El-Ansary v El-Raghy
[2002] WASC 51
EL-ANSARY & ANOR -v- EL-RAGHY & ORS [2002] WASC 51
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2002] WASC 51 | |
| Case No: | COR:350/1998 | 10-13 SEPTEMBER, 19 SEPTEMBER 2001, 16-18 JANUARY 2002, 21-23 JANUARY 2002 | |
| Coram: | TEMPLEMAN J | 25/03/02 | |
| 46 | Judgment Part: | 1 of 1 | |
| Result: | Application dismissed | ||
| B | |||
| PDF Version |
| Parties: | MOHAMED EL-ANSARY BARBARA EL-ANSARY SAMI ABBAS YOUSSEF EL-RAGHY MICHAEL JOHN BRENZ KRIEWALDT EL-RAGHY KRIEWALDT PTY LTD (ACN 009 091 516) NORDANA PTY LTD (ACN 009 087 414) PHARAOH GOLD MINES NL (ACN 062 135 728) CENTAMIN NL (ACN 007 700 352) |
Catchwords: | Corporations law Whether shares were issued for the sole or substantial purpose of diluting shareholding Whether conduct was oppressive or unfairly prejudicial to, or unfairly discriminatory, pursuant to s246AA of the Corporations Act 2001 (Cth) Trusts Whether shares were owned beneficially Practice and procedure trial of preliminary issue |
Legislation: | Corporations Act 2001 (Cth), s 246AA, s 243A, s 243G Evidence Act 1906 (WA), s 79C |
Case References: | Jenkins v Enterprise Goldmines NL (1992) 10 ACLC 136 Jones v Dunkel (1959) 101 CLR 298 Nullacourt Pty Ltd v Walker, unreported; Library No 950249A; 19 May 1995 Shamsallah Holdings Pty Ltd & Anor v CBD Refrigeration and Airconditioning Services Pty Ltd & Ors (2001) 19 ACLC 517 Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Company NL & Anor (1968) 121 CLR 483 Howard Smith Ltd v Ampol Petroleum Ltd & ors [1974] AC 821 In the Matter of Companies (Western Australia) Code v Spargos Mining NL (1990) 3 WAR 166 John J Starr (Real Estate) Pty Ltd v Andrew Australasia (Pty Ltd) (1991) 6 ACSR 63 Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113 Mills & Ors v Mills & Ors (1938) 60 CLR 150 New South Wales Rugby League Ltd v Wayde (1985) 1 NSWLR 86 Ngurli & Anor v McCann & Anor (1953) 90 CLR 425 Ord Forrest Pty Ltd v Federal Commissioner of Taxation (1974) 130 CLR 124 Re Bright Pine Mills Pty Ltd [1969] VR 1002 Re London School of Electronics Ltd [1986] Ch 211 Re Overton Holdings Pty Ltd (1984) 2 ACLC 777 Re Tivoli Freeholds Ltd [1972] VR 445 Shamsallah Holdings Pty Ltd v CBD Refrigeration and Airconditioning Services Pty Ltd (2001) WASC 8 Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459 Whitehouse & Anor v Carlton Hotel Pty Ltd (1987) 162 CLR 285 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
- BARBARA EL-ANSARY
Applicants
AND
SAMI ABBAS YOUSSEF EL-RAGHY
First Respondent
MICHAEL JOHN BRENZ KRIEWALDT
Second Respondent
EL-RAGHY KRIEWALDT PTY LTD (ACN 009 091 516)
Third Respondent
NORDANA PTY LTD (ACN 009 087 414)
Fourth Respondent
PHARAOH GOLD MINES NL (ACN 062 135 728)
Fifth Respondent
CENTAMIN NL (ACN 007 700 352)
Sixth Respondent
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Catchwords:
Corporations law - Whether shares were issued for the sole or substantial purpose of diluting shareholding - Whether conduct was oppressive or unfairly prejudicial to, or unfairly discriminatory, pursuant to s246AA of the Corporations Act 2001 (Cth)
Trusts - Whether shares were owned beneficially
Practice and procedure - trial of preliminary issue
Legislation:
Corporations Act 2001 (Cth),s 246AA, s 243A, s 243G
Evidence Act 1906 (WA), s 79C
Result:
Application dismissed
Category: B
Representation:
Counsel:
Applicants : Mr M H Zilko SC & Mr M D Cuerden
First Respondent : Mr R E Birmingham QC & Mr L A Tsaknis
Second Respondent : Mr R E Birmingham QC & Mr L A Tsaknis
Third Respondent : Mr R E Birmingham QC & Mr L A Tsaknis
Fourth Respondent : Mr R E Birmingham QC & Mr L A Tsaknis
Fifth Respondent : Mr R E Birmingham QC & Mr L A Tsaknis
Sixth Respondent : Mr P E Harris
Solicitors:
Applicants : Tottle Christensen
First Respondent : Healy Pynt
Second Respondent : Healy Pynt
Third Respondent : Healy Pynt
Fourth Respondent : Healy Pynt
Fifth Respondent : Healy Pynt
Sixth Respondent : Fearis Salter Power Shervington
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Case(s) referred to in judgment(s):
Jenkins v Enterprise Goldmines NL (1992) 10 ACLC 136
Jones v Dunkel (1959) 101 CLR 298
Nullacourt Pty Ltd v Walker, unreported; Library No 950249A; 19 May 1995
Shamsallah Holdings Pty Ltd & Anor v CBD Refrigeration and Airconditioning Services Pty Ltd & Ors (2001) 19 ACLC 517
Case(s) also cited:
Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Company NL & Anor (1968) 121 CLR 483
Howard Smith Ltd v Ampol Petroleum Ltd & ors [1974] AC 821
In the Matter of Companies (Western Australia) Code v Spargos Mining NL (1990) 3 WAR 166
John J Starr (Real Estate) Pty Ltd v Andrew Australasia (Pty Ltd) (1991) 6 ACSR 63
Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113
Mills & Ors v Mills & Ors (1938) 60 CLR 150
New South Wales Rugby League Ltd v Wayde (1985) 1 NSWLR 86
Ngurli & Anor v McCann & Anor (1953) 90 CLR 425
Ord Forrest Pty Ltd v Federal Commissioner of Taxation (1974) 130 CLR 124
Re Bright Pine Mills Pty Ltd [1969] VR 1002
Re London School of Electronics Ltd [1986] Ch 211
Re Overton Holdings Pty Ltd (1984) 2 ACLC 777
Re Tivoli Freeholds Ltd [1972] VR 445
Shamsallah Holdings Pty Ltd v CBD Refrigeration and Airconditioning Services Pty Ltd (2001) WASC 8
Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459
Whitehouse & Anor v Carlton Hotel Pty Ltd (1987) 162 CLR 285
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1 TEMPLEMAN J: In 1996, Pharaoh Gold Mines NL ("PGM") was an unlisted public company with a share capital of $1, represented by five issued shares of 20 cents each. In July and August 1996, two of the directors of PGM caused the company to issue a further 390,000 shares to companies which they owned. The applicants, who each held one share, contend that the share issues were made for the sole or substantial purpose of diluting their shareholding and that the directors' conduct was accordingly oppressive, or unfairly prejudicial to, or unfairly discriminatory against them, pursuant to s 246AA(2)(e) of the Corporations Law. The applicants seek an order that some or all of the directors and their respective companies purchase the applicants' two shares at a fair and proper value to be determined. Alternatively, the applicants seek an order that PGM purchase their shares and that its capital be reduced accordingly.
2 On 9 November 1998, Centamin NL ("Centamin") which is a listed public company, agreed to purchase the PGM shares held by the directors and their respective companies. The applicants contend that Centamin entered into the purchase agreement with knowledge of their then proposed claim. The applicants therefore seek such relief against Centamin as may be appropriate, consequential upon any order made against any of the other respondents.
3 By order of Master Bredmeyer, the question whether the respondents or any of them should be held liable to purchase the applicants' shares was to be tried as a preliminary issue.
4 That issue, which has taken 11 days to try, largely by way of cross-examination on affidavit evidence, proved to be complex. It would have been preferable for the matter to have been tried on pleadings, a course which would have facilitated the discovery process and would have resulted in a more realistic estimate of the length of the trial. As it was, the trial was part-heard between September 2001 and January 2002, because of the unavailability of counsel in that period. This was an unsatisfactory situation for all concerned.
5 I commence my consideration of the preliminary issue by introducing the principal parties. I proceed by taking a broadly chronological path through the critical events of the three years or so which preceded the share issues in July and August 1996.
