Kuterba v Sirtex Medical Limited

THE FACTUAL AND PROCEDURAL BACKGROUND 3 The background to the present application is as follows. 4 Following announcements made by Sirtex to the ASX on 9 and 16 December 2016, in February 2017 Portfolio Law commenced an 'open' shareholder class action against Sirtex, with Mr Hayward as the representative applicant. In January 2017 Maurice Blackburn commenced investigating a class action against Sirtex and on 31 July 2017 the firm publicly announced that investigation. On 18 December 2017 Maurice Blackburn commenced another 'open' shareholder class action, with Mr Kuterba as the representative applicant. 5 On 30 April 2018 the Court made orders that the two proceedings be consolidated with Mr Kuterba and Mr Hayward as joint representative applicants. The case is listed for hearing on 1 April 2019 on an estimate of four weeks, and a mediation is scheduled for mid-December 2018. 6 At the time the first shareholder class action was commenced in February 2017 (and until recently) Sirtex was a public company listed on the ASX with substantial assets and a strong cash flow from its operating activities. Its 2018 Annual Report shows that: (a) as at 30 June 2017 Sirtex had $118.3 million in cash and cash equivalents and other short-term deposits (liquid assets) and its assets exceeded its liabilities by $149.4 million. It generated $55.9 million in net cash through operating activities; and (b) as at 30 June 2018 Sirtex had $127.9 million in liquid assets and its assets exceeded its liabilities by $159.1 million. It made a profit before tax of $59.2 million in that financial year and generated $56 million in net cash through operating activities. The company achieved underlying EBITDA of $75.9 million after excluding various costs. 7 Sirtex was recently taken over in a complex scheme of arrangement (the Scheme), approved by the Court on 12 September 2018. Under the Scheme two overseas entities became the ultimate owners of all Sirtex shares for consideration of $1.9 billion. As a result Sirtex has been delisted from the ASX. 8 The Scheme booklet provided to shareholders shows that: (a) all shares in Sirtex are now held by Grand Pharma Sphere (Australia Bidco) Pty Ltd (Bidco) which is an Australian proprietary company established on 23 July 2018 for the purpose of receiving the transfer of Sirtex shares and holding them on and from implementation of the Scheme; (b) Bidco is wholly owned by Grand Pharma Sphere Pte Ltd (Holdco), a holding company which the bidders incorporated in Singapore; (c) Holdco is in turn 51% owned by CDH Genetech Limited (CDH Genetech) incorporated in the Cayman Islands. CDH Genetech is part of the CDH Group which the booklet describes as a dedicated alternative asset fund manager with approximately US$20 billion of committed capital under management. CDH Genetech is a wholly owned subsidiary of CDH Fund V LP, a limited liability partnership incorporated in the Cayman Islands; (d) the remaining 49% of Holdco is owned by Grand Decade Developments Limited (Grand Decade) incorporated in the British Virgin Islands. Grand Decade is wholly owned by China Grand Pharmaceutical and Healthcare Holdings Ltd (CGP) which the booklet describes as a public company listed on the Hong Kong stock exchange with market capitalisation of approximately $1.97 billion. 9 The new ownership structure under the Scheme is as follows: 10 CDH Genetech made an equity contribution of $493.2 million to the $1.9 billion purchase price, CGP made an equity contribution of $473.9 million, and the balance of $933.3 million was funded through loan facilities with Bank of China Limited Macau Branch (Bank of China Facilities). CDH Genetech has agreed that the members of the Sirtex Group (which includes Sirtex itself) will guarantee the Bank of China Facilities and provide security over their assets in favour of the Bank of China. 11 CDH Genetech and CGP intend to relocate Sirtex's corporate headquarters, research and development function, and management of its IT functions to the United States and Sirtex's CEO is relocating to the USA. 12 On 18 September 2018 the applicants filed an interlocutory application seeking the following orders: Pursuant to s 33ZF of the Federal Court of Australia Act 1976 the Respondent shall provide the applicants with at least 14 days written notice of any proposal that it or any of its related companies transfer or dispose of any of the liquid assets of the Respondent or its subsidiaries, other than in the ordinary course of business. 