EDEN ENERGY LTD -v- DRIVETRAIN USA INC [2012] WASC 192 (8 June 2012)

Supreme Court of WA|2012-06-08|Before: Corboy J

1 Eden Energy Ltd alleges that it made an agreement with Drivetrain USA Inc and Engenco Ltd by which:

(a) Eden Energy agreed to sell and Drivetrain agreed to purchase all of the issued shares in Eden Hydrogen Inc.

(b) Eden Innovations Ltd agreed to sell and Drivetrain agreed to purchase all of the issued shares in Eden Cryogenics LLC.

(d) Engenco agreed to guarantee the obligation of Drivetrain to pay the purchase price for the shares.

2 Eden Energy further alleges that Drivetrain has only partly paid the purchase price for the shares. It claims that the sum of $680,000 remains due and owing and has applied for summary judgment against Drivetrain and Engenco for that amount, together with interest.

3 The contract for the sale and purchase of the shares comprised two agreements: a deed of agreement dated 28 October 2008 (the sale agreement) and a deed of variation dated 6 January 2009 (the variation deed). I shall refer to the sale agreement and the variation deed together as the agreements.

4 The sale agreement provided that the shares in Eden Hydrogen and Eden Cryogenics were to be purchased by Coote Investments Pty Ltd. The agreement was varied by the variation deed to provide that the shares were to be acquired by Drivetrain. Coote Investments and Drivetrain were subsidiaries of Engenco.

5 The sale agreement contained various conditions precedent, including that the board of Engenco approve the proposed acquisition of the shares. The variation deed waived that requirement.

6 Drivetrain and Engenco (collectively, the defendants) deny that they are bound by the agreements. They allege that the board of Engenco did not approve the purchase of the shares and that the variation deed was made by a director, Mr Michael Coote, without authority and in breach of duties that he owed to Engenco and Drivetrain.

7 The defendants further allege that Eden Energy knew of Mr Coote's lack of authority and breach of duty as a director of Engenco through its solicitors, Solomon Brothers. They claim that they are entitled to compensation for Eden Energy's knowing participation in Mr Coote's breach of duty and that their foreshadowed claim for compensation may be set off against Eden Energy's claim for the balance of the purchase price of the shares.

8 Solomon Brothers appear for Eden Energy in this action. Drivetrain and Engenco have applied for an order restraining them from continuing to act having regard to the allegations of knowledge that they have made as part of their defence to the claims brought by Eden Energy.

9 I have decided that the application for summary judgment should be dismissed and that Solomon Brothers should be restrained from continuing to appear for Eden Energy.

The agreements for the sale and purchase of the shares

10 The sale agreement was made between Eden Energy, Eden Innovations and Coote Investments (then known as Coote Energy Pty Ltd) (attachment 'APG3' to the affidavit of Aaron Philip Gates made on 13 April 2011). It provided for Coote Investments to purchase all of the shares issued in Eden Hydrogen and Eden Cryogenics from Eden Energy and Eden Innovations. The consideration for the sale of the shares was the issue of four million shares in Engenco (then known as Coote Industrial Ltd).

11 Settlement of the sale of the shares was expressed to be conditional on:

(a) Engenco obtaining the approval of its board 'to the acquisition by [Coote Investments] of the Sale Shares upon and in accordance with the terms and conditions of this Agreement by no later than 30 November 2008' (cl 2.1).

(i) about various maters relating to shareholdings in Eden Hydrogen and Eden Cryogenics;

(ii) that all representations and warranties in cl 11 and cl 12 of the agreement and the second schedule to the agreement were 'true and correct in all material respects';

(iii) that there had been no material adverse changes concerning certain businesses operated by Eden Hydrogen (the businesses referred to in recital A(i)) and the business of Eden Cryogenics; or in the results of operations, prospects or financial condition of Eden Hydrogen and Eden Cryogenics after the date of execution of the agreement (cl 2.2).

12 Those conditions were expressed to be solely for the benefit of Coote Investments and only it could waive the conditions. However, either party could terminate the agreement prior to settlement if the conditions precedent were not satisfied by the dates specified.

13 The agreement also provided that from the date of execution, Coote Investments would advance to Eden Hydrogen and Eden Cryogenics 'weekly in advance ... up to Settlement, that amount which is necessary to fund the cash flow requirements of the Business in the following week, capped at AU$100,000 per week' (cl 6.1). Provision was made for weekly cash flows to be given to Coote Investments and there was a procedure specified for resolving disputes over whether funds were required according to the cash flows.

14 The variation deed was made on 6 January 2009 between Eden Energy, Eden Innovations, Drivetrain and Engenco (attachment 'APG4' to Mr Gates' affidavit). The principal amendments to the sale agreement effected by the deed of variation were to:

(b) provide for a cash consideration of $2 million payable by instalments (cl 4);

(d) delete cl 2 of the agreement (the conditions precedent and the ancillary provisions permitting termination of the sale agreement if the conditions were not satisfied by 30 November 2008) (cl 3);

(e) provide for Engenco to guarantee the obligation of Drivetrain to pay the purchase price (cl 5).

15 Clause 12 of the sale agreement included a warranty given by Eden Energy and Eden Innovations that the various representations, warranties, undertakings and statements contained in the second schedule to the agreement were 'accurate, true and correct'. The warranties in the second schedule were extensive. They concerned matters such as the state of the accounts and records of Eden Hydrogen and Eden Cryogenics, their taxation position, ownership of their assets and numerous other aspects of the companies' affairs that might ordinarily be the subject of a due diligence undertaken prior to the acquisition of a business. The warranties were not deleted from the sale agreement by the variation deed.

16 The sale agreement was made on 27 October 2008. As has been noted, the board of Engenco was to give its approval to the transaction by 30 November 2008. Settlement was to occur on the second business day after board approval. The date for settlement was varied by the variation deed to 6 January 2009 so that settlement apparently occurred simultaneously with execution of the deed.

17 It was apparent from the descriptions of their businesses contained in the recitals to the sale agreement that Eden Hydrogen and Eden Cryogenics were involved in technology development. The evidence disclosed that the businesses were conducted in the United States of America.

18 Mr Gates (who is the company secretary and chief financial officer of Eden Energy), Glenn Parrett (who is the chief executive officer of Drivetrain Power & Propulsion Pty Ltd and who was a director of Engenco between 28 June 2006 and 26 November 2009) and Ronald Stampalia (who is the chief financial officer and company secretary of Engenco) gave evidence about the various parties to the agreements and the relationships between those parties and associated entities. In summary, that evidence disclosed that:

(a) Gregory and Douglas Solomon were and had been directors of Eden Energy since 21 May 2004, together with Guy Touzeau Le Page. Richard Jonathon Beresford had been a director of Eden Energy since 8 May 2007 (attachment 'APG1' to Mr Gates' affidavit). They were also shareholders in Eden Energy (see the annual reports for Eden Energy years ended 30 June 2008 and 30 June 2009, attachments 'RS1' and 'RS2' to the affidavit made by Mr Stampalia on 11 April 2011).

(b) Eden Innovations was a wholly owned subsidiary of Eden Energy and was, prior to 27 October 2008, the owner of all of the shares issued in Eden Hydrogen and Eden Cryogenics (Mr Stampalia's affidavit, par 16 and attachments 'RS1' and 'RS2').

