[2003] HCA 75
Seaham Grange Pty Ltd v John Farragher Pty Ltd [2019] NSWSC 1847
142 ACSR 11
Vacuum Oil Pty Ltd v Stockdale (1942) 42 SR (NSW) 239
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285
R J Pietriche (Plaintiff)
W R Chan (Second defendant)
No appearance for First, Third, Fourth and Fifth defendants
Source
Original judgment source is linked above.
Catchwords
[2003] HCA 75
Seaham Grange Pty Ltd v John Farragher Pty Ltd [2019] NSWSC 1847142 ACSR 11
Vacuum Oil Pty Ltd v Stockdale (1942) 42 SR (NSW) 239
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285R J Pietriche (Plaintiff)
W R Chan (Second defendant)
No appearance for First, Third, Fourth and Fifth defendants
Judgment (7 paragraphs)
[1]
Background to the share issue of 17 June 2019
The plaintiff Hilly Woodland is now a wholly owned subsidiary of China Huarong Macau (HK Investment) Holdings Ltd (CHM). Formerly, Hilly Woodland was a wholly owned subsidiary of Dongfang Modern Agriculture Holding Group Ltd (DFM), a company which at the time was listed on the Australian Stock Exchange. There is evidence before me to the effect that it was suspended on around about 11 June 2019, following the resignation of all save one of its directors, thereby contravening Corporations Act, s 201A(2).
CHM provided a facility of HK$300,000,000 to DFM. DFM provided security for that facility, including a charge over shares in Hilly Woodland which, at the time, was owned by its wholly owned subsidiary, Alpha Blossom. There was also in place a shareholders' deed dated around 20 April 2018, one aspect of which required, as a "Fundamental Matter", any issues of share capital to be subject first to an offering to existing shareholders in accordance with their proportionate entitlements (cl 6.19.1 and schedule 3, item 27, reading the reference to clause 8 as one to clause 9).
Returning to the HK$300,000,000 facility, interest was payable on nominated dates, including on 19 June 2019. The amount of interest payable on that date was HK$15,706,849.32, which is just less than AUD 3m.
The Second Share Issue the subject of this proceeding purportedly took place on 17 June 2019, two days before the interest payment was due. In evidence before me are translations (by an authorised NAATI translator) of some WeChat messages exchanged between lender and borrower concerning the interest obligation. On 11 June 2019 one of those messages, directed to Mr Mike Cai, who is father of the third defendant and who held the position of "Chairman Consultant" of DFM, attached a notification letter of interest payment. Mr Cai acknowledged receipt some three and a half hours later by what is translated as "Got it. Received with thanks". There ensued over the next three or four days an exchange, the upshot of which is that Mr Mike Cai announced that the company has "suffered huge losses due to several storms in Jiangxi resulting in severe flooding, thus the interest of this instalment is not able to be paid". The messages do not suggest any acquiescence by the lender in the nonpayment of interest which Mr Cai proposed. To the contrary, they sought an urgent meeting to discuss and work through those issues. The exchanges in evidence cease on 17 June 2019. It is difficult to judge the tone of the messages from their translation; on one reading they appear to be polite apologies of the inability to find a mutually convenient time for a meeting to occur. They culminate with some 16 messages on 17 June 2019, in which Mr Cai did not take the call, or apologised that it was a bad time, and requested the lender not to visit him in Guangzhou, and rejected suggestions to meet "anywhere in Guangzhou, Fuzhou, Shaoguan, or Zhuhai at your pick", culminating in a proposal to send a colleague to Macau on 18 or 19 June.
[2]
The share issue of 17 June 2020
I turn to what is known about the share issue on 17 June 2019 the subject of this proceeding. I interpolate that much of that information comes as a result of documents supplied following the commencement of proceedings under s 247A of the Corporations Act in the Federal Court of Australia by Hilly Woodland in late October 2019.
