Mopeke Pty Ltd & Ors v Airport Fine Foods Pty Ltd & Ors [2007] NSWSC 243 | Case summary

2127/05 Mopeke Pty Ltd & Ors v Airport Fine Foods Pty Ltd & Ors (Costs) JUDGMENT (ex tempore) 1 HIS HONOUR: Consequent upon the judgment I delivered on 2 March 2007 [Mopeke Pty Ltd & Ors v Airport Fine Foods Pty Ltd & Ors [2007] NSWSC 153], two main issues remain for resolution: the first is the form of the order to be made for purchase of the Bradfield interests' shares - and, in particular whether it should be made, as the Bradfield interests contend, primarily against the Lagerlow interests (the majority shareholders) with an election to the plaintiffs to substitute the company or whether, as the defendants contend, it should be made against the company; and the second is how the costs of the proceedings should be borne. 2 So far as the form of the share purchase order is concerned, it is implicit, if not explicit, in the principal judgment, that I have concluded that the exclusion of Mr Petrovski from the day to day management of the company is conduct unfairly prejudicial to the Bradfield interests in their capacity as shareholders in the company, within the meaning of (CTH) Corporations Act, s 232. In those circumstances, s233(1) authorises, inter alia, an order: "(d) for the purchase of any shares by any member"; and "(e) for the purchase of shares with an appropriate reduction of the company's share capital". It is plain, therefore, that either form of order is authorised by the Act. Although it is my impression that the more common remedy is an order for purchase of the minority's shares by the majority, the Butterworths Australian Corporation Law & Practice observes that a common order is for the company or its members to purchase the minority shareholding. No reference has been made to any authority that suggests that one is to be preferred over the other. 3 That said, the policy of the law is that the capital of corporations should be maintained, and the rigorous procedures required to be followed if a company desires to reduce its capital are well known. The concerns that underpin that policy are that a creditor, having advanced funds to or traded with a limited company, is entitled to expect that the capital of the company will be preserved. So where there is to be a reduction of capital, the ordinary practice is that the creditors must be circularised and notified. For this reason, where a court is asked to make an order for the purchase of shares by the company within an appropriate reduction of the share capital, it should be concerned to be satisfied that that course will not prejudice the position of creditors. 4 Although the plaintiffs submit that their preferred order is, in the first instance, one against the majority shareholders, no reason has been advanced in support of that contention. What underpins the plaintiffs' desire to have an election to, in effect, substitute the company as the purchaser, seems to be doubt as to whether the majority shareholders, which are themselves limited companies, have the wherewithal to fund the purchase. I apprehend that no such doubt attends the position of the company itself. 5 On the other hand, the second to sixth defendants have advanced reasons as to why it is preferable that the order be made for the purchase of the Bradfield interests' shareholding by the company: in particular, that there are fiscal advantages, in respect of potential liability for stamp duty and capital gains tax, which might well be incurred if the purchase is by the Lagerlow interests, but not if by the company. It does not seem to me that giving the majority the benefit of those potential fiscal advantages involves any unfairness, because neither valuation made allowance for those potential liabilities in valuing the shares. It seems to me, therefore, that fairness between the parties tends to favour rather than point against making an order that the company, rather than the Lagerlow interests, purchase the Bradfield interests' shares. 6 As I have said, before acceding to such an application, the Court should consider whether creditors are likely to be prejudiced. As will be recalled, this company has significant cash assets and no debt, or at least no debt of significance, and I think I am justified in concluding that creditors would not be prejudiced by the reduction of capital which would be associated with a purchase by it of the plaintiffs' shares. Of course, there are no shareholders other than the Bradfield interests who will be brought out, and the Lagerlow interests who will be the only remaining shareholders and who support the proposed course, so I need not be concerned with the question of prejudice to any other shareholder. 7 No reason has been advanced as to why the orders should not be made for purchase by the company rather than by the Lagerlow interests. The company itself adopted a neutral position, but did not oppose the orders being made against the company rather than against the majority. 8 For those reasons I will make an order under s 233(1)(e) for the purchase of the plaintiffs' shares by the first defendant company, with an appropriate reduction of its capital. 9 I turn then to the question of the costs. The starting point is that the Bradfield interests as plaintiffs have succeeded in the proceedings in obtaining the relief for which they contended at trial, or relief to substantially the same effect and, prima facie, on the principle that costs ordinarily follow the event, are entitled to their costs. 10 Mr Lawson, for the Bradfield interests, submits that those costs should be payable on an indemnity basis from 12 July 2005. On 6 July 2005, the Bradfield interests made an offer to the Lagerlow interests, to the effect that the Bradfield interests would acquire the Lagerlow interests' shareholding in the company for a price of $2.7 million. The offer included the following provisions: 4. Acceptance of this offer is on the condition that Lagerlow Holdings, Airsas, their agents and associates undertake not to engage in any activity detrimental to the business of AFF together with an undertaking not to engage in any business activity on Sydney, Brisbane and Perth International Airports. 5. Payment and additional terms as agreed between the parties.

