Bhagat v Royal and Sun Alliance Life Assurance Australia Limited

[2000] NSWSC 20

Reported Decision: [2000] 33 ACSR 472

New South Wales

Supreme Court

CITATION:	BHAGAT V. ROYAL & SUN ALLIANCE LIFE ASSURANCE AUSTRALIA LIMITED & ORS. [2000] NSWSC 20
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 3018/99
HEARING DATE(S):	03/12/99
JUDGMENT DATE:	15 February 2000
PARTIES :	Hari Bhagat - Plaintiff Royal & Sun Alliance Life Assurance Australia Ltd. - 1st Defendant Duncan Boyle - 2nd Defendant Tyndall Australia Limited - 3rd Defendant Michael Wilkins - 4th Defendant
JUDGMENT OF:	Hodgson CJinEq at 1

COUNSEL :	Plaintiff in person Mr. S. Robb QC for 1st and 2nd defendants Mr. A. Bell for 3rd and 4th defendants
SOLICITORS:	The plaintiff acted for himself Middletons Moore & Bevins, Sydney for 1st & 2nd defendants Mallesons Stephen Jaques, Sydney for 3rd & 4th defendants
CATCHWORDS:	Corporations - Takeovers - Obligations of offeror - Claim for injunction or damages by offeree on the basis of alleged misrepresentations. - Practice - Summary disposal - Defendants' application granted.
LEGISLATION CITED:	Corporations Law ss.701, 704, 705, 750.
DECISION:	See p.20 of judgment

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

CORAM: HODGSON, CJ in Eq.

Tuesday 15th February 2000

NO. 3018 OF 1999
BHAGAT V. ROYAL & SUN ALLIANCE LIFE ASSURANCE AUSTRALIA LIMITED & ANOR.

JUDGMENT

1 In February 1999, the first defendant RSA made a takeover offer in respect of shares in the third defendant TA. By 26th May 1999, pursuant to that takeover offer, RSA had purportedly become entitled to 260,686,620 of the 263,356,745 issued shares in TA. Out of the remaining 2,670,125 shares, 220 were owned by the plaintiff Mr. Bhagat. 2 By his summons in these proceedings, filed on 6th July 1999, against RSA, the second defendant Duncan Boyle (the Managing Director of RSA), TA, and the fourth defendant Michael Wilkins (the Managing Director of TA), Mr. Bhagat sought certain declarations, and an order that RSA not acquire his shares in TA until the occurrence of certain specified events. 3 However, no interlocutory injunction was sought, and on 23rd July 1999 RSA purported to compulsorily acquire, pursuant to s.701 of the Corporations Law, the outstanding 2,670,125 shares, including the 220 shares previously owned by Mr. Bhagat. For those 220 shares, RSA paid to TA, to hold on behalf of Mr. Bhagat, a total of $616.00, that is, $2.80 per share. 4 I am dealing with four Notices of Motion. 5 First, a Notice of Motion dated 22nd September 1999 by the first and second defendants, seeking summary dismissal of the proceedings against them, and certain other orders in the alternative. Then, there are three Notices of Motion brought by Mr. Bhagat: one filed 2nd August 1999, seeking orders setting aside the compulsory acquisition until the hearing of the case; one filed 13th October 1999, seeking the same orders and also dismissal of the first and second defendants' Notice of Motion; and one filed 5th November 1999, seeking orders requiring RSA to disclose Mr. Bhagat's claims whenever it should seek any benefit arising from the consolidation of accounts made possible by 100% ownership of TA.