(c) Coote Investments and Drivetrain were wholly owned subsidiaries of Engenco (Mr Stampalia's affidavit, pars 8 and 10). The directors of Engenco at the time of the agreements were Donald Hector (chairman), Mr Coote (managing director), Don Patterson (chief executive officer), Peter Wilson and Mr Parrett (Mr Parrett's affidavit, par 9).

(d) Mr Coote, through Ganesha Nominees Pty Ltd, and Coote Investments were substantial shareholders of Eden Energy (Mr Stampalia's affidavit, pars 11 and 12 and the attachments referred to in those paragraphs).

(e) Mr Coote, through Ganesha Nominees and on his own account, was a substantial shareholder in Engenco (Mr Stampalia's affidavit, par 13 and the attachments referred to in that paragraph).

(f) Mr Coote was the sole director of Drivetrain (Mr Stampalia's affidavit, par 9).

19 Mr Parrett gave evidence that was not contested for the purpose of these applications that he understood that Mr Coote effectively controlled Engenco through shareholdings held by himself and entities associated with him, members of his family and their associated entities and other 'close supporters' (Mr Parrett's affidavit, par 10).

20 It was not in issue that Mr G Solomon, Mr D Solomon and Michelle Hawksley were partners of Solomon Brothers at the time that the agreements were made. Mr Stampalia and Mr Parrett gave evidence about the involvement of Solomon Brothers with the affairs of Engenco. Their evidence was not disputed. They stated that:

(a) Since in or about 2006, Solomon Brothers had acted as the corporate solicitors for Engenco and its subsidiaries and was the 'dominant provider' of legal services to Engenco. Ms Hawksley was the partner who principally provided those services (Mr Stampalia's affidavit, pars 18 and 19).

(b) Solomon Brothers were 'intimately involved' in Engenco's business and in particular, in providing detailed services in relation to the acquisition or potential acquisition by Engenco of several businesses. Ms Hawksley worked on various matters for Engenco on 'a very frequent basis' (Mr Parrett's affidavit, par 15).

21 Mr Stampalia attached to his affidavit a bundle of invoices rendered by Solomon Brothers to Engenco. My calculations from the bundle indicated that that Solomon Brothers rendered invoices to Engenco between 2006 and March 2011 for an amount of approximately $700,000.

The circumstances in which the agreements were made

22 Mr Parrett and Mr Stampalia gave evidence about the circumstances in which the agreements were made. That evidence was not contested by Eden Energy. Rather, its submissions focussed on what it contended was not established by their evidence. Consequently, this section of the reasons is in narrative form.

23 In mid October 2008, Mr Coote advised the board of Engenco that 'we have been working on a minority play to purchase some of the assets of distressed entity Eden Energy' (email dated 16 October 2008 from Mr Coote to the board; attachment 'GP1' to the affidavit of Mr Parrett). The proposal was to acquire the businesses of Eden Hydrogen and Eden Cryogenics in consideration for four million shares issued in Engenco.

24 According to Mr Parrett, Mr Hector and Mr Wilson expressed concern about the proposal. Mr Wilson sent an email to Mr Coote, with a copy to the other members of the board of Engenco, raising various questions about the proposed acquisition (attachment 'GP3' to Mr Parrett's affidavit). The email referred to Eden Energy running out of cash and to the possibility of administrators being appointed. Mr Wilson concluded his email with the following comment:

No doubt you have considered all of these issues and many more, however my first instinct is: we are really struggling to stay afloat ourselves, there are potential complications from [Eden Energy's] financial position; do we need the distraction and should we be exposing ourselves to a company in financial difficulties at a time when we are vulnerable?

25 Mr Hector also sent an email to Mr Coote with a copy to other members of the board of Engenco stating, 'I'm not sure I understand the ins and outs of [Eden Energy's] balance sheet just from my first reading of it, with the accumulated losses and the liability to [Eden Innovations] (whatever the nature of that is), depending on their cash position, it looks like they may be headed for insolvency'. He added:

There is also the [Engenco] equity holding in [Eden Energy] to consider (and I also understood that you (or your family interests) have a significant shareholding??). I would think we would need some legal advice to determine what our position would be if [Eden Energy] goes down the tubes'.

26 Mr Hector concluded his email by expressing the need for caution and raising the possibility that the businesses might be acquired much more cheaply, if they were of 'good strategic value', from any administrator that might be appointed to Eden Energy (email dated 17 October 2008; attachment 'GP1' to Mr Parrett's affidavit).

27 Another person associated with Engenco, Mr Timpany, also sent an email to Mr Coote at this time commenting on the financial position of the businesses proposed to be acquired. He noted that the purchase price appeared to be a significant discount to the value of the net assets of the businesses and speculated that 'the existing owners just can't afford to meet the cash flow requirements so are forced into this position' (attachment 'GP2' to Mr Parrett's affidavit).

28 There followed further email exchanges about the proposal. In summary:

(a) Mr Coote sent an email to Mr Wilson on 19 October 2008 responding to Mr Wilson's queries (attachment 'GP3' to Mr Parrett's affidavit). The email contained further information about the businesses and noted that a share sale agreement was 'close'. Settlement on the sale was proposed to be not before 15 November 2008. The email also confirmed that Eden Energy had run out of cash and noted that trading in its shares had been suspended and that it was 'working through options'. Mr Coote stated that he did not consider that the right approach was to wait for Eden Energy to go into administration. He also stated, in relation to Mr Hector's comments, that, 'I don't believe we have a conflict of interests, but feel that we may want to exit Eden as soon as or when possible ... they have some other good aspects, but I have my concerns'.

(b) In an email dated 20 October 2008 from Mr Hector to Mr Coote and others, Mr Hector enquired whether Mr Coote had obtained advice from Ms Hawksley regarding 'the potential complications which might flow from the [Engenco] equity holding and those of your family interests'. He also indicated that Ms Hawksley's view should be obtained on what might happen to the assets if Eden Energy went into administration or liquidation (attachment 'GP3' to Mr Parrett's affidavit).

(c) Mr Coote responded to the concerns expressed by Mr Hector and Mr Wilson by email sent on 20 November 2008 (attachment 'GP5' to Mr Parrett's affidavit), noting that:

First point of interest is that Greg Solomon is the Chairman/Managing Director of Eden Energy he is also the Managing Partner of Solomon Brothers, our lawyers and who Michelle Hawksley works for. Michelle has indeed completed the Share Sale Agreement on behalf of Eden, but you will see from reading it that it is very evenly thought through, as you would expect from Michelle ...

It is therefore, a little difficult to ask some of the solvency etc questions of Michelle ... if your concerns are not allayed by this message, we will have to seek specifics elsewhere.

(d) Mr Coote advised in the same email that Mr G Solomon and Mr D Solomon were providing funding to Eden Energy to enable it to 'sort out' its cash requirements. Mr Coote suggested that alternative forms of consideration might be offered for the businesses of Eden Energy either four million Engenco shares or $2 million, with Engenco to choose between the alternatives at settlement of the transaction. Mr Coote also stated in the same email that:

Potential conflict of interest concerns Solomon Brothers do not believe there is a conflict of interest due to the fact that in reality, the transaction is clearly in our favour, as in [Engenco's] advantage and therefore any shareholding in Eden is being hampered by the sale of these businesses at this price, so by voting, it could be argued that assuming we vote yes, we are voting against the best interests of [Eden Energy] and therefore, against any personal aspects that may apply. If in doubt on this subject, when it comes to the final vote, I can officially abstain from voting.