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Mr and Mrs Mohamed El-Ansary
6 The applicants are Mohamed El-Ansary and his wife Barbara El-Ansary. Mr El-Ansary qualified as a geologist at Cairo University in 1965. He is a member of the Australasian Institute of Mining and Metallurgy and the Society of Economic Geologists (an American institution). He worked as a geologist after he graduated, spending a period of three years in Egypt from 1965 to 1968. Mr El-Ansary has been a director of a number of Australian listed public companies and of an international mining company. These include Pharaoh Metals Corporation NL, to which I shall refer in more detail below. Mr El-Ansary has participated in a number of mineral project developments in Western Australia and has been responsible for mining exploration portfolios in Canada, the United States of America and Indonesia.
7 Mrs El-Ansary played no part in any of the relevant events and has not given evidence in these proceedings.
Mr Sami El-Raghy
8 Sami Abbas Youssef El-Raghy, who is the first respondent, also qualified as a geologist in Egypt. He has a degree from the Alexandria University from which he graduated in 1962. Mr El-Raghy has been engaged in the mining industry since 1968. He has been engaged principally in exploration and mining work with a number of Australian and international companies. Mr El-Raghy's family trust company is Nordana Pty Ltd ("Nordana"), the fourth respondent, to which 95,000 shares in PGM were issued in July and August 1996.
Mr Michael Kriewaldt
9 Michael John Brenz Kriewaldt, who is the second respondent, is an economic geologist, that is, one who deals with the recognition of mineral deposits. Mr Kriewaldt qualified in 1958 when he graduated from the University of Western Australia. He has been employed as a geologist since 1955, when he was a student. He has worked for a number of major companies in a career of over 40 years. Most of his experience as a geologist has been in field work; that is, mainly exploration, but he has been employed also in development and production.
10 Mr Kriewaldt and Mr El-Raghy have known each other since the early 1970's. On 11 April 1984, they established El-Raghy Kriewaldt Pty
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- Ltd, ("El-Raghy Kriewaldt"), to undertake research, funding and acquisition of mining properties. Mr El-Raghy and Mr Kriewaldt were and are the only directors and shareholders of El-Raghy Kriewaldt. In July and August 1996 295,000 shares in PGM were issued to El-Raghy Kriewaldt. It is the third respondent.
Centamin NL
11 Centamin, the sixth respondent (which is now known as Centamin Egypt Ltd) is a long established listed public company engaged in mineral exploration. Mr El-Raghy became a director of Centamin in 1993 (Exhibit 239) and has remained a director since then. It is common ground that at all material times Mr El-Raghy and his associates have controlled Centamin (TS189, 516). When Mr El-Raghy acquired the control of Centamin, it had no cash and debts of some $3.6 million.
12 Mr El-Ansary was appointed a director of Centamin on 12 February 1993, at the invitation of Mr El-Raghy. The two men had not had a business relationship before, although they had known each other as friends for a long time (Exhibit 81, par 4, exhibit 239).
13 Mr El-Ansary resigned as a director on 23 January 1996.
14 Centamin's company secretary in 1996 was Roland Charles Bocso, a public accountant.
Pharaoh Gold Mines NL
15 PGM was incorporated as a shelf company. It was purchased by El-Raghy Kriewaldt on 25 October 1993, for the sum of $1,200.
16 When purchased, PGM had five shareholders each holding one 20 cent share. Those shares were transferred to Mr and Mrs El-Ansary, Mr and Mrs El-Raghy and Mr Kriewaldt. However, it is contended by the respondents that all the shares were held on trust. That is an issue to which I shall refer later in these reasons.
17 The directors of PGM, following its acquisition, were Mr El-Ansary, Mr El-Raghy and Mr Kriewaldt. Mr El-Ansary resigned from the board on 23 January 1996. He was replaced by Youssef El-Raghy, Mr El-Raghy's brother. Although Mr Youssef El-Raghy was somewhat vague about his appointment, I find that he became a director of PGM on 23 January 1996, as appears from the company's records.
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18 PGM was purchased for the purpose of acquiring rights which had been granted to Nordana by the Egyptian Geological Survey and Mining Authority ("EGSMA") to explore for gold deposits in the eastern deserts of Egypt. EGSMA is a legal entity created by the Decree of the President of the Arab Republic of Egypt (Ex 136 par 5). Exploration rights had been granted to Nordana by EGSMA pursuant to a letter of intent dated 2 September 1993. The letter of intent operated for a period of 12 months from 2 September 1993. However, it was the intention of the parties, as set out in Article 6 of the letter of intent, that Nordana or a nominee approved by EGSMA would enter into negotiations for a concession agreement before that period expired.
19 On 1 November 1993 Nordana assigned its interest in the letter of intent to PGM which, on 22 December 1993, together with Mr El-Raghy and Mr El-Ansary, entered into an Acquisition of Assets Agreement with a company then known as American Boulder NL. That company changed its name subsequently to Pharaoh Metals Corporation NL ("Pharaoh Metals"). Mr Bocso was its company secretary also.
20 It was recited in the Acquisition of Assets Agreement (Exhibit 1, p 61) that Pharaoh Metals (as I shall refer to American Boulder NL) wished to acquire the asset shares, rights and entitlements of the vendors to the assets described in Attachment 2 to the Agreement. The attachment is not in evidence.
21 The Agreement recited also that Mr El-Raghy, Mr El-Ansary and PGM, who were referred to as "the Vendors", had the rights "to sell, joint venture or otherwise deal with the assets and shares of (PGM)". This despite the fact that PGM had three other shareholders.
22 The consideration for the Acquisition of Assets Agreement was shares and options in Pharaoh Metals, and cash. Payment was to be made to "the Vendors" at certain defined points in the development of the project. This was detailed in Attachment 1 to the Agreement, which was entitled "Nine Steps to Building the Company". These steps included the appointment of Mr El-Raghy as General Manager of Operations in Egypt, his subsequent promotion to Director of Operations in Egypt and the appointment of Mr El-Ansary as the Managing Director of Pharaoh Metals.
23 The Agreement provided also for the vendors to negotiate terms acceptable to Pharaoh Metals for the signing of a standard concession agreement between EGSMA and PGM to secure the necessary titles,
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- licenses and agreements required to give Pharaoh Metals unrestricted access to explore and develop the mining assets described in Attachment 2. In so doing, the vendors were to endeavour to maximise Pharaoh Metals' equity and interests in the project and to minimise its tax from profits derived from the project.
24 It is to be noted that the Agreement made no provision for the distribution or appropriation of the consideration between "the Vendors". Nor is there evidence of any agreement between the shareholders of PGM in relation to these matters. This is consistent with the respondents' contention, to which I shall refer in due course, that the parties' original shareholdings in PGM were not of any significance.
25 From about December 1993 to March 1994, Mr El-Raghy was in Egypt, where he negotiated a Concession Agreement with the Government of the Arab Republic of Egypt and EGSMA (Ex 225, p 97, in the translation). That Agreement, which was executed in April 1994, entitled PGM to carry out exploration and mining for gold and associated minerals in the Eastern deserts of Egypt, and to exploit its discoveries by the treatment and marketing of products in collaboration with the Egyptian Government and EGSMA. The agreement imposed on PGM an obligation to obtain a letter of guarantee, to be issued by the National Bank of Egypt or any other bank acceptable to EGSMA, in an amount of $US 500,000. This was to guarantee the execution of PGM's minimum exploration obligations for the first 12 months of the exploration period. Exploration was defined to include detailed examination of the surface and underground by drilling and mining operations leading to the delineation, quantification and specification of all bodies and the relevant methods of extraction and treatment. It was agreed further that EGSMA would issue quarterly instructions to the bank which had issued the guarantee, to release PGM from its obligation by amounts equal to the amounts it spent during the relevant period.
26 If PGM elected to extend the exploration period then, a similar letter of guarantee was to be furnished to EGSMA at the time when PGM gave notice of the extension.
PGM's progress under the Concession Agreement
27 Evidence about these matters was given by Gaber Mahmood Bayomy Naim who was the Chairman of EGSMA from April 1993 to 1998. Mr Naim is an experienced geologist. He deposed to the fact that a number of the obligations imposed on PGM by the
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- Concession Agreement were considered essential both by EGSMA and the Egyptian Government. These were that PGM should:
• provide a letter of guarantee to cover its minimum yearly exploration costs
• meet minimum expenditure requirements
• prepare and adhere to an exploration and work program and budget
• provide EGSMA within 30 days from the end of each calendar half year, a statement of exploration activity showing costs incurred by PGM during that period
• have its records and supporting documentation available for inspection at all times
• maintain an office in Egypt
• keep proper books of account for the work performed and have them available for inspection by the Egyptian government.
