Bain Pacific Associations & Ors and Kelly & Ors
[2006] FamCA 518
•16 June 2005
[2006] FamCA 518
FAMILY LAW ACT 1975
IN THE FULL COURT OF THE
FAMILY COURT OF AUSTRALIA
AT SYDNEY Appeal No. EA40 of 2005
File No. SYF7042 of 2000
IN THE MATTER OF: BA P ASSOCIATIONS
LLC, BCIP ASSOCIATES II-B
AND: PEP (NZ) LIMITED,
PEP CO-INVESTMENTS
PTY LIMITED, PEP INVESTMENT
PTY LIMITED
Applicant Companies
AND: K
1st Respondent Wife
AND: OTHERS
CORAM: BRYANT CJ, WARNICK AND MAY JJ
DATE OF HEARING: 26 OCTOBER 2005
DATE OF JUDGMENT: 16 JUNE 2006
JUDGMENT OF THE FULL COURT
Appearances: Mr C Simpson of counsel instructed by Minter Ellision, Lawyers, Aurora Place, 88 Phillips Street, Sydney, NSW, 2000 appearing for the applicant companies
Mr I Harrison of senior counsel instructed by Robilliard, Lawyers, Level 4, 79 George Street, Parramatta, NSW, 2150 appearing for the 1st respondent wife
Mr S Fowler, Solicitor of Stuart Fowler & Partners, Level 5, 130 Elizabeth Street, Sydney, NSW, 2000 appearing for the respondent husband (only, if necessary as to costs)
| Name of Appeal | BA P Associations & Ors & K & Ors |
| Appeal Number | EA40 of 2004 |
| Date of Appeal Hearing | 26 October 2005 |
| Date of Judgment | 16 June 2005 |
| Coram | Bryant CJ, Warnick and May JJ |
Catchwords: APPEALS – LEAVE TO APPEAL – FROM DECISION OF FAMILY COURT JUDGE – PROPERTY SETTLEMENT – SUMMARY DISMISSAL – An application for leave to appeal from a refusal of the trial judge to summarily dismiss an application by the wife to set aside a provision of a shareholder agreement entered into between the husband and the appellant companies – The effect of the agreement was to restrict the husband from disposing of any shares, units or performance options which he owned to any person other than an ‘affiliate’ of the husband – The wife was not a person to whom the definition ‘affiliate’ applied. The appellants argued that the trial Judge either applied the wrong principle or failed to apply the right principle correctly in so far as he excluded from his consideration incontrovertible facts raised by the investors and confined himself only to the case of the wife – The trial Judge did not misstate what was said in cases such as Beck and his Honour had taken notice of the non-contentions elements of the investors’ case.
RIGHTS OF THIRD PARTIES – The appellants argued that there was no authority to support an exercise of discretion to make orders extinguishing the rights of bona fide third party purchasers for value – The absence of authority may arise because bona fide transactions for value ordinarily do not diminish the estate over which the parties are at issue and so parties do not care to attack them – Secondly, once it is conceded that an order is within power, the argument in support of summary dismissal is rendered extremely difficult.
TRANSACTION TO DEFEAT CLAIM – SECTION 106B FAMILY LAW ACT– The appellant’s argued that the effects of the transaction were only temporary and as such it could not be said that the anticipated order had been defeated, albeit the actual receipt by the wife of the property might be deferred – The deferral of an entitlement of the wife to receive property which, but for the agreement, she might otherwise receive at the time orders were made might well amount to defeat of an “anticipated order” – Once the availability of an argument to the contrary is recognised, the proposition put on behalf of the investors could not carry an application for summary dismissal.
Pelerman & Pelerman (2000) FLC 93-037
Beck & Beck (2004) FLC 93-181
Gould & Gould; Swire Investments Ltd (1993) FLC 92-434
Webster v Lampard (1993) 177 CLR 598
Lindon v Commonwealth of Australia (No. 2) (1996) 136 ALR 251
Rutherford & Rotherford (1991) FLC 92-255
Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc. (1981) 148 CLR 170That the appeal be dismissed. That the appellants pay the costs of the respondent wife as agreed and in default of agreement, as assessed under Division 19.6.2 of Chapter 19 of the Family Law Rules 2004.
