Biometrics Limited v Roget
[2005] WASC 81
BIOMETRICS LIMITED -v- ROGET & ORS [2005] WASC 81
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2005] WASC 81 | |
| Case No: | CIV:2415/2004 | 27 APRIL 2005 | |
| Coram: | BLAXELL J | 6/05/05 | |
| 13 | Judgment Part: | 1 of 1 | |
| Result: | Application to vary injunction refused | ||
| B | |||
| PDF Version |
| Parties: | BIOMETRICS LIMITED (ACN 104 113 760) ROBERT RAYMOND ROGET IAN WHYTE MARK WILLIAM PITT COMPLIANCE CERTIFICATION SYSTEMS PTY LTD |
Catchwords: | Procedure Injunction Interlocutory injunction restraining shareholder in public company Application to vary injunction to enable voting rights to be exercised Serious issue to be tried Balance of convenience in circumstances where damages not an adequate remedy for either party |
Legislation: | Corporations Act 2001, s 707(3), s 717(1) |
Case References: | Carr Boyd Minerals Ltd v Ashton Mining Ltd (1989) 15 ACLR 599 Christmas Island Resort Pty Ltd v Casinos Australia International (Christmas Island) Pty Ltd, unreported; FCt SCt of WA; Library No 960641; 8 October 1996 Hopkins v Foyster [2001] NSWC 915 Air Express Limited v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249 American Cyanamid Co v Ethicon [1975] AC 396 Castlemaine Tooheys Ltd v State of South Australia (1986) 161 CLR 148 Kerridge v Foley [1968] 1 NSWR 628 Uniting Church of Australia Property Trust (NSW) v Macquarie Radio Network Pty Ltd (1997) 24 ACSR 721 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
ROBERT RAYMOND ROGET
First Defendant
IAN WHYTE
Second Defendant
MARK WILLIAM PITT
Third Defendant
COMPLIANCE CERTIFICATION SYSTEMS PTY LTD
Fourth Defendant
Catchwords:
Procedure - Injunction - Interlocutory injunction restraining shareholder in public company - Application to vary injunction to enable voting rights to be exercised - Serious issue to be tried - Balance of convenience in circumstances where damages not an adequate remedy for either party
(Page 2)
Legislation:
Corporations Act 2001, s 707(3), s 717(1)
Result:
Application to vary injunction refused
Category: B
Representation:
Counsel:
Plaintiff : Mr M H Zilko SC & Mr P A Sheiner
First Defendant : Mr R A C Cullen
Second Defendant : No appearance
Third Defendant : Mr R A C Cullen
Fourth Defendant : Mr W S Martin QC & Mr P T Arns
Solicitors:
Plaintiff : Christensen Vaughan
First Defendant : Cullen Babington Hughes
Second Defendant : No appearance
Third Defendant : Cullen Babington Hughes
Fourth Defendant : Arns & Associates
Case(s) referred to in judgment(s):
Carr Boyd Minerals Ltd v Ashton Mining Ltd (1989) 15 ACLR 599
Christmas Island Resort Pty Ltd v Casinos Australia International (Christmas Island) Pty Ltd, unreported; FCt SCt of WA; Library No 960641; 8 October 1996
Hopkins Professional Services Pty Ltd v Foyster Holdings Pty Ltd [2001] NSWSC 915
(Page 3)
Case(s) also cited:
Air Express Limited v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249
American Cyanamid Co v Ethicon [1975] AC 396
Castlemaine Tooheys Ltd v State of South Australia (1986) 161 CLR 148
Kerridge v Foley [1968] 1 NSWR 628
Uniting Church of Australia Property Trust (NSW) v Macquarie Radio Network Pty Ltd (1997) 24 ACSR 721
(Page 4)
1 BLAXELL J: This is an application to vary an interlocutory injunction against the fourth defendant which restrains it from exercising its rights as a major shareholder in the plaintiff company. The injunction prevents the fourth defendant selling, dealing in, transferring, or voting in respect of, its shares. The application seeks a variation to enable the fourth defendant to vote at general meetings of the plaintiff.
2 The fourth defendant bears the onus of establishing that there are changed circumstances of sufficient gravity to justify the proposed variation (Christmas Island Resort Pty Ltd v Casinos Australia International (Christmas Island) Pty Ltd, unreported; FCt SCt of WA; Library No 960641; 8 October 1996). In my view, the materials before me do show a significant change of circumstances in the plaintiff company's management and financial situation. Furthermore, the injunction was granted ex parte, and I consider that justice can only be done on the present application if the whole matter is reviewed afresh.