Don H; for your reference Ganesha (my personal trust etc) holds around 21.4m shares or approximately 11.9% of Eden; plus CXG [Engenco] holds the 2m shares or 1.1%. Both Don and I have major concerns as to what will be left of Eden Energy and whether there will be much to support the current shareholding valuations, which are already discounted considerably.

29 On 30 October 2008, Mr Coote distributed a copy of the sale agreement to members of the board of Engenco (attachment 'GP6' to Mr Parrett's affidavit). The executed copy of the agreement produced in evidence by Mr Gates was dated 27 October 2008. Accordingly, it may be inferred that the agreement distributed to the board of Engenco on 30 October 2008 had been executed. That was consistent with the contents of Mr Coote's accompanying email which noted that the agreement was subject to board approval and the date for completion had been extended to 30 November 2008.

30 The sale agreement was expressed to have been executed by Coote Investments pursuant to s 1 to s 7 of the Corporations Act 2001 (Cth). It was signed by Mr Coote, who was described as being the 'sole director/sole secretary'.

31 Mr Parrett gave evidence that around mid October and prior to 27 October 2008, he 'implored' Mr Coote not to proceed with the proposed acquisition and made it 'very clear' to him that he was not in favour of the purchase of the shares issued in Eden Hydrogen and Eden Cryogenics. He formed the view that Mr Coote was not giving serious consideration to his concerns (Mr Parrett's affidavit, par 23).

32 The question of whether Engenco required independent advice regarding the acquisition of the shares from Eden Energy and its wholly owned subsidiary, Eden Innovations, was again raised in emails exchanged between Mr Coote and Mr Hector in mid-November 2008. Mr Hector sent an email to Mr Coote on 17 November enquiring whether he had sought advice from a solicitor other than Ms Hawksley concerning the 'related party issues should [Engenco] buy assets from Eden Energy' (attachment 'GP9' to Mr Parrett's affidavit; note that it is to be inferred from the email that Mr Hector did not regard Engenco as being obliged to acquire the assets at this time).

33 Mr Coote responded with an email to Mr Hector also sent on 17 November 2008 (attachment 'GP9' to Mr Parrett's affidavit) in which he stated:

Michelle Hawksley has been extremely even-handed with this, albeit that she has acted for Solomons in this matter. Greg Solomon is the chairman for Eden Energy and is also the managing partner for Solomons and Partners he doesn't really work in the firm, his brother Doug does that part Doug is also a director of Eden Energy ...

We did discuss at some length a potential conflict of interest as CXG has 2 million shares in [Eden Energy] not an issue really, as it is 2m in 182m shares, so a very small quantity, but M. Coote, through Ganesha, holds around 22m shares in [Eden Energy] ...

My feeling is that the deal is bad for [Eden Energy] in that they are selling assets that they have put considerable funds into, namely around US$12m which is being written off as part of the deal ...

I don't see the need in this to gain a legal opinion on this issue of potential conflict unless the board feels strongly that it is required, I think it will be dead money, but am happy to comply with the majority decision here.

34 Mr Hector responded to Mr Coote's email with a further email dated 19 November 2008 (attachment 'GP9' to Mr Parrett's affidavit). Mr Hector stated that he considered that it was important that Engenco obtain independent advice for two reasons: first, Engenco owned shares in Eden Energy and second, Mr Coote was a major shareholder in Eden Energy and was the managing director of and a major shareholder in Engenco. Mr Hector observed 'to not seek the advice would be to invite further criticism from the analysts and, potentially, questions from the authorities'.

35 Mr Coote responded to Mr Hector's email by advising that the then company secretary of Engenco was to confer with a solicitor who was not a member or employee of Solomon Brothers (attachment 'GP10' to Mr Parrett's affidavit). Mr Parrett stated in his affidavit that he had no recollection of Engenco or its board receiving legal advice from the solicitor referred to in Mr Coote's email (Mr Parrett's affidavit, par 30).

36 Mr Parrett attached to his affidavit further emails dated between 18 and 23 November 2008 that indicated that arrangements were being made for the incorporation of a company in the United States of America for the purpose of acquiring the shares issued in Eden Hydrogen and Eden Cryogenics (attachment 'GP11' to Mr Parrett's affidavit). The arrangements had been instigated by Mr Coote.

37 Mr Parrett stated that he attended a meeting of the board of Engenco held on 24 November 2008. The minutes of that meeting were attached to Mr Stampalia's affidavit (attachment 'RS11'). They indicated that the board considered a submission regarding the acquisition of the shares issued in Eden Hydrogen and Eden Cryogenics. It was recorded that Mr Coote had advised that significant due diligence work remained to be undertaken and that:

Based on the information presented the directors were in favour of the transaction but required additional information before resolving:

- Completion/advancement of due diligence

- Understanding of cash flow requirements given current conditions

- Resolution on structure of acquisition price

38 According to Mr Parrett, concerns about the proposed acquisition were expressed at the meeting by Mr Hector, Mr Wilson and himself. In particular, they were not in favour of purchasing the businesses using shares issued in Engenco for consideration as that might impact on Engenco's share price (Mr Parrett's affidavit, par 32). Mr Parrett was to make further enquiries about the businesses of Eden Hydrogen and to report back to the board (Mr Parrett's affidavit, par 33; attachment 'RS11' to Mr Stampalia's affidavit).

39 Mr Parrett conducted a teleconference with two officers of Eden Hydrogen on 26 November 2008. He concluded that the businesses of Eden Hydrogen were poorly managed and required urgent and ongoing funding to continue their operations. He also formed the view that the 'financial projections and performance prospects of the businesses were high risk' (Mr Parrett's affidavit, par 35). He communicated his observations and concerns to the other directors of Engenco (Mr Parrett's affidavit, par 36).

40 On 30 November 2008, Mr Coote advised the members of Engenco's board by email that the date for completion of the acquisition of the shares in Eden Hydrogen and Eden Cryogenics had been extended to 16 December 2008. The email stated that the 'CP for sign off' had also been extended. It was proposed to alter the consideration for the purchase to cash to be paid over 12 months (Mr Parrett's affidavit, par 13 and attachment 'GP13').

41 A board meeting by teleconference was scheduled for 16 or 17 December 2008. However, Mr Parrett stated the meeting was cancelled (Mr Parrett's affidavit, par 39). He was advised of the cancellation by an email sent by Mr Hector.

42 Mr Coote sent an email on 24 December 2008 to a number of persons advising of the 'basic structure and management positions' for Drivetrain USA to own and operate the businesses of Eden Hydrogen and Eden Cryogenics. Several of the recipients of Mr Coote's email were appointed to positions with Drivetrain USA. The email concluded, 'We look forward to you all joining the [Engenco] group as we start 2009' (attachment 'GP14' to Mr Parrett's affidavit). The email was copied to Mr Parrett but not to any of the other directors of Engenco.

43 Mr Coote advised by email dated 6 January 2009 that the 'documentation' had been 'signed off' that day for completion (attachment 'GP15' to Mr Parrett's affidavit). Again, the email was copied to Mr Parrett but not to other directors of Engenco.

44 The variation deed was dated 6 January 2009. The agreement recorded that it had been executed by Coote Investments and Engenco pursuant to s 127 of the Corporations Act and by Drivetrain USA by the authority of its sole director, Mr Coote. He also signed the agreement for Coote Investments and Engenco. Mr Patterson signed the agreement for Engenco.