Documents lodged with ASIC suggest that 3,703,333 shares were issued with an amount of AUD $4 paid per share. ASIC's records reflect that they were issued to the fifth defendant Ms Lili Pan and the second defendant Mr Heng. However, in answer to a request for all minutes of directors' meetings concerning the issue of those shares, the firm of solicitors - not the same firm as that whose authority was terminated in the last 24 hours - then acting for BHP advised, by letter dated 22 July 2020, that its client
"does not hold any minutes of directors' meetings which fall within the scope of this request".
In answer to a request seeking documents evidencing the payment and transfer of any funds from the second or fifth defendants in consideration for their shares, the letter continued,
"Our client did not receive funds at the time of the second share issue."
In answer to a request for any bank statements of BHP recording the receipt of any funds in relation to, relevantly, the Second Share Issue, the letter continued,
"We refer to the response ... above, and confirm there are no bank statements that fall within the scope of the request."
Notwithstanding those answers, a document described as "Application for the issue of shares of [BHP]", signed, as it appears, by the fifth defendant, was also provided. That document states:
"Accompanying this application is the issue price of $1.00 per share."
The Federal Court proceedings were discontinued relatively shortly after the provision of that information from the solicitors then acting for BHP, but on the explicit basis that Hilly Woodland be released from the implied undertaking to use the documents only for the purposes of that proceeding. (The evidence does not appear to disclose precisely how the implied undertaking arose, but the letter of 22 January 2020 proceeds on the basis that it was common ground that production was subject to the undertaking.) The release expressly extended to the use of the documents for "the purpose of the commencement of proceedings for relief under the Corporations Act 2001 (Cth)."
[3]
Subsequent events
Two days later, the second instalment of interest was unpaid. In the exercise of its rights of security, Hilly Woodland became a wholly owned subsidiary of CHM on around 2 July 2019.
The effect of the issue of some 3.7 million shares to the second and fifth defendants is that what had been Hilly Woodland's majority shareholding of BHP of 70% has been diluted to a 15% minority interest.
According to ASIC records, the fifth defendant was appointed as a director of BHP on 31 October 2019, some 4 months after the shares were issued to her. The materials before me include some disputed factual controversy concerning the circumstances under which her appointment took place. There is also a deal of evidence directed to what may well be substantial irregularities in the ongoing conduct of the affairs of BHP.
However, for the immediate purposes of this application, and in the unusual circumstances where all of the defendants who have played any active role in the litigation had until very recently either consented to or did not oppose the entirety of the relief (save as to costs) which the plaintiff seeks, it is sufficient to proceed directly to the gravamen of the case.
[4]
Hilly Woodland's claim of oppression
This litigation has been directed more than anything else to the events of 17 June 2019. Hilly Woodland says that it was oppressive by BHP to make the Second Share Issue on 17 June 2019. A major plank of its case is that the evidence established that that share issue was made for the improper purpose of seeking to defeat the entitlement of the lender CHP to enjoy the security it had bargained for in the event of a default of its obligations to repay the interest on the HK$300,000,000 facility. It submits that the "inevitable and natural inference" is that "in anticipation of CHM imminently taking control of Hilly Woodland, the Second Share Issue was calculated to dilute Hilly Woodland's shareholding and exclude CHM from any material involvement of any type in the affairs of the company".
In support of that conclusion, Hilly Woodland relies upon the following considerations.
First, there is the timing. The obligation to make a substantial repayment of interest accrued 2 days after the shares were issued. The shares were issued after there had been WeChat communications between lender and borrower about that repayment. Mr Hongwei Cai, the son of Mr Mike Cai, was a director of BHP and the sole director of DFM at the time.
Secondly, Hilly Woodland relies upon the seeming irregularities and inconsistencies in the documents it has tendered in evidence before me, including the evidence from the solicitors retained by it in relation to the Federal Court s 247A proceedings that no money was received for the 3.7 million shares which were issued. Putting to one side the seeming breach of the Shareholders' Deed, in the absence of receipt of consideration, there is no immediately apparent legitimate purpose for the share issue.