In pending property settlement proceedings brought by the wife she sought an order:
“…pursuant to section 106B for the setting aside of the provisions of clause 11 of the Shareholders’ Agreement dated 23 November 1999 entered into between the husband and the remaining respondents (“the Shareholders’ Agreement”).”
The husband and the “remaining respondents” sought an order that the application of the wife for the order set out above, be summarily dismissed. On 15 March 2005, his Honour Rose J dismissed the application for summary dismissal. Against that dismissal, some of the “remaining respondents”, namely the entities described in the Shareholders’ Agreement as “the investors”, have pursued an application for permission to appeal and these reasons relate to the disposition of that application.
The draft Notice of Appeal contained five grounds which, by the written outline of argument of counsel for the investors and his oral argument, were reduced to three propositions:-
·Firstly, that the Judge at first instance, in addressing the issue of “summary dismissal”, had either applied the wrong principle or had failed to apply the right principle correctly, in so far as he excluded from his consideration, incontrovertible facts raised by the investors and confined himself only to the case of the wife.
·Secondly, that, since the result of an order in terms sought by the wife would be the extinguishment of the rights of bona fide third party “purchasers” for value, such an order could not, or would not, be a permissible exercise of discretion.
·Thirdly, that while the effect of clause 11 of the Shareholders’ Agreement might have been to restrict the capacity of the husband to deal with his shares and even to have diminished their value, these effects were only temporary. Therefore, it could not be said that an anticipated order had been defeated, albeit the actual receipt by the wife of property might be deferred, because of clause 11.
We will return to discussion of these arguments, of the principles applicable to permission to appeal and of our conclusions, after a short background and summary of the judgment of the Judge at first instance.
Background and summary of the judgment of Rose J
The husband and wife commenced cohabitation in about April 1980, though they separated for a time before marrying in September 1984, finally separating in August 1988. The marriage was dissolved by decree nisi in July 2001.
His Honour recorded that in the property settlement proceedings, interim orders were made in November 2001, requiring, among other things, transfer by the husband to the wife of his interest in the former matrimonial home and that he pay all mortgage instalments in relation to that property. In the substantive proceedings the wife sought, apart from the order pursuant to section 106B, an order for periodical spousal maintenance, a declaration as to personalty, the discharge by the husband of the mortgage over the former matrimonial home and A$2 million.
In his reasons, his Honour set out the legal principles relating to summary dismissal, commencing with a reference to what was said by the Full Court of this Court in Pelerman & Pelerman (2000) FLC 93-037 at 87,582. Importantly in relation to this appeal, his Honour also said:
“11. It has been further held that “it is only the respondent’s material to which regard should be had in the determination of an application for summary dismissal”. In application of that principle, I have not had regard to any of the evidentiary material on behalf of the respondents or any of them or the submissions made in respect thereof notwithstanding the lack of objection by counsel for the wife.”
We assume that the reference to the “respondents”, in the second sentence of the paragraph, was a reference to the applicants for summary dismissal.
In support of the proposition contained in parentheses in the first sentence of paragraph 11, his Honour referred to Beck & Beck (2004) FLC 93-181 at 79,051.
His Honour then turned to the statement of claim of the wife and recorded that the material therein, which his Honour proceeded to quote, was not controversial. He noted that between November 1991 and March 1999 the husband had purchased 90,921 shares in the company, AEMS Pty Ltd. On 27 November 1999, the husband entered into the Shareholders’ Agreement as a consequence of which the shares earlier referred to became subject to that agreement and in particular to clause 11. His Honour continued:
“19. Clause 11 of the Shareholders Agreement restricts the husband “as a manager and unit holder disposing of any shares, units, or performance options of which he is the registered owner and beneficial holder in the company to any person other than an affiliate of” the husband. There is no issue that the husband is “a manager and unit holder”.
