Stone Group v Taylor

8 SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION MASTER MACREADY TUESDAY 2 FEBRUARY 1999 4669/98 - STONE GROUP ASIA PACIFIC INVESTMENTS LIMITED v JOHNSON TAYLOR CORPORATE LIMITED JUDGMENT 1 MASTER: This matter is an application to set aside a statutory demand which was served by the defendant on the plaintiff. The statutory demand is dated 26 October 1998 and claims the sum of $102,400. The debt is said to be for an underwriting commission and management fee pursuant to an underwriting agreement between the parties as varied on 10 September 1998. 2 The claim for the underwriting fees concerns a capital raising which was done on behalf of the plaintiff. The capital to be raised was approximately $3.3 million and was not completely successful in that the whole amount was not raised. 3 The reasons why the statutory demand is sought to be set aside is that it is said that there is on offsetting claim either equal to or greater than the amount sought in the demand. 4 The basis of the offsetting claim is not the failure to raise the appropriate amount of capital, which was accepted, but another matter which seems to be on the periphery of the documentation which really relates to another desire of the plaintiff company, which was to increase its shareholder spread. Apparently it has some 200 shareholders and wanted to increase that to 300 in order to satisfy the Stock Exchange and the listing requirements. 5 There have been given in evidence a number of what might be described as pre-contractual representations. They are three in all. The first appears in par.12 of the affidavit of Mr Cheng who is the secretary of the plaintiff company, which was sworn 16 November 1998. In a discussion with persons from the defendant Mr Cheng in response to a question asked about shareholdings said he was told by the defendant's private client stockbroker that they had thirty-five very good licensed advisers, they usually had a good client base and should be able to give the spread. 6 Some time later, on 15 June, there was a further conversation (see par.15) in which Mr Cheng raised the fact that in fact they only had about 300 shareholders and wanted 200 more. The defendants stated that they would help and indicated that the defendant would have eighty-five advisers by 1 July 1998 and would have the capacity to help the plaintiff. They said, "We should get you the shareholders you need, at least 100 or more". Mr Cheng replied, "We want that in writing". 7 The following day, 26 June, a letter was sent in respect of the general arrangements and the shareholder spread was addressed in that. The letter said: "We refer you to cl.2.3 of the underwriting agreement. We are acutely conscious of the need in this case to increase the shareholder spread of Stone and we shall do everything possible to achieve a positive result for you. Whilst we can give no absolute assurances, it is reasonable for you to assume that we can deliver a further 100 shareholders and hopefully many more as part of the process". 8 These representations were all made prior to the execution of the underwriting agreement which obviously was in draft form because there was a reference to it in that letter. Clause 2.3 of the underwriting agreement provides: "Marketing. The underwriter agrees to use reasonable endeavours (short of paying additional fees or commissions) to encourage its sub-underwriting brokers to promote the Rights Issue among their clients in an effort to procure applications in respect of a shortfall, from as many non-members as is reasonably practical". 9 The full amount was not raised but that is not the matter of complaint. Only a few shareholders responded, some of those being existing ones and certainly the additional 100 shareholders were not achieved. 10 There are a number of matters which have been raised which it is said cause the application to fail. The first of these was evidence of the quantification of the offseting claim. In his affidavit Mr Cheng does not in any way deal with the question of the offset other than in par.28 where he annexes a letter of 9 November 1998 from his solicitors to the other side. That letter, because it was written at a time when clearly the parties were contemplating litigation, the demand having been issued, is not admissible as a business record. It was admitted on a limited basis under s.136 because as evidence only of the assertion and not evidence of the truth of the facts asserted. That letter in its terms does make a claim or an assertion as to what is the loss in damages. There were in fact seven matters: Legal fees, balance $54,632.48 Printing and artwork (prospectus) $26,345.00 Independent expert's report $17,500.00 Independent accountant's opinion $5,000.00 Consulting fees (non executive directors) $57,069.05 Air fare and accommodation expenses $12,882.80 Lost subscriptions (99 x 2000) $198,000.00 Total $371,429.33 11 As I have said, this is an assertion of damage and there is no evidence of it. This is somewhat important because if one pauses and considers the context in which this claim is made one has to bear in mind that there has been a partially successful capital raising which has gone ahead and, quite obviously, a number of the expenses would relate to that capital raising. How they could be described as damages suffered in respect of the limited matter complained of is simply not apparent. For instance the expert's reports, accountant's opinion, clearly all relate to matters concerned with the capital raising, which was successful to an extent. 12 There is then this elliptical description of lost subscriptions. What that refers to is not explained and how it is quantified is also not explained. In other words one has assertions of matters which on their face might well not be related to the representation which is complained about, but in fact to the capital raising which went ahead. 13 It has been urged on me that one has to have regard to these matters at a somewhat different level in evidentiary terms. Certainly in the context of considering whether an affidavit is a sufficient affidavit for the purposes of the section, somewhat less strictness applies. The matter has been dealt with in a number of cases and recently in Zenoust Imports v Alembic Chemical Works Ltd at 28 ASCR 465 where Santow J dealt with the extent to which an affidavit has to articulate the extent of the offsetting claim if it is to meet the minimum requirements. I hasten to add that in the present case the case has not been argued upon this basis but simply on the basis that there is no evidence of the amount of the claim. 14 However I do note in that case his Honour's view that the level of articulation is not high. There is a difference between that case and Sacron Constructions Pty Ltd v Concrite Quarries Pty Ltd (1997) 15 ACLC 1303, a decision of Emmett J. The affidavit in that case merely asserted a cross-claim equal to or greater than the amount claimed. 15 In the present case the affidavit in support does not even do this. Although I do note that in par.3 it says there is no agreement that the plaintiff has an offsetting claim. 16 Accordingly it does seem to me that when one comes to look at the question of what is the amount of the offsetting claim the court has to have some evidence on which it can base its decision. This is because the section requires it to determine the admitted amount after determining the amount of the offsetting claim. 17 Given the complete lack of explanation as to how the damages arise I think to even accept an assertion in respect of it is not appropriate. Accordingly I am not satisfied that there has been demonstrated an offsetting claim. 18 Another matter which has to be looked at is the question of the nature of the representation. If one looks at representations as to future conduct, they are what will be obtained in the future by way of additional shareholders in the company. That raises a problem of what is the necessary proof of the falsity of the representations as to future conduct. The matter arises because the claims are both under s.51 and 51A(i) of the Trade Practices Act. Under s.51A there is special provision dealing with the matter. Section 51A(i) deems the representations as to a future matter misleading unless the corporation had reasonable grounds for making it and under sub-s(ii) the onus of proof of reasonable grounds rests with the corporation making the statement. 19 In the present case the plaintiff has led absolutely no evidence of falsity of promise. The fact that the result was not achieved does not in any way prove the falsity of the promise. More is necessary. 20 In contrast if one looks at the evidence which has been put forward by the defendant one has a letter marked 30 October 1998 which details all the efforts made by the defendant to spread the possibility of the clients' shares amongst other brokers around Australia. There is listed a large number of brokers who have been contacted and there was discussion about the level of interest generated in the presentation. There is then reference to a critical factor in the lack of success in attracting investors being the fact that the share market over this time was below the issue price. It was said there was no incentive for investors to buy new issue shares. 21 Accordingly the only evidence of falsity which has been put forward would suggest that the defendant took reasonable steps to promote it. One might infer they had reasonable grounds for making the statements. For this reason I think also that there has been a failure to prove that there is an offsetting claim. Accordingly it seems to me that the offsetting claim had not been made out and accordingly I dismiss the summons and order the plaintiff to pay the defendant's costs.

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