13 That application was opposed by Sirtex which, amongst other things, contended: (a) that the application was overly broad in seeking to injunct even a "proposal" rather than a decision; (b) that the application was imprecise in the carve-out of transactions "in the ordinary course of business" when the newly created business under the Scheme did not yet have an ordinary course; and (c) that, in substance, the applicants sought a freezing order without establishing any proper basis for such an order and without proffering an undertaking as to damages. I refused the application on 24 September 2018 and granted leave to the applicants to bring on a revised application should they choose to do so. 14 On 26 September 2018 the applicants filed a revised application seeking the following orders: 1. Pursuant to s 23 and 33ZF of the Federal Court of Australia Act 1976 (Cth), until further order or 30 June 2019, whichever is the earlier, the Respondent shall provide the Applicants with at least three business days written notice before implementing any decision that is made (including a decision to declare or pay a dividend or to make a return of capital) which would result in the Respondent's consolidated liquid assets (cash and amounts on deposit) declining to less than $80 million. 2. The order in paragraph 1 does not apply to any decision to enter into, or to the performance of any legal obligation assumed under, any guarantee or security in respect of the debt provided by Bank of China Limited Macau Branch to finance the transactions described in the scheme booklet issued by the Respondent dated 1 August 2018. 3. Liberty to apply on one business day's notice. 15 The order in paragraph 2 acts as a carve-out from the order sought in paragraph 1 (Order 1) and it is not contentious. The carve-out is made because Sirtex gave an undertaking to Mr Hayward on 12 September 2018 in the following terms: Sirtex Medical Limited (ACN 078 166 122) (Sirtex) undertakes to Todd Hayward: 1. to provide Todd Hayward a copy of any documents lodged by Sirtex or any of its subsidiaries with ASIC pursuant to sections 260B(5) and 260B(6) of the Corporations Act 2001 (Cth) relating to Sirtex or any of its subsidiaries: (a) entering into any guarantee in respect to the debt provided by Bank of China Limited Macau Branch arising from the transactions described in the Scheme Booklet issued by Sirtex dated 1 August 2018, or (b) granting any security over its assets in respect of such debt, within one business day of lodgement of those documents with ASIC, and 2. to provide to Todd Hayward written notice of the intention of Sirtex or any of its Australian subsidiaries to enter into any guarantee in respect of the debt provided by Bank of China Limited Macau Branch arising from the transactions described in the Scheme Booklet issued by Sirtex dated 1 August 2018, or to grant any security over its asset in respect of such debt, not less than 14 days before entering into such guarantee or granting such security. 16 There are three further factual matters of significance: (a) the majority of Sirtex's assets are liquid assets held in cash or cash equivalents and other short term deposits. As at 30 June 2018 its liquid assets totalled $127.9 million and while there is no evidence that those assets have been transferred out of Australia or depleted, such assets could be easily and speedily moved out of the jurisdiction; (b) the class action may result in an order for substantial damages to be paid. In an earlier interlocutory application Sirtex relied on a report by Mr Tony Samuel, an expert forensic accountant, in which he opined that, by reference to one loss assessment method, the aggregate value of class members' claims was $283 million (although in his view a more reasonable estimate was $82.7 million and he provided his opinion without reference to the question of whether Sirtex had any liability to pay such damages); and (c) Sirtex has insufficient insurance to meet any substantial agreed settlement or damages award. The evidence is that Sirtex only has $10 million of insurance cover, of which $2 million had been spent on defence costs as at 30 June 2018. I expect most or all of the insurance cover to be expended on defence costs if the class action proceeds to judgment.