20. Pursuant to Clause 1.1 of the Shareholders Agreement “the term “affiliate” is defined as:
a.In relation to a shareholder or unit holder that is a person, the spouse or child of that party, or, for estate planning purposes a trust or company controlled (and which will continue to be controlled) by that party;
b.In relation to [SW], any entity which succeeds [SW] as trustee of a unit trust and which has been previously approved of by all of the other parties to this agreement.”
21. The wife is not a person to whom the definition “affiliate”, as defined in the Shareholders Agreement, applies.
22. The shares held by the husband and by him in his capacity as trustee to which earlier reference has been made are contended by the wife to have a value of $2,900,000.00 as at 30 June 2001. “as at the same date it is said for the husband the shares have a value of $1,049.000.00.”
23. The assets of the husband and wife or either of them “significantly comprised the former matrimonial home […], the 1st respondent’s (sic husband) interest in a property in Canberra, the shares in the company previously referred to and the unit. It is alleged by the wife that the husband hold [sic] beneficially a one third interest in the units in the AEMS Employment Unit Trust Number 12.”
24. The wife contended that:-
(i)The husband “knew or ought reasonably to have foreseen that” she would make an application at some time for a property settlement pursuant to the provisions of Section 79 of the Family Law Act.
(ii)The husband knew or ought reasonably have forseen as reasonably probably [sic] that the wife would seek to include the shares and units previously referred to as part of the total pool of assets of the husband and wife or either of them and as a consequence available to satisfy any order pursuant to Section 79 of the Family Law Act.
(iii)The value of the shares in the company had been diminished by the husband entering into the shareholders agreement.
(iv)Each of those contentions is opposed by the husband and to the extent relevant the other respondents. They are, of course, essentially contested questions of fact the resolution of which, if relevant, is peculiarly a matter for the trial judge and not for me.” (footnote references omitted)
His Honour then turned to a discussion of section 106B of the Family Law Act 1975, as amended, saying that:
“25. The provisions of Section 106B provides a discretionary power to set aside or restrain transactions including those which may affect the interests of third parties and to that extent is not read down to limit its operation in respect of either sham transactions or where the third party is the alter ego of the husband or wife. Section 106B was inserted by amending legislation in 2000 replacing what had previously been Section 85 although the terms of both sections are identical.” (footnote references omitted)
As authority for the proposition in the first sentence of paragraph 25 of his reasons, his Honour cited Gould & Gould; Swire Investments Ltd (1993) FLC 92-434.
His Honour then set out the “…necessary or essential elements which need to be established before the exercise of the discretionary power can be contemplated”. He then moved to consider “THE EXERCISE OF DISCRETIONARY POWER – THIRD PARTIES”. He said:
“The prospective exercise of discretion having regard to the interests of third parties lies very much at the heart of the application before me.”
He then quoted the terms of section 106B(3) and noted those cases in which the reluctance of the court to interfere with the rights of a bona fide purchaser had been stated.
Of significance to the first argument in support of the application before us, his Honour also addressed submissions on behalf of the investors and in so doing made statements which are critical to a consideration of the argument that he misapplied the principle as to the material to which he could have regard. The relevant parts of his Honour’s reasons are set out later in discussion of the argument.
Then, under the heading “Conclusion” his Honour said:
“35. I have concluded that the questions of fact and law to which I have referred represent matters of substance to be determined. I bear in mind that even if the wife’s case is a weak one, that “is not sufficient to warrant termination.” There are disputed issues of fact and absence of material evidence of a commercial nature to which I have referred. In the face of those matters, as well as the questions of law which are open to be argued, I have determined that I must follow the caution emphasised in the leading authorities including “nowhere is that need for exceptional caution more important than in a case where the ultimate outcome turns upon the resolution of some disputed issue or issues of fact.” In such a case, it is essential that “great care… be exercised to ensure that under the guise of achieving expeditious finality a plaintiff is not improperly deprived of his (or her) opportunity for the trial of his (or her) case by the appointed tribunal. For the reasons outlined by me I am unable to conclude that the application of the wife “is clearly frivolous or vexatious”. (footnote references omitted)
The arguments in support of the application
In his written submissions in particular, counsel for the investors argued that his Honour had misapplied the statement in Beck (supra at 79,052) that:
“..[A]n application for summary dismissal must be determined on the basis only of the material put forward by the respondent (to that application)…”
Counsel submitted that this statement in Beck followed the reference by that court to the joint judgment of the majority of the High Court in Webster v Lampard (1993) 177 CLR 598 and in particular the passage:
“As has been said, it was incumbent on the Master, in the absence of any opportunity of cross-examination, to dispose of the case on the basis that the Websters’ version of the facts, which was not inherently incredible, would ultimately be accepted on the trial of the action.”
