Connective Services Pty Ltd v Slea Pty Ltd

Case [2019] HCA 33

HIGH COURT OF AUSTRALIA

KIEFEL CJ,
GAGELER, KEANE, GORDON AND EDELMAN JJ

CONNECTIVE SERVICES PTY LTD & ANOR  APPELLANTS

AND

SLEA PTY LTD & ORS  RESPONDENTS

Connective Services Pty Ltd v Slea Pty Ltd

[2019] HCA 33

9 October 2019

M203/2018

ORDER

1.Appeal dismissed.

2.The appellants pay the costs of the first and second respondents.

On appeal from the Supreme Court of Victoria

Representation

D F Jackson QC with D G Guidolin for the appellants (instructed by Quinn Emanuel Urquhart & Sullivan)

J T Gleeson SC with K E Foley and G C Kozminsky for the first and second respondents (instructed by Arnold Bloch Leibler)

Submitting appearances for the third and fourth respondents

Notice:  This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

CATCHWORDS

Connective Services Pty Ltd v Slea Pty Ltd

Companies – Shares – Implied prohibition against financial assistance by company to acquire shares in company – Meaning of "financial assistance" – Where s 260A(1) of Corporations Act 2001 (Cth) provides that company may financially assist a person to acquire shares in the company only if giving the assistance does not materially prejudice the interests of the company or its shareholders, or the company's ability to pay its creditors – Where appellant companies' constitutions contained pre-emption clause which provided that, before a shareholder could transfer shares of a particular class, those shares must first be offered to existing shareholders of that class in proportion to the number of shares of that class already held by that shareholder – Where sole shareholder of one shareholder company entered into agreements for sale of shares – Where appellant companies claimed that agreements breached pre-emptive rights provisions – Where injunction sought under s 1324 of Corporations Act to restrain appellant companies from prosecuting proceedings in relation to pre‑emptive rights on basis that proceedings contravened the prohibition against financial assistance in s 260A(1) – Whether funding by company of legal proceedings directed at compelling one shareholder to offer shares to other shareholders is financial assistance – Whether the companies should be enjoined from continuing legal proceedings at their expense to vindicate alleged breach of pre-emptive rights.

Words and phrases – "acquisition of shares", "creditors", "financial assistance", "implied prohibition against financial assistance", "injunction", "material prejudice", "power to enforce company constitution", "pre-emptive rights", "shareholders".

Corporations Act 2001 (Cth), ss 260A(1), 1324(1).

KIEFEL CJ, GAGELER, KEANE, GORDON AND EDELMAN JJ.

Introduction

  1. In Trevor v Whitworth[1], Lord Macnaghten said that "[i]f shareholders think it worth while to spend money for the purpose of getting rid of a troublesome partner who is willing to sell, they may put their hands in their own pockets and buy him out, though they cannot draw on a fund in which others as well as themselves are interested". That concern with maintenance of corporate capital was extended by statutory provisions which provided protection for shareholders and creditors from a company giving financial assistance to acquire its shares.…

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Details
AGLC
Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33
Case
[2019] HCA 33
Decision Date

CaseChat Overview and Summary

The High Court of Australia heard an appeal concerning whether appellant companies, Connective Services Pty Ltd and another, should be restrained from continuing legal proceedings to enforce pre-emptive rights regarding their shares. The dispute arose when Slea Pty Ltd, a shareholder, entered into agreements for the sale of its shares, which the appellant companies alleged breached their constitutions' pre-emption clauses. Slea Pty Ltd and Minerva Financial Group Pty Ltd sought an injunction to halt these proceedings, arguing that the appellant companies' funding of the litigation constituted financial assistance in contravention of section 260A(1) of the *Corporations Act 2001* (Cth).

