Nutectime International Pty Limited v Timentel Pty Limited

Judgment 1THE COURT : This is an appeal from orders of Gzell J [2009] NSWSC 1096 in oppression proceedings brought by Mrs Ehsman, a minority shareholder, against Timentel Pty Ltd (the company), the other shareholders (the defendants) and their company Nutectime International Pty Ltd under ss 232 and 233 of the Corporations Act 2001 (the Act). The former section relevantly provided: "The Court may make an order under section 233 if: (a) the conduct of a company's affairs; or (b) an actual or proposed act or omission by or on behalf of a company; or (c) a resolution, or a proposed resolution, of members or a class of members of a company; is either: (d) contrary to the interests of the members as a whole; or (e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity." 2On 16 October 2009 Gzell J published his reasons for judgment and on 30 October made his formal orders (red 57). Order 1 directed Nutectime to retransfer, for no consideration, the assets it acquired from the company under two agreements of 2 September 2005 (the sale agreements). Order 2 directed the company to restore its shareholders' loan accounts to the state they were in prior to 6 May 2005, and Order 3 directed that it be wound up. Order 6 dismissed the defendants' cross claim. 3The Judge found that the execution by the company of a loan facility and charge in favour of the defendants on 9 May 2005 gave them a preference over the existing loan of Mr and Mrs Ehsman [54]-[55]. The transactions were therefore oppressive, unfairly prejudicial to, and unfairly discriminatory against Mrs Ehsman. 4The Judge also found that completion of the sale agreements on 2 September 2005 and the application of the purchase price to pay off the defendants' secured loan were oppressive to, unfairly prejudicial to, and unfairly discriminatory against Mrs Ehsman [70], [77], [81]. 5The company was left without assets and with no capacity to pay anything to Mr and Mrs Ehsman in reduction of their loan account. All its assets had been transferred to Nutectime which was owned and controlled by the defendants. 6Although the Judge's reasons would have supported an order setting aside the loan facility and the charge, that order was not made. This could have been corrected under the slip rule. 7The company and the defendants brought a cross claim against Mr and Mrs Ehsman based on a contract evidenced by minutes of a directors' meeting. It alleged in substance that the shareholders had agreed that Mr Brady, one of the defendants, would arrange for the company's debts to be paid by DNB Global Corporation (DNB), that the other shareholders would then pay their share, and DNB would be reimbursed. 8The Judge held that the parties had not intended to enter into legal relationships and the cross claim was dismissed. 9Nutectime, Mr Brady and Mr Paix, another shareholder and director, appealed. The third defendant Mr Frasca submitted to the orders of the Court save as to costs. 10Mrs Ehsman invented a wrist watch in the form of a bracelet with a split face and hands which could appear in either or both halves of the split face. She applied for patents in Australia and the United States. Early in 1998 she met Mr Brady and they agreed to work together to develop the invention. In October Timentel was incorporated with Mrs Ehsman owning 50% of the shares and Mr Brady the other 50%. The other defendants, Messrs Paix and Frasca, became interested in the project and were allotted 5% of the shares reducing the other holdings to 45%. Mr and Mrs Ehsman, and Mr Brady became directors. Mr Brady became the Chairman. 11Swiss consultants were engaged to develop prototypes. In November 1998 Mrs Ehsman granted the company an exclusive royalty free licence to work her invention. 12The Swiss consultants developed significant improvements (the new invention) and the company applied in France for a second patent. The board meeting on 16 March 1999 noted that the company's capital was almost exhausted. The minutes record (1/436) that Mr and Mrs Ehsman were having difficulty paying their share of the expenses. The other directors agreed to consider increasing their contributions and the board arranged to meet on 28 March "to finalise and resolve strategy". 