Striker Resources Nl v Australian Goldfields Nl [2006] WASC 153 | Case summary

Striker Resources Nl v Australian Goldfields Nl [2006] WASC 153 | Case summary | Zoe

[142]

4 The defendant denies any liability to the plaintiff on the grounds that there was never an enforceable contract concluded between them for this underwriting. The defendant's position is that the underwriting agreement relied upon by the plaintiff is incomplete and uncertain and that, although over the passage of about nine months from July 1997 to March 1998 there were many discussions, other communications and negotiations between the two parties about settling the terms of a proposed underwriting, no concluded or certain agreement was ever reached between them and their mutual dealings concerning the underwriting never passed the point of inconclusive negotiations or at the most an agreement to agree. Because of this stance by the defendant, the plaintiff advances an alternative case that if (contrary to its primary position) there was no certain and enforceable underwriting agreement, there was nevertheless a mutual assumption by the parties that the underwriting agreement was binding and enforceable and created a legal obligation for the defendant to underwrite the proposed share issue. Furthermore, the plaintiff alleges that the defendant made a series of representations to the effect that the underwriting agreement was in place and was in the process of being implemented, including statements made in its published reports and accounts and to the ASX which resulted in an assumption, acted on by the plaintiff as known to the defendant, that the underwriting obligation existed. These representations, the ensuing assumption by the parties as to the binding effect of the underwriting, realised and accepted by the defendant give rise, on the plaintiff's case, to an estoppel preventing the defendant from retreating from its implied promise to complete the underwriting - Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387 - with the effect that the defendant is precluded from relying upon any unenforceability of the underwriting agreement and is liable for damages for its breach of that undertaking to the same extent as if the underwriting agreement had been valid and enforceable as a certain contract.

[157]

(a) Was there an enforceable contract between the plaintiff and the defendant for the latter to underwrite a capital raising by Striker by the issue of shares to the value of $7,500,000 set out in the secondary underwriting provisions in cl 10(2) of the underwriting agreement of 2 December 1996?

(b) If so, has there been a breach of that obligation by AGF by a repudiation of its alleged obligations in or about May, alternatively August 1998, or at some other date, entitling Striker to recover damages for the losses and expenses thereby caused?

(c) If the alleged secondary underwriting obligation contained in the underwriting agreement of 2 December 1996, does not constitute a binding contract because, as the defendant alleges, it is uncertain or incomplete, has there nevertheless been an estoppel arising from the representations of the defendant and the conduct of the parties which prevents the defendant from relying upon the unenforceability of the alleged contract?

(d) If there has been such an estoppel, what is the relief necessary to give it proper effect: Is the plaintiff entitled to damages as if an enforceable contract had existed or is it limited to some more restricted and, if so, what remedy?

(e) Is the defendant entitled to judgment on its counterclaim for $2.328 million for advances made by it to the plaintiff for working capital and other payments during the period May 1997 to March 1998 and, if so, is interest recoverable on any part of that claim?

(f) In the event that the plaintiff establishes an entitlement to a money claim against the defendant, is the plaintiff entitled to set some or all of that claim off against an equivalent amount of the defendant's counterclaim (if established), notwithstanding that the defendant is in liquidation and that the plaintiff's claim has only been finally established and quantified after the commencement of the winding up?

(g) In the event that the plaintiff's claim for damages fails but the defendant's counterclaim succeeds, is the plaintiff entitled to defeat the counterclaim or reduce it by reason of the alleged estoppel?

[250]