Of this passage, counsel submitted:
“As appears from the statement of principle the Full Court was expressing itself to apply, the High Court was not expressing any principle that a court should not have “regard to any of the evidentiary material on behalf of the respondents or any of them or the submissions made in respect thereof”.
Notwithstanding these references to expressions of principle and criticism of statements by Rose J of the pertinent principle, the thrust of the submission for the investors was not so much that Rose J had misstated the principle, but that he had misapplied it.
In considering whether Rose J did misapply the relevant principle, we accept the proposition, as we understand it to be put by counsel for the investors, that apart from material in the case of the respondent to an application for summary dismissal, the court may have regard to relevant non-contentious facts, even if raised by the applicant for summary dismissal.
We enquired of counsel for the investors about the material to which he contended Rose J should have had regard. Counsel took us to an affidavit contained in volume 2 of the Appeal Book, by Mr M, the managing director of one of the investors. Mr M explained the “modus operandi” of the investment fund. Among other things he deposed (commencing at paragraph 15):
“15. There was further discussion about the continued employment engagement of each of senior managers and other executives. In the course of that discussion, I said words to the effect:
“If we come in, we don’t allow key executives to sell down their shareholdings. In all our investments, a key tenet is that all our investors, PEP executives as investors [referring to PEP Investment Pty Limited], as well as company management, are all focussed on exactly the same thing and that is to maximise shareholder returns during the term of the investment.”
...
20. Various documents, including a Shareholders Agreement, were subsequently negotiated between all the parties who held shares and the PEP and [B] entities. A copy of the Shareholders Agreement dated 25 November 1999 is the Exhibit marked ‘PJM-1B’.
21. Pursuant to the Shareholders agreement, the PEP and [B] entities paid $28,803,248.53 and took up 58.2%, being 496,351 of the shares in [AEMS] Pty Limited.
22. The Shareholders agreement contained provisions, including clause 11, which restricts the disposal by the parties regarded as the management team from disposing of shares held by them.
23. My purpose, on behalf of PEP, in requiring that provision as a condition of investing in [AEMS] Pty Limited, was to ensure that the management of the company retained significant equity in the company. A primary reason leveraged buy-outs are effective is because management’s incentives and goals are directly aligned with those of the shareholders. Management are significant shareholders.…
24. PEP would not have made its investment in [AEMS] Pty Limited in the absence of a provision of the kind referred to in paragraph 22 above. Further, any modification of those provisions will adversely affect PEP’s investment because of the loss of the rights it has as a shareholder under the Shareholders Agreement in relation to management shares.”
In support of his contention that Rose J ignored these matters, counsel for the investors referred firstly, to his Honour’s statement of the relevant principles and secondly, to statements such as those in the second sentence of paragraph 11 earlier quoted, but repeated here:
“…In application of that principle, I have not had regard to any of the evidentiary material on behalf of the respondents or any of them or the submissions made in respect thereof notwithstanding the lack of objection by counsel for the wife.”