The central legal issue before the High Court was whether the appellant companies' funding of legal proceedings to compel a shareholder to offer their shares to other existing shareholders, in accordance with pre-emptive rights provisions in their constitutions, amounted to financial assistance for the acquisition of shares under section 260A(1) of the *Corporations Act 2001* (Cth). This required the court to determine if such conduct contravened the prohibition against financial assistance, which is permitted only if it does not materially prejudice the company or its shareholders, or its ability to pay creditors. The court also considered the effect of section 1324(1B) of the *Corporations Act 2001* (Cth) on the onus of proof in applications for injunctions based on alleged contraventions of section 260A(1)(a).

The High Court reasoned that section 1324(1B) shifted the onus to the appellant companies to prove that their conduct did not constitute a contravention of section 260A(1)(a). The Court found that the funding of litigation to enforce pre-emptive rights, which would ultimately facilitate the acquisition of shares by existing shareholders, constituted financial assistance. This assistance was deemed to contravene section 260A(1) because the appellant companies failed to demonstrate that this conduct did not materially prejudice their interests or their ability to pay creditors. The Court of Appeal's conclusion that an injunction should issue was therefore upheld.

The appeal was dismissed, and the appellant companies were ordered to pay the costs of the first and second respondents.

Orders

Orders of the court

1. Appeal dismissed.

2. The appellants pay the costs of the first and second respondents.

Background

Background to the litigation

The question on this appeal is whether the appellant companies should be enjoined from continuing legal proceedings at their expense to vindicate alleged pre-emptive rights of their shareholders to be offered for purchase shares in the companies, which rights the companies allege have been breached. For the reasons below, the Court of Appeal of the Supreme Court of Victoria was correct to conclude that s 260A(1) was contravened and that an injunction must issue.Background In 2003, the two appellant companies (which can be described collectively as "the Connective companies") were incorporated to conduct a mortgage aggregation business. At all relevant times, the shareholders in the Connective companies have been: (i) the first respondent (Slea Pty Ltd, "Slea") with 33.33%; (ii) the third respondent (Millsave Holdings Pty Ltd, "Millsave") with 50%; and (iii) the fourth respondent ("Mr Haron") with 16.67%. Since 2011, the directors of the Connective companies have been Mr Haron, Mr Lees (who is associated with Millsave), and Mr Maloney. The constitution of each Connective company contained an identical pre-emption clause ("the pre-emptive rights provisions"). In broad terms, the pre-emptive rights provisions required that before a shareholder could transfer shares of a particular class, those shares must first be offered to existing shareholders of that class in proportion to the number of shares of that class already held by that shareholder. In May 2009, the sole director and sole shareholder of Slea, Mr Tsialtas, entered an agreement with the second respondent (Minerva Financial Group Pty Ltd, "Minerva") for the sale of Mr Tsialtas' shares in Slea ("the 2009 Agreement"). Shortly afterwards, Mr Tsialtas disclosed the existence of the 2009 Agreement to the Connective companies. There is a dispute about whether the 2009 Agreement has been terminated by Mr Tsialtas, as Slea and Minerva claim. In August 2010, Slea, Minerva and Mr Tsialtas entered a second agreement, entitled "Accommodation Agreement". In December 2011, in Slea's amended defence to a separate proceeding brought by Mr Haron, the existence of the Accommodation Agreement was disclosed to Mr Haron, the Connective companies, and Millsave. Slea also disclosed the Accommodation Agreement in an oppression proceeding against Mr Haron, the Connective companies, and Millsave. On 11 August 2016, the Connective companies instituted proceedings against Slea and Minerva, also joining Millsave and Mr Haron as defendants ("the pre-emptive rights proceeding"). In the pre-emptive rights proceeding the Connective companies claimed that the 2009 Agreement and the Accommodation Agreement breached the pre-emptive rights provisions, and alleged that Slea intended, and still intends, to transfer its shares in the Connective companies to Minerva without complying with the pre-emptive rights provisions. The relief sought by the Connective companies included an order to compel Slea to offer its shares in the Connective companies to Millsave and Mr Haron in accordance with the pre‑emptive rights provisions.

