Stephen Hooker v Infinity Systems Pty Ltd; Ian James Purchas v Infinity Systems Pty Ltd

Stephen Hooker James Wilson Blue Radish Inc. Ltd Infinity Systems Pty Ltd (ACN 106 672 280) PARTIES : Ian James Purchas (in his capacity as receiver and manager of the First Defendant) Nicholas Craig Malanos (in his capacity as receiver and manager of the First Defendant) Infinity Systems Pty Ltd (Receiver & Manager appointed) (ACN 106 672 280) SecureNet Monitoring Pty Ltd Andrew Wilson

4635/2007 A.J. Abadee (Plaintiffs) COUNSEL : 4635/2007 J.T. Johnson (Second and Third Defendants) 1257/2008 J. Hogan-Doran (Plaintiffs) 1257/2008 F. Salama (Second Defendant)

4635/2007 Thompson Eslick Solicitors (Plaintiffs) SOLICITORS : 4635/2007 TressCox Lawyers (Second and Third Defendants) 1257/2008 Eakin McCaffery Cox (Plaintiffs) 1257/2008 Worthington Williams Lawyers (Second Defendant)

• 9 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

4635/2007 STEPHEN HOOKER -V- INFINITY SYSTEMS PTY LTD (ACN 106 672 280) 1257/2008 IAN JAMES PURCHAS AND NICHOLAS MALANOS -V- INFINITY SYSTEMS PTY LTD (RECEIVER & MANAGER APPOINTED) (ACN 106 672 280) EX TEMPORE JUDGMENT 1 HIS HONOUR: There are two applications before the Court. 2 The first, in proceedings 4635/2007, is brought by Mr Stephen Hooker, Mr James Wilson and Blue Radish Inc Ltd, a company associated with Mr Hooker, for an order under s 237(1) of the Corporations Act 2001 (Cth) ("the Act") for leave to bring proceedings in the name of the first defendant ("Infinity" or "the Company" as the case may be) and the second defendant SecureNet Monitoring Pty Ltd ("SecureNet") against the third defendant, Mr A Wilson. An ancillary order is sought that Mr John Frederick Lord be appointed an independent investigator under s 241 of the Act. I shall refer to these proceedings as "the derivative proceedings". 3 On 17 January 2008 Messrs Ian James Purchas and Mr Nicholas Craig Malanos ("the receivers") were appointed receivers and managers to Infinity by a creditor holding a charge dated 19 February 2007. 4 The second, in proceedings 1257/2008, commenced in this Court on 25 January 2008, is by the receivers for orders restraining Mr A Wilson from obstructing or hindering them in the performance of their functions, and for ancillary orders concerning access to Infinity's books and records. I shall refer to these proceedings as "the receivers' proceedings".