and more particularly, in paragraph 34:
“34. It was cogently submitted on behalf of the husband and the other respondents that no reasonable exercise of discretion could result in the orders sought being made. It was submitted that Clause 11 could not in effect be dissected to only deal with the interests of the husband and the respondents face significant adverse commercial consequences in the event of Clause 11 being set aside. It is not difficult to anticipate the potential commercial consequences that may follow as a result of a key Clause of the Shareholders Agreement being set aside which imposed significant restraints as material features of the Shareholders Agreement. The difficulty that I have is that I am bound by the Full Court’s Judgment in Beck to have regard only to the evidence of the wife for the purpose of determining whether or not the application for summary dismissal attracts the principles previously set forth by me with the result that the substantive application is “doomed to fail” or is “clearly frivolous or vexatious”. It may well be that evidence adduced by the husband and/ or one or more of the respondents and if accepted by the trial judge would demonstrate that it is not possible to make “any order proper for the protection of” such respondents as a “person interested”. It had been forcefully submitted that it was not possible to make any such protective order in the circumstances of the case. However, I can only proceed on the evidence that is properly before me and able to attract the required weight. That evidence for the purpose of the application before me is solely the evidence of the wife.”
True it is that in paragraphs 11 and 34 of his Honour’s reasons, he has not recognised any qualification to the proposition that an application for summary dismissal must be determined on the basis only of the material put forward by the respondent to the application. However, his Honour has not misstated what was said in cases such as Beck, and, more importantly to the outcome of the application before us, we consider that it can be seen from his Honour’s reasons that he has in fact taken notice of the non-contentious elements of the investors’ case.
In paragraph 34 (just quoted) Rose J accepts the commercial nature of the agreement between the investors and the husband and the significance to the investors of clause 11. As seen, he says:
“…It is not difficult to anticipate the potential commercial consequences that may follow as a result of a key clause of the Shareholders Agreement being set aside.…”
When his Honour then turns to speak of having regard only to the evidence of the wife, in our view it becomes clear enough that all that his Honour is saying is that a trial will be needed for a court to decide in the end whether or not to interfere with the rights of the investors under the Shareholders’ Agreement. This interpretation is much reinforced by the last few sentences of the paragraph in question and in particular, those which read:
“It may well be that evidence adduced by the husband and/or one or more of the respondents and if accepted by the trial judge would demonstrate that it is not possible to make “any proper order for the protection of” such respondents…However, I can only proceed on the evidence that is properly before me and able to attract the required weight.”
That Rose J has taken from the investors’ case below what the investors wished him to take as uncontroverted, is reinforced by the first sentence of paragraph 33, which is:
“33. On the evidence before me, there is no dispute that the respondents are each an interested person for the purpose of section 106B(3) and “bona fide”.…”
What the investors contended for as incontrovertible, which Rose J obviously did not accept as such, was that there could not possibly be any facts relevant to any order “proper” for the protection of “the investors”, which might be established at trial.
This argument was also strongly pursued before us as the second point identified earlier, namely that an order extinguishing the rights of bona fide third parties in general, and of the investors in particular, could or would not be a permissible exercise of discretion. Though at times this argument was put in such absolute terms that it was as if counsel was submitting that the terms of section 106B(3) did not permit an order that extinguished the rights of a bona fide “purchaser” for value, counsel disavowed that that was his proposition. Rather he said, the absence of any case in the last 100 years in which such an order had been made, demonstrated his point that such an order would not be made. Whilst counsel did not claim to have conducted the most comprehensive search of past cases possible, he had certainly gone through the judgment of the Full Court in Gould (supra) and examined each of the cases dealing with the section or its equivalent, which were mentioned in that judgment.
At this stage we make two observations about counsel’s proposition. One is that we do not find it surprising that there is a scarcity of cases in which, pursuant to section 106B or its equivalent, the rights of bona fide purchasers for value have been interfered with. This is because, by and large, a purchase for value does not diminish the estate to which the parties seek an entitlement, and it is deemed unnecessary to attack the transaction.
Secondly, and of particular relevance to an application for summary dismissal, once it is conceded that an order as sought is within power, the argument in support of summary dismissal is rendered extremely difficult.
Counsel maintained however, that anticipation of possible factual circumstances, in which an order as sought might be made, was speculative. He repeated his proposition that there were no imaginable circumstances in which the rights of the third party would not be extinguished by the order sought, if made. In other words, the position of the third party could not be protected.
