William McCausland and Another v Surfing Hardware International Holdings Pty... [2009] NSWIRComm 187 | Case summary

1 These matters were set down for hearing on Monday, 22 June 2009. On the second day of the hearing, an application was made on behalf of the applicants that the hearing be adjourned in order to enable proceedings to be commenced in the Federal Court against the respondents with a view to removing the s 106 proceedings into the Supreme Court, pending the Federal Court application to remove the proceedings into the Supreme Court. The Court has been informed that proceedings have since been commenced by the applicants in both the Federal Court and the Supreme Court. 2 The application in this Court came about because of the belated provision of a document by the respondent three days before the hearing on Friday 19 June 2009, the existence of which until that point, the applicants had been unaware. According to the applicants, the document is of "fundamental crucial importance" giving rise to causes of action to be commenced in the Federal Court. These causes of action were said to contemplate breaches of fiduciary duties of the directors of the corporate respondents, misrepresentation by silence and other breaches under the Corporations Act 2001 (Cth) and the Trade Practices Act 1974 (Cth). 3 Although the respondents disputed the significance of the document attributed to it by the applicants, asserting instead that its relevance was confined to issues of quantification in the claims under s 106, they effectively joined in the application to adjourn the proceedings in this Court to enable their removal into the Supreme Court. In this regard, the respondents, through their senior counsel, put to the Court: The matter should go to the Supreme Court: That is our submission. That is where it should have been. The appropriate order to make, is that the matter be adjourned to allow that to happen but only on the condition that the plaintiff [sic] pays the respondent's costs thrown away by this event. Secondly, that they pay those costs on an indemnity basis and thirdly, that they pay those costs forthwith and that we have liberty to move to recover those costs forthwith. An order in those terms would do justice between the parties in so far as your Honour could ever do it given the circumstances. We make that submission, because, this Court should not be taxed with this case. It has taken long enough but, we shouldn't be in a position that we run a trial and then we defend a trial, jurisdictional issues arise and there is no doubt they are there. How they may resolve what ever resolve your Honour we can only speculate. Parties are left with a 3 stage process, trial, appeal before they can get to court of appeal. If this matter is cross-vested it is a 2 stage process and there is an automatic right of appeal from the Supreme Court of New South Wales. 4 The matters have had a protracted history of litigation. When this concern was put to the applicants by the Court, their senior counsel informed the Court that the applicants were fully aware and accepting of the consequences of an adjournment, namely further delay in the determination of their applications. The respondents did not point to any prejudice to them arising from a further delay. Both parties relied on the perceived advantage in having all causes of action heard in the one jurisdiction and avoiding a multiplicity of proceedings. 5 The adjournment application was granted by the Court primarily on the basis that it was supported by the respondents. 6 This judgment deals with the parties' respective applications for costs arising as a result of the application to adjourn the proceedings. 7 It is convenient, at this point, to make some brief observations about the document which motivated the applicants to apply for an adjournment. 8 On 24 March 2009, Michael Thomas Alscher, a director of Crescent Capital Partners Group (CCP), affirmed an affidavit. CCP, it should briefly be explained, was involved in the compulsory acquisition of the applicants' shareholdings in SIH Holdings Pty Limited (the second respondent) by the use of a "drag-along" clause in a shareholders agreement dated 20 December 2002. The "drag-along" clause, as I understand it, facilitated a process whereby if 60 per cent of shareholders expressed a desire to outbid an external shareholder then the remaining shareholders would be "dragged along" into the sale process. The applicants allege that their shareholdings in the second respondent were sold to CCP at an undervalue. 9 According to Mr Alscher in his affidavit, he had formed the view that an appropriate offer to be made by CCP for the shareholdings in the second respondent would be $0.67 per share. To that effect, he submitted a report on 16 July 2004 to the Investment Committee of CCP recommending that an offer of $0.67 per share be made for all shares in the second respondent, other than those shares already held by CCP. It was to this report that the subject document produced three days before the hearing should have been annexed, but was not, according to the respondents. 10 The document is a spreadsheet prepared by Mr Alscher. It records, among other things, budget forecasts for the second respondent in 2005 and CCP's proposal to bid for the shareholdings in the second respondent. On the last page of the spreadsheet, under the sub-heading, Valuation Table, there appears a nominated share valuation of $1.88. According to the applicants, this information as well as other information on the spreadsheet, provides a significant amount of data of direct relevance to the question whether $0.67 per share represented a fair market value or whether the value should have been much higher. According to the applicants, the information raises fundamental questions with regard to how many other persons were aware of the spreadsheet at or around the time the shares were sold and were therefore on notice that the nominated value of the shares was far in excess of $0.67 per share. The information is also said to be relevant to the issue of whether the applicants were forced to sell their shares at an undervalue. The applicants also claim that the information in the spreadsheet, having only recently come to light, was therefore not made available to their expert valuer retained for the purposes of providing a report for use in the s 106 proceedings. 