11 This offer was apparently conveyed to the Lagerlows at about 4.28pm on Wednesday, 6 July 2005 and was expressed to expire at 5pm on Monday 11 July 2005. On 11 July, shortly after 6pm, the Lagerlow interests responded that the offer would not be considered at that stage, because it was incomplete, requiring stipulation of payments and additional terms yet to be agreed. 12 This offer of $2.7 million for the Lagerlow interests' 60 percent shareholding valued the company at a higher value than I ultimately found that it has and, to that extent, was an offer that, if accepted, would have been a better outcome for the Lagerlow interests than the litigation has produced. 13 There ensued further correspondence, offers and counter offers, none of which could be said to have involved an offer that the offeree has bettered at the hearing. However, on 9 February 2006, the solicitors for the Lagerlow interests offered to sell their 60 percent shareholding to the Bradfield interests for $2.7 million, to be paid by 24 March 2006. This offer involved substantially the same terms as the original offer made on behalf of the Bradfield interests. On 13 February 2006, the solicitors for the Bradfield interests responded that their offer of $2.7 million had expired seven months ago, and that their clients now had no interest in purchasing the Lagerlow interests' shares on those terms. There followed further offers and counter offers, but again none that could be said to have been bettered by the offeree at trial. 14 I do not think that the offer of 6 July 2005 justifies an indemnity costs order from that or from any other date. First, it was not an offer of compromise under the Rules, so the prima facie provisions of the Rules in respect of offers of compromise and their costs consequences do not apply. Secondly, because it left payments and additional terms to be agreed, it was not an offer capable of immediate acceptance. Thirdly, it would have forced upon the offerees a restraint of trade which they were not obliged to accept, and which this Court has not imposed and would not have imposed in conjunction with an order for purchase of the minority shareholding. Fourthly, it was open only for about three business days. And, fifthly, when seven months later the Lagerlow interests indicated a willingness to settle on such terms, the Bradfield interests were no longer prepared to do so. Accordingly, I will not make an order that the plaintiffs' costs be payable on an indemnity basis. 15 Next, a question arises as to whether the costs to which the plaintiffs are otherwise entitled should be reduced on account of issues that they did not press at trial. Generally speaking, courts are reluctant to embark on the exercise of apportioning costs between issues and the respective success of the parties on those issues. I outlined the reasons for and policy that underlies this in Waterman v Gerling (No 2) [2005] NSWSC 1111. In essence, Courts may be persuaded to deprive a successful party of costs of an issue on which it fails, if that issue is severable and occupied a significant and identifiable portion of the hearing. 16 In this case, the issues on which the plaintiffs did not succeed were, for the most part, not pressed at trial. It is true that the plaintiffs did not succeed on two aspects of oppression that they pursued at trial (relating to the funding of the defence of the proceedings, and the conduct of directors' meetings), but these occupied only a slight part of the case as presented. The issues which the plaintiffs pleaded but did not press at trial necessarily occupied no time at trial, although they would have involved some time, and incurred some costs, in the pre-trial process. 17 Parties should not be discouraged, by fear of being visited with a special costs order, from focussing on the main issues, by abandoning the issues they see as their least strong. The course of abandoning such issues is a responsible one, which saves the Court time and the parties costs. 18 In this case, I do not think it can be said that the issues which were not pressed were clearly severable issues. Indeed, in response to the plaintiffs' case that it was oppressive for the company to be funding the litigation, an argument was advanced, which I accepted, that the various issues were clearly overlapped and that the same matrix of facts underlay them all. As I said, in paragraph 31 of the primary judgment, there was an extensive factual overlap between the oppression claim (which was pressed), and the pleaded claims (which were not pressed) against the company for damages for breach of contract, duress and contract review. I do not think the test for depriving the successful plaintiffs of the costs of the issues not ultimately pursued is satisfied in this case. 19 That said, the plaintiffs' case was, in substance, a case against the first defendant company and the second and third defendants who constitute the majority. The fourth, fifth and sixth defendants were the directors of the company. No relief has been granted against them. There is no reason why they should be liable for the plaintiffs' costs of the proceedings. 20 Mr Lawson has sought costs only against the second to sixth defendants and not against the first defendant, presumably on the basis that it is the majority and not the company who should bear the costs. On the other hand, I have accepted that the company had a proper interest in defending the proceedings and was obviously a necessary party to them. In circumstances where, on completion of the buy-out, the interests of the majority and those of the company will coincide, there does not seem to be any detriment to any party involved in making an order against the company as well as the second and third defendants. If, for one reason or another, the defendants desire to adjust that position as between themselves then, no doubt, they can enter into appropriate arrangements inter se to that end. 21 While I accept that the fourth, fifth and sixth defendants should not be liable for the plaintiffs' costs, it does not follow that the plaintiffs should pay their costs. They were the directors of the company. It is commonplace to join the directors of a corporation where their conduct is going to be scrutinised in proceedings against a corporation, as was the case here. They shared representation with the second and third defendants, and it is not apparent that there were any additional costs incurred by reason of their involvement in these proceedings. It follows that I will not make the order sought by the defendants that the plaintiffs pay the fourth, fifth and sixth defendants' costs. 22 Accordingly, subject to any submissions which counsel may wish to make on their form, my orders are:

Mopeke Pty Ltd & Ors v Airport Fine Foods Pty Ltd & Ors

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Judgment (16 paragraphs)

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Cases Cited (2)