Deputy Commissioner of Taxation of the Commonwealth of Australia v Advanced Communications Technologies (Australia) Pty Ltd (recs and managers app'td) (subject to deed of company arrangement)
[2003] VSC 487
•16 December 2003
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 6401 of 2002
| THE DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA | Plaintiff |
| v | |
| ADVANCED COMMUNICATIONS TECHNOLOGIES (AUSTRALIA) PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) & ORS | Defendants |
AND BETWEEN
No. 4542 of 2003
| ASIA INFOTECH PTE LTD | Plaintiff |
| AND | |
| ADVANCED COMMUNICATIONS TECHNOLGIES (AUSTRALIA) PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) & ANOR | Defendants |
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JUDGE: | Hansen J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 7, 11-13 March 2003 | |
DATE OF JUDGMENT: | 16 December 2003 | |
CASE MAY BE CITED AS: | Deputy Commissioner of Taxation of Commonwealth of Australia v Advanced Communications Technologies (Australia) Pty Ltd (Recs and Mans appointed) (subject to deed of company arrangement). | |
MEDIUM NEUTRAL CITATION: | [2003] VSC 487 | |
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CONTRACT – Sale of shares – Conditions precedent – Instalments of purchase price – Provision for retention of instalments paid if sale not completed for any reason – Whether penalty – Whether relief against forfeiture.
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APPEARANCES: | Counsel | Solicitors |
| For the Applicant 4th and 5th Defendants in 6401 of 2002 and for the 1st Defendant in 4542 of 2003 | Mr P R Hayes Q.C. and Mr P Neustupny | Middletons |
| For the Respondent in 6401 of 2002 and the Plaintiff in 4542 of 2003 | Dr C N Jessup Q.C. and Mr A P Rodbard-Bean | Abbott, Stillman and Wilson |
HIS HONOUR:
In an agreement for the sale of shares for a price payable by a deposit and instalments, there was provision for the vendor to retain the deposit and any instalments paid if the sale was not completed. The sale not being completed, the vendor terminated the agreement and retained the amounts paid. Conceding that the vendor's termination of the agreement was effective, the purchaser seeks the repayment of the instalments (but not the deposit paid) on the basis that the provision for their retention is a penalty and, as such, void. The vendor contends to the contrary, that the provision is not a penalty. In addition, the vendor claims that the purchaser is estopped from contending that the provision for retention is a penalty. These, in essence, are the issues for determination.
The agreement was in writing, constituted by a sale deed dated 27 August 2002. The parties to the sale deed are Asia Infotech Pte Ltd ("Asia Infotech") as purchaser, Advanced Communications Technologies (Australia) Pty Ltd ("ACTA") as vendor, and Global Communications Technologies Pty Ltd ("Global"). Global holds a debenture charge, dated 21 December 2001, over the assets and undertaking of ACTA. The directors of ACTA and Global were, and are, a father and son, Roger and Jason May.
On 29 July 2002 Global appointed David Neil Lockwood and Kenneth Stewart Sellers as joint and several receivers and managers of ACTA, pursuant to the debenture. The receivers and managers negotiated the sale and Lockwood executed the sale deed for ACTA. Clause 7.2 of the sale deed provided that the receivers and managers had executed the deed with the consent of Global.
Background
ACTA was registered in Victoria on 24 March 1999. In his evidence Lockwood stated that ACTA's business involved the development of a wireless terrestrial multi-protocol software defined radio communications operating system known as Spectrucell and PC4. He said that Spectrucell and PC4 comprised a collection of software defined radio technologies used to implement commercial wireless applications.
I now refer to some matters and facts which, to an extent, I set out in my judgment in Rathner v Global Communications Technologies Pty Ltd[1]. In some instances I repeat what I said in that judgment.
[1][2003] VSC 390.
On 15 July 2002 the Deputy Commissioner of Taxation ("the Commissioner") filed an originating process in proceeding 6378 of 2002 for the winding up of ACTA in insolvency, based on the failure to comply with a statutory demand served on 8 May 2002. The amount demanded was $1,568,853.32 for tax related liabilities.
In the afternoon on 15 July 2002[2], I heard counsel for the Commissioner who, urgently and without notice, sought interim injunctions to restrain ACTA from dealing in or disposing of its assets, and a company called Spectrucell SDR Pty Ltd ("Spectrucell SDR") from dealing in or disposing of assets which Spectrucell SDR may have acquired from ACTA since 8 May 2002 or was in the process of acquiring. The Commissioner had not had time to commence the proceeding. Being satisfied that a threatened dealing made it appropriate to do so, and on the basis that a writ would be filed the next day, I granted injunctions until 19 July 2002 which restrained ACTA and Spectrucell SDR respectively to the extent sought[3].
[2]Lockwood incorrectly gave the date as 16 July 2002 in his affidavit sworn 6 February 2003 in proceeding 6401 of 2002.
[3]The injunctions were granted in more elaborate terms than I have described; what I have said reflects the substance of the orders.
On 16 July 2002 the Commissioner filed a writ in proceeding 6401 of 2002 against ACTA and Spectrucell SDR seeking ongoing injunctions.
On 18 July 2002 the directors of ACTA appointed Gideon Isaac Rathner as administrator of the company pursuant to s 436A(1) of the Corporations Act ("the Act").
On 19 July 2002 I continued the injunctions until 2 August 2002 but with certain exceptions. The exceptions permitted ACTA to sell or deal with cash in its current trading account, any monies received pursuant to an R & D Start Grant, and any trading receivables collected by or paid to the administrator, for the purpose of paying debts of ACTA incurred in the ordinary course of ACTA's business during the administration, paying reasonable costs and expenses incurred in connection with the defence of the proceeding, and paying the administrator's fees and expenses of the administration (but not including expenses in connection with any other proceeding in court).
As mentioned, on 29 July 2002 Global appointed Lockwood and Sellers as receivers and managers of ACTA.
The receivers and managers continued ACTA's business with a view to continuing the development of the Spectrucell and PC4 technology. At the same time, they set about ascertaining the assets of ACTA, as the sale of such assets was the logical source of raising funds with which to meet ACTA's liabilities.
On 2 August 2002 the parties, including the receivers and managers, were before the Court. The injunctions were continued until the hearing and determination of the proceeding or further order, with a qualification added to the exception concerning payment of the administrator's legal expenses, and with an order authorising the administrator to distribute $68,000 to pay employees for the first week of the administration. I further ordered, specifically in relation to the receivers and managers, that they:
(a)be at liberty to advertise, seek expressions of interest in the purchase of, and enter into negotiations for the sale of, assets of ACTA, and
(b)have liberty to apply on 24 hours written notice to the other parties for directions with respect to the receivership, any proposed sale of assets of ACTA and the distribution of the proceeds of such sale.
On 16 August 2002 I ordered that Global and the receivers and managers be added as defendants, that the writ be amended to include a claim that Global's debenture was invalid and void ab initio, with consequential orders as to the invalidity of the appointment of the receivers and managers, and gave leave to the Commissioner under s 440D(1) of the Act to begin and continue with the proceeding.
On 21 August 2002 I fixed the trial of the winding up application and proceeding 6401 of 2002 before myself on 9 September 2002.
I now refer to the actions of the receivers and managers in relation to the sale of ACTA's assets.
ACTA’s assets included a holding of 57.5 per cent of the issued shares in Australon Enterprises Pty Ltd ("Australon") which directly and through a subsidiary, Australon Technologies Pty Ltd ("Australon Technologies"), owned 55 per cent of the issues shares in Intermoco Ltd ("Intermoco"), a publicly listed company. There were 2,000 issued shares in Australon and they were held as follows:
| ACTA | 1150 |
| New Page Pty Ltd ("New Page") | 500 |
| Springwell Australia Pty Ltd ("Springwell") | 100 |
| Asia Infotech | 200 |
In an affidavit which he swore on 27 August 2002 in proceeding 6401 of 2002 in support of an application for authority to sell ACTA's shareholding in Australon, Lockwood described the Australon shares as ACTA's principal asset and stated that ACTA did not own any other assets of significant value. In turn, the principal asset of Australon was its shareholding in Intermoco.
As early as 31 July 2002 Lockwood received a letter from Springwell offering to purchase ACTA's shareholding in Australon and all of the intellectual property owned by ACTA in the Spectrucell technology. Lockwood considered it was not a valid notice under the shareholders’ agreement referred to below and, accordingly, that it did not trigger the pre-emption provisions in that agreement.
Shortly after his appointment Lockwood met Ron Parsons who, on behalf of Asia Infotech, expressed interest in Asia Infotech acquiring ACTA's shares in Australon. That was followed by negotiations with Parsons who acted throughout for Asia Infotech, in which Warwick John Stewart Isherwood of Maddocks, solicitors, represented Asia Infotech and Andrew Gaffney of Middletons, solicitors, represented the receivers and managers. On 14 August 2002 a document entitled "Heads of Agreement" was signed, which listed the terms on which the receivers and managers and Asia Infotech were prepared to enter into a contract for the sale of ACTA shares in Australon. Before signing, Lockwood marked the document "Accepted, subject to contract". A formal sale deed was to be prepared.
Following further negotiations, the parties agreed to a sale on the terms contained in the sale deed dated 27 August 2000.
The provision in cl 4.4 of the sale deed for non-refund of monies paid was insisted upon by Lockwood given, as he said in evidence, that the sale deed locked up the shares until 31 January 2003, a period of approximately six months[4].
[4]See para 25 of Lockwood's affidavit sworn 6 February 2003 in proceeding 6401 of 2002.
Before referring to the terms of the sale deed it is convenient to refer to two other agreements to which ACTA was a party. They were a shareholders' agreement dated 3 December 2001, and a restriction agreement dated 9 January 2001. Those agreements formed part of the context in which the receivers and managers had to work.
The parties to the shareholders' agreement were ACTA, New Page, Australon and Springwell. The agreement governed the relations between the parties as shareholders in Australon. Clause 12, which dealt with and restricted the disposal of shares, included a right of pre-emption in favour of the continuing shareholders.
The parties to the restriction agreement were Intermoco (then called Gawler Gold and Mineral Exploration Ltd), Australon, Australon Technologies, ACTA, Global and Roger May. For the purpose of Intermoco complying with Chapter 9 of the ASX Listing Rules, the agreement placed escrow restrictions on the ability of Australon and Australon Technologies to dispose of their shareholding in Intermoco, and the ability of ACTA to dispose of its controlling interest in those securities, being its interest in Australon.
I now refer to the terms of the sale deed.
