BETWEEN : TRAFALGAR WEST INVESTMENTS PTY LTD as trustee for the TRAFALGAR WEST INVESTMENTS TRUST

Application to extend interim injunction - Oppression action - Restraint sought against rights issue - Family corporation

Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57

Fexuto v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672

(This judgment was delivered extemporaneously on 20 April 2011 and has been edited from the transcript.)

1 This is a contested application seeking to extend until trial, an interim injunction that was for all intents and purposes obtained ex parte by the plaintiff on 25 March 2011. There is a vast amount of affidavit material filed in this oppression action, seeking to extend the interim injunction to a trial of COR 59 of 2011. In particular there is Mr Jebb's five volume affidavit which was before Heenan J on 25 March 2011.

2 Adding to the voluminous extent of materials in the oppression injunction application is the interrelationship the action carries to the proceedings in COR 138 of 2010, in which the plaintiff (Trafalgar) was seeking access to documents, invoking s 247A of the Corporations Act 2001 (Cth). It was also seeking to enforce compliance with orders in respect of notices which it had issued to the first defendant (Superior Lawns) pursuant to s 293 of the Corporations Act. Trafalgar is a 30% shareholder in Superior Lawns. Accordingly, this action and COR 138 of 2010 are inherently interrelated. Both are before me today.

3 I will first deal with the vestiges of some aspects of controversy in COR 138 of 2010, concerning Trafalgar seeking to enforce orders for an audit of financial statements of Superior Lawns for the financial year ended 30 June 2009. The related issue presently inhibiting an audit from being completed (and there seems to be little dispute that it must be under s 293 and so should obviously be completed as soon as possible), is one of money. More particularly, there arises the issue of the funding of the performance of the remaining audit work by the accounting firm engaged to complete the audit.

4 There is a significant cost dimension to the s 293 work which Trafalgar has caused to be required, not only in respect of how much money has to be paid to auditors, but also the accountants of the first defendant will need to be paid for their professional work in gathering and marshalling much financial and records information, in order for the auditors to then complete their audit work.

5 It seems that to date there has been at least $50,000 worth of accounting work which has already accrued by way of imposed expenditure upon the first defendant, just as regards the currently incomplete audit of the June 2009 financial accounts of Superior Lawns. Since it has long been a family company, Superior Lawns has never before formally reported, or needed to have had its annual financial accounts audited.

6 Superior Lawns therefore has kept minimal records, consistent with its limited reporting obligations as essentially, a family proprietary corporation.

7 That was the case at least until 2006, when the plaintiff, Trafalgar (the controlling personality behind which is Mr Patrick Jebb), was consensually allotted shares and became a 30% shareholder in the first defendant. That Trafalgar 30% shareholding interest is the foundation stone for an oppression claim that is the subject matter of COR 59 of 2011.

8 But in COR 138 of 2010, the controversy is really over a 'raising of money' issue, in terms of at least $20,000 to $30,000 that is needed to pay for a completion of auditing work by accountants Grant Thornton which is started, but not yet finished, in respect of the 30 June 2009 audit. Money is the problem holding up completion of the 2009 audit.

9 It is obviously in everyone's interest that the 2009 audit work be swiftly completed. No conceptual resistance is raised by any of the defendants against that. Rather, they only express concerns of financial pragmatism as to how the 2009 auditing exercise is going to be funded or, expressed more crudely, where the money to pay the accountants and auditors will come from.

10 The oppression action COR 59 of 2011 is essentially between the same parties, albeit with one extra defendant (Damien Craig Flugge). An interim injunction application in this action was heard urgently before Heenan J on a Friday afternoon, 25 March 2011, in circumstances where a voluminous five volume affidavit of Mr Jebb (which obviously took some considerable time to assemble and prepare) and further materials were submitted to the Court to sustain urgent interim injunctive relief. The originating process sought on behalf of Trafalgar, as plaintiff, a very significant amount of range relief on the invocation of s 232 and s 233 of the Corporations Act; that is, for allegedly oppressive conduct against Trafalgar as a 30% shareholder in Superior Lawns.