Thirdly, it relies upon the fact that it was squarely within the camps of the defendants to explain what had occurred, and that rather than attempting any explanation, the first, third and fifth defendants have abruptly terminated authority for their lawyers to appear today, and otherwise have provided no explanation. The fourth defendant has never appeared, despite service having been effected upon him. The evidence summarised above was served upon all defendants.
Fourthly, and perhaps as importantly as any of the foregoing, Hilly Woodland relies upon the fact that each of the first, third and fifth defendants who terminated the authority of their lawyers within the last 24 hours had previously consented to all of the substantive orders sought by the plaintiff. Of course, the second defendant, who does appear, does not oppose any of the relief that is sought.
[5]
Consideration
It has been clear since amendments made in 1983 to s 320 of the Companies Code introducing the language now found in s 232(b) that an isolated act can itself amount to oppression within the meaning of s 232. I am not suggesting that the plaintiff relies upon merely an isolated act in the present case; it does not. But it is sufficient for present purposes to confine attention to the events of 17 June 2019.
The issuing of shares with the intent of diluting what would otherwise be a majority shareholding is amply capable of amounting to oppressive conduct. The reasons for that were explained by the Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 at 835 and by the High Court in Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 at 289; [1987] HCA 11. But on the evidence before me, this is not merely dilution, but dilution accompanied by the issuing of shares for no pecuniary consideration, despite what ASIC was told and contrary to the document apparently signed by Ms Pan. I pass over the inconsistency in the latter document of the issue price being $1.00 per share, and the $4.00 per share in the form lodged with ASIC. There is no reason to doubt the accuracy of the former solicitors' unequivocal communication to the effect that, "Our client did not receive funds at the time of the second share issue", and that firm's statement that there were no banking records disclosing any such receipt.
It may be that there is some explanation for what seems on its face to be a most serious misuse of the company's power to issue shares. In light of the fact that this hearing has, for practical purposes, proceeded ex parte, I have been concerned to assess whether that might be so. I pass over what the position might be were this merely a case where the plaintiff has adduced a powerful body of evidence summarised above supporting the serious allegations of misuse of power which, in my opinion, it has done in the present case, and whether that of itself would suffice to make the orders that are sought.
But what removes the present case from the ordinary run of applications in which a powerful body of evidence has been adduced supporting a conclusion of a serious misuse of the company's power is the fact that all of the defendants who have appeared, including the third defendant who, on the evidence before me, has more than any other of the board members been responsible for what has occurred, have until 24 hours ago consented to the relief sought. If that consent had merely been the consent of natural persons unassisted by lawyers and perhaps unfamiliar with the English language and living outside of this country, then perhaps it might not carry very great weight. But that consent was given at a time where, for some months, those defendants had retained Australian lawyers and capable counsel. Their consent must be taken to have been made on a fully informed basis, with every opportunity for taking legal advice before the consent was given.
I am conscious of the seriousness of the allegations. Nonetheless, in those unusual circumstances, I am comfortably satisfied that the relief sought that the Second Share Issue was invalid and no effect should issue. The Second Share Issue was inter alia oppressive, within the meaning of s 232. There is no occasion for a lengthy summary of the decisions bearing upon s 232 and its predecessors. In Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704, Young J said that the proper approach was to ask "whether objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair", an approach recently endorsed in In the matter of ACN 607 358 887 (formerly known as Carzapp Pty Ltd) [2019] NSWSC 1561 at [205]-[206] and In the matter of Bicher & Son Pty Ltd [2020] NSWSC 711 at [76]. The dilution of Hilly Woodland's shareholding to no advantage of BHP and with, I find, the purpose of denying CHM's control, answers that description. The appropriate order under s 233 is a declaration of invalidity and an order setting it aside.