The background
3 The plaintiff is a public company which was listed on the Australian Stock Exchange on 18 November 2003. As at July 2004 there were four directors of the company being the first defendant (as chairman), the second and third defendants, and one Stevan Vujovic. The chief executive officer was Mr Roger Henning, and the company secretary was Mr Kim Hogg. On 27 July 2004 certain shareholders who held more than 5 per cent of the issued shares in the company requisitioned a general meeting pursuant to s 249D of the Corporations Act 2001. Their notice of requisition required resolutions to be put for the removal of each of the first, second and third defendants as directors, and for the appointment of Messrs Howard Croxon and Richard Walker in their place. In response to this requisition, the directors of the plaintiff resolved on 17 August 2004 to call a general meeting of the company on 27 September 2004.
4 At that same directors' meeting on 17 August 2004, the first defendant tabled a proposed agreement between the plaintiff and the fourth defendant ("CCS") which had already been executed by CCS. The director Stevan Vujovic strongly objected to the agreement because of the magnitude of the proposal and the lack of prior notice. The other directors nevertheless ratified the agreement which was essentially to the following effect:
• The plaintiff agreed to purchase 350,000 fully paid ordinary shares in CCS (being 35 per cent of that company's issued capital) for the sum of $300,000.
(Page 5)
- • The purchase price was to be satisfied by the issue of 5,000,000 fully paid ordinary shares in the plaintiff (being approximately 12.5 per cent of that company's issued capital.)
• CCS granted the plaintiff an option (exercisable at any time within 6 months) to acquire a further 16 per cent of the former's issued capital for the sum of $200,000.
• CCS agreed to a nominee of the plaintiff being appointed as one of its three directors.
• CCS warranted that it had "full corporate power to own" a licence granted by Intramedics Pty Ltd ("Intramedics") to use, develop and commercialise certain technology known as "Vigilance" (which technology was the subject of Australian patent application number 2004902855 filed on 31 May 2004).
• The plaintiff agreed to contribute in proportion to its shareholding to the operating expenses of CCS (in accordance with a budget annexed to the agreement).
• In the event of the plaintiff failing to contribute to such operating expenses it was liable (following the service of certain notices) to forfeiture of its shareholding in CCS.
5 On 17 August 2004 CCS also entered into a licensing agreement with Intramedics which was essentially as follows:
• Intramedics granted CCS a perpetual and transferable licence to use, develop and commercialise the "Vigilance" technology, which licence was to be exclusive for the first seven years.
• CCS would pay Intramedics a royalty of 3 per cent of the gross revenue received as a result of the use of the technology.
• That royalty would be payable annually and would be not less than $100,000 within the first 24 months of the agreement, and not less than $100,000 per annum thereafter.
6 It is relevant to note with reference to the issues in the present proceedings that cl 10 of the licence agreement contained an "undertaking" by Intramedics to the following effect:
"The licensor believe that … the licensor has the right, power and authority to enter into this agreement and is the applicant for all Intellectual Property Rights in the Licensed Technology and the Documentation."
(Page 6)
7 The inventor of the "Vigilance" technology and the applicant for the patent referred to in the licence agreement was Jeffrey David Edwards. Mr Edwards conceived of the idea for the technology in about 2000 and he first applied for a patent (No. PS1149) on 19 March 2002. The provisional specification for that first application described technology which was very similar to (and the plaintiff would say exactly the same as) that described in the second patent application filed on 31 May 2004.
8 The first patent application lapsed on 19 March 2003. Prior to then, Mr Edwards executed a deed assigning the intellectual property in the technology to Isologics Pty Ltd ("Isologics"), a company of which he was then Chief Executive Officer. Under the terms of that deed of assignment (dated 18 September 2002) Mr Edwards assigned to Isologics:
" … all of his right, title, and interest in and to the Invention, the Application, any Letters Patent, or similar privileges granted thereon … together with all the profit, benefit and advantage therefrom arising or in any way appertaining thereto".