5 Both proceedings were heard concurrently. I initially made no order that evidence in one be evidence in the other. During the course of the hearing the true extent of the relationship between the proceedings emerged and I ordered that evidence in one be evidence in the other. 6 In the derivative proceedings, Mr A Abadee of counsel appeared for the plaintiffs and Mr J T Johnson of counsel appeared for SecureNet and Mr A Wilson. 7 In the receivers' proceedings Mr J Hogan-Doran of counsel appeared for the receivers and Mr F Salama of counsel appeared for Mr A Wilson. 8 Mr Hogan-Doran was not instructed in the derivative proceedings but informed the Court that the receivers neither consented to nor opposed the relief sought on behalf of the plaintiffs. Mr Johnson for the second and third defendants, that is SecureNet and Mr A Wilson, opposed the orders sought. 9 Mr Salama's position was restricted to seeking an adjournment on the grounds that Mr A Wilson had very recently retained different solicitors in the receivers' proceedings. His solicitors in the derivative proceedings had, however, remained constant. 10 On 25 January 2008 the Court was informed that solicitors TressCox, who had throughout appeared for SecureNet and Mr A Wilson in the derivative proceedings, would not be appearing today and that a notice of ceasing to act would be filed in due course. However, I was informed from the Bar table by Mr Johnson that no such notice was filed and that those solicitors remained on the record for the defendants although the intervening appointment of the receivers meant that they had no effective retainer for Infinity. 11 It is necessary to set out briefly the factual circumstances which give rise to the derivative proceedings. 12 On 1 April 2005 SecureNet was incorporated as a wholly owned subsidiary of Infinity. 13 Mr A Wilson was associated with a company called QSS Security Systems Pty Ltd ("QSS") which developed an automated security system. By agreement in 2005 Infinity acquired from QSS the intellectual property rights related to the system (sometimes called the platform). Infinity in turn entered into an agreement with SecureNet granting to SecureNet a non-transferable licence to use the intellectual property. 14 In about 2006 Mr Hooker acquired 7 per cent of Infinity. 15 On 29 May 2006 a shareholders agreement was entered into between Mr A Wilson, Mr James Wilson, Mr Tait-Styles, Mr Hooker and Infinity. The shareholders agreement establishes and regulates rights and obligations in respect of the ownership of the Company and the management and conduct of its business. 16 Clause 28.1(a) provides that "Each Shareholder covenants and agrees with the other Shareholders and the Company as follows: (a) the Shareholder will cause the Business to be conducted solely through the Company". 17 In early 2007 Mr Hooker's shares were transferred to the third plaintiff, Blue Radish Inc. Ltd, and it agreed to be bound by the terms of the shareholders agreement. 18 Mr Hooker had an involvement in the business of Infinity and SecureNet. Amongst others he reviewed and prepared business proposals for the marketing of the platform. Infinity and SecureNet entered into various licence agreements. There was a proposal for its product to be licensed to a Canadian company, Tyco, but the evidence establishes that this did not occur. Subsequently a licence agreement was entered into between Tyco and another entity, SecureNet Systems AG ("the Swiss company") which was established by Mr A Wilson in about August 2007. This happened after advice had been obtained from Ernst & Young about setting up a foreign corporation as part of a plan to exploit the platform. 19 At the time the establishment of the Swiss company was being considered an issue between the parties concerned the fact that the arrangements contemplated involved the Swiss company having a shareholders' structure which did not include Mr Hooker's interests, as well as a proposed arrangement which (Mr Hooker contends) involved the diminution of the value of Infinity's intellectual property rights and their potential exploitation by their transfer, in effect, to the Swiss company. 20 The complaint which the plaintiffs make, and which forms the basis for derivative proceedings, is concisely set out in a letter dated 14 August 2007 from the plaintiffs' solicitor to Infinity. In substance, (and it is not necessary to deal in great detail with it for the purposes of an application such as this), the assertion is that benefits and opportunities which properly belong to Infinity and SecureNet are being diverted to the Swiss company at the instance of Mr A Wilson, to the detriment of Infinity.

21 It was also put that what was proposed in relation to the Swiss company involved a breach by Infinity of its obligations under cl 28.1(a) of the shareholders agreement which requires that the business be conducted solely through Infinity. 22 On behalf of the second and third defendants there was read an affidavit sworn 30 January 2008 by David John Thrum, the chief executive officer of Infinity. An attachment to it was a licence agreement dated 30 August 2007 between Infinity and the Swiss company. He also deposes to the fact that there is substantial doubt about an investment from Tyco into Infinity. 23 Section 237(1) of the Act provides as follows: "A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings."

24 Section 237(2) provides as follows: "The court must grant the application if it is satisfied that: (a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and (b) the applicant is acting in good faith; and (c) it is in the best interests of the company that the applicant be granted leave; and (d) if the applicant is applying for leave to bring proceedings -- there is a serious questions to be tried; and (e) either: (i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or (ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied."