I reach that conclusion relying merely on my finding as to the purpose of the Second Share Issue. I do not need to address Hilly Woodland's further claims based on breaches of the Shareholders' Deed, or the evidence of subsequent conduct, save to note that I cannot see how any of that evidence in any way improves the position from the defendants' perspective. I reiterate that until the last 24 hours, the first, third and fifth defendants consented to the substantive relief sought.
I am also satisfied that this is an appropriate case to make the rarely made orders removing the third and fifth defendants as directors of BHP. Mr Hyde, very properly, has taken me to the decision of Black J in Seaham Grange Pty Ltd v John Farragher Pty Ltd [2019] NSWSC 1847; 142 ACSR 11 at [90], where his Honour accepted, in relation to the orders removing directors from their offices, that while the Court had power to make such orders, they were rarely made. Indeed, in that case, the orders were not made.
The reasons that lead me to conclude that this rarely exercised power is appropriate are twofold. As raised during argument, the first is that this is a case where the third and fifth defendants consented to that course as recently as 24 hours ago. The second is that while I am conscious that the consequence of setting aside the Second Share Issue is to restore Hilly Woodland into its position as 70% shareholder which can, therefore, control a general meeting, I accept Mr Hyde's submission that in its dealings with third parties, including financiers, there is merit in the authority and status of those controlling this company to be confirmed by Court order, rather than merely by general meeting or board resolution.
I am unaware of a comparable case, but it is, it seems to me, inherently unlikely that there will be many comparable cases where, 24 hours before the final hearing, consent was advised to the entirety of the substantive final relief and thereafter, the authority of the solicitors and counsel was withdrawn.
[6]
Further matters and orders
There are two outstanding matters. The first is the declaration sought in prayer 2 of the originating process that the fifth defendant was not validly appointed as a director of BHP. I am prepared to hear the plaintiff further on this, but my present view is that an order removing her as director of the company may be sufficient for present purposes. But as I said, this not being a matter that I have hitherto raised in argument, I would be prepared to hear further from the plaintiff in that respect.
The second outstanding matter is the position of the fourth defendant. Unlike the others, he has played no part at all in this litigation. In particular, he has not consented to the orders sought by the plaintiff. However, I do not think that there should be any separate treatment of him. I am satisfied he has been served and is amenable to this Court's jurisdiction. His colleagues on the BHP board, who so far as the evidence discloses, have been more closely involved in the events giving rise to the oppression of which Hilly Woodland complains, saw fit yesterday to consent to those orders. There is nothing of which I am aware in the material which has been placed before me, to suggest that the fourth defendant should be treated any more favourably than those who have engaged with the litigation process. The result is that, in the absence of the appointment of further directors, BHP will be left with a single director, Mr Heng, but its Constitution contemplates that possibility.
[Discussion as to form of orders.]
I make the following orders:
1. The following orders are made:
"1. A declaration that, in all the circumstances, the Second Share Issue was invalid and of no effect.
4. An order pursuant to section 233 of the Corporations Act:
(a) setting aside the Second Share Issue;
(d) removing the Third, Fourth and Fifth Defendants as directors of BHP."
In these orders,
"BHP" is defined as Bio Health Pharmaceuticals Pty Ltd (ACN 142 070 344);
"Second Share Issue" is defined as the issue by BHP of:
(a) 2,592,333 ordinary class shares to the Fifth Defendant, Lili Pan; and
(b) 1,111,000 ordinary class shares to the Second Defendant, Samuel Sieng Heng,
on 17 June 2019.
1. The First, Third, Fourth and Fifth Defendants pay the Plaintiff's costs.
2. Liberty to the Plaintiff to provide a note in support of prayer 2 of the Originating Process filed 2 April 2020.
3. Liberty to the Plaintiff to apply on 24 hours' notice by email to the Associate of Leeming JA in relation to such further orders as may be sought in relation to prayers 2 and 4(c) of the Originating Process filed 2 April 2020.
