Cleary v Australian Co-operative Foods

Patrick Cleary and Maxwell Cochrane (P) PARTIES : Australian Co-operative Foods Limited (D1) Ian A Langdon; Phillip J Bruem; Alan R Tooth; Jamie G Alison; Jeff E Ballon; Trevor R Connor; Thomas J Girgensohn; Wilf J Jarrett; Mal E Lanham; John J Mcaulay; Duncan A McInnes; Rowan R Moore; John J Reynolds; Michael D Ross; Charlie R Shearer; Ian H Zandstra (being the board of D1) (D2) Geoffrey D Boxsell (being the 'returning officer' and an employee of D1) (D3) JUDGMENT OF : Austin J

S Rares SC with S Emmett (P) COUNSEL : M Oakes SC (D) T Stuart (Registrar of Co-operatives) Corrs Chambers Westgarth (P) SOLICITORS : Addisons (D) I V Knight, Crown Solicitor (Registrar of Co-operatives) CATCHWORDS : CORPORATIONS - co-operatives - scheme of arrangement - misleading and deceptive conduct - validity of postal votes and proxies - appropriate declaratory and injunctive relief; TRADE PRACTICES - effect of conduct on validity of proxies and postal votes - relief; PRACTICE AND PROCEDURE - costs - costs ordered against directors of corporation who engaged in misleading or deceptive conduct Australian Securities and Investments Commission Act 1989 (Cth), ss 12DA, 12GD, 12GM ACTS CITED : Corporations Law ss 995, 1114, 1324 Fair Trading Act 1987 (NSW) ss 42, 65, 72 Supreme Court Act 1970 (NSW) s 23 Australian Competition & Consumer Commission v International Technology Holdings Pty Ltd (1997) ATPR paragraph 41-559 Australian Securities Commission v Mount Burgess Gold Mining Co NL (1994) 62 FCR 389 Baillie v Oriental Telephone & Electric Co Ltd [1915] 1 Ch 503 BHP Limited v Bell Resources Limited (1994) 8 ACLR 689 Cardile v LED Builders Pty Ltd (1999) 162 ALR 294 Cleary v Australian Co-operative Foods (No 2) [1999] NSWSC 991 F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 Fraser v NRMA Pty Limited (1994) 52 FCR 1 Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 Hughes v Union Cold Storage Co Ltd (1934) 78 Sol Jo 551 Kaye v Croydon Tramways Company [1898] 1 Ch 358 CASES CITED : Krambousanos v Jedda Investments Pty Ltd (1996) 64 FCR 348 Mesenberg v Cord Industrial Recruiters Pty Limited (1996) 39 NSWLR 128 NCSC v Monarch Petroleum NL [1984] VR 733 Pacific Coast Coal Mines Ltd v Arbuthnot [1917] AC 607 R v Judges of the Federal Court of Australia, ex parte Pilkington ACI Operations Pty Limited (1978) 142 CLR 113 Re Advance Bank Australia Ltd (1997) 22 ACSR 513 Re Chevron (Sydney) Ltd [1963] VR 249 Re Crusader Ltd (1995) 17 ACSR 336 Re Linter Textiles Corp Ltd [1991] 2 VR 561 Re MB Group plc [1989] BCLC 672 Re Price Mitchell Pty Ltd (1984) 9 ACLR 1 Re Sonodyne International Ltd (1994) 15 ACSR 494 Tiessen v Henderson [1899] 1 Ch 861 DECISION : See paragraphs 73 and 74

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3968/99 - PATRICK CLEARY & 1 OR V AUSTRALIAN CO-OPERATIVE FOODS LTD & 16 ORS (NO.3)

1 HIS HONOUR: In my reasons for judgment delivered on 12 October 1999 ( Cleary v Australian Co-operative Foods (No 2) [1999] NSWSC 991) I addressed some separate questions for determination under Pt 31 of the Rules of the Supreme Court. The separate questions are set out in paragraph 11 of my judgment. My answers to the separate questions are in paragraph 124 of my judgment. 2 I decided that the procedure adopted by the Defendants in the 6 September Materials with respect to the change of postal votes was not a lawful procedure because it was not authorised by the Co-operatives Act 1992 ('the Act'), the Co-operatives Regulation 1997 ('the Regulation') or the Rules of the first defendant ('the Rules'). I also decided that the first defendant ('Dairy Farmers') and the second defendant ('the directors of Dairy Farmers') had, by sending the 6 September Materials to the members and MCU holders of Dairy Farmers, engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 12DA of the Australian Securities and Investments Commission Act 1989 (Cth) ('ASIC Act)', s 995 of the Corporations Law and s 42 of the Fair Trading Act 1987 (NSW). I adjourned the proceeding to enable the parties to make submissions with respect to relief having regard to my reasons for judgment. 3 Counsel for the plaintiff has drawn my attention to an inadvertent error in paragraph 100 of my reasons for judgment of 12 October 1999. I wish to clarify the matter before making any orders which would give effect to those reasons for judgment. I was dealing in that paragraph with the plaintiffs' contention that the 6 September Materials were misleading in describing the Parmalat Proposal as 'highly conditional'. In paragraph 100 I summarised the plaintiffs' written submissions on that point, as contained in paragraph 55 of the submission document headed 'The Conduct Issue'. The submission says: 'In circumstances where Mr Bryant stated that the conditions precedent are normal and not exceptional for a merger proposal, it is misleading to use such graphic language which suggests a level of uncertainty that is simply not sustainable in light of the expert evidence.' 4 In fact I had ruled that the portion of the report annexed to Mr Bryant's affidavit in which he gave that evidence was inadmissible in the form in which it was presented. I granted leave to the plaintiffs to adduce oral evidence from the witness in admissible form, but the leave was not used. Therefore, my mistake was to refer in paragraph 100 of my reasons to an opinion by Mr Bryant which was not, in fact, in evidence. 5 I am satisfied that my mistake had no effect on my reasoning and conclusion. I referred to Mr Bryant's opinion in the course of and solely for the purpose of summarising the plaintiffs' submission. My reasoning concerning the submission is in paragraph 101 of the judgment. I relied on construction of the 6 September Materials in light of the Parmalat Proposal and evidence of Mr Jephcott. The evidence of Mr Bryant in the unadmitted part of his report formed no part of my reasoning.

