Chemeq Ltd v Shepherd Investments International Ltd
[2007] WASC 92
•13 APRIL 2007
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: CHEMEQ LTD -v- SHEPHERD INVESTMENTS INTERNATIONAL LTD & ORS [2007] WASC 92
CORAM: McKECHNIE J
HEARD: 12 &13 APRIL 2007
DELIVERED : 13 APRIL 2007
FILE NO/S: CIV 2204 of 2006
BETWEEN: CHEMEQ LTD (ABN 77 009 135 264)
Plaintiff
AND
SHEPHERD INVESTMENTS INTERNATIONAL LTD
First DefendantSTARK TRADING
Second DefendantCENTAR INVESTMENTS (ASIA) LTD
Third DefendantSTARK ASIA MASTER FUND LTD
Fourth DefendantJP MORGAN INSTITUTIONAL SERVICES AUSTRALIA LTD (NOW KNOWN AS BTA INSTITUTIONAL SERVICES AUSTRALIA LTD) (ABN 48 002 916 396)
Fifth DefendantHARMONY INVESTMENT FUND LTD
Sixth Defendant
Catchwords:
Practice and procedure - Application to vary orders pending appeal - Turns on own facts
Legislation:
Nil
Result:
Application dismissed
Category: B
Representation:
Counsel:
Plaintiff: Mr B D Luscombe
First Defendant : Mr A Chai
Second Defendant : Mr A Chai
Third Defendant : Mr A Chai
Fourth Defendant : Mr A Chai
Fifth Defendant : No appearance
Sixth Defendant : Mr A Chai
Solicitors:
Plaintiff: Mallesons Stephen Jaques
First Defendant : Blake Dawson Waldron
Second Defendant : Blake Dawson Waldron
Third Defendant : Blake Dawson Waldron
Fourth Defendant : Blake Dawson Waldron
Fifth Defendant : No appearance
Sixth Defendant : Blake Dawson Waldron
Case(s) referred to in judgment(s):
Chemeq v Shepherd Investments International [2007] WASC 16
McKECHNIE J: This is an application by the plaintiff Chemeq to vary orders made by Templeman J on 29 March 2007, the variation being sought as follows:
"(a)the following words be added at the end of paragraph (b) of the undertakings given by the Plaintiff to the Court (after sub‑paragraphs (i)-(iv) inclusive):
'save that the plaintiff may enter into a subscription agreement with International Finance Corporation of Australasia Pty Ltd and any transaction, commitment or liability contemplated by that subscription agreement'; and,
(b)the Further Schedule attached to the Orders be varied to add a further general expenditure line item – 'Costs associated with conditional subscription agreement with International Finance Corporation of Australasia Pty Ltd ‑ $215,000', …"
There are other orders sought.
On 1 February 2007, Templeman J delivered his decision in Chemeq v Shepherd Investments International [2007] WASC 16. The effect of his decision is that the company Chemeq must redeem bonds held by the defendants of some $60 million. An appeal was lodged by Chemeq. This appeal was heard on 12, 21 and 22 March this year and the decision has been reserved.
On 8 February 2007, Templeman J made orders to preserve the status quo until the outcome of the appeal. The bondholders were restrained from enforcing their rights. Chemeq, in turn, was severely restricted in undertaking all but essential expenditure as set out in a schedule. Order (b) provided:
"until determination of the appeal or further order, the Plaintiff will not:
(i)enter into any transaction or commitment or incur any liability other than that set out in the Schedule to this order;
(ii)sell any of the assets, business or undertaking of the Plaintiff;
(iii)distribute any income or assets of the Plaintiff; or
(iv)engage further employees or contractors of the Plaintiff or terminate or vary the employment of existing employees or contractors; and
…"
There are other orders that are not presently relevant. There have been two variations to the original order by orders of Templeman J, dated 16 March and 29 March 2007. Neither are material for present purposes.
Pursuant to liberty to apply, which was embodied in the orders, on 11 April 2007 Chemeq applied to the Court to further vary the orders. Templeman J is unavailable to hear the application. I have already set out the variations sought.
The reason why the variation is sought is set out in the affidavit of Lindsay David Hale Williams sworn on 11 April 2007. He deposes:
"4.In mid‑December last year, International Finance Corporation of Australasia Pty Ltd (IFCA), a private investment company based in Perth, approached me, introduced themselves and made enquiries on a confidential basis regarding the possibility of refinancing the plaintiff.
5.In early February this year, IFCA approached me again and expressed an interest in commencing confidential preliminary discussions regarding possible refinancing of the plaintiff to enable it to pay out the first, second, third, fourth and sixth defendants (Defendants) and to provide further working capital for the plaintiff. Discussions between the plaintiff and IFCA continued into early March.
