Idoport Pty Ltd & Ors v Efficiency Investment BV and Anor

Idoport Pty Ltd & Ors v Efficiency Investment BV and Anor - [2001] NSWSC 1197 - NSWSC 2001 case summary — Zoe

[4]

1 The issue in these proceedings is whether and to what extent the Plaintiffs can continue to require the First Defendant ("Efficiency") to continue funding current litigation between the First Plaintiff (`Idoport") and an associated company, Market Holdings Pty Ltd ("Market") on the one hand, and the National Australian Bank and other parties on the other hand. I will for convenience refer to those proceedings as "the Idoport Proceedings". 2 The Idoport Proceedings have been continuing before Einstein J in this Court for more than a year. As at September 2001 Efficiency had paid a total of $7.5M into a bank account, called the "Idoport Account", for the purpose of funding the litigation. Payments out of the account could be made only with the authority of a representative of the Plaintiffs and a representative of Efficiency. The Second Defendant, Mr Sheahan, is an authorised representative for that purpose and is a party to some of the agreements the subject of this dispute. He has taken no active part in the proceedings. 3 By mid-September this year $6,791,500 had been paid out of the Idoport Account for costs and expenses incurred in the Idoport Proceedings, leaving the balance in the account of some $867,000. On 13 September Einstein J delivered a judgment indicating that he would order the Plaintiffs to provide security for the continuing costs of the Defendants in the Idoport Proceedings. The amount of the security was unspecified but it was obvious that, when calculated, it would be substantial. 4 Efficiency decided to cap its liability to continue funding the Idoport Proceedings by invoking provisions of one of the funding agreements which, it says, enabled it to convert loans already made to the Second Plaintiff ("Negubo") into share capital in Negubo, and thereafter entitled it to bring to an end the Plaintiffs' right to call for further funds under the loan arrangements. On 15 and 16 September 2001 Efficiency gave notices to the Plaintiffs under one of the agreements which, it contends, brought about that result. 5 The Plaintiffs dispute that Efficiency has validly brought to an end its obligations to continue funding the Idoport Proceedings. On 16 November 2001 it filed a Summons seeking orders that the balance of $867,000 in the Idoport Account be paid out to it and an order that Efficiency pay a further $1M to it pursuant to what the Plaintiffs say is a valid demand made on 25 October 2001 in accordance with the funding agreements. 6 By its Defence and Cross Claim filed on 30 November 2001 Efficiency claims that its obligation to continue funding has been brought to an end. It claims an order that Negubo issue to it one fully paid share and one share partly paid to $7,007,605 pursuant to what it claims has been the valid exercise of its right to convert loans made to Negubo into share capital. Efficiency also seeks a declaration that it is not liable to make any further payments towards the costs of the Idoport Proceedings. Alternatively, it seeks rectification of the funding agreements with the Plaintiffs. Finally, it seeks an order that the balance of the funds in the Idoport Account be paid out to it. 7 Because the Idoport Proceedings have been adjourned to 29 January 2002 to await the outcome of these proceedings, these proceedings have been heard as a matter of extreme urgency during the Court vacation. 8 One of the issues raised by the Plaintiffs was whether signatures on certain documents of Efficiency were forgeries. On 14 December it became obvious that the parties would not be able to obtain sufficient expert evidence to deal with that issue properly by 17 December, the date fixed for commencement of the trial. It seemed to me that determination of all issues other than the issue of whether the disputed signatures were forgeries could and should proceed on 17 December, since resolution of those issues in a certain way would make it unnecessary to determine the issue of forgery. 9 Accordingly, on 14 December I ordered pursuant to SCR Pt 31 r2 that the issue of whether the disputed signatures were forgeries be tried separately from, and after, all other issues in the proceedings. 10 The trial commenced on 17 December and continued until late on 19 December. The case was argued with admirable thoroughness and ability by Messrs Forster SC and Manousaridis for the Plaintiffs and by Messrs Einfeld QC and Kerr for the Defendants, and they raised a great number of points. I trust I do no disrespect to their arguments if, due to the urgent need for need for a decision, I concentrate on those issues which seem to me to be decisive of the case.