As mentioned, the parties to the sale deed were Asia Infotech, ACTA and Global. By cl 3.1 ACTA agreed to sell, and Asia Infotech agreed to purchase, ACTA's shares in Australon, free of encumbrances and on the terms and conditions in the deed. The structure of the deed is that it commences, in cl 1, with a definition of numerous expressions used in the deed. In referring to cl 3.1 I have summarised the definition of ACTA's interest as meaning "shares". That sufficiently describes the obligation which was to sell its entire right, title and interest in Australon.
Clause 2 made the agreement subject to certain conditions precedent, cl 4 provided for the price and payment, cl 5 for completion, cl 6 contained warranties and releases, and there were other clauses. In the deed ACTA is referred to as "ACT", Asia Infotech is referred to as "AIPL", and Intermoco as "INT".
The conditions precedent were set out in cl 1 as follows:
"Condition Precedent 1 means approval of the Supreme Court of Victoria to the sale of ACT's Interest on the terms and conditions in this Deed, such approval to be in a form reasonably satisfactory to AIPL, within 3 Business Days of the date of this Deed.
Condition Precedent 2 means approval of shareholders of INT, of the purchase of ACT's Interest by AIPL, in accordance with Item 7 of section 611 of the Corporations Act 2001 (Cth).
Condition Precedent 3 means an exemption or approval from the ASX under the Restriction Agreement, for the sale of ACT's Interest on the terms and conditions in this Deed, such exemption or approval to be in a form reasonably satisfactory to AIPL, within 5 Business Days of the date of this Deed.
Condition Precedent 4 means the written consent of all parties to the Shareholders Agreement, for the sale of ACT's Interest on the terms and conditions in this Deed.
Conditions Precedent means Condition Precedent 1, Condition Precedent 2, Condition Precedent 3 and Condition Precedent 4."
Clause 2 dealt with the conditions precedent and provided for termination in the event of non-satisfaction, as follows:
"2. CONDITIONS PRECEDENT
2.1 Deed Conditional
This Deed will have no effect unless and until the Conditions Precedent are satisfied on terms reasonably satisfactory to AIPL and ACT.
2.2Parties to procure
2.2.1ACT must use its reasonable endeavours to procure the satisfaction of Condition Precedent 1 and Condition Precedent 3, and pay all costs and expenses in this regard.
2.2.2AIPL must use its reasonable endeavours to procure the satisfaction of
Condition Precedent 1, Condition Precedent 2 and Condition Precedent 4, and pay all costs and expenses in this regard.
2.3Parties to assist
2.3.1ACT must do all things reasonably necessary to assist AIPL to procure the satisfaction of Condition Precedent 1, Condition Precedent 2 and Condition Precedent 4 (without the obligation to incur any monetary expense).
2.3.2AIPL must do all things reasonable necessary to assist ACT to procure the satisfaction of Condition Precedent 1 and Condition Precedent 3 (without the obligation to incur any monetary expense).
2.4AIPL to maintain restriction
In the event that this is necessary to obtain the satisfaction of Condition Precedent 3, AIPL agrees to be bound by the terms of the Restriction Agreement as if it was named in that document as the "controller".
2.4Termination
Subject to clause 4.4 below, if the Conditions Precedent are not satisfied by 31 January 2003, either party may by written notice to the other terminate this deed without prejudice to any Claims the parties may arising prior to the termination."
Clause 3 contained the agreement of sale. Clause 4 then dealt with price and payment, and cl 5 dealt with completion, as follows:
"4. PRICE AND PAYMENT
4.1 Price
AIPL must pay AUD $6 million for ACT's Interest.
4.2 Payment
The price is payable as follows:
4.2.1a deposit of AUD $100,000 must be paid into the trust account of Maddocks on the date of this Deed, and will be released to ACT by Maddocks within 24 hours of satisfaction of Condition Precedent 1 and Condition Precedent 3 (whichever occurs later);
4.2.2AUD $1.4 million must ge paid to ACT within 10 Days of satisfaction of Condition Precedent 1 and Condition Precedent 3 (whichever occurs later);
4.2.3AUD $1.5 million must be paid to ACT within 45 Days of satisfaction of Condition Precedent 1 and Condition Precedent 3 (whichever occurs later); and
4.2.4AUD $2 million must be paid to ACT at Completion.
4.3Method of payment
Unless otherwise agreed, all payments of the Price will be:
4.3.1by bank cheque made payable to "Advanced Communications Technologies (Aust) Pty Ltd (Receivers & Managers Appointed)"; and
4.3.2delivered to the solicitors for the Receivers and Managers.
4.4Refund
If any of the Conditions Precedent are not satisfied or Completion does not occur for any reason, any monies paid to ACT or the Receivers and Managers pursuant to clauses 4.2.1, 4.2.2, 4.2.3, will be retained by those parties.
4.5Damages not an adequate remedy
The parties agree that, in the event of a breach of this Deed by either party, damages will not be an adequate remedy, and that in order to adequately protect its rights under this Deed upon any default by either party, either party may apply for and must obtain:
4.5.2ex-parte interim, interlocutory or final injunctions prohibiting or restraining the other party from any breach or threatened breach of this Deed; or
4.5.2orders requiring the other party to specifically perform its obligations under this Deed,
in addition to seeking or obtaining any award of damages or account of profit for a breach of this Deed by the other party.
4.6No exclusion of law or equity
Nothing in this Deed must be construed to exclude the operation of any principle of law or equity intended to protect and preserve AIPL's rights under this Deed, or to exclude any remedy available to AIPL for a breach of this Deed by ACT.
5. COMPLETION
5.1Date for Completion
Completion will occur on the Completion Date.
5.2ACT's obligations at Completion
On the Completion Date, ACT must:
5.2.1deliver to AIPL a duly executed transfer of ACT's Interest in favour of AIPL and any share certificates in respect of ACT's Interest free of all Encumbrances;
5.2.2…
5.2.3…
5.3AIPL's obligations at Completion
On the Completion Date, AIPL must pay the amount specified in clause 4.2.4 in accordance with this Deed."
"Completion" and "Completion Date" were defined in cl 1. "Completion" meant the performance by the parties of their respective obligations under cl 5.2 and 5.3. "Completion Date" meant the date after the satisfaction of condition precedent 2, or such other date as agreed by the parties in writing.
Of the remaining provisions of the deed it seems necessary only to mention the following. Clause 9.2 was an entire understanding provision in the usual terms, and cl 9.8 provided that time was of the essence as regards all dates, periods of time and times specified in the deed.
On 30 August 2002, the receivers and managers applied to me for approval of the sale, for the purpose of obtaining satisfaction of condition precedent 1. Lockwood swore a substantial affidavit in support of the application. He referred to the history of the matter, to ACTA's shareholding in Australon, to Intermoco, to the negotiations for the sale of the shares, to the shareholders’ agreement and the restriction agreement, to having undertaken a valuation of ACTA's shares for the purpose of evaluating the offer of $6M, to other factors influencing the value of ACTA's shares, to the sale deed, to the costs and expenses of the receivership, and to the disposition of the proceeds of sale should the Court approve the proposed sale of ACTA's shares. I ordered that the receivers and managers be at liberty to sell ACTA's shareholding in Australon to Asia Infotech for $6M pursuant to the agreement contained in the sale deed. I further ordered that the receivers and managers retain the proceeds of sale in an interest bearing account but with power to apply the proceeds in payment of debts incurred by them in the ordinary course of the receivership, their fees and expenses of the receivership and the litigation, together with pay as you go tax and withholding tax to the Commissioner. It is common ground that condition precedent 1 was satisfied by that order or by 11 September 2002, when I made the further orders referred to below.
The trial of the proceeding commenced on 9 September 2002 and concluded, following settlement discussions, with consent orders on 11 September 2002. The orders were prepared by the parties and included a statement in the Other Matters section that each party to the proceeding, including the Commissioner (and the administrator), was of the opinion that the sale of ACTA's shareholding in Australon was on fair and reasonable commercial terms. It was ordered that the receivers and managers were authorised to enter into an agreement to sell ACTA's shareholding in Australon to Asia Infotech pursuant to the agreement contained in the sale deed dated 27 August 2002 without the inclusion of condition precedent 3, and with such other changes to the deed that did not change the substance of the agreement as may be agreed by the receivers and managers and the purchaser.
The terms of the settlement were such that final orders disposing of the proceedings could not then be made, and the proceedings were adjourned to 7 February 2003. As it has happened, the proceedings remain adjourned.
As contemplated by the order, on 17 September 2002 Asia Infotech, ACTA and Global executed a deed which amended the sale deed. By the amending deed:
(a)the parties agreed that failure to satisfy condition precedent 3 be deleted from the sale deed.
(b)Asia Infotech agreed that the $100,000 deposit held in Maddocks trust account be released to ACTA.
(c)ACTA agreed to transfer the Australon shares to Asia Infotech upon completion of the payment of the $6M purchase price, the shares to be transferred in two tranches at the direction of Asia Infotech. Upon mutual agreement of the parties a first tranche may be transferred to Asia Infotech as payments for shares are received.
The deed of settlement was attached to the order made on 11 September 2002. It is appropriate to make brief reference to its terms. It included an agreement by Global to pay to the Commissioner a sum of money (called "the settlement sum") by instalments in consideration for which the Commissioner would discontinue proceeding 6401 of 2002. It provided that Global would pay the settlement sum upon receipt by ACTA of the proceeds of the sale of shares in Australon (being the sale the subject of my orders on 30 August 2002) by three instalment payments. The instalments were tied to the amounts payable under the sale deed subsequent to the deposit in that each instalment payable to the Commissioner was of a lesser sum and payable two days after clearance of Asia Infotech's payment. The deed specified the way in which the Commissioner was to apply the money so received. Without referring to all of the provisions of the deed of settlement, it is sufficient to say that the receipt by the receivers and managers of the sums payable by Asia Infotech under the sale deed was critical to Global being able to fulfil its obligations under the deed of settlement. For the settlement to be performed with the result that the Commissioner's proceedings be dismissed or discontinued, the receivers and managers had to receive the sale proceeds under the sale deed. Hence, it was expressly provided that the parties would consent to orders in proceeding 6401 of 2002 varying the injunction to allow the receivers and managers liberty to sell ACTA's assets on the basis that the net proceeds of any such sale be held in trust pending payment of the sum specified in the deed of settlement.
Finally, the deed stated the agreement of the parties that the administrator of ACTA be at liberty to convene the second meeting of creditors within 14 days, contained some provision as to that meeting, and referred to a proposed deed of company arrangement.
The second meeting of creditors of ACTA was duly held on 26 September 2002. The creditors resolved that the company execute a deed of company arrangement. A deed was duly prepared, and executed by Rathner as deed administrator, ACTA, Global, and Roger and Jason May. The deed is dated 17 October 2002.
