Valra Pty Ltd as Trustee for Abdul Rahim Valibhoy Family Trust v Mag Men... [2016] FCA 23 | Case summary

SIOPIS J: 1 Valra Pty Ltd as trustee for Abdul Rahim Valibhoy Family Trust (Valra) has made an application for preliminary discovery pursuant to r 7.23 of the Federal Court Rules 2011 (the Rules) seeking the discovery of a range of documents from Mag Men Holdings Pty Ltd (Mag Men Holdings). Valra seeks discovery of the documents in order to determine whether to commence a proceeding against Mag Men Holdings, the prospective respondent. 2 Valra is under the control of Mr Abdul Rahim Valibhoy (Rahim). No disrespect is intended by referring to the persons in this case by their first names. This was the style of nomenclature adopted by the parties in their affidavits and submissions. 3 Until 14 March 2014, Valra held 647,000 ordinary shares in Mag Men Holdings. However, on that day, those shares were compulsorily sold to Tactracom Pty Ltd (Tactracom) - a company of which Mr Vali Valibhoy (Vali) was the sole director, and through a company, Intracom Pty Ltd (Intracom), the sole shareholder. Vali is a nephew of Rahim and was, on 14 March 2014, also a director of Mag Men Holdings. Valra's shareholding represented an investment of $618,750.80 which Valra had made in Mag Men Holdings during the period February 2006 to April 2009. Rahim did not, on behalf of Valra, execute the share transfer deed transferring the shares to Tactracom. That was done by Vali as a director of Mag Men Holdings. In transferring Valra's shares to Tactracom in that manner, Mag Men Holdings purported to act pursuant to cl 15 of a deed, referred to as the shareholders' deed, which had previously been executed by Valra and the other shareholders of Mag Men Holdings. The total consideration which Valra received for the sale of its Mag Men Holdings shares was $6.47. 4 Rule 7.23 of the Rules provides as follows: (1) A prospective applicant may apply to the Court for an order under subrule (2) if the prospective applicant: (a) reasonably believes that the prospective applicant may have the right to obtain relief in the Court from a prospective respondent whose description has been ascertained; and (b) after making reasonable inquiries, does not have sufficient information to decide whether to start a proceeding in the Court to obtain that relief; and (c) reasonably believes that: (i) the prospective respondent has or is likely to have or has had or is likely to have had in the prospective respondent's control documents directly relevant to the question whether the prospective applicant has a right to obtain the relief; and (ii) inspection of the documents by the prospective applicant would assist in making the decision. (2) If the Court is satisfied about matters mentioned in subrule (1), the Court may order the prospective respondent to give discovery to the prospective applicant of the documents of the kind mentioned in subparagraph (1)(c)(i). 5 The terms "prospective applicant" and "prospective respondent" are defined in r 7.21 as follows: prospective applicant means a person who reasonably believes that there may be a right for the person to obtain relief against another person who is not presently a party to a proceeding in the Court. prospective respondent means a person, not presently a party to a proceeding in the Court, against whom a prospective applicant reasonably believes the prospective applicant may have a right to obtain relief. 6 Valra seeks preliminary discovery on the basis that it, by its director, Rahim, reasonably believes that it may have a right to obtain relief in this Court against Mag Men Holdings on the basis that it has breached cl 15 of the shareholders' deed; and on the basis that there has been oppressive conduct within the meaning of s 232 of the Corporations Act 2001 (Cth), in relation to the transfer of Valra's shares to Tactracom. 7 In support of its application, Valra relied upon the affidavit of Rahim dated 3 December 2014. 8 Mr Mohamed Shariff Valibhoy (Shariff) is Rahim's brother and Vali's father. The late Mr Mohamed Amin Valibhoy (Amin), who died on 25 August 2011, was also a brother of Rahim. Each of Amin and Shariff had prior to 14 March 2014, also invested in Mag Men Holdings, in one capacity or another. Shariff controlled, and still controls, a company called Comintra Pty Ltd (Comintra) which acquired shares in Mag Men Holdings; and before his death, Amin and his wife acquired shares in Mag Men Holdings in their capacity as trustees for the MA Valibhoy Superannuation Fund. 9 By 14 March 2014, there were also other shareholders in Mag Men Holdings. One such shareholder was a company, Candy Floss Ltd, which was controlled by Mr Ravindra Nilkanth Pathare (Ravi). Another shareholder was SLP Mag Nation Ltd controlled by Mr Bret Jackson (Bret). Further, until 7 March 2014, Vali held 500,000 shares in Mag Men Holdings. Each of Shariff, Ravi and Bret had at different times before 14 March 2014, been a director of Mag Men Holdings. 10 Mag Men Holdings was until 18 March 2014, the holding company of the following companies: Mag Nation Pty Ltd, Mag Nation Business Services Pty Ltd, Mag Nation Retail Services Pty Ltd, and Mega Mags Limited. Mag Nation Pty Ltd owned and operated a magazine retail business trading as "Mag Nation" in Australia with retail shops in Australia. Mega Mags Limited owned a magazine retail business trading as "Mag Nation" in New Zealand with retail shops in New Zealand. 11 On 26 August 2010, a director of Mag Men Holdings sent the shareholders (including Valra) of Mag Men Holdings a memorandum (the 2010 memorandum) proposing a share restructure of Mag Men Holdings. 12 The 2010 memorandum explained, in effect, that whilst the business was earning revenue, corporate overheads were not being covered. The memorandum stated that some of the shareholders had agreed to continue debt funding the business on the basis that the proposed restructure was implemented. On 8 September 2010, a restructure involving all of the shareholders (including Valra) was effected. It was this restructure which resulted in Valra holding the 647,000 ordinary shares in Mag Men Holdings referred to above. 