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11 There are five documents which are said to constitute the funding arrangements between the parties, namely, the documents termed "the Negubo Loan Agreement", "the Idoport Loan Agreement", "the Market Holdings Participation Agreement", "the Partnership Agreement" and "the Shareholders Agreement". 12 Efficiency says that all five documents regulate one transaction, namely, the funding arrangements between the parties for the Idoport Proceedings, and that all documents together evidence an agreement which became binding on the parties in December 2000. Efficiency relies upon the terms of the Shareholders Agreement for its claim that it has terminated its obligations to continue funding. 13 The Plaintiffs say that although the Negubo Loan Agreement has become binding as a contract between the parties the Shareholder Agreement has not, because it has never been executed by Efficiency. The Plaintiffs say that the Negubo Loan Agreement is still on foot and that Efficiency has never been entitled to avail itself of the terms of the Shareholders Agreement. 14 The first broad issue is, therefore: was the Shareholders Agreement a binding contract between the parties in September 2001, when Efficiency purported to exercise its rights thereunder? 15 The Plaintiffs say that even if the Shareholders Agreement was a binding contract in September 2001, the Notices purportedly given under it by Efficiency on 15 and 16 September for the purpose of capping its liability to continue funding were not, in fact, given by or on behalf of Efficiency because they were not signed by Mr Ossevoort, the sole director of Efficiency. They say that Mr Ossevoort's signatures on the Notices are forgeries and were really appended by Mr Charpentier, a director of Efficiency's parent company. 16 Mr Ossevoort has given evidence that the signatures on the documents are, in truth, his. Mr Charpentier and another director of Efficiency's parent company, Mr Reytenbagh, have also given evidence to that effect. However, as I have noted, the issue of the genuineness of the signatures is not for determination at this stage of the proceedings so that Efficiency has, for the purposes only of this argument, conducted the case on the assumption that it was Mr Charpentier, and not Mr Ossevoort, who signed the notices. Nevertheless, Efficiency submits, the Notices under the Shareholders Agreement have been effectively given. 17 The second broad issue is, therefore: on the assumption that the Notices sent to Negubo on 15 and 16 September 2001 were signed by Mr Charpentier and not by Mr Ossevoort, have notices under the Shareholders Agreement validly been given by or on behalf of Efficiency? 18 The Plaintiffs say that even if the Shareholders Agreement was a binding contract and even if the Notices given on 15 and 16 September were validly given by or on behalf of Efficiency, nevertheless the Notice given on 16 September capping liability to continue further funding was of no effect because Efficiency was not entitled under the Shareholders Agreement to give that Notice at the time it did. 19 The third broad issue is, therefore: as at 16 September 2001 was Efficiency entitled under the Shareholders Agreement to give a Notice capping its liability to continue funding? 20 The Plaintiffs say that even if all issues referred to so far are resolved in Efficiency's favour, nevertheless Negubo made a valid demand under the Negubo Loan Agreement for further funding on 13 and 14 September 2001, before Efficiency had issued its Notices under the Shareholders Agreement capping further liability. Accordingly, the Plaintiffs say that Efficiency remains liable to provide funds in accordance with that demand. 21 Efficiency says that the letters of 13 and 14 September are not demands for further funds within the meaning and operation of the Negubo Loan Agreement. 22 Accordingly, the fourth broad issue is: did Negubo make an effective demand for further funds under the Negubo Loan Agreement on 13 or 14 September 2001? 23 The Plaintiffs say that the balance of funds remaining in the Idoport Account has already been advanced to Negubo under the Negubo Loan Agreement and that Negubo is presently beneficially entitled to those funds. They seek an order requiring Efficiency to permit payment of those funds to Negubo. 24 Efficiency says that the funds are still held on trust for it. It concedes that if it has validly capped its liability to continue funding under the Negubo Loan Agreement by successfully invoking the provisions of the Shareholders Agreement, nevertheless the Shareholders Agreement requires it to provide 'run-off' funding to the extent of a further $1M. The amount in the Idoport Account represents the balance of the $1M payable to Negubo. Efficiency says that it is entitled to deduct from the funds remaining in the Idoport Account an amount representing accrued interest under the Negubo Loan Agreement, so that the balance in the account, after deduction of accrued interest, is the only amount to which Negubo is entitled. 25 There does not seem to be a real issue as to the fate of the balance in the Idoport Account. Whether it is presently the beneficial property of Negubo or of Efficiency, it represents the balance of the 'run-off' funding which Efficiency concedes it must provide to Negubo. The only issue is: what, if any, amount is to be deducted for accrued interest before the balance in the Idoport Account is paid to Negubo?

[6]