(a) He took over management of the 'USA businesses' operated by Engenco and its subsidiaries in or about September 2009. Those businesses included the businesses of Eden Hydrogen and Eden Cryogenics. The businesses were subsequently wound down or sold off. According to Mr Parrett, the costs of winding up and selling the businesses cost 'millions of dollars over and above the purchase price' (Mr Parrett's affidavit, par 43).

(b) To the best of his knowledge, the transfer of funds to enable Drivetrain USA to pay instalments of the purchase price to Eden Energy for the shares in Eden Hydrogen and Eden Cryogenics was authorised by either Mr Coote or Mr Patterson (Mr Parrett's affidavit, par 44).

46 It is also relevant to note that the directors' report appearing in the annual report for Eden Energy for the year ended 30 June 2008 (attachment 'RS1' to Mr Stampalia's affidavit) referred to several post balance date events including that Eden Energy had signed a letter of intent with another entity for the provision of shortterm working capital; that it terminated the letter of intent on 24 September 2008; that Eden Energy was 'placed into voluntary suspension whilst the directors [sought] alternatives for funding the company by either a capital raising and/or sale of asset/s' and that the directors resolved on 17 October 2008 to sell, among other things, the business of Eden Hydrogen and Eden Cryogenics 'due to the current difficult economic environment' and 'after assessing the priorities for the various hydrogen projects and their cash flow requirements'. The sale agreement was made ten days after that resolution. Further, Mr Coote's first advice to the directors about the possibility of acquiring by the businesses of Eden Hydrogen and Eden Cryogenics was by an email sent on the day before the resolution of the directors of Eden Energy.

47 Finally, the directors' report included in the annual report for Eden Energy for the year ended 30 June 2009 (attachment 'RS2' to Mr Stampalia's affidavit) disclosed that directors' fees had been paid to Mr G Solomon and Mr D Solomon. Further, the financial statements for the year ended 30 June 2009 recorded that:

(a) Management and administration fees had been paid to a company in which Mr G Solomon and Mr D Solomon had an interest.

(b) Eden Energy had issued 750,000 $1 convertible notes to Fission Energy Ltd, with interest payable at 10% per annum, secured over the assets of Eden Energy. In addition, Eden Energy had issued five million options, each to acquire one share. The options could be exercised at a price of 10 cents at any time prior to 31 December 2011. The convertible notes were repaid on 27 February 2009. The directors' report for Eden Energy indicated that Mr G Solomon and Mr D Solomon were directors of Fission Energy. They were also shown as holding a number of options issued by Eden Energy.

The role of Solomon Brothers in the share sale transaction

48 It was not in issue that Solomon Brothers acted for Eden Energy and that the firm prepared each of the agreements. It was also not in issue that Ms Hawksley was involved in advising Eden Energy on the transaction and in preparing the agreements. The cover sheets for each agreement bore her reference.

49 Mr Stampalia attached to his affidavit (attachment 'RS13') a copy of an email sent on 27 July 2010 by Mr G Solomon to Mr Vince De Santis. A copy of the email was forwarded to Mr Stampalia shortly afterwards. It is to be inferred from its contents that the email was written in response to concerns raised about Solomon Brothers' role in the share sale transaction.

50 Mr G Solomon stated in the email that Ms Hawksley had advised Engenco on 10 October 2008 that she was acting for Eden Energy in the transaction and that Engenco should obtain its own advice. Mr G Solomon's email incorporated a copy of an email sent to Mr Coote by Ms Hawksley on 10 October 2008. Ms Hawksley's email attached a draft of the sale agreement and advised that it had been prepared by her acting for Eden Energy. The email referred to the possibility of Mr Coote seeking independent legal advice.

51 Mr Coote responded to Ms Hawksley's email by an email sent on 12 October 2008. He advised that it was likely that Mr Timpany would review the draft and 'we will decide tomorrow whether we will appoint an external lawyer' (attachment 'RS14').

52 Mr Stampalia also attached to his affidavit correspondence exchanged between the defendants' solicitors and Solomon Brothers regarding the share sale transaction and the preparation of the agreements. The correspondence commenced with a letter dated 25 August 2010 from Engenco's then solicitors to Solomon Brothers (attachment 'RS15'). The letter asserted that the relationships between the various parties to the agreements and the circumstances surrounding the transaction were such that shareholder approval was required for the sale of the shares. The letter also claimed that, 'we consider that your firm and Ms Hawksley should have known or had constructive knowledge, in light of your firm's relationship with [Engenco] and its dealings with Mike Coote that shareholder approval was necessary'.

53 Mr G Solomon replied by letter dated 6 September 2010. The letter drew a distinction between the sale agreement (which was referred to as 'the Agreement') and the variation deed (which was referred to as 'the Deed'). It was noted that there was no complaint that the terms of the Agreement were 'commercially unusual or unreasonable'. The letter continued:

Mike Coote informed Greg Solomon, by email on 16 December 2008, that [Engenco] would seek board signoff on that day or the following day in connection with the proposal. As foreshadowed, this board meeting occurred. Whilst you note that the [Engenco] board had some reservations regarding the Agreement, we assume that the board approved the Agreement at that meeting (and, certainly neither Solomon Brothers nor Eden had any reason to suspect, from Mike's email or any subsequent correspondence, anything to the contrary).

54 It was to be noted that Mr Solomon stated that the board meeting that was to have been convened on 16 or 17 December 2008 had occurred. It was not apparent from the letter or the evidence before the court how Mr G Solomon knew that the meeting had been convened. The meeting was postponed according to Mr Parrett. No minutes of such a meeting were produced by Mr Stampalia.

55 Mr G Solomon attached to his letter a copy of an email sent to him by Mr Coote on 16 December 2008. The email advised that Mr Coote would seek 'board signoff' for a proposal by which:

(a) the sale agreement would be 'completed with no conditions precedent';

(b) settlement on the sale and purchase would occur on 6 January 2009;

(d) the purchase price would be $2 million, paid by instalments.

56 According to Mr Coote's email, shares in Engenco were then trading at between $0.25 and $0.30. Consequently, the previously agreed consideration of four million shares was equivalent to a cash consideration of $1 million to $1.25 million. There was no explanation for the significant increase in the value of the consideration, except for whatever might be inferred from the proposals to pay cash (so that the share price for Engenco might not be depressed by the issue of further shares) and to pay the purchase price by instalments. The only evidence of the course of the negotiations over the share sale transaction and the agreements was contained in the affidavit of Mr Parrett and its attachments.

57 Finally, Mr G Solomon maintained in his letter to the former solicitors for Engenco that Solomon Brothers were not aware of the circumstances surrounding the execution of the variation deed and had no basis for enquiring whether board approval had been obtained for the deed or sale agreement.

Eden Energy's evidence on its application for summary judgment

58 Mr Gates produced a transaction ledger maintained by Eden Energy recording payments made by the defendants of instalments of the purchase price for the shares in Eden Hydrogen and Eden Cryogenics (attachment 'APG5' to Mr Gates' affidavit). The defendants did not dispute the accuracy of what was recorded in the transaction ledger so that the amount claimed by Eden Energy as the balance due for the purchase of the shares under the agreements was not in issue.

(a) A letter dated 16 March 2010 from Engenco to Eden Energy written in response to an audit inquiry. That confirmed that, according to Engenco's records, Drivetrain was indebted to Eden Energy in an amount of $880,000 together with interest as at 31 December 2009 (attachment 'AGP6' to Mr Gates' affidavit).