As to this proposition, essentially that the power under section 106B would never be properly exercised to the effect that the rights of a third party purchaser for value were interfered with, we think the observations of Kirby J in Lindon v Commonwealth of Australia (No.2) (1996) 136 ALR 251, at 256, apposite:
“3. An opinion of the court that a case appears weak and such that it is unlikely to succeed is not, alone, sufficient to warrant summary termination. Even a weak case is entitled to the time of a court. Experience teaches that the concentration of attention, elaborated evidence and argument and extended time for reflection will sometimes turn an apparently unpromising cause into a successful judgment.”(footnote references omitted)
And later on the same page:
“4. …If there is a serious legal question to be determined, it should ordinarily be determined at a trial for the proof of facts may sometimes assist the judicial mind to understand and apply the law that is invoked and to do so in circumstances more conducive to deciding a real case involving actual litigants rather than one determined on imagined or assumed facts.”
We think that the reality of this case is that a trial would be necessary to identify the amount and composition of an award for property settlement to the wife and consequently the impact of any orders on the husband’s shareholding and in turn, upon the investors rights. It might transpire that payment to the wife would require the sale of only a small part of the husband’s shareholding, in which case an examination of the prospect of the husband and the investors renegotiating agreement or the husband being ordered to enter into a further agreement in the terms of the present clause 11, in relation to the balance of the husband’s shareholding after a sale, might well be appropriate.
We repeat that in our view all that Rose J was saying in the passages which attracted the attention of counsel for the investors was in effect, that he could not have regard to the arguments on the part of the investors because the standing of those arguments would depend upon the facts established at trial.
As to the further argument put on behalf of the investors, namely that it could not be said that the effect of clause 11 of the Shareholders Agreement was to defeat an anticipated order, but rather, all that could be said was that receipt by the wife of an entitlement might be deferred, we think this proposition is sufficiently dealt with by recognising that there is an obvious argument to the contrary namely, that deferral of an entitlement of the wife to receive property which, but for the agreement, she might otherwise receive at the time orders were made, might well amount to defeat of an “anticipated order”.
Once the availability of an argument to the contrary is recognised, the proposition put on behalf of the investors could not carry an application for summary dismissal.
Principles applicable to permission to appeal
The Full Court of this Court discussed the principles appropriate to what was then referred to as “leave” to appeal, in Rutherford & Rutherford (1991) FLC 92-255. Their Honours followed the High Court decision in Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc. (1981) 148 CLR 170 at 177 in which, in relation to appeals from interlocutory orders, that court said that, for such leave to be granted, there needed to be an error of principle and/or a substantive injustice demonstrated.
Conclusions
As to whether the investors have, as a result of the decision appealed, suffered a substantial injustice, we observe:
· firstly, the primary effect of the order appealed is that the investors must now face a trial rather than not. The prospect of recovery of costs, in the event of the wife’s failure against the investors, on its face provides redress to the investors for involvement in a trial.
· secondly, as to the question of error of principle, but also as to prejudice, even if statements by Rose J amount to a misstatement of principle, in circumstance where we are satisfied that his Honour did not in the end misapply principle, we consider that any misstatement should not found a grant of permission to appeal.
· thirdly, we are of the view that, even if Rose J both misstated and misapplied the principles applicable to applications for summary dismissal, a re-exercise of discretion, taking account of those matters which it was contended for the investors ought be taken into account, would still, for the reasons given, result in the dismissal of the application for summary dismissal.
For these reasons, we consider the application for permission to appeal should be dismissed.
Costs of the application for permission to appeal
Counsel for the investors acknowledged that if the appeal failed it was appropriate that costs follow the event.
ORDERS
That the application for permission to appeal be dismissed.
That the applicants pay the costs of the respondent wife as agreed and in default of agreement, as assessed under Division 19.6.2 of Chapter 19 of the Family Law Rules 2004.
I certify that the 42 preceding
Paragraphs are a true copy of the reasons for judgment delivered by this
Honourable Full Court.
Sgnd:
Associate
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