26 The Negubo Loan Agreement, the Idoport Loan Agreement, the Market Holdings Participation Agreement, the Partnership Agreement and the Shareholders Agreement were each executed by the Plaintiffs and sent to Efficiency on about 12 December 2000. Efficiency did not execute and return to the Plaintiffs any of the Agreements to which it was a party, namely the Negubo Loan Agreement, the Market Holdings Participation Agreement and the Shareholders Agreement. The five Agreements executed by the Plaintiffs remained in a safe in the office of Efficiency in Belgium. 27 On 15 September 2001 the execution pages of the Negubo Loan Agreement and the Shareholders Agreement were dated 15 September 2001, signed - Efficiency says, by Mr Ossevoort on its behalf - and a facsimile of each execution page only was transmitted to the Plaintiffs by Mr Charpentier on 15 September. 28 As I have noted, for the purposes of the questions to be tried at this stage of the proceedings, it is assumed that the signatures purporting to be those of Mr Ossevoort were, in fact, written by Mr Charpentier. 29 Messrs Charpentier and Reytenbagh say that when the five Agreements were executed by the Plaintiffs Mr Griese, then also acting on behalf of Efficiency and carrying on negotiations with the Plaintiffs in Australia, rang them in Belgium, told them that the Plaintiffs had executed the Agreements, and said that Mr Maconachie and the Plaintiffs' Senior Counsel, Mr J.J. Garnsey QC, had requested that Efficiency not return executed counterparts to the Plaintiffs at that time. 30 Mr Griese did not give evidence so that the evidence of Messrs Charpentier and Reytenbagh is, of course, hearsay as to whether Mr Maconachie and Mr Garnsey made such a request of Mr Griese. However, I admitted the evidence of Messrs Charpentier and Reytenbagh on this point as evidence of their belief, that belief being relevant on the issues of estoppel and rectification. 31 Messrs Charpentier and Reytenbagh were cross examined by Mr Forster but this evidence was not challenged. 32 There is no evidence which suggests that at any time after despatch to Efficiency of the copies of the five Agreements executed by the Plaintiffs, the Plaintiffs ever sought return by Efficiency of the three Agreements to which was a party, duly executed by it. 33 Nevertheless, from 20 December 2000 onwards Negubo, through Mr Maconachie, made requests to Efficiency for advances under the Negubo Loan Agreement and monies were progressively paid out of the Idoport Account thereafter in accordance with the terms of the Negubo Loan Agreement. In fact, the most substantial part of the funding for the Idoport Proceedings has been paid out of the Idoport Account since 20 December 2000. 34 The Plaintiffs say that although the Negubo Loan Agreement has never been executed by Efficiency - because the purported signature of Mr Ossevoort on 15 September 2001 is a forgery - nevertheless, it became binding on the parties on or shortly after 20 December 2000 because the parties evinced a common intention at that time to be bound immediately by their conduct in requesting and paying funds according to the provisions of that Agreement. The Plaintiffs say that the Negubo Loan Agreement is still binding on Efficiency. 35 However, the Plaintiffs say that the other Agreements executed by them and sent to Efficiency together with the Negubo Loan Agreement are not binding. The Plaintiffs rely upon a clause which appears in all of the Agreements, including the Negubo Agreement, in the following terms: "18 Counterparts

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39 The parties to the Negubo Loan Agreement are Efficiency, Negubo and Mr and Mrs Maconachie. By Clause 4.1 Efficiency agrees that it "will advance to Negubo such monies as requested from time to time by Negubo to pay costs and expenses incurred by Negubo in preserving and/or realising its Assets" . Preservation of "Assets" is a shorthand way of saying "funding the Idoport Proceedings and achieving a judgment or settlement". 40 Clause 4.3 requires the funds advanced ("the Negubo Loan Amount") to be paid into a bank account established by Negubo for that purpose. Clause 4.4 provides for interest on the Negubo Loan Amount to accrue "from the date that monies are advanced" . Interest is to be capitalised at certain dates and is itself to carry interest. Capitalised interest forms part of the Negubo Loan Amount: Clause 4.5. 41 Clause 6 provides that the Negubo Loan Amount is repayable on demand from Efficiency but that such a demand may only be made if Negubo has, in effect, realised sufficient from the proceeds of the Idoport Proceedings to pay the demand at the time it is made. 42 Looked at in isolation, the terms of the Negubo Loan Agreement, particularly Clause 4.1, merely provide that Efficiency will advance funds to Negubo for the Idoport Proceedings, unlimited in amount and for an unlimited time. As Mr Forster concedes, the terms of the Negubo Loan Agreement, divorced from the other four Agreements, give Negubo a 'blank cheque' to fund the Idoport Proceedings at Efficiency's expense. Efficiency is entitled only to interest on the funds advanced and may recover the advance only from proceeds of the Idoport Proceedings, if any. 43 Negubo is not a party to the Idoport Proceedings. Once the funds from Efficiency reach Negubo, they must be disbursed to or on behalf of the parties to the Idoport Proceedings, that is, Idoport and Market Holdings. The disbursement is effected by three other Agreements: the Idoport Loan Agreement, the Market Holdings Participation Agreement and the Partnership Agreement. A fourth Agreement, the Shareholders Agreement, inter-reacts with all the other Agreements.