OUTLINE OF FACTS

6 Prior to the takeover offer, Mr. Bhagat brought proceedings No.3398 of 1998 against TA and certain subsidiaries; and on 9th February 1999, he filed a Notice of Motion in those proceedings alleging fraudulent breaches of the Meridian Investment Trust, involving TA and its subsidiaries. 7 It appears that, on 17th February 1999, there was a report in the Australian Financial Review that RSA was to make a takeover offer for TA. 8 On 18th February 1999, Mr. Bhagat wrote to TA, for the attention of Mr. Wilkins, referring to this report, and requiring confirmation that TA had made full and proper disclosure to RSA of Mr. Bhagat's Notice of Motion of 9th February 1999 claiming that officers of Tindal Funds Management (NSW) Limited (a subsidiary of TA) be removed for fraud, and that TA was a defendant in proceedings No.3398 of 1998. 9 On 22nd February 1999, Mr. Bhagat wrote to TA advising that, should he succeed in obtaining the orders sought in his Notice of Motion of 9th February 1999, he would commence proceedings against TA and its officers. 10 On 25th February 1999, TA sent a notice to its shareholders, including Mr. Bhagat, advising that RSA intended to make a takeover offer, namely a cash offer at $2.80 per share; and that subject to certain conditions, TA would recommend acceptance of that offer. 11 On 26th February 1999, RSA served on TA its Part A statement and a copy of its takeover offer, and served on ASIC a notice under s.637(2)(a) of the Corporations Law. 12 On 1st March 1999, Mr. Bhagat wrote to RSA, for the attention of Mr. Boyle, enclosing a copy of his Notice of Motion of 9th February 1999, and recommending that RSA examine certain records identified in his letter relating to the allegations in the Notice of Motion. 13 On 9th March 1999, Mr. Bhagat wrote to TA, claiming that it had infringed his rights as a shareholders, and that various persons, including Mr. Wilkins, may be found guilty of dishonesty on determination of his Notice of Motion of 9th February 1999, and removed as officers of TA; and requesting TA to inform its shareholders of this circumstance, and also requesting that there be no final acceptance of RSA's offer until the Notice of Motion had been determined. 14 On 24th March 1999, the takeover offer was made, the offer documents incorporating the Part A statement and TA's Part B statement dated 12th March 1999. Clause 3.1 of the offer provided that the offer would remain open from 24th March 1999 until 7pm on 5th May 1999. The offer documents were sent to all the shareholders of TA. 15 On 31st March 1999, Mr. Bhagat wrote to RSA enclosing his summons in proceedings No.1848 of 1999, and asking RSA to refrain from proceeding with the takeover until this summons had been determined. This summons is a document of 67 pages, and contains 132 paragraphs. It seeks declarations of fraudulent breaches of trust involving TA and its subsidiaries, and also Mr. Wilkins among others, and also seeks orders restraining TA from promoting the takeover. 16 On 27th April 1999, RSA sent a notice to the shareholders of TA, including Mr. Bhagat, advising that RSA was entitled to 60% of the shares in TA, urging the remaining shareholders to accept, and extending the offer to 7pm on 12th May 1999. 17 On 28th April 1999, Mr. Bhagat wrote to RSA asking to be advised whether the Corporations Law would be infringed if, on determination of the proceedings No.1848 of 1999, the directors of TA were found guilty of being dishonest, and whether the takeover by RSA could be set aside. 18 On 4th May 1999, RSA sent a notice to TA shareholders, including Mr. Bhagat, advising that RSA was entitled to 88.5% of the shares in TA, urging the remaining shareholders to accept, and extending the offer until 7pm on 19th May 1999. 19 On 6th May 1999, RSA announced that its offer was free from conditions, thereby indicating acceptance by 90% of the shareholders. Also on 6th May 1999, Mr. Bhagat wrote to RSA giving notice that RSA was persisting with its offer even though it was aware or ought to be aware that the declarations sought in the summons in proceedings No.1848 of 1999 were justified, that the directors of TA may be found guilty of dishonesty, and that this was why those directors had accepted the RSA offer. 20 On 7th May 1999, RSA sent a notice to TA shareholders, including Mr. Bhagat, advising that RSA was entitled to 92.3% of the shares of TA, and urging the remaining shareholders to accept. 21 On 12th May 1999, Mr. Bhagat wrote to RSA noting that there had been no response to his earlier letter, and requiring firstly that RSA explain why there had been no disclosure to TA shareholders that the declarations claimed in the summons in proceedings No.1848 of 1999 were justified and that the directors of TA may be found guilty of dishonesty; and secondly, that RSA not compulsorily acquire his shares without making such disclosure and until proceedings No.1848 of 1999 had been determined. 22 On 17th May 1999, Middletons Moore & Bevins (MMB), solicitors acting for RSA, wrote to Mr. Bhagat, advising that they had been instructed to respond to his letters of 28th April, 6th May, and 12th May 1999. The letter conveyed that RSA denied that it had failed to make proper disclosure. 23 On 18th May 1999, RSA sent a notice to TA shareholders, including Mr. Bhagat, advising that RSA was entitled to 96.8% of the shares in TA, urging the remaining shareholders to accept, and extending the offer to 7pm on 26th May 1999. 24 On 18th May 1999, Mr. Bhagat wrote to MMB asking for a response to paragraph 2 of his letter; and on 24th May 1999, MMB replied asking for the basis of Mr. Bhagat's claim against RSA. On 27th May 1999, Mr. Bhagat wrote to MMB elaborating on his claim, especially his claim that the entire proceeds of the Melbourne litigation concerning the Estate Mortgage Trusts should have been distributed or held exclusively for unit holders other than the holders of new units created in 1998. 25 On 28th May 1999, RSA initiated the procedure under the Corporations Law to compulsorily acquire the remaining shares in TA. To that end, it sent a notice to dissenting offerees, including Mr. Bhagat. 26 On 9th June 1999, MMB wrote to Mr. Bhagat noting that his claims in proceedings No.1848 of 1999 were still to be determined; and urging Mr. Bhagat to confine the issues he was raising to the proceedings already commenced. There followed further correspondence between Mr. Bhagat and MMB, which I need not detail. 27 As noted at the beginning of this judgment, the compulsory acquisition of the remaining shares, including that of Mr. Bhagat's 220 shares, was completed on 23rd July 1999.