6.In the course of those negotiations the plaintiff caused to be prepared a draft subscription agreement and provided that document on a confidential basis to IFCA. Refinancing terms could not be agreed and discussions ended on 9 March.
7.On 4 April, the plaintiff received a non negotiable written offer from IFCA (Offer). The Offer attached a conditional subscription agreement pursuant to which IFCA agrees to subscribe for up to $75 million in new capital in the plaintiff in two stages:
(a)In the first stage, IFCA offers to subscribe for a number of shares representing 75% of the fully diluted fully paid ordinary share capital of the plaintiff at 19.35 cents per share (clauses 1 and 3.3). If successful, this would raise $60 million and IFCA would hold approximately 75% of the issued capital of the plaintiff.
(b)In the second stage, IFCA offers to fully underwrite a non-renouncable rights issue to the plaintiff's shareholders to raise a further $15 million at 19.35 cents per share (clause 3.6).
The conditions precedent include a clause (being clause 2.1) that:
'Notwithstanding anything in this agreement, this agreement will have no force or effect unless and until an order is obtained by the Company from the Supreme Court of Western Australia that the Company may enter into this agreement and any transaction, commitment or liability under this agreement without breaching the order granting injunction restraining defendants in CIV 2204 of 2006 made by the Honourable Justice Templeman in chambers on 8 February 2007. Such order to be on terms acceptable to the Subscriber, such order to be obtained on or before 12 April 2007'.
Attached hereto and marked 'LDW 58' is a copy of the Offer.
8.The Offer was open until noon on Thursday 5 April. Upon receipt of the Offer, I sought clarification from IFCA regarding the timing of the closure of the Offer and was informed by Cyril D'Silva, the managing director of IFCA, that it expired at noon on Thursday 5 April and that it would not be extended.
9.On 5 April, prior to commencement of trading on ASX, the plaintiff requested the ASX to halt trade in the plaintiff's securities pending the release of an announcement. Attached hereto and marked 'LDW 59' is a copy of the announcement of the trading halt.
10.During the morning of Thursday 5 April, discussions took place between the respective legal advisers to each of the plaintiff and IFCA. Those discussions led to some amendments to the terms of the conditional subscription agreement, although one of these amendments altered the substance of the Offer.
11.Later that morning, rather than let the Offer expire and in order to provide the shareholders of the plaintiff with the opportunity to consider the Offer, the directors of the plaintiff resolved to sign the conditional subscription agreement. It is a condition precedent to completion of the conditional subscription agreement and a requirement of the ASX Listing Rules that shareholder approval be obtained to the proposed subscription agreement.
12.Some time after mid-day on Thursday 5 April the Chairman of the plaintiff (Mr Hopkins) and I signed the conditional subscription agreement.
13.Subsequently, the plaintiff worked with its advisers and with IFCA to settle the form of an announcement to ASX. Unfortunately the ASX Company Announcements Platform closed at 2.30 pm WST that day (being the day before the Easter break) and it was not possible to lodge it prior to that time. The relevant announcement was lodged with ASX that afternoon but was not published by ASX until just prior to the opening of the market on the morning of Tuesday 10 April, following the Easter holiday break. Attached hereto and marked 'LDW 60' is a copy of that announcement attaching the executed conditional subscription agreement.
14.On the morning of Tuesday 10 April, I caused the plaintiff's lawyers to write to the Defendants' lawyers and inform them of the announcement. By reason of Listing Rule 15.7 it was not possible to inform the Defendants or the market generally of the information in the announcement. Attached hereto and marked 'LDW 61'is a copy of the relevant fax (without the announcement which was attached to it) together with the relevant fax transmission report.
15.Subsequently, the lawyers for the respective parties exchanged correspondence regarding the offer. …"
I interrupt to note that at a short hearing on 12 April counsel for Chemeq advised me that the time period under cl 2.1 had been extended to Monday, 16 April 2007.
As counsel for Chemeq acknowledged on 12 April, the company is at least technically in breach of Templeman J's order. It has after all already entered into the subscription agreement notwithstanding that there are conditions precedent, many of them to be fulfilled and shareholders' approval to be obtained.
Mr Luscombe for Chemeq argues, and I am only summarising the essence of his submission, that the variation is really about $215,000 which might be unavailable to the bondholders if the appeal is dismissed. He points to the affidavit of Jan Symington sworn on 13 April 2007 which says at par 4:
"I am informed by Mr Williams, the CEO of the plaintiff and believe that the plaintiff has given further consideration to the need for expenditure in relation to 'Project Safe' and that it has resolved to defer further consideration of that project until after April, thereby reducing the anticipated cash payments for April by $105,000."