I set out the terms of the deed, and subsequent events relating to it, in my judgment in Rathner v Global Communications Technologies Pty Ltd[5]. For completeness, I note that cl 7(a) of the deed provided for the establishment of a fund, in part as follows, that:
"[T]he Directors [Roger and Jason May] and Global must cause to be paid to the Deed Administrator $3.25 million on or before 28.2.03, of which a minimum of $2.45 million must be received from the proceeds of the Sale of Shares."
The expression "Sale of Shares" was defined to mean the sale of ACTA's right, title and interest in Australon pursuant to the sale deed.
[5][2003] VSC 390.
Shortly after execution of the deed dated 17 September 2002 amending the sale deed, Parsons told Lockwood that Asia Infotech had terminated Maddocks retainer, and that he was acting for Asia Infotech for the purpose of finalising the completion of the sale of the shares and that he was authorised to accept delivery of documents on behalf of Asia Infotech.
On 18 September 2002 Lockwood received the deposit of $100,000 from Asia Infotech. Further payments under the sale deed were made as follows: $1.4M on 26 September 2002 and $1.5M on 31 October 2002. On the latter day, Parsons told Lockwood that Asia Infotech would not pay the final instalment without some comfort that ACTA intended to complete the transaction. Lockwood agreed to provide Parsons with a transfer for 510 shares in Australon to Asia Infotech to be held in escrow pending completion. In the letter with which Lockwood forwarded the transfer he stated that condition precedent 2 still applied.
Lockwood said in evidence that between 31 October 2002 and 8 January 2003 he was not aware of any steps being taken by Asia Infotech to procure satisfaction of condition precedent 2. On 8 January 2003 Lockwood sent an email to Parsons referring to the necessity for conditions precedent 2 and 4 to be satisfied and requesting, as soon as possible, details of the steps taken to procure such satisfaction prior to 31 January 2003. On or about 21 January 2003 Parsons told Lockwood that Asia Infotech wished to settle the sale without obtaining the approval of the shareholders of Intermoco, advice apparently having been given that such approval was not necessary. Lockwood obtained advice from Maddocks on the matter. The advice was that the shareholder approval was necessary under Chapter 6, in particular s 606 of the Act. On 29 January 2003, Gaffney (of Middletons) sent an email to Parsons which concluded with the statement that in the absence of compelling evidence to the contrary of his view of the legal position, Lockwood would have no alternative other than not to proceed with the transfer of the shares unless condition precedents 2 and 4 were satisfied.
In response, Parsons contacted Lockwood and a meeting was arranged for 30 January 2003. Parsons wanted to provide evidence that condition precedent 2 was not applicable to the transfer of shares under the sale deed. Later that afternoon, and on 30 January 2003, there were discussions between Gaffney and Parsons, and in the afternoon of 30 January 2003 a meeting occurred, attended by Parsons, Jason May, Lockwood and Gaffney. The matters discussed are set out in Lockwood's affidavit. Parsons relied on advice from Baker and McKenzie which he produced, together with other documents, as to Asia Infotech having agreed to hold some of the ACTA shares on trust for another party. This was to deal with condition precedent 2. Also, apparently Springwell and New Page consented to the sale. Gaffney questioned the sufficiency of the Baker and McKenzie advice, in particular the extent of their instructions, and spoke to Baker and McKenzie about providing background documents to enable it to review their advice. Gaffney asked Parsons if he wished to tender the balance of the purchase price. He did not do so.
The parties agreed to meet on 31 January 2003 to enable Baker and McKenzie to review their advice, and Parsons to obtain the balance of the purchase price.
On 31 January Gaffney wrote to Baker and McKenzie and enclosed a copy of the sale deed, the amending deed and various other documents relating to the relationship between the shareholders in Australon and between Australon and Intermoco. Gaffney also pursued Parsons for particulars as to the number of shares the subject of the trust stating that without that information he could not change his advice to Lockwood.
At a meeting in the afternoon Parsons produced documents to support his contention that there was no Chapter 6 issue precluding completion, and tendered cheques totalling $6M. Gaffney, having spoken to Baker and McKenzie, remained of the view that there would still be a breach of s 606 of the Act, and so informed Parsons. Gaffney told Parsons that Asia Infotech should put forward a realistic proposal to satisfy condition precedent 2 or the parties could go to court for a decision in relation to the lack of shareholder approval. Gaffney said that Lockwood had to refuse to complete the sale and that he would terminate the sale deed. Parsons telephoned someone, after which Baker and McKenzie advised Gaffney of a change in Asia Infotech's interest in Australon which affected the position under s 606, and, after 5.00 pm, Australon sent Gaffney a letter dated 31 January 2003 confirming the transfer referred to. Gaffney advised Parsons that because of the piece-meal approach of Asia Infotech to the Chapter 6 issue Lockwood had no option but to go to court for a determination, and at about 5.34 pm he advised Parsons that he could not see how condition precedent 2 could be satisfied, and that Lockwood had elected to terminate the sale deed. If, however, Asia Infotech had an alternative proposal for selling the shares, Lockwood would be happy to hear it.
On 1 February 2003 Middletons, on behalf of ACTA and the receivers and managers, forwarded a notice of termination to Parsons, and a copy to Global. The notice stated that ACTA, pursuant to cl 2.4 of the sale deed, gives written notice to Asia Infotech and Global that it terminates the sale deed with effect from the date of service of the notice.
On 6 February 2003 Middletons filed a summons on behalf of the receivers and managers in proceeding 6401 of 2002. The summons sought several orders and declarations the substance of which was to clarify that the sale had been validly terminated and that the receivers and managers were free to re-sell the shares. Pursuant to leave granted on 7 May the summons was amended to seek directions as to whether:
(a)the receivers and managers may complete the sale deed without being in breach of s 606;
(b) the receivers and managers had validly terminated the sale deed;
(c) the receivers and managers are at liberty to re-sell the shares.
On 18 February 2003 Asia Infotech filed a writ in proceeding 4542 of 2003 against ACTA and Australon. The writ claimed a variety of relief including a declaration that ACTA had not validly terminated the sale deed, an order for specific performance on payment of the balance of purchase price, an injunction until trial restraining ACTA from selling the shares, relief from forfeiture of Asia Infotech's interest in the shares, equitable damages, and alternatively, repayment of the $3M.
The proceeding against Australon was discontinued on 28 February 2003.
Before long too, Asia Infotech accepted that the sale deed had been terminated and abandoned the claim for specific performance.
I fixed the amended summons and certain issues in proceeding 4542 of 2003 for hearing before myself on 3 March 2003. As it transpired, the trial commenced a few days later.
Before the trial I heard counsel, including counsel for the Commissioner and the deed administrator, on several applications. Among other things:
(a)On the application of the deed administrator, I ordered that Part 5.3A of the Act operate in relation to ACTA so that the deed of company arrangement was varied as follows:
(i)in the definition of "Sale of Shares" in cl 1.1, the words "pursuant to the Sale Deed" are deleted; and
(ii)in cl 7(a), the words "28 February 2003" are replaced with "30 April 2003 or within 14 days after the hearing and determination by this Court at first instance of both this proceeding and proceeding number 4542 of 2003, whichever first occurs".
The effect of the order in para (i) was that the sale was not required to be pursuant to the sale deed.
(b)On the application of the receivers and managers for a variation of the injunctions in proceeding 6401 of 2002, which restrained dealings in, or the disposal of, ACTA's assets, to permit the receivers and managers to enter into a litigation funding agreement on the terms set out in an agreement exhibited to an affidavit sworn by Lockwood, I ordered, after hearing argument, that the injunctions be dissolved[6]. That left the receivers and managers free to enter into the litigation funding agreement. Lockwood explained that the purpose of the funding was to provide funds for the costs of proceeding 4542 of 2003, any further litigation arising in respect of the Australon shares and any potential liability of ACTA to disgorge the $3M paid by Asia Infotech under the sale deed. Lockwood deposed as to the then market price of shares in Intermoco and stated that there was an available market in which to sell sufficient of ACTA's shares in Australon at a sum that would enable ACTA to meet its obligations under the deed of settlement and the deed of company arrangement. Also, money could be borrowed against the shares to enable those obligations to be met.
[6]Deputy Commissioner of Taxation of the Commonwealth of Australia v Advanced Communications Technologies (Australia) Pty Ltd [2003] VSC 67.
The pleadings were amended during the trial. By the end of the trial the pleadings in proceeding 4542 of 2003 comprised a further amended statement of claim, a second further amended defence and counterclaim, an amended reply, and a defence to counterclaim. I refer below to the issues which I tried. The balance of the issues were settled by the parties at a trial before Habersberger J in May 2003.
The pleadings
The trial was conducted by reference to the relevant issues in the pleadings in proceeding 4542 of 2003 as distinct from the questions in the amended summons for directions. In effect, the latter was overtaken by the former. Being a suit between the contracting parties, the former was the convenient vehicle for the identification and determination of the issues. The parties conducted the trial accordingly.
I tried the issues raised by the following parts of the pleadings:
(a)In the further amended statement of claim, paras 1-29, excluding the paragraphs struck out on amendment, and the claims in the prayer for relief for repayment of the $3M, or so much thereof as constitutes a penalty; an order that the $3M paid to ACTA be repaid; and interest in respect of the $3M[7].
(b)In the second further amended defence and counterclaim, paras 1-29, excluding the paragraphs struck out on amendment, and paras 37-39 relating to the share transfer Lockwood provided to Parsons on 31 October 2002, claiming that the transfer was of no force or effect on the basis of which ACTA sought by counterclaim an order for delivery up of the transfer. Otherwise the issues in the counterclaim were not before me for determination. In its defence to counterclaim Asia Infotech conceded that the share transfer was no longer of force or effect under the sale deed. Counsel conceded that the transfer should be returned but stated that, despite searches, the transfer could not be found. As the issue concerning the transfer was conceded, it is not necessary to consider it further.
(c)In the amended reply, paras 1-6 and 8.
(d)Save as referred to at (b), the defence to counterclaim does not concern the issues before me.
[7]Counsel conceded that the deposit of $100,000 was not liable to be repaid.
Without referring to all matters, the following is admitted on the pleadings, namely:
(a) Condition precedent 1 was satisfied by 11 September 2002.
(b) $3M was paid by instalments (on the dates referred to at [42]).
(c)Condition precedent 2 was not satisfied at 31 January 2003[8].