ISSUES

28 It is common ground that I should approach this matter on the basis that there is a serious question to be tried whether there have been fraudulent breaches of trust concerning the Meridian Investment Trust by TA and/or its subsidiaries and/or its officers. It is also common ground that the declarations sought in the summons are of no utility on their own. The real question is whether Mr. Bhagat could possibly be entitled to relief which would prevent or reverse the compulsory acquisition of his shares. Mr. Bhagat also seeks to advance a claim that, in the alternative, he could be entitled to damages on grounds set out in a draft Statement of Claim which he has provided. 29 Resolution of these issues will require consideration of some sections of the Corporations Law, notably s.701(5) and (6), s.704(1), s.705(3) and (4), and s.750, Pt.A, pars.14 and 17. Those provisions are in the following terms:

701(5) Where a notice is given under subsection (2), the offeror is entitled and bound, subject to this section, to acquire the shares to which the notice relates on the terms that were applicable in relation to the acquisition of shares under the takeover scheme or pursuant to the takeover announcement immediately before the end of the offer period.

701(6) Subsection (5) does not apply in relation to a dissenting offeree where, on an application made by the dissenting offeree:
(a) before the end of one month after the day on which the notice was given under subsection (2); or
(b) before the end of 14 days after the day on which the dissenting offeree was given a statement under subsection (9);
whichever is the later, the Court orders that subsection (5) is not to apply in relation to the dissenting offeree.

704(1) Where:
(a) there is, in a statement that purports to be a Part A statement served under subsection 637(1), in an offer that purports to be a takeover offer, in a statement that purports to be a Part C statement served under paragraphs 679(1)(a) or in a notice served or given under section 657 or subsection 701(2) or 703(1) or (4), matter that is false in a material particular or materially, misleading; or
(b) there is an omission of material matter from such a statement, offer or notice;
a person to whom this subsection applies contravenes this subsection.

705(3) Where:
(a) a takeover offer is sent, or a takeover announcement is made, in respect of shares in a company;
(b) at any time during the period beginning when the takeover offer is sent or the takeover announcement is made and ending at the end of the offer period, a person to whom this subsection applies:
(i) makes or issues an oral or written statement to the public, or publishes an advertisement, in connection with the offers under the takeover scheme or in connection with the takeover announcement, relating to a prescribed matter; or
(ii) sends, in connection with the offers under the takeover scheme or in connection with the takeover announcement, a document relating to a prescribed matter to any of the holders of shares in, or of renounceable options or convertible notes granted or issued by, the target company (other than a document required by this Chapter to be so sent); and

(c) there is in the statement or advertisement, or in the document, matter that is false in a material particular or materially misleading;
that persons contravenes this subsection.