11 The duty judge did not have any real opportunity to consider the voluminous materials, in the very urgent circumstances of Friday afternoon 25 March 2011. He granted only interim relief. Relief essentially, at that time, could not realistically be opposed by the defendants, save for pointing out that they and their solicitors had received a voluminous amount of material very late and so, had no real opportunity to consider it. The defendants did, however, raise one issue over the worth of an undertaking given by Trafalgar. The judge recognised the legitimacy of that concern and added a requirement that Mr Jebb provide his individual undertaking as to damages to sustain the interim injunction. That was done.

12 This is the inter partes interlocutory application on notice. Both sides now have filed extensive written submissions. They have each filed further affidavit materials in augmentation to their submissions, beyond the one sided position before the Court on 25 March 2011.

13 Still, the test articulated by the High Court for interlocutory injunctions in Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57 as to the need for the demonstration by an applicant of a serious question and for the balance of convenience to favour the grant, needs to be addressed. It is here addressed in a framework of showing serious questions that would underpin final relief at a trial on the oppression cause of action, which is the subject matter of the originating process of 24 March 2011, and then assessing overall the balance of convenience.

14 By way of a brief background, Mr Jebb's five volume affidavit identifies some 37 instances of what might be neutrally argued, 'irregularities' in how it is alleged Superior Lawns has in the past conducted its business and affairs. The exercise goes back some considerable time, commencing with negotiations for Mr Jebb to work his way into the management of the business, by forgoing salary from the time that he became a director and 30% shareholder, up to the time that he resigned as a director of Superior Lawns in about April 2009. Trafalgar remains a 30% shareholder in Superior Lawns.

15 The interim injunction, and now the requested extension of it to trial, sought by interlocutory injunction, is predicated upon a recently foreshadowed capital raising or rights issue (with a view to raising funds) by Superior Lawns and about which Trafalgar strongly complains that it is likely to be prejudiced by being diluted downwards from its 30% shareholding interest.

16 A consequence of the capital raising being pursued is that all shareholders in Superior Lawns have received an invitation to subscribe further funds. In the case of Trafalgar as a 30% shareholder, it has been offered three million shares on the basis of subscription at 10 cents each, constituting a contribution of $300,000.

17 Trafalgar has not said at this time whether it proposes to take up that invitation to subscribe, or not. It might subscribe, in which case it would have to pay $300,000. But Trafalgar expresses concerns now about the potential misuse of any money raised by the board of Superior Lawns. Trafalgar points to the 37 catalogued instances of alleged irregularity. It says that it does not hold any optimism as to the legitimacy of how subscription funds would be applied in future. Nevertheless, Trafalgar's position is that it has not yet made a decision about whether to subscribe or not. Obviously it does not want to be diluted further from its 30% minority shareholding position. But the court of course at a trial is not constrained as regards the buyout relief it might order to fixing itself to an assessment of the interest held by Trafalgar at trial (i.e. post dilution). It might for instance think it appropriate to assess the case for valuation and mandatory buyout orders at the time proceedings were issued, or at some other just date.

18 The funds sought to be raised were said by Superior Lawns to be for a threefold purpose. First was in order to facilitate audit litigation. Second was to repay loans to Superior Lawns by a trust company associated with the Flugges (the second and third defendants). Third was for a somewhat generically expressed one-word description of 'operations'.

19 Trafalgar says that it has been put in a position of prejudice by the capital raising, that the basis upon which the funds are being raised needs to be analysed and that the threefold expression as to the need for the funds as at 18 March 2011 is, on analysis, not sustainable. It suggests that the capital raising is implemented for an improper purpose by the directors of Superior Lawns, mainly to dilute its interest. However, the basis for the assertion of impropriety by the directors is only said to be by way of inference from what is proposed. I would not draw any inference of impropriety based on what has been filed, by inference or otherwise.

