Transocean Capital Pty Ltd v AFSIG Pty Ltd [2006] NSWSC 806 | Case summary

3460/06 TRANSOCEAN CAPITAL PTY LIMITED v AFSIG PTY LIMITED & ANOR JUDGMENT 1 I am dealing with the claims in paragraphs 2, 4 and 5 of a notice of motion filed by the defendants on 27 July 2006. Paragraph 2 seeks an order that certain paragraphs of the statement of claim be struck out. Paragraph 4 seeks an order that the plaintiff provide security for costs. By paragraph 5, the defendants seek discharge of an undertaking given by them to the court. The strike-out claim - the relevant contract 2 The parts of the statement of claim challenged by the defendants concern an agreement between the first defendant and the plaintiff. The agreement is in writing and is dated 7 April 2006. It is entitled "Subscription Agreement" and sets out an agreed basis on which the plaintiff was to subscribe for shares in the first defendant. The paragraphs of the statement of claim the defendants say should be struck out are paragraphs 27 to 39. Before describing them, I should say more about the agreement. 3 The agreement was drawn by lawyers. The parties are the first defendant (designated "Company") and the plaintiff (designated "Subscriber"). The agreement recites the wish of the Subscriber to subscribe for the "Subscription Shares" (that is, 30 million ordinary fully paid shares in the capital of the Company) and the Company's agreement to allot and issue the Subscription Shares to the Subscriber on the terms and conditions set out in the agreement. Other definitions of particular relevance in clause 1.1 are the following: "'Completion' means the completion of the issue and allotment of the Subscription Shares in accordance with this agreement." "'Completion Date' means each of the dates referred to in clause 4.1 or any other date agreed by the Company and the Subscriber." "'Condition Precedent' means the condition precedent set out in clause 3.1 ('Condition Precedent')." 4 Clause 3 as a whole is headed "Condition Precedent". It consists of several sub-clauses. Clause 3.1 is as follows: " 3.1 Condition Precedent Completion is conditional [sic] each of the shareholders and proposed [sic] in the Company execution [sic] a shareholders deed on terms and conditions acceptable to both the Company and the Subscriber (acting reasonably)." 5 It is also necessary to quote clauses 3.4 and 3.5: " 3.4 Satisfaction of Condition Precedent The Condition Precedent in clause 3.1 ( Condition Precedent ) is for the benefit of both the Company and the Subscriber and, if it is not satisfied or waived by 5:00pm (WST) on 5 April 2006 or a later date agreed by the parties, then this agreement may be terminated at any time by the Subscriber or the Company by notice to the other party. 3.5 Effect of termination If this agreement is terminated clause 3.4 ( Satisfaction of Condition Precedent ) then, in addition to any other rights, powers or remedies provided by law: (a) each party is released from its obligations under this agreement other than in relation to clauses 7 ( Confidentiality ) and 8 ( Costs and expenses ); (b) each party retains the rights it has against any other party in connection with any breach or claim that has arisen before termination; and (c) the Subscriber must return to the Company all documents and other materials in any medium in its possession, power or control which contain information received from or on behalf of the Company." 6 The main operative provisions are clauses 4.1 and 4.4: " 4.1 Time of completion Subject to the satisfaction of the Condition Precedent and clause 4.6, Completion will take place in four (4) equal instalments as follows: (a) on 31 March 2006, the Subscriber shall apply for 7,500,000 Subscription Shares in the form set out in Schedule 1 and must pay $500,000 of the Subscription Price to the Company or on before that date; (b) on 8 May 2006, the Subscriber shall apply for 3,750,000 Subscription Shares in the form set out in Schedule 1 and must pay $250,000 of the Subscription Price to the Company on or before that date; (c) on 31 May 2006, the Subscriber shall apply for 3,750,000 Subscription Shares in the form set out in Schedule 1 and must pay $250,000 of the Subscription Price to the Company on or before that date; and (d) on 30 June 2006 but subject to clause 4.6, the Subscriber shall apply for 15,000,000 Subscription Shares in the form set out in Schedule 1 and must pay $1,000,000 of the Subscription Price to the Company on or before that date." " 4.4 Company's obligations after Completion As soon as practicable after each Completion Date, and not later than five Business Days after each Completion Date, the Company agrees to deliver to the Subscriber: (a) a share certificate for the Subscription Shares allotted and issued on the relevant Completion Date; and (b) if requested by the Subscriber, a certified copy of the register of the Company evidencing the registration of the Subscriber or its nominee." The strike-out claim - approach 7 The defendants say that relevant parts of the statement of claim should be struck out because they disclose no reasonable cause of action: Uniform Civil Procedure Rules 2005, rule 14.28(1)(a). 