56 The position adopted by the plaintiff in relation to the defendant's contentions that the secondary underwriting agreement is uncertain or incomplete can now be stated. Striker submits that the new underwriting agreement is required to contain contingencies for termination which are "similar" to those contained in the existing underwriting agreement, apart from cl 10.1(u). Clause 10.1 defines the contingencies for the termination and those contingencies assume the existence of other clauses in the existing underwriting agreement, namely, cl 10.1(a) refers to cl 6.2 and cl 10.1(q) refers to cl 9. Hence, so the plaintiff submits, if a new underwriting agreement is to contain similar termination contingencies the new agreement must also contain the clauses of the existing underwriting agreement expressly referred to in the agreement of 2 December 1996 (Exhibit 3). Further, upon the plaintiff's approach, the operation of the contingencies in cl 10.1 is governed by the final words of that provision, which state that should AGF terminate the underwriting agreement pursuant to cl 10, it shall thereupon cease to be entitled to the payment of the underwriting commission pursuant to cl 8 but not the costs and fees incurred by AGF as specified in cl 11. As the submission runs, this necessarily provides that the new agreement will contain clauses to the effect of the existing cls 8 and 11. Clause 8 deals with the underwriting commission payable, cl 9 provides for the covenants by Striker and cl 11 covers underwriting costs. Hence, the very terms of cl 10.2, in the plaintiff's submission, address and provide for the existence of provisions dealing with underwriting commission, termination contingencies, other costs of underwriting and covenants by Striker and so supply the content on those subjects alleged to be absent, or subject to further agreement, by the defendant. According to the plaintiff, this construction is supported by cl 10.2 which refers to the underwriting agreement in respect of that pro rata issue which, by cl 1.1, is defined to mean the existing underwriting agreement - an indication that, subject to minor variations as necessary, the December 1996 underwriting agreement shall provide the model and content for the "new underwriting agreement".

[254]

60 The defendant next submitted that there was no agreement between the parties nor any mechanism for establishing the content of the prospectus which it was expressly recognised may be necessary for the new issue. It is true that, apart from recognising the need for a prospectus, the agreement of December 1996 did not make any express provision for its content. Nevertheless, the basic terms of the issue, the number of shares, the issue price, that the issue should be pro rata to existing shareholders, and that it should be for capital to finance the exploration and development activities proposed for the Kimberley/Ashmore tenements the subject of the agreements leading to the plaintiff's takeover of the shareholding in Jade Resources, mean that the major terms and purposes of the share issue were all identified and acknowledged. Obviously, much further content would be necessary in the prospectus but that would be largely determined by law (see Corporations Act, Ch 6D - Fundraising - see previously Corporations Law, Pt 7.11 and 7.12) and the historical and objective details relating to the ownership of the tenements, available geological and prospective information concerning them and the objective details about the plaintiff's financial position, accounts and share structure at the date of the issue which could be readily identified. Because the need for a prospectus was recognised and its content readily capable of ascertainment, I do not consider that there is any lack of certainty or completeness in this respect. It is equally important to note that nothing in the underwriting agreement of December 1996 made the defendant's underwriting obligation conditional or dependent upon the content of the proposed prospectus, yet it did provide for a number of "drop-out contingencies" through the incorporation of cl 10.1 (except for cl 10.1(u)) all of which, having regard to their terms, were protective of the defendant's financial interests so that, had approval of a proposed prospectus been considered important or necessary, one would expect to find provision to that effect among those contingencies. The absence of such a provision is, therefore, not insignificant.

[257]

63 The defendant also submits that nothing in cl 10.2 or in the underwriting agreement of 2 December 1996 adverted in any way to whether or not the proposed pro rata share issue was to be renounceable or non-renounceable by existing shareholders in Striker. The submissions on behalf of AGF were that if the entitlement to the new shares were to be renounceable that would give rise to a market in the rights to the new shares so that an existing shareholder who is disinclined to take up his pro rata entitlement would be able to dispose of his rights to do so to some third person or entity who, so it is to be presumed, would be more disposed to do so. By this means, so it was submitted, there would be a greater prospect of the share issue being fully subscribed or largely subscribed if the rights were to be renounceable than if they were not renounceable. Whether that is so or not is likely, in my view, to depend upon the market price of the quoted shares in Striker during the offer period and the manner in which the market measures the prospects for appreciation in Striker's shares, by the performance of the exploration and development which the capital raising was to finance. No conclusion in this regard can be drawn because of the absence of evidence as to the these matters and it is therefore not possible to conclude that a renounceable, rather than a non-renounceable share issue (or vice versa) would be more favourable for the underwriter. So far as it is necessary to do so, I consider that the wording of the cl 10.2 which refers to a "new issue of shares by the company by pro rata offer to all members of the company ... " implies that the offer is non-renounceable. The only evidence about the potential significance of the renouncability of the shares in the new issue was from the plaintiff's witnesses Mr Hart and Mr Dodd, each of whom said that whether the new share issue was renounceable or not would not affect the underwriter's obligation and this question never appears to have been an issue between the parties. I do not consider that the absence of any provision in the underwriting agreement relating to whether or not the new shares were to be renounceable or not renders the agreement uncertain or incomplete.