(b) An email from Mr Parrett to Mr G Solomon sent on 12 May 2010. Mr Parrett confirmed in the email that Drivetrain owed $880,000, together with interest, to Eden Energy and Eden Innovations. The email also confirmed that interest at the rate of 9% per annum was payable on the amount owing from 31 July 2009. The email stated that it was Drivetrain's intention to repay the debt with payment being contingent upon selling a business operated by Eden Hydrogen (attachment 'APG7' to Mr Gates' affidavit).

60 Mr Parrett referred in his affidavit to his email to Mr G Solomon. He stated that the email had been sent at a time when the business of Drivetrain was 'under substantial pressure and harassment from Eden for payment and for written confirmation of the debt and when it would be paid' (Mr Parrett's affidavit, par 45). Mr Parrett sought advice from Mr Patterson and Mr Coote regarding payment of the debt and confirmation of payment. He was advised by Mr Patterson that email confirmation of the debt should be provided to Eden Energy. He understood that the email was required for 'compliance purposes in relation to its reporting obligations' and that he was 'working with oral instructions from the Managing Director and Chief Executive Officer of Engenco that the obligations existed, but were the subject of negotiation between [Mr Coote] and [Mr G Solomon] in the context that the transaction had actually amounted to Engenco taking on a burden from Eden Energy' (Mr Parrett's affidavit, par 45).

The principles relevant to the summary judgment application

61 The principles to be applied on an application for summary judgment were succinctly summarised by Murphy J (as his Honour then was) in SAS Global Forrestdale Pty Ltd v Towton Investments Pty Ltd [2010] WASC 167 [13] [17]. I gratefully adopt and apply the principles identified by his Honour. Summary judgment will only be granted where there is no real question to be tried in the clearest of cases, when there is a high degree of certainty about the ultimate outcome if the action went to trial. In Webster v Lampard [1993] HCA 57; (1993) 177 CLR 598, Mason CJ, Deane and Dawson JJ said at 603:

[The issue] was whether the material before the Master demonstrated that that action should not be permitted to go to trial in the ordinary way because it was apparent that it must fail. The power to ordinary summary judgment must be exercised with 'exceptional caution' and 'should never be exercised unless it is clear that there is no real question to be tried'.

...

Nowhere is that need for exceptional caution more important than in a case where the ultimate outcome turns upon the resolution of some disputed issue or issues of fact. In such a case, it is essential that 'great care ... be exercised to ensure that under the guise of achieving expeditious finality a plaintiff is not improperly deprived of his or her opportunity for the trial of his or her case by the appointed tribunal.'

62 The persuasive onus rests on the applicant for judgment but the respondent to the application bears an evidentiary onus. It is appropriate, therefore, to turn to the matters raised by the defendants in answer to the application.

63 Eden Energy contended that each of the agreements had been signed on behalf of Coote Investments by Mr Coote and that the variation deed had been signed on behalf of Engenco by Mr Coote and Mr Patterson and on behalf of Drivetrain by Mr Coote. Mr Coote was described in each agreement as the sole director and secretary of Coote Investments. He was described as a director of Engenco and the sole director of Drivetrain in the variation deed. Mr Patterson was described in the variation deed as a director or secretary of Engenco. Accordingly, each agreement was apparently signed on behalf of Coote Investments and Engenco in a form that satisfied s 127(1) of the Corporations Act. Eden Energy was entitled to assume that the agreements were duly executed by those companies: s 128(1) and s 129(5).

64 The defendants contended that Eden Energy was not entitled to make the assumption referred to in s 129(5) of the Corporations Act as it knew or suspected that the variation deed had not been duly executed by Engenco as Mr Coote and Mr Patterson were acting without authority: see s 126(1) and s 128(4).

65 Eden Energy responded to that contention by further submitting that:

(a) the defendants had not adduced evidence capable of establishing that Mr Coote and Mr Patterson were not, in fact, authorised to execute the agreements on behalf of Coote Investments, Engenco and/or Drivetrain;

(b) the knowledge allegedly possessed by Solomon Brothers and to be imputed to Eden Energy was merely knowledge that the sale agreement contained a condition requiring board approval for the transaction it was not alleged that Solomon Brothers knew or suspected that the approval of the board had not been obtained to either of the agreements.

66 Consequently, there were two issues to be considered concerning Mr Coote's authority to make the variation deed: whether he was, in fact, authorised to make the deed and if not, whether Eden Energy knew or suspected that he had acted without authority.

Is there an issue to be tried concerning the authority of Mr Coote and Mr Patterson?

67 The constitution of Engenco provided that the business of the company was managed by the directors (cl 12.1; the constitution of Engenco was attachment 'PH1' to the affidavit of Paul Andrew Hopwood sworn 22 June 2011). A director was permitted to contract with the company and any contract entered into by or on behalf of the company in which a director was 'in any way' interested was not avoided or prejudiced on that account. However, a director who had a 'material personal interest' in a matter that related to the affairs of the company was required to give the other directors notice of that interest at a directors' meeting as soon as practicable after the relevant facts had come to the knowledge of the director. Directors were also required to comply with s 191, s 192 and s 195 of the Corporations Act (cl 11.19 and cl 11.20). The directors could 'in all respects' act as directors in connection with any contract in which had an interest, including in relation to the execution of the contract or the use of the company's common seal. However, a director could not vote in relation to any contract or proposed contract in which he or she had 'directly or indirectly a material interest' (cl 13.30).

68 Section 191 of the Corporations Act requires a director who has a 'material personal interest' in a matter that relates to the affairs of the company to give the other directors notice of that interest. Section 192 provides that the notice may be in the form of a standing notice of the nature and extent of the interest. Section 195 provides that a director of a public company who has a material personal interest in a matter that is being considered at a directors' meeting must not be present while the matter is considered at the meeting or vote on the matter (subject to s 195(2) and s 195(3)). Section 195(5) provides that a contravention of the section does not affect the validity of any resolution made by the directors at the meeting.

69 The expression 'material personal interest' is not defined by the Corporations Act. The concept is discussed in H A J Ford, R P Austin and I M Ramsay, Ford's Principles of Corporation Law (loose leaf) at [9.130]. I am satisfied that it is arguable that Mr Coote had a material personal interest in the subject matter of the agreements having regard to his direct and indirect shareholdings in Eden Energy. That is especially so given the suggestions in the evidence that the financial position of Eden Energy was precarious at the time of the transaction; that it was suffering cash flow difficulties; that the sale of the businesses of Eden Hydrogen and Eden Cryogenics was precipitated by those difficulties; that trading in the shares of Eden Energy had been suspended and that the possibility of the company being placed in administration had been raised by Mr Wilson immediately following Mr Coote's initial advice about the proposed purchase of the businesses of Eden Hydrogen and Eden Cryogenics.

An issue to be tried on whether Mr Coote and Mr Patterson were, in fact, authorised

70 In my view, the defendants have raised an issue to be tried on whether the board of Engenco did, in fact, approve the deed of variation and/or expressly or impliedly authorise Mr Coote and Mr Patterson to make the deed. Mr Parrett stated that he was not aware that 'final' approval was given by the board of Engenco to the sale agreement. He also stated that 'my enquiries with Don Hector and Peter Wilson accord with my recollection that no final approval was given by the Board of Directors of Engenco to purchase the Eden subsidiaries in any form, and certainly not in the terms of either the [sale agreement] or [the variation deed]' (Mr Parrett's affidavit, par 37). Mr Stampalia stated that he had searched for but had not found a record of a board meeting at which the board of Engenco approved the company entering into the agreements (Mr Stampalia's affidavit, pars 23 and 28).