28 Mr Naim deposed also to the fact that the failure of PGM to perform any of its obligations would be considered by EGSMA and the Egyptian Government as a serious breach of the Concession Agreement which would put the Agreement at risk of cancellation.
29 During the period 29 January 1995 to 28 January 1996, EGSMA was satisfied that the exploration performed by PGM pursuant to the Concession Agreement had been carried out properly and that PGM had met all its contractual obligations. The work was audited by EGSMA and inspected by EGSMA mine inspectors.
30 I accept Mr Naim's evidence in relation to all these matters.
31 On 24 December 1995, Mr El-Raghy wrote to Mr Naim on behalf of PGM to request an extension of the exploration period for a further two years. Two days later, Mr El-Raghy asked EGSMA to extend the period of the existing letter of guarantee for a period of three months until the amount required under the next letter of guarantee was determined.
32 After some further correspondence, Mr Naim wrote to Mr El-Raghy on 6 January 1996 enclosing an opinion of EGSMA's legal adviser to the effect that PGM was required to provide a letter of guarantee in an amount of $US 2 million before 28 January 1996, which was the date for the completion of the first exploration period.
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33 At this stage, as Mr El-Ansary accepted in cross-examination (TS 84) and as I find to be the fact, PGM was dependent entirely upon Pharaoh Metals for its continued funding, pursuant to the Acquisition of Assets Agreement.
The Events of January and February 1996
34 By the beginning of January 1996, a major disagreement had emerged between Mr El-Ansary and Mr El-Raghy as to the course being pursued by PGM in Egypt. A meeting of the Pharaoh Metals board was convened for 14 January. It appears from a letter which Mr El-Raghy wrote to his co-directors on 12 January, that he was given notice of the meeting on or before 9 January. He said in his letter that he was not available for a telephone hook-up on 14 January and asked that the meeting be postponed until 17 January. He said:
"Right now, my prime concern is to get the issue of the extension of the (Concession) Agreement resolved before the 28th of this month and this is taking all my effort and time."
35 Despite Mr El-Raghy's request, the meeting did take place on 14 January. Although the minutes of the meeting are not in evidence, I find that a letter of that date written by Mr El-Ansary to Mr El-Raghy contains an accurate summary of the meeting (Exhibit 122).
36 First, the board resolved to appoint Mr Alistair MacKinlay as a director of Pharaoh Metals and to issue him with a total of 4 million options exercisable at 20 cents each into fully paid shares in the company. Mr MacKinlay, who is a solicitor, was a friend and neighbour of Mr El-Ansary. He had conducted an investigation into the affairs of PGM.
37 The board resolved also that a minimum of $US 45,000 should be transferred immediately from PGM's account in Egypt to Pharaoh Metals' account in Perth. Furthermore, the board resolved that "cost cutting should be adopted in all areas of expenditure" and that PGM should purchase capital assets only with prior approval of Pharaoh Metals' board. The board resolved that no further expenditure was to take place in Egypt until certain conditions had been satisfied. It is not necessary to set out those conditions in detail. It is sufficient to say that they included the approval of EGSMA and the Egyptian Government to the transfer of all titles and assets covered by the Concession Agreement from PGM to
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- Pharaoh Metals. Other conditions related to the way in which PGM would continue its exploration activities.
38 Mr El-Ansary concluded his letter by saying that due to his conflict of interest between Pharaoh Metals and PGM, he had offered the board of Pharaoh Metals his unconditional resignation but that his offer had been declined.
39 Mr El-Raghy responded to Mr El-Ansary's letter by letter dated 21 January (Exhibit 123). In his letter he complained that board decisions affecting his area of responsibility had been taken without his "input, consent or consultation".
40 Mr El-Raghy went on to summarise the situation as he saw it. He recommended a course different from that proposed by the board. He was critical of what he described as the poor performance of Pharaoh Metals, and its inability to raise finance. Because of that, Mr El-Raghy said, Pharaoh Metals would not be able to meet the financial obligations required for it to continue with the Egyptian concessions beyond 28 January. That was because it was beyond Pharaoh Metals' financial capacity to obtain the letter of warranty: and PGM could not avoid the requirement of the letter of warranty by declaring a discovery.
41 Mr El-Raghy concluded his letter by saying that Mr El-Ansary should arrange for Pharaoh Metals' Australian Bank to instruct its Egyptian Bank to issue a letter of guarantee for the amount of $US 185,000 and that it should do so before 27 January.
42 Mr El-Raghy's letter prompted a further Pharaoh Metals' board meeting, at which he was present by telephone.
43 At the meeting, Mr El-Raghy was invited to go through his letter and Mr El-Ansary's letter of 14 January in detail. Following discussion, it was resolved that within 24 hours, Mr El-Raghy should advise what might be achieved with the existing funding. It was also noted that Mr El-Raghy should comply with the resolution of 14 January that $US 45,000 be transferred back to Australia. A further meeting was to be held on the following day (Exhibit 124).
44 Also on 23 January, Mr El-Ansary resigned from the boards of PGM and Centamin. I accept his evidence that he did so because of his perception that a conflict existed between his duty as the managing director of Pharaoh Metals, a public company and his duty and interest as a director and a shareholder of PGM (TS 82).
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45 As I have noted above, Mr El-Ansary was replaced in PGM's board by Mr Youssef El-Raghy.
46 On 24 January, Mr El-Ansary set out his concerns in a memorandum to his co-directors (Exhibit 12). In his memorandum, Mr El-Ansary was critical of Mr El-Raghy. He said that Mr El-Raghy had applied for a two year extension of the exploration period under the Concession Agreement and had therefore committed PGM to further expenditure and a bank warranty
"… without so much as consulting or even informing (Pharaoh Metals) until 22 January, leaving (Pharaoh Metals) all of 3 working days to provide a bank warranty which requires 3 days to prepare. Sami, as joint managing director of (Pharaoh Metals) is fully aware that the company's cash resources do not permit it to commit to such expenditure, nor is the company capable of raising such funds in a matter of days."
47 Elsewhere in his memorandum, Mr El-Ansary referred to the proposal to raise $15 million at the time of entering into the Acquisition of Assets Agreement. He went on to say:
"The possibilities of equity fundraising are very slim due to depressed market conditions and a large number of a short-term investors holding substantial amounts of the company's shares. Equity fundraising, if available, can only be for small amounts of funds at substantial dilution to shareholders. Accordingly, the exposure to the requirements of the renewal of the exploration period had to be avoided.
The company needed to make the most out of the funds available, and produce encouraging exploration results which would attract investors and progress the company to project development and generation of cash flow in the shortest possible time."
48 Mr El-Ansary set out his conclusions, including the fact that the failure of Pharaoh Metals to attract investors or secure a joint venture partner, despite numerous presentations to share brokers and potential partners, indicated that a great deal of work and encouraging results were required to convince investors and other mining companies of the potential of the Egyptian project.
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49 He went on to refer to the warning given by Mr El-Raghy that PGM's commitments under the Concession Agreement were not negotiable and that Pharaoh Metals' current cash resources were $550,000 plus $90,000 in Egypt. He added:
"Should we commit to such expenditure and issue a bank warranty for $US 185,000, this will leave us with US$ 282,000 or approximately 6 months expenditure in Egypt provided we do not spend anything else anywhere else. If we are unable to raise additional funds by mid 1996, we face the following non-negotiable, simultaneous consequences:
(1) (Pharaoh Metals) runs out of cash
(2) (Pharaoh Metals) forfeits the amount of US$ 185,000 bank warrantee (sic)
(3) EGSMA cancels the Concession Agreement".
50 In his evidence in cross-examination, Mr El-Ansary was rather more sanguine about the progress of the Concession Agreement than suggested by the gloomy prognosis in his memorandum. When asked whether he had been aware in January 1996 that if Pharaoh Metals stopped paying money payable under the Acquisition of Assets Agreement, PGM would be in default, Mr El-Ansary said he had never believed that to be the case. It was not, he said, "a clear-cut situation" because Mr El-Raghy had assured him on numerous occasions that he was "capable of getting the whole thing sorted out" (TS 83).