[8]As to this, para 14 of the further amended statement of claim alleged that on or about 31 January 2003 Asia Infotech provided evidence to ACTA and the receivers and managers of satisfaction of condition precedent 4, had contended that satisfaction of condition precedent 2 was unnecessary in the circumstances, and had tendered the balance of $3M. In the second further amended defence, ACTA denied these allegations and alleged that Asia Infotech had failed to procure satisfaction of either condition on or before 31 January 2003. ACTA did not, however, allege that the cause of that failure was that Asia Infotech had not used its best endeavours to procure satisfaction as required by cl 2.2.2 of the sale deed. ACTA did not allege a breach of that obligation or claim that it suffered loss and damage as a result of such a breach. In its amended reply, Asia Infotech admitted non-satisfaction of condition precedent 2 but, as to condition precedent 4 alleged that ACTA had not relied on its non-satisfaction as a ground of termination of the sale deed, and further alleged that in the circumstances (apparently including that ACTA had failed to do all things necessary to assist Asia Infotech to procure such satisfaction) ACTA was contractually precluded or estopped from relying upon the non-satisfaction of condition precedent 4 as a basis for resisting any relief to which Asia Infotech may otherwise be entitled. The effect of these pleadings was to raise an issue as to whether condition precedent 4 had not been satisfied at 31 January 2003 and, if it had not, ACTA could rely on that non-satisfaction. However, the issue did not matter because, as counsel for Asia Infotech conceded, as condition precedent 2 had not been satisfied ACTA had been entitled to terminate the sale deed.
The issue then raised by Asia Infotech was that the provision in the sale deed for retention by ACTA of the monies paid is void or unenforceable as it is in the nature of a penalty[9]. In para 29 of its pleading by way of defence, ACTA denied this claim and alleged that:
[9]Para 29 of the further amended statement of claim.
(a) Asia Infotech seeks equitable relief but its conduct is unconscionable.
(b)The retention of any amount by ACTA pursuant to cl 4.4 was a consequence of the failure to satisfy condition precedent 2 and not of a breach of the sale deed.
(c)Further and alternatively, the retention was pursuant to a genuine and reasonable pre-estimate of the damages which, to Asia Infotech's knowledge, would be suffered by Lockwood and ACTA in the event that the sale deed was not completed on 31 January 2003.
(d)Further and alternatively, Asia Infotech is estopped from claiming that cl 4.4 constitutes a penalty or that the amount must be refunded. The estoppel arose in the following circumstances:
· Asia Infotech knew that the amounts paid to ACTA were to be paid out and disbursed under a deed of company arrangement and/or to meet ACTA's liabilities to the Commissioner and/or to pay ACTA's outstanding liabilities and/or for ACTA's day to day trading activity.
· For this reason the parties negotiated and agreed on cl 4.4.
· Relying on this ACTA disbursed and paid out the amounts received from Asia Infotech without keeping any amount in reserve in case completion of the sale deed did not occur.
· ACTA has suffered detriment in that Asia Infotech now claims that the amounts paid must be refunded.
(e)Further and alternatively, if cl 4.4 is void or unforceable as being in the nature of a penalty, any amount to be repaid should be reduced by the loss and damage actually suffered by ACTA as a result of non-completion of the sale deed.
The second further amended defence included particulars of para (a), (c) and (d) above. In the amended reply Asia Infotech, among other things, denied the allegation in para (a); as to para (b) said that reference should be made to the sale deed for its full terms and effect; as to para (c) denied there was any genuine and reasonable pre-estimate of damages, and that it knew of any such pre-estimate; as to para (d) it denied the estoppel; and as to para (e) ACTA had not made a claim for damages.
Evidence
Asia Infotech did not file an affidavit. ACTA relied on three affidavits sworn by Lockwood. The first affidavit was sworn on 6 February 2003 and filed in proceeding 6401 of 2002. In this affidavit Lockwood deposed to the general circumstances of and relating to the making of the sale deed[10]. Among the exhibits to this affidavit was the affidavit which Lockwood had sworn on 27 August 2002 in proceeding 6401 of 2002. The second and third affidavits were sworn on 3 and 4 March 2003 in proceeding 4542 of 2003, the former dealing with the agency of Parsons and the circumstances in relation to the inclusion of cl 4.4 in the sale deed, while the latter dealt with Lockwood's reliance on cl 4.4 and the matter of damages. The three Lockwood affidavits were duly tendered.
[10]Gaffney swore an affidavit on 7 February 2003 which confirmed aspects of Lockwood's affidavit. In view of the confinement of the issues at the trial the affidavit was not tendered.
The trial took the following course. In the afternoon on 7 March 2003 counsel opened Asia Infotech's case. Counsel took the approach that the case was established on the pleadings, the acknowledged premise being that ACTA's counsel would be tendering the Lockwood affidavits which included the sale deed and other relevant documents as exhibits. Approaching the case in this way the opening took the course of counsel outlining the pleadings and stating Asia Infotech's position. The opening was completed without the tender of any document.
Asia Infotech's case having thus been opened and presented, counsel then proceeded to open ACTA's case. A number of documents were tendered during the opening. Counsel for ACTA then proceeded to evidence. He commenced by calling Isherwood, followed by Lockwood and, finally, Martin Yong Pang Yii. Isherwood and Yii had not sworn affidavits; each gave evidence under subpoena. I now refer to their evidence, commencing with Lockwood.
Lockwood
Lockwood dealt with the matter of the value of ACTA's shares in Australon in his affidavit sworn on 27 August 2002.[11] He said that for the purpose of evaluating Asia Infotech's offer of $6M he had undertaken a valuation of ACTA's shares based upon the value of Australon's shareholding in Intermoco. His valuation did not take account of Australon's asset backing, its liabilities or its financial position in any other manner. He was informed by Roger May, a director of Australon, and believed, that Australon's principal asset was its shareholding in Intermoco and that it owned no other asset of significant value. On 22 August 2002 Intermoco shares traded at 6.2 cents per share, and the average price over the last 50 days had been 5.5 cents per share. On that basis a rough estimate of the value of Australon's shares in Intermoco was –
[11]This affidavit was exhibited to his affidavit sworn on 6 February 2003.
· At 6.2 cents $16,430,000
· At 5.5 cents $14,575,000
On that basis, at 57.5 per cent of the issued capital Australon's shareholding was –
· At 6.2 cents $9,447,250
· At 5.5 cents $8,380,625
Lockwood then referred to other factors which in his opinion substantially influenced the saleability of ACTA's shares in Australon, and hence had the capacity to significantly reduce the value of the shares.
First, the value of ACTA's shares lay in Intermoco but it is Australon and not ACTA that can sell shares in Intermoco. Further, as Australon holds more than 20 per cent of Intermoco's issued capital, the Act precluded the sale of its shares in one lot without the prior approval of Intermoco's shareholders. To obtain such approval, which would involve an independent valuation and a general meeting, would entail delay and cost. To allow for the risk of a drop in the share price during that process, a purchaser would discount the value of the shares. Under the sale deed, Asia Infotech was responsible for procuring the consent to the sale and paying the costs and expenses associated with doing so. Next, the average daily trading volume of Intermoco shares was low. In the 50 days to 22 August 2002 only 146,500 shares were traded; at 6.2 cents per share that was approximately $9.083M worth of shares. In such a limited volume market it would be difficult to dispose of the Intermoco shares in one parcel, which would further cause a purchaser to discount the price of the shares. Further, a purchaser would not have an immediate right to board representation, and would have to wait until the next annual meeting to exercise control. Finally, on 23 August 2002 Lockwood was advised by a sharebroker that it would be near impossible to sell a long line of Intermoco shares in the current share market environment without a substantial discount on the value of Intermoco shares, which last traded at 6 cents.
The second factor was the shareholders’ agreement, which contained a right of pre-emption in favour of the other shareholders. Lockwood considered that a purchaser would not be likely to be prepared to wait up to two months while the pre-emption procedure was undertaken, with the attendant risk of a fall in the share price in the meantime. That limited the saleability and, hence, the value of the shares. Further, cl 13 of the agreement provided that if a shareholder committed an event of default (including failure to comply with a statutory demand, and suffering an application to wind up or the appointment of an administrator) the other Australon shareholders had an option to buy the defaulting shareholder's shares at 80 per cent of the market price as determined under the agreement less the cost of a valuation. As at 27 August 2002 Lockwood had not received such a notice; he regarded Springwell's offer received on 31 July 2002 as not being valid for that purpose.
The third factor was the restriction agreement which, without ASX approval, restrained ACTA from disposing of its shares in Australon, and Australon from disposing of its shares in Intermoco, until January 2003. A purchaser of ACTA's shares would have to agree to be bound by the escrow condition and hence to be exposed to the risk of a fall in the Intermoco share price until the expiration of the escrow period.
The fourth factor was the restrictions in Chapter 6 of the Act, applicable because the purchaser would be acquiring a relevant interest in more than 20 per cent of Intermoco's shares via the acquisition of the shares in Australon. Accordingly, the sale of Australon's shares would require the approval of Intermoco's shareholders, which would add cost and delay, and expose the purchaser to the risk of a fall in the price of the shares pending approval, which would warrant a discount.
Fifthly, there was no secondary market in the shares in Australon, as it was a proprietary company.
I refer to Lockwood's cross-examination on this evidence below, for the moment referring to other parts of his evidence in chief.
I now refer to the evidence in Lockwood's affidavit sworn on 3 March 2003 as to the inclusion of cl 4.4 in the sale deed. Lockwood commenced by referring to the matters that led him to require cl 4.4. They were (by reference to the paragraphs in the affidavit):
(a)In para 16 Lockwood acknowledged that the sale might not be completed until 31 January 2003, a period of more than five months from the date of execution of the sale deed. Under the sale deed interest was not payable on the outstanding balance of the purchase price. The risk was that Asia Infotech did not complete the purchase, which might not be known until 31 January 2003. If that risk eventuated, the shares would have been frozen, without interest, and the market price might have fallen in the meantime. Moreover, there was the further and related risk that Asia Infotech was a foreign corporation whose directors Lockwood had not met, and he had no indication that Asia Infotech had any assets in Australia.
(b)In para 17 Lockwood set out a calculation of interest which might have been earned on the purchase sum from time to time, assuming that payments were made at the times stipulated in cl 4. At a rate of interest of 12 per cent per annum the amount of interest to 31 January 2003 was $193,578, and $986.30 per day thereafter.
(c)In para 18 Lockwood developed the point as to the risk of a fall in the price of Intermoco shares in the period to completion. He described that as a substantial risk that could result from general market conditions or an announcement by Intermoco. He was concerned that a fall of, for example, two or three cents, could result in Asia Infotech electing not to complete the transaction. In that event ACTA would have a parcel of shares worth less than previously. Then, the shares may take an uncertain, and substantial, time to resell, and any resale would be complex and costly having regard to the Australon shareholders’ agreement, the constitution of Australon, and the size of the parcel of shares. He was not able to put a value on this risk, save that for each one cent fall in the value of Intermoco shares the value of –
· Australon's total direct shareholding in Intermoco would diminish by approximately $2,649,375, and
· ACTA's shareholding in Australon would diminish by $1,510,143.
(d)In para 19 Lockwood noted that when the sale deed was entered into it was contemplated that certain of the proceeds of sale would be paid to ACTA's creditors under the proposed deed of company arrangement and to the Commissioner under any settlement. Without the certainty that ACTA could immediately apply the $3M to these purposes and pay substantial receivership creditors, ACTA faced the real risk of being immediately wound up.
(e)In para 20 Lockwood stated that the part payments of purchase price would provide funds with which to pay the cost and expense of procuring satisfaction of condition precedents 1 and 3. Lockwood estimated that he incurred costs and expenses in this regard of $50,000.
Then, in para 21, Lockwood referred to Parson's initial offer as stated in a commercial term sheet which Parsons sent by email on 13 August 2002[12]. The terms included a provision that if the conditions precedent "are not completed to the reasonable satisfaction of the Acquiring Entity by 30 September 2002 then the Acquiring Entity may withdraw from the transaction without any liability to the Acquiring Entity and all monies paid by the Acquiring Entity be refunded in full", the Acquiring Entity being defined to mean Asia Infotech or its nominee. The terms were not acceptable to Lockwood without ACTA being entitled to retain any monies paid if the conditions precedent were not met by the purchaser. That was because:
(a)Lockwood required sufficient funds to be able to continue to incur and discharge receivership expenses,
(b)The directors of ACTA would not otherwise be able to formulate a proposal for a deed of company arrangement, and
(c)There would be no basis upon which to put a settlement proposal to the Commissioner.
Lockwood informed Parsons of these issues in their negotiations leading to the execution of the sale deed and the amending deed.
[12]Exhibit DNL 9 to Lockwood's affidavit sworn on 6 February 2003.
Lockwood said (in para 22) that after reviewing the commercial term sheet he told Parsons that he would not enter into the sale agreement unless it provided that upon failure of the purchaser to comply with the terms of the contract any monies paid would be retained in full. Parsons said he would consider this proposal. On 14 August 2002 Parsons sent Lockwood a revised commercial term sheet which excluded the refund provision[13]. The term sheet did not, however, include a provision for retention of the monies paid.
[13]Exhibit DNL 10 to Lockwood's affidavit sworn on 6 February 2003.
In subsequent meetings and discussions leading to the sale deed Lockwood told Parsons that it was imperative for ACTA that any monies received from Asia Infotech be non-refundable and that he would not enter into an agreement to sell the shares unless such a term formed part of the agreement. He told Parsons in the negotiations for the sale deed and the amending deed that ACTA had debts in excess of $6M (para 23).
The result of Lockwood's insistence was that Asia Infotech agreed to the sale deed with the inclusion of the provision for retention in cl 4.4. In para 24 Lockwood said that cl 4.4 reflected the agreement he reached with Parsons on 14 August 2002, and he took comfort from the security it provided him in relation to the disbursement of the monies paid. In the circumstances, ACTA would suffer considerable prejudice and loss if Asia Infotech was able to claim its money back in the event of having failed to procure satisfaction of conditions precedent 2 and 4.
Lockwood said further (in para 25), that after terms of settlement were signed by the Commissioner on 11 September 2002, he (Lockwood) told Parsons of the settlement and that a substantial part of each amount paid by Asia Infotech would be paid to the Commissioner immediately. Under the terms the Commissioner gave ACTA a discount of $700,000. If the sale deed was not completed and ACTA defaulted under the terms, that amount could again be payable, with interest, and the two legal proceedings could be re-listed for trial with significant legal costs of defence, which he estimated could be in the order of $250,000.
If the sale deed was not completed there would be legal fees in negotiating a resale of the shares (estimated at $50,000) and any subsequent court proceedings that might follow regarding the saleability of the shares (say $150,000) (para 26). The current litigation had already cost in excess of $400,000 (in legal expenses and receivership fees), and it had been necessary to obtain litigation funding to enable Lockwood to defend Asia Infotech's claim and prosecute the counterclaim (para 27). In concluding his affidavit Lockwood said that Asia Infotech and Parsons were well aware that in the circumstances he had described ACTA would not have the $3M to repay.
Lockwood's affidavit sworn on 4 March 2003 was a short affidavit in which, in one substantive paragraph, he stated that in reliance on the fact that cl 4.4 had been included in the sale deed:
(a)He caused ACTA to enter into the deed of settlement with the Commissioner pursuant to which ACTA and Global undertook to pay the Commissioner $1,750,000 as set out therein;
(b)The directors of ACTA proposed, and ACTA, Global and the directors of ACTA entered into, the deed of company arrangement pursuant to which the directors of ACTA and Global undertook to pay to the deed administrator $3.25M on or before 28 February 2003, of which a minimum of $2.45M must be paid from the proceeds of sale of the shares;
(c)He continued to incur and discharge receivership expenses and liabilities in respect to the receivership of ACTA utilising certain of the proceeds received from Asia Infotech.
I now refer to Lockwood's evidence in cross-examination. A deal of the cross-examination was directed to the question of the damages that ACTA might have suffered if the sale was not completed. In this respect, Lockwood was cross-examined on statements in his affidavit sworn on 3 March 2003, commencing with the matter of interest foregone referred to in paras 16 and 17. This, he said, was a head of damage if the sale did not go ahead. In August 2002, prior to entering into the sale deed, he made a rough calculation of interest of between $100,000 and $200,000. He roughly took $3M at 10 per cent. He did not have a document that evidenced that estimate. He explained the use of 12 per cent in his affidavit on the basis that that was "the Court scale" meaning, as I understood it, the penalty interest rate for the purpose of interest on judgment. He was not specifically aware if 12 per cent could have been obtained in the market in August 2002, indeed he had not made inquiries. He understood that 12 per cent was now available from a number of debentures. He insisted that in August 2002 he would have been able to get 10 or 12 per cent in the commercial market. He deals with a number of finance houses that raise money and who on lend at rates in excess of 12 per cent. He acknowledged that he would have wanted an investment to be secure and that the higher the rate of interest the greater the risk in a transaction. He assessed the deal as commercially high risk and therefore he would have had to take a higher rate of interest. As he had not made a specific inquiry at the time he was not specifically aware of anywhere he could have invested at 10 to 12 per cent. In the course of this evidence Lockwood agreed with the suggestion that the risk he was talking about was the risk that Asia Infotech might not perform the contract. He was then asked:
"And that's what this $3M retention was all about, wasn't it? – Correct.
Holding Asia Infotech to its contract? – Correct.
Exerting a premium over low risk investments by reference to your fear that they may not perform? – No, its not exerting a premium at all."
Lockwood went on to disagree that his assessment of the risk had nothing to do with the damages if the agreement was not performed.
Then, regarding the actual calculation of interest in para 17, it was seen that it was made on the basis that the $6M was payable on execution on 27 August 2002, whereas the $6M was payable by instalments as stipulated in cl 4.2. Appreciating that, Lockwood said that his assessment of the damages was based on a loss of opportunity of not having the use of the $6M.
Counsel then asked Lockwood questions about para 18 of his affidavit. This concerned the risk of a fall in the price of Intermoco shares in the period to completion. The risk was real, there was minimum volume in the market place, and a substantial parcel of shares would have seen the price go down. He searched the ASX and the Intermoco website for information. Nothing alerted him to the prospect of a public announcement that might impact on the share price. The general stock market conditions were less than certain. He could not comment as to whether the Intermoco share price moved in line with movements in the market generally. He disagreed that he made no serious attempt to consider the potential impact of general market conditions on Intermoco shares over the next six months, adding that he is a commercial businessman and is aware of what impacts the stock market generally. The fact that Intermoco traded in low volumes did not necessarily mean that the price might not move in the same way as shares in the market generally. He considered the low sales and the price range.
In the course of this evidence Lockwood stated that the $3M being non-refundable was a basic term of his negotiation; if he did not receive the money "to keep it" there was no contract, he could not restructure ACTA without it. He was then asked if para 18 "was concerned to persuade the court that in determining that, you were making some kind of pre-estimate of the damages that you might suffer?", to which he replied that "[t]hey were all considerations of how I structured the contract and why I structured it in a certain way". That led counsel to ask some questions about para 21.
As to para 21, Lockwood said that he told Parsons of the matters referred to as early as 7 or 8 August 2002. He told Parsons that he would not enter into a contract if the first $3M was refundable, as he had to re-structure ACTA and the shares were the only liquid asset he had to sell at the time. Without completion and the $3M being non-refundable he could not work with ACTA and the creditors, and if he didn't realise the assets ACTA would go into liquidation. He did not tell Parsons the amount required for receivership expenses. It could not be defined at the time. At the time "the cashburn load of" ACTA was around $400,000 per month. He had not factored in a specific period of time, and there was litigation. He mentioned a deed of company arrangement to Parsons at their first or second meeting, saying he intended to re-structure ACTA and was going to use the proceeds to do so, "and that's what I put to him". He was asked how much was he going to pay under the proposed deed, and answered –
"As I said to Mr Parsons, I intended to utilise all the $3M, it wouldn't be able to be repaid, and he accepted that basis. It's always been the key process of any negotiations I have and that's what the contract's ultimately reflected."
Lockwood said that the discussions with Parsons referred to in para 22 were the same discussions referred to in para 21.
Counsel then asked Lockwood questions about the evidence in his affidavit sworn on 27 August 2002 concerning the value of ACTA's shares in Australon. With reference to para 21 of that affidavit, he agreed that the record of Intermoco's share price showed that the 52 week low was 3.5 cents. Then, he agreed, the values at 27 August 2002 have to be qualified by the matters that Lockwood had proceeded to discuss in the affidavit. These matters brought him to the view that $6M was a reasonable price. At $9.4M the $6M was about a 36 per cent discount to the market, while at $8.4M it was about a 28.4 per cent discount. Lockwood said that the factors set out in this affidavit were some of the considerations he regarded in valuing the shares and agreeing to $6M. It was then put to him that as he had otherwise taken into account the difficulty of selling the shares in one parcel in deciding that the $3M should not be refundable, the reference to it in the exercise of valuing the shares was "double counting". He disagreed. He had not already factored that into the $6M sale price.
Counsel then took Lockwood back to para 18(b) of his affidavit sworn on 3 March 2003 in which he referred to a fall in the value of ACTA's shareholding of $1,510,143. That figure did not take account of the various discounting factors; Lockwood said that he did not put forward the calculation in para 18 as a calculation he had made in August 2002. He had not made the calculation in para 18(b) then. He had done calculations then, he "was aware of the issues in the affidavit, and they were difficult issues to consider in respect to what was the value and what was the loss". He explained that para 18(b) set a parameter and that is not inconsistent with the issues discussed in the earlier affidavit. He concluded a long answer by saying "So my only credibility and comfort factor was the cash paid up front" which, he agreed with counsel, was "a security factor". He denied that the provision for retention had nothing to do with any attempt to calculate the losses if the contract was not performed and added:
"As I said, the issue confronting me was the liquidation of the company and without having any assets or cash, liquidation would have ensued. The damages to Advanced Communications Technology Aust would have been substantial. The reason it would have been substantial is because the intellectual property would have been at risk; the employees would have left. You know, finance companies might have re-possessed computers. The intellectual property would have walked out the door. It was a substantial risk.
Yes, that's right, that's why I say it was security rather than calculation? – It was a reasonable estimate of my downside if this deal went sour."
Lockwood then agreed that there was no single piece of paper that showed any workings or calculations on his part in August 2002 as to how much ACTA would lose if the sale did not proceed. At this point counsel produced to Lockwood a sheet prepared by counsel setting out calculations of the value of ACTA's shares; this became Exhibit 1. This showed a number of scenarios of results depending on the price of Intermoco shares, all on the assumption that the shares were sold in one lot or at least all at the one price, and on the basis of accounting for discounting factors. It was comparing the sale price to the discounted price of $6M (adjusted downwards through the price scenarios). It was designed to show the point at which such a straight out sale would produce a return of less than $6M. At 5.5 cents the proceeds were $8,380,625, as set out in para 22 of Lockwood's affidavit sworn on 27 August 2002; that was more than $6M, and on that basis there would not be a loss. It showed that the Intermoco share price would have to have halved (to 2.75 cents) to produce a loss of $3M. Lockwood objected that the exercise was artificial and did not take account of all the relevant circumstances, adding that $3M was struck as a reasonable estimate on the things he was not aware of at the time, "for all the discounts and for all the reasons I've just said". And he agreed that all of those things were the things that caused him to propose to the Court in August 2002 that $6M was a fair commercial price for the sale of the shares. Further, as shares became free of the Escrow conditions in January 2003, the share price might have dropped if those shares were placed on the market. But, he acknowledged, the removal of the escrow condition meant that the shares could be traded.
Lockwood went on to observe that Asia Infotech was "a special purpose buyer", they had a relationship having bought shares in Australon in March, they had the shareholders' agreement and understood the relationship between New Page and Springwell, so they had inside knowledge that other persons did not have.
At a late stage in his evidence, during the lunch adjournment, when it seemed that Lockwood's cross-examination had just been completed, counsel for ACTA gave counsel for Asia Infotech a document dated 22 August 2002 on the note paper of Sims Lockwood (being Lockwood's firm) containing a calculation of the value of Australon's shares in Intermoco. The document was four pages long. The analysis was relatively detailed. The valuation allowed the following discounts: 10 per cent – 20 per cent for the restriction agreement, 20 per cent for the shareholders’ agreement, 0 - 5 per cent on account of the secured creditor, and 5 per cent for other factors, a total of 30 per cent – 50 percent. It concluded that, on a discounted basis, the range was a low of $3.96M on the basis of 5.2 cents per share (the average 30 day price), and a high of $6.61M on the basis of 6.2 cents per share (the price at 21 August 2002). The document became Exhibit EE.
Lockwood was cross-examined on the document. He explained its previous non-production on discovery as being due to his not understanding or thinking it was relevant. He had looked at it for the purpose of preparing his affidavit sworn on 27 August 2002. The work paper, as he described it, was not prepared by him. It was prepared under his instruction by John Adams of the firm. Lockwood agreed that if he suffered any loss or damage as a result of the sale deed not being fully performed it would be by reference to the discounted values in the document. He said that the downside was $2M being the $3.9M from the $6M – that was his worst case and in other circumstances he might have suffered no loss.
Lockwood explained his earlier use of the expression "special purpose buyer". It did not mean that Asia Infotech would pay a premium. He meant that he could do a deal in a short space of time, which then allowed him to proceed with his restructuring of ACTA. As to damages, Asia Infotech was aware that there was no deal if he could not keep the money. Lockwood said that his damages, in his assessment, was the liquidation of ACTA which would have the creditors substantially worse off. If he had to find another purchaser he did not know how much he would be paid for the shares.
In re-examination Lockwood was asked to compare the benefit of keeping the shares or selling them to Asia Infotech in August 2002. He supposed that he took a simple view that the cash was going to be used to restructure ACTA and therefore the benefit was substantial, it avoided litigation, it avoided an argument on the interpretation and effect of the shareholders' agreement, and how it and Australon's constitution worked. There was no other obvious purchaser of the shares at the time, and that was relevant to the deed he insisted on.
As to then estimating a loss if the sale did not proceed, the work sheet showed a range of values but there were a lot of unknown factors such as the state of the market, the volume of shares, the shareholders’ agreement and, ultimately, his need for cash to keep ACTA alive. Without cash, liquidation would have occurred, the intellectual property would have been at risk, and the creditors might have lost tens of millions. The potential was that the intellectual property was worth nothing, and the shares might have been realised in the fullness of time or subject to litigation. He supposed that the $3M was a reasonable estimate of what might have occurred, but the range could have been anything.
I found Lockwood to be an honest witness. He gave evidence in a reasonable manner seeking to explain his position and the considerations relevant, or which affected, his approach to the sale deed and his insistence on cl 4.4, and at the same time answering the cross-examiner. It is to be appreciated that on his appointment as receiver and manager he was placed in a difficult position. ACTA was insolvent and, to avoid liquidation, it was necessary to sell, as quickly as possible and for as much as possible, the sole liquid asset of ACTA which was its shares in Australon, and he needed to be able to use the money paid by the purchaser on immediate disbursement to creditors and in paying the costs of the receivership. Regarding his evidence overall, his aim in negotiating the sale deed was clear and understandable, being to ensure that whether or not the sale was completed he was able to disburse the instalments with no risk of refund to Asia Infotech. In that way he could deal with ACTA's creditors and, as he said, restructure the company. It is singular that Asia Infotech relied solely on cross-examination, calling no evidence at all. Asia Infotech put no person in the witness box – such as Parsons, Yii, or a solicitor from Maddocks – to dispute any aspect of Lockwood's evidence. Further, the documents tendered from the Maddocks file and the evidence under subpoena of Isherwood and Yii were consistent with, or confirmatory of, evidence of Lockwood. I have no doubt that Lockwood's account of the transaction, and his evidence overall, was true and correct. He is an intelligent and experienced professional in his area of expertise and impressed me as such in giving evidence. Indeed, the sale deed itself reflected his skill and expertise. I am satisfied that his failure to produce, at an appropriate time, the Adams work sheet was due to honest error. I considered that matter in concluding, as stated above, that I found Lockwood to be an honest witness.
Isherwood
Isherwood gave evidence of, in summary: documents in the Maddocks file relating to the transaction; the identity of his client and, in particular, whether it was Asia Infotech or Yii, Isherwood insisting that he had acted for Asia Infotech, Yii having told him that Asia Infotech was the client; Yii's role and whether Yii's knowledge was to be attributed to Asia Infotech, in relation to which Isherwood said he received instructions from Yii as agent for Asia Infotech, and also from Parsons, Yii having told Isherwood that Parsons represented Asia Infotech; his knowledge, before the sale deed was executed, that the purchase monies were to be disbursed almost immediately on their receipt by the receivers and managers; Asia Infotech not requiring a liquidated damages clause, as the amount stipulated for damages might have indicated that the sale price of $6M was low; the fact that he acted in the matter until (it seems) 18 September 2002 when the file was taken over by another person at Maddocks; and other matters.
It is convenient to note the following concerning the documents tendered from Isherwood's (or Maddocks) file.
(a)In a document described as a fact sheet sent by Maddocks to counsel, dated 19 August 2002, some facts were set out concerning the relationship between New Page, Springwell, Asia Infotech and Yii. Among other things it was noted that Yii is a director of New Page, Australon and Australon Ltd, it was stated that Yii has provided business consultancy services to New Page, Springwell and Asia Infotech in relation to their investment in Australon and that he continues to provide services to New Page and Asia Infotech. He has also acted for Springwell in relation to a proposed offer by Springwell to acquire ACTA's interest in Australon.
(b)Then there is a draft of a sale agreement for the sale of ACTA's shares which has the provision to pay the $6M by instalments but in which it is provided that if any condition precedent is not satisfied or completion does not occur for any reason ACTA will refund all monies paid by Asia Infotech under the deed in full.
(c)There is another draft of the sale agreement attached to an email from Yii dated 22 August 2002 which includes the same provision for refund of monies paid.
(d)There is a file note of Isherwood of a telephone conversation he had with Andrew Chambers of Middletons for the receivers and managers on 23 August 2002 in which, among other things, it is stated that "[t]hey want to use the money to fund ongoing operations of ACT, not to pay out Global (subject to instructions)", and "We both agreed that it would be unlikely to get the money for Global's purposes as the debenture charge is under challenge".
(e)That is followed by another Isherwood file note, this time of a telephone conversation with Yii later on 23 August, in which he notes having informed Yii that "they want to get the money to run ACT, not to take the money to Global".
(f)Then, later on 23 August, there is an email from Isherwood to Gaffney at Middletons, which refers to a document amended by Gaffney and approved by the receivers and managers. It is stated that the amendments are substantial, do not accord with the term sheet dated 14 August 2002, and are rejected. "In particular", Isherwood states, "the concepts that moneys are not refundable when the conditions precedent have not been met and the limitation of liability of the receivers and managers are and will never be acceptable to our client". Isherwood sent a further draft with the email. In this draft the refund clause was amended so that it did not apply if the conditions precedent were not satisfied or completion does not occur by reason of a breach of the deed by ACTA, in which event ACTA will, at the discretion of Asia Infotech, refund all monies paid or Asia Infotech may apply for and obtain injunctions and orders referred to in cl 5.5 which was then limited to Asia Infotech's rights.
(g)There is a note "For Ron Parsons re Asia Infotech from R May" with an attached copy of my order in proceeding 6401 of 2002 made on 11 September 2002, and the attached deed of settlement.
At times, the examination in chief of Isherwood fell into cross-examination and the relevance and utility of the examination was not immediately apparent. The conduct of the examination in chief was, to an extent, the product of the fact that Isherwood came from Asia Infotech's camp and that ACTA's counsel had to call Isherwood to properly get some documents into evidence or for Isherwood to explain the contents of documents in his file. In addition, there was a background context of bitterly fought litigation between the ACTA and May interests on the one hand, and the Asia Infotech and Yii (and possibly other) interests on the other hand, concerning ACTA. Regarding the matter overall I found Isherwood to be an honest witness.
Yii
Yii was the last witness. He said he is the managing director of Intermoco[14]. He owns MLW Technology, which is the sole shareholder in New Page. He is the sole director and controller of New Page. (I interpolate that a historical company extract for New Page, dated 27 February 2003, records that the sole shareholder is MLW Computer Services Pty Ltd of the same address as that stated for Yii in the extract). The principals of Asia Infotech are one Rianto and his wife Evelyn, who instructed him to have dealings with the lawyers in Australia[15]. They reimbursed him for the $100,000 Yii had provided to Maddocks, and which was released to ACTA. They had known of the non-refundable provision in the sale deed. Yii had legal advice about that provision before he discussed it with Mr Rianto. When the sale deed was entered into he and Mr Rianto knew that the receiver planned to spend the $3M, he assumed to meet ACTA's debts. Yii's evidence occupies only seven pages of the transcript. He was not cross-examined. I accept the evidence he gave.
[14]A historical company extract for Intermoco dated 23 August 2002 records that Yii is a director having been appointed on 31 January 2002.
[15]Mr Rianto's first name is Gunawan; see exhibit DNL1 to Lockwood's affidavit sworn on 3 March 2003.
I make the following findings on the above evidence, and the evidence of Lockwood and documents placed in evidence. I find that Yii acted as agent for Asia Infotech in the matter of the sale deed, and that Parsons did also, each being duly authorised by Asia Infotech on its behalf. I further find that Asia Infotech executed the sale deed aware of cl 4.4, and otherwise of all of the terms of the deed, knowing that the non-refund provision represented the carefully negotiated position of the parties. Indeed, as Lockwood's evidence shows, it was insisted upon by him. Asia Infotech knew that the receivers and managers intended to apply the $3M as it was paid to meet the obligations of ACTA (as distinct from paying the money to Global), the receivers and managers not otherwise having the funds from which to do so, and it knew that once the moneys were expended, the receivers and managers would not have funds to repay the $3M. I further find that Asia Infotech knew that the Australon shareholding was ACTA's principal liquid asset, apart from the intellectual property in the technology being developed by ACTA.
The submissions
Counsel for Asia Infotech pointed to the effect of cl 4.4, which was that if a condition precedent was not satisfied by 31 January 2003 ACTA could terminate the deed and retain the instalments and the shares. In these circumstances, the principle stated by Dixon J in McDonald v Dennys Laselles Ltd[16] was applicable, with the result that the instalments less the amount of the deposit should be repaid with interest. In McDonald, where a vendor had terminated a contract for the sale of land on the basis of the purchaser's breach in not paying an instalment of the purchase money, Dixon J said, in the passage relied on:
"It is now beyond question that instalments already paid may be recovered by a defaulting purchaser when the vendor elects to discharge the contract (Mayson v Clouet (1924) AC 980). Although the parties might by express agreement give the vendor an absolute right at law to retain the instalments in the event of the contract going off, yet in equity such a contract is considered to involve a forfeiture from which the purchaser is entitled to be relieved (see the judgement of Long Innes J in Pitt v Curotta (1931) 31 SR (NSW) 477 at 480-482)."
It is convenient to note that, after then referring to certain cases and to forfeiture of estate under a contract as distinct from forfeiture of instalments paid under a contract, Dixon J continued at 478 –479 as follows:
"However, these cases establish the purchaser's right to recover the instalments, other than the deposit, although the contract is not carried into execution. If a vendor under a contract containing an express power to forfeit instalments at first determined the contract and retained the instalments but afterwards resiled from his former election to treat the contract as discharged and insisted that, if the purchaser was unwilling to forfeit his instalments according to the tenor of the agreement, he should at least carry out the sale, perhaps the purchaser as a term of equitable relief against forfeiture would be required to carry out his contract. But, where there is no express agreement excluding the implication made at law, by which the instalments become repayable upon the discharge of the obligation to convey and the purchaser has a legal right to the return of the purchase money already paid which makes it needless to resort to the equity and submit to equity as a condition of obtaining relief, the vendor appears to be unable to deduct from the amount of the instalments the amount of his loss occasioned by the purchaser's abandonment of the contract. A vendor may, of course, counterclaim for damages in the action in which the purchaser seeks to recover the instalments."
"The first is the purely mechanical test of whether the provision sought to be impugned does or does not exceed the loss or damage which the innocent party could obtain if he sued for damages for breach of contract … It has nothing to do with judicial discretion, and it has nothing to do with any notion of unconscionability. It is, I apprehend, the traditional test applied in this area of the law. Its mechanical nature is, no doubt, a reflection of the common law origin of the doctrine of penalties.
A second line of authorities suggests that relief against penalties is in its nature discretionary, so that the nature of the relationship between the contracting parties may make the contractual stipulation in question unconscionable. This seems to be the view espoused by Mason J and Wilson J in AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 193-194, a passage which has been set out in extenso in the judgment of Mahoney JA. This view perhaps reflects the later equitable appropriation of the common law doctrine of penalties.”
In my view, the distinguished line of cases which supports the first view makes its adoption inevitable."[43]
[42](1991) 22 NSWLR 615.
[43]At 650-651.
In PC Developments, a purchaser of commercial real estate was granted, under a contract of sale of the property, a revocable licence and authority to enter the property, prior to completion of the contract, to carry out certain works. The contract contained a clause which provided that if the contract was not completed, other than as a result of a default of the vendor, the purchaser would not be entitled to remove the works or claim compensation from the vendor in respect of the works. However, if so required by the vendor, the purchaser would be liable to reinstate the property at the purchaser’s expense.
Applying the mechanical approach, Meagher JA held that the clause was not penal, but compensatory. It provided a right to retain improvements coupled with a right to insist on reinstatement of the original works. In the event of a breach of the contract by the purchaser, the vendor could either retain the improvements or insist on reinstatement. It was impossible to predict whether the value of the vendor’s right to retain the improvements, considered at the time of formation of the contract, would exceed the damages recoverable by the vendor in the event of a breach. Consequently, Meagher JA held that the clause was not in the nature of a penalty.
Meagher JA rejected the application of the equitable approach, but held that if the Court did have a discretion, that discretion ought not be exercised. Neither the clause nor the conduct of the vendor could be characterised as unconscionable. Furthermore, the parties were of equal bargaining power and acted on the advice of reputable legal and commercial advisers.
In accordance with Meagher JA’s decision, counsel contended that relief against the enforcement of a contractual penalty is determined by a mechanical process, rather than equitable principles.
In reply, counsel for ACTA rejected the submission that the discretion of the court to grant equitable relief against the enforcement of a penalty has ceased to exist. Counsel referred to the decision of Mahoney JA in PC Developments, and his application[44] of the following statement of Mason and Wilson JJ in AMEV-UDC that:
"[E]quity and the common law have long maintained a supervisory jurisdiction, not to rewrite contracts imprudently made, but to relieve against provisions which are so unconscionable or oppressive that their nature is penal rather than compensatory. The test to be applied in drawing that distinction is one of degree and will depend on a number of circumstances, including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff’s conduct in seeking to enforce the term. The courts should not, however, be too ready to find the requisite degree of disproportion lest they impinge on the parties’ freedom to settle for themselves the rights and liabilities following a breach of contract."[45]
Counsel submitted that the approach to be applied is that of Mahoney JA in PC Developments[46], consistent with the decision of Mason and Wilson JJ in AMEV-UDC. Following this approach, a penalty is distinguished from a provision which is merely compensatory by reference to the circumstances subsisting between the parties and the unconscionability of enforcing the relevant provision. Furthermore, Mason and Wilson JJ clearly state, and Mahoney JA confirms, that equity has a role in relieving against contractual penalties.
[44]At 629.
[45]At 193-194.
[46]At 629.
Counsel for ACTA then referred to the decision of Dixon J in McDonald and submitted, in terms of the passage quoted at [100] that ACTA, as vendor, has "an absolute right at law to retain the instalments", and that Asia Infotech seeks the assistance of equity to recover those payments.
Similarly, counsel submitted that the decision of the High Court in Legione v Hateley[47], relied on by counsel for the plaintiff in their written submissions prior to their change in approach, confounds Asia Infotech’s case. In that case Mason and Deane JJ referred to:
"… the fundamental principle according to which equity acts, namely that a party having a legal right shall not be permitted to exercise it in such a way that the exercise amounts to unconscionable conduct."[48]
[47](1983) 152 CLR 406.
[48]At 444.
Then, after referring to the statement of their Honours set out at [101], counsel referred to their later statement that:
"In the ultimate analysis the result in a given case will depend upon the resolution of subsidiary questions which inevitably arise. The more important of these are: (1) Did the conduct of the vendor contribute to the purchaser’s breach? (2) Was the purchaser’s breach (a) trivial or slight, and (b) inadvertent and not wilful? (3) What damage or other adverse consequences did the vendor suffer by reason of the purchaser’s breach? (4) What is the magnitude of the purchaser’s loss and the vendor’s gain if the forfeiture is to stand? (5) Is specific performance with or without compensation an adequate safeguard for the vendor?"[49]
It is, of course, immediately apparent that that passage was directed to the case then before the court, in which the defaulting purchaser sought relief from forfeiture in order to enable specific performance, a quite different case from the present.
[49]At 449.
Counsel for ACTA then referred to Ronstan International Pty Ltd v Thomson[50], a decision of the Court of Appeal of this Court in which a provision for interest in a commercial agreement was held to be a penalty. Buchanan JA stated, in a judgment with which Chernov and Eames JJA concurred, that:
"The mere fact that a contractual term operates to impose upon a party an obligation to pay a sum greater than can be recovered at law does not entail the result that the term is a penalty. The degree of disproportion between the stipulated amount and the loss likely to be suffered by the promisee must show that the term is oppressive or unconscionable."[51]
There is a footnote to each sentence in that passage. The footnote to the first sentence refers to PC Developments at 628-631 per Mahoney JA. The footnote to the second sentence refers to AMEV-UDC at 193-194 per Mason and Wilson JJ. Each reference includes the passage quoted above at [133]. The references indicate the application of the approach in that passage. Counsel, thus, on the basis of the authorities referred to, advocated equity’s continuing role in the law of penalties, and, in particular, its application to the present dispute. I am bound to follow and apply a decision of the Court of Appeal of this Court, applying as it does a statement in a joint judgment of two judges in the majority in the High Court in AMEV-UDC.
[50][2002] VSCA 75.
[51]At [26].
Furthermore, it is important to attend closely to the way in which Mason and Wilson JJ expressed themselves in the passage in their judgment in AMEV-UDC relied upon by Asia Infotech and set out above at [124]. That is the passage which refers to the equitable jurisdiction "withering on the vine". Their Honours were addressing the situation in which the agreed sum has been held to be a penalty. That being the case, the narrow question, as Elizabeth Lanyon has contended[52], is that of the consequence of identifying the clause as penal. Noting that elsewhere in their judgment their Honours use the familiar phraseology of equity, Lanyon argues that:
[52]Elizabeth V. Lanyon, "Equity and the Doctrine of Penalties", Journal of Contract Law (1996) 9, 234-258.
"[I]t is possible to confine their conclusion to the question of relief rather than treating it as characterising the operation of the doctrine generally."[53]
Lanyon’s analysis is persuasive in view of Mason and Wilson JJ’s subsequent statement of the test to be applied in distinguishing a mere compensatory clause from a clause of a penal kind. Mason and Wilson JJ emphasised equity’s "supervisory jurisdiction … to relieve against provisions which are so unconscionable or oppressive that their nature is penal rather than compensatory"[54]. So understood, the equitable dimension of the doctrine of penalties exists in the power and obligation of the Court to judge the character of a clause by reference to the relationship between the parties in negotiating the clause and the unconscionability of its enforcement.
"[T]he unconscionability lies in contracting for a clause compensating the promisee in excess of unliquidated damages where the promisor was handicapped in the bargaining process. The greater the disproportion between the clause and the nominal common law damages, the greater the need to show that the promisor was aware of the nature and extent of the clause and the risks involved."[55]
In contrast, it is conventionally understood that the Court has no discretion to refuse relief following the identification of a penalty; the clause is considered unenforceable ab initio.
[53]At 236.
[54](1986) 162 CLR 170 at 193.
[55]At 249.
In this area reference may also be made to the comprehensive discussion of the issues in Meagher, Gummow and Lehane’s Equity Doctrines and Remedies[56]. See also the references in Harris v Digital Pulse (2003) 56 NSWLR 298 at [59]-[60] per Spigelman CJ and at [338] per Heydon JA.
[56](2002) 4th ed., Butterworths, Chapter 18.
Approaching the matter on the basis I have indicated, I conclude that the provision for retention of instalments paid is not a penalty. The sale deed was a carefully negotiated agreement. It was vital to Lockwood that the sale deed include a term to the effect of cl 4.4. He insisted upon it. Without it he would not agree to the sale, which Asia Infotech knew. Asia Infotech was also aware of the insolvent status of ACTA, that Lockwood intended to disburse the instalment monies when they were received, and that the Australon shares were ACTA's only liquid asset. It was explained by Lockwood, and Asia Infotech knew, that the reason for the inclusion of cl 4.4 was that once the instalment monies were disbursed there could not be restitution except in the event of an unforeseeable circumstance or, to put it another way, some unforeseeable windfall favouring an insolvent company. Asia Infotech accepted the inclusion of cl 4.4 as the price of procuring the agreement, and thus, as the means by which to acquire ACTA's shares and, in consequence, a substantial measure of control in Intermoco.
Intermoco was a speculative stock which traded in low volumes and at low but variable prices. On the evidence, a change in price of several cents was significant, especially if in the period of just over five months to completion the change was an appreciable fall. Lockwood's estimate of the value of the shares, made for his own purpose in forming a view as to the reasonableness of the price, and with a view to obtaining satisfaction of condition precedent 1, took appropriate regard of relevant matters. $6M was a reasonable figure arrived at with appropriate caution, and discounting, and was a reasonable commercial figure in the circumstances.
I conclude that uppermost in Lockwood's consideration was the immediate need for funds for the purpose of dealing with creditors, restructuring ACTA as he described it, and paying receivership costs. I reject the contention that the purpose and intendment of cl 4.4 was to be security to ensure payment of the balance of the purchase price, as it may have been outstanding from time to time. The purpose and intention, known to Asia Infotech, was that the instalment monies were going to be disbursed and Lockwood would not be able to repay them if the contract should go off for any reason. Lockwood was thus to be protected. That was what Lockwood required, and why he required it. He made that known to Asia Infotech and Asia Infotech freely and voluntarily accepted the term. Not only did Asia Infotech accept the term, but it did so on the basis that instalments would be paid subsequent to deposit and prior to the completion date.
While that was Lockwood's price for the agreement, the price of Intermoco shares, and hence the value of ACTA's Australon shares, might have risen, even substantially, by the time of completion or shortly thereafter. And, of course, the might have fallen to a point at which $6M might have seemed a high price. As managing director of Intermoco, Yii was better placed than Lockwood to know of matters sensitive to the price of Intermoco’s shares. Manifestly he was, and would at all material times be, better informed on such matters than Lockwood. The contrast in their respective positions was reflected in Lockwood's evidence that in attempting to ascertain material information concerning Intermoco he searched the ASX site and Intermoco's website, and consulted a broker. Yii did not have to do that. It may be said that Yii acted in the negotiation stage merely as an agent for Asia Infotech and that Asia Infotech's knowledge of matters concerning Intermoco’s share price is the relevant consideration. That is to say, that it cannot be assumed that Yii communicated price sensitive information that was not available to Lockwood. In view of the absence of evidence from Asia Infotech, the extent of Asia Infotech's awareness of such matters is not known. Nevertheless, Yii was, in the circumstances, a particular agent, and it is safely assumed that Asia Infotech satisfied itself that the price and terms were reasonable from its point of view. In that regard, there was the indication in the evidence that suggested that Asia Infotech did not pursue a liquidated damages provision for fear of indicating to Lockwood that the sale price was low. All in all, however, Asia Infotech was as well, if not better, able to evaluate the commerciality of the terms of sale as was Lockwood.
The parties dealt with each other at arm's length. They knew what they were dealing with. Lockwood knew there was a range of factors which could affect the price of Intermoco shares. They are relatively obvious and I find they were known to Asia Infotech. Of course, there may have been other matters known to Yii, but while that seems obvious, to go further is to venture into speculation. The situation was one, with a long lead time to payment of the final balance of $3M, in which it was very difficult to estimate what the loss to ACTA might be in the event that the sale did not proceed. How was Lockwood to know what the Intermoco share price would be on the date (whatever it be) that the sale went off? Understandably, and necessarily, cl 4.4 applied if the sale was not completed for any reason. If the sale did go off, Lockwood could not know if it would do so on account of a breach by Asia Infotech, or not. There might, for instance, have been an anticipatory breach of the obligation to procure satisfaction of conditions precedent 2 or 4, or of some other obligation on Asia Infotech's part to be performed. It cannot be assumed that 31 January 2003 would be the date. How was Lockwood to know, let alone anticipate, the variables, and their relative state, on the date as it turned out to be? How was Lockwood to know that any and what additional factor material to the Intermoco share price might not arise? How could it be supposed that at some date the loss of the sale or damages for breach could be estimated at X or Y dollars, or at some approximate range of likelihood? The price might be up, or down, that was each party's risk. Having attended to Lockwood's evidence closely I conclude that while he had been aware of factors which would affect the share price and the matter of loss or damages, he had considered loss or damage in that context. There was sense in that. That is, he essayed an attempt to identify the factors which would affect the price and, having done so, those factors could be applied to whatever price the Intermoco shares stood at. That would provide a guide to the difference (up or down) relative to the sale price of $6M and, hence, to whether there was a loss.
The more that one reflects upon the reality of the situation the more it becomes apparent that on 27 August 2002 one would not have known what amount might represent the loss of the sale, except in terms of a range of possible movements in the Intermoco share price. Considering that alone, $2.9M was not out of all proportion to that which might have occurred.
Even if I was satisfied (which I am not) that there was, regarded as at 27 August 2002, a disproportion between the instalments and the loss likely to have been suffered if the contract was terminated, I am satisfied that the degree of that disproportion was not such that the provision in cl 4.4 is oppressive or unconscionable.
There is a complete absence of anything in Lockwood's conduct in the matter that could be described as unconscionable. In fact, no such submission was made. Indeed, in the absence of evidence disputing Lockwood's account it is hard to see how any attack on him of that sort could have been made. The parties were free to deal with each other on such terms as might have pleased them. Lockwood had control of the shares, but he was an anxious seller as he needed to raise funds quickly to have any hope of staving off liquidation. Asia Infotech was under no such constraint and, it might have been thought, had the whip hand. But, even if it did not, there was nothing in the relationship that placed ACTA or Lockwood in a position of advantage or influence over Asia Infotech in a sense relevant to unconscionable conduct in equity. Acting through lawyers, and upon their advice, the sale deed was freely and voluntarily negotiated and agreed. There was no mistake, no equitable fraud, no undue influence, no surprise, or any other factor relevant to unconsionability. In the language of Meagher JA in PC Developments at 651 the "contract was commercially justifiable".
In conclusion, in my view cl 4.4 is not penal in nature. It follows that the claim fails.
I have not based my conclusion on ACTA's primary submission that cl 4.4 is not a penalty or in the nature of a penalty because it provides for retention of instalments on the happening of an event other than breach. Without overlooking the point, it has seemed appropriate to deal with the case as I have.
In the circumstances it seems unnecessary to consider ACTA's alternative claim of estoppel. I do no more than record my view that Asia Infotech's contentions on the point are correct.
I mention one further point which was not expressly the subject of submissions. The point concerns instalment cases, and the question that is conveniently stated in Meagher, Gummow and Lehane's Equity Doctrines and Remedies[57] as follows:
"Does equity have any role where one party declines or is unable to continue with the contract, part payments having been made, and the contract expressly provides that such payments are not to be repaid in such circumstances?"
There is the Victorian case of Smyth v Jessep[58] in which Monahan J held that equity had jurisdiction and he ordered repayment of deposits that were penalties. Then, in the following year, O'Bryan J decided In re Hoobin, dec'd[59], a deposit case. While Monahan J followed Denning LJ (with whom Somervell LJ agreed), in Stockloser v Johnson[60], O'Bryan J preferred the contrary view of Romer LJ in Stockloser. Romer LJ had himself preferred the view of Farwell J in Mussen v Van Diemens Land Co[61] that relief against forfeiture of instalments paid would only be granted to a purchaser who was willing and able to complete the contract. After all, if a party seeks equity why should he or she not do equity by completing the contract? In Galbraith v Mitchenall Estate Limited[62] Sachs J preferred the view of Romer LJ. The contrary view of Denning LJ is that equity may grant relief if the forfeiture clause is penal and it is unconscionable for the money to be retained. The different views were commented on in Yardley v Saunders [1982] WAR 231 at 237, where there is reference to Coates v Sarich [1964] WAR 174 which applied Smyth, and Tropical Traders Ltd v Goonan (No. 2) where there was reference to Smyth. Counsel for ACTA did not submit that the approach identified by Farwell J, Romer LJ and Sachs J, and favoured by O'Bryan J in this Court, was either open to be applied or should be applied. In view of the absence of argument on the point I do no more than mention it.
[57](2002) 4th ed., Butterworths, at [18-135].
[58][1956] VR 230.
[59][1957] VR 341.
[60][1954] 1 QB 476.
[61][1938] Ch 253.
[62][1965] 2 QB 473.
The claim will be dismissed. It is unnecessary to answer the questions in the summons for directions. I will hear counsel on the question of costs.
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