9 During late 2004 there was considerable turmoil within the plaintiff company which resulted in a complete change of directors. On 3 November 2004 the plaintiff commenced the present action, claiming (inter alia) damages against the first, second and third defendants for breach of fiduciary duty (by reason of their decision to enter into the agreement on 17 August 2004) and declarations against the fourth defendant that the agreement was rescinded and that the issue of 5,000,000 shares was void and of no effect.
10 When Mr Edwards became aware of the present proceedings (on about 3 November 2004), he telephoned the company secretary of Isologics. He then negotiated an agreement that in return for payment of the sum of $10,000, Isologics would release all claims to the technology the subject of the deed of assignment. Isologics subsequently provided Mr Edwards with a "No Claim Notice" in return for payment by him of the $10,000.
11 On 3 November 2004 an ex parte interlocutory injunction was granted restraining the fourth defendant from selling, transferring or otherwise dealing with the 5,000,000 shares it held in the plaintiff. On 4 November an ex parte variation was granted which further restrained the fourth defendant from exercising or purporting to exercise any rights (including voting rights at a general meeting of the plaintiff) in respect of those shares.
(Page 7)
12 Subsequently, the turmoil within the plaintiff company has continued. There have been numerous further changes in its directors as well as a steady deterioration in its financial reserves. The plaintiff has also received three requisitions from dissident shareholders (including interests associated with the first defendant) requiring general meetings to be called pursuant to s 249D of the Corporations Act 2001 for the purpose of removing and/or appointing directors. The plaintiff will be convening a general meeting on 10 June 2005 to deal with these requisitions, and the fourth defendant wishes to be relieved of the restraint on its voting rights so that it may fully participate.
13 The plaintiff did not appoint a director to CCS nor did it contribute towards that company's operating expenses. Pursuant to the terms of the agreement, and following a notice of default, CCS has purported to forfeit the 350,000 shares that were issued in the name of the plaintiff.
The plaintiff's claim
14 The statement of claim pleads that there was a breach of fiduciary duty by the first, second and third defendants on 17 August 2004 inter alia in:
• Causing the plaintiff to enter into the agreement with CCS and to issue shares to that company when it was not in the best interests of the plaintiff to do so.
• Failing to conduct due diligence investigations in relation to the agreement.
• Failing to obtain legal advice in respect of the agreement.
• Failing to make proper inquiries as to the ownership and value of the rights acquired by the plaintiff under the agreement.
15 The plaintiff also pleads that the first, second and third defendants caused the plaintiff to enter into the agreement with CCS for an improper purpose. The improper purpose is said to be the issue of the shares to enable CCS to vote against the resolutions to be put to the general meeting on 27 September 2004 for their removal as directors.
16 As against the fourth defendant, the plaintiff pleads that it participated in the breach of fiduciary duty by the other defendants with knowledge of that breach or alternatively with knowledge of circumstances which would have indicated to a reasonable and honest person that the first, second and third defendants were so breaching their fiduciary duties.
(Page 8)
17 There is a further claim against the fourth defendant under s 52 of the Trade Practices Act 1974 (Cth) alleging misleading and deceptive conduct by way of misrepresentations made (inter alia) as to the ownership and novelty of the "Vigilance" technology. The plaintiff further pleads that the consideration for the issue of the shares to the fourth defendant has wholly failed.
18 Damages are claimed against all defendants. There are also claims for various declarations as well as for orders rescinding the agreement with the fourth defendant and rectifying the plaintiff's share register.
Whether there is a serious issue to be tried
19 I have before me 16 affidavits sworn by 11 different deponents which either support the original application for the interlocutory injunction or support or oppose the present application for a variation. It is clear from all of these materials that the plaintiff's case as to breach of fiduciary duty relies on the inferences which it contends should be drawn from the following facts.
20 Prior to 17 August 2004, dissident shareholders in the plaintiff company had called for the removal of the first, second and third defendants as directors and had requisitioned the general meeting that was to be held on 27 September 2004. The remaining director, Stevan Vujovic, was not to be the subject of any resolution for removal.
21 The meeting of directors on 17 August 2004 was held without a prior agenda being circulated. Nor was Mr Vujovic informed of the matters to be discussed. At that meeting the first defendant tabled the proposed agreement with CCS (which was already executed by CCS), a copy of the licence agreement between CCS and Intramedics, and a brochure on the Vigilance technology. The first defendant recommended ratification of the agreement with CCS, but Mr Vujovic strongly objected "stating that a proposal of this magnitude required due and proper consideration". The directors nevertheless, and by a majority comprising the first, second and third defendants, voted to ratify the agreement.