25 Mr Johnson put that I could not be satisfied that it is probable that the Company will not itself bring the proceedings or properly take responsibility for them or the steps in them. The receivers are in possession of all of the Company's assets and undertaking including any chose of action against Mr A Wilson or any other person or entity and their position is neutral. The appointment of the receivers was at the instance of an arm's-length creditor, and there is no challenge to their appointment. 26 Mr Abadee put that a solution was for the Court to make a conditional order on the basis that leave be granted if the receivers do not proceed. In the alternative he put that the proceedings should be adjourned to enable the position of the receivers to become known. 27 The present neutral position of the receivers is, it appears to me, amongst others, a consequence of the fact that (as the evidence establishes) access to the Company's records and other assets has been denied to them. 28 I am not satisfied that it is probable that the Company will not bring the proceedings or properly take responsibility for them or for the steps in them. Pending proper consideration by the receivers as to whether they will or will not bring these proceedings or take responsibility for them, I am not satisfied that the requirements of s 237(2)(a) of the Act have been met. 29 Mr Johnson further submitted that I could not be satisfied that the applicant or the plaintiffs are acting in good faith. Ultimately, it seemed to me, his submissions turned on what he put was an open offer from the defendants including Mr A Wilson to bring the shareholdings of the Swiss company into line with those in Infinity. 30 The open offer was contained in a letter from TressCox dated 17 January 2008. Paragraph 1 of that letter put the relevant part of the open offer in the following terms: "All existing shareholders in Infinity Systems Pty Ltd will be afforded the opportunity to hold proportionate shareholdings in SecureNet Systems AG".

31 Mr Johnson also put that it was not in the best interests of the Company that the plaintiffs be granted leave because, on the evidence before the Court, the value of the opportunities which are asserted to have been lost and the ability to recover any damages or equitable compensation, upon which he put the onus lay on the plaintiffs, had not been established. 32 I am satisfied that the plaintiffs are acting in good faith. The evidence establishes a clear serious question to be tried as to whether there has been a breach of the shareholders agreement, but, more importantly, whether there have been breaches by Mr A Wilson of his fiduciary (or statutory) duties to Infinity. 33 It is not appropriate at this stage of the proceedings to embark upon an investigation of what, ultimately, any claim for equitable compensation might amount to. In proceedings such as these it is almost inevitable that one of the claims for relief will be for the imposition of a constructive trust on entities or persons holding benefits and assets, which it will be asserted are properly the property of, and enured for the benefit of, Infinity and SecureNet. 34 It also seems to me that the submission with respect to the open offer does not deal with the problem which has arisen. The question is not the particular position of the individual shareholders in Infinity, but rather whether the rights and entitlements of Infinity or its subsidiary have been infringed. 35 Mr Abadee accepted that at this point the evidence did not sufficiently clearly indicate that there was a separate claim at the instance of SecureNet. He put that the position of SecureNet was not the "fulcrum" of the claim. 36 The predominant issue is likely to be whether there have been breaches by Mr A Wilson in respect of obligations owed to Infinity and whether there are persons who are in possession of property of Infinity or who have knowingly participated in any such breach. 37 It is not possible, nor appropriate, to say anything more at this stage of the proceedings than that there is a serious issue to be tried. 38 Given I am not satisfied that the receivers will not proceed, I decline to grant the relief sought. I also consider it inappropriate to appoint an independent inspector at this time. 39 Mr Johnson put as a primary submission in the derivative proceedings, on behalf both of SecureNet and Mr A Wilson, that there was no challenge to the appointment of the receivers. 40 Perhaps remarkably, a submission was made by Mr Salama, appearing for Mr A Wilson in the receivers' proceedings, that an adjournment of those proceedings should be granted because it was intended to impeach the appointment of the receivers. This position appeared to me to be inconsistent with the stance of Mr A Wilson in the derivative proceedings in which he relied on the fact that there was no challenge to the appointment. 41 I gave counsel an opportunity to reconsider their respective positions and was informed that the one which I should accept as being put by Mr A Wilson was that there was no challenge to the appointment of the receivers. 42 Mr Salama fairly conceded that he could not put anything as to the balance of convenience favouring an adjournment. He put his case for an adjournment only on the basis that solicitors had only recently been instructed by Mr Wilson. 43 There is no basis for the adjournment application to succeed. The receivers were appointed by an arm's-length creditor and the evidence is that they are being hindered or obstructed in the carrying out of their duties pursuant to that appointment. 44 There will be orders accordingly. **********

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