"Project Safe" is a project which is part of the schedule approved by Templeman J as a variation in the order last made by him on 29 March 2007, therefore the true sum in contention is really $110,000. Furthermore, although this is far from his client's preference, if necessary I can order that no expenditure be undertaken until $60 million is deposited with a stakeholder by the subscriber, IFCA.
It is for the directors Chemeq, not the bondholders, to decide, after due diligence, if the subscription should be pursued. The bondholders' interest in these proceedings, argues Mr Luscombe, is really limited to the possible increased expenditure.
Mr Chai, on behalf of the bondholders, says that they have real concerns as to the financial ability of IFCA. On 11 April, Chemeq, through its solicitors, provided further information relating to IFCA's backers. That was of a confidential nature.
However, in response, the bondholders' solicitors replied by letter dated 12 April 2007:
"… in order for our clients to consider a variation of the orders made by his Honour Justice Templeman to allow your client to further progress its potential refinancing our clients require:
(a)credible evidence (preferably by affidavit from an officer of IFCA) of the matters raised in the three dot points in our facsimile to you dated 10 April 2007; and
(b)security (to be provided by IFCA) for the expenditure in the sum of $215,000 associated with the subscription agreement with IFCA in the event that the appeal is dismissed and your client does not reach a final agreement with IFCA in relation to refinancing."
They then referred to certain information provided by the solicitors for Chemeq, saying:
"… The information was readily available to our clients from websites and does not provide them with any independent means by which they can verify the financial standing of IFCA.
We confirm that our clients are unable to properly consider your client's request that the orders of Justice Templeman be varied in the absence of credible, independent information on these matters."
Their preference as to affidavit evidence has not materialised. They, however, have been provided with certain confidential information. Counsel has indicated that while this is a start it is far from sufficient for their purposes. Also, his clients are overseas and he has not been able to obtain firm instructions. He therefore does not have instructions to consent to the application. His clients have concerns but they are not in a position to form a view to oppose the application either.
This is unsurprising. Having regard to the shortness of time for consideration of the subscription agreement by Chemeq, the requirements of the ASX as to giving notice to the market, and the Easter break, the bondholders have not had proper time to make reasonable inquiries. This is a matter I take into account in deciding the application.
I do not attribute blame to anyone but it is the fact that Mr Williams' affidavit, to which I have referred, was not sworn and filed until Wednesday, 11 April, leaving the bondholders to meet a deadline of 12 April. Any benefit of the subsequent extension of four days, two of which are a weekend, is negated by what I regard as a seriously incomplete response to reasonable requests for financial information by the bondholders.
Notwithstanding, the alternative proposal limiting expenditure until $60 million is deposited with the stakeholder, the bondholders have a legitimate right to assess any expenditure that may lead to a diminution of Chemeq's assets. That assessment must include some knowledge of the financial position of IFCA. They do not have this and in consequence cannot perform the assessment.
I return to Templeman J's orders. They are in terms similar to orders often fashioned in situations where a party has failed at trial but has promptly exercised its right to challenge the judgment. There are two competing interests to be balanced. On the one hand there is the right of a successful party to an immediate judgment. On the other there is the right of the unsuccessful party to seek a decision in its favour on appeal.
In preventing a successful party from immediately enjoying the fruits of its judgment, the Court must ensure that if an appeal is ultimately dismissed there will be fruit to pick; it will not have all been eaten. So, commonly, an unsuccessful party is severely restricted in its ability to spend money much beyond what is necessary for care and maintenance or essential matters until the appeal process is complete. It must of course be allowed to continue to trade.
I assume that the orders made by Templeman J were crafted, probably with the input of the parties, in order to achieve the balance to which I have just referred. Notwithstanding the eloquence of Mr Luscombe for Chemeq that the variation is really only about spending $110,000, it is in fact a fundamental redrawing of the order. I am conscious of what in some ways is the preliminary nature of the subscription agreement. I do not overlook that. There are many matters that must be resolved before the subscription comes to pass, if it ever does.
However, to return to principles that are quite basic, Chemeq has been consigned to limbo until the appeal decision in order to maintain the status quo. If the bondholders enthusiastically endorsed or even reluctantly endorsed the proposed variation that would be a substantial factor in favour of granting it, notwithstanding what I have said about the general principles. After all, they presently have a $60 million interest in Chemeq. But they do not.
IFCA has imposed time limits on the subscription, as it is entitled to do. IFCA has declined to provide much financial information, as it is also quite entitled to do. This of course is not IFCA's application but Chemeq's. As a result of IFCA's decisions, however, Chemeq has been unable to secure the bondholders' agreement. The variation would otherwise greatly affect the status quo pending the resolution of the appeal and I therefore dismiss the application.
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