8 It is clear that this jurisdiction is exercisable only in obvious cases and that an application such as the present is not the occasion for any form of extended inquiry into the real merits of the plaintiff's case. I therefore take at face value the allegations of fact in the statement of claim. 9 The paragraphs of the statement of claim challenged by the defendants fall into two groups. I shall consider them separately. The strike-out claim - first aspect 10 The first group consists of paragraphs to the following effect. 1. The plaintiff (as "Subscriber") made the clause 4.1(a) payment on 7 April 2006. 2. It was a condition precedent to "Completion" that the first defendant should execute a shareholders agreement in accordance with clauses 3.1 and 3.4 by 5 April 2006. 3. By 5 April 2006, the condition precedent had been neither waived nor performed; nor had the parties agreed any later date as the relevant deadline. 4. Relying on the non-fulfilment of the condition, the plaintiff terminated the agreement on 29 May 2006. 5. As a result, the agreement was void ab initio . 6. The plaintiff is therefore entitled to a refund of the payment made on 7 April 2006. 11 What is not said in the particular paragraphs of the statement of claim but is made clear in an earlier paragraph is that the plaintiff "was issued with 7.5 million ordinary shares" in the first defendant following the making of the payment on 7 April 2006. 12 The first defendant maintains that the paragraphs of the statement of claim I have summarised must be struck out as showing no reasonable cause of action. It is said on behalf of the first defendant that the contract itself specifies in clauses 3.4 and 3.5 the consequence of non-fulfilment of the clause 3.1 condition and that there is no room for the plaintiff to put forward any consequence of non-fulfilment not so specified. Reference was made to the decision of the High Court in Sandra Invesments Pty Ltd v Booth (1983) 153 CLR 153 for the proposition that an express provision as to the consequence of non-fulfilment of a contractual condition should be taken as an exhaustive statement of the rights flowing from such non-fulfilment. 13 The plaintiff's response is to emphasise the description of the condition as a "condition precedent". That, it is said, meant that, unless and until the condition was fulfilled, no effective contractual obligation existed. The plaintiff's position draws from the description of the condition as a "condition precedent" the message conveyed by Samuels JA in Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 at p.705: "It seems to me to follow from Ankar [ Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549] that it is meaningless to speak of the substantial performance of a condition precedent. Either it has been performed, or it has not. If it has, performance enlivens the obligation to which the stipulation is a condition precedent. If it has not, the obligation does not arise ." [Emphasis added] 14 Were it not for one matter, I would be satisfied that, as the defendants contend, clauses 3.4 and 3.5 alone prescribe the consequences of non-fulfilment of the clause 3.1 condition and there is no scope for any other consequence of non-fulfilment of the condition. The thing that causes me to hold back from stating that conclusion in a definitive way is that, even though there is a provision stating that headings (including the "Condition Precedent" headings to both clause 3 as a whole and clause 3.1) are for convenience only and do not affect interpretation, there is an operative provision which expressly refers to the clause 3.1 condition as a "condition precedent". That precise description is given to the condition in the definition of "Condition Precedent" in clause 1.1 ("… means the condition precedent set out in clause 3.1 …"). 15 There may accordingly be said to be a question as to the precise intention of contracting parties who not only spelled out in clauses 3.4 and 3.5 the consequences of non-fulfilment but also chose to describe the particular condition as a "condition precedent", a description that might conceivably entail the effect stated in the final sentence of the above paragraph from the judgment of Samuels JA. 16 I cannot say that the case pleaded in the first group of paragraphs of the statement of claim is doomed to fail even though, on the face of the document, the characterisation put forward by the defendants seems by far the more plausible. The strike-out claim - second aspect 17 The second group of paragraphs of the statement of claim challenged by the defendants is to the following effect: 1. It was the mutual intention of the plaintiff and the first defendant that all moneys paid by the former to the latter would be used solely for the purpose of implementing a project having particular essential features. 