IMF (Australia) Ltd v Sons Of Gwalia Ltd

REASONS FOR JUDGMENT ON APPLICATION FOR DECLARATION Introduction 1 IMF (Australia) Limited (IMF) is a company which engages in the commercial funding of litigation. It was recently approached by a number of shareholders in the Western Australian mining company, Sons of Gwalia Ltd which entered voluntary administration on 29 August 2004. IMF has obtained a copy of the Share Register for Sons of Gwalia. It wishes to approach past and present shareholders of Sons of Gwalia who may have acquired their shares on the basis of a misleading picture of the company's financial strength painted by alleged non-disclosure of the state of its gold reserves and its commitments under gold hedging contracts. 2 In providing a copy of the Register to IMF, the administrators for the company drew its attention to s 177 of the Corporations Act 2001 (Cth) which restricts the use of information from the Register except for purposes related to the holding of the interests recorded in the Register and the exercise of rights attached to those interests. The company has declined to exercise its discretion under s 177 to approve the use of the information for the proposed approach to shareholders by IMF. 3 IMF now seeks a declaration that it should be permitted to use the information as to shareholders' names and addresses to approach those shareholders as proposed and invite their participation in collective recovery action against the company. 4 For the reasons that follow, I am of the opinion that the proposed use of the Share Register information is prohibited by s 177(1) of the Corporations Act and is not exempted by the provisions of s 177(1A). This conclusion relates only to limitations on the use of information about shareholders obtained from the company's Share Register. It has nothing to say about other ways of bringing proposed recovery action to the attention of shareholders and inviting their participation. Factual and Procedural Background 5 Sons of Gwalia Ltd is a Western Australian mining company which has been listed on the Australian Stock Exchange (ASX) since 1983. It mines for gold and minerals through two operating divisions known as the Gold Division and the Advanced Minerals Division. 6 On 29 August 2004, Darren Weaver and Andrew Love were appointed by the company's directors as voluntary administrators to the company. The appointments were announced on the following day to the ASX. Some of the background leading up to the appointments as seen by the company's officers was referred to in letters dated 1 and 2 September 2004 from the company secretary, Mr CW Foley to the ASX in answer to queries raised by it with the administrators. 7 The company announced, in its report for the quarter ended 30 March 2004, that it had commenced a Strategic Review of its business. On 14 July 2004, it announced that the Review was continuing and involved, inter alia, analysis of its resources and reserves and a review of its gold production plans, potential rationalisation plans, hedging policies, asset carrying values and balance sheet management. 8 In July and August, the company commissioned an external review of its Marvel Loch Underground Project. According to Mr Foley preliminary advice received on about 12 August 2004 supported the company's preliminary view that the mine plan and production forecasts, given the resources at that date, were uneconomic. Mr Foley said in his letter to the ASX: 'Consequently, although the Company was aware of the possibility of a material deterioration in its reserves and resources further work was required to finalise the review, consider the consequences of a reduction in reserves and resources and the action the company was taking in respect to any such reduction.' A statement of gold reserves and resources was prepared on 26 August 2004 by the company management for presentation to the Board at a meeting that was then scheduled for 30 August 2004. 9 The company's future production plans were affected by the reduced reserves and resources outlook. This potentially amounted to a material adverse change in the position of the company. According to Mr Foley the company commenced work with its advisers to meet with its lenders and counter-parties to seek their agreement to an "enforcement standstill". The company was told on 28 August 2004, that it could not obtain unanimous support for the standstill from all the lenders and counter-parties. Mr Foley said that it was at that time that the company became aware that a material deterioration in its gold reserves and resources would be regarded by lenders and counter-parties as a material adverse change in its financial position under its agreements with the counter-parties. The Board meeting scheduled for 30 August was brought forward to 29 August 2004. On that date the directors resolved to appoint the administrators. 