[7]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 11 December 2020
HIS HONOUR: The first defendant, Bio Health Pharmaceuticals Pty Ltd (BHP), is a company incorporated under the Corporations Act 2001 (Cth) with registered office in Silverwater in western Sydney. The plaintiff, Hilly Woodland Ltd, is a company incorporated in the British Virgin Islands. It is currently an (approximately) 15 per cent shareholder in BHP. Prior to the share issue which has led to this proceeding, it was the majority 70 per cent shareholder of BHP.
Hilly Woodland moves this Court on an originating process dated 27 March 2020 seeking eight orders, of which at this final hearing the following substantive orders are pressed:
"1. A declaration that, in all of the circumstances, the Second Share Issue was invalid and of no effect.
2. A declaration that the fifth defendant was not validly appointed as a director of BHP.
4. An order pursuant to s 233 of the Corporations Act:
(a) setting aside the Second Share Issue;
(c) appointing three individuals to be nominated by the plaintiff as directors of BHP; and
(d) removing the third, fourth and fifth defendants of directors of BHP or, alternatively, requiring them to resign as directors of BHP."
The originating process defines the Second Share Issue as the purported issue on 17 June 2019 of 2,592,333 ordinary class shares to the fifth defendant and 1,111,000 ordinary class shares to the second defendant.
I should note that Hilly Woodland also pressed prayer 3 which was a declaration that "the third and fourth defendants breached sections 181(1) and/or 182(1) of the Corporations Act". I indicated during argument that I would not make a declaration in those terms. Aside from anything else, declarations should be clear on their face, and the prayer does not identify the duty which has been breached, or, importantly, the findings on which any conclusion of breach would rest. In the form sought, they suffer from at least the same deficiencies as were deprecated by the High Court in Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53; [2003] HCA 75 at [89]-[90]. The form of the declaration should specifically and succinctly identify the gist of the relevant conduct and its relationship to contravention: Australian Securities and Investments Commission v Youi Pty Ltd [2020] FCA 1701 at [69]. The plaintiff acknowledged, appropriately, that what mattered was not so much the issuing or refusal of the declaration, but the conduct of 17 June 2019 which founded its entitlement to relief for oppression. I shall proceed accordingly. Later references in these reasons to the consent or non-opposition to the entirety of the substantive relief sought by Hilly Woodland are to be understood as references to the orders reproduced above, excluding prayer 3.
There are five defendants. In addition to the first defendant BHP, the defendants are the four persons who are recorded in ASIC's register as the current directors of that company: Mr Samuel Sieng Heng (second defendant), Mr Hong Wei Cai (third defendant), Mr Ming Sing Barton Tso (fourth defendant) and Ms Lili Pan (the fifth defendant). Each of the third, fourth and fifth defendants are residents of the People's Republic of China. The second defendant Mr Heng lives in Sydney.
It is convenient immediately to refer to two matters which have dominated the running of the trial today. Both are relatively unusual.
The events of the last 24 hours
The first is that as of yesterday, Wednesday 9 December 2020, each of the first, third and fifth defendants consented to each of the orders now pressed by the plaintiff.
Secondly, each of the first, third and fifth defendants has within the last 24 hours, but after communicating their consent - in a way which I will in due course elaborate - terminated the authority of the solicitors retained by them in this proceeding. Counsel who in turn had been retained by those firms, two of whom had previously filed submissions in accordance with the Court's directions, appeared before the Court at 10.15 this morning when the matter was called, as a matter of courtesy, and to supply notices pursuant to UCPR r 7.27 advising that the first, third and fifth defendants had terminated the authority of the firms of solicitors formerly acting for them. (To be precise, Mr Bateman who as a matter of courtesy attended on the Court advised that although he presently had no such notice to provide to the Court, one would be forthcoming, and indeed over the luncheon adjournment a filed copy of such a notice was supplied to my chambers.) There has been no appearance by the first, third or fifth defendants today.