71 Eden Energy pointed in its submissions to a various matters that were said to establish that Mr Coote and Mr Patterson made the variation deed with the express or implied authority of Engenco (plaintiff's submissions in support of application for summary judgment):

(a) The defendants had relied on 'vague evidence' about an alleged lack of approval or authority. The directors of Engenco at the time had not sworn affidavits 'positively or unambiguously asserting a lack of authority'. Mr Parrett had not done so and Mr Hector had not provided an affidavit. A Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 inference was available that Mr Hector's evidence would not have assisted Engenco (par 27).

(b) Mr Parrett had deposed to Mr Coote describing the proposed transaction as a 'small acquisition which was in the scope of his authority and a minority play' (Mr Parrett's affidavit, par 32). That indicated that Mr Coote had actual authority to execute documents on behalf of Engenco if the value of the subject matter was below a specified threshold. Mr Coote's authority was also indicated by Mr Parrett's evidence concerning the subsequent confirmation of a debt due to Eden Energy (par 28).

(c) The directors were aware that the variation deed had been executed and subsequently, Drivetrain had operated the businesses of Eden Hydrogen and Eden Cryogenics; Drivetrain had paid or caused to be paid a number of instalments of the purchase price for the shares; Engenco and Drivetrain had acknowledged their liability to pay the balance of the purchase price and Engenco's annual report for the year ended 30 June 2009 contained several references indicating that the businesses of Eden Hydrogen and Eden Cryogenics formed part of the business activities of Engenco. Those events demonstrated that a binding contract had been made (par 35).

(d) No evidence had been adduced by the defendants concerning the authority of Mr Coote to have made the variation deed on behalf of Drivetrain. The company had not been incorporated under the Corporations Act but the indoor management rule applied as, in the absence of evidence to the contrary, it was to be presumed that the law of the place in which Drivetrain was incorporated was the same as the law of the forum. Mr Coote was the sole director of Drivetrain and signed the variation deed in that capacity (par 40).

72 Several matters are relevant to those submissions:

(a) The defendants contended that the court could not have recourse to Jones v Dunkel inferences when determining a summary judgment application, reference being made to the decision of the New South Wales Court of Appeal in Ollis v New South Wales Crimes Commission [2007] NSWCA 311; 177 A Crim R 306. The reasons of the court in that case did not go so far as to establish that a Jones v Dunkel inference could never be drawn in a summary judgment application. However, I accept that relying on such an inference would ordinarily be inconsistent with the nature of the discretion to be exercised in determining such an application. The defendants only carried an evidential burden to raise an issue to be tried concerning the plaintiff's claim; it was for the plaintiff to persuade the court there was no defence to its claim and that leave to defend should not be granted. In my view, no inference was to be drawn from the fact that Mr Hector did not provide evidence in this application.

(b) The complaint that there was no unequivocal statement to the effect that Mr Coote was not authorised to make the variation deed did not adequately acknowledge the general effect of the evidence given by Mr Stampalia and Mr Parrett, at least for the purpose of this application:

(i) The sale agreement was subject to board approval. The board did not approve the agreement according to Mr Parrett. Rather, it required further enquiries to be made. That appeared to be consistent with an email sent by Mr Coote to a person who was described as the CEO of Eden Innovations on 24 November 2008 (attachment 'GP12' to Mr Parrett's affidavit).

(ii) A further board meeting was to be held on 16 or 17 December 2008 but it was cancelled according to Mr Parrett.

(iii) The variation deed was made without the board further considering the share sale transaction, the sale agreement or its subsequent variation. No resolution was passed by the board approving the transaction or the agreements or authorising Mr Coote and Mr Patterson to execute the variation deed and settle on the sale.

(iv) It may be inferred from the terms of the sale agreement, the sequence of events described by Mr Parrett prior to the proposed board meeting on 16 or 17 December 2008 and the email sent by Mr Coote to Mr G Solomon on 16 December 2008 that Mr Coote considered that it was necessary to obtain the approval of the board to the transaction, including the proposed variations, and that the board had not relinquished control over the acquisition by conferring authority on Mr Coote to complete it on such terms as he thought fit.

(c) Engenco is a public company with several directors. A director acting individually does not possess ostensible authority to bind a company. Directors can only act collectively as a board and the function of an individual director is to participate in decisions of the board: Northside Developments Pty Ltd v RegistrarGeneral [1990] HCA 32; (1990) 170 CLR 146, 205 (Dawson J). A managing director may, nevertheless, have wide powers, actual or ostensible. However, it is plainly arguable that it was not within the usual authority of a managing director of a public listed company such as Engenco to bind the company to share sale transaction and the agreements, particularly where he may have been in a position of conflict and had a material personal interest in the transaction.

(d) Mr Parrett's affidavit referred to Mr Coote stating at the meeting of the board of directors of Engenco held on 24 November 2008 that the acquisition was a 'minority play' that was within the scope of his authority. According to Mr Parrett, Mr Coote also stated 'words to the effect that the size of the transaction suggested that it was not material' (Mr Parrett's affidavit, par 32). However, those statements were apparently inconsistent with the terms of the sale agreement which required board approval. Further, the gist of Mr Parrett's evidence about what occurred at the board meeting on 24 November 2008 suggested that the board did not consider that the proposed transaction was a 'small acquisition' or a 'minority play' or that it was a transaction that fell within the scope of Mr Coote's authority. Again, Mr Coote's email of 16 December 2008 was consistent with an inference that the board had not recognised that Mr Coote had authority to complete the share transaction without its approval or that it had conferred authority on him to do so.

(e) The constitution of Engenco expressly provided for the appointment of a managing director (cl 13.36). The directors were empowered to confer on the managing director any power that they could exercise (cl 13.37). However, there was no evidence that the directors had conferred any particular powers on, or vested any specific authority in, Mr Coote. There was no evidence that he possessed authority to commit the company to transactions involving 'less than a specified amount' or if he did possess authority of that kind, what the limit of his authority might be.

(f) The terms of the sale agreement and Mr Parrett's account of the directors' meeting suggested that the size of the transaction was not regarded by the board as being immaterial. In my view, it was also arguable that, in the circumstances Mr Parrett had a material personal interest for the purpose of s 195 of the Corporations Act and the constitution of Engenco.

(g) An inference might be drawn from the conduct of Engenco after January 2009 that Mr Coote was authorised to make the agreements or that the agreements were ratified. The question of ratification is further considered in the next section of the reasons but there were competing inferences available on the evidence which, in my view, should be resolved by a trial. The position of Drivetrain is also considered later in these reasons.

73 I consider that those matters indicate that there is an issue to be tried on whether Mr Coote and Mr Patterson had authority (express, implied or usual) to:

(a) agree to the acquisition of the shares in Eden Hydrogen and Eden Cryogenics without the approval of the board of Engenco;

(b) agree the terms of the purchase, including the variations to the sale agreement;

74 The existence or otherwise of authority is a question of fact: Horizon Star Pty Ltd v Carina Holdings Pty Ltd [2003] WASCA 94. It is a factual question of the kind about which a court should exercise great care before concluding that it may be determined in a summary hearing.

