Leawell Pty Ltd as Trustee for the Garton Smith Trust, in the matter of... [2009] FCA 26 | Case summary

REASONS FOR JUDGMENT 1 This is an application for an urgent interim injunction. The applicants are shareholders in the first respondent, Watershed Premium Wines Ltd (the company). The company is a public unlisted company which carries on business as the manager of a managed investment scheme comprising persons engaged in the growing of grapes for the production of wine and as the manager of the wine marketing operations of the scheme. The second to sixth respondents are directors of the company. The seventh to eleventh respondents are shareholders in the company and are related entities of the directors. 2 A number of the shareholders, including the directors and their related entities, are creditors of the company, having previously made shareholder loans to the company. These loans were made by the shareholders some time ago when the company was founded. The total amount still outstanding in respect of the shareholder loans is $4.25 million. The loans have been reflected in the annual accounts of the company as being loans repayable on demand. The applicants are not creditors of the company. 3 On 24 December 2008, the company issued an information memorandum referred to as the Offer Information Statement inviting shareholders to acquire, what was referred to, as "parcels". Each parcel comprises the making of a five year term loan of $1,000 and the acquisition of 26 shares at one cent per share. The information memorandum says that the purpose of the offer is to discharge the existing on demand shareholder loans. The information memorandum goes on to provide that those shareholders who are already creditors of the company can set‑off the amount of the existing debt against any amount payable on the taking up of the offer. Accordingly, the offer will not result in the flow of $4.25 million of "new money" to the company. The primary effect of the full implementation of the offer will be to replace on demand shareholder debt with long‑term shareholder debt and the issue of 110,578 new shares at one cent per share. The information memorandum does not contain a valuation report. 4 The on demand debt currently due by the company to the directors and related entities comprise more than $3.7 million of the $4.25 million owed. The directors have advised that they intend to take up the offer. There has been no general meeting called by the company for the shareholders to approve the making of the offer referred to in the information memorandum of 24 December 2008. 5 The reason why this application is urgent is that the period within which shareholders are to make offers to acquire the "parcels" expires on 19 January 2009 and the new shares are to be issued on 20 January 2009. 6 The originating application shows that there are two main limbs to the final relief which the applicants claim. First, the applicants seek to enjoin the company by way of a permanent injunction pursuant to s 1324(1) of the Corporations Act 2001 (Cth) (the Act), from accepting any offers made by shareholders to acquire the "parcels" referred to in the information memorandum; and from issuing any of the new shares referred to in that information memorandum. There are other orders which are sought but they are irrelevant to this interlocutory application. 7 Secondly, the applicants seek orders pursuant to s 233(1) of the Act, that there be an inquiry as to the fair and reasonable value of the applicants' shares in the company as at 25 October 2007 and as at 8 January 2008; and that the second to eleventh respondents, alternatively the company, purchase the applicants' shares in the company at the higher of the two valuations. 8 The interim relief which is sought by the applicants is sought under s 1324(4) of the Act. 9 This application was heard over two days. At the end of the hearing on 15 January 2009, I delivered an extempore judgment and made orders dismissing the applicants' motion for the interim injunction. However, on 16 January 2009, I directed that the District Registrar of the Court not enter those orders and relisted the motion for further hearing on 16 January 2009 because after the hearing I apprehended that I may not have fully understood the nature of the final relief sought by the applicants and the case sought to be advanced by the applicants. At the end of the hearing on 16 January 2009, having heard further argument, I revoked the orders that I had made on the previous day, and decided to issue an interim injunction restraining the company from accepting any offers for the acquisition of the "parcels"; and from issuing any shares pursuant thereto. I asked the parties to bring in orders reflecting my decision. I said that I would deliver my reasons later. These are my reasons. 10 In very brief summary, the applicants' claim for a final injunction under s 1324(1) of the Act, restraining the acceptance of the offers and the issue of shares, is based on allegations of a threatened breach by the company of s 208 of the Act, and also breaches and threatened breaches by the directors of ss 180, 181, 182 and 183 of the Act. In short, the applicants claim that the information memorandum provides for the giving of a financial benefit to related parties of the company (namely, to the directors and their related entities) and that in breach of s 208(1) there has been no approval of the members in the manner set out in ss 217‑227 of the Act. Further, it is said that the directors are acting, and threatening to act, in breach of their statutory and fiduciary duties in seeking to issue shares at undervalue to dilute substantially the shareholding of the applicants. 