51 This, I think, was said with the benefit of hindsight. I have no doubt that at the time, Mr El-Ansary believed what he said in his memorandum.
52 A further meeting of the Pharaoh Metals Board was held on 24 January. According to unsigned minutes, which I accept as accurate (Exhibit 16A, Annexure MEA 3) the Board considered that a budget proposed by Mr El-Raghy was not acceptable. This would have required the expenditure of $US600,000 in Egypt in 1996. Instead, the Board resolved to make $US250,000 available for the Egyptian operations.
53 It is common ground that at about this time, the Board terminated Mr El-Raghy's position as Pharaoh Metals' managing director in Egypt. There is in evidence, a draft letter dated 29 January 1996, apparently prepared by Mr MacKinlay for the purpose of notifying Mr El-Raghy of the nature of the complaints made against him and the nature of the
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- actions proposed to be taken by Pharaoh Metals (Exhibit 14). I accept that a letter in precisely the terms of the draft was never sent. It was admitted into evidence in order to explain Mr El-Ansary's evidence in cross-examination. However, I infer from the draft letter that Mr El-Raghy's appointment was terminated on or shortly before 29 January.
54 The draft made reference to advice given by Mr MacKinlay that Pharaoh Metals was in a position to place PGM "under the protection of the insolvency laws with a view to winding it up". In cross-examination, Mr El-Ansary said he was of the view that Mr El-Raghy's actions were placing PGM at risk of becoming insolvent. That was, I think, somewhat disingenuous, because as Mr El-Ansary also accepted in cross-examination, PGM was dependent on Pharaoh Metals for its funding (TS 92, 85).
55 Mr El-Raghy's response to these developments was to instruct PGM's solicitors to serve a notice of termination of the Acquisition of Assets Agreement and to resign as a director of Pharaoh Metals. The notice was served on 2 February and the letter of resignation was sent the following day.
56 On 7 February 1996 Mr El-Ansary wrote to PGM's solicitors about recent developments and in particular, about the notice of termination of the Assets Acquisition Agreement. He described himself in the letter as "a major shareholder of PGM". He went on to say, in substance, that Pharaoh Metals did not accept the notice of termination. He continued:
"Unless you can convince me and convince Mike Kriewaldt that the termination of the Acquisition of Assets Agreement and the continuation of refusing to return (Pharaoh Metals') money and assets, will have any outcome other than the potential loss of PGM's only asset, an enormous legal bill and an almost certain loss of credibility and reputation of three professionals, I shall have no alternative but to seek to wind up PGM to minimise the damage and to protect our interest." (Exhibit 15)
57 Mr El-Raghy and Mr Kriewaldt were unmoved by this approach. They held a Board meeting of PGM on 14 February. The meeting included Mr Youssef El-Raghy who was then PGM's general manager in Egypt. He was present by telephone.
58 The meeting noted that the refusal of Pharaoh Metals to meet its commitment under the Acquisition of Assets Agreement had left PGM
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- with a number of financial liabilities to creditors and employees and that PGM was in default under the Concession Agreement. It was noted that until PGM was able to remedy the default, it was of paramount importance that its operations in Egypt continue without interruptions, so that the Egyptian Government would not cancel the Agreement (Exhibit 126).
59 The meeting noted also that PGM had urgent need of cash to meet the daily expenditure of the Alexandria office and the parties carrying out operations in the field. It was resolved that:
"1. (PGM) obtain EMC (its major creditor) approval and if possible the approval of other debtors (sic creditors) associated with the company directors to accept shares in the company at 10c per share to be credited as full paid in exchange for their debt.
2. The directors arrange replacement of share(s) at 10 cents/share to raise $500,000, to retire debt and cover ongoing expenses.
3. (PGM) should intensify its search for a possible JV partner to finance one or more projects.
4. The directors seek Stock Exchange listing (either direct or backdoor) in Australia and overseas."
60 (The reference to EMC, is to Egyptian Mineral Commodities, a company associated with Mr Youseff El-Raghy. I shall refer to the EMC debt in more detail below).
61 The meeting referred also to discussions with Centamin about "limited refinancing" of the Egyptian operation. It was noted that both PGM and Centamin had agreed that their respective financial positions needed to be addressed before any deal could be finalised.
62 Finally, it was resolved that certain actions be taken immediately. These included:
"The Directors demand that the two shares in (PGM) held in trust by Mr M El-Ansary and Mrs B El-Ansary be sold to interest(s) associated with Mr S El-Raghy or Mr M Kriewaldt."
63 I have set out the developments which led to the breakdown of relations between the parties in January 1996 because, in my view, it
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- forms an important part of the background to the present dispute. Although I have recorded the material events, I make no attempt to determine where the merits lay. Indeed, it would be quite inappropriate to do so. Clearly, the principal players, who were professional men, held strong but opposing views which they were unable to reconcile, concerning the way in which the Concession Agreement was to be funded and performed. The dispute generated very considerable personal animosity between Mr El-Ansary on the one hand and Mr El-Raghy and Mr Kriewaldt on the other.
Were Mr and Mrs El-Ansary's shares held on trust?
64 As I have noted above, although Mr El-Ansary regarded himself and his wife as major shareholders of PGM, Mr El-Raghy and Mr Kriewaldt asserted that the El-Ansary shares were held on trust. However, despite the resolution passed on 14 February 1996 that those shares be "sold", it appears that the trust contention was not raised until after the commencement of these proceedings. In an affidavit sworn on 29 January 1999 (Exhibit 81) Mr El-Raghy asserted that an oral agreement had been made in about September 1993 between Mr El-Ansary, Mr El-Raghy and Mr Kriewaldt that the original five shares in PGM would be held on trust for Nordana, the El-Raghy company to which EGSMA had granted the rights to explore for gold deposits in Egypt. According to Mr El-Raghy it was agreed also that none of the shareholders would hold any beneficial interest in PGM by reason of their respective shareholdings, and that if PGM was listed on the Australian Stock Exchange, shares would be issued to Mr El-Ansary, Mr El-Raghy and Mr Kriewaldt "in accordance with their agreed contributions to that company at the time of listing". Furthermore, Mr El-Raghy said, it was agreed that upon the incorporation of PGM, Nordana would be paid such compensation for assigning the interest granted to it by EGSMA under the letter of intent as agreed between Mr El-Ansary, Mr El-Raghy and Mr Kriewaldt.
65 It is somewhat surprising that an agreement as important and as detailed as that to which Mr El-Raghy referred in his affidavit was not reduced to writing or (as is apparently the case) referred to in any earlier document. It is equally surprising, if there was such an agreement as Mr El-Raghy contended, that he made no reference to it in his evidence-in-chief when he was referred to the minutes of PGM's Board meeting of 14 February 1996 and was asked the basis upon which he said the shares were held in trust for Nordana. Mr El-Raghy answered the question by saying that Nordana was the company which had the concession area but
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- had not been paid for it. As I understood his evidence, Mr El-Raghy went on to say that the existence of the trust was "always understood" (TS 355).
66 Furthermore, Mr Kriewaldt, in his evidence, said that he did not recall any discussion, when PGM was acquired and the shares were issued to the five shareholders, as to who would hold the shares and the capacity in which they would be held (TS 791). I accept Mr Kriewaldt's evidence that the transfers of the five shares from the founding members of the shelf company which became PGM were arranged by the vendor of that company. I infer that Mr and Mrs El-Ansary, Mr and Mrs El-Raghy and Mr Kriewaldt were chosen as a matter of convenience, so as to satisfy the requirement for a minimum of five shareholders. I accept Mr Kriewaldt's evidence that he kept the five share certificates in PGM's record book because no one asked for them and because, at least as far as he was concerned, they were of no significance (TS 791).
67 Mr El-Ansary, in an affidavit sworn 16 March 1999 (Exhibit 3) said that he had never discussed the matters to which Mr El-Raghy referred in relation to the alleged trust agreement and that no such agreement had been made. He maintained that denial in his evidence (TS 185).
68 The existence of an express trust was not pressed by leading counsel for the respondents in his closing address. Rather, counsel submitted, a trust should be found from the surrounding circumstances. These included the facts (as I find them to be) that the costs of acquiring PGM were paid by El-Raghy Kriewaldt; that Mr and Mrs El-Ansary had not paid for any shares, and that they had not been issued with the share certificates, which had been retained by PGM itself.