2. On 7 April 2006, the plaintiff executed the agreement and made the payment based on that intention. 3. By reason of the intention, the first defendant was entitled to use the proceeds of the payment only for the implementation of such a project and was required to refund those proceeds if it did not proceed with such a project. 4. By about 9 May 2006, the first defendant had confirmed to the plaintiff that it no longer intended to implement any such project. 5. The first defendant accordingly holds the proceeds on trust for the plaintiff and is required to refund them to the plaintiff. 18 The defendants make two basic points about this part of the plaintiff's case: first, that the alleged trust is inconsistent with the express terms of the parties' agreement and is accordingly unrecognisable; and, second, that the alleged trust is inconsistent with fundamental principles of company law and is for that reason unrecognisable. 19 There is force in what the defendants say. Once shares have been subscribed for, allotted and issued, the resultant share capital may not be returned except by way of formal reduction or some analogous transaction undertaken consistently with Chapter 2J of the Corporations Act 2001 (Cth). A person who is involved in a reduction of share capital that does not comply with s.256B(1) contravenes s.256D(3). 20 It was submitted on behalf of the plaintiff that, despite these rules, there is room to find that subscription moneys for shares, if paid to the company for application by it in a particular way, become impressed with a trust which causes them to be held by the company for the subscriber if the prescribed application falls. Mr Stack of counsel, who appeared for the plaintiff, quoted the following passage in the speech of Lord Wilberforce in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 at p.581: "It is said, first, that the line of authorities mentioned above stands on its own and is inconsistent with other, more modern, decisions. Those are cases in which money has been paid to a company for the purpose of obtaining an allotment of shares (see Moseley v Cressey's Co ; Stewart v Austin ; and Re Nanwa Gold Mines Ballantyne v Nanwa Gold Mines Ltd) . I do not think it necessary to examine these cases in detail, nor to comment on them, for I am satisfied that they do not affect the principle on which this appeal should be decided. They are merely examples which show that, in the absence of some special arrangement creating a trust (as was shown to exist in Re Nanwa Gold Mines Ltd) , payments of this kind are made on the basis that they are to be included in the company's assets. They do not negative the proposition that a trust may exist where the mutual intention is that they should not be included." 21 Mr Stack placed emphasis on the final sentence. 22 Read in isolation, this passage may be thought to support the proposition for which Mr Stack contends, namely, that moneys received by a company for the allotment of shares may, after completion of allotment and issue, be impressed with a trust in the company's hands in such a way that, if some agreed application of the moneys is not made, the moneys are to be held on trust for the person who subscribed for the shares. But the capacity of the passage to convey that message does not withstand scrutiny when regard is had to the line of cases to which reference is made. 23 Each of those cases - Moseley v Cressey's Co (1865) LR 1 Eq 405, Stewart v Austin (1866) LR 3 Eq 299 and Re Nanwa Gold Mines Ltd [1955] 1 WLR 1080 - involved a situation where moneys had been paid to a company upon application for the allotment of shares but no shares had been allotted. The question was whether the applicant ranked with unsecured creditors or whether the moneys were subject to some form of trust or lien in favour of the unsatisfied applicant. The essence of the decisions appears from the judgment of Page Wood VC in the Moseley case: "But if the object had been to create a lien of this kind, the obvious way of doing so would have been to have said in the prospectus that there would be a lien on the deposits until the company was established, or that it was to be set aside as a trust fund in the names of the trustees, to be returned in the event of the company not being established." 24 The reference here to the establishment of the company is, in the context, a reference to the allotment of the shares. 