10 The preceding outline of what appears from Mr Foley's correspondence to the ASX is set out by way of background only. It involves no concluded finding of fact in relation to any of the matters set out in the letters going to the nature and scope of the company's difficulties and the times when officers and directors became aware of them. 11 IMF is a company listed on the ASX with offices in Perth, Sydney and Melbourne. It carries on business as a litigation funder. It has funded a number of 'mass plaintiff claims' around Australia in the last three years. It employs several qualified lawyers and investigators. It holds licences to conduct investigations and to act as a debt collector. Its managing director, Mr Hugh McLernon, is a legal practitioner of long experience. Since 1990 he has been employed by, and held senior management positions in, IMF and in two other litigation funders. 12 IMF has been approached by approximately 20 of the current shareholders in Sons of Gwalia with a view to having it investigate and consider funding a shareholders' claim against the company. Mr McLernon said in his affidavit: 'The applicant has identified a potential claim by some of the respondent's current shareholders against the respondent arising out of a possible contravention of s 674 of the Corporations Act 2001 and out of the respondent possibly having engaged in misleading or deceptive conduct by failing to disclose facts known to the respondent to the ASX in contravention of one or more of the Corporations Act 2001, the Australian Securities and Investment Commission Act 2001 and the Trade Practices Act 1974 ("the Claim"). The Claim arises generally from the respondent's lack of disclosure to the ASX on and following 22 July 2004. Further investigation may show the Claim arose earlier.' He referred to documents which IMF had obtained relating to the disclosure, by Sons of Gwalia to the ASX, of information in the six weeks leading up to the appointment of voluntary administrators. The documents comprised correspondence exchanged between the administrators, the ASX and the company secretary and included the letters of 1 and 2 September 2004 summarised above. 13 Mr McLernon expressed the opinion that some of the shareholders in Sons of Gwalia might have a claim against the company on the basis that they acquired its shares after the date on which market sensitive information was known to it but not disclosed to the market or to the ASX. He identified the relevant information as: '…the significant shortfall in the respondent's gold reserves as against both the gold reserves previously announced by the respondent and against the respondent's obligations to deliver gold in accordance with hedging contracts the respondent had entered into.' Mr McLernon expressed the opinion that persons who acquired shares in Sons of Gwalia on or after 22 July 2004 might have a claim against it. About 50 million shares in the company were traded between 22 July 2004 and 30 August 2004. The share price, after a large fall on 22 July 2004, ranged between slightly over $2 and $1.25 in that period. Shareholders in the company who acquired shares after 22 July 2004 might have a claim for the difference between the price they paid for the shares and the current value of those shares which appears to be nil. He noted that the administrators have announced that Sons of Gwalia is likely to be placed in liquidation. 14 IMF will not fund the claim unless engaged by many or most of the shareholders who may be able to pursue a claim. Mass plaintiff claims are expensive to pursue and require substantial resources. There is risk associated with any litigation. Mr McLernon said that unless IMF is engaged by many of the possible claimants the claim would be too uneconomic in terms of cost and risk for IMF to fund. Many of the persons who acquired shares from 22 July 2004 would have claims of less than $50,000. A successful claimant would have to prove as an unsecured creditor and would not receive payment of the debt owed to him in full. Pursuit of the claim by claimants without funding would be uneconomic. IMF wishes to contact current shareholders in Sons of Gwalia to provide them with information relating to it and the fact that a group of current shareholders has approached it. It wants to invite the shareholders who acquired shares in circumstances where they might have a claim, to engage it to investigate the claim and to fund litigation. 15 IMF obtained a copy of the Register of Shareholders in Sons of Gwalia relating to those who had become shareholders on or about 22 July 2004. It also received a letter over the name of Mr Weaver, one of the administrators. It appeared to be a pro forma letter. It began: 'Dear Sir/Madam I note you have requested to inspect/obtain a copy of the Sons of Gwalia Limited (Administrators Appointed) shareholders register. I bring your attention to the provisions of Section 177 of the Corporations Act 2001.' It then set out the terms of that section which includes reference to restrictions on the use of information on a share register. Mr Weaver made no further comment in his letter. It was nevertheless referred to in Mr McLernon's affidavit as a 'Warning Letter'. 