Ultimate Media Group v Adframe Australia [2005] NSWSC 633 | Case summary

3629/04 ULTIMATE MEDIA GROUP v ADFRAME AUSTRALIA PTY LIMITED 3286/05 ULTIMATE MEDIA GROUP v ADFRAME AUSTRALIA PTY LIMITED & Anor JUDGMENT 1 HIS HONOUR: The plaintiff moves for orders in terms of paragraphs 7, 7.1, 8, 9, 10 and 11 of an amended notice of motion filed 21 June 2005. 2 In these proceedings the plaintiff seeks to enforce an agreement made on 23 May 2002 with the first and second defendants, pursuant to which the plaintiff would initially acquire from the second defendant, 50 percent of the shares in the first defendant. The agreement provides that each of the plaintiff and the second defendant would be entitled to appoint and replace two directors of the first defendant, and that at the expiration of three years, the second defendant would sell the remaining 50 percent of the issued shares of the first defendant at a price to be determined in accordance with a formula based on a multiple of the previous two financial years' average profit after interest and tax. 3 It is a further term of the agreement that the second defendant would be employed by the first defendant on a salary of $5,000 per month inclusive of superannuation during the first three years of the agreement. 4 The defendants deny that the agreement on which the plaintiff sues is enforceable, and say that they were induced to enter into it by misrepresentations by the plaintiff. They accept that there is a serious question to be tried that the agreement is enforceable in accordance with its terms. 5 The agreement of 13 May 2002 records that the second defendant was the beneficial owner of all of the shares in the first defendant. According to an ASIC search which was tendered, he is the company's sole director. 6 These proceedings were commenced on 3 June 2005, although there were earlier proceedings between the same parties, which are still on foot, which raise much the same issues, amongst others, (see the judgment of Hamilton J of 3 June 2005, Ultimate Media Group Pty Ltd v Adframe Australia Pty Ltd [2005] NSWSC 538 at [3]). 7 By its notice of motion the plaintiff seeks an order that the second defendant be restrained until further order from dealing with any assets of the first defendant outside the ordinary course of business. This claim was said to be a form of Mareva relief, to prevent dissipation of the first defendant's assets prior to the plaintiff's acquiring 100 percent of its issued capital as it claimed it is entitled to do. 8 The plaintiff also seeks various orders restraining the second defendant from dealing with his shares in the first defendant and restraining any attempted issue of new shares without the plaintiff's consent. It also seeks an order to restrain the second defendant from appointing any director of the first defendant without its consent. Finally, it seeks an order restraining the first defendant from repaying gross wages and loan accounts to the second defendant or Ms Cienwen Galletti, or any other person, in a sum greater than $5,000 per month, without the plaintiff's consent or further order of the Court. 9 The plaintiff complains it was not until June this year that the second defendant agreed to register transfer of shares amounting to 50 percent of the share capital in the first defendant, and that that followed a three day hearing before Hamilton J. It relied on evidence from which an inference could be drawn that after the date of the agreement, the second defendant caused shares which were registered in the name of third parties, but which, according to the agreement, were beneficially owned by him, to be transferred to himself and his wife. 10 It was submitted that I should infer that the transfer of shares to the second defendant's wife was done with the intention of thwarting any order which might ultimately be made to specifically enforce the contract of 23 May 2002 in relation to the transfer of the remaining 50 percent of the shares to the plaintiff. 11 It is fair to say that this allegation, based on an analysis of the share register and share transfers, was only articulated during the course of final submissions by reference to a few documents contained in a voluminous exhibit. In response to this contention, counsel for the defendants proffered an undertaking to the Court on behalf of the defendants, but without admissions, that until further order of the Court, or final determination of these proceedings, and of proceedings number 3629 of 2004, the defendants will not deal with, mortgage or encumber the balance of the 50 percent of the shares in the first defendant, which the second defendant owns or controls. 12 Assuming, without deciding, that the evidence could justify an interlocutory restraint on the disposal or dealing with the shares in the first defendant, the undertaking which the defendants proffer provides all the protection to the plaintiff which it could reasonably seek. 13 The defendants also, without admissions, proffered an undertaking to the Court that they would appoint Messrs Mount and Cope, or such other persons as the plaintiff may nominate, as directors of the first defendant upon their delivering the requisite consents to act as directors. Clause 4.1 of the agreement provides that the plaintiff and the first defendant would have the right to appoint and replace two directors each to the board of the company, and that as at the date of the agreement, the directors of the company would be the second defendant, Ms Cienwen Galletti, Mr Mount and Mr Cope. 14 In the light of that provision, it would be wrong to make an order restraining the second defendant from appointing any director of the first defendant without the plaintiff's consent. He is entitled to have two nominees, which may include himself, on the board. He is prepared, without admissions, to appoint the plaintiff's two nominees. Whatever may have been the position in the past, there is no threat of any future breach of clause 4.1. 15 It is unnecessary to express a view on whether the second defendant has committed any past breach of clause 4.1, assuming the agreement is enforceable against him. It appears to me that neither party sought to enforce the agreement in accordance with its terms, and the defendants, of course, deny that they are bound by the agreement. 16 The relief sought in paragraph 7.1 of the notice of motion is based on an alleged breach of clause 3.7 of the agreement. That clause provides: "The parties agree that Paul Galletti will be employed by Adframe on a salary of $5000 per month inclusive of superannuation during the first three years of this agreement."