THE PARTIES' SUBMISSIONS 17 Sirtex did not submit that Order 1 is unclear or ambiguous in its terms, or that some change to its framing would, as a matter of balance or commerciality or circumstance, be preferable. The dispute between the parties boils down to whether or not the applicants should be required to make an undertaking as to damages. 18 The applicants express grave concerns that CDH Genetech and CGP may act speedily to remove Sirtex's liquid assets from Sirtex's control and to transfer them out of the jurisdiction of the Court. They say, and I accept, that these liquid assets could be moved to anywhere in the world by straightforward international bank transfer. Sirtex or its parent entities could direct such a transfer to take place immediately. 19 The applicants argue that the order they seek is the minimum which should be done to protect class members against the possibility that the processes of the Court might be frustrated in this way. They say it is inappropriate to characterise Order 1 as a freezing order, and they and IMF decline to provide an undertaking as to damages in such circumstances. They submit that Order 1 merely requires Sirtex to inform the applicants three days before it implements a decision that would reduce its liquid assets to below $80 million. If the applicants receive such a notification they say they will decide whether it is appropriate to seek a freezing order, and if they do so they will provide an undertaking as to damages at that point. 20 Sirtex contends that, on the contrary, Order 1 is in substance a freezing order, since it would prevent Sirtex from dealing with certain of its assets for a period of at least three days in the circumstances outlined in the order. It says that the order would inhibit Sirtex's operations for nine months until 30 June 2019. Then, if Sirtex is successful in its defence of the class action, or if it is unsuccessful but ultimately the judgment is less than $80 million, it will have been burdened in a way which subsequent events show it should not have been burdened. It says that putative judgment creditors, the applicants and class members, should not be allowed to inhibit Sirtex's business for three days without there being some price for doing so. It submits that the price of the order sought must be an undertaking as to damages. 21 Mr John Biggs, a director of Sirtex's solicitors Watson Mangioni Lawyers Pty Ltd, says on affidavit that while the applicants could not personally satisfy an undertaking as to damages, it could be inferred that IMF has sufficient resources to do so. 22 Sirtex says that it will consent to the orders sought by the applicants on the condition that IMF provides an undertaking as to damages. It argues that, except in special circumstances, an undertaking as to damages should be required in every case of an interlocutory injunction and that this is not one of the rare cases in which it may be appropriate for the Court to exercise its discretion to grant an injunction without an undertaking. It says that it is of no moment that the applicants describe proposed Order 1 as an unimportant restraint or restraint which could not conceivably affect Sirtex.

DETERMINATION 23 It is common ground between the parties that, as a superior court of record, the Federal Court has power to make such orders as it may determine to be appropriate "to prevent the abuse or frustration of its process in relation to matters coming within its jurisdiction": Jackson v Sterling Industries (1987) 162 CLR 612 at 623. Sirtex accepts that s 23 of the Federal Court of Australia Act 1976 (Cth) (the Act) provides power for the Court to make the order sought. 24 A freezing order is a paradigm example of an order to prevent the frustration of a court's process: Patrick Stevedore Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) (1998) 195 CLR 1 at [35]. Another example is an injunction requiring the respondent to notify the applicant before it moves substantial assets out of the jurisdiction, which is the remedy the applicants seek. Such orders may be appropriate where there is a sufficient prospect of the invocation of the enforcement process as well as a danger that assets will be removed or otherwise dealt with. 25 I consider there is a reasonable prospect that the applicants' case will succeed and Sirtex may be required to pay substantial damages, and I am persuaded there is a danger that Sirtex's assets will be removed from the jurisdiction. Where injunctive relief is granted an undertaking as to damages will usually be required but in the unusual circumstances of the present case I consider it is appropriate to make the orders sought, without requiring an undertaking. 26 I am satisfied the applicants have a prima facie case on the face of the pleadings, and the proceeding does not appear to be speculative or adventurous. The applicants rely on Mr Samuel's estimates of quantum as indicating that damages may be substantial. While his estimates are of limited value, on the assumption the case succeeds, I accept the applicants' contention that the class action may result in Sirtex being ordered to pay damages in the vicinity of $80 million. 