The submissions of the parties on relief 6 The further hearing on the question of relief took place yesterday. The plaintiffs submitted that in addition to making orders answering the first two separate questions in the manner set out in my reasons for judgment on 12 October I should make: · the orders sought in pars 1, 2, 3 and 7 of the amended summons, namely, orders avoiding or declaring invalid the whole of the postal ballot, restraining the defendants from counting the postal ballot or publishing the result, and declaring the procedure for change of votes was not a lawful procedure; · a declaration reflecting my answer that the first and second defendants engaged in misleading or deceptive conduct in sending the 6 September Materials to members and MCU holders; · an order that the first and second defendants be restrained from proceeding without leave of the Court with any business at the 'Court-ordered meeting' (that is the meeting of MCU holders, which was the subject of my order of 30 July 1999 in proceedings 2822/99) or any adjournment thereof, other than the taking of such steps as are necessary to adjourn the meeting; · orders that the first and second defendants pay the plaintiffs' costs concerning the invalidity of the change of vote procedure, and that the second defendants pay the plaintiffs' costs with respect to the misleading conduct issue.

The plaintiffs handed up draft orders to this effect. 7 If these orders were to be made they would be final relief as to part of the proceedings brought by the plaintiffs. Final orders are justified, say the plaintiffs, because they give effect to my reasons for judgment. The Court's power to make final orders disposing of part of proceedings after answering separate questions is conferred by Pt 31 r 6. The general principles upon which the Court should move from answering separate questions to making final orders have not been contested before me. 8 The Rules of Dairy Farmers have been amended since I handed down my reasons for judgment by adoption of a rule which authorises a new change of vote procedure with provisions to protect the secrecy of the ballot. The Registrar has registered the amendment. In light of this, the defendants say that the consequences of my findings can be overcome by their sending to members and MCU holders a correcting supplement to the Restructure Booklet, enclosing a further opinion by the independent expert together with a tax opinion and correspondence with Parmalat. They also wish to include a media release about the financial results of Dairy Farmers. 9 They have produced drafts of these documents which have been the subject of submissions, and of comments by me. As a result of that process, the defendants propose to revise the drafts with a view to those revised documents being sent to members and MCU holders. 10 The defendants say that Dairy Farmers will undertake to dispatch these correcting materials and if it does, no other orders are needed in these proceedings except as to costs. 11 They submit that as an alternative to an undertaking by Dairy Farmers, the Court could make an order on the joint and several application of the defendants directing Dairy Farmers to dispatch the correcting materials. The Court's power to make such an order may be found, they say, in s 1324 of the Corporations Law and in the injunction provision of other legislation modelled on s 80 of the Trade Practices Act 1974, namely, s 12GD of ASIC Act and s 65 of the Fair Trading Act. They also say that a source of power is the Court's inherent power as confirmed and reinforced by s 23 of the Supreme Court Act 1970 (NSW).

Declaratory orders 12 It cannot be denied that the plaintiffs are entitled to some orders in consequence of my reasons for judgment of 12 October 1999, even if the defendants are right that corrective materials can be dispatched. I see no reason why I should not make orders answering the first two separate questions in the manner set out in my reasons for judgment of 12 October. Similarly, I see no reason why I should not make a declaration reflecting my answer that the first and second defendants engaged in misleading or deceptive conduct in sending out the 6 September Materials.

Issues as to the form of relief 13 The other relief sought by the plaintiffs and the relief sought by the defendants raise issues of more difficulty. It seems to me that four issues arise, namely, (a) whether I should make declaratory or injunctive orders as to the validity of all or any of the postal votes which have been cast; (b) whether I should enjoin the defendants from proceeding with the Court-ordered meeting; (c) whether I should take any steps (and if so, what steps) to allow corrective materials to be dispatched; (d) costs, including the costs sought against the directors personally. 14 As to issue (a), the focus of submissions has naturally been on the postal ballot, but I propose to deal with the effect of misleading conduct on proxies for the meetings as well. I should note that there are, in fact, two meetings in question. The first is the Court-ordered meeting of MCU holders to consider the scheme which affects them. The second is the meeting of members convened for the purpose of dealing with some matters ancillary to the Restructure Proposal including amendments to the Rules. 15 As to issue (b), it is appropriate to consider the meeting of members to make those ancillary decisions as well as the Court-ordered meeting of MCU holders.