13 Rahim deposed that after October 2010, he ceased receiving any updates in relation to the performance of Mag Men Holdings. He said that he was not that concerned about the absence of updates because of personal problems. These included that his brother Amin had become extremely ill and Rahim had been involved in his care until Amin passed away in August 2011. 14 In the meanwhile, said Rahim, unbeknown to him, on 19 October 2010, Shariff and his son, Vali, were appointed as directors of Mag Men Holdings. 15 Rahim went on to say that by December 2013, he was becoming increasingly concerned that he had not received any shareholder updates as to the performance of Mag Men Holdings. 16 By an email dated 5 December 2013, Rahim sought from Mag Men Holdings "any shareholder information" in relation to the company which was available. 17 On 6 December 2013, Vali informed Rahim by email, that there was no positive news about Mag Men Holdings, that there had been two consecutive years of declining sales and Mag Men Holdings had been struggling for the past couple of years and had been kept afloat by loans from Comintra (the company controlled by Vali's father, Shariff) and Knox Investment Partners Fund III AUD 2 Limited (Knox Partners), which was a New Zealand based shareholder in SLP Mag Nation. Knox Partners was associated with Bret through SLP Mag Nation. Vali also told Rahim that Knox Partners were exploring the possibility of a publishing company acquiring Mag Nation to keep the business running. Vali also said that the plan was taking a long time to come to fruition and that the business existed on a "hand to mouth" basis. Vali offered to compile a comprehensive report of the company's position during the last two to three years, or to send Rahim the filed annual accounts up until June 2012. 18 Rahim asked for the filed annual accounts and by an email dated 9 December 2013, Vali forwarded to Rahim copies of the tax returns for Mag Men Holdings and each of the subsidiaries (other than Mega Mags) for the year ended 2010, as well as the financial statements of each of those entities for the years ended 2011 and 2012. Those financial statements included a detailed profit and loss statement and a detailed balance sheet and a side by side comparison of the figures from the previous year. Vali invited Rahim to advise him if he had any questions about the accounts. The financial statements forwarded by Vali were unsigned. 19 By an email dated 17 December 2013, Rahim made it clear that in seeking information about Mag Men Holdings, he was addressing Vali, in his capacity as an "authorised officer" of Mag Men Holdings, and that he was inquiring in his capacity as a shareholder. 20 By an email dated 18 December 2013, Rahim requested that Vali provide him with a report, and the copies of signed, dated and filed financial statements. In response, Vali said that he would send Rahim signed accounts with the shareholder report he intended to compile. 21 Following that email exchange, Vali obtained the signed directors' declaration pages for the annual accounts from the company's former accountant, and sent copies of those pages to Rahim. 22 By an email dated 19 February 2014, Vali circulated a shareholder update. 23 The shareholder update stated: As you are aware, it has been a long while since you've received an official update with regards to Mag Men Holdings. The last official communication you would have had would have been in mid 2010, when the previous Managing Director, Sahil Merchant, left the company. To jog your memories, in July 2010, we had 3 stores in Australia (Elizabeth St and Greville St in Melbourne, King St in Sydney) and 3 stores in Auckland (Sylvia Park, Ponsonby and Queen St). The company has had an especially difficult time these past few years. Apart from facing a general retail environment that has been extremely difficult for bricks and mortar stores to operate in, we have had to contend with the decline of many parts of the publishing industry. The latter has come about as a result of changes in the way in which information is consumed. The public is increasingly using e-readers and tablets to read publications which they would have previously bought physical copies of. Any expansion plans were shelved, and our focus was squarely on cutting costs. We have substantially reduced corporate staff and costs over this period. In addition to this, as leases have expired on loss making stores, we have shut them down. Specifically, we have closed 2 stores in Auckland - Queen St in 2012 and Sylvia Park in 2013. As the remaining New Zealand operations continue to incur a loss, we have made the decision to separate and divest all New Zealand operations form Mag Men Holdings. What this means is that Mag Men will no longer be responsible for the existing New Zealand operations of the company. Ravi Pathare and Vali Valibhoy feel that they can make this operation viable, and accordingly, have taken over the liabilities and ongoing costs pertaining to Mega Mags Ltd. The Board considered the only viable alternative to this was to shut down the NZ business entirely. The King St store in Sydney continues to make a loss, and when the lease for that store expires in July this year, we are likely to shut down that store too. 24 The shareholder update went on to say that the company had continued to make substantial losses over the last few years, and had survived by drawing on the existing working capital loan facility from two shareholders, Comintra and Knox Partners, that had been in place since September 2009. 25 The shareholder update advised that Bret and Shariff had resigned as directors of Mag Men Holdings and Ravi and Vali were continuing as directors of Mag Men Holdings. 26 The update also stated that Vali had recently provided Mag Men Holdings with a secured loan for further working capital requirements; and that the directors, Ravi and Vali, were currently exploring the prospects of the company being acquired by another larger company which operated within the printing and publishing industry, but that this acquisition may not eventuate, and should this be the case, there would be a need to consider "an extensive restructure of the company". 27 On 5 March 2014, Vali caused a new company, Tactracom, to be registered. As I have said, Vali was the sole director. The shareholder was Intracom (of which Vali was and is the sole director and shareholder). 28 On 7 March 2014, Vali transferred his 500,000 ordinary shares in Mag Men Holdings to his father, Shariff. 