20 The injunction is sought on the basis that essentially Superior Lawns is said, by reference to an analysis undertaken of (QuickBooks) accounts and records (recently produced for the period up to early December 2010, in COR 138 of 2010), that money does not really need to be raised in order to fund a still incomplete 2009 audit.

21 From these QuickBooks accounts, tracking of the levels of the Superior Lawns bank overdraft back to 2010, it is said that Superior Lawns is doing well in a cashflow sense. It has a $220,000 overdraft limit and has not yet drawn upon the overdraft. It is argued that Superior Lawns is at liberty to access any surfeit of funds on its trading account or its overdraft if needed, in order to find any extra money to fund completion costs associated with the 2009 audit. It is also said that a capital raising based upon funding a resistance to Trafalgar's litigation, as Trafalgar sees it, is an arguable improper purpose.

22 Trafalgar attacks the second expressed basis of the need for funds in terms of repaying a loan on the loan accounts of the Flugges or their associated trustee in the short term. It argues that those very loans are the subject of challenge on the basis of them not being legitimate. They should be set aside, ignored or recaptured. Those allegations arise within some of the 37 instances of catalogued irregularity that are complained about. So, any attempt in the short term to repay those loans is argued to be improper and therefore not a proper basis to justify the capital raising.

23 The third basis for the capital raising, namely 'operations' is pointed to by Trafalgar as essentially lacking requisite detail. By analysis to the Superior Lawns QuickBooks accounts, raising money for operations at the present time is said to be unwarranted.

24 The position of all the defendants in response, both through affidavits sworn by Ms de Roo (an accountant who has for many years acted for the first defendant), and by Mr Flugge's affidavits, is that additional funds are necessary at this time. They are said to be required in order to properly function. The first defendant's options as regards funds are either from debt or equity and that an equity raising at this time is prudent and necessary.

25 It is difficult for anyone not a member of the board of directors of an operational business enterprise to second guess a board of directors in terms of whether or not the company should be allowed to raise funds under a capital raising. It is the board of directors who will ultimately be held accountable for the success or failure of operations of the company. It is the board that may be called to account if the company becomes insolvent or trades in circumstances which prove to be non-prudential or to the detriment of creditors. Why should a court second guess the decision of a board as to the funds needed for the day to day operations of the business conducted?

26 Decisions about funding the corporation's business by debt or equity would rarely be second guessed by a court.

27 I am not persuaded here, subject to small reservations that I will identify, that overall it would be a proper interlocutory exercise for this Court to second guess Superior Lawns' board of directors over the board's decision that a capital raising is necessary.

28 The question, by reference to serious question and balance of convenience conclusions, is whether the present interim injunction inhibiting the rights issue should be continued. The 37 alleged past instances of irregularity spanning years will, at some stage, need to be minutely evaluated. At a superficial level at this time, some of the grievances look to be petty or niggling matters - framed as a 'well-poisoning' exercise, in an effort to obtain short term tactical leverage.

29 But the real focus of the evaluation required now is in respect of the interrupted capital raising proposal by the proposed rights issue. My analysis of that as a basis to continue the interim restraint further, is that it is insufficient, subject to resolving two associated matters that I propose to raise with counsel for the defendant, to be addressed by undertaking or agreement.

30 The balance of convenience here is for me the more significant determining factor, notwithstanding arguable serious questions as regards matters that may at trial eventually be assessed as oppressive. But I would not presently characterise these causes of action as strong, only arguable at a trial. However, at this stage, it is not necessary in my assessment, given the balance of convenience overall, to continue the interim restraints against the capital raising, provided some reasonable degree of protection is afforded to Trafalgar in that exercise.

31 One element of protection to Trafalgar will be afforded if the audit, presently incomplete for the 30 June 2009 financial year, is finished as soon as possible. Funds are needed in order for Grant Thornton to finish the audit work. The plaintiff's accountants, Ms de Roo's firm, will also need to be paid for their ongoing work in providing accounting information necessary to facilitate Grant Thornton's primary auditing work.