Four categories of votes and proxies 16 For the purpose of considering this issue I propose to subdivide postal votes which have been cast into four categories and proxies which have been lodged into three categories. For the sake of simplicity I shall refer to members alone, rather than members and MCU holders, but what I say about members' proxies applies with equal force to the proxies of MCU holders in respect of their meeting. 17 The first category of postal vote, which is not a separate category of proxies, is the category of replacement votes cast pursuant to the invalid change of vote procedure which was inaugurated by the 6 September Materials. The conclusion reached in my judgment of 12 October 1999 entails that those votes are invalid. I need not say anything more about the first category except to remark that on the evidence, it appears that 21 replacement votes have been received as at 20 October 1999. 18 The second category applies to postal votes and proxies. It comprises postal votes and proxies lodged after the Parmalat Proposal was delivered to Dairy Farmers on 31 August 1999, but before the dispatch of the 6 September Materials. There is no exact evidence of the number of postal votes in this category and the evidence with respect to proxies is out of date. It seems, however, that 1,305 postal votes were received by the returning officer between 30 August and 6 September 1999. Members in this category had not been informed of the Parmalat Proposal before lodging their votes or proxies, though it existed when they did so. They were, therefore, not fully informed. 19 In the third category, which affects proxies as well as postal votes, are votes and proxies which used the materials sent to members with the Restructure Booklet early in August 1999, lodged with the returning officer after dispatch of the 6 September Materials (which included a media release capable of immediate communication). There is a substantial risk that the members who lodged votes or proxies in those circumstances had been misled at the time when they did so. Their decisions are, therefore, tainted by the misleading conduct of Dairy Farmers and its directors and they ought not to be relied upon as an accurate expression of the will of those members. There were 1,189 postal votes in this category as at 20 October 1999 out of a total 4,027 postal votes cast by that date. Initially, some 5,097 voting guides were issued with the Restructure Booklet. 20 The fourth category, applying to both proxies and postal votes, comprises votes and proxies sent to the returning officer before the Parmalat Proposal was received by Dairy Farmers on 31 August 1999. There are approximately 1,533 postal votes in this category. My judgment of 12 October was confined to the 6 September Materials and does not deal with whether members were fully informed before 31 August. The plaintiffs allege that they were not. That question is likely to involve substantial evidence as to the course of negotiations between Parmalat and Dairy Farmers before and after I made my orders of 30 July 1999 in the scheme proceedings. 21 The plaintiffs' allegations have not been heard, let alone determined. If one were to assume for present purposes that all of the members who voted or lodged proxies before 31 August 1999 were fully informed, the question would be whether their decision should be vitiated by the occurrence of a material event after the votes were lodged, but before the results of the ballot were declared. I propose to make that assumption for the purposes of the present application for relief. 22 The question is whether the Court has the power to make orders with respect to the validity of the votes and proxies in each category and if it has the power, whether it ought to do so.

Validity of resolution of members 23 Typically, the question whether members of a corporation have been fully and fairly informed arises in the context of a meeting rather than a postal vote (see the cases cited in Ford's Principles of Corporations Law paragraph [7.460]). If the members were misled or not fully informed at the time when they voted at the meeting or appointed proxies for it, the appropriate remedy may be an order declaring invalid or setting aside the resolution of the members: Pacific Coast Coal Mines Ltd v Arbuthnot [1917] AC 607; Hughes v Union Cold Storage Co Ltd (1934) 78 Sol Jo 551. Alternatively, and perhaps more commonly, the Court may make an order restraining the company from acting on the resolution or carrying it into effect: eg, Kaye v Croydon Tramways Company [1898] 1 Ch 358; Tiessen v Henderson [1899] 1 Ch 861; Baillie v Oriental Telephone & Electric Co Ltd [1915] 1 Ch 503. 24 If the resolution has not been passed and a timely application is made, an order may be made restraining the company from proceeding with the meeting - perhaps subject to leave, in order to permit the directors to seek dissolution of the injunction if adequate corrective disclosure has occurred. An order of the latter kind was made by Gummow J in Fraser v NRMA Pty Limited (1994) 52 FCR 1, 32. Such orders do not deal directly with the validity of proxies. An order of the latter kind seem to leave open the question whether proxies lodged before the distribution of the corrective material can remain in place for use at the eventual meeting. If distribution of corrective material is a possibility, it may be necessary for the Court to make a determination as to the validity of proxies and votes which have already been lodged, or the use to which they may be put.

Where an uninformed member grants a proxy 25 A proxy (more precisely an instrument of proxy as opposed to a proxy holder) is essentially a grant of authority by A to B to vote on A's behalf at a meeting, either in the manner directed by A ('directed proxy') or in B's discretion ('undirected proxy'). Section 179 of the Act recognises proxies of either kind. The principal and agent relationship which the proxy creates (see Re Advance Bank Australia Ltd (1997) 22 ACSR 513) may be created for value or without any contract. 26 The problem with which I am presently concerned may be characterised broadly as the question of validity of a conferral of authority by a principal upon an agent at a time when the principal is under a material misapprehension not induced by the agent. In the present context, the misapprehension implies that the vote which is subsequently cast by the agent (the proxy holder) at the meeting does not reflect the true will of the principal (the member) and so it is open to the Court to invalidate the resolution which is adopted at the meeting, or to restrain the corporation from acting in accordance with it. The question of the validity of the proxy itself is normally not determined. 27 The scope of the actual authority conferred by a principal upon an agent is ascertained by applying ordinary principles of construction, including any proper implications from the express words used: Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, 502 per Diplock LJ; see generally Bowstead & Reynolds on Agency (16th ed by F M B Reynolds, 1996), p 51 ff. If a proxy is conferred at a time when the member is under a material misapprehension either because of misleading disclosure by a third party or because of failure of the third party to make disclosure of something which it was the third party's duty to disclose, the conferral of authority may be ineffective as a matter of construction. That consequence may arise, in my opinion, even in cases where the misapprehension or lack of information of a material matter is not the product of any misrepresentation or omission to disclose by the third party. In such a case the conferral of authority would fail because it is subject to an implied limitation, such that authority does not exist if the substratum upon which it is based is destroyed. Consequently, it seems to me there is some ground for concluding that in the second and third categories of case, so far as they relate to proxy votes, the conferral of the authority by the instrument of proxy is invalid as between member and proxy holder (although questions of ostensible authority would arise if the position of third parties is considered).