25 The same approach to application moneys has been taken in Australia: see Re Fada (Australia) Ltd [1927] SASR 590 and Re Associated Securities Ltd [1981] 1 NSWLR 742. It is sufficient to quote from the headnote in the latter case: " Held : (1) In the ordinary case of a contract under which one party is to allot shares to the other on payment of the price, the money paid for the projected allotment is paid as consideration for the allotment and becomes the property of the company (unless it is an offer "to the public" in which case the money is held on trust for the applicant). (2) A relationship of trustee/beneficiary in respect of the money paid for such an allotment will not be presumed unless a special arrangement which creates such a relationship can be found. (3) No such special arrangement was evident in the offer to allot two shares for every five shares held nor in the intention to allot such additional shares as were available after any under-subscription. (4) The relationship between the company and the stockholders in respect of the money paid under the contract to allot shares was merely that of debtor and creditor." 26 Reference may also be made to the recent decision of the Court of Appeal in Salvo v New Tel Ltd [2005] NSWCA 281 where it was held that moneys were held upon trust for persons entitled to an allotment of convertible notes which had been paid for but not issued. The majority (Spigelman CJ and Young CJ in Eq) favoured the view that there was an express trust according to the terms of the parties' contract. Handley JA was of the view that the trust was an implied trust, although one that was consistent with the terms of the agreement. 27 In this case, by contrast with all those I have mentioned, the parties' intentions, as manifested in the agreement, were that the moneys should become the property of the first defendant, being the price received by it for the allotment and issue of shares to the plaintiff. Refund of the moneys to the plaintiff would be entirely foreign to the nature of the transaction and the rules about maintenance of share capital. Even if there had been some unwritten common intention as to the way in which the first defendant should deploy the proceeds of the share issue, the terms of the contract and the clear nature of the subject matter preclude any finding that refund of the money and cancellation of the shares was an element of that common intention. Any such element would have been unlawful except perhaps upon rescission of the contract of allotment (see, for example, Houldsworth v The City of Glasgow Bank (1880) 5 App Cas 317). And this part of the pleading in no way alleges any right to rescind the contract of allotment. As is recognised in the joint judgment of Mason CJ, Deane, Dawson and Toohey JJ in Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15 at p.33, the proposition that a shareholder may not, directly or indirectly, receive back any part of his or her contribution to the company's capital holds good under today's legislation, except insofar as that legislation itself otherwise allows. 28 I am therefore of the opinion that the second group of paragraphs of the statement of claim shows no reasonable cause of action and must be struck out. The security for costs application 29 The defendants contend that security for costs should be ordered because, on the basis of "credible testimony" (to use the words in s.1335(1) of the Corporations Act), there is reason to believe that the plaintiff will be unable to pay the costs of the defendants if they are successful in their defence. That is the first stage of the inquiry upon an application such as this. If reason so to believe is found, the court moves to the second and discretionary question of whether security should be ordered. 30 The defendants point to two particular matters emerging from the evidence: first, that the plaintiff is a newly formed company that has an issued capital of $30.00; and second, that it sues as a trustee. 31 The evidence of the first matter comes from an ASIC search annexed to an affidavit of the defendants' solicitor. The search shows that the plaintiff was registered on 5 July 2005 and that it has on issue 30 ordinary shares on which a total of $30.00 is "paid/taken to be paid". The shares are shown as held, in parcels of 15, 10 and 5, respectively, by three proprietary companies each of which is shown as holding the shares non-beneficially. 32 Evidence of the plaintiff's trustee status comes from the statement of claim where it is said, first, that the plaintiff is the trustee of the Transocean Capital Unit Trust; and, second, that the plaintiff, as trustee of the Transocean Capital Unit Trust, has been, since 5 July 2005, "part of a group of companies known as the Transocean Group which conducts a boutique investment banking and corporate advisory business and which, amongst other things, provides corporate finance and capital raising services to emerging businesses". 33 The plaintiff has not placed before the court any evidence of its financial position or of any express right of indemnity it enjoys as trustee. It has been content to meet the security for costs application on the ground mapped out by the defendants. It says, quite simply, that the evidence about a paid up share capital of $30.00 and the plaintiff's trustee status "establishes nothing" and that the idea that the plaintiff does not have the capacity to meet an adverse costs order flies in the face of the very subject matter of the proceedings - in essence, that the defendants solicited the plaintiff as an investor of $2 million in their project. 