16 Following receipt of the Warning Letter, Mr McLernon wrote to Mr Weaver on 22 September 2004. He referred to the approach to his company by current shareholders of Sons of Gwalia and the request that IMF investigate and, if appropriate, fund a claim. He said IMF had obtained its copy of the Register on behalf of the shareholders. Referring to those who had become shareholders on 22 July 2004 he said: 'The obvious purpose of obtaining the register was to make contact with those persons and; a) advise them of the existence of the shareholder group; b) provide material to them relevant to the potential claim; c) invite them to join the group in a potential representative or group action against Sons of Gwalia.' He said that the Register had been sought in the belief that the proposed use was relevant to the holding of Sons of Gwalia shares by the persons who purchased them after 22 July 2004. Their losses had arisen out of their acquisition of the shares in question. The acquisition would be an essential part of the cause of action. He referred to the Warning Letter and said: 'In order to put the matter beyond doubt we seek the approval of the company pursuant to section 177(1A) of the act (sic) so as to enable us to provide the material referred to in paragraph 6 to the shareholders referred to in the register.' He said that such a consent would ensure that IMF did not even inadvertently breach the provisions of the Corporations Act and that the shareholders received appropriate assistance in relation to their considerable losses. He asked that if the administrators were not prepared to give their consent under s 177(1A), that they advise whether, in their view, the provision of the information referred to would be a breach of s 177. He indicated that if the administrators did not consent and were of the view that there would be a breach, then IMF would approach the Supreme Court with a request to 'declare the position'. Such an application might also be made if IMF did not get a response from the administrators regarding their view of the section. 17 On 24 September 2004, Mr Weaver wrote to Mr McLernon in the following terms: 'I refer to your letter dated 22 September 2004 concerning the shareholders register for SOG. I instructed Computershare to attach the notice setting out the provisions of section 177 of the Corporations Act 2001 (the "Act"). The attachment was provided to all persons who sought access to the register and was provided to them for information purposes only. I have taken advice on the questions you have asked and respond that it would not be appropriate: a) for SOG (by its Administrators) to provide the approval requested; or b) for the Administrators to provide their views as to whether the provision of the information referred to in paragraph 6 of your letter would constitute a breach of s 177 of the Act.' 18 On 28 September 2004, Solomon Bros Solicitors, acting for IMF, wrote to the administrators stating IMF's intention to commence proceedings for a declaration that the course of conduct proposed in par 6 of Mr McLernon's letter of 22 September 2004 would not constitute a contravention of s 177 of the Corporations Act. As the appropriate respondent was Sons of Gwalia, IMF requested the consent of the administrators to commence the proceedings. There was no response to that letter. 19 Mr McLernon exhibited to his affidavit a draft proposed letter from IMF to the current shareholders in the Sons of Gwalia. The letter is a draft and may be amended. It would enclose a Chronology of Relevant Events, a sheet of Shareholder Claim Information, Frequently Asked Questions and Answers, a Share Chart and a Funding and Retainer Agreement in duplicate. Copies of these documents were exhibited to Mr McLernon's affidavit. The material parts of the draft letter were as follows: 'Dear Sons of Gwalia Shareholder Action I am writing to all shareholders of Sons of Gwalia Ltd ("SOG") who purchased shares on or after 23 July 2003 (sic) providing notification of a shareholder legal action being considered against SOG. This action will seek recovery of shareholder value lost as a result of SOG allegedly making misleading statements and failing to keep the market fully informed in respect of its gold reserves and its hedge book position, either through the proof of debt process or litigation. This shareholder action will be conducted by Jackson McDonald, a leading Perth law firm and is funded by IMF (Australia) Ltd, an ASX listed corporation specialising in litigation funding.' 