Where an uninformed member casts a postal vote 28 There is an analogy between voting by proxy at a meeting and voting by ballot without a meeting, whether the votes are cast by post or in person at a polling station. In each case the voting process leads to the declaration of the result of the ballot. In the case of a New South Wales co-operative the result of the ballot is declared by the returning officer signing a statement under paragraph 8 of Schedule 2 of the Regulation. The decision of the members takes effect at that time. Regardless of whether particular postal votes are invalidated by a material misapprehension which existed when those votes were sent, the decision of the members upon the declaration of the ballot may be vitiated by informational deficiencies which existed at the time the votes were sent. If it is, the Court could declare the resulting decision to be invalid, or grant an injunction to restrain the corporation from acting upon it. 29 Beyond the prospect of invalidity of the declaration of the result of the ballot is the question whether the votes, when sent, should be treated as individually invalid. By analogy with the analysis presented above concerning proxies, it appears to me that if a vote is lodged at a time when the voter is subject to informational deficiency either because of material misrepresentation by a third party or because of failure to disclose by a third party who has a duty to disclose, or simply because a sufficiently material event has occurred of which the voter is not aware, the act of voting may be vitiated by those circumstances. It seems to me that in the present case, in view of the serious informational deficiency to which the voting process was subject once the Parmalat proposal was received on 31 August 1999, the postal votes in the second and third categories as well as the instruments of proxy should be treated as invalid.

Relief with respect to invalid proxies and postal votes 30 That leads to the question of the proposed form of relief to be granted with respect to votes and proxies in the second and third categories. The difficulty I have here is that an order of the Court purporting to determine validity in these circumstances would purport to bind parties who are not before the Court, namely, the individual members and proxy holders. 31 Section 12GM of the ASIC Act and s 72 of the Fair Trading Act confer upon the Court the power to make a wide variety of orders in certain circumstances. The orders which may be made include an order declaring the whole or part of any contract to be void or even void ab initio (see s 12GM(7)(a)). However, assuming for the moment that the plaintiffs in this case fit the category of plaintiffs for the purposes of s 12GM, and that proxies and postal votes can be treated as equivalent to contracts for this purpose, the problem is that the orders which the section authorises are all orders with respect to conduct of a person who has engaged in the misleading conduct or who has been involved in the contravention. Except in the case of certain 'collateral arrangements', s 12GM does not in its terms authorise the Court to make an order invalidating a contract affecting some third party who has not been involved in any contravention. 32 Section 1114 of the Corporations Law authorises the Court to make an order declaring a contract to be void. It has been held that s 1114 can affect contracts, the parties to which are not parties in the proceedings before the Court: NCSC v Monarch Petroleum NL [1984] VR 733; Australian Securities Commission v Mount Burgess Gold Mining Co NL (1994) 62 FCR 389. However, no doubt as a safeguard in case this power is misused, the relevant application must be made by the Australian Securities and Investments Commission, which is not an applicant before me. 33 It is appropriate to infer, therefore, that s 12GM is not intended to permit the Court to make orders invalidating juridical acts (other than 'collateral arrangements') by or in favour of parties who are not before the Court: see Australian Competition & Consumer Commission v International Technology Holdings Pty Ltd (1997) ATPR paragraph 41-559; Krambousanos v Jedda Investments Pty Ltd (1996) 64 FCR 348. 34 The difficulty may be overcome by giving effect to my view that the votes and proxies are invalid, or at least are not to be relied upon, by an appropriate injunctive order. In the case of postal votes the injunction would restrain the third defendant from declaring the result of, and the first and third defendants from acting upon, the declaration of the result of the postal ballot if votes of the vitiated kind are counted. In the case of proxies the order would not be quite the order made by Gummow J in the NRMA case, but instead would be an order restraining the third defendant from declaring the result of, and the company from acting upon the declaration of the result of, a poll on any resolution in which proxies of the vitiating kind are used.