17 It then goes on to make further provisions in relation to his duties and to deal with circumstances after the expiration of the three years from the date of the agreement. 18 It is clearly established that the first defendant has paid amounts in excess of $5000 per month before tax and including superannuation to the second defendant and his wife. It appears also that the amounts of salary so paid may not have been paid or not entirely have been paid by cash, and but credited to their loan accounts. The plaintiff apprehends that there may be an improper repayment of the loan accounts arising from the making of excess payments by way of salary or wages to the second defendant and his wife. The evidence did not show that the company has paid more than $5000 per month before tax and including superannuation to the second defendant himself. 19 The plaintiff says that it should be implied that the parties intended, and that they agreed, that the amounts referred to in clause 3.7 covered all sums payable as wages to any employees of the company, not just the second defendant, unless a board constituted in accordance with clause 4.1 decided otherwise. 20 The statement of claim does not allege a breach of clause 3.7. The defendants said in final submissions that, in due course, they would lead evidence that it was intended by the parties that the figure in clause 3.7 was to be net of tax. There is no such evidence at the moment, or at least none to which I was referred. 21 It may be that it was the common intention of the parties that the amount referred to in clause 3.7 should cover all employees, not just the second defendant, as the plaintiff contends. If that is so, however, the agreement would have to be rectified, because the instrument as it stands plainly refers only to the salary payable to the second defendant. I see no basis for implying a term that the first defendant should employ no one other than the second defendant. 22 Schedule 1 to the agreement contemplates the company may have more employees. There was no evidence, at least none to which I was directed, that Ms Bethel, the second defendant's wife, did not do work for the company, or that the amount paid or credited to her as wages was more than a proper wage for what she has done. The plaintiff may not know what work she has done, but I would not infer, in the absence of evidence on the topic, that the payments to her were improper. 23 On the present pleading, and the present state of the evidence, I do not consider that there is a serious question to be tried that there has been a breach of clause 3.7 or that there would be a breach of clause 3.7 by the first defendant continuing to pay the salaries which have been paid to date. In any event, so far as the future conduct of affairs is concerned, the plaintiff will have a measure of protection by having two of its nominees on the board. Accordingly, I refuse the relief sought in paragraph 7.1 of the notice of motion. 24 There remains the claim in paragraph 7 of the notice of motion to restrain the second defendant from dealing with the first defendant's assets except in the ordinary course of business. As I have said, that relief is sought on the basis that there is reason to believe that the second defendant will cause the first defendant to dispose of its assets, with the result that a judgment in favour of the plaintiff will be frustrated. 25 An injunction of the type sought is not granted to provide a form of security to a plaintiff, but to prevent a defendant from abusing the Court's processes by taking steps which would render any final relief ineffective. The jurisdiction is to be exercised with caution, and only in a clear case. If wrongly granted, such an injunction may inhibit the conduct of commercial affairs, and it may be impossible for a defendant, subject to an injunction, to prove any loss suffered by reason of it, if he seeks later to enforce an undertaking as to damages (see Cardile v LED Builders Limited (1999) 198 CLR 380, at 399 to 403). 26 There is no evidence of any improper dealings by the second defendant with the assets of the first defendant. The plaintiff has not demonstrated any substantial ground for fearing that the second defendant would do so. The dealings in the company's shares do not give rise to such an apprehension. Given that the second defendant claims to be beneficially entitled to all of the shares in the company, many of which were not registered in his name, I do not see a basis for apprehending that by changing the legal owner of the shares, he was seeking to put it out of his power to direct a transfer of the remaining 50 percent. 27 His wife had notice of the terms of the agreement. I do not infer that the dealings were made for an improper purpose, still less that they indicate that it was the second defendant's intention to frustrate a judgment, so that I should apprehend that there may in the future be an improper dealing with the company's assets. 28 The plaintiff will, in any event, have two nominees on the board, if it wishes. It will be in a position to know how the company's affairs are being conducted, and to move promptly if any specific improper dealing is proposed or embarked upon. 29 For these reasons, on the basis of the undertakings to the Court which were proffered yesterday by the defendants, I will dismiss paragraphs 7 to 11 of the amended notice of motion. I assume that the defendants' undertakings were proffered on the basis of the plaintiff offering an undertaking as to damages. I note that the plaintiff, through its counsel, gives the usual undertaking as to damages. 30 I note also that the defendants, through their counsel, undertake to the Court, without admissions, that until further order of the Court or final determination of the proceedings and of proceedings 3629 of 2004, they will not deal with, mortgage or encumber the balance of the 50 percent of the shares in the first defendant, which the second defendant owns or controls. 31 I note that the defendants, through their counsel, further undertake to the Court, without admissions, that they will appoint Messrs Mount and Cope, or such other persons as the plaintiff may nominate, as directors of the first defendant, upon such persons delivering the requisite consents to act as directors. 32 I dismiss paragraphs 7 to 11 of the notice of motion.

Ultimate Media Group v Adframe Australia

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