22 During the course of that directors' meeting, the first defendant stated that both he and the Chief Executive Officer, Roger Henning, "had been working on the proposal over the previous six weeks". However, Mr Henning deposes that although he became aware of the technology in July, and met with the inventor, Mr Edwards, on 16 August 2004, he "was surprised when the Board approved an investment in CCS, because it was
(Page 9)
- the first time I had heard details of the arrangement" (affidavit sworn 2 November 2004).
23 The incorporation of CCS, the execution of the licence agreement between CCS and Intramedics, the execution of the agreement between CCS and the plaintiff, and the issue of shares by CCS to the plaintiff all occurred on 17 August 2004. The issue by the plaintiff of 5,000,000 shares to CCS took place on 19 August 2004. There are indications that some of these arrangements were made in haste. In this regard, the document executed by CCS and the plaintiff on 17 August 2004 was in fact only a draft, as the solicitors for the parties were still in the final stages of settling its terms. There are also certain aspects of the licence agreement between CCS and Intramedics which the plaintiff contends show that it was drafted in haste.
24 Following the directors' meeting on 17 August, Mr Vujovic was unsuccessful in his efforts to obtain further information about the arrangements with CCS. The unchallenged evidence from Mr Vujovic is that on 24 August 2004 the first defendant told him words to the effect that "I am only a non-executive director and as such he would not allow me to seek any information regarding the investment". Subsequently, Mr Vujovic was referred to the plaintiff's solicitors, but he did not at any time receive a "substantive response … in relation to any of the questions raised … about the CCS transaction".
25 At the general meeting of the plaintiff on 28 September 2004 CCS voted against removal of the first, second and third defendants as directors, but those resolutions were passed by a majority of the shareholders present. A subsequent search of the plaintiff's records revealed very little material on the CCS transaction. On 21 October 2004, written requests were sent to each of the first, second and third defendants seeking further documents or information relating to (inter alia) due diligence, expert reports, and a share valuation of CCS, but these requests went unanswered.
26 The inferential case relied on by the plaintiff is contradicted by the direct evidence of (inter alia) the first defendant, Mr John Palermo (a chartered accountant and corporate adviser to CCS), and Mr Jeffrey Edwards. According to those deponents, the agreement between the plaintiff and CCS on 17 August 2004 was reached following negotiations between the first defendant and Mr Palermo which had commenced on
(Page 10)
- 9 June 2004. During this period the first defendant also met with Mr Edwards and a prototype of the Vigilance technology was demonstrated. All negotiations were conducted on an entirely commercial basis, at arm's length, and in good faith.
27 The fourth defendant also contends that no adverse inference should be drawn from the multiplicity of events on 17 August 2004. All that happened on that date was that the previously (orally) agreed joint venture between the plaintiff and CCS came into effect, and it was commercially and legally appropriate that the execution of agreements and other events should all have occurred at the same time.
28 In my view, the facts relied on by the plaintiff (including the matters referred to below) collectively establish a reasonably strong case that there was a breach of fiduciary duty by the first, second and third defendants. However the outcome of that claim will, necessarily, depend upon the Court's findings as to the credibility of the defence witnesses. I hold a different view in respect of the related claim against the fourth defendant, because the plaintiff will only succeed if it can prove that CCS was aware of the other defendants' breach of fiduciary duty. In my opinion, the case which supports that inference is fairly weak.
29 The plaintiff has a much stronger case against CCS for its claims that there was misleading and deceptive conduct contrary to s 52 of the Trade Practices Act, and that there was a total failure of consideration for the agreement of 17 August 2004. In that regard, it was fundamental to the agreement that CCS represented that it had rights to the Vigilance technology under the licence from Intramedics.
30 The correctness of that assertion will come to be judged by a comparison of the first and second patent applications lodged by Mr Edwards and by the terms of the assignment dated 12 September 2002.
31 In my view, when one compares the specifications in the first and second patent applications, they are essentially the same, and the latter is merely a modified version of the former. It is significant that by the terms of the deed of assignment Mr Edwards assigned not just his rights under the first patent application, but "all of his right, title, and interest in and to the Invention". Isologics still held those rights at the time of the agreement between the plaintiff and CCS on 17 August 2004. It was not until 3 November 2004 that Mr Edwards, upon becoming aware of the present proceedings, took steps to obtain a release from Isologics (by then
(Page 11)
- known as Open Television Pty Ltd) of its rights under the deed. That release was then granted in consideration of the payment of $10,000.