75 Eden Energy contended that the events that occurred after the variation deed constituted ratification by Engenco of the share transaction and the agreements. A contract entered into by an agent in excess of its authority may be ratified by the principal, including by the principal accepting the benefits conferred under the contract: Brockway v Pando [2000] WASCA 192; 22 WAR 405 [114] [120] (Malcolm CJ). The defendants had settled on the sale and purchase of the shares; accepted a transfer of the shares; assumed control of the businesses conducted by Eden Hydrogen and Eden Cryogenics and partly paid the purchase price.

76 Eden Energy identified a number of particular matters as evidencing ratification of the share transaction and the agreements by the subsequent conduct of Engenco (plaintiff's submissions in support of application for summary judgment, pars 21 35 and 42 43):

(a) the annual report for the year ended 30 June 2009 contained several references to the acquisition of the shares;

(b) Drivetrain paid or caused to be paid instalments of the purchase price the transaction ledger produced by Mr Gates disclosed that payments of $150,000 per month were made between January and July 2009, $220,000 was paid on 11 August 2009 and $200,000 on 9 July 2010 (see Mr Gates' affidavit, par 11);

(c) Engenco and Drivetrain acknowledged their liability to pay the balance of the purchase price plus interest to Eden Energy;

(d) Engenco had caused the businesses of Eden Hydrogen and Eden Cryogenics to be sold or wound up.

77 The defendants submitted that (defendants' responsive submissions):

(a) Their subsequent conduct did not affect their entitlement to equitable compensation as a result of the knowing participation by Eden Energy in a breach of fiduciary duty by Mr Coote (par 9).

(b) In any event, it was open to infer that the subsequent conduct identified by Eden Energy occurred while Mr Coote continued to direct how Engenco should deal with the transaction (par 10). That was especially as Mr Patterson was supportive of Mr Coote and there was an arguable case that Mr Patterson was involved in and assisted Mr Coote's breaches of duty (par 11).

(c) A transaction made in breach of duty by a director could only be ratified by the shareholders at a general meeting after full disclosure of the breach had been made (par 12).

(d) The onus rested on Eden Energy to show that Engenco had knowledge of all of the relevant facts for ratification to be effective. That burden was not discharged by pointing to what a particular director or the directors did following the making of the variation deed (par 15).

78 The following principles regarding ratification of an agent's unauthorised acts are relevant to the parties' submissions:

(a) To ratify the unauthorised act of an agent, the principal must have, at the time of ratification, full knowledge of all of the material circumstances in which the act was done by the agent: P Watts & F M Reynolds, Bowstead & Reynolds on Agency (19th ed, 2010), 2067.

(b) Ratification may be implied from subsequent conduct and a principal may be estopped from denying the effect of its agent's act. However, implied ratification and estoppel are distinct legal concepts. It was to be noted that Eden Energy had not contended that the defendants were estopped from denying that they were bound by the agreements.

(c) A transaction entered into on behalf of a company may be ratified by the directors if they had power to enter into the transaction. Ratification by the directors of company may be implied from part performance made or permitted by the company. However, the directors cannot ratify an act that could only be done by or with the approval of the company's members: Bowstead & Reynolds on Agency, 2078.

(d) A principal can ratify an unauthorised act by an agent that constituted a breach of fiduciary duty by the agent: G E Dal Pont, Law of Agency (2nd ed, 2008), 5.17. Similarly, the directors may affirm a sale of property by a director to the company. However, the directors must be aware of the facts and must be 'competent and impartial judges as to whether the purchase ought or ought not to be made': Tracy v Mandalay Pty Ltd [1953] HCA 9; (1953) 88 CLR 215, 241 (Dixon CJ, Williams and Taylor JJ).

(e) A company's shareholders may ratify an act done by the directors in breach of their fiduciary duties provided that there has been a full and frank disclosure of, and a clear assent to, the breach: Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; 39 WAR 1, 34.2.4.

(f) The onus of establishing that an unauthorised transaction by an agent was subsequently ratified by the principal rests on the party asserting the transaction.

79 It was to be inferred that the directors of Engenco learnt at some time that the company had acquired the shares issued in Eden Hydrogen and Eden Cryogenics and had assumed the conduct of their business operations. However, when and in what circumstances that occurred was not apparent from the evidence. There was no evidence that all of the directors were informed about the terms of the acquisition and in particular, about the making of the variation deed and its provisions. The inference from the evidence given by Mr Parrett and Mr Stampalia was that the directors, as a board, did not consider the terms of the variation deed or the share transaction after the meeting held on 24 November 2008. There was no evidence that the directors resolved to approve the transaction and the agreements or even, that they formed a view about the transaction and the agreements independently of Mr Coote.

80 There was no suggestion in the evidence that the share transaction and the agreements had been considered by Engenco in general meeting. The acquisition was reported in the annual report for Engenco for the year ended 30 June 2009. A note to the financial statements included in the annual report disclosed that the shares had been acquired on 6 January 2009 for a cash consideration of $2 million; $900,000 paid and the balance to be paid (attachment 'RS6' to Mr Stampalia's affidavit, note 25 to the financial statements). The note also recorded that $1,412,000 in costs had been incurred in connection with the acquisition of the shares. It was to be inferred that this amount represented funds advanced by Coote Industrial and/or Engenco between the date of the sale agreement and settlement.

81 As the defendants submitted, the question of whether the agreements were impliedly ratified by Engenco did not affect their claim that they are entitled to equitable compensation. However, I have concluded that there is an issue to be tried on whether the agreements were ratified. I have reached that conclusion for the following reasons:

(a) As has been noted, I consider that it is arguable that Mr Coote had a material personal interest in the subject matter of the share transaction and the agreements. In my view, it is also arguable that Mr Coote was in a position of conflict. The basis for that conclusion is explained later in the reasons.

(b) It has also been found later in the reasons that it is arguable that Mr Coote breached his fiduciary duty by executing the variation deed, assuming that he did so without the express or implied authority and approval of the board of Engenco. It is arguable that the transaction and the agreements could only be ratified by the company in general meeting. The question was not just whether the board of Engenco could ratify the unauthorised act of its 'agent' but whether the board could ratify a transaction and the agreements by which the transaction was effected that was made by a director acting in breach of his fiduciary duties.

(c) Even if the share sale transaction and the agreements could be ratified by the board of Engenco, arguably it would not be enough to show that the directors allowed the agreements to be implemented with knowledge of their terms. In the absence of evidence that the directors arrived at a considered decision to ratify the agreements with full knowledge of the circumstances in which they were made, the most that can be inferred is that the directors acquiesced in the company implementing the agreements. That would leave open the possibility that the directors were, themselves, in breach of their duties by their passive acceptance of what had occurred and that ratification could not be implied from their conduct - they did not 'competently and impartially judge', even tacitly, that the share sale transaction and the agreements should be adopted in the best interests of Engenco and its subsidiary, Drivetrain.

(d) According to Mr Parrett, at least some of the steps relied on as evidence of the ratification of the share sale transaction and the agreements were performed by or at the instance of Mr Coote and Mr Patterson. In fact, effect was given to the agreements at settlement. That occurred on the same day as the variation deed was executed.

82 As previously noted, it must be borne in mind that ratification and estoppel are distinct concepts. However, I would have concluded that there was an issue to be tried even if Eden Energy had alleged that the defendants were estopped from denying that the agreements were validly executed and binding.

The principles relevant to s 128(4) of the Corporations Act

83 I accept and apply the following propositions concerning s 128(4):

(a) A person dealing with a corporation is not required to make any enquiry in order to be able to rely on the assumptions provided for by s 129 of the Corporations Act. That, of course, was the statutory purpose of s 128 and s 129.