27 In terms of the danger that Sirtex's assets will be removed from the jurisdiction, it is noteworthy that the great bulk of them, approximately $128 million, are liquid, being held as cash or cash equivalents or in short-term deposits. They are fungible and could be rapidly moved out of Sirtex's control and the jurisdiction if Sirtex or its parent entities directed that. Having regard to the low level of other substantial assets in the jurisdiction and the paucity of Sirtex's insurance cover, if a large proportion of Sirtex's liquid assets is transferred out of the jurisdiction Sirtex may be unable to satisfy a substantial judgment. That is not to suggest that Sirtex or its parents would deliberately dilute or strip Sirtex's assets in an effort to frustrate the Court's processes (for which there is no evidence), but rather to recognise that Sirtex's parents may transfer substantial monies out of the jurisdiction for legitimate business purposes. 28 While the applicants have the onus of establishing such an order is appropriate, at one level their concern could have been addressed by CDH Genetech and CGP undertaking that, if judgment is given against Sirtex in the proceeding, they will stand behind Sirtex. The applicants have sought assurances in that regard and they have not been forthcoming. 29 In my view Sirtex is incorrect to characterise proposed Order 1 as a freezing order. Freezing orders are described in rule 7.32 of the Federal Court Rules 2011 (the Rules) (and in identical terms in r 37A.02 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) and r 25.11 of the Uniform Civil Procedure Rules 2005 (NSW)) as follows: A freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets. 30 That description is consistent with the relevant Federal Court Practice Note. Annexure A to "Freezing Orders Practice Note (GPN-FRZG)" is an example form of a freezing order. It includes the following order 6(a): You must not remove from Australia or in any way dispose of, deal with or diminish the value of any of your assets in Australia ('Australian assets') up to the unencumbered value of AUD$[ ] ('the Relevant Amount'). 31 The authorities reflect the same meaning of the term: see for example Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 CLR 380 at 403 and PT Bayan Resources TBK v BCBC Singapore Pte Ltd and Others [2015] HCA 36; (2015) 258 CLR 1 at [42]-[47]. Properly understood, a freezing order is an order which, in order to prevent the frustration of the court's processes, preserves the assets of the respondent and prevents the respondent from dealing with them. 32 In the present case the applicants do not seek an order that would prevent Sirtex or its parent entities from dealing with their assets. They only seek three business days' notice before Sirtex implements any decision to undertake transactions that would result in it retaining less than $80 million in cash and equivalent assets. 33 While the order may theoretically act as a short-term bar to Sirtex dealing with its assets, I am not persuaded that it will do so in practice. The order requires Sirtex to provide three business days' notice before "implementing" any decision to reduce its liquid assets below $80 million. It is not conditioned upon the making of such a decision. Sirtex presently has liquid assets of approximately $128 million and it generates approximately $56 million a year in net cash flow from its operating activities. 34 In my view it is unlikely that any decision Sirtex or its parent entities make to transfer away from Sirtex such substantial monies that its liquid assets fall below $80 million would be implemented on the spot. If Sirtex or its parents make such a decision and Sirtex immediately notifies the applicants, it seems likely that the period of three business days will run before the decision is to be implemented. In such circumstances the order will not bite. 35 Having said this, I must accept the possibility that Sirtex or its parent entities may for legitimate business purposes decide they need to transfer a substantial amount out of Australia in less than three days such that Sirtex's liquid assets will fall below $80 million. If that be the case Sirtex may, on four hours' notice to the applicants, apply to the Court to vary the orders so that they do not have a freezing effect. The Court will speedily hear and determine the application. If such an application is made the applicants will be called on to decide whether they wish to seek a freezing order. If they do so, they accept that they will be obliged to provide an undertaking as to damages. 36 The usual requirement that a party seeking an interlocutory injunction give an undertaking as to damages exists to safeguard the respondent from being without remedy for damage suffered as a result of an interlocutory order where subsequently it is held that it ought not to have been made. However, the power to order injunctive relief under s 23 of the Act is broad and the circumstances of the present case are unusual. The order sought only requires Sirtex to give three days' notice to the applicants if it proposes to diminish its cash and equivalent assets to less than $80 million, when they are currently $128 million and it generates net cash flow from operating activities of $56 million per year. I intend the order to be one requiring notification rather than affecting Sirtex's freedom to deal with its assets and in such circumstances there is no good reason to require the applicants to provide an undertaking as to damages. The effect of the order is to put off the question of an undertaking until there is evidence that it will, in fact, operate as a freezing order. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Murphy.