[11]

44 The parties to the Idoport Loan Agreement are Negubo and Idoport. By Clause 4.1 Negubo agrees that it "will advance to Idoport such monies as Idoport requests from time to time to meet Idoport's obligations under the Partnership Agreement to pay" the costs and expenses of the Idoport Proceedings "pending satisfaction of the conditions precedent to the Partnership Agreement and the Market Holdings Participation Agreement or in the event those conditions are not satisfied" . Clause 4.7 provides that Negubo's obligations to make advances to Idoport are conditional upon Negubo having at the time of any request by Idoport sufficient cash to meet the request. In other words, Negubo cannot be required to advance money to Idoport unless it has been put in funds by Efficiency pursuant to the Negubo Loan Agreement. 45 Clause 5 provides that Negubo's obligations to advance money to Idoport will terminate immediately if conditions precedent to the Partnership Agreement and the Market Holdings Participation Agreement are satisfied and those Agreements take effect. 46 Clause 6 provides that unless and until the Partnership Agreement and the Market Holdings Participation Agreement take effect, a mechanism exists for Negubo to cap its obligations to continue funding to Idoport for the Idoport Proceedings. Negubo may give notice to Idoport terminating its obligations to advance further money when costs and expenses spent in the Idoport Proceedings reach $6.5M or $9M, or at the end of each period of three months from notification that $9M has been spent. If a "capping notice" is given, Negubo must still advance a further $1M in addition to the amount of the total advances as at the date of the "capping notice": Clauses 6.4, 6.7, 6.9. 47 By Clause 9.1 Negubo acknowledges that recovery of the advances to Idoport is limited to the proceeds of the Idoport Proceedings which become available to Idoport. 48 By Clause 9.2, if the Partnership Agreement and the Market Holdings Participation Agreement take effect, Idoport must procure that the proceeds of the Idoport Proceedings are paid in accordance with the terms of the Partnership Agreement. By Clause 9.3, if the Partnership Agreement and the Market Holdings Participation Agreement do not take effect, the balance of proceeds of the Idoport Proceedings, after repayment of the Idoport Loan Amounts are split between Negubo and Idoport in certain proportions.

[12]

49 The parties to the Market Holdings Participation Agreement are Efficiency, Market Holdings, Mr Sheahan as Liquidator of Market Holdings, Mr Maconachie and Negubo. By Clause 3 the Agreement is subject to conditions precedent being satisfied "on or before 90 days after the date of this Agreement or such later date as Efficiency determines" . The conditions precedent are that Mr Sheahan is appointed Liquidator of Market Holdings and, importantly, that the Court or a Committee of Inspection or a resolution of the creditors of Market Holdings approve Market Holdings entering into the Market Holdings Participation Agreement and the Partnership Agreement. 50 Clause 3.4 provides that if the conditions precedent are not satisfied within the required time "this Agreement is terminated and [Efficiency] has no obligation under this Agreement" . 51 Clause 4.1 provides that, subject to the satisfaction of the conditions precedent, Efficiency will provide to Market Holdings such monies as Mr Sheahan requests from time to time in order to meet Market Holdings' proportion of the costs of the Idoport Proceedings as provided in the Partnership Agreement. 52 Clause 5 provides a mechanism whereby Efficiency can cap its obligations to continue funding Market Holdings for the Idoport Proceedings. Efficiency may give notice to Market Holdings terminating its obligation to advance further money when costs and expenses in the Idoport Proceedings reach $6.5M, or $9M, or at the end of each period of three calendar months from notification that $9M has been spent. If a capping notice is given, Efficiency must advance a further $500,000 to Market Holdings. 53 By Clause 8.1 Efficiency agrees that its right to recover amounts advanced under the Market Holdings Participation Agreement is limited to the proceeds from the Idoport Proceedings. 54 By Clause 8.2 Market Holdings must do everything in its power to procure that the proceeds of the Idoport Proceedings are applied in repayment of the advances by Efficiency to Market Holdings pursuant to the Market Holdings Participation Agreement and to Idoport under the Idoport Loan Agreement. The balance of the proceeds is then to be apportioned between Market Holdings and Idoport in specified proportions.

[13]

55 The parties to the Partnership Agreement are Market Holdings, Idoport, Mr Sheahan and Mr Maconachie. The Agreement recites that Market Holdings and Idoport wish to form a partnership as to the "conduct and the outcome" of the Idoport Proceedings. The Agreement is subject to the same conditions precedent as the Market Holdings Participation Agreement. 56 By Clause 8 the management of the partnership business, i.e., the conduct of the Idoport Proceedings, is vested in a Litigation Operating Committee. By Clause 10, responsibility for the costs of the Idoport Proceedings is apportioned equally between Idoport and Market Holdings, subject to certain specific provisions. 57 By Clause 11 the accountant for the partnership is to notify Market Holdings and Idoport immediately when $6.5M and $9M are spent in the costs of the Idoport Proceedings. Receipt of such a notice by Market Holdings triggers its obligation under Clause 5 of the Market Holdings Participation Agreement to notify Efficiency, enabling Efficiency to exercise its right to cap further funding to Market Holdings under that Agreement. By giving a notice to Idoport, Market Holdings may terminate the obligation of both Idoport and itself to contribute to the costs of the Idoport Proceedings in accordance with the Partnership Agreement, subject to an obligation upon each of them to provide a further sum of $500,000. Market Holdings may also give notice to Idoport terminating the obligations of Market Holdings and Idoport to contribute funding at the end of each period of three calendar months from notification that $9M has been spent. 58 By Clause 12 Market Holdings and Idoport are required to procure that the proceeds of the Idoport Proceedings are applied first in repayment of loans by Efficiency to Market Holdings under the Market Holdings Participation Agreement and by Negubo to Idoport under the Idoport Loan Agreement; the balance of the proceeds is then to be split between Market Holdings and Idoport in specified proportions.