29 By email dated 10 March 2014, Vali and Ravi, the directors of Mag Men Holdings, forwarded to Mag Men Holdings' shareholders, including Valra, a memorandum detailing the "proposed extensive restructure" of Mag Men Holdings. 30 The memorandum essentially said that the acquisition of Mag Men Holdings by a larger company would not eventuate in a viable time frame "leaving the company with a substantial unfulfilled funding requirement". 31 The memorandum went on to state that other avenues of funding had been examined but apart from Vali, no other party was willing to provide any further funding. The memorandum stated that to secure the further funding it was proposed that Tactracom, which was owned by Vali, would purchase all the shares in Mag Men Holdings for $100 with effect from 7 March 2014. 32 There was attached to the memorandum a "term sheet" which added the following terms: Key Terms for the proposed re-structure of Mag Men Holdings Pty Ltd 1. Tactracom Pty Ltd ACN 168 381 637 proposes to purchase all the shares in Mag Men Holdings Pty Ltd ACN 114 559 296 for $100 with effect from Friday 7 March 2014. 2. Mag Men Holdings Pty Ltd and its Australian subsidiaries will be purchased with all existing assets and all existing liabilities including outstanding tax liabilities. 3. By separate agreement, the major debt holders in Mag Men Holdings, have come to terms for treatment of their loans. 33 The email of 10 March 2014, stated that if the shareholders agreed with the restructure, the shareholders should indicate their acceptance by returning the term sheet with the box on that document ticked, indicating their acceptance, or they should reply to the email stating: "I accept the proposal by Tactracom Pty Ltd to buy all shares in Mag Men Holdings." 34 On 13 March 2014, Vali spoke to Rahim by telephone. According to Rahim, Vali said, amongst other things, that: Mag Men Holdings was running short of funds, and that Knox Partners had been considering funding Mag Men Holdings but that by the end of January 2014, Mag Men Holdings had not received any firm commitment from Knox Partners. Vali would have to call in his loan that he had made towards the end of 2013 as he was afraid that he would lose it if Mag Men Holdings could not secure funding and he did not want to continue going unless he had control of Mag Men Holdings. Ravi would keep half of the New Zealand business and would resign from the Australian entities. Vali had had to transfer his 5% shareholding in Mag Men Holdings to his father Shariff because he could not as a shareholder of Mag Men Holdings, make an offer to acquire Mag Men Holdings. Vali said he could make Mag Men Holdings work and for this reason he was asking everyone to write off their shares in the company. Shariff's loan and Knox Partners' loan to the company inclusive of interest, each stood at $1.3 million. I interpose to add that this was a reference to loans which had been made to Mag Men Holdings by Comintra and Knox Partners. Vali had more than 90% of the shareholders' acceptance for his proposal and he did not, by reason of the shareholders' deed, require Rahim's approval but he would like to have it anyway. Amin's estate had agreed to the proposal. Mag Men Holdings would be liquidated if the proposal was not implemented. Vali would provide Rahim with copies of the share transfer forms and the additional information Rahim had requested, and that Rahim did not need to respond until he had had a chance to read those documents. 35 The reference by Vali to the 90% shareholder acceptance in the telephone conversation with Rahim, was a reference to cl 15 of the shareholders' deed that provided for the compulsory sale of shares in certain circumstances. The relevant clause reads as follows: 15 TRANSFER OF SHARES - Compulsory Sale of Exit (Come Along) 15.1 Conditions for compulsory sale If: (i) the Shareholders holding at least 90% of the Company's issued Shares agree to sell the whole of their Shares in the Company to the same purchaser upon terms that are arm's length terms; or (ii) the Shareholders holding at least 50% of the Company's issued Shares agree to sell the whole of their Shares in the Company to the same purchaser on terms that are arm's length for a price that would value all of the issued Shares, if sold at that same price, at a value greater than the historic value of total paid up capital in the Company; and (iii) that purchaser, within the meaning of section 50AA of the Corporations Act: (i) does not control; and (ii) is not controlled by any of those Shareholders, then: (iv) clauses 10 to 12 shall not apply, and (v) the remaining Shareholders must sell all their Shares in the Company upon the same terms, to the same purchaser. 15.2 Company may act as agent for Shareholder If: (i) a Shareholder is required by clause 15.1 to sell all the Shareholder's Shares in the Company; and (ii) a Shareholder fails or declines to execute any documents required to effect and complete that sale, the Company may execute all such documents as are required to effect and complete that sale, including sale agreements and transfer of Shares, but only if the terms of those documents are the same as the terms of the corresponding documents executed by the Shareholders holding at least 90% where the sale is occurring under clause 15.1(i) or at least 50% of the Company's issued Shares where the sale is occurring under clause 15.1(ii). 36 By an email dated 13 March 2014, Rahim wrote to Vali explaining that he was not in a position to decide on the proposal based on the information about Mag Men Holdings that Vali had provided to him. Rahim requested that Vali provide him with a number of documents including the shareholders' deed, the working capital agreement and the shareholding register, as well as details of the loans made by Comintra and Knox Partners. 37 On 14 March 2014, Vali as a director of Mag Men Holdings, executed a share transfer form which transferred Valra's shares in Mag Men Holdings to Tactracom. 