Evidence

Evidence Before The Court

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Decision

Reasons for decision

KIEFEL CJ, GAGELER, KEANE, GORDON AND EDELMAN JJ
It has been said that a company disputing the application of s 260A(1) bears the substantive onus of proof to negate material prejudice in all cases[59]. That issue did not arise in this appeal and was not the subject of any submissions in this Court. Relevantly to this appeal, s 1324(1B) provides that in an application for an injunction based upon an alleged contravention of s 260A(1)(a), the court "must assume that the conduct constitutes, or would constitute, a contravention of [s 260A(1)(a)] unless the company or person proves otherwise". In relation to s 1324(1B), the Court of Appeal correctly concluded that, in proceedings for an injunction under s 1324(1) to restrain a contravention of s 260A(1)(a), s 1324(1B) required the Connective companies to disprove that their conduct constituted a contravention of s 260A(1)(a)[60]. The Connective companies were therefore required in the application for an injunction to disprove each element of "the conduct" that "would constitute" a contravention of s 260A(1)(a), including those in the prefatory words.[59]Adler v Australian Securities and Investments Commission (2003) 179 FLR 1 at 88 [410]-[411]. See also Austin and Ramsay, Ford, Austin and Ramsay's Principles of Corporations Law, 17th ed (2018) at 1820 [24.710].[60]Slea Pty Ltd v Connective Services Pty Ltd (2018) 359 ALR 159 at 173 [75].The decisions of the primary judge and the Court of Appeal Before the primary judge, Almond J, Slea and Minerva sought a dismissal or stay of the pre-emptive rights proceeding on a number of bases[61]. One basis was that since the Accommodation Agreement had been obtained in discovery as part of other litigation, the pre-emptive rights proceeding had been commenced in breach of the Connective companies' legal obligation, historically described as an implied undertaking, not to use the Accommodation Agreement for any purpose other than that litigation[62]. The primary judge granted a stay on that ground[63]. However, the Connective companies subsequently applied for, and were given, leave nunc pro tunc to use the Accommodation Agreement for the purpose of commencing the pre-emptive rights proceeding[64].[61]Connective Services Pty Ltd v Slea Pty Ltd (2017) 53 VR 130 at 135 [10].[62]See Hearne v Street (2008) 235 CLR 125 at 157-160 [105]-[108]; [2008] HCA 36.[63]Connective Services Pty Ltd v Slea Pty Ltd (2017) 53 VR 130 at 159-160 [116].[64]Slea Pty Ltd v Connective Services Pty Ltd (2017) 53 VR 161 at 179 [73]. An alternative form of relief sought by Slea and Minerva before the primary judge is the subject of this appeal. They sought an injunction under s 1324(1) of the Corporations Act to restrain the Connective companies from prosecuting the pre-emptive rights proceeding on the basis that by doing so they were in violation of the implied prohibition against financial assistance in s 260A(1) of the Corporations Act. The primary judge held that the Connective companies had not contravened s 260A[65]. Central to his Honour's reasoning was the absence of a transaction between the Connective companies and Millsave or Mr Haron. The search for a transaction, which is not a requirement of s 260A, led his Honour to the conclusion that the commercial realities of the pursuit of the pre-emptive rights proceeding by the Connective companies were that the Connective companies had "simply brought the proceeding in order to ensure that their constitutions are followed according to their terms"[66]. The primary judge also said that there was no benefit conferred on Millsave or Mr Haron, accepting the submission by the Connective companies that the rights of Millsave and Mr Haron to be offered the shares existed prior to any proceeding, and also drawing a distinction between the acquisition of shares and the offer of shares pursuant to a pre-emptive right[67].[65]Connective Services Pty Ltd v Slea Pty Ltd (2017) 53 VR 130 at 159 [115].[66]Connective Services Pty Ltd v Slea Pty Ltd (2017) 53 VR 130 at 156-157 [97].[67]Connective Services Pty Ltd v Slea Pty Ltd (2017) 53 VR 130 at 157 [98].

Ratio Decidendi

Legal Principle Established

Established by: KIEFEL CJ, GAGELER, KEANE, GORDON AND EDELMAN JJ

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