ii) an instrument of transfer in registrable form,

in return for payment of the consideration for the Sale Shares.

(f) If [the] Offeree fails either to:

(i) accept the Offer Notice within 30 days of receipt of the Offer Notice; or

(ii) tender the consideration when the Transferring Party delivers the certificate and instrument pursuant to sub clause (c) [sic], (e)

the Transferring Party may Transfer the Sale Shares to any person approved by the other Shareholder (which approval shall not be unreasonably withheld) upon no more favourable terms and conditions than those disclosed in the Offer Notice.

(g) The Transferring Party may only Transfer Shares pursuant to sub-clause (e) [sic] (f) if the transferee enters into an agreement with the Offeree covenanting to assume all obligations under and to be bound by this agreement as if it were a party.

(h) The Parties shall procure that the Board approves a Transfer under these provisions.

...

15. NOTICES

15.1 Method of Giving Notices

A notice, consent, approval or other communication (each a "Notice") under this agreement shall be in writing, signed by or on behalf of the person giving it, addressed to the person to whom it is to be given and:

(a) delivered;

(b) sent by pre-paid mail; or

(c) transmitted by facsimile,

To that person's address.

...

At a glance

Court

Decision date

Before

Source

Judgment (203 paragraphs)

Parties

Cases Cited (2)