705(4) The persons to whom subsection (3) applies are:
(a) the offeror or an associate of the offeror;
(b) the target company;
(c) an officer of the target company or an associate of such an officer; or
(d) if the offeror or an associate of the offeror is a body corporate - an officer of the body corporate or an associate of such an officer.

14. The statement shall set out whether, so far as is known to the offeror, the financial position of the target company has materially changed since the date of the balance-sheet laid before the company in general meeting and, if so, full particulars of the change known to the offeror.

17. The statement shall set out any other information material to the making of a decision by an offeree whether or not to accept an offer, being information that is known to the offeror and has not previously been disclosed to the holders of shares in the target company.

SUBMISSIONS

30 Mr. Robb QC, for the first and second defendants, has provided written submissions which I will leave with the papers. 31 Mr. Robb submitted that the order sought in the summons that RSA not acquire Mr. Bhagat's shares in TA until the occurrence of certain events, namely determination of proceedings No.1488 of 1999 and completion of enquiries by ASIC, was no longer obtainable. The real question was whether Mr. Bhagat could possibly be entitled to an order requiring that his shares be restored to him. 32 The first question was whether there was a serious question to be tried as to whether RSA and/or Mr. Boyle had knowledge of alleged dishonest breaches of trust by TA and/or associated companies or persons. Mr. Robb submitted that it was plain that they had no knowledge of alleged breaches at the time of their alleged occurrence; and although, after and as a result of the takeover offer, they became aware that Mr. Bhagat was alleging that such breaches had occurred, they did not become aware that any such breaches had in fact occurred. 33 The second question was whether such knowledge as RSA and/or Mr. Boyle had could support a cause of action against them. Mr. Robb submitted that the heart of Mr. Bhagat's claim was that RSA and Mr. Boyle were obliged to notify TA's shareholders that TA or associated companies or persons may have committed fraudulent breaches of trust, as alleged by Mr. Bhagat. In fact, Mr. Robb submitted, they had no obligation to do so, and would probably have become liable to other persons if they had done so. 34 Mr. Robb submitted that it could not be said that there was any omission of material matter under s.704(1) of the Corporations Law. There was no evidence that the price being offered was other than a proper price, so that the only effect of the truth of Mr. Bhagat's claims would be to reduce the value of the shares. In those circumstances, to publish Mr. Bhagat's unsubstantiated allegations would have been detrimental to TA shareholders, and would also involve the risk of defamation of persons subject to the allegations. 35 The third question was whether an injunction would be an appropriate remedy. Mr. Robb submitted that no possible damage to Mr. Bhagat was suggested by evidence; and even if damage was suggested, damages rather than an injunction would be an appropriate remedy. Mr. Robb pointed out that an injunction would now have to be a mandatory injunction, in circumstances where the procedure under s.701(6) of the Corporations Law had not been availed of, and the time limit had expired. 36 The fourth question was the balance of convenience, which arose only if the whole claim was not liable to be struck out. Mr. Robb submitted that Mr. Bhagat had not sought an interlocutory injunction initially, and was not offering any undertaking as to damages. The wholly owned status of TA would confer valuable benefits on RSA, namely savings in accounting expenses and accountability on tax matters, and plainly in the absence of an undertaking as to damages, the balance of convenience was against Mr. Bhagat. 37 Mr. Bhagat also provided some written submissions which I will leave with the papers. He took me through the correspondence which I outlined in the earlier part of this judgment. 38 Mr. Bhagat submitted that in his letter of 1st March 1999, he had clearly stated what RSA and Mr. Boyle should look at, and this had been reinforced in the letter of 31st March 1999. By 25th April 1999, RSA had full knowledge of the fraud, and yet was urging shareholders to accept its offer as soon as possible. The fact that it was urging acceptance showed that RSA considered that it had a bargain, and it could be inferred that the purchase was at an undervalue. 39 This conduct by RSA was repeated on 28th April 1999, after it had received a summons giving full details of the breaches of trust. The letter of 27th May 1999 to MMB gave full details of Mr. Bhagat's allegations. 40 Accordingly, Mr. Bhagat submitted, RSA and Mr. Boyle were aware of breaches involving dishonesty. They had a duty to disclose this when urging acceptance of their offer, on 27th April and 4th May. The TA shareholders may have had a claim against TA and particularly its directors which they stood to lose by the takeover. Accordingly, RSA and Mr. Boyle were guilty of fraud in the takeover, and the takeover was itself vitiated by fraud. 41 Mr. Bhagat submitted that if in fact RSA and Mr. Boyle had examined his claims and believed they were of no consequence, they could have disclosed that, and indeed should have done so. Pursuant to paragraphs 14 and 17 of the material relating to Pt.A statements in s.750 of the Corporations Law, there was a breach in not setting out information which was material, relevant, and not previously disclosed. 42 Mr. Bhagat submitted that the acquisition of TA shares was the result of misrepresentation, and that accordingly the acquisition should be set aside. In relation to Mr. Bhagat's shares, the acquisition was liable to be set aside under s.701(6) of the Corporations Law; and the Court should dispense with the time limit provided in that provision. 43 On the balance of convenience, Mr. Bhagat submitted that, by reason of the fraud of RSA and Mr. Boyle, the balance of convenience favoured the grant of an injunction. At least, the Court should require that, whenever RSA sought to have the benefit of the concessions concerning accounting and taxation given in relation to wholly owned subsidiaries, it should disclose the allegations and claims made by Mr. Bhagat.