In the above I have omitted reference to the second and fourth defendants. The second defendant has appeared throughout these proceedings and appeared today for the majority of the hearing by solicitor and counsel. He does not oppose any of the orders sought by the plaintiff and he seeks no orders on his own account, including as to costs. (Hilly Woodland has clarified that it seeks costs against the first, third, fourth and fifth defendants, but not the second defendant.) An affidavit by Mr Heng the second defendant was read by the plaintiff on the application.
Pausing there for a moment, and putting to one side the position of the fourth defendant, the position until some 24 hours ago was that the active defendants all either consented to or did not oppose the entirety of the relief sought by the plaintiff. That of itself did not relieve the plaintiff from its burden of establishing that the orders sought by it are appropriate, and in particular, the position of the fourth defendant which I will shortly explain makes it necessary for the plaintiff to make out its case. That has occurred, in an expeditious and an efficient fashion, in a way which has enabled me to give these reasons now, immediately after the conclusion of the hearing, in circumstances where it is said by both the plaintiff and the second defendant that it is desirable to obtain relief as soon as may be, not least in relation to ongoing negotiations with lenders which, I am told from the bar table, resume early next week.
I turn to the position of the fourth defendant. He has never supplied a notice of appearance (in that respect his position is to be contrasted with all of the other defendants). He is the subject of orders made by Black J on 6 July 2020 authorizing service pursuant to UCPR rr 10.14 and 11.4 by email to a nominated address, and granted leave pursuant to r 11.8AA to proceed against him if no appearance is filed by him by the specified time (4pm on 14 July 2020). The evidence of service comfortably satisfies me that service upon the fourth defendant has been effected in accordance with that order.
I return to the position of the first, third and fifth defendants. Exhibit C is an email from the plaintiff's solicitors to my Associate sent at 11.14am yesterday advising that the first, third and fifth defendants consented to the orders (excluding as to costs) which I have earlier identified. Exhibit B is a bundle of correspondence between the solicitors formerly acting for the first, third and fifth defendants and those acting for the plaintiff which include email exchanges from the separate firms acting for the first and third defendants, on the one hand, and the fifth defendant on the other hand, on Monday 7 and Tuesday 8 December 2020 confirming what is apparent on the face of exhibit C, namely, that they consented to informing the Court of their consent to the making of final orders.
What was contemplated by emails exchanged on Tuesday 8 December 2020 was in fact the making of consent orders resolving the proceeding. That has not occurred, by reason of the fact that the law firms formerly retained by the first, third and fifth defendants have had their authority terminated. Further, Mr Hyde, who with Mr Pietriche appears for the plaintiff, has pointed me to the written submissions supplied on behalf of the first and third defendants, which were filed before notification was given of their consent to the substantive orders, which make it plain that there had formerly been active involvement by those defendants in this litigation.
The practical consequence of the foregoing is as follows. The proceeding today has been heard on a final basis, but without any substantive opposition from any of the defendants. That has left the plaintiff to make out its case in support of the orders that it seeks in the usual way. However, and the matter which more than anything else makes this case highly unusual and indeed exceptional, is the fact that within the last 24 hours there has been consent to all of the substantive orders which the plaintiff seeks against the first, third and fifth defendants. That does not relieve the plaintiff from discharging its burden, but it very significantly assists the Court in reaching the conclusion that the orders sought by the plaintiff are appropriate. Law firms had been retained by the first, third and fifth defendants until yesterday and experienced counsel in turn retained by those firms and they, the evidence in exhibits B and C makes plain, have conveyed their clients' consent - until their authority was withdrawn - to those orders. I should make it plain that I do not rely upon anything said by counsel who, merely as a matter of courtesy, appeared this morning. They had no authority to speak on behalf of their former clients: see Vacuum Oil Pty Ltd v Stockdale (1942) 42 SR (NSW) 239 at 242 and Pham v Gall [2020] NSWCA 116 at [15]. However, what was done on their behalf by their lawyers before the termination of their authority is available to the plaintiff as an admission.
The foregoing enables a considerably more abbreviated account of the essential underlying facts to be given than would otherwise be the case.