34 I refer, in this connection, to observations of Smithers J in Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) 7 ATPR 40-584. His Honour said (at p.46,729): "Where the only tangible assets of an applicant company are held in trust for another entity and its solvency depends on its right as trustee to indemnity against that entity it is necessary for the court to have in mind the difficulties which a successful respondent would face in attempting to execute in respect of an order for costs. Indeed, unless some step is taken to alleviate those difficulties it is reasonable and just to treat the applicant company as if it were without assets to meet such a liability." 35 Smithers J also said (at p.46,731): "I have concluded that an applicant being a trustee company which desires to resist an order for security for costs should establish that recourse to property held by or for it will be available to the party against whom it has brought its action and be adequate, at the appropriate time, to meet the possible liability for costs." 36 This approach was accepted and adopted by Tadgell and Cummins JJ in Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] 1 VR 150. In that case there was evidence that the party against which security was sought in the Court of Appeal (a defendant) was a trustee and that it held, as trustee, substantial real estate assets, some of which were unencumbered. The company's paid up capital was $3.00. In ordering security for costs, Tadgell and Cummins JJ said: "It was contended for the defendants that in order for security for costs of the appeal should be refused because [sic] holds unencumbered real estate the value of which exceeds the likely cost of the appeal and over which it has a right of recourse as trustee by way of indemnity. These facts, however, by themselves seem scarcely to meet the plaintiff's contention. The solicitors for the plaintiff have sought to inspect the trust deed under which Lagarna is constituted trustee but it has not been produced to them and it was not in evidence before us. For all that appears the trustee may, and I am prepared to assume that it would, be required at any time to transfer its legal interest in the unencumbered property to the beneficiaries of the trust or to encumber it." 37 Also instructive is the judgment of Goldberg J in Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486. I quote from paragraph [18] of the judgment: "The evidence discloses that each applicant has a paid up capital of $2. It is not disputed that each applicant is a trustee company so that it has no other assets. On this ground alone I consider that there is credible testimony that there is reason to believe that the applicants will be unable to pay the respondents' costs if the respondents are successful. Assuming that the applicants have a right of indemnity out of the relevant trust funds which they administer is it necessary to consider what is the position of those trust funds." 38 Goldberg J went on to refer to the evidence about the trust assets and their substance. 39 In the present case, the defendants have shown the two matters to which I have referred: first, that the plaintiff has a paid up capital of $30.00 only; and, second, that it is a trustee. In the absence of countervailing evidence, those matters alone must be taken to represent "credible testimony" of the plaintiff's likely inability to pay the defendants' costs if the defendants are successful. The plaintiff has not sought to adduce evidence of the relevant trust instrument and its provisions as to indemnity. Nor has the plaintiff sought to show the extent of the trust assets that may be available in support of any indemnity. It has been content merely to observe that the defendants were willing to regard it as a good source of the $2 million they required for investment purposes. But, of course, there is a great difference between the plaintiff's own ability to obtain funds if and when it needs them for deployment in its business and the ability of a creditor of the plaintiff to force the plaintiff to obtain and disgorge funds when the creditor seeks to enforce a right to be paid. 40 I am satisfied that the defendants have shown reason to believe that the plaintiff will be unable to pay the costs of the defendants if they are successful in their defence. I therefore turn to the discretionary question whether security should be ordered. 41 The discretionary question should be approached by reference to a number of factors referred to in the judgment of Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189. They are set out in a well known passage at pp.197 to 198 which I need not repeat. Consideration of those criteria in this case leads to the conclusion that security should be ordered. In particular: 1. The defendants have not been guilty of delay. 