38 On 18 March 2014, each of SLP Mag Nation (which was the company associated with Bret) and Comintra (which was the company associated with Shariff) entered into a share sale agreement with Tactracom whereby each agreed to sell its shares in Mag Men Holdings for a total sum of $51.12 and $21.14 respectively. This price was based on Tactracom's offer to purchase the whole shareholding in Mag Men Holdings for $100. Further, each of SLP Mag Nation and Comintra agreed to cancel its outstanding loan that it had made to Mag Men Holdings, in consideration of the issue to it of redeemable preference shares in Tactracom. I observe in passing, that the parties to the SLP Mag Nation agreement appear to have treated the loan, referred to, as the Knox Partners' loan in the financial statements as being the SLP Mag Nation loan, referred to in that agreement. 39 On 18 March 2014, the directors of Mag Men Holdings held a meeting. The minutes of that meeting record that based on the "substantial trading losses" and "substantial debt" the directors considered the current market value of Mag Men Holdings was nil. 40 The minutes also recorded the fact that pursuant to each of the share sale agreements the loans owed by Mag Men Holdings to Comintra and Knox Partners had been cancelled. The minutes also recorded that more than 90% of the shareholders had transferred their shares to Tactracom, and that Vali in his capacity as a director of Mag Men Holdings had signed the share transfer form transferring Valra's shares to Tactracom. 41 On 18 March 2014, each of SLP Mag Nation and Comintra was issued with redeemable preference shares in Tactracom calculated by reference to the amount of the cancelled loan which had been owed by Mag Men Holdings to that entity or related entity. 42 By an email dated 18 March 2014, Vali wrote to Rahim annexing the loan agreement between Comintra and Mag Men Holdings, the charge securing that loan, a loan extension letter, and an unexecuted shareholders' deed. Rahim had requested copies of those documents during the 13 March 2014 telephone conversation. The email also stated that shareholders with holdings representing 90% of all the shares in Mag Men Holdings had approved the proposal and had transferred their shares in Mag Men Holdings to Tactracom. Vali went on to say that in accordance with the terms of the shareholders' deed, he had transferred the remaining shares in Mag Men Holdings, including the shares held by Valra, to Tactracom. 43 By an email dated 19 March 2014, Rahim advised Vali and Ravi that he did not consent to the transfer of his shares to Tactracom. 44 On 19 March 2014, Valra received the amount of $6.47 for its shares. 45 Rahim deposed that in a Mag Nation newsletter dated 2 May 2014, Mag Nation had said that it had opened a new store in Melbourne; and that an article published on the internet on 7 August 2014, had stated that Mag Nation had opened a new store in Sydney and was also proposing to open two additional stores in Melbourne and Sydney. 46 Rahim went on to depose that he was concerned that whilst Valra had received only $6.47 in consideration for the transfer of its shares, Comintra and SLP Mag Nation, which had also been shareholders in Mag Men Holdings, acquired shareholdings in Tactracom which in turn controlled, or had interests in, Mag Men Holdings, Mega Mags, Mag Nation, Mag Nation Business Services and Mag National Retail Services. 47 Further, Rahim said that, Ravi (who had through his company, Candy Floss, until 14 March 2014, been a shareholder in Mag Men Holdings) had acquired a 50% shareholding in Mega Mags. 48 Rahim went on to depose to correspondence that had passed between solicitors in which Valra had requested the production of the financial statements and governance documents relating to Mag Men Holdings and its subsidiaries, and that the production had not been forthcoming. Mag Men Holdings, said Rahim, had failed to produce the documents which he said would assist Valra in determining whether to commence proceedings against Mag Men Holdings to obtain relief in relation to either of the causes of action referred to below. 49 Rahim went on to depose that by reason of the matters referred to above, he "reasonably believed" that Valra may have the right to obtain relief from Mag Men Holdings on the following grounds: (1) breach of cl 15 of the shareholders' deed on the basis that: (a) the terms upon which Mag Men Holdings shares were sold to Tactracom was not at arm's length as required by cl 15.1; or (b) Tactracom controlled and/or was controlled by Comintra and/or SLP Mag Nation; (2) relief under s 233 of the Corporations Act for oppression in forcing the sale of Valra's interests in Mag Men Holdings. 50 Rahim then said that at the date of swearing his affidavit, Mag Men Holdings had failed to produce the documents which would assist in determining whether to commence proceedings against Mag Men Holdings to obtain relief in respect of each of the causes of action referred to. Valra, said Rahim, was not in a position to decide whether to commence proceedings until it had inspected those documents. Rahim went on to identify, in a schedule to his affidavit, the documents which he said would assist in determining whether to commence a proceeding against Mag Men Holdings. 51 Prior to the hearing, Valra withdrew its request for certain of the categories of documents to which Rahim referred in the schedule to his affidavit. The documents from that schedule in respect of which Valra now seeks preliminary discovery are the following: 1. Constitution of Tactracom Pty Ltd (Tactracom). 2. Constitution of Comintra Pty Ltd. 3. Constitution of SLP Mag Nation Ltd. 4. Executed Tactracom Shareholders' Deed. 5. Executed Comintra Pty Ltd Shareholders' Deed. 6. Executed SLP Mag Nation Ltd Shareholders' Deed. 7. Executed Mag Men Holdings Pty Ltd (MMH) Shareholders' Deed. 8. All documents relating to the takeover of MMH by Tactracom including but not limited to: (a) Minutes of Directors Meetings; (b) Board Papers or reports; (c) Correspondence between MMH and Tactracom; (d) Correspondence between MMH and the shareholders of MMH; (e) Any documents evidencing any contract or understanding between any shareholders of MMH and Tactracom. 9. Externally prepared financial statements for MMH for the financial year ending 30 June 2013. 10. Externally prepared financial statements for Mega Mags Ltd (Mega Mags) for the financial year ending 30 June 2013. 11. MMH management accounts for the period 1 July 2010 to 31 March 2014. 