[314]

95 Next, the plaintiff alleges that its secretary, Mr Hart, presented a draft prospectus to the Striker board meeting of 23 January 1998 and that the plaintiff's board of directors resolved to form a committee containing representatives of Striker and the defendant to meet each week to progress the prospectus with completion to take place in mid-February. This board meeting of the plaintiff was attended by Messrs Naylor, Gore, Quek and Wong, the latter two being AGF nominated directors of the plaintiff. Not only does Exhibit 1, pages 18 and 19, confirm that such a meeting of the directors of Striker occurred on that date and resolved as the plaintiff alleges, but it reveals that in addition to four directors and the secretary of Striker attending the meeting (Wong and Quek also being directors of AGF), Messrs Michael Naylor and Brendan Gore attended by invitation. Those two were, respectively, a consultant to the defendant and the defendant's company secretary. AGF admits that such a meeting was held but otherwise denies that it resolved, as alleged, and pleads further that by the terms of the draft prospectus and the incomplete matters contained in the draft prospectus, such conduct did not amount to a representation as alleged by the defendant. The only evidence on the issue is that the plaintiff resolved, as is recorded in the minutes of the directors' meeting of 23 January 1998, and I find that it did. I also find that this resolution and the proposed steps to form a committee upon which representatives of both parties were to serve to progress the prospectus with completion in mid February, constituted the understanding upon which both parties were then working, namely, the preparation of the prospectus for a new share issue to be underwritten by the defendant to raise capital in terms of the earlier agreement and the announcements to the ASX. Plainly, the common assumption by the parties at this date was that the capital raising was proceeding in accordance with the secondary underwriting arrangements set out in the December 1996 agreement.

[320]

100 The defendant simply denies that any such statements were made and pleads further that if they were made they did not constitute conduct giving rise to representations as alleged by the plaintiff and that any reliance upon them was unreasonable. However, I am satisfied that at the board meeting of the plaintiff on 30 September 1997 its directors, who were also directors of its major shareholder AGF, requested the deferment of the proposed share issue until the first quarter of 1998, for the reasons recorded and that this resulted in concern being expressed by the non AGF directors of Striker leading them to seek interim funding by the $3,000,000 convertible note issue and for a new underwriting agreement that was to be "unconditional" which, in the context, must be taken to be one without any of the drop-out clauses, thus giving an unconditional commitment to the underwriting, the proposed share issue and access to a minimum of $7,500,000 for new working capital. I find this to reflect the common approach by both parties that the new share issue would proceed, underwritten by AGF as originally agreed, but that rather than taking place in the second half of 1997 or "as soon as possible after 30 June 1997" it would be deferred to the first quarter of 1998 because of perceived market conditions. This was absorbed, somewhat reluctantly by the other directors of Striker who raised the need for interim working capital pending the share issue and who also sought a new underwriting agreement which would give an unconditional commitment by AGF. This, in my view, confirms the mutual reliance of parties on the proposed share issue to raise the capital needed for the diamond exploration and development activities always contemplated but a postponement of that giving rise to the need for some alternative short term source of capital or working finance. Involving as it does a deferment of the underwriting obligation of AGF it maintains the assumption that the share issue would proceed and be underwritten by the defendant but, simply, that it would be delayed and that the delay gave rise to a desire for other interim arrangements.

[366]