11 According to the respondents the figures in the spreadsheet are not self-explanatory. The figures in the Valuation Table, it was suggested, do not reflect the value of the applicants' shareholdings. Rather, they reflect EBITDA (earnings before interest, tax, depreciation and amortisation) forecast figures for 2005 and forecast figures for shareholdings for 2005 (the $1.88 share value) of other corporations operating in the same industry, namely Billabong and Quiksilver. 12 This may or may not be an accurate reflection of the contents of the spreadsheet. For my own part, the document, on its face, is not at all self-explanatory. The figures in the Valuation Table may provide some support for the applicants' claim that their shareholdings in the second respondent were sold at an undervalue and that persons or entities concerned were aware of this. Without the benefit of other material, I am not in a position, nor have I been invited, to assess whether the spreadsheet has the significance contended by the applicants. 13 The parties are clearly at odds about the significance of the late disclosure of the document insofar as it impacts on the present s 106 applications. There can be little doubt, as the summonses for relief disclose, that the issue to which the spreadsheet is said to be of relevance, is an important one in the applicants' respective cases, that is, whether their shareholdings in the second respondent were sold at an undervalue. Seen in its proper context, the spreadsheet does not raise a new issue. The applicants' primary argument, however, based on the disclosure of the spreadsheet, was that it founded other causes of action in other jurisdictions, thus providing a justification for the adjournment application by reason of the prospect of avoiding a multiplicity of proceedings through the mechanism of cross-vesting the two sets of proceedings in the Supreme Court. 14 The applicants' application for costs was based on the contention that had the spreadsheet been properly attached to Mr Alscher's affidavit of 24 March 2009, the application for an adjournment would have been made at that time. In the result, the applicants say they have incurred costs associated with the preparation of their respective cases. Because of the respondents' failure to provide the spreadsheet in March 2009, the applicants', "work and costs have been thrown away". The applicants submitted in the alternative that if the Court were not minded to make an order for costs in their favour, that costs should be reserved pending the outcome of the cross-vesting application. 15 The respondents also made an application for their costs. According to them, the information in the spreadsheet raises no new issue in the applicants' cases since their cases have been from the outset that the shareholdings were sold at an undervalue. Moreover, the applicants were on notice at the time of the service of Mr Alscher's affidavit of the existence of the spreadsheet. In developing this particular contention, the respondents informed the Court that Mr Alscher had been required for cross-examination. This request, no doubt, proceeded from a close inspection of Mr Alscher's report of 16 July 2004. The report makes specific reference to the unattached spreadsheet and therefore should have elicited enquiries at a much earlier stage from the applicants as to the existence of the spreadsheet and its contents. The applicants' expert valuer who prepared a report on the valuation of the applicants' shareholdings at the time of sale also made no enquiry about the spreadsheet referred to in the report. 16 I have inspected the 16 July 2004 report. It contains two references to "attached spreadsheets" (which were not attached). This, in my view, should have alerted the applicants to the existence of those spreadsheets and caused them to make appropriate enquiries about their existence, as well as their contents, at a much earlier time. The references to the attached spreadsheets in the Report are made in the context of the proposed bid valuation for the shareholdings by CCP, as well as market valuations, and calculations and listed competitor valuations. All these matters, about which the applicants were clearly on notice as at 24 March 2003 (or at the time of service of the affidavit), are matters of direct relevance to the applicants' claim that their shareholdings were undervalued. No reason has been advanced to the Court on the applicants' behalf as to why production of these documents was not earlier sought at an appropriate time. 17 In addition, the respondents tendered three draft summonses for relief on their costs application. The documents suggest an intention on the part of the applicants to seek the leave of the Court to further amend the summonses. No such application has been made to the court. The draft documents have therefore not been taken into account in the Court's consideration of the costs applications. The applicants did however inform the Court during the adjournment application that the s 106 proceedings would not finish within the allotted time frame of two weeks. 18 What is significant, and weights heavily against the success of the applicants' application for costs as a result of the adjournment, is that the express references to "attached spreadsheets" in Mr Alscher's affidavit clearly indicate that they were on notice of the existence of the documents and had the opportunity to make enquiries and take steps to procure those documents as early as March 2009, or at the time when the affidavit was served. 19 The same reasons weigh heavily in favour of the respondents' application for costs incurred in preparation for the hearing. In my view, the applicants had the opportunity to obtain the spreadsheet at a much earlier stage. Had they availed themselves of this opportunity, the process in which they are presently engaged could have been commenced at an earlier and more convenient stage, not only for the parties, but also for the Court in its allocation of time and public resources. Nevertheless, the respondents joined in the application to adjourn the proceedings so that steps could be taken by the applicants to cross-vest the proceedings in the Supreme Court. Because the applications have been made at an interlocutory stage of the proceedings, I propose to follow the usual course and reserve costs, bearing in mind the comments I have made with regard to the merits of each of the parties' costs applications. Orders

William McCausland and Another v Surfing Hardware International Holdings Pty Limited and Others

At a glance

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Judgment (15 paragraphs)

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