(b) Consequently, a person does not lose the benefit of the assumptions in s 129 merely because, in the circumstances, their suspicions ought to have been aroused: Sunburst Properties Pty Ltd (in liq) v Agwater Pty Ltd [2005] SASC 335 [178] (Gray J). Section 128(4) does not incorporate the concept of being 'put upon enquiry': Errichetti Holdings Pty Ltd v Western Plaza Hotel Corporation Pty Ltd [2006] WASC 113 [74] (Master Newnes (as his Honour then was)); Sunburst Properties [178].

(c) The expression 'knew or suspected' in s 128(4) does not encompass the knowledge that a person is deemed to possess in equity through a failure to make usual enquiries or a failure to enquire when put on notice of the need to enquire: Ford's Principles of Corporation Law, [13.300]. In short, actual knowledge is required and constructive knowledge is not actual knowledge.

(d) A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to 'a slight opinion, but without sufficient evidence': Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266, 303 (Kitto J).

(e) The material time for the purpose of applying s 128(4) is when the transaction was made rather than when a party takes a step pursuant to the transaction: Barclays Finance Holdings Ltd v Sturgess (1985) 3 ACLC 662.

84 Proof that a person knew or suspected a matter will most often be established by (Ford's Principles of Corporations Law [13.300]):

[E]vidence of facts from which the judge ... can infer that they knew, despite their affecting not to know. The inference may be made on the basis of the person's statements and conduct, his or her circumstances and facts certainly known to that person from which he or she could make conclusions of fact by deduction.

85 Further, in drawing an inference of subjective knowledge or suspicion:

(a) The court may take into account the conclusions that a hypothetical reasonable person in the same position would have drawn from the facts known and then presume that the actual person relying on the assumptions in s 129 would have reached the same conclusions. However, the court's view of what a reasonable person would know cannot be conclusively attributed to a person as actual knowledge is required. Persons invoking the assumptions under s 129 can deny that they knew or suspected that the assumptions were incorrect and it is then a question of whether the court believes them: Ford's Principles of Corporations Law [13.300].

(b) Arguably, a court is entitled to approach the matter in two stages (Ford's Principles of Corporation Law [13.300]):

Where opportunities for knowledge on the part of the particular person are proved and there is nothing to indicate that there are obstacles to the particular person acquiring the relevant knowledge, there is some evidence from which the court can conclude that such a person has the knowledge. However, this conclusion may be easily overturned by a denial on his part of the knowledge which the court accepts, or by a demonstration that he is properly excused from giving evidence of his actual knowledge. (RCA Corporation v Custom Cleared Sales Pty Ltd (1978) 19 ALR 123, 126).

86 The defendants contended that Eden Energy, particularly through Solomon Brothers, knew or suspected that Mr Coote was not authorised by Engenco to enter into the variation deed. Its knowledge or suspicion was to be inferred from the following matters (defendant's submissions in opposition to summary judgment, pars 26, 27 and 57):

(b) the deletion in the variation deed of the requirement for board approval notwithstanding that Engenco assumed a liability as guarantor under the agreement;

(c) Mr Coote advised that board approval for the variation deed would be sought but neither Eden Energy nor Solomon Brothers was ever informed that approval had, in fact, been obtained.

87 In answer to those contentions, Eden Energy argued that (plaintiff's responsive submissions, pars 3 7):

(a) The defendants had not discharged their evidentiary burden of adducing evidence capable of establishing that Mr Coote and Mr Patterson were not, in fact, authorised to execute the variation deed on behalf of Coote Energy, Engenco and/or Drivetrain.

(b) The knowledge that Eden Energy possessed, through Mr G Solomon and Ms Hawksley, was merely knowledge of a requirement to obtain board approval. The defendants did not allege that Eden Energy had knowledge of, or suspected, an actual failure to obtain approval.

A party who knows of a requirement to get approval and is presented with a signed document which could only be validly signed and presented if the approval has been obtained, is entitled to draw the inference that the approval had, in fact, been obtained.

88 Four points may be noted about those submissions.

89 First, as has been explained, it would not be sufficient at trial for the defendants to establish that Eden Energy ought to have suspected that Mr Coote and Mr Patterson were not authorised to execute the variation deed; they would be required to show that Eden Energy actually knew or suspected that they lacked authority. As the application for summary judgment was argued, that issue crystallised around whether there was a question to be tried that Eden Energy knew or suspected that the board of Engenco had not approved the share transaction on the terms contained in the agreements. Eden Energy did not directly put in issue that it knew or suspected that board approval was required the question was whether it knew or suspected that the required approval had not been obtained.

90 Second, the defendants' submissions on the knowledge of Eden Energy were primarily directed to their foreshadowed claim under the second limb of Barnes v Addy (1874) LR 9 Ch App 244. Nevertheless, the same matters were relied on to contend that there was an issue to be tried on the knowledge or suspicions of Eden Energy for the purpose of applying the statutory assumptions under s 129. Conversely, Eden Energy's responsive submissions focussed on whether there was an issue to be tried under s 128(4). However, the concept of knowledge is not the same in each context. Constructive knowledge is not relevant to the application of s 128(4); it is relevant to a Barnes v Addy claim.

91 Third, constructive notice is also relevant to the application of the indoor management rule. A person may be taken to have known for the purpose of that rule what would have been learnt had an enquiry been made in circumstances where a reasonable person would have made the enquiry: Northside Developments and see the discussion in Ford's Principles of Corporations Law at [13.200].

92 Fourth, as with the question of authority, the issue what, if anything, Eden Energy knew or suspected is a factual question that will, almost certainly, require an inference to be drawn from all of the relevant circumstances. It is a factual question of the kind that is not ordinarily suited to summary determination. That does not mean that the defendants are required to do no more than make the allegation. It is, however, the kind of factual question about which the court must exercise 'great care' in a summary hearing.

93 It is convenient to return to whether there is an issue to be tried under s 128(4) after considering the defendants' foreshadowed claim for equitable compensation.

The foreshadowed knowing participation claim The parties' contentions

94 The defendants contended that (defendants' submissions in opposition to summary judgment, pars 36 40):

(a) Mr Coote had a conflict of duty and interest in promoting the sale of assets held by Eden Energy to Engenco or any subsidiary of Engenco. Eden Energy was in financial difficulties. Mr Coote and associated entities had a significant shareholding in Eden Energy. It was in Mr Coote's personal interest to 'obtain value' for Eden Energy.

(b) It was to be inferred from the evidence that Mr Coote knew not only that Engenco's board had not approved the acquisition of the shares but that it probably would not do so. It was a breach of the duty that he owed to Engenco to cause the variation deed to be drafted in such a way as to avoid the requirement for board approval that had been a condition precedent to the sale agreement.

(c) Wherever the boundaries of a director's fiduciary duties might lie, it was at least arguable that Mr Coote breached duties that he owed to Engenco 'in purporting to push the transaction with [Eden Energy] through, in circumstances where Engenco's board had reservations, had not approved of the transaction, and Mr Coote was (viewed objectively) personally interested'.

95 Eden Energy contended that (plaintiff's submissions in reply, pars 9 14):

At a glance

Court

Decision date

Before

Source

Judgment (294 paragraphs)

An issue to be tried on whether Mr Coote and Mr Patterson were, in fact, authorised

Cases Cited (12)