11 It is also pleaded that there have been other occasions since October 2007 when the directors have, in breach of their statutory and fiduciary duties, issued new shares in the company without giving the applicants a reasonable opportunity to participate in the new share issue. This conduct has progressively diluted the applicants' shareholding in the company. The applicants also contend that this conduct, as well as that related to the threatened issue of the 110,578 new shares, pursuant to the 24 December information memorandum, comprises oppressive conduct, which they rely upon, in support of their claim for "buy out" relief under s 233 of the Act. 12 However, in support of their claim for an urgent interim injunction under s 1324(4), the applicants concentrated on their claim for final injunctive relief under s 1324(1) to enjoin the threatened breach by the company of s 208(1) of the Act. 13 The applicants contended that the offer to acquire the "parcels" referred to in the information memorandum comprised the giving of a financial benefit to a related party of the company because it provided for the issue of shares at undervalue to the directors and their related entities. The applicants relied upon independent valuation evidence which showed that in March 2007 one share in the company was valued at between $1,090 to $1,223. The offer in the information memorandum by contrast sought to provide for the issue of a share for the consideration of one cent. Further, the applicants contended that the offer was discriminatory because it distinguished between those shareholders that were also creditors of the company and those shareholders who were not. The shareholders who were not creditors of the company would have to become creditors of the company by advancing "new money" to the company in order to take up the offer, whereas the shareholders who were already creditors would be able to set‑off the existing debts against the subscription monies. 14 Section 1324(4) of the Act provides that: Where in the opinion of the Court it is desirable to do so, the Court may grant an interim injunction pending determination of an application under subsection (1). 15 Whether or not an interim injunction should be granted under s 1324(4) does not depend upon the application of the usual equitable principles for the granting of interlocutory injunctive relief. The remedy is a statutory remedy. Therefore, consideration must be had to the Parliament's intention in providing by that section, a statutory power to aid the enforcement of the Act, which may be invoked by the regulatory authority, and also by persons whose interests may be affected by a breach of the Act. However, the considerations taken into account in determining applications for equitable injunctive relief will usually be of some assistance in determining whether it is "desirable" for a court to make an interim order under s 1324(4). (See, Australian Securities and Investments Commission v Mauer‑Swisse Securities Ltd (2002) 42 ACSR 605 at 612‑614). 16 The company contended that it was not "desirable" to grant the interim injunction. 17 First, it was said that any relief granted would amount to final relief. I do not accept this contention. The relief sought will not preclude any of the shareholders from making the offers referred to in the information memorandum, but will restrain the acceptance of those offers and any consequential action. Thus, the effect of the orders will do no more than delay the timetable foreshadowed in the information memorandum and receipt of any "new money" which may be advanced to the company. There was no evidence before me as to whether, and if so, how much "new money" it was anticipated would be raised by the proposal in the information memorandum. Further, I intend to order an expedited trial of the question of whether the company threatens to contravene s 208 of the Act and whether the applicants are entitled to a final injunction to restrain the contravention of that section. 18 Secondly, it was contended that there was no serious question to be tried that there was a threatened contravention by the company of s 208 of the Act. The company contended that there was no evidence that the issue of a share in the company at one cent would amount to the issue of the company's shares at undervalue. In my view, this submission cannot be accepted. There is evidence of an independent valuation from RSM Bird Cameron valuing a share in March 2007 at more than $1,000. The company did not refer in its information memorandum to any independent valuation justifying the issue of a share at one cent as being fair and reasonable. Nor did the company lead any evidence to that effect. In my view, there is a serious issue to be tried that the issue of the shares for one cent per share is an issue at undervalue which would have the effect of giving a financial benefit to a related party of the company. 