Scanlon v Sigiriya Capital Pty Ltd

Judgment 1YOUNG AJ: These proceedings, between a former employer and employee in the finance industry, are brought to determine which party is entitled to own a valuable parcel of shares. 2Those shares were placed with the plaintiff defeasibly. The placement was, on the plaintiff's evidence, a bonus being compensation for the alleged fact that he was being paid a salary below his market worth. 3The parties fell out. The shares concerned rocketed in value due to factors for which neither party can claim credit. The plaintiff claims that the shares are his. The defendant claims that because of the happening of certain events, the plaintiff's title determined and that the shares must be revested in it. 4The proceedings were heard by me on 25 and 26 February 2013. Mr P Kite SC and Mr G Boyce appeared for the plaintiff and Mr V Bedrossian appeared for the defendant. 5Having given a broad outline of what this case is all about, I must now turn to the details. 6The plaintiff commenced these proceedings seeking declaratory relief in respect of shares held by the plaintiff in Sirius Minerals plc, a company registered in the United Kingdom with an Australian subsidiary. He also seeks an injunction restraining the defendant from exercising any powers under the Loan Agreement to which I shall shortly refer by reason either of the conversion of the shares under the CREST Transfer Form, or the termination of the plaintiff's employment with the defendant. 7The defendant cross-claims, seeking declaratory relief and an order that the plaintiff (cross-defendant) take the steps necessary to transfer the shares to the defendant (cross-claimant). 8Key facts that are not in dispute include that the defendant is a company incorporated in Australia which carries on business giving advice specialising in investment in natural resources. The plaintiff was employed by the defendant as an "Investment Banking Executive" under a written contract dated 16 September 2009. He reported to Mr Fraser, who was the Executive Chairman and Managing Director of the defendant. 9On 8 November 2010, the defendant lent AU$47, 500 to the plaintiff under a written contract (the Loan Agreement) for the exclusive purpose of acquiring 2,500 shares in York Potash Ltd, a company registered in the United Kingdom. Counsel on both sides referred to this agreement as a "golden handcuff", creating an incentive for the plaintiff to continue his employment with the defendant and perhaps acting as extra compensation in light of a salary which may have been below market levels. The plaintiff acquired the shares under a Share Subscription Deed between himself and York Potash Ltd, also dated 8 November. 10In May 2010, the Fraser Family Trust (which was headed by Mr Fraser and, at the time, the sole member of York Potash) had entered into a memorandum of understanding with Sirius, granting Sirius an option to acquire the entirety of the shares in York Potash in exchange for 150 million Sirius shares. As is clear from its terms, the Loan Agreement contemplated that the 2,500 York Potash shares would be exchanged for the relevant number of Sirius shares. 11Sirius did exercise its option and on 17 January 2011 all persons, including the plaintiff, holding shares in York Potash sold their shares to Sirius in exchange for an allocation of shares in Sirius. The plaintiff received 7, 499, 850 Sirius shares in exchange for the 2,500 York Potash shares. 12Also on 17 January, Mr Fraser was appointed Chief Executive Officer and Managing Director of Sirius. 13Because of an extraordinarily good find of potash off the coast of Whitby, Yorkshire, the shares had a value of about AU$1.6 million in August 2012. If the plaintiff was entitled to pay out the loan agreement in cash, he would only need to pay about AU$58,575. 14I should now turn to the relevant parts of the Loan Agreement. 1 Definitions and interpretation 1.1 In this Agreement, unless the context requires another meaning: Approved Purpose means to fund the acquisition by the Borrower of 2,500 York Potash shares. Drawdown Date means the date on which the Loan is, or is to be, made to the Borrower under this Agreement. Early Termination means that, prior to the Final Repayment Date, the Borrower terminates its employment contract with the Lender, or its contract is terminated by the Lender due to a breach of that employment contract by the Borrower. Event of Default means an event listed in clause 11.1. Facility means the loan facility of $47,500 to be made available by the Lender to the Borrower under this Agreement (as reduced or cancelled in accordance with this Agreement). Final Repayment Dates means 8 November 2013. Security Interest means a right, interest, power or arrangement in relation to any property which provides security for, or protects against default by a person in, the payment or satisfaction of a debt, obligation or liability and any arrangement under which rights are subordinated to the rights of another party, and includes: (a) a mortgage, charge, bill of sale, pledge, deposit, lien, encumbrance, hypothecation or other security interest; (b) any other arrangement having the effect of conferring security (including any conditional sale, hire purchase or lease agreement, or arrangement for the retention of title or sale and repurchase arrangement); or (c) any contractual arrangement under which