32 Furthermore, there is an outstanding request that there be an auditing of Superior Lawns' accounts to 30 June 2010. There is no conceptual objection to the validity of a notice given in that respect by Trafalgar. Therefore, there looms on the horizon even further accounting and auditing work to be done, then paid for by Superior Lawns.

33 I would assess this work as likewise incurring potential costs perhaps in the order of $50,000 to $70,000, factoring the auditors' costs with those of the first defendant's accountants, overall. Obtaining funds by the proposed capital raising by Superior Lawns would facilitate the completion of audited accounts to 30 June 2010.

34 My residual concern is over any potential prejudice to Trafalgar's position in allowing a capital raising to go ahead. I make my assessment about that on the basis that it seems to me that inevitably in this case there must be pleadings to better identify the basis for the alleged oppression across 37 different incidents of potential oppressive conduct. As I have worked my way through the originating summons and supporting affidavits filed on 24 March and thereafter, it has become apparent that there arises complexity over how any ultimate potential relief for oppression under s 233 might be granted. The possible relief seems to differ, depending upon whether Mr Jebb personally, or through his company Trafalgar, is pursuing a remedy in his or Trafalgar's right or whether, as s 233(1) seems to contemplate, particularly by s 233(1)(f) and s 233(1)(g), that some sort of quasi-derivative action articulating causes of action of Superior Lawns is to be run. These are causes of action not affirmatively pursued yet by Superior Lawns. So, in a derivative way, Trafalgar seems to wish to run such actions in the oppression proceedings, but then at the end of proceedings seek orders to the plaintiff's advantage, akin to orders made by the Court of Appeal of New South Wales in Fexuto v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672, by reference there to what was Corporations Law s 260(2)(g).

35 But, even applying Fexuto and recognising a breadth of potential end outcomes if oppression were shown, still the most likely end relief for Trafalgar, in the event of ultimate success at a trial, looks to me as of this moment, to be a mandatory buyout order of the plaintiff's minority (30%) shareholding interest in Superior Lawns. A buyout would need to be implemented by reference to a valuation of Superior Lawns' 30% shareholding interest at some date to be ascertained by the trial judge, as appropriate. That of course is merely an interlocutory observation, weighing the probabilities on the evidence at this point.

36 A buyout of Trafalgar's 30% interest being the likely end result, it would seem for the purpose of implementing a mandatory buyout of the minority shareholders, that reliable audited accounts for Superior Lawns would form an essential part of a valuation exercise. Audited accounts will be completed hopefully for 30 June 2009 and then, for 30 June 2010, under orders already made in allied proceedings, assuming the work can be paid for by Superior Lawns. There should as well be completed, in my view, audited accounts by Superior Lawns for 30 June 2011.

37 I am looking therefore for the defendants to provide to me an undertaking as regards a completion of audited accounts for the 30 June 2011 financial year as well as a precondition to any discharge of the interim injunction. Bearing in mind it is going to happen for the 2009 and 2010 financial years and where this action presently sits at 20 April 2011, that this ought not to be too great a burden.

38 A second requirement I am going to seek of the defendants, is as regards protecting against any possibly improper repayment of related party loans (as referred to in the notice which was sent advising shareholders of the proposed capital raising on 18 March 2011), that there be an undertaking not to repay any of those related party loans before trial, or until further order. I am not speaking of working capital loans made to Superior Lawns by Mr and Mrs Flugge, since Mr Jebb resigned as a director in 2009. I am addressing only impugned loan transactions in terms of arrangements with trusts associated with the Flugges that form part of instances of alleged oppressive conduct raised in Mr Jeff's affidavits, not being repaid until these issues are resolved.

39 Upon receipt of undertakings from the defendants that any funds raised under the proposed capital raising will not be disbursed in repayment of related party loans until further order and the further undertaking to facilitate audited accounts for the 30 June 2011 financial year, I would discharge the interim injunction currently in place and so then, allow the capital raising to proceed.

40 The matter can be listed for a directions hearing in the CMC List at a time to be fixed after the plaintiff prepares and files a statement of claim.