19 Next the company contended that there was no serious issue to be tried because it was plain beyond doubt that the exemption in s 215 of the Act applied. In my view, there is a serious issue to be tried that the offer in the information memorandum discriminates between the class of shareholders who are creditors of the company and those that are not. There is, therefore, in my view, also a serious question to be tried as to whether s 215 of the Act applies. 20 It was, then, contended that an interim injunction was not needed because the applicants would not suffer irreparable harm if interim relief was refused. This contention cannot be accepted. Section 209(1) of the Act provides that if a company contravenes s 208 of the Act, the contravention "does not affect the validity of any contract or transaction connected with the giving" of the financial benefit. Thus if the interim injunction is not obtained and the offers are accepted, the applicants would not be able to impugn the validity of the issue of the new shares on the grounds of a contravention by the company of s 208 of the Act. Accordingly, there is a very substantial benefit to the applicants in preventing the acceptance of the offers and the issue of the shares which would be irretrievably lost if the interim injunction was not granted. I observe in this regard that there is a note to s 209 in the Act to the following effect: A Court may order an injunction to stop the company or entity giving the benefit to the related party. 21 I do not accept that there is a readily available claim in damages as an adequate alternative remedy to the claim for injunctive relief. The Act provides that the directors and those involved in any contravention of s 208 of the Act are liable to pay a civil penalty. However, that remedy cannot be invoked by aggrieved shareholders. In my view, this is an instance where the statutory basis of the remedy in s 1324 of the Act as a means to ensure compliance with the Act, is a significant consideration in favour of granting an interim injunction. 22 Further, the fact that the applicants sought a "buy out" of their shares as final relief under s 233 of the Act in respect of the alleged oppressive conduct of the respondents, did not preclude the applicants from being entitled to enforce the provisions of the Act whilst they remained shareholders. 23 The company also submitted that the balance of convenience favoured the refusal of the interim injunction. The company contended that if the injunction was granted then there was a risk that the company would not be able to pay any shareholder creditor who between now and the trial made demand for the repayment of the debt. The second respondent deposed that the company would not be able to borrow $4.25 million from the bank to repay the loans. 24 The evidence was that the shareholder on demand debt had been in existence for about seven years. Further, there was no mention in the information memorandum that there was an imminent likelihood of any shareholder creditor making demand. However, on the morning of the hearing on 15 January 2009, affidavits were filed by Mr Ralph Steel, Mr Gregory Hancock and Mr David Miller. Each deposed that he was, or represented, a shareholder creditor and that he had been advised by a director, Mr Brett Robins, of the injunction application. Each went on to depose that if an interim injunction was granted, he proposed to make demand for the repayment of the shareholder loan. Two of the deponents said that they wanted the money to pay for events which would occur in May 2009. The third deponent did not explain why he needed the money. I place little weight on these affidavits. This is because of their timing; and because of the absence of any explanation from each deponent as to why he would make such a demand, when on the evidence of the second respondent there was a risk that the making of the demand would put the company into liquidation with the consequence that the demands would not be met. In any event, if the demands were made and the company was to go into liquidation this would be as a consequence of the directors having permitted the company to get into a precarious financial position and then seeking to remedy the position by embarking upon a course of action which is arguably unlawful, rather than adopting a less contentious means of raising funds. 25 Accordingly, I will grant an interim injunction restraining the acceptance of any offers made pursuant to the offer to acquire the "parcels" referred to in the information memorandum, and the issue of any new shares referred to in the information memorandum. 26 Insofar as the applicants seek the interim injunction in aid of the claim for final relief that the second to eleventh respondents, alternatively the company, acquire the applicants' shares at the higher of the 25 October 2007 or the 8 January 2008 valuations, I decline that application on the grounds that there would be no utility in granting that interim relief because the final relief could be granted even in the absence of the making of interim orders restraining the acceptance of the offers and issue of the new shares. I certify that the preceding twenty‑six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis.

Leawell Pty Ltd as Trustee for the Garton Smith Trust, in the matter of Watershed Premium Wines Ltd v Watershed Premium Wines Ltd

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Judgment (20 paragraphs)

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