52 Rahim deposed that he "reasonably believed" that Mag Men Holdings had, or was likely to have, in its control the constitutions and shareholders' deeds of Tactracom, Comintra and SLP Mag Nation on the basis that Mag Men Holdings was owned by Tactracom and was, in effect, controlled by Comintra and SLP Mag Nation and that it was reasonable to expect that Mag Men Holdings would have satisfied itself that it was compliant with cl 15.1 of the shareholders' deed by reference to those documents. 53 Rahim also said that he "reasonably believed" that Mag Men Holdings had, or was likely to have, in its control the executed shareholders' deed together with any executed variations as the shareholders' deed was a corporate governance document. 54 Rahim then deposed that he reasonably believed that Mag Men Holdings had, or was likely to have, in its control the documents referred to in para 8 of the schedule above as it was reasonable to expect that the documents were generated in the course of Mag Men Holdings' due diligence in considering the "takeover" proposal by Tactracom. 55 Rahim said that the documents listed in paras 9 to 11 of the schedule were financial records of Mag Men Holdings which he believed Mag Men Holdings had, or was likely to have, in its control. 56 On 19 February 2015, Vali filed an affidavit responding to Rahim's affidavit of 3 December 2014. Among other things, Vali's affidavit addressed a response to Rahim's evidence in relation to Mag Men Holdings having in its control each of the class of documents referred to above by Rahim. Vali also gave evidence of other correspondence between himself and Rahim which had been omitted from Rahim's affidavit. Vali also attached to his affidavit the financial statements of Mag Men Holdings and Mega Mags for the year ended 30 June 2013. 57 On 9 March 2015, Valra filed an affidavit sworn by Jeffrey Laurence Herbert in support of an application to amend Valra's originating application so as to expand considerably the range of documents in respect of which preliminary discovery was sought. 58 Mr Herbert deposed that on 26 February 2015, his firm, PPB Advisory had been instructed to review the documents produced by Mag Men Holdings with a view to ascertaining "in effect the financial position of Mag Men Holdings as at 14 March 2014". The documents referred to by Mr Herbert added an additional 40 different categories of documents to the documents sought by Valra by way of preliminary discovery. Most of the documents, however, comprised the financial statements and source documentation for each of the subsidiary companies, Mag Nation, Mag Nation Retail Services, Mag Nation Business Services and Mega Mags. 59 On 9 March 2015, Valra also filed a minute of amended originating application which expanded the range of documents in respect of which preliminary discovery was sought, to include those documents referred to by Mr Herbert in his affidavit. 60 On 20 March 2015 and 23 March 2015, Vali filed further affidavits. The latter affidavit attached the financial statements for Mag Men Holdings for the period 1 July 2013 to 17 March 2014.

the potential claim for relief based on s 233 of the corporations act 63 I consider first whether Valra has satisfied the requirements of r 7.23(1) of the Rules in relation to its potential claim for relief under s 233 of the Corporations Act. 64 Rule 7.23(1)(a) of the Rules refers to a right to obtain relief in "the Court" and, therefore, attention should be directed first to whether Valra has satisfied the requirements of r 7.23(1) in respect of a potential claim, which if made, would invoke the jurisdiction of this Court. (See, Apache North-West Pty Ltd v Newcrest Mining Ltd (2009) 182 FCR 124 at [8] per Moore and Gilmour JJ.) 65 Section 233 of the Corporations Act gives the Court power to make a variety of orders in circumstances identified in s 232 of the Corporations Act. Section 233 relevantly provides: The Court may make an order under s 233 if: (a) the conduct of a company's affairs; or (b) an actual proposed act or omission by or on behalf of the company; or (c) a resolution or proposed resolution of members or a class of members of a company; is either: (d) … (e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity. 66 As mentioned, in his affidavit, Rahim has deposed that he "reasonably believed" that Valra may be able to obtain relief against Mag Men Holdings under s 233 of the Corporations Act for oppression in "forcing the sale of Valra's interest in Mag Men Holdings". 67 In its written submissions, Valra claimed that there were four potential bases upon which it may obtain relief under s 233 of the Corporations Act arising from conduct associated with the forced sale of its shares. These were: (a) failing to give Valra enough time to consider the takeover proposal; (b) breach of cl 15.1 of the shareholders' deed; (c) sale of Valra's shares at "significant under value"; (d) unfairly discriminatory conduct. 68 In my view, the evidence does not establish reasonable cause to believe that Valra may have a right to obtain relief under s 233 of the Corporations Act on the basis that Valra was not given sufficient time to consider the takeover proposal. The compulsory transfer power vested in Mag Men Holdings under cl 15 of the shareholders' deed, was enlivened upon shareholders holding at least 90% of the shares in the company agreeing to sell their shares to Tactracom. That circumstance did not depend upon Valra's consent, nor indeed upon any decision being made by Valra. It follows that once that condition was fulfilled, whether Valra was given sufficient time to consider whether to sell its shares, was irrelevant to the enlivening of the obligation to sell its shares to Tactracom, and the attendant power in Mag Men Holdings to transfer Valra's shares to Tactracom under cl 15.2 of the shareholders' deed. 69 I will deal with the contention that there was a breach of cl 15.1 of the shareholders' deed later in these reasons. 70 I now deal with the contention that Valra reasonably believes that it may have a right to obtain relief under s 233 of the Corporations Act on the basis that the sale of Valra's shares was at "significant under value". Although Valra has not identified specifically the nature of the impugned conduct which would afford the potential relief, I assume that it comprises the conduct of the other shareholders in consenting to sell their shares on the basis that the value of Mag Men Holdings was at the date of sale $100. 