20 The letter then referred to the enclosures. It continued: 'The blue part of the Funding and Retainer Agreement is to be completed by you, signed and returned in the reply paid envelope. The white Funding and Retainer Agreement is for your retention. If you do not wish to pursue your losses then please ignore this correspondence. Once the blue form is received by IMF, Jackson McDonald will send you an advice on the Funding Agreement and the litigation on a confidential basis. A 14 day period is then provided to you to finally decide whether you wish to proceed.' The letter concluded: 'I look forward to assisting you recover your losses.' It was signed by John Walker a director of IMF. 21 The Chronology attached to the letter set out for the most part events which occurred in relation to the company between 30 June 2003 and 30 August 2004. The next attachment was the single page document entitled 'SONS OF GWALIA LTD ("SOG") SHAREHOLDER CLAIM INFORMATION'. This set out under various subheadings the basis upon which shareholders who purchased shares in Sons of Gwalia might be entitled to recover losses and the quantum of those losses. It referred to the appointment of administrators and the publicly stated reason for the appointment which was that: 'The review of operations identified a serious deterioration in the status of the gold reserves and resources which raised concerns about the Company's ability to meet its hedge book commitments. The Company was advised that the position would constitute an event of material adverse change under the counterparty agreements.' Under the subheading 'The Claim' reference was made to a Sons of Gwalia statement in June 2003 about its proven and probable gold reserves and in October 2003 about its forward gold production for the ensuing five years. The information sheet stated: 'If the above figures were correct SOG would have been able to satisfy its gold hedging commitments. Either the figures were incorrect at the time they were disclosed or they subsequently became incorrect and SOG failed to tell the market before 30 August 2004. Clearly the gold reserves and resources did not simply deteriorate overnight.' 22 The document entitled 'FREQUENTLY ASKED QUESTIONS' related largely to the basis upon which a claim might lie against Sons of Gwalia and the cost to a shareholder of joining the action. Shareholders were to be informed by this document that if successful they would be likely to receive between 60% and 75% of the amount recovered, less their share of the costs depending upon how many shares they purchased and how long it would take. The full amount of the claim was unlikely to be recovered as Sons of Gwalia had gone into administration. IMF would obtain from the action the return of its costs and a 25% to 40% share of the recovery proceeds depending upon the number of shares purchased and the time it took to recover the proceeds. It was said in the 'Frequently Asked Questions' documents that the claim would initially be advanced through the Proof of Debt process and then, if necessary, as a representative claim made by a shareholder on behalf of all shareholders or a group claim, with all funded shareholders named on it. A six-month chart of the Sons of Gwalia share price was also exhibited. So too was a Sons of Gwalia Retainer & Funding Agreement between the shareholder and IMF. Under the terms of the proposed agreement, IMF would pay the legal costs of the shareholder in connection with the claim process whether by way of proof of debt procedure or by legal proceedings. IMF would also pay any costs order made against the shareholder in the proceedings in respect of costs incurred during the term of the agreement. IMF undertook to provide any security for costs ordered by the court in the proceedings relating to costs incurred during the term of the agreement. IMF would be paid a commission ranging between 25% and 40% depending upon the number of shares held by the relevant shareholder and the date at which the claim was resolved. The Present Proceedings 23 On 1 October 2004, IMF lodged an application in this Court seeking a declaration pursuant to s 21 of the Federal Court of Australia Act 1976 (Cth) and s 1337B of the Corporations Act that conduct in which it proposes to engage will not contravene s 177(1) of the Corporations Act. The orders sought by IMF are as follows: '1. Pursuant to s 440(b) of the Corporations Act 2001, the applicant have leave to commence and proceed with this application. 2. A declaration that the applicant will not contravene s 177(1) of the Corporations Act 2001 by using information obtained from the respondent's register of members to contact the current shareholders in the respondent and provide to those shareholders information relating to:- 2.1 the applicant; 2.2 the existence of a group of current shareholders in the respondent who have engaged the applicant to investigate a potential claim against the respondent and, if the potential claim is pursued, possibly fund that litigation against the respondent; and 2.3 a potential claim some of the current shareholders in the respondent may have against the respondent arising from a contravention of s 674 of the Corporations Act 2001 by the respondent or from the respondent having engaged in misleading or deceptive conduct proscribed by one or more of the Trade Practices Act 1974 (Cth), the Australian Securities and Investments Commission Act 2001 (Cth) and the Corporations Act 2001 (the "Claim"); and 2.4 inviting the current shareholders in the respondent, who acquired shares in the respondent in circumstances where he, she, it or they may be able to pursue the Claim, to engage the applicant to investigate the Claim and fund litigation of the Claim if the Claim is pursued. 