DECISION

44 It is plain that there is no evidence that RSA and/or Mr. Boyle had any knowledge of any alleged fraudulent breaches of trust when such breaches allegedly occurred. Such knowledge as they may have had arose after, and as a result of, publicity concerning the proposed takeover offer. 45 The Part A statement was served on 26th February 1999. There is no evidence of any direct communication of Mr. Bhagat's allegations to RSA or Mr. Boyle prior to then. However, Mr. Bhagat submitted that it could be inferred that the contents of his letters to TA of 18th February 1999 and 22nd February 1999 were passed on. I doubt if that inference is open on the present material, but I would not summarily dismiss the proceedings because of the absence of that inference. That is a matter within the knowledge of RSA and Mr. Boyle, and if it occurred, it could be proved as a result of discovery. I am prepared, for the purposes of these proceedings, to assume that the material was passed on. 46 However, at that stage, the material amounted merely to unsubstantiated allegations. To include such unsubstantial allegations in the Part A statement would tend to give them credence, tend to suggest a lower value for the shares, and could be defamatory. In those circumstances, in my opinion, it could not conceivably be a breach of s.704 of the Corporations Law, or a misrepresentation at general law or misleading conduct of any kind, to omit that material from the Part A statement. 47 By the time the offer itself was made, that is 24th March 1999, RSA and Mr. Boyle had received Mr. Bhagat's letter of 1st March 1999, which referred to certain documents and made particular allegations arising out of that material. A close and careful examination of those documents and allegations might have disclosed a problem which I have discussed in three judgments delivered in proceedings No.3384 of 1999, particularly those of 20th October 1999 and 17th December 1999, namely a possible conflict between a requirement of the Fourth Schedule of the Meridian Investment Trust Deed that the entire proceeds of the Melbourne litigation concerning the Estate Mortgage Trusts should be for the benefit of existing unit holders, and the terms on which new units in the Meridian Investment Trust were issued pursuant to a Prospectus of June 1998. 48 However, Mr. Bhagat's letter did not clearly identify this problem, and it was disguised by much broader allegations, including unsubstantiated allegations of fraud. Simply to pass on to offerees Mr. Bhagat's allegations as they stood would in those circumstances have involved the same problems as I have referred to. Even if RSA or Mr. Boyle had precisely identified the problem which I have referred to, and managed to formulate a way to refer to that problem without inappropriately publicising unsubstantiated allegations of fraud, reference to that problem could only have tended to suggest a lower apparent value of shares. In my opinion, Mr. Bhagat's suggestion that this is balanced or outweighed by possible claims that the shareholders may have had against TA's directors or other associates is fanciful. 49 In all these circumstances, in my opinion the making of the offer without referring to Mr. Bhagat's allegations could not possibly be a breach of s.704 or s.705 of the Corporations Law, nor could it be a misrepresentation at general law nor misleading conduct. 50 There were further communications by RSA to TA shareholders, including communications of 27th April 1999, 4th May 1999, 7th May 1999, and 18th May 1999, urging them to accept its offer. By those dates there had been further communications by Mr. Bhagat, but in my opinion they did not alter the situation from that which I have discussed in relation to earlier communications. In my opinion, those communications could not possibly be a breach of s.704 or s.705 of the Corporations Law, nor could they amount to misrepresentations or misleading conduct. 