71 In support of this potential claim, Rahim deposed that he was extremely surprised when he received the 19 February 2014 shareholder update (see [23] above) because he had "not prior to receiving that update received any information about Mag Men Holdings that indicated the company was in financial difficulty". Also, Rahim deposed that after the "takeover" had been completed, he had seen a newsletter dated 2 May 2014 from Mag Nation and an article published on the internet about the business. He deposed as follows: Contrary to the dire state of the Mag Nation business put to me by Vali [in December 2013 and in the update in February 2014] I understand from a Mag Nation newsletter dated 2 May 2014 that shortly after [Mag Men Holdings] was taken over by Tactracom that Mag Nation opened a new store in Melbourne and from a recent article published on the internet on 7 August 2014 that Mag Nation had opened a new store in Sydney and is proposing to open two additional stores in Melbourne and Sydney. 72 At the hearing, Valra contended that the valuation of the Mag Men Holdings in March 2014 at $100 was a surprise because until then the financial statements of Mag Men Holdings had reflected a substantial excess of assets over liabilities. 73 In my view, the objective evidence does not sustain Valra's contention that there is reasonable cause to believe that the sale of Valra's shares in Mag Men Holdings was at "significant under value"; nor does it justify Rahim's evidence in his affidavit to have been "extremely" surprised at the content of the February 2014 shareholder update because he had not prior to that been aware that Mag Men Holdings was in financial difficulty. 74 Prior to the swearing of his affidavit, Rahim was in possession of a number of financial statements for Mag Men Holdings and the subsidiary companies that Vali had sent to Rahim. First, on 9 December 2013, Vali had forwarded to Rahim financial statements that included the financial statements for Mag Men Holdings and Mag Nation for the years ended 30 June 2011 and 30 June 2012 as well as the tax returns for Mag Men Holdings and Mag Nation for the year ended 30 June 2010. In addition, on 19 February 2014, Vali sent Rahim the financial statements for Mag Men Holdings and Mag Nation for the year ended 30 June 2010. Each of these financial statements also reflected by way of comparison the position of each company in the previous financial year. Then, on 24 February 2014, Vali sent Rahim the tax returns for Mega Mags, the company conducting the New Zealand trading operations, for the 2010, 2011 and 2012 financial years. 75 It is the case, as Valra contended, that the financial statements for Mag Men Holdings which Vali supplied to Rahim showed that in the years ended June 2009 to June 2012, Mag Men Holdings had net assets which ranged from approximately $6.2 million in 2009, approximately $7 million in 2010, approximately $5.9 million in 2011 and approximately $5.6 million in 2012. 76 However, a feature of the balance sheet in respect of each of those years was that the major asset of Mag Men Holdings was a receivable in the form of a loan made by Mag Men Holdings to Mag Nation, the subsidiary company conducting the Australian operating business, which varied from $6.5 million in 2009 to $8.1 million in 2012. It is also the case, that during that period the major liabilities of Mag Men Holdings comprised loans from Knox Partners and Comintra. As at June 2012, the financial statements of Mag Men Holdings showed total liabilities of $2.65 million of which $2.27 million comprised monies owed by Mag Men Holdings on these two loans. 77 A major determinant, therefore, of the financial viability of Mag Men Holdings, as reflected in those financial statements, was the recoverability of its major asset, namely, the receivable, being the loan made to Mag Nation. The recoverability of this loan depended in turn upon the financial position of the borrower, namely, the Australian operating company, Mag Nation. 78 A perusal of the financial statements for Mag Nation during that period shows that Mag Nation's major asset was a loan made to Mega Mags for $3.6 million. The other assets were also loans to related companies. Therefore, the extent to which Mag Nation was in a position to service and repay the loan made to it by Mag Men Holdings, depended upon its own trading performance and the trading performance of the other operating company, namely, Mega Mags, which as I said, conducted the New Zealand business. 79 However, the financial statements in respect of each of Mag Nation and Mega Mags showed that the each company was a loss making enterprise during the whole period in question. Mag Nation incurred a loss of $607,829 in 2009, $557,293 in 2010, $242,882 in 2011 and $216,706 in 2012. Further, the financial statements for Mag Nation also show that in each of those years the current liabilities exceeded the current assets of the company by about $500,000; and that the total liabilities of Mag Nation exceeded its total assets by $2.09 million in 2009, $2.6 million in 2010, $2.8 million in 2011 and $3.1 million in 2012. Further, the tax returns for Mega Mags showed that it had up to 30 June 2012 incurred accumulated losses in excess of $3 million. I might add that the financial statements of all the companies did not reveal any fixed or other assets of any significant value. 80 Accordingly, while the financial statements of Mag Men Holdings, which were available to Rahim at the time of swearing his affidavit, reflected a substantial excess of assets over liabilities, that circumstance is not sufficient, in my view, to constitute reasonable cause to believe that Valra may have a right to relief on the grounds that the other Mag Men Holdings' shareholders engaged in oppressive conduct by agreeing to sell their shares at "significant under value". This is because a perusal of those financial statements showed that Mag Nation was in no position to repay the monies advanced to it by Mag Men Holdings, and that Mag Men Holdings was indebted to each of Comintra and Knox Partners in substantial amounts. 