3. Costs.' Statutory Framework - The Corporations Act 2001 (Cth) 24 Chapter 2C of the Corporations Act is entitled 'Registers'. It covers companies and registered schemes (s 167A). It requires that a company set up and maintain various registers being: (a) A Register of members (s 169) (b) A Register of option holders (s 170) (c) A Register of debenture holders (s 179) 25 The Register of members is required to set out the member's name and address and the date on which the member's name was entered on the register (s 169(1)). Where there are 50 or more members the register must include an up-to-date index of their names which is convenient to use and will allow a member's entry in the register to be readily found (s 169(2)). Where there is a share capital the register must show, inter alia, the shares held by each member and details about them including the class and whether or not they are fully paid and, if not, the amount unpaid on them (s 169(3)). The register must also show the names and details of each person who stopped being a member of the company within the last seven years and the date of that cessation (s 169(7)). 26 Registers required to be kept under the Act must be kept at the company's registered office or principal place of business or another place in the jurisdiction approved by the Australian Securities and Investment Commission (ASIC) or a place in the jurisdiction where the work of maintaining the register is done (s 172(1)). 27 The Act obliges the company to allow anyone to inspect a register kept under Ch 2C(s 173(1)). Upon payment of a fee the company must give the person requesting it a copy of the register within seven days of the request (s 173(3)). 28 Section 177 of the Act, which is central to the present proceedings, provides for restrictions on the use of information obtained from registers: '(1) A person must not: (a) use information about a person obtained from a register kept under this Chapter to contact or send material to the person; or (b) disclose information of that kind knowing that the information is likely to be used to contact or send material to the person. … (1A) Subsection (1) does not apply if the use or disclosure of the information is: (a) relevant to the holding of the interests recorded in the register or the exercise of the rights attaching to them; or (b) approved by the company or scheme. … (1B) An offence based on subsection (1) is an offence of strict liability. (2) A person who contravenes subsection (1) is liable to compensate anyone else who suffers loss or damage because of the contravention. (3) A person who makes a profit from a contravention of subsection (1) owes a debt to the company or the scheme. The amount of the debt is the amount of the profit. (4) If a person owes a debt under subsection (3) to the scheme: (a) the debt may be recovered by the responsible entity as a debt due to it; and (b) any amount paid or recovered in respect of the debt forms part of the scheme property.' 29 The history of the provisions relating to registers was helpfully summarised by Byrne J in O'Brien v Sporting Shooters Association of Australia (Victoria) [1999] 3 VR 251 at 254. As his Honour pointed out Companies legislation has long had a requirement that a company maintain a Register of Members which had to be kept open for inspection by members and that members be entitled to a copy of the register upon payment of a fee. When the first Corporations Law Simplification Act 1995 (Cth) was passed, a new Pt 2.5 was inserted which included a provision, s 216J, similar in terms to s 177(1). Like the present s 177(1) it prohibited the use of information about persons obtained from a register to send information to such persons but created an exemption for such use where it was: '(c) Relevant to the holding of shares, options or debentures concerned or the exercise of the rights attaching to them.' The expression 'shares, options or debentures' was intended to pick up the three types of register which a company was obliged to maintain under s 216A. 30 In 1998, the provisions relating to registers were amended by the Company Law Review Act 1998 (Cth) (No 61 of 1998) and the Managed Investments Act 1998 (Cth). By operation of the Company Law Review Act, Pt 2.5 became Ch 2C and s 216J became s 177. The new paragraph s 177(1)(c) exempted from the prohibition a use of information obtained from the register which was: '(c) Relevant