13The minutes of the 16 March meeting continued: "Frank Frasca then expressed concern as to Funds in Bank not being sufficient to pay ongoing bills ... Patti Ehsman said that David N Brady had always paid the amounts upfront so that we kept in good standing. He would then work out what they owed and they paid it to him. Patti proposed, subject to agreement from David, that the method continue as he was completely trustworthy ... David N Brady was asked if he would agree to continue this method. He did so. Frank Frasca stated all shareholders must guarantee payment of their respective payment amounts as and when bills occurred and that this would be a guarantee as shareholders of the company and as individuals and asked for agreement on this from all present - agreement was given. Chairman asked if Patti Ehsman was formally moving this and she said yes. The chairman then wrote down and read out words as above, whereupon she so moved it. Seconded by Michael Ehsman. Vote 4 - nil David N Brady abstained - Motion passed." 14The minutes were signed by Mr and Mrs Ehsman as directors, by Mr Brady as chairman and by Mr Frasca and Mr and Mrs Paix as shareholders. 15The next meeting was held, as arranged, on 28 March. The minutes record the presence of Mr and Mrs Ehsman, Mr Brady, and Mr and Mrs Paix and Mr Frasca. They record (1/439): (1) IT WAS RESOLVED that until further notice all funding requirements be paid by each shareholder Group, not pro rata to % shareholding, but at 25% for each Shareholder Group, as a means of assisting Michael and Patricia Ehsman through their tight financial situation ... (4) IT WAS RESOLVED that all parties would pay equal amounts of AUD$36,000 by 29 March 1999 to facilitate payment of items tendered ... on basis of resolutions 1 and 2 abovementioned." 16The minutes were signed by Mr Brady as chairman. 17Mr Brady would arrange for DNB Global Corporation, in which he had a minority interest, to pay the company's accounts as they became due for payment. DNB would invoice the company which would obtain the funds from its shareholders to reimburse DNB. 18The practice continued until the meeting on 20 February 2001 (2/454). A decision was then taken to extend the second patent to the European Block of 18 countries. The minutes record that this would be very expensive, but was critically necessary. The resolution to proceed was passed unanimously and the minutes further record: "5. David Paix stated he had confirmation from Michael and Patti Ehsman that their finances had improved, and, as he could no longer afford to support them by continuing to pay at 25% shareholding, whilst only holding 5% shares, he moved that from this moment onwards each Shareholder Group pay their own funding requirement contributions specific to the shareholding that Shareholder Group has in the Company. In the case of He and Dawn Paix @ 5%, for Frank Frasca @ 5%, for Patti and Michael Ehsman @ 45% and David N Brady @ 45%, although noting that David N Brady had already paid much more than he was required to ... Vote: All in favour - unanimous". 19The next meeting of relevance took place on 9 June 2002 (2/490). Messrs Paix and Franca were appointed directors over the opposition of the Ehsmans, and Mrs Ehsman was replaced as secretary by Mr Paix. At the meeting on 30 June (2/495) the shareholdings of Mr and Mrs Paix and Mr Franca were increased to 15% and the shareholdings of the Ehsmans and Mr Brady were reduced to 35%. 20Mrs Ehsman was not present at the meeting on 1 August (2/523) and Mr Ehsman, who was, walked out during the meeting. 21The accounts of the company for the year ending 30 June 2002 were signed by its accountants and the defendants on 18 February 2003 (2/567). These showed shareholders' loan accounts of $1,604,911, including the Ehsmans' loan account of $312,349. 22On 11 February 2003 the defendants served notices of demand on the company for their loan account debts. At the meeting on 12 March (2/584) the parties agreed to try to work together for a trial period of three months, and the defendants agreed to suspend their demands if Mr Ehsman resigned as a director. He later did so. 23Development of the new invention proved difficult and expensive. The minutes of the meeting on 4 August 2004 (2/612), at which Mrs Ehsman was present, record: "3. Moneys verbally approved for shock resistance and guarantee from all parties. Final clarification of funds by Patricia Ehsman tomorrow. 4. David Brady (Chairman) to ring Switzerland tonight and agree in principle to proceed with overhaul of watch. Final clarification and confirmation to be given within 24 hours. If confirmed to DNB to proceed, DNB to send funds immediately and get work started" 24These resolutions were approved unanimously. The minutes record that the secretary later spoke to Mr Ehsman who confirmed that he had his share of the moneys and was ready to proceed. This information was passed on to the chairman. 25The minutes of the next meeting held on 24 August (2/616) record a statement by Mrs Ehsman that "she had the funds", and a statement, presumably by Mr Brady, that DNB had commissioned further development work on the watch and sent CHF 100,000 to the Swiss consultants. The minutes include: "7. There was total agreement to proceed on the revised costings noting that these costs may not be the final costs." 