money or claims to, or the benefit of, a bank or other account may be applied, set-off or made subject to a combination of accounts. Shares means the York Potash Shares and/or the Sirius Option Shares. Sirius Option Shares means any Sirius shares received pursuant to the Share Subscription Deed and any outstanding entitlement to receive Tranche 1 Sirius shares or Tranche 2 Sirius shares which has arisen or may arise pursuant to the Share Subscription Deed. Transaction Documents means: (a) this Agreement; (b) the Share Subscription Deed; (c) each document which the Lender and Borrower agree in writing is a Transaction Document under this Agreement; and (d) each document entered into or provided under any of the documents described in paragraphs (a), (b) or (c), or for the purpose of amending or novating any of those documents. 2 The Loan 2.1 Subject to this Agreement, the Lender agrees to provide the Facility to the Borrower in one drawing. 2.2 The Borrower must use the Loan only for the Approved Purpose. ... 5 Repayment, prepayment and cancellation Repayment 5.1 Subject to clause 6.7, the Borrower must pay the Amount Owing (including any interest accrued under clause 4.1) in full to the Lender on the Final Repayment Date. 5.2 In the event of an Early Termination, repayment of the Loan may only be achieved as follows: (a) should Early Termination occur prior to the one year anniversary of the Drawdown Date, by the Borrower delivering clear and unencumbered title to 100% of the Shares to the Lender or its nominee, and issuing an irrevocable transfer notice to York Potash or to Sirius, or both, as the case may be, to have the Borrower's name on the relevant share register removed and replaced in favour of the Lender or its nominee in respect of the 100% of the Shares; or (b) should Early Termination occur after the one year anniversary of the Drawdown Date, by the borrower delivering: (i) cash in an amount equivalent to the figure calculated as the Early Termination Service divided by the Loan term, then multiplied by the Amount Owing; and (ii) clear and unencumbered title to that number of shares, representing a proportion of the total number of the Shares, calculated as the Early Termination Shortfall divided by the Loan Term, then multiplied by the total number of the Shares to the Lender or its nominee, and issuing an irrevocable transfer notice to York Potash or to Sirius, or both, as the case may be, to have the Borrower's name on the relevant share register removed and replaced in favour of the Lender or its nominee in respect of the proportion of the Shares as calculated pursuant to sub-clause 5.2(b)(ii). 5.3 In consideration for entering into this Agreement, the Borrower irrevocably appoints the Lender to be his attorney for the purposes of executing and delivering, in the name of the Borrower, all documents required to be executed and delivered by the Borrower under any portion of clause 5.2. Prepayment 5.4 Subject to clause 5.2, the Borrower may only prepay the Loan in cash with the written consent of the Lender or an Authorised Officer of the Lender. 5.5 Amounts prepaid may not be reborrowed under this Agreement. ... 9 Representations and warranties 9.1 The Borrower represents and warrants to the Lender in respect of itself that: ... (d) documents binding: the Transaction Documents constitute (or will, when signed and delivered, constitute) their respective legal, valid and binding obligations enforceable against it in accordance with their terms. ... (l) title: it will be the sole beneficial owner of the Shares purported to be charged or mortgaged by it free of any Security Interest or other third party right or interest other than the Permitted Security Interests... 10 Undertakings Positive undertakings 10.1 Unless the Lender or an Authorised Officer of the Lender otherwise agrees in writing, the Borrower must: ... (e) ranking of obligations: ensure that its obligations under the Transaction Documents at all times rank ahead of all its other obligations (other than those which on its winding-up, liquidation, dissolution or similar process must be preferred by operation of law) except for any priority agreement to which the Lender or an Authorised Officer of the Lender agrees in writing in respect of any Permitted Security Interest; Negative undertakings 10.2 Unless the Lender or an Authorised Officer of the Lender otherwise agrees in writing, the Borrower must not: (a) Security Interests: create or permit to exist a Security Interest over all or any part of its assets, revenues or business, other than a Permitted Security Interest; ... (c) Disposal: sell, pledge, encumber, assign, transfer, or take any economically similar action, or make any such offer, in relation to the Shares, nor permit the sale, encumbrance, assignment, transfer or economically similar action of the Shares in any manner, including such actions as writing covered options or other economically similar undertaking. 