to the holding of the interests recorded in the Register or the exercise of the rights attaching to them.' The Managed Investments Act, which brought into the legislative requirements for registers those relating to registered schemes, also amended par 177(1)(c) by inserted the word 'interests' after the word 'shares'. But as Byrne J observed (at 255): 'As things stood after the amendment to para (c) made by Act No 61 of 1998, this amendment was ineffective because the words "the shares" did not then appear.' The change effected by the Company Law Review Act was not simply to substitute the word 'interest' for the words 'shares, options or debentures' as a simpler way of saying the same thing. Byrne J said: 'What is inserted in place of those words is the expression, "the interests recorded in the register".' His Honour rejected the proposition that par (c) did not extend to the interests of members of a company limited by guarantee and that the amendment was merely intended to restate the existing paragraph in simpler terms. 31 It is not necessary for present purposes to set out the terms of the various statutory obligations which it is said may have been breached by Sons of Gwalia. The provisions mentioned in submissions made on behalf of IMF include Listing Rule 3.1 of the ASX Rules and s 674 of the Corporations Act imposing obligations to disclose specified events or matters to the market in accordance with the Listing Rules. Reliance is also placed upon the prohibition on misleading or deceptive conduct in s 1041H and the availability of damages under s 1041I or compensation under s 1325. Reference is also made to s 12DA of the Australian Securities and Investment Commission Act 2001 (Cth) and the damages and compensation remedies available under ss 12GF and 12GM of that Act. 32 IMF seeks leave to proceed with the present action under s 440D of the Corporations Act. That provides: '(1) During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except: (a) with the administrator's written consent; or (b) with the leave of the Court and in accordance with such terms (if any) as the Court imposes. (2) Subsection (1) does not apply to: (a) a criminal proceeding; or (b) a prescribed proceeding.' Statutory Framework - The Jurisdiction and Powers of the Court 33 A general jurisdiction is conferred upon the Court by s 39B of the Judiciary Act 1903 (Cth) in matters arising under laws of the Commonwealth. This is to be found in s 39B(1A) which provides: 'The original jurisdiction of the Federal Court of Australia also includes jurisdiction in any matter: (a) in which the Commonwealth is seeking an injunction or declaration; or (b) arising under the Constitution, or involving its interpretation; or (c) arising under any laws made by the Parliament, other than a matter in respect of which a criminal prosecution is instituted or any other criminal matter.' 34 Chapter 9 of the Corporations Act which is entitled 'Miscellaneous' includes Pt 9.6A entitled 'Jurisdiction and procedure of Courts'. In Div 1, which deals with civil jurisdiction, subdiv B dealing with conferral of jurisdiction includes s 1337B which provides, inter alia: '(1) Jurisdiction is conferred on the Federal Court of Australia with respect to civil matters arising under the Corporations legislation.' 35 The powers of the Federal Court conferred upon it by the Federal Court Act include the power to make declarations of right. This power is conferred by s 21: '(1) The Court may, in relation to a matter in which it has original jurisdiction, make binding declarations of right, whether or not any consequential relief is or could be claimed. (2) A suit is not open to objection on the ground that a declaratory order only is sought.' Contentions 36 On behalf of IMF it was submitted first that the Court has jurisdiction to grant the declaration which it seeks. Section 1337B of the Corporations Act and s 39B(1A) of the Judiciary Act were invoked. The question whether IMF's proposed conduct would constitute a contravention of s 177 of the Corporations Act was said to be a matter arising under that Act and so within the jurisdiction of the Court. It was submitted that the Court therefore has jurisdiction to grant a declaration as to whether the proposed conduct is lawful. Reliance was placed upon Australian Gaslight Company v Australian Competition and Consumer Commission (No 2) (2003) ATPR 41-692 and Telstra Corporation Ltd v Australian Telecommunications Authority (1995) 133 ALR 417 at 424-6 (per Lockhart J). 37 On the question whether the declaratory relief sought is merely hypothetical, IMF argued that a declaration is not hypothetical where, as here, a person wishes to engage in a course of conduct and asks the Court whether he or she may lawfully do so. It was said that there is a long established practice of granting declarations when a trader wishes to know whether a proposed course of conduct is lawful. Broadly speaking the criteria advanced are that: