Connective Services Pty Ltd v Slea Pty Ltd

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.