51 Finally, there was the notice to dissenting offerees of 28th May 1999. That notice is subject to the requirements of s.704(1) of the Corporations Law, so that an offence would be committed if the notice was false or misleading, or if it omitted a material matter. By that time, in his letter of 27th May 1999 to MMB, Mr. Bhagat had further elaborated his allegations, including the particular problem which I have referred to. However, this was still closely combined with unsubstantiated allegations of fraud, and in my opinion, the same comments apply as before. In my opinion, the notice to dissenting offerees could not possibly, on the material before me, be considered a breach of s.704 or otherwise a misrepresentation or misleading. 52 For those reasons, in my opinion, there is no material supporting a claim for a breach of the Corporations Law, or for misrepresentation or misleading conduct. Furthermore, in my opinion, there is no evidence suggesting a possibility of loss caused to Mr. Bhagat from any such conduct. Any disclosure of Mr. Bhagat's allegations, if they had any effect at all, could only have tended to depress the value of the shares; and as I have said, in my opinion any suggestion that this is balanced or outweighed by the possibility of some action by the shareholders against directors or other persons associated with TA is fanciful. The circumstance that TA made a takeover offer and urged acceptance of it cannot of itself support an inference that the price offered was an undervalue. 53 Furthermore, even if (contrary to the above) there were some suggestion of damage, the scale of any loss to Mr. Bhagat in respect of his 220 shares, out of a total of over 260 millions shares, could not conceivably justify relief by way of mandatory injunction. Particularly is this so where a statutory remedy is given by s.701 of the Corporations Law, which Mr. Bhagat did not adopt. In my opinion, there is no possibility of a case being made out for extension of time for initiating the procedure under s.701(6). 54 I have read Mr. Bhagat's proposed Statement of Claim in the proceedings. In my opinion, it does not take the matter any further. In addition to elaborating on the allegations which I have discussed, it does expressly seek damages as well as injunctive relief; but the absence of material supporting a claim for breach of the Corporations Law or for misrepresentation or misleading conduct, and the absence of material suggesting loss to Mr. Bhagat, is fatal to any claim for damages. The Statement of Claim also seeks to introduce certain allegations against the first and second defendants concerning the conduct of proceedings. That is not a matter which has been the subject of submissions, but in my opinion there would be no justification in keeping these proceedings alive simply because some quite unrelated allegations were sought to be made out by Mr. Bhagat. 55 I do not believe there is any possibility that Mr. Bhagat's case against the first and second defendants could be reformulated to avoid the objections I have discussed. Furthermore, this is not a case where dismissal of the proceedings against the first and second defendants would leave Mr. Bhagat without a remedy for losses which he claims to have suffered: he can still pursue the proceedings he has brought against those he alleges to be primarily responsible. On the other hand, if these proceedings are not dismissed now as against the first and second defendants, they will continue to incur substantial costs in relation to claims which in my opinion must fail. 56 For those reasons, this is a case where the remedy of summary dismissal is appropriate. 57 The orders that I make are as follows:

1. I dismiss the proceedings as against the first and second defendants.

2. I dismiss Mr. Bhagat's Notices of Motion filed 2nd August 1999, 13th October 1999 and 5th November 1999.

3. I order Mr. Bhagat to pay the costs of the first and second defendants of all four Notices of Motion and of the proceedings.

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Last Modified: 09/25/2000