69 Although Mr El-Ansary accepted in cross-examination that he had not paid the 20 cents for his or his wife's shares in PGM, and had not made any "cash contribution" to PGM (TS 127) he said that they had actually "more than paid for the shares", because Mr El-Raghy and Mr Kriewaldt and their companies owed them "a great deal of money" at the time (TS 105). That is not a matter about which I am able to make a finding. However, I accept that Mr El-Ansary engaged in some activities which benefited PGM in its early days when the Concession Agreement was being negotiated and the Egyptian project established. These matters are set out in Mr El-Ansary's affidavit of 16 March 1999 (Exhibit 3) and were not challenged in cross-examination.
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70 I can see a resulting trust argument arising from the fact that PGM was purchased by El-Raghy Kriewaldt. However, if the shares held by Mr and Mrs El-Ansary were held on resulting trust, the beneficiary would be El-Raghy Kriewaldt, not Nordana. Furthermore, the trust would attach also to the shares held by Mr and Mrs El-Raghy and Mr Kriewaldt. They, apparently, regard themselves as owning the shares beneficially.
71 The existence of a resulting trust would be inconsistent with the Acquisition of Assets Agreement. As I have already noted, this referred to Mr El-Raghy and Mr El-Ansary as the vendors of PGM.
72 Furthermore, Mr El-Raghy did not raise the trust issue in opposition to the application made by Mr El-Ansary to restrain PGM, Mr El-Raghy and Mr Kriewaldt from issuing further shares in PGM in June 1996. Had the trust existed, as Mr El-Raghy asserts, it would have provided a complete defence to Mr El-Ansary's application.
73 In PGM's annual returns for the years ended 30 June 1995 to 30 June 2000 inclusive, it was certified that the shares were owned beneficially by all of the shareholders and were fully paid. (Exhibits 15, 171, 175, 176, 177, 178) By s 1274 of the Corporations Law, the annual returns are evidence of the truth of their contents.
74 It is therefore for those respondents who assert the existence of a trust to adduce evidence to prove, albeit on the balance of probabilities, that the annual returns are inaccurate in this respect. I do not accept Mr El-Raghy's evidence that there was express agreement about these matters. I am not persuaded, therefore, that the shares were held on trust.
75 In all the circumstances, I find that Mr and Mrs El-Ansary are the beneficial owners of two shares in PGM.
Funding of PGM from January 1996
76 By the Notice of Meeting dated 29 May 1996 (Exhibit 170) PGM's directors sought the authority of its members to issue further shares "to raise a maximum of $500,000 for the purposes of providing working capital".
77 Mr El-Ansary disputes that PGM needed working capital. He contends that PGM had sufficient funds from other sources to enable it to continue its operations without raising funds by the placement of shares.
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78 Furthermore, Mr El-Ansary contends that the $39,000 raised by the share placements in July and August 1996 were relatively small amounts compared with the total expenditure required to enable PGM to maintain its operations. In particular, that amount is insignificant when compared with the amount of $1.12 million which Mr El-Raghy and Mr Kriewaldt borrowed from Grubb Finance in September 1996: a loan which had been agreed in July of that year, before the final two share placements were made.
79 Mr El-Ansary contends that these circumstances support the inference that the share placements were not made for the purpose claimed by the respondents but for the improper purpose of diluting his and Mrs El-Ansary's shareholdings.
80 The issue of funding was explored in considerable detail in the course of the trial. Leading counsel for Mr El-Ansary sought to demonstrate from documents discovered by the respondents that PGM was able to find a great deal of money during the course of 1996. This proposition was not accepted by Mr El-Raghy or Mr Kriewaldt. Their evidence was to the effect that PGM managed – albeit with some difficulty – to pay those expenses which had to be paid, but that it did not and could not pay all its debts.
81 In this context, I refer to Mr Kriewaldt's evidence (TS 865) that no one could say truthfully that PGM's bills were not being paid. However, in my view, it was clear from the line of questioning immediately preceding that answer that Mr Kriewaldt was referring to bills which had to be paid: not to all the bills.
82 It was a requirement of the Concession Agreement that PGM's expenditure should be audited. That work was carried out by Shawki and Co of Alexandria who were PGM's auditors. Shawki and Co prepared quarterly expenditure statements "in accordance with generally accepted auditing standards" (Exhibits 214-217 are examples). The statements contained a breakdown of Egyptian office costs, exploration costs, labour costs and home office costs for the relevant periods. The home office costs were the costs referable to PGM's office and expenditure in Perth and included salaries and travel expenses. However, as Shawki and Co said in their successive expenditure statements, they did not audit the home office records. There is therefore no independent evidence to verify Mr El-Raghy's evidence to the effect that many of PGM's expenses were not paid but "allocated". That is, the expenses were recorded in the books as having accrued due, but not had in fact been paid.
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83 However, I accept the evidence of Mr El-Raghy that not all expenditure included in the statements prepared by Shawki and Co was paid. I accept that some of that expenditure was "allocated" although I am unable to make a finding as to the precise amount.
84 I find that as at 31 December 1995, PGM had available to it in Egypt, $US 66,682.64. Of this, $US 62,380.37 was held on short-term deposits at the MI Bank, Cairo. All these funds were claimed by Pharaoh Metals.
85 The short-term deposits were rolled over from time to time. On each occasion, interest was paid and funds withdrawn. For example, a deposit of $US 40,000 on 14 November 1995 was rolled over on six occasions between then and March 1996, when the amount had been reduced to $US 1,754. In the intervening period, the relevant bank account showed amounts totalling some $US 130,000 as being credited to that account (See Exhibit 208A). This obviously presented a misleading picture.
86 The reality, I find, is that no external funds were credited to PGM's Egyptian account until about 22 July 1996, when $25,326.85 was transferred from PGM's account with the National Australia Bank, Perth, to the MI Bank in Cairo. Allowing for bank fees, this was converted to $US 19,966.50. These funds were generated by the placement of 250,000 shares in PGM to El Raghy Kriewaldt on 22 July.
87 The amount of the loan from Grubb Finance also creates a misleading impression. That is because although $1.12 million was borrowed, some $615,000 was used to re-finance existing borrowings made by Mr El-Raghy and Mr Kriewaldt and related companies and to pay fees in excess to $100,000 to Grubb Finance. The balance of some $505,000 was used to obtain a letter of warranty from the National Australia Bank for the purpose of satisfying PGM's outstanding liability to EGSMA pursuant to the Concession Agreement.
88 I am satisfied that the funds required by PGM in Australia to continue its operations were supplied largely by El-Raghy Kriewaldt and Nordana and by Messrs El-Raghy and Kriewaldt personally. To the extent that the funds derived from El-Raghy Kriewaldt, they were drawn on Centamin, in which El-Raghy Kriewaldt had a loan account. Although Centamin owed El-Raghy Kriewaldt substantial sums of money during the first half of 1996, Centamin's own funds were limited during that period with the result that funds were not always available to repay El-Raghy Kriewaldt.
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89 PGM maintained an account with the National Australia Bank in Perth from which it met its Australian expenses. During the first half of 1996, PGM maintained in that account very little more than necessary to meet its ongoing expenses. For example, on 3 July 1996, the account had a credit balance of $541.70. PGM was then in urgent need of funds. These were supplied on the following day: $6,000 was credited when Nordana and the Nordana Superannuation Fund took a placement of shares and paid $6,000.
90 In August, the balance of the account rose from some $1.220.40 to $24,200 as a result of the sale of shares in Pharaoh Metals and the purchase of shares in PGM by El-Raghy Kriewaldt and Nordana. However, the balance was reduced to $936.82 on 28 August following the payment of legal fees and the repayment of the loans which had been used to purchase the Pharaoh Metal shares (Exhibit 90).
91 Although the Grubb Finance loan had been approved in July 1996, the funds were not available until September. I am satisfied that PGM had an urgent need for funds in the interim.
92 In considering PGM's financial position, I have been assisted very considerably by the evidence of Maureen Ann Pinington, which I accept in its entirety. I am satisfied that Mrs Pinington, who has been the accountant and book-keeper for PGM since 1993, and Centamin since 1975, maintained the relevant books and records in a careful and conscientious way. In particular, I accept as accurate, Mrs Pinington's unchallenged analysis of PGM's bank accounts in Perth and Cairo (Exhibit 234, Annexure E1 and E2).