Where the member acted before the occurrence of the material event 35 This brings me to the fourth category, which relates to votes and proxies lodged before 31 August 1999 (the date when Dairy Farmers received the Parmalat Proposal). On the basis of the analysis presented above, there is no ground for saying that these proxies and votes are invalid per se . At the time when the members acted there was, upon the assumption which I have made, adequate information available for that purpose. It is true that the plaintiffs challenge that proposition in a part of the proceedings which has not yet been heard. If they succeed then the fourth category may be merged into the second and third for the purposes of analysis. I am not in a position to treat the facts in that way for the time being. 36 Although, in my view, votes and proxies in the fourth category are not invalid per se for the purposes of relief consequent upon my determination of the separate questions, it appears to me appropriate to take into account the significance which would be attached to decisions produced by the use of those votes and proxies. 37 The purpose of the postal vote is, in part, to obtain the decision of the members under s 344 of the Act with respect to the members' scheme of arrangement which is part of the Restructure Proposal. As I observed in my reasons for judgment of 12 October 1999, the Court has a supervisory jurisdiction with respect to schemes of arrangement. That jurisdiction enables the Court, for example, to require a further process to be embarked upon, if at the hearing to consider whether to approve the scheme, the Court is not satisfied that the true will of the persons affected by it has been ascertained (see Re MB Group plc [1989] BCLC 672; and more generally Re Chevron (Sydney) Ltd [1963] VR 249; Re Crusader Ltd (1995) 17 ACSR 336). Having regard to the serious nature of the misleading conduct which I have found to exist in this case, my view is that if the plaintiffs in proceedings 2882/99 were to rely, at the hearing to approve the members' scheme under s 344, upon votes in the fourth category I would not be satisfied that in all the circumstances the true will of the members of Dairy Farmers had been ascertained. This is because after those postal votes were lodged, a matter of such material significance as the Parmalat Proposal has occurred which has led to substantial supplementary disclosure and may well lead to further corrective disclosure. In other words, my view would be that I would expect to see evidence of a voting process which had given the members a proper opportunity to respond to the new information. 38 That leads to the question whether the Court's expectation would be satisfied by members in the fourth category being given the opportunity to withdraw and replace their votes, or it would be necessary for new votes to be cast. The answer to that question cannot finally be given until the Court has the opportunity to review the information which is to be sent to the members as a result of the foreshadowed application in those proceedings, and the arrangements for replacement of votes which may be offered. As at present advised I doubt whether, given the seriously misleading conduct which has occurred, I could be satisfied that the true will of the members would be ascertained by corrective disclosure and a replacement voting procedure without an entirely fresh vote.

Conclusions as to votes and proxies 39 It follows that in my view: (a) postal votes in the first category are invalid; (b) it is likely that postal votes and proxies and in the second and third categories are also invalid, but there are limitations on the Court's powers such that the appropriate orders to reflect that view are injunctions of the kind which I have indicated; (c) proxies and postal votes in the fourth category are not invalid, but the Court may not be confident that if they are taken into account, the resulting decisions would reflect the true will of the members and MCU holders for the purpose of making orders under s 344 of the Act.

Injunction to restrain the holding of the meetings 40 The plaintiffs seek an injunction of the kind granted by Gummow J in the NRMA case to restrain the defendants from proceeding with the Court-ordered meeting without leave. Although the application is apparently confined to the Court-ordered meeting, it seems to me the same principles will apply with respect to the meeting of members to consider ancillary matters. 41 Since the plaintiffs have been successful with respect to the separate questions, prima facie they are entitled to relief which would reflect their success. If there were utility at this stage in an injunction to restrain the defendants from proceeding with any meeting without leave, the application for that injunction would need to be seriously considered. The decision on that application is, of course, discretionary. 42 The defendants have foreshadowed that they wish to distribute corrective material, and have submitted that relief of this kind would therefore be inappropriate. For reasons which I shall explain, it seems to me that the application for directions for the distribution of corrective material should not be made in the present proceedings, but should be made in the scheme proceeding, No. 2882/99. Nevertheless, it is relevant to the application in the present proceedings that the defendants have indicated their intention to proceed with corrective material, if the Court gives appropriate directions and, indeed, a mature draft of corrective material was, as I have mentioned, the subject of consideration at yesterday's hearing. 43 In those circumstances, it seems to me that the Court should not grant an injunction at this stage of the kind sought by the plaintiff. My view is that there is no sufficient point in doing so, given the application which the defendants wish to prosecute. Instead, the proper order in the present proceedings is an order granting liberty to the plaintiffs to apply before me to restore that application for this injunction on 24 hours notice to the defendants, on the basis that the application would obviously merit serious consideration if corrective material is not distributed pursuant to appropriate directions of the Court in the near future.