81 It was apparent, therefore, that the continued financial viability of Mag Men Holdings depended entirely on the continuing support of its two main lenders, because in the event that the two main lenders withdrew their support from the parent company and required repayment of their loans, the parent company would not be able to meet its liability under the loans by calling upon the receivable from Mag Nation. In other words, the financial viability of Mag Men Holdings as reflected by the net asset position relied on by Valra, was illusory. 82 As mentioned, in December 2013, Vali had sent Rahim an email stating that Mag Men Holdings was operating from "hand to mouth" and that its continued viability depended upon the continued financial support of its two shareholder lenders. As set out above, the financial statements which Vali sent to Rahim, confirmed that position. I place no weight, therefore, on the evidence of Rahim that he had not prior to 19 February 2014, been advised that Mag Men Holdings was in financial difficulty. 83 As mentioned, prior to the hearing, Mag Men Holdings provided further financial statements for Mag Men Holdings and Mag Nation. The financial statements for Mag Men Holdings reflected the financial position of that company as at 30 June 2013 and as at 17 March 2014. The financial statements for Mag Men Holdings revealed that as at 30 June 2013, the receivable from Mag Nation was recorded at about $4.39 million, compared to about $8.19 million as at 30 June 2012. The 30 June 2013 financial statements, however, reflected as an asset for the first time, an investment by Mag Men Holdings in Mega Mags of about $2.53 million and a loan to Mega Mags of $785,754. 84 Counsel for Valra submitted that the reduction in the amount of the receivable from Mag Nation suggested that Mag Nation had in the course of the 2013 financial year repaid more than $3 million to Mag Men Holdings and that this reflected, in turn, that Mag Nation was a viable business. I do not accept that submission. There is no record in the financial statements of Mag Men Holdings to reflect any such transaction. Rather, the financial statements of Mag Men Holdings suggest a re-arrangement of Mag Nation's previous debt obligation between Mag Men Holdings, Mag Nation and Mega Mags, so that Mag Men Holdings acquired from Mag Nation the debt owed by Mega Mags and then converted part of that debt to equity in Mega Mags. There is simply no objective evidence to support the submission made by counsel for Valra, that there appeared to be a repayment by Mag Nation of about $3.7 million of the loan due to Mag Men Holdings during the 2013 financial year. 85 Accordingly, the objective evidence derived from the financial statements does not incline the mind to accepting the proposition that the other shareholders acted oppressively by agreeing to sell their shares in Mag Men Holdings at a "significant under value". To the contrary, the objective evidence supports the position that at 14 March 2014, Mag Men Holdings' financial viability depended entirely upon the continuing support of its shareholder lenders. 86 For the sake of completeness, I observe that at the hearing, Valra also referred to a letter from Mag Men Holdings' accountant accompanying the 17 March 2014 accounts, which stated that the company had incurred arrears of interest in excess of $650,000 to each of Comintra and SLP Mag Nation. Valra complained that the basis for the calculation of interest in that amount was unexplained. In my view, this circumstance does not assist Valra in demonstrating reasonable cause to believe that it may have a right to relief on the basis of a forced sale of its shares at significant undervalue. This is because it is apparent on the evidence before the Court that even if the amounts claimed for arrears of interest are excluded, Mag Men Holdings was on 17 March 2014 still not in a position to meet the liabilities due to its lenders if the lenders were to withdraw their support. 87 Further, Rahim's evidence as to the reports of Mag Nation opening new stores does not comprise a basis upon which to conclude that there is reasonable cause to believe that the sale of Valra's shares at 14 March 2014, was at a "significant under value". This is because, by 18 May 2014, Mag Men Holdings' financial position had improved considerably, consequent upon the cancellation of its debt. 88 Further, it is apparent from the reports referred to by Rahim that Mag Nation was downsizing its operations by closing a store in Elizabeth Street on the expiry of the lease, and was now operating its business from a space located within the premises of an established bookshop. Also, future plans for opening new shops referred to in reports were expressed in cautious terms. 89 Accordingly, in my view, Valra has failed to satisfy the requirements under r 7.23(1)(a) of the Rules, in relation to its potential oppression claim based on an allegation of forcing the sale of Valra's shares at a "significant under value". 90 The evidentiary foundation for the claim for preliminary discovery of the additional categories of documents included in the amended originating application, was provided by Mr Herbert. Mr Herbert deposed no more than that those were the categories of documents which he would require if he was to carry out a full valuation of Mag Men Holdings as at 14 March 2014. On Mr Herbert's evidence, the documents he identified are, therefore, relevant to a potential claim by Valra that there was oppressive conduct in the other Mag Men Holdings' shareholders agreeing to sell their shares, and so forcing a sale of Valra's shares, at a "significant under value". 91 I have already found, however, that Valra has failed to satisfy the requirements of r 7.23(1)(a) of the Rules, that it has reasonable cause to believe that there was oppressive conduct by the other shareholders in forcing the sale of Valra's shares at a "significant under value". It follows that there is no basis for making an order for preliminary discovery of the documents identified by Mr Herbert, in respect of that potential claim. 92 I now deal with the fourth of Valra's potential claims for relief under s 233 of the Corporations Act; namely, the potential claim that Valra has been unfairly discriminated against, in that it was not provided with the opportunity that was given to SLP Mag Nation, Comintra and Ravi to continue to maintain an interest in the companies comprising the Mag Men Holdings group of companies. 