131 The more is this approach apposite in the present case when one accepts, as is unavoidable, the fact that full performance of the underwriting contract, involving as it did a pro rata offer of new shares to existing shareholders, would have resulted in the defendant having the opportunity to take up a further 19 per cent or so of the shares offered by virtue of its then existing shareholding in Striker, to say nothing of the prospect of enlarging its holding to a greater extent had it been required to take up any shortfall of the issue. This means that it is impossible to grant relief which would, in effect, see the full performance of the assurance that a new share issue would be fully underwritten by the defendant, nor to grant equitable relief in the form of monetary compensation which would be fully equal to the damages which would be recoverable at common law had an enforceable underwriting contract existed. The measure of monetary relief must be to relieve against the consequences and reliance upon the expectation generated in the plaintiff, to the knowledge of the defendant, by acting on the common assumption or representation. In some cases, perhaps the present, this may equal or approximate the damages which would have been recoverable had an enforceable underwriting contract existed, but there is no reason that that should always be the case and the particular result will depend on the particular consequences caused by reliance on the representation or assumptions generated by the defendant's conduct. For a pre-Giumelli analysis of the limitations on relief, or in cases of promissory estoppel distinguishing between expectation loss and restitutionary loss, see Carter: "Contract Restitution and Promissory Estoppel" (1989) 12 UNSW Law Journal at 30 and, in particular, the discussion of Austotel Pty Ltd v Franklins Self Serve Pty Ltd (1989) 16 NSWLR 582. Hence, it is unnecessary to address the difficult question of whether "expectation damages" could be a component in the monetary relief granted in such a case of estoppel, where such damages would be available for breach of contract - cf Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64.

[367]

132 In the present case, I have already examined the consequences of the estoppel arising from accepting the interim payments and the measure of relief appropriate to that aspect of the estoppel. However, had the plaintiff's only entitlement to relief been dependent on this promissory estoppel, it would be necessary to examine the relief appropriate to the consequences of the removal of the assurance that the underwriting would be fully underwritten by the defendant. It seems to me that, as a matter of principle, losses or expenses suffered by the plaintiff during the period when it was acting on the expectation that the defendant would fully underwrite the new share issue, that is, from early July 1997 until August 1998, should be recoverable under this doctrine. In addition, the costs and expenses occasioned to the plaintiff by further delay before substitute financial accommodation or capital could be raised should also come within the purview of this relief. The additional costs, if any, of raising necessary working capital or other financial accommodation do not, however, seem to me to be necessarily recoverable. Such initial costs would clearly be recoverable in an action for damages for breach of an enforceable contract to perform the underwriting as flowing directly from the breach of contract involved. However, that does not seem to me to be a measure of relief for such an estoppel because of its connection with the enforcement of the particular contract concerned. For example, the cost of raising capital from alternative sources or obtaining financial accommodation may have been much greater than the cost which the defendant represented would be involved in raising capital by its underwriting, but that does not mean that that additional cost should be recoverable as relief for the estoppel so created, because reliance on the common assumption or representation has not had the effect, on that hypothesis, of depriving the plaintiff of an opportunity to raise the capital or obtain the financial accommodation at that cheaper rate. However, if reliance upon the representation or assumption which forms the basis of the estoppel did in fact deprive the plaintiff of an opportunity to raise capital more cheaply or earlier from other sources, the onus of proof of which would rest upon the plaintiff, then that would be a detriment resulting from reliance upon the representation or common assumption which would warrant a corresponding measure of relief.

Striker Resources Nl v Australian Goldfields Nl

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (655 paragraphs)

Striker Resources Nl v Australian Goldfields Nl (In Liq) [2006] WASC 153 (2 August 2006)

(a) AGF's announcement to the ASX of 15 July 1997

(b) The fax transmission from Naylor of AGF to Hart of Striker dated 25 July 1997

(c) The participation by representatives of Striker and of AGF during August 1997 to March 1998 and efforts to draft a proposed prospectus and undertaking of due diligence exercise for the implementation of the secondary underwriting agreement

(d) Statements by AGF nominated directors of Striker at the plaintiff's directors' meetings during July 1997 to March 1998

(e) Oral statement made by Gore of AGF to Hart of Striker on 29 October 1997

(f) Oral statement by Naylor of AGF to Hart of Striker on 2 December 1997

(g) The letter from Quek of AGF to Messrs Price Waterhouse dated 12 December 1997

(h) The notes to Striker's financial statements for 31 March 1997 and 30 September 1997

(i) Note 30A to the defendant's financial statements of 30 June 1997

(j) The absence of any notification or advice from AGF to Striker that it did not intend to give effect to the secondary underwriting commitment or that this was not binding upon the defendant

(a) The suspension of Striker's shares on the quotation on the ASX on 9 March 1998

(b) Variation of the terms of the New Sage Joint Venture

Parties

Legislation Cited (1)

Cases Cited (66)