The distribution of corrective materials 44 At yesterday's hearing there was much debate with respect to a draft of corrective materials which is intended in due course to become an exhibit in the appropriate proceedings. The draft comprised a document prepared by the first defendant, presumably under the authority of its directors, dealing with my reasons for judgment of 12 October 1999 and seeking to make disclosure in response to them. That draft included instructions on voting and set out the text of the new rules for postal ballots to which I have referred. Attached to the draft was a report by Ernst & Young Corporate Finance Pty Limited as independent expert, dated 19 October 1999. In that report Ernst & Young concluded that should the retention of farmer control of Dairy Farmers not be of paramount importance to existing members and MCU holders, then Ernst & Young was of the opinion that the proposed restructure would not be fair and reasonable or in the best interests of existing members and MCU holders. Should the retention of farmer control be of paramount importance to existing members and MCU holders, then Ernst & Young was of the opinion that the Restructure Proposal would be fair and reasonable and in the best interests of members and MCU holders. 45 Also attached to the corrective materials was a report by B D O Nelson Parkhill, dated 18 October 1999, setting out the tax consequences of the Parmalat Proposal and commenting on the tax implications of some modifications to it which might be needed in the event that the Parmalat Proposal were to proceed after the Restructure Proposal was implemented. Also attached were a letter from Parmalat to the directors of Dairy Farmers of 13 October 1999, a reply by the Chairman of Dairy Farmers of 18 October 1999 and a media release dated 17 October 1999 headed 'Dairy Farmers Announces Record Result'. These materials together comprise the corrective materials which the defendants wish to send to members and MCU holders. 46 The immediate question is whether it is appropriate in the present proceedings for the Court to make any order authorising the dispatch of the corrective materials and indeed, whether the Court has the power to do so. As the plaintiffs pointed out, no application has been made in the present proceedings for any such order, although at yesterday's hearing the defendants' counsel handed up a draft cross-claim which would seek an order pursuant to s 1324 of the Corporations Law and any other enabling legislation to the effect that the first defendant dispatch such materials. 47 The defendants contended that there were four sources of authority for the Court to make such an order in the present proceedings. The first source of authority is s 1324 of the Corporations Law. The defendants urged upon me 'the wide view' of the section adopted in BHP Limited v Bell Resources Limited (1994) 8 ACLR 689 in contrast to 'the narrow view' adopted in Mesenberg v Cord Industrial Recruiters Pty Limited (1996) 39 NSWLR 128. Whatever view one takes as to the scope of s 1324 it seems to me that that section is not an appropriate ground for making the kind of order which the foreshadowed application envisages. Essentially, the order concerned would be a mandatory injunction made on the application of parties including the party to be enjoined. It would simply provide a framework for the first defendant to do what it wishes to do in order to correct its own misleading conduct. If the section is otherwise available I would not be disposed, in the exercise of my discretion, to use it in that way - even if one were to restrict the application to one made by the second or third defendants alone, since the first defendant is obviously connected to them. 48 Secondly, the defendants seek to rely on s 12GD of the ASIC Act and s 65 of the Fair Trading Act, which empower the Court to grant an injunction on the application of named parties and 'any other person'. The defendants contend that the words 'any other person' must be given their natural meaning and should not be so qualified as to be limited to consumers: R v Judges of the Federal Court of Australia, ex parte Pilkington ACI Operations Pty Limited (1978) 142 CLR 113, 131. Again, it seems to me that even if the section is literally available, as a matter of construction, to an applicant which wishes to secure an order against itself, or to the directors or returning officer of that applicant for that purpose, such a use would be inappropriate on discretionary grounds in a case such as the present. The section permits civil enforcement of the statutory provisions which it supports against , rather than on the application of, those who contravene those provisions. 49 The defendants also contend that the Court has the power to make an order of the kind sought because of the inherent jurisdiction, confirmed by s 23 of the Supreme Court Act. The scope of s 23 has been the subject of recent elucidation by the High Court of Australia: Cardile v LED Builders Pty Ltd (1999) 162 ALR 294. The Court should be wary of confining its inherent jurisdiction in any artificial way. Nonetheless if jurisdiction exists under either of these headings, it would be a surprising use of that jurisdiction to make an order of the kind which the defendants propose. I would not exercise the Court's discretion to do so. 50 As an alternative to such an order, the defendants indicated that they would offer an undertaking to the Court to dispatch corrective material. The undertaking would be noted by the Court when it made orders in these proceedings. While it seems it me that such a procedure would be possible, the Court needs to consider in a case of this kind what the consequence of the undertaking might be, when given in proceedings to which only a small number of the potential counterparties to whom it would have significance have been joined as parties in the proceedings. 51 It appears to me preferable for any obligation of Dairy Farmers with respect to corrective materials to be undertaken in the proceedings to which the disclosure of information is primarily related, namely, the proceedings constituted for the Court's approval of the schemes of arrangement involving members and MCU holders, No. 2882/99. Because of the supervisory jurisdiction to which I have referred, the Court is able to give directions at the second hearing for a further procedure to be undertaken to ascertain the true will of the members and MCU holders. In principle, it appears to me that the same supervisory jurisdiction authorises the Court to make appropriate orders at an earlier time upon application. For the reasons given in my judgment of 12 October 1999 the directors of a corporation which has embarked upon a scheme of arrangement have an obligation to disclose to the members or creditors affected by the scheme any material new development occurring after the dispatch of the explanatory statement and notice of meeting and before the scheme is approved. I do not suggest that before doing so the directors are obliged to make an application to the Court. However in a case such as the present, where there is a substantial dispute already on foot, directors who wish to discharge their obligation to disclose material information may well think it prudent to apply to the Court for directions. 52 If an application to the Court for directions with respect to the disclosure of supplementary information about a material new event were to be made, the Court would be able to deal with the application by virtue of its supervisory jurisdiction. It would not be appropriate for the Court to confer any imprimatur on the supplementary disclosure documents, just as no imprimatur is conferred on the scheme or the original explanatory statement when the Court orders that a meeting be convened to consider the scheme: Re Sonodyne International Ltd (1994) 15 ACSR 494, 497. However, if directions with respect to the dispatch of supplementary material were obtained, the directions would have the same general effect, in one respect, as the Court's orders have when they are made at the first hearing in response to an application for the convening of the scheme meeting. The Court ought not to give directions with respect to the convening of the scheme meeting unless the scheme is of such a nature and is cast in such terms that, following approval at the meeting, the Court would be likely to approve it on an unopposed application: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69, 72; Re Linter Textiles Corp Ltd [1991] 2 VR 561; Re Price Mitchell Pty Ltd (1984) 9 ACLR 1; Re Sonodyne International Ltd, supra. 53 Though these cases refer to the scheme itself, the principle of the cases seems to me to be equally applicable to the explanatory statement which accompanies the scheme, since the statement is reviewed and (in the case of company) approved by the Court. Adapted to the present circumstances, the principle implies that the Court should not direct the dispatch of supplementary disclosure materials unless it is of the view that if those materials are dispatched in a timely fashion and the scheme is approved at the relevant meeting or meetings, it would approve the scheme on an unopposed application. 54 There is therefore an available mechanism in proceedings No. 2882/99 for the defendants to raise the question of a corrective disclosure statement, and there are obvious problems in the defendants raising that question in the present proceedings. The appropriate course, in my view, is for me to proceed to make the orders which I have outlined without making a broader injunctive order of the kind made by Gummow J, on the basis that the defendants have foreshadowed an application for directions as to the dispatch of corrective materials in proceedings No. 2882/99. The present plaintiffs may appear in those proceedings to resist the application, if they choose to do so. 55 I intend to grant the plaintiffs liberty to apply to me on 24 hours' notice in the present proceeding, to restore their application for such an injunction, so that they can raise the issue again if insufficient progress if made towards corrective disclosure. The defendants have stated through their counsel that they will supply the revised draft corrective disclosure materials to the plaintiffs prior to their application to the Court.