93 In this regard, Valra contended that each of Comintra and SLP Mag Nation was given the opportunity to acquire an interest in Tactracom and thereby to continue to enjoy an interest in the companies comprising the Mag Men Holdings group. Further, said Valra, Ravi, who was previously through his company, Candy Floss, a shareholder in Mag Men Holdings, was given the opportunity to acquire a 50% interest in Mega Mags, which was not given to Valra. 94 In my view, the objective evidence does comprise reasonable cause to believe that Valra may have a right to obtain relief on the grounds that Mag Men Holdings' affairs were conducted in a manner which unfairly discriminated against Valra, in that Valra was not afforded the opportunity given to other shareholders, to invest in Tactracom, or to take an interest in one of the subsidiary companies, and so retain an interest in one or more of the Mag Men Holdings group of companies. 95 It is the case that Vali, who was until 9 March 2014, a shareholder in Mag Men Holdings, Comintra and SPL Mag Nation had made a greater financial commitment to Mag Men Holdings through having provided substantial loan support to Mag Men Holdings than had Valra. However, each of those entities was given the opportunity to invest in Tactracom with the prospect of recovering the whole or at least some of their investment in Mag Men Holdings, whereas Valra, which had also made a substantial investment, but not as substantial as the other three entities mentioned, was not given that same opportunity. Any such opportunity may have been attended with a requirement for Valra to make an additional financial commitment, but whether that be the case or not, the opportunity was, in any event, denied to Valra. 96 Further, no explanation was given by Mag Men Holdings which explained why Ravi was afforded the opportunity to acquire a 50% interest in Mega Mags and the same opportunity was not afforded to any other shareholder or associated person. 97 Accordingly, I find that Valra has satisfied the requirements of r 7.23(1)(a) of the Rules in respect of its contention that it reasonably believes that it may have a right to obtain relief in respect of a claim of oppressive conduct in unfairly discriminating against Valra. 98 Valra said that the documents relevant to this potential claim for relief, comprised the documents in para 8 of the schedule to the amended originating application, namely: All documents relating to the takeover of MMH by Tactracom including but not limited to: (a) Minutes of Directors Meetings; (b) Board Papers or reports; (c) Correspondence between MMH and Tactracom; (d) Correspondence between MMH and the shareholders of MMH; (e) Any documents evidencing any contract or understanding between any shareholders of MMH and Tactracom. 99 Rahim deposed that Valra "reasonably believed" that the documents in para 8 of the schedule, referred to above were, or were likely to have been, in the control of Mag Men Holdings because it would be expected to have done some due diligence in respect of the Tactracom proposal. Vali responded in his affidavit of 19 February 2015, by saying that the only signed minutes of directors meetings "directly relevant to whether Valra has any right to obtain relief as alleged", are the minutes of the meeting of 18 March 2014 which had already been disclosed. 100 Vali went on to say that there were no board papers or reports, nor was there any correspondence between Mag Men Holdings and Tactracom "directly relevant to whether Valra has any right to obtain relief as alleged". Vali made the same response in relation to correspondence between Mag Men Holdings and its shareholders. 101 In relation to documents evidencing any contract or understanding between any of the shareholders of Mag Men Holdings and Tactracom, Vali deposed that "the only contracts directly relevant to whether Valra has any right to obtain relief as alleged" were the share sale agreements which had already been disclosed. 102 Mag Men Holdings submitted that the deposition by Vali in his affidavit, in the terms set out in [99] to [101] above, was a complete answer to the claim that preliminary discovery should be given in relation to the documents identified by Valra in para 8 of the schedule to its amended originating application. 103 In support of that contention, Mag Men Holdings referred to United Voice v Accolade Wines Australia Limited [2013] FCA 285. At [83], Lander J observed: UV and AWU cannot satisfy the test in r 7.23(1)(c)(i) in respect of those documents that Accolade Wines says it does not have. No one could reasonably believe, in view of Accolade Wines' statement, that those documents are in Accolade Wines' control. 104 In my view, those observations do not apply in the particular circumstances of this case. 105 Vali's affidavit, which was relied upon by Mag Men Holdings, does not refer to the category of documents specifically identified in para 8 of the schedule, namely, documents relating to the "takeover of [Mag Men Holdings] by Tactracom". Rather, the statements made in Vali's affidavit are in conclusory terms in that they refer to documents that are "directly relevant to whether Valra has any right to obtain relief as alleged". In my view, a response in such conclusory terms is unsatisfactory. It does not answer the question whether there are documents within the company's control which fall within the description of the documents identified in [98] above. Further, I accept Valra's submissions that it was unlikely that the takeover occurred in circumstances where no documents were generated between Mag Men Holdings and the shareholders who benefited from the takeover, particularly, in light of the fact that the debts owed by Mag Men Holdings were to be cancelled as part of the "takeover". 106 Therefore, I will order that Mag Men Holdings provide preliminary discovery in respect of the documents referred to in para 8 of the schedule to the amended originating application.

Valra Pty Ltd as Trustee for Abdul Rahim Valibhoy Family Trust v Mag Men Holdings Pty Ltd

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Judgment (8 paragraphs)

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Cases Cited (9)

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