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64 It may be seen that the scheme of the Agreements for providing funding for the Idoport Proceedings operates as follows. 65 If the conditions precedent to the Market Holdings Participation Agreement and the Partnership Agreement are satisfied, then in accordance with the partnership between Market Holdings and Idoport which comes into existence, each partner is required to pay a share of the costs of the Idoport Proceedings. Market Holdings gets its share by making requests to Efficiency under the Market Holdings Participation Agreement. Idoport gets its share by making requests to Negubo under the Idoport Loan Agreement, Negubo in turn making corresponding requests to Efficiency under the Negubo Loan Agreement. 66 If Efficiency wants to cease funding the Idoport Proceedings altogether, it stops the flow of funds to Market Holdings by exercising its capping rights under Clause 5 of the Market Holdings Participation Agreement. It stops the flow of funds to Idoport by giving a notice to Negubo under Clause 3.2 of the Shareholders Agreement, whereby the Negubo Loan Amount is converted to equity, and then it exercises its rights under Clause 5.4 of the Shareholders Agreement not to make any further payments to Negubo in response to Negubo's calls. No further funds are, therefore, provided to Negubo so that under Clause 4.7 of the Idoport Loan Agreement, Negubo is not required to meet further requests by Idoport for funds. 67 If Efficiency calls a halt to funding in this way, it receives out of the proceeds of the Idoport Proceedings, if any, repayment of its loans to Market Holdings with interest under Clause 8.2 of the Market Holdings Participation Agreement together with a dividend on the share in Negubo under Clause 6 of the Shareholders Agreement. Under Clause 9.2 of the Idoport Loan Agreement, Idoport will have received a percentage of the proceeds of the Idoport Proceedings specified in Clause 12 of the Partnership Agreement. Negubo holds the shares in Idoport. Consequently, a dividend on the Negubo share will represent for Efficiency a percentage of the balance of proceeds of the Idoport Proceedings. 68 On the other hand, if the conditions precedent to the Market Holdings Participation Agreement and the Partnership Agreement are not satisfied, then no partnership comes into existence between Market Holdings and Idoport whereby both share the costs of the Idoport Proceedings. Idoport must fund the proceedings on its own. Idoport gets those funds by making requests to Negubo under the Idoport Loan Agreement; Negubo in turn makes requests to Efficiency under the Negubo Loan Agreement. 69 If Efficiency wants to cease funding the Idoport Proceedings it gives notice to Negubo under Clause 3.2 of the Shareholders Agreement and converts the Idoport Loan Amount to equity. Efficiency then gives a notice to Negubo under Clause 5.4 capping its liability for further funding by way of calls on the Negubo share. No further funds are, therefore, provided to Negubo so that under Clause 4.7 of the Idoport Loan Agreement Negubo is not required to meet further requests by Idoport for funds. 70 If Efficiency calls a halt to funding in this way it receives a dividend on the share in Negubo under Clause 6 of the Shareholders Agreement. Under Clause 9.3 of the Idoport Loan Agreement Negubo will have received from Idoport out of the proceeds of the Idoport Proceedings amounts equal to the loans from Efficiency to Negubo and on-lent to Idoport; Negubo will also have received a specified proportion of the balance of the proceeds of the Proceedings. Accordingly, a dividend on the Negubo share will represent for Efficiency repayment of its loans to Idoport with interest, together with a percentage of the balance of the proceeds of the Idoport Proceedings. 71 Construed in this way, the five Agreements together provide a funding scheme which, although complex, makes sound commercial sense. The five Agreements are all part of an interlocking structure: the cash flow to conduct the Idoport Proceedings begins with funding going from Efficiency to Negubo under the Negubo Loan Agreement; thereafter the funds can flow on from Negubo to both Idoport and Market Holdings if the conditions precedent to the Market Holdings Participation Agreement and the Partnership Agreement are satisfied. If they are not satisfied, the funds can flow to Idoport alone. After $6.5M has been spent, the cash flow tap can be turned off by Efficiency under the either Market Holdings Participation Agreement or the Shareholders Agreement, whichever has become applicable. Whichever cash flow route has been selected, when the tap is turned off, Efficiency receives out of the proceeds of the Idoport Proceedings its principal, interest and a proportion of the balance of the proceeds.