Costs 56 In the result the plaintiffs have been very substantially successful with respect to the separate questions, and the application for final relief which they have made consequent upon my answers to the separate questions. Prima facie one would expect that costs would follow those events. However, there are some submissions by the plaintiffs and the defendants which require further consideration. 57 The plaintiffs submit that the first and second defendants should pay their costs in relation to the first separate question concerning the validity of the change of the vote procedure. They make no application for costs against the third defendant. 58 With respect to the second separate question concerning misleading and deceptive conduct, the plaintiffs contend that the directors of Dairy Farmers, the second defendants, should be ordered to pay the plaintiffs' costs and no order in respect of that matter should be made against the first or third defendant. The order against the directors alone is sought on the basis that they were responsible for authorising the misleading and deceptive conduct which I have found to exist and that in the circumstances it is not appropriate for the burden of costs to be shared by them with the co-operative of which the plaintiffs are members. If Dairy Farmers were required to pay or share in the costs then to a degree the members of the Dairy Farmers including the plaintiffs would suffer in consequence of the misleading conduct which the directors authorised. The plaintiffs say this should not be allowed to happen. 59 The plaintiffs draw attention to the serious nature of the misleading conduct in the present case. I have already commented on the nature and seriousness of the first and second defendants' misleading conduct. In my reasons for judgment of 12 October 1999 I described the tone of the 6 September Materials as 'emotive, critical and negative', and I referred to them as 'combative and intemperate rather than balanced and informative' (paragraph 7). 60 The new report by Ernst & Young seems to me to confirm what was said in my reasons for judgment of 12 October about the deficiencies in the account of their opinion presented in the 6 September Materials. The opinion now expressed by Ernst & Young is noticeably different from their short opinion which was included in the 6 September Materials. I held that it was misleading for Dairy Farmers and its directors to include that short statement in the 6 September Materials without the qualifications which Ernst & Young placed upon it, concerning the limits of the work which Ernst & Young had done by way of evaluation and review, and concerning the significance to Ernst & Young of their understanding of the importance of farmer control. The new opinion of Ernst & Young shows just how important their understanding of the importance of farmer control was to their earlier expression of opinion. They now say that if farmer control does not have the paramount importance which they previously understood it to have, then the Restructure Proposal is not fair and reasonable or in the best interests of members and MCU holders. The difference between the statement of Ernst & Young in the 6 September Materials and the opinion now expressed is so stark as to bring home the gravity of the misleading conduct on the earlier occasion. 61 The plaintiffs say that the conduct of the management team authorised by the directors before, during and after the hearing of the proceedings, and in particular, the conduct of Mr Langdon and Mr Tooth, brought about the situation which forced them to take these proceedings and that conduct has persisted up to the point of judgment. They submit that the evidence establishes that Mr Langdon, Mr Tooth and the management team engaged in conduct which was inappropriate and high-handed in relation to the whole subject matter of the proceedings, and that Mr Langdon, Mr Tooth and the management team have treated the Court's decision of 12 October in a derisory manner. They asked me to infer that this conduct was authorised by the directors. 62 It appears to me that the plaintiffs submission has some substance, though I believe it is an exaggeration to say that by their conduct Mr Langdon, Mr Tooth and the management team have since 12 October treated the Court's decision in a 'derisory manner'. I am concerned about the following elements in the course of conduct of members of the management team, when their cumulative effect is considered: · in the August edition of Farmer News Mr Langdon is quoted as saying 'the meetings left the directors and management in no doubt that the farmer members of the Dairy Farmers Group have not worked for generations over a period of 99 years to yield control of a business that is poised for so much success in the future'; · in his letter of 1 September 1999 to members Mr Langdon referred to the Parmalat Proposal as 'highly conditional', 'both unsolicited and unwelcome', and 'preying on farmers' uncertainty', and he advised members to 'ignore any Parmalat propaganda'; · in the press announcement of 31 August 1999 Mr Tooth is quoted as saying 'the timing of the Parmalat Proposal is questionable and it appears to be designed to disrupt the Restructure Proposal', and the Parmalat Proposal is 'highly conditional' and 'unsolicited and unwelcome'; · the September edition of Farmer News creates an overall impression which confirms the combative flavour of the 6 September Materials; · in a press release of 23 September 1999 Mr Langdon is quoted as saying, 'The Board believes that there is no foundation to the allegations made by the two dissident farmers and intends to vigorously defend its actions in Court'; · in a letter to members of 23 September 1999 he refers to 'any Parmalat propaganda'; · in letters to various members of 24 September 1999 Mr Langdon states his view that it is 'unfortunate that others have incorrectly assumed that those signatories [to a requisition for a meeting] also represent support for the costly and unnecessary litigation that has now commenced'. 63 The course of conduct reflected in these documents confirms the findings which I made with respect to the 6 September Materials in my judgment of 12 October 1999. It shows to my mind that senior officers of Dairy Farmers including the Chairman Mr Langdon, with the authority of the Board reflected in the Board resolution of 3 September 1999, had embarked upon a campaign to defeat the prospects of the Parmalat Proposal being developed for consideration by members prior to their vote on the restructure proposal, and further a campaign of isolating and criticising the plaintiffs for their initiation of the proceedings which are before me now. 64 In my opinion Mr Langdon ought to have realised, at least by the time when the proceedings were instituted, that there were some substantial issues which needed to be considered. His conduct suggests that either he did not properly understand the basis of the plaintiffs' case or else he acted in deliberate disregard of his understanding for tactical purposes. 