32 Mr Edwards' first affidavit in these proceedings (sworn 30 March 2005) made no reference at all to the payment of $10,000 and he also deposed (in par 9) that "I never transferred the technology in Vigilance … to Isologics". However, the true situation became apparent with the affidavit of Graeme Bowden (the company secretary of Isologics) sworn on 11 April 2005. All of the relevant facts tend to speak for themselves, and the plaintiff clearly has a strong case that the fourth defendant engaged in misleading and deceptive conduct when representing its rights to the technology at the time of the agreement on 17 August 2004.
33 For all of these reasons I am of the view that there is a serious issue to be tried.
Whether damages will be an adequate remedy
34 On 10 June 2005 the plaintiff will convene a general meeting requisitioned by dissident shareholders to consider resolutions to remove present directors and to substitute others in their place. Depending upon the outcome of that meeting, the management and direction of the company may or may not change.
35 The 5,000,000 shares issued to the fourth defendant on 17 August 2004 are a substantial proportion (some 12.5 per cent) of the plaintiff's issued capital. Obviously, these shares have the potential to be a fairly potent vote at the general meeting on 10 June 2005, and the ability or otherwise of the fourth defendant to vote could well determine the outcome of the resolutions.
36 Whatever my decision on the present application, if the losing party is ultimately successful, there will be considerable difficulty in quantifying damages. From the fourth defendant's point of view, it will have lost the chance to change the management and direction of the plaintiff which may have impacted on share value in unquantifiable ways.
37 Similar considerations apply from the point of view of the plaintiff, and it (through its present directors) also contends that if the resolutions to be put to the general meeting on 10 June 2005 are carried, this may result in the present proceedings being discontinued. The plaintiff would then be left in the situation of having issued 5,000,000 shares to the fourth defendant without there being any benefit in return.
(Page 12)
38 When all of these matters are taken into account it seems unlikely that damages will be an adequate remedy for the party adversely affected by my present decision, in the event that that party is ultimately successful.
The balance of convenience
39 It is in this context that the fourth defendant puts in issue the adequacy of the plaintiff's undertaking as to damages. It points out that during the period from August 2004 to January 2005 the company's cash reserves reduced from $2.6M to $1.6M. There is no current source of income, and at the current rate of expenditure the company is likely to exhaust its reserves by the end of the calendar year 2005.
40 Furthermore, there has been considerable turnover in directors of the plaintiff, and the fourth defendant contends that there is instability in the management and policy direction of the company. These are matters of vital significance to the value of the fourth defendant's shareholding in the plaintiff.
41 The plaintiff answers these contentions on the basis that any excessive expenditure, and the turmoil within the company, have been brought about by the decisions and actions of the defendants (and in particular the first defendant). It also contends that the potential prejudice to the plaintiff is significant in that a variation of the injunction would effectively ratify an agreement which is unlikely to be upheld at trial. Furthermore, if the fourth defendant is able to vote at the general meeting on 10 June 2005, there may well be a new board of directors who take the view that the present proceedings should be discontinued. Consistent with the authority of Carr Boyd Minerals Ltd v Ashton Mining Ltd (1989) 15 ACLR 599, 606-7, this is a material matter for the Court to take into account when exercising its discretion.
42 Quite obviously there is significant potential for prejudice to either party depending upon the outcome of the present application. Although the Court is normally reluctant to interfere in advance with proceedings at company meetings (Hopkins Professional Services Pty Ltd v Foyster Holdings Pty Ltd [2001] NSWSC 915) the very issue whether the fourth defendant should be permitted to vote is central to the question of prejudice. Accordingly, I must decide that issue if I am properly to consider the balance of convenience.
43 If there was "virtual equipoise" in the strength of the parties' cases or in the balance of convenience then it might have been the counsel of
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- prudence to protect the status quo that pre-existed the writ (Carr Boyd Minerals v Ashton Mining at 607). However, I consider that the balance is firmly tipped in favour of the plaintiff by the strength of its case against the fourth defendant for misleading and deceptive conduct.
44 For these reasons I have come to the conclusion that the application for variation of the interlocutory injunction should be refused.
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