2. The plaintiff's impecuniosity has not been caused in any way by the defendants. 3. The defendants' application for security cannot be said to be oppressive. 4. No one standing behind the plaintiff has come forward with any offer of support or indemnity. 42 I therefore need to consider the amount of security that should be ordered. The defendants propose a sum of $75,000. No fully articulated basis for that is put forward, beyond the bare facts that the hearing is expected to take three days and it is said that there are to be ten witnesses. With those matters unchallenged, I propose to order security in the sum of $50,000 in the first instance. The objective is not to provide the defendants with full indemnity against all eventualities: Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497. The defendants may make a further application at a later stage if they think it necessary to do so. The undertaking 43 On 3 July 2006, the defendants, by their counsel, gave to the court the following undertaking: "The Defendants will forthwith cause the sum of $500,000 currently held in a bank account maintained in the name of the First Defendant to be paid to a controlled money account bearing interest, in the name of Karp Steedman Ross-Adjie, solicitors, 14 Walker Avenue, West Perth where those funds will be maintained until further order of the Court." 44 At the same time, the plaintiff, by its counsel, gave to the court the usual undertaking as to damages. 45 The defendants now ask to be released from the undertaking concerning retention of the sum of $500,000. They do so on the basis of what they say is a material change in circumstances. 46 The first matter to which the defendants point is removal from the plaintiff's case of allegations of what counsel described as "conduct analogous to fraud", being contravention of ss.1041E and 1041F of the Corporations Act. I should say at once that I do not regard this as any change in circumstances of a material kind when it is recognised that claims under s.52 of the Trade Practices Act 1974 and analogous State legislation are maintained. It is true that there are some differences between the two classes of contravention but they are not, to my mind, sufficient to warrant any conclusion that the case the plaintiff seeks to pursue has changed in any material way. 47 The second point the defendants make is that the plaintiff has shown no prima facie right to proprietary relief and that its claim is, at best, a claim to be an unsecured creditor. Again, I am not satisfied that that would be a change in circumstances warranting release of the undertaking. Mareva type orders (or undertakings in lieu) are typically found in cases where it has been shown that there is some relevant apprehension about the availability of assets to meet a money judgment. 48 Third, the defendants say that the "price" given for their undertaking with respect to the sum of $500,000, being the usual undertaking as to damages given to the court by the plaintiff, has now been shown to be, at best, of questionable value, given the plaintiff's status as trustee. The plaintiff's response is that there has been no change in circumstances in this respect. As the plaintiff points out, the plaintiff's status as trustee of the Transocean Capital Unit Trust was clearly shown on the face of the parties' contract dated 7 April 2006. The defendants simply cannot say that they have become aware of that only in more recent times. And having been content to give the undertaking with respect to the sum of $500,000 on 3 July 2006 upon the plaintiff's giving the usual undertaking as to damages on the same occasion, when they had been aware from 7 April 2006 that the plaintiff was a trustee, the defendants cannot now be heard to question the sufficiency of the undertaking as to damages. 49 The undertaking with respect to the sum of $500,000 will not be released. Orders 50 I make the following orders: 1. Order that paragraphs 34 to 39 of the statement of claim filed on 14 July 2006 be struck out. 2. Order that the plaintiff do give security in the sum of $50,000 for the costs of the defendants. 3. Order that the security be in such form as the Registrar determines. 4. Order that the proceedings be stayed until such security is so provided. 51 In view of the mixed outcome, I propose to make no order as to costs in relation to the claims in paragraphs 2, 4 and 5 of the notice of motion filed on 27 July 2006, to the intent that the parties should bear their own costs respectively. **********

Transocean Capital Pty Ltd v AFSIG Pty Ltd

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Judgment (12 paragraphs)

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Legislation Cited (1)

Cases Cited (8)

Cited By (14)