93 Leading counsel for the applicants devoted considerable attention to the funding issue during the course of the trial. However, in his closing address counsel submitted that it did not matter whether PGM had to find $500,000 or $50,000: "… what matters is whether the company was able to pay its debts in Egypt to keep afloat its interests there. That's all that matters". And a little later:
"We say it doesn't matter what the amount is or what the source was. There was no need for the share placements." (TS 1077-8)
94 I do not accept that the funding issue was unimportant. In my view, the difficulty experienced by Mr El-Raghy and Mr Kriewaldt in attempting to maintain PGM's Egyptian operations is a crucial factor in this case.
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The relationship between the parties in July and August 1996
95 The share placements of July and August 1996 must be viewed not only against the background of PGM's financial position, but also in the context of the relationship between the parties.
96 I have already referred to the differences of opinion which led to the termination of the Acquisition of Assets Agreement. There was also a degree of mutual suspicion and distrust between Mr El-Ansary and Mr El-Raghy. One matter which contributed to that distrust was a claim by Mr El-Raghy that $US 30,000 had to be paid by PGM to members of the EGSMA Committee who were involved in the negotiations for the Concession Agreement. As I understand Mr El-Ansary's evidence, he believed that the claim was made fraudulently by Mr El-Raghy and Mr Youseff El-Raghy as a means of siphoning money out of PGM for themselves.
97 It was Mr El-Raghy's evidence that the Board of Pharaoh Metals had been aware of the need to pay the fee from the outset. I make no finding whether or not that is so. However, the unsigned minutes of the meeting of the Pharaoh Metals Board of 24 January 1996, which I have accepted as accurate, contain a reference to the matter. It is there recorded that Mr El-Raghy informed the meeting that there were a number of large accounts outstanding, including the payment of $US 30,000.
98 On 27 January Mr Youseff El-Raghy wrote to Mr El-Raghy setting out the various expenses which had to be met in order that the Egyptian project could continue. These included an outstanding fee of $US 30,000 "for the signing of the Agreement".
99 Mr Youseff El-Raghy came from Egypt to give evidence at the trial. He had not visited Australia previously and English is not his first language. Having heard him give evidence and seen a letter which he wrote in English in his own hand, I am of the view that he did not have the ability to compose the letter of 27 January – at least in English. However, I accept that the letter was prepared on his instructions.
100 Mr Youseff El-Raghy said in his evidence that he had been asked personally for the $US 30,000 by "the person in charge of agreements and foreign corporations" at EGSMA. He later identified this person as Mr Badawi (TS 452).
101 In June 1996, Mr El-Ansary asked Mr Badawi about the claim for $US 30,000. Mr Badawi responded by a facsimile dated 26 June saying
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- that no such payment was due and that the allegation was "a completely false, untrue and hurting statement" (Exhibit 16B, Annexure MEA6).
102 Mr Badawi went on to say that Mr Naim, as Chairman of EGSMA, had referred the matter to the Administrative Surveillance Authority for a full investigation.
103 Mr Naim's evidence was that he had never asked for a payment of $US 30,000: although, it was never suggested that he had made the demands.
104 Mr Naim said, and I accept, that Mr Youseff El-Raghy was involved with Mr El-Raghy in the negotiations which led to the grant of the Concession Agreement. Although the Concession Agreement had been negotiated with Nordana, PGM had assumed that company's liabilities.
105 This matter was raised in the present proceedings for the purpose of casting doubt on Mr El-Raghy's integrity and credibility. It is not necessary for me to make any finding about the propriety or otherwise of a demand for a signing fee of $US 30,000. It is sufficient to say that I believe Mr El-Raghy's evidence that, so far as he was concerned, the fee was payable: and that in January 1996, he regarded it as important to the continuation of the project that the fee be paid.
106 To return to the relationship between the parties in July 1996: there was then an action pending in this Court between Pharaoh Metals as plaintiff and PGM and Mr El-Raghy as defendants. A writ had been issued on 7 February 1996 in CIV 1106 of 1996. The writ was endorsed with a claim for a declaration that PGM was a trustee for Pharaoh Metals and a claim for an account by PGM and Mr El-Raghy of all monies received by them from Pharaoh Metals. There was also a claim for a declaration that PGM and Mr El-Raghy owed "a fiduciary duty of care" to Pharaoh Metals, and damages for breach of that duty and for breach of contract.
107 The writ was not in evidence at the trial. However, the existence of the litigation was mentioned by at least two witnesses. Furthermore, there is evidence about a mediation which was to be conducted in May 1996 in those proceedings: a matter which did assume some significance in the course of the trial. I have therefore obtained the writ from the Court record. It will become Exhibit 245.
108 No doubt as a result of the commencement of proceedings on 7 February, there was an unpleasant meeting between Mr El-Ansary,
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- Mr El-Raghy and Mr Kriewaldt at the offices at 57 Kishorn Road, Mount Pleasant. These were offices shared by Pharaoh Metals, PGM and other companies associated with Mr El-Raghy and Mr Kriewaldt.
109 The premises were owned as to one-third by El-Aura Pty Ltd – an El-Ansary company – and as to two-thirds by El-Raghy Kriewaldt. At the meeting, Mr El-Raghy told Mr El-Ansary that he would have to vacate the premises. Mr El-Ansary then offered to buy out El-Raghy Kriewaldt for two-thirds of the value of the property. That offer was not accepted. In the end, El-Raghy Kriewaldt bought out El-Aura for one-third of an agreed valuation.
110 To digress: it was submitted by leading counsel for the applicants that if El-Raghy Kriewaldt had sold its two-third interest instead of purchasing El-Aura's one-third interest in the Kishorn Road property, it would have solved PGM's financial position.
111 That may have been so if Mr El-Raghy and Mr Kriewaldt had been prepared to continue without office accommodation and to lend more money to PGM. However, as I have noted, their intention, as expressed at the PGM board meeting of 14 February 1996, was to raise capital from external sources. Furthermore, as Mr El-Raghy pointed out in his evidence, although the sale of the El-Raghy Kriewaldt interest in the Kishorn Road property would have brought in some $330,000, it would have left Mr El-Raghy and Mr Kriewaldt without an asset which could be used as security for future borrowings.
112 The point sought to be made by leading counsel for the applicants was that Mr El-Raghy and Mr Kriewaldt were able to raise money to purchase El-Aura's interest in the Kishorn Road property, suggesting that they were able to raise money generally. From this, it was submitted, the inference could be drawn that a placement of shares in PGM was not necessary for fundraising purposes.
113 I do not accept that submission because I think the two matters are unrelated. El-Raghy Kriewaldt's purchase of El-Aura's interest in the Kishorn Road property reflected a commercial decision taken at a time when Mr El-Raghy and Mr Kriewaldt hoped to raise capital for PGM from external sources. Furthermore, the interest was not purchased with surplus funds. Moneys were borrowed from the bank for the purpose.
114 In fact, it proved impossible to raise capital for PGM. Mr El-Raghy attempted to do so by approaching a number of interstate and overseas investors in terms which, it is submitted on behalf of the applicants, cast
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- further doubt on his credibility. That is because in the letters (Exhibits 81-4) Mr El-Raghy referred to the fact that Centamin was in the process of finalising an agreement with PGM to acquire its assets in Egypt. The letters were written on Centamin letterhead.
115 It was submitted by leading counsel for the applicants that if Centamin was in the process of finalising an agreement with PGM, then the latter's financial position could not have been as precarious as Mr El-Raghy and Mr Kriewaldt assert. Alternatively, it was submitted, if no such agreement was in prospect, then Mr El-Raghy's letter was positively misleading.
116 The evidence of Mr El-Raghy, Mr Kriewaldt and Mr Bocso was to the effect that if Centamin had had sufficient funds early in 1996, it would almost certainly have entered into an agreement with PGM of the kind referred to in Mr El-Raghy's letters to potential investors. Mr El-Raghy's letters made it plain that Centamin required $US 3 million to spend on the Egyptian projects which then, of course, belonged to PGM. However, I accept that if $US 3 million had been raised, Centamin and PGM would have entered into an appropriate agreement.
117 Mr El-Raghy wrote on behalf of Centamin because it was a listed public company and therefore had better prospects of raising funds than did PGM. The letters were obviously couched in optimistic terms in what was a difficult market. Indeed, Mr El-Ansary had made that very point in his memorandum dated 24 January 1996 to the board of Pharaoh Metals.
118 Mr El-Raghy's letters did not constitute offers capable of acceptance so as to create legal relations. They invited a response which would have led to closer examination of the proposed investment. In these circumstances, despite the inaccuracies in the letters, I am not persuaded that they are damaging to Mr El-Raghy's credibility.