26The Judge found [32] that Mr and Mrs Ehsman made no further contributions after 24 August 2004. 27On 8 October a letter was sent to Mrs Ehsman by the defendants which referred to her approval for further development and willingness to contribute to the cost. They complained that payment had not been forthcoming (2/625). On 20 October notice was given (2/630) of a meeting on 9 November to discuss the sale of the company's assets "having regard to the difficulty being experienced ... in raising much-needed further working capital ... to the project." 28Mrs Ehsman did not attend the meeting which resolved (2/692) that the Ehsmans be informed that they could retain their own valuer to value the second patent. The meeting also noted that further working capital was required to protect the patent and develop the watch. 29Mrs Ehsman and her solicitor attended the meeting on 29 November. The minutes record the following resolutions passed over Mrs Ehsman's opposition (2/713): "14. FF, ... proposed a resolution: That having regard to the inability of the Ehsmans to agree with the other shareholders on the further development of its IP in its patented hinged electronic watch and the Ehsmans' refusal to contribute further necessary working capital an impasse had been reached which could best be resolved by the company selling its assets, paying creditors and distributing the remaining funds amongst the shareholders ... 15. FF ... proposed a 2 nd resolution: Chairman is authorised to investigate sale of Timentel assets by internal and external sale process and report back to the next Board meeting ...". 30The meeting on 7 December 2004 was also attended by Mrs Ehsman and her solicitor. The minutes record (2/730) that Mr Brady tabled an "Overview of moneys owed by Ehsmans in period from April to December 2003 (sic) detailing Ehsmans arrears for full period ...". Resolution 8 opposed by Mrs Ehsman was: "8. The Chairman stated bills needed to be paid including legals, Patent issues, ASIC & Williamson Chaseling and proposed that the 35% shareholders put in 10K each and the 15% shareholders put in a proportionate amounts ..." The motion, which was opposed by Mrs Ehsman, was carried. The minutes continued: "The chairman asked, in light of the motion being carried, would PE contribute her share, but she said no. The Chairman said we need to pay our bills, why won't you contribute. Mr Doyle [Mrs Ehsman's solicitor] then said that PE had voted against the motion. [He] then suggested the Chairman could put funds into the company as a loan, to pay the bills ...". 31On 21 December Mr Doyle e-mailed the company's solicitor (2/747): "A better option is for DNB Global to lend the money to Timentel on either a secured or unsecured basis." 32Mrs Ehsman did not attend the meeting on 12 January 2005 when the other directors resolved (2/771) to obtain an independent valuation with a view to the sale of the company's assets, with the first offer to shareholders. 33On 28 January the directors, other than Mrs Ehsman, approved the company's accounts for the year ended 30 June 2003 (2/778). These disclosed shareholder loans of $1,704,660, of which $330,494 was owed to the Ehsmans. On 21 February the defendants wrote to the Ehsmans drawing attention to their outstanding contributions of $75,000, asking them to honour their agreement and immediately pay what they owed (2/804). 34On 28 February, in the absence of Mrs Ehsman, the directors resolved to obtain a valuation of the company's assets from a firm in Switzerland (2/821). 35On 21 February (2/804) the other directors wrote to the Ehsmans again, asserting that they were in breach of the agreement to share in funding the company, and asking them to pay their overdue share of the expenses in the order of $75,000. There was no response. 36On 10 March the company sent an invoice (2/823) to the Ehsmans for $73,987.43 for their contributions to company costs from 6 August 2004 to 27 February 2005. There was no response. 37Mr Brady prepared a contribution reconciliation summary (2/837-9) which showed that the Ehsmans owed $81,853. On 13 April the company's solicitors sent a copy to the Ehsmans' solicitors with copies of the board minutes of 16 and 28 March 1999, and 20 February 2001. 38On 20 April Mr Brady sent a memorandum by facsimile to the other directors, including Mrs Ehsman (2/854-8). Amounts of CHF 60,890 plus VAT together with patent annuity fees were due for payment by 11 May if the company was to validate the second patent in the European Block. An invoice for this amount from the company's patent attorneys in Switzerland was attached (2/859). 