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

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.

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Judgment (8 paragraphs)

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