119 To return to the relationship between the parties: by July 1996, there was a complete breakdown in communications between Mr El-Ansary on the one hand, and Mr El-Raghy and Mr Kriewaldt on the other. As I have noted, Pharaoh Metals was maintaining its contention that PGM held its assets on trust for Pharaoh Metals. Furthermore, PGM's attempts to raise funds by selling Pharaoh Metals shares (to which it was entitled through a rights issue) were being frustrated by Pharaoh Metals. That is because Pharaoh Metals declined to deliver the scrip on the basis of a concern that PGM was using Pharaoh Metals' money to buy shares in that company. In order to resolve that impasse, PGM commenced proceedings in the
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- Federal Court. It was successful in obtaining an order that Pharaoh Metals deliver up the relevant scrip.
120 Mr El-Ansary, as a member of the Pharaoh Metals board, supported its position against PGM. I accept his evidence that he saw it as his duty to do so (TS 829).
121 Mr El-Ansary supported Pharaoh Metals in another way. He was a sub-underwriter of the rights issue to which I have referred above: and he paid some $100,000 pursuant to those obligations. The rights issue was promoted with the objective of raising approximately $1 million to enable Pharaoh Metals to develop a portfolio of mining interests in Australia. In the prospectus (Exhibit 16B, Annexure ASE1) the Chairman of Pharaoh Metals informed shareholders that expenditure in Egypt had been terminated and that "as a precaution" the directors had provided for the assets associated with the Acquisition of Assets Agreement to be written off.
122 At about this time, Mr El-Ansary disposed of all his (or his family trust's) holding of shares in Centamin. He did so in the knowledge that Mr El-Raghy was seeking to raise funds for Centamin for the purposes of the proposed agreement with PGM. Mr El-Ansary knew of these matters because when he left the Kishorn Road property, he took a computer from which he downloaded copies of the relevant letters.
123 Furthermore, Mr El-Ansary gave serious consideration to selling his shares in PGM. On 3 May 1996 Mr McKinlay wrote to Pynt and Associates who were PGM's solicitors. Mr McKinlay enclosed a copy of a letter to an independent solicitor who was to act as a mediator between the parties in the action which had been commenced by Pharaoh Metals on 7 February. Mr McKinlay continued:
"Mr El-Ansary recognises that a part of the matters to be resolved with Mr El-Raghy and (PGM) is whether or not he continues to remain as shareholder in (PGM)."
124 Pynt and Associates responded by letter dated 6 May 1996 in which they said they were instructed on behalf of El-Raghy Kriewaldt to offer to purchase the two shares in PGM held by Mr and Mrs El-Ansary for 40 cents, being 20 cents per share. The offer was to remain open until the commencement of the preliminary mediation conference which had been scheduled for 21 May.
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125 I find that the offer was made on the instructions of Mr Kriewaldt. In cross-examination, he conceded that the offer was "stupid". It is not surprising that it was not accepted.
126 There is no evidence about the price which Mr El-Ansary might have accepted for the sale of the two shares in mid-1996. However, it appears to have been his perception then that PGM was insolvent. Given that PGM had been unable to provide the letter of warranty to EGSMA which had been outstanding since January 1996 and given that Pharaoh Metals was claiming all of PGM's assets, it seems unlikely that there would have been any incentive to Mr El-Ansary to maintain his shareholding in PGM or to increase it at that time.
127 Furthermore, as Mr El-Ansary acknowledged in his cross-examination, he had a conflict of interest as a director and shareholder of Pharaoh Metals and as a shareholder in PGM.
128 In summary: as at July 1996, the relationship between the parties had broken down to the extent that they were not communicating with each other except through their solicitors. Their disputes had not been resolved by mediation. They had severed their connections in relation to the Kishorn Road property. Mr El-Ansary had virtually no interest in Centamin and (apparently) very little reason to maintain his interest in PGM. His and Mrs El-Ansary's two shares in PGM were the only link binding them to Mr El-Raghy and Mr Kriewaldt.
The PGM share placements of July and August 1996
129 The share placements followed from a resolution passed at an extraordinary general meeting of PGM held on 14 June. The meeting was the subject of a notice dated 29 May 1996 which was in the following terms:
"To consider and if thought fit pass the following resolutions as ordinary resolutions:-
1. That the Directors of the Company be authorised to issue 3,460,210 ordinary fully paid 20 cent shares in the capital of the Company, at a discount of 10 cents per share, to Egyptian Mineral Commodities of Alexandria, Arab Republic of Egypt in full satisfaction of a debt of $346,021 due by the Company to Egyptian Mineral Commodities.
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- 2. That the Directors of the Company be authorised to issue by way of placement, ordinary fully paid 20 cent shares in the Company at discounts of up to 10 cents per share, to raise a maximum of $500,000 for the purposes of providing working capital for the Company, at any time within 3 months of the date of the passing of this resolution.
Note:
Youseff El-Raghy, a Director of the Company, controls Egyptian Mineral Commodities referred to in the first resolution and accordingly any votes cast (other than in respect of proxies given by other members of the Company which contain clear instructions as to how such votes are to be exercised) on the resolution by that Director and any associate of that Director shall be disregarded.
EXPLANATORY STATEMENT
1. Issues of Shares to Egyptian Mineral Commodities
The Company does not have funds to meet the debts to Egyptian Mineral Commodities and accordingly has agreed with that Company, subject to the passing of the first resolution, to satisfy the debt by the issue of shares.
2. Placement
The Company is in need of working capital to be able to continue to operate, and as the Company cannot borrow funds without security being provided, it is necessary for the required funds to be raised by way of placement of shares."
131 Evidence of the meeting was given by both Mr Pynt and Mr Kriewaldt. I accept Mr Kriewaldt's evidence that he went to Mr Pynt because he had known him for many years, both as a lawyer and an accountant. I find that he told Mr Pynt he wanted business advice
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- initially, because he wanted know how to capitalise PGM in the face of the hostile actions taken by Pharaoh Metals.
132 Mr Kriewaldt said in his evidence that there was discussion about "associated people". That reflects the evidence given by Mr Pynt in his affidavit (Exhibit 232) and under cross-examination, all of which evidence I accept.
133 Mr Pynt said he discussed with Mr Kriewaldt the need to clear the outstanding debts in the accounts of PGM, either by way of share placement or structured repayments, so as to make PGM more attractive to investors. They also discussed raising capital by way of share placement and the need to obtain proper approvals before proceeding.
134 Mr Pynt advised Mr Kriewaldt that as EMC was a related party, the proposed allotment of shares to clear the EMC debt would need shareholder approval. Mr Pynt advised also that because Mr and Mrs El-Ansary were shareholders of PGM and because Pharaoh Metals, of which Mr El-Ansary was a director, was in dispute with PGM, shareholder approval for any placement should be sought and that Mr El-Ansary should be given notice of the proposal so that he would have the opportunity to offer to contribute.
135 I find that Mr Kriewaldt did not tell Mr Pynt that shares for capital raising were to be placed with companies associated with him and Mr El-Raghy. However, I see nothing sinister in that because I do not think the decision had then been made. I see no reason for Mr Kriewaldt to have concealed from Mr Pynt that he or Mr El-Raghy or companies related to them would be taking shares, if that was to be the case. Mr Kriewaldt impressed me as a man who was careful, if not meticulous, in the discharge of his duties as a director. He went to see Mr Pynt in order to obtain advice so as to ensure that matters were dealt within a proper manner. I accept his evidence that he wanted to avoid litigation.
136 The notice of the meeting for 14 June was sent to Mr El-Ansary. He received it on or about 30 May. On 12 June, Mr El-Ansary commenced proceedings against PGM, Mr El-Raghy and Mr Kriewaldt by writ issued out of this Court in CIV 1615 of 1996. Mr El-Ansary sought an injunction restraining PGM from holding the extraordinary general meeting on 14 June. Alternatively, he sought injunctions to restrain the directors of PGM from putting either of the resolutions which were the subject of the notice. On the day he commenced proceedings,
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- Mr El-Ansary issued a chamber summons for interlocutory injunctions to the same effect as those sought in his writ.
137 In support of his application, Mr El-Ansary swore two affidavits (Exhibits 18 and 22). In the first affidavit, Mr El-Ansary claimed that the sum of $346,021 was not immediately due and owing to EMC. Mr El-Ansary said he knew as a fact that the sum was not due and payable until the first gold pour from the Egyptian tenement projects. Mr El-Ansary said he had confirmed that, by speaking to a representative of PGM's auditors for the financial years ended 1994 and 1995. Mr El-Ansary's information from that source was that the $346,021 was the Australian dollar equivalent of $US 250,000, an amount due to EMC for services rendered to PGM, but which was not payable until the first gold pour from the mining concessions in Egypt.