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72 The terms of the Negubo Loan Agreement make it clear that the cash flow from Efficiency is to start before it is known which of the two alternative cash flow routes will ultimately be selected. It makes obvious commercial sense that all mechanisms provided by the five Agreements be contractually binding on the parties as soon as the cash starts to flow from Efficiency to Negubo under the Negubo Loan Agreement, so that as events later unfold the parties can elect which of the relevant contractual mechanisms to activate by giving the appropriate notices under the relevant Agreements. 73 As a matter of construction of the five Agreements, therefore, the construction advanced by Efficiency makes obvious common sense. On the other hand, the construction advanced by the Plaintiffs produces a highly capricious, not to say commercially absurd, result. 74 The Plaintiffs' construction, i.e, that the Negubo Loan Agreement is not interconnected with the other Agreements so that it can stand alone, produces the result that Efficiency can be bound to provide Negubo with limitless funds for as long as Negubo wishes, without security: the cash flow tap, once turned on by Negubo, cannot be turned off by Efficiency. I cannot accept that that was the parties' intention. The Negubo Loan Agreement is not self contained. The "Assets" to be preserved by the provision of Efficiency's funds are Negubo's shares in Market Holdings and Idoport, inter alia. By Clause 7.1 Negubo must use its best endeavours to recover its entitlement to money under the Idoport Loan Agreement. By Clause 8.1.4 it covenants not to agree to change any agreement to which it is a party without Efficiency's consent. By Clause 8.1.6 it promises to keep Efficiency informed of any matter of which it becomes aware pursuant to or in connection with any agreement to which it is a party. The very terms of the Negubo Loan Agreement show that it is part of an interconnected structure of other agreements, all of which must be contemporaneously operative as contracts. 75 If evidence be wanted that the parties had, in fact, a common intention as at December 2000 that all five Agreements, especially the Shareholders Agreement, would become immediately binding, it is provided by a document entitled "Acknowledgement under Shareholders' Agreement" dated 10 May 2001, signed by Efficiency and by Mr Maconachie on behalf of himself, his wife and Negubo. The document states: "1. The parties acknowledge and agree that any delay by Efficiency Investment BV in serving the notice referred to in paragraph 3.2 of the Shareholders' Agreement shall not in any way affect or impair the validity or efficacy of the Shareholders' Agreement.