11 Events of Default 11.1 It is an Event of Default if: ... (c) other default: the Borrower fails to perform or observe any other obligation under a Transaction Document and: (i) the Lender considers that the failure or default cannot be remedied; or (ii) the Lender considers that the failure or default can be remedied but it is not remedied to the Lender's satisfaction within 3 Business Days (or any longer period the Lender of an Authorised Officer of the Lender approves) from the earlier of: (A) the date the Borrower became aware of the default or ought reasonably to have become aware of the default; and (B) receipt by the Borrower of a notice from the Lender requiring it to remedy the default. ... (k) undertakings: an undertaking given to the Lender or an agent or advisor of the Lender by or on behalf of the Borrower or an agent or advisor of the Borrower is not honoured strictly in accordance with its terms; ... 11.2 If an Event of Default occurs the Lender may by notice to the Borrower: (a) declare the Amount Owing to be either: (i) payable on demand; or (ii) immediately due and payable without further demand, notice or other legal formality of any kind; or (b) declare the Facility cancelled; or (c) declare the Amount Owing to be immediately due and payable without further demand, the Amount Owing to be satisfied only by delivery of the Shares. or make any or all of these declarations. 11.3 A notice given under clause 11.2 is effective on its receipt. 11.4 Subject to clause 5.2, if the Lender gives a notice under clause 11.2 the Borrower must immediately pay to the Lender the Amount Owing in full and in the form demanded in the notice under clause 11.2. In consideration for entering into this agreement, the Borrower irrevocably appoints the Lender to be its attorney for the purposes of executing and delivering, in the name of the Borrower, all documents required to be executed and delivered by the Borrower and sub-clause 11.2(c). ... 14 Assignment Assignment by the Borrower 14.1 The Borrower must not assign or otherwise transfer, create any charge, trust or other interest in or otherwise deal with a Transaction Document or a right, remedy, power, duty or obligation under a Transaction Document without the prior written consent of the Lender or an Authorised Officer of the Lender. ... 16 Preservation of rights ... Moratorium legislation 16.4 To the extend permitted by law, a provision of a law is excluded if it does or may, directly or indirectly: (a) lessen or vary in any other way the Borrower's obligations under a Transaction Document; or (b) delay, curtail or prevent or adversely affect in any other way the exercise by the Lender of any of its rights, remedies or powers under a Transaction Document. ... 18 General Provisions Consents and approvals 18.2 The Lender may give its approval or consent conditionally or unconditionally or withhold its approval or consent in its absolute discretion unless a Transaction Document expressly provides otherwise. (Emphasis added.) 15Sometime in early 2011, the plaintiff was told by the defendant that Mr Fraser would be pursuing his new role with Sirius on a full-time basis, and that the defendant's business activities would be winding down accordingly. 16The plaintiff says (and Mr Fraser gave no evidence so that there is no contrary version) that when both he and Mr Fraser were in London in the week of 17 January 2011, Mr Fraser said to the plaintiff, "Mate, I have some bad news for you. I've been talking to the Board. They have said that I cannot be CEO of Sirius and keep running Sigiriya as well. I'm sorry, but I am shutting it down." 17Subsequently, there were discussions with Mr Fraser about the plaintiff taking up employment with Sirius. 18In mid-February of that year, the defendant informed the plaintiff that his employment would be terminated at the end of the month, and that his upcoming salary would be his last. It also requested the plaintiff to sign a Deed of Release absolving the defendant of any outstanding liability towards the plaintiff, which the plaintiff refused to do. The plaintiff has received no salary payments from the defendant since 28 February 2011 19On 9 March 2011 the plaintiff entered into a written contract of employment with Sirius, with the role of "Manager of Business Development". The commencement date of the second contract was set as 17 January 2011. 20Later that year, the employment relationship appears to have soured and on 25 November 2011 the plaintiff received an email notifying him that his employment was suspended pending investigation into his conduct and performance. After some correspondence in early to mid December, the plaintiff received a letter from Mr Fraser on the Sirius Australia letterhead which purported to terminate his employment with both Sirius and Sigiriya. 21The letter made several allegations of unsatisfactory conduct, including alleged breaches of the plaintiff's employment obligations, and continued: In view of the breaches of your employment contracts with both Sirius and Sigiriya, as outlined above and in my letter dated 6 December 2011, I have decided to terminate your employment with both Sirius and Sigiriya. This decision is fully supported by the Boards of both companies. As a result of the termination of your employment contract with Sigiriya, the following provisions of clause 5 of the Loan Agreement executed on 8 November 2010 become operative: 5.2 In the event of an early termination, repayment of the Loan may only be achieved as follows: (b) should Early Termination occur after the one year anniversary of the Drawdown Date, by the Borrower delivering: i. cash in an amount equivalent to the figure calculated as the Early Termination Service divided by the Loan Term, then multiplied by the Amount Owing; and ii. clear and unencumbered title to that number of the Shares, representing a proportion of the total number of the Shares, calculated as the Early Termination Shortfall divided by the Term Loan, then multiplied by the total number of the Shares to the Lender or its nominee, and issuing an irrevocable transfer notice to York Potash or to Sirius, or both, as the case may be, to have the Borrower's name on the relevant share register removed and replaced in favour of the Lender or its nominee in respect of the proportion of the Shares as calculated pursuant to sub-clause 5.2(b)(ii). 