39Mr Brady wrote (2/854): "... we need shareholder commitment to pay their shares of the necessary validation fee by 22 April 2005, with all respective shares of the necessary funds put in place to transfer no later than 06 May 2005. This is essential to securing and enhancing the value of the Company's IP Asset. ... an alternative may be for the Company to borrow the amount required on a short term loan to secure validation of the European Block Patent while the Company finds a buyer for its IP Assets as foreshadowed and proposed in recent Board meetings. If the shareholders are unable and unwilling to fund payment of the required validation fee I would recommend we seek a short term loan ...". 40Mr Brady proposed a loan which would be secured by a registered first charge in favour of the lender over the company's IP assets. The directors, other than Mrs Ehsman, who did not vote, signed copies of a circular resolution to seek a loan from an outside source. 41A board meeting on 29 April (2/866), which Mrs Ehsman did not attend, confirmed the circular resolution. Item 5 of the minutes stated: "Chairman stated he was instructed by the other four (4) directors of DNB Global that it was no longer prepared to carry debts on behalf of Timentel, particularly as the Ehsman component, up to 18.03.05 stood at above AUD $86,000.00, with no attempt made to pay anything by Ehsmans since before August 2004. A quick calculation was done which revealed a need for an amount of at or near AUD $120,000.00 to cover payments for the Patents, Williamson Chaseling and outstanding amounts not paid by Ehsmans to Williamson Chaseling and Sparke Helmore. FF moved that the Chairman and Secretary seek to borrow this amount on whatever terms were available and offer a First Registered Charge over the Company Assets, as this appeared the only way we could equitably satisfy creditors, plus secure and protect the Patents at this time." 42The resolution was carried. Mr Brady sent Mrs Ehsman a facsimile letter (2/868) which stated "3. The Board voted unanimously to seek loan funds to accommodate the requisite payment of the European Patent Block and offer a First Registered Charge over the Assets of the Company to a willing Funding Party." 43Mr Brady approached two banks which refused to lend without personal guarantees, and a financier who would only lend at an interest rate of 80% to 120% (black 263-5). Mr Paix approached another bank and a building society without success (black 359). 44On 3 May the company's solicitors wrote to the Ehsmans' solicitors (2/869) enclosing a copy of the valuation by Mr Spode of Les Artisans Horlogers of Switzerland who valued the company's assets at CHF 220,000, and the chairman's memoranda of 20, 28 and 29 April. The letter continued: "3.1 ... the Chairman and Secretary have had to start making inquiries with conventional lenders with a view to raising approximately $200,000 additional working capital from which the Company can pay the abovementioned European Block Patent validation fees and various other outstanding fees and charges owed to various service providers. 3.2 So far the approaches to conventional lenders have been unsuccessful and it seems likely that loan funds from private lenders will need to be called upon. Messrs Brady, Paix and Frasca are prepared to lend the company $200,000 but under strict conditions that those funds are secured by way of a Fixed and Floating Charge. 3.3 ... at the Company's next Board meeting on 9 May, the directors will ... consider, and if thought necessary, resolve to proceed with such further loans as may be available from shareholders or other sources ... and to secure the repayment of those loans by way of a first registered Fixed and Floating Charge over the Company's assets. 3.4 We are instructed to advise you that Messrs Brady, Paix and Frasca at least consider these steps are necessary and prudent having regard to the need to secure payment of the European Block Patent fee and the further development of the Company's IP Assets." 45Mrs Ehsman did not attend the meeting on 9 May at 12 noon, but Mr Brady received a faxed letter from her solicitors at 9.35 am (2/881). The solicitors said that their clients would like the opportunity to make their own independent inquiries about the Swiss valuation. The letter continued: "It may be that the Ehsmans are also prepared to lend money jointly on a secured basis, depending on the proposed terms of the loan." 46The minutes of that meeting (2/883) record the following: "5. The Chairman referred to the Company's urgent need for further working capital to cover various expenses and noted that he, Mr Frasca and Mr Paix had agreed in principle to provide a Loan Facility (Loan) of up to $246,000 to the Company to cover various expenses including the following:

At a glance

Court

Decision date

Before

Source

Judgment (3 paragraphs)

Parties

Cases Cited (5)

Cited By (1)