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78 The Plaintiffs say that because Mr Charpentier, not Mr Ossevoort, signed the Notices under Clauses 3.2 and 5.4.1 of the Shareholders Agreement sent to the Plaintiffs on 15 and 16 September, those Notices were not given by Efficiency and have no effect under the Shareholders Agreement. 79 As I have noted, for the purposes only of this stage of the proceedings, it is assumed that Mr Charpentier, not Mr Ossevoort, signed the documents. There is, however, no dispute that it was Messrs Reytenbagh and Charpentier who made the decision that the Notices should be given, prepared the Notices and despatched them by facsimile to the Plaintiffs on 15 and 16 September. 80 Clause 15.1 of the Shareholders Agreement provides that a Notice under that Agreement "must be in writing and in English, and may be given by an authorised representative of the sender" . By Clause 15.2.3 a Notice "may be given to a person … by sending it by facsimile to the person's facsimile number last notified" . 81 Clearly, the 15 and 16 September Notices were in writing and in English. Clause 15.1 does not require that they be "signed" by an authorised representative, or at all. All that is required is that whoever "gives" the Notice, that is, brings it to the attention of the recipient, is authorised to do so. Accordingly, an unsigned Notice, given by a person authorised to give it, is an effective Notice under the Clause. 82 I am satisfied that Messrs Charpentier and Reytenbagh were authorised by Efficiency to give the 15 and 16 September Notices by sending them to the Plaintiffs by facsimile, for the following reasons. 83 Mr Charpentier gives evidence that at all times he and Mr Reytenbagh have conducted on behalf of Efficiency its dealings with Mr Maconachie in relation to the funding arrangements for the Idoport Proceedings. Prior to February 2001, Mr Griese also acted on behalf of Efficiency. This evidence was neither objected to nor challenged in cross examination. Mr Charpentier says that it was he, as representative of Efficiency's parent company, Omica, who resolved to appoint Mr Ossevoort as sole director of Efficiency. Mr Ossevoort, and the former sole director of Efficiency, Mr Posthuma, carried out their duties as sole directors of Efficiency subject to Mr Charpentier's direction. The negotiations for the Idoport Proceedings funding were conducted on behalf of Efficiency by Messrs Charpentier and Reytenbagh, never by Mr Posthuma or Mr Ossevoort. During the drafting of the funding Agreements, it was Messrs Charpentier and Reytenbagh who decided that Efficiency would be used as the vehicle through which the funding would be provided. The Agreements executed by the Plaintiffs were sent in December 2000 not to Efficiency's registered office in the Netherlands, but to the office of Messrs Charpentier and Reytenbagh in Belgium. They were kept in a safe in that office. All requests by the Plaintiffs for funds under the Negubo Loan Agreement were considered and authorised by Messrs Charpentier and Reytenbagh. A number of the authorisations were signed by Mr Charpentier. 84 None of the foregoing evidence was challenged in cross examination. 85 Mr Reytenbagh gives evidence that at all times he and Mr Charpentier "have been the representatives of Efficiency" with respect to Efficiency's dealings with Mr Maconachie in relation to the funding arrangements for the Idoport Proceedings. Prior to February 2001, Mr Griese was also a representative of Efficiency with respect to those dealings. This evidence was neither objected to nor challenged in cross examination. Mr Reytenbagh says that he was primarily responsible for the negotiations with Mr Maconachie. Efficiency's sole director at all times acted at the direction of Mr Charpentier and himself. During the negotiations he and Mr Charpentier elected to use Efficiency as the vehicle for the Idoport Proceedings funding. He approved on behalf of Efficiency the deposit of Efficiency's funds into the Idoport Account and on behalf of Efficiency he authorised its bank to transfer those funds. 86 None of the foregoing evidence was challenged in cross examination. 87 The evidence of Mr Ossevoort is that at all times since his appointment as sole director of Efficiency he has acted at the direction of Mr Charpentier, as representative of Omica, and Mr Reytenbagh. This evidence was not challenged. 88 It was clear from Mr Ossevoort's cross examination that, because Efficiency was incorporated in the Netherlands and required certain formal documents to be signed by a resident in the Netherlands, Mr Ossevoort was appointed as a director of convenience only. He took no part in decision-making for Efficiency and simply signed and did whatever he was asked to do by Messrs Charpentier and Reytenbagh in relation to Efficiency's affairs. Certainly, Mr Ossevoort never played any part at all in the funding arrangements between Efficiency and the Plaintiffs - apart, possibly, from signing documents on request - and he had no knowledge whatsoever of the substance of those arrangements. 89 In those circumstances, I am satisfied that Messrs Charpentier and Reytenbagh were, in fact, at all times acting on behalf of Efficiency, as they say. In so far as an act of Efficiency itself was required to give them that authority, that act was the complete acquiescence of the sole directors of Efficiency, first Mr Posthuma and then Mr Ossevoort, in whatever was done on Efficiency's behalf by Messrs Reytenbagh and Charpentier. 90 Accordingly, I hold that the drawing up and sending of the 15 and 16 September Notices by Messrs Charpentier and Reytenbagh were acts done by them as authorised representatives of Efficiency. Accordingly, the 15 and 16 September Notices were validly given by an authorised representative of Efficiency for the purposes of Clause 15.1 of the Shareholders Agreement. 91 It is, accordingly, unnecessary to decide whether Mr Ossevoort's signatures on the Notices were in fact written by Mr Charpentier.

[40]