65 A matter of particular concern to me is the way in which my reasons for judgment of 12 October 1999 were described in a document which was distributed to field representatives and others shortly after my judgment was handed down. The document contains a summary of my reasons for judgment which makes no direct reference to my findings against the directors. It identifies only the particular contents of the 6 September Materials which I found to be misleading. It is expressed in such a way that the reader would be likely to infer from it that the contravention of the law was merely technical. 66 This evidence must be assessed in the light of the weighty duty that directors of a corporation bear when they propose a restructure scheme of the kind which was proposed in this case. The directors' duty to ensure that before taking their decision, the members who are affected by the proposed scheme are fully and fairly informed of all material matters, was underscored by Gummow J and the Full Federal Court in Fraser v NRMA Holdings Ltd (1995) 55 FCR 452. Their duty is a central part of their fiduciary obligation and is reinforced, in the way described by the Full Federal Court (55 FCR at 465-467), by statutory consumer protection provisions of great importance. In the present case the directors' conduct in authorising the management team, including Mr Langdon, to act in the misleading and combative way that they did fell far short of what is required by legal principles. 67 It seems to me appropriate for the Court to take a view on the question of costs which reflects the importance of those matters. I therefore accept the submission by the plaintiffs that the order for costs in respect of the separate question as to misleading and deceptive conduct should be made against the directors alone. 68 The defendants submitted that my finding of misleading and deceptive conduct was a finding of a breach of an objective statutory standard. That is true; but having regard to the matters to which I have referred, the misleading conduct in the present case flows from an authority given by the board in circumstances where the board ought to have foreseen that their authority would be used to campaign rather than to inform. Their conferral of authority must be regarded as unwise, at least, and possibly worse. 69 The defendants submitted that there was no allegation against the directors or any of them that they acted dishonestly or in bad faith. I should make it clear that my findings are not findings of dishonesty or bad faith. Nonetheless the findings which I have made justify the orders which I propose to make. 70 Finally, the defendants submitted that the directors acted on the advice of their legal and merchant banking advisers in preparing the 6 September Materials. The evidence indicates that advice was obtained and Mr Langdon says that it was followed. 71 The plaintiffs drew attention to a joint legal advice by Addisons and Gilbert & Tobin dated 2 September 1999, which stated that the supplementary materials should contain a comparison of the Parmalat Proposal to the Restructure Proposal. The 6 September Materials do not contain a comparison of the Parmalat Proposal with the Restructure Proposal, and the plaintiffs say that Mr Langdon, with the authority of the directors, overrode or departed from the joint legal advice. On the evidence before me I am not able to infer that in dispatching the 6 September Materials Mr Langdon overrode or departed from legal advice. It may be that the written advice was expanded and qualified by meetings which led to the production of the 6 September Materials. Be that as it may, Mr Langdon and the directors who authorised the dispatch of the 6 September Materials cannot avoid the consequences which ought to follow with respect to costs by saying that they relied upon the advice of legal and merchant banking advisers. The conduct which makes it appropriate to order the directors to pay costs is their authorising the preparation of responses to the Parmalat Proposal which had a hostile and emotive flavour, antithetical to their duty to ensure that the members were fully and fairly informed. They are responsible for the tone of the responses even if the content may have been governed by advice. 72 The defendants also drew attention to some aspects of the case where the plaintiffs have not been successful. In particular, when the plaintiffs gave written particulars of the alleged misleading conduct they purported to rely on one matter referred to in argument as 'Particular 5', with which they did not proceed at the hearing for determination of the separate questions. That is true, but it is clear from counsel's submissions that Particular 5 will be subject of further contention in the case at an appropriate time. Particular 5 has not been abandoned and, therefore, I should not conclude that work done by the defendants in response to Particular 5 has been wasted. The defendants also referred to the plaintiffs' failure with respect to two aspects of their claim to misleading conduct relating to the 'flawed valuation' and 'lack of financial information' issues. It is true the plaintiffs failed to succeed on those matters, but they are relatively minor when measured against the degree of success which the plaintiffs have had generally. There is no basis, in my view, for reducing the amount of costs to which the plaintiffs would otherwise be entitled.

Conclusions 73 My conclusions, therefore, are that orders should be made with respect to the validity of the voting and proxy process in the manner which I have indicated; orders should be made reflecting the answers to the first two separate questions; a declaration should be made with respect to the misleading or deceptive conduct; the plaintiffs should be granted liberty to apply to me on 24 hours' notice to reinstate their application for an injunction of the kind ordered by Gummow J in the NRMA case; and orders should be made that the first and second defendants should bear the plaintiffs' costs with respect to determination of the separate questions and also the argument for relief concerning those questions, except that the second defendants alone should bear the plaintiffs' costs with respect to the determination of separate question 1.2 concerning misleading conduct. 74 I stand the proceedings over to Wednesday 27 October 1999 at 9.30am for the purpose of making the orders which I have outlined, in consequence of my determination of the separate questions. I direct the plaintiffs to bring in short minutes for that purpose. I intend to stand the proceedings over for mention before the Registrar, so that directions can be given for the further progress of the matter. * * * * * * * * * *

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