5.3 In consideration for entering into this Agreement, the Borrower irrevocably appoints the Lender to be its attorney for the purposes of executing and delivering, in the name of the Borrower, all documents required to be executed and delivered by the Borrower under any portion of clause 5.2. You will receive a separate letter in relation to repayment of the Loan. 22Mr Fraser's reliance on clause 5.2(b) as opposed to clause 5.2(a) is consistent with the letter's attempted termination of the plaintiff's employment with the defendant as of 23 December 2011. 23However, it is now not in dispute that his employment with the defendant took place by agreement sometime at the end of February or in early March of 2011. If that letter had any validity, the relevant clause is therefore 5.2(a), the plaintiff's termination being prior to the one-year anniversary of the Drawdown Date being 8 November 2012. 24Through a letter dated 30 December 2011 by his solicitors, the plaintiff disputed, inter alia, the basis for his termination, or the allegation that his employment with the defendant continued after 28 February 2011, and the defendant's right to act under either clause 5.2 or 5.3 of the Loan Agreement. 25The plaintiff's view as to the timing of the termination must be correct as it is now admitted that the employment ceased on 28 February 2011. 26Before turning to the rival submissions, I must set out the facts concerning the plaintiff's dealings with JP Morgan. 27Although JP Morgan is popularly known as a prominent United States Finance House, the evidence in the present case shows that, actually, a person dealing with "JP Morgan" will probably be dealing with a separate corporation merely licensed to use the name JP Morgan and trading to some extent under the aegis and control of the American company. However, no point was taken in the case on this matter by either party. 28The plaintiff had a prior association with a senior officer of JP Morgan. He made use of this association to open an account with JP Morgan and also to obtain credit so that he could trade in shares with JP Morgan. 29The plaintiff gave evidence that he has the qualifications of Master of Financial Economics from Oxford and Master of Management from Cambridge. However, when cross-examined on the JP Morgan documents, one would not think that he showed any proper appreciation of the legal issues involved. 30The JP Morgan entity which whom the plaintiff opened an account was Bear Stearns. The "Customer Service Agreement" in clause 3 provided that each JP Morgan entity was given a lien and continuing security on all property carried or controlled through any JP Morgan entity. 31I will now turn to the rival submissions. The plaintiff's basic case is that there was no "Early Termination" of his employment with Sigiriya which would entitle the defendant to seek delivery of the Sirius shares pursuant to clause 5.2(a). 32Furthermore, although there is no doubt that the plaintiff converted his Sirius shares from certificated to uncertificated form and that that involved transferring them to JP Morgan to be held in a brokerage account, the plaintiff argues that this did not amount to a "Disposal" or other proscribed dealing which would entitle the defendant to succeed. 33In the alternative, the plaintiff argues that the reliance on clause 5.2(a) and/or the exercise of the discretion as to whether to apply it by the defendant is contrary to implied terms of good faith and reasonableness. 34The defendant argues that the termination by agreement which occurred in early 2011 falls within the definition of "Early Termination". It also argues that the conversion of the Sirius shares constitutes a "Disposal" or other proscribed dealing entitling it to seek delivery up of the shares. 35The defendant further argues that any implied term of good faith and/or reasonableness has been excluded in this case. In the alternative, the actions of the defendant are not contrary to such an implied term. 36I should note here that the thought crossed my mind the case would include an application for relief against forfeiture. The core complaint of the plaintiff appears to be that relinquishing the shares would amount to a windfall to the defendant which is unjustifiable in comparison with the actual prejudice suffered by reason of any alleged breach. However, despite prompting, no such case was attempted. Thus I can put that thought aside. 37For the same reason I need not consider whether the plaintiff's agreement with JP Morgan is valid or void for uncertainty, or whether there is a security interest in NSW which has not be stamped under the Duties Act 1997. 38Accordingly, I need to adjudicate on the following points which I now consider. As they are all interrelated, I need to deal with them in groups, which I will do under the following heads: A. Questions of liability