5.4.2 upon notice being given under clause 5.4.1, Efficiency shall have a continuing obligation to pay calls to a total of a further $1,000,000, whereupon the right of Negubo to make and Efficiency's liability to pay calls shall terminate and the Share shall be fully paid at $7,500,000;" 94 The Plaintiffs say that these Clauses operate in the following way. When a Notice under Clause 3.2 is given the provisions of Clause 4.1 are not self-executing, notwithstanding Clause 3.3. Efficiency's release of the Negubo debt does not take effect immediately: Efficiency must execute a formal deed of release. However, it is not required to deliver that deed of release to Negubo until Negubo actually issues the share to Efficiency. Negubo is not, however, obliged to issue that share: it has the option whether it will do so or not. 95 If Negubo chooses to ignore a Notice under Clause 3.2, the Plaintiffs say, the consequence is that Efficiency's release under Clause 4.1 never takes effect, the Negubo Loan Amount is not converted to equity, the capping provisions on calls under Clause 5 do not take effect, nor do the provisions of Clauses 6, 7, 8 and 9 of the Shareholders Agreement, and the content of Clause 10 becomes pointless, even if Clause 10 can still operate. In short, if as has happened, the cash flow route from Efficiency through the Negubo Loan Agreement has gone to Idoport alone because the conditions precedent to the Market Holdings Participation Agreement and the Partnership Agreement have not been fulfilled, then there is no way that Efficiency can turn off the tap, because the only means of doing so is to convert the Negubo Loan Amount to equity under Clause 4.1 and whether that can be done is entirely in the unfettered discretion of Negubo. 96 This construction of Clause 4.1 of the Shareholders Agreement produces the same unreal commercial result as the Plaintiffs' construction of the Negubo Loan Agreement as a 'stand alone' agreement. The words of Clause 4.1 are very far from supporting such a construction and I am unable to accept it. 97 Clause 3.3 means that once a Clause 3.2 Notice is received, the substantive provisions of the Shareholders Agreement have immediate effect. Clause 4.1 is self-executing and the release of the Negubo Loan Amount in Clause 4.1 is immediately effective. The words "will release" are used only because the release will occur well after the date of execution of the Shareholders Agreement, when conditions precedent are fulfilled. 98 Upon Negubo receiving a Clause 3.2 Notice the Negubo debt under the Negubo Loan Agreement is extinguished and Negubo is under an obligation "in consideration of" (i.e., in return for) that extinguishment to issue a share to Efficiency. That obligation is specifically enforceable. Efficiency, by giving a Clause 3.2 Notice, has exchanged one form of property for another: a debt owing by Negubo is exchanged for an equitable chose in action, namely the right to compel the issue of a share by Negubo. 99 This construction of Clause 4.1 produces a sensible commercial result. In my opinion, it is the correct construction of the Clause. 100 The Plaintiffs then say that, under Clause 5.4.1 Efficiency can give a capping notice "only upon the Share being partly paid" to $6.5M, which indicates that the share must actually have been issued, partly paid, at the time that the Notice is given. As at 16 September the Negubo share had not been issued so that the Notice under Clause 5.4.1 given on that date is of no effect. 101 I am unable to accept this construction. 102 Clause 5.4.1 makes no reference to the issue of the Negubo share. It is, of course, clear, that the Clause gives Efficiency a right which is conditional in that it may only be exercised in a certain circumstance. But the circumstance is not that Negubo has issued a share ; the circumstance is that Efficiency has paid a specific amount for the share, whenever Negubo comes to issue it. 103 If at the time Efficiency gives a Clause 3.2 Notice it has already advanced $6.5M to Negubo under the Negubo Loan Agreement, then by giving the Notice it converts the $6.5M from a loan to Negubo into payment to Negubo for the share. It is from time of payment for the share, not date of issue of the share, that the fifteen day period specified in Clause 5.4.1 runs. The actual issue of the share, after payment, is a mere matter of mechanics for which Negubo is responsible and which it may be compelled to do by a suit for specific performance if it delays in issuing the share for an unreasonable time. 104 Accordingly, I hold that the exercise by Efficiency of a right under Clause 5.4 to give a Notice capping further payment of calls on the Negubo share is not conditional upon the share actually having been issued by Negubo at the time of the Notice. 105 The Plaintiffs say next that a Notice under Clause 5.4.1 can only be given "upon" the share being paid to $6.5M, which means that notice must be given precisely at the time when payment of calls, whether effected by virtue of Clause 4.1 or made under Clause 5.3, reach $6.5M - not a cent more and not a cent less. Because the Negubo Loan Amount had reached $6,791,500 by 15 September, when the Clause 3.2 Notice converted the debt into a payment for the share, it was already too late for the exercise of a right under Clause 5.4.1. If Efficiency wants to cap further payment of calls on the share, the Plaintiffs say, it must pay further calls up to $9M and must then give a Notice under Clause 5.4.3 at a time when the calls amount to exactly $9M, not a cent more and not a cent less. 106 I confess to having expressed surprise at this submission but Mr Forster assured me that it was pressed. I am unable to accept it. 107 In my view, Clause 5.4.1 means that notice of an election may be given by Efficiency within fifteen days from the time at which payment for the Negubo share reaches $6.5M, regardless whether at the time that the Notice is given payment of calls has exceeded that amount. However, if such Notice is not given within the fifteen day period, Efficiency must wait until it has paid calls totalling not less than $9M before it is entitled to give a notice of election under Clause 5.4.3. 108 There is no dispute that the Notice under Clause 3.2 was sent by facsimile to the Plaintiffs on 15 September. By Clause 15.3.2 of the Shareholders Agreement it is deemed to have been received by the Plaintiffs on that day. Accordingly, by Clause 3.3 and by Clause 4.1, the conversion of the Negubo Loan Amount from debt to equity was effected on 15 September and on that day Efficiency had paid $6.9M for the Negubo share. 109 There is no dispute that the Notice under Clause 5.4.1 was sent by facsimile to the Plaintiffs on 16 September. Likewise, that Notice is deemed to have been received by the Plaintiffs on that day, which is the first day upon which notice under Clause 15.5.1 could validly have been given. 110 For these reasons, I hold that the Notice under Clause 5.4.1 of the Shareholders Agreement given on 16 September was validly given and was effective to terminate Efficiency's obligation under Clause 5.1 to pay further calls on the Negubo share, subject only to Efficiency's obligation under Clause 5.4.2 to pay 'run-off' calls so as to bring the total amount of calls paid up to $7.5M.

At a glance

Court

Decision date

Before

Source

Judgment (48 paragraphs)

Parties

Cited By (3)