138 In his second affidavit, Mr El-Ansary deposed to the fact that while he had been a director of PGM there had never been a demand for payment by EMC. He deposed to the fact also that PGM had "substantial potential assets and value". These included $US 66,700 on deposit in Egyptian bank accounts and assets with book values of $260,000 and loans amounting to $29,000 which were payable on demand and could be called in. Mr El-Ansary did not say that all of PGM's assets were the subject of a claim by Pharaoh Metals then pending in this Court.
139 In relation to the second resolution, Mr El-Ansary said he had not been told to whom the placement was to be made and that he had not himself been offered any shares in the placement.
140 Despite the fact that Mr El-Ansary contended that the EMC debt was not due and payable, the debt had appeared in PGM's financial statements for the year ended 30 June 1995 which were included in the annual report to that date. The debt was shown as a current liability, without the qualification to which Mr El-Ansary referred in his affidavit. Furthermore, Mr El-Ansary was himself a signatory to the annual report which contained the opinion that the financial statements gave a true and fair view of the company's state of affairs as at 30 June 1995.
141 On 14 June 1996, Mr El-Raghy swore two affidavits in opposition to Mr El-Ansary's application. In the first affidavit, Mr El-Raghy said that the EMC debt was now "due and payable" and that it was not conditional upon the first gold pour from the tenements which were the subject of the Concession Agreement. He said his brother, Mr Youseff El-Raghy, controlled EMC and that he (Mr El-Raghy) had no interest whatsoever in
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- the company and was not an associate of his brother or EMC under the Corporations Law. Mr El-Raghy pointed to the fact that the debt was recognised as a current liability in PGM's financial statements, as I have noted above.
142 Mr El-Raghy continued in his affidavit:
"The purpose of settling the debt to (EMC) by the issue of shares rather than by payment of cash, which is not available, is to present a better balance sheet of (PGM) to enable it to, and to assist it in, the raising of further capital with a view to a listing of (PGM) on the Australian Stock Exchange."
143 (Exhibit 23 par 15)
144 I am satisfied that this statement was true. I find that Mr El-Raghy and Mr Kriewaldt genuinely believed (and with justification, having been so advised by Mr Pynt) that while the EMC debt appeared as a current liability in PGM's accounts, it would be difficult, if not impossible, to attract investors. That is because potential investors would be likely to think there was a risk that their funds would not be used for the purpose of exploration or exploitation of the concession agreement, but for the purpose of discharging existing debts.
145 For that reason, whether or not the EMC debt was in fact "due and payable" is largely irrelevant. However, it was put against Mr El-Raghy in cross-examination that his oft-repeated statement that the debt was due and payable was at best evasive and at worst, "an outright lie". That is because although Mr El-Raghy denied that the debt was payable only after the first gold pour from the Egyptian tenements had taken place, it was his evidence that Mr Youseff El-Raghy had agreed that EMC would not require payment until PGM's financial position had improved to the extent that it was able to make such payment (TS 440-1). Indeed, it is clear, as a matter of inference, that some such agreement must have existed between Mr El-Raghy and his brother. That is because PGM was never in a position to pay a debt of that amount.
146 Furthermore, when the injunction was granted to restrain the placement of shares to discharge the EMC debt, EMC it did not pursue its demand for payment. Indeed, less than one month after the injunction had been granted, Mr Bocso wrote to a potential lender saying that:
"(EMC) is controlled by Sami El-Raghy, brother of Jussof (sic Youseff) El-Raghy of Alexandria, Egypt. Whilst the loan was
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- not converted into shares, you can be assured that this loan will not be called up while Sami El-Raghy controls the company".
147 (Exhibit 52).
148 Mr Bocso acknowledged in cross-examination that in the letter he had reversed the roles of Mr El-Raghy and Mr Youseff El-Raghy. However, the point remains that the inability of PGM to issue shares to EMC in satisfaction of the debt did not result in the EMC debt being called up.
149 Despite that, both Mr El-Raghy and Mr Kriewaldt gave evidence that the EMC debt would have to be paid when demanded.
150 Presumably in response to Mr El-Ansary's assertion that there never had been a demand, Mr Youseff El-Raghy wrote to Mr El-Raghy on 13 June 1996 in the following terms:
"As discussed, a few weeks ago and agreed verbally with you, EMC require the payment of 250,000 US$ (346,021) Australian dollars immediately.
We have agreed to accept 3,460,210 shears (sic shares) in Pharaoh Goldmines NL in lien (sic lieu) of this payment."
151 I draw the inference that Mr Youseff El-Raghy wrote in those terms at the request of Mr El-Raghy.
152 Despite that demand, I accept that the statement contained in Mr El-Raghy's affidavit that the EMC debt was due and payable was misleading. However, it was not materially so: as I have noted above, whether or not the debt was due and payable was largely irrelevant.
153 The application for an interlocutory injunction was heard by Anderson J on 14 June 1996. Although his Honour granted an injunction in relation to the proposed placement of shares to EMC, he declined to restrain the placement of shares for capital raising purposes. It seems that Anderson J gave his reasons extempore, having regard to the fact that the injunction application was heard on the morning of the day on which the meeting was to be held. There is no record of those reasons. However, Mr Kriewaldt said in his evidence, and I accept, that he regarded the fact that the Court had declined to restrain the placement of shares for capital raising purposes as an authorisation to proceed.
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154 The extraordinary general meeting of PGM was duly held on 14 June 1996. Mr El-Raghy and Mr Kriewaldt were present, as was Mr Bocso who held a proxy for Mr El-Raghy. I accept as accurate the statement in the minutes (Exhibit 241) that three proxies were tabled. These were proxies given by Mr and Mrs El-Raghy and Mr Kriewaldt. I accept Mr El-Raghy's evidence that although he and Mr Kriewaldt intended to attend the meeting, it was common practice to appoint proxies in case their attendance was prevented by unforeseen circumstances.
155 It was Mr El-Ansary's evidence that he had submitted proxy forms for himself and Mrs El-Ansary and that he had posted them in one envelope addressed to 57 Kishorn Road, Mount Pleasant. Although Mr El-Ansary produced a copy of a proxy form completed by Mrs El-Ansary which, he said, he had found among other papers on the eve of the trial, I do not accept that he sent the forms to PGM's offices. Had he done so, I have no doubt that their receipt would have been recorded. I am satisfied that Mr Kriewaldt, who managed PGM's administrative matters, would have taken care to ensure that all proxies were recorded.
156 Nothing of any consequence turns on this issue because Mr and Mrs El-Ansary's votes would not have prevented the resolution from being passed.
157 Immediately following the extraordinary general meeting of PGM, there was a meeting of the directors. This was attended by Mr El-Raghy and Mr Kriewaldt. A resolution was passed that the directors intensify their efforts to:
"raise funds by sale of shares subject to the Corporations Law and the approval received at the Extraordinary General Meeting …" (Exhibit 129)
158 A week later, on 20 June, a further directors' meeting was held, attended again by Mr El-Raghy and Mr Kriewaldt. Mr El-Raghy reported:
"(1) The Directors are encountering difficulties in finding investors, because of the fact that the large debt to (EMC) is not repaid, and poses a danger to the future of the company.
(2) The Directors Sami El-Raghy and Michael Kriewaldt have both pledged their own and their families' assets on
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- the line to arrange a letter of warranty with the National Australia Bank.
- Advice has been received today from the National Australia Bank, that the application has been rejected." (Exhibit 130)
159 I accept this minute as an accurate record of the business transacted at the meeting.
160 Although there is no evidence of any formal approach to potential investors following the meeting of 14 June, I accept the evidence of Mr El-Raghy and Mr Kriewaldt that they each spoke to persons whom they hoped might invest in the company, but without success.
161 Accepting, as I do, that PGM was then in dire financial straits, I do not find it surprising that informal approaches were made. The circumstances were such that there would have been little time to prepare detailed submissions.
162 I do not accept the submission of leading counsel for the applicants, based on Jones v Dunkel (1959) 101 CLR 298, that I should draw an adverse inference from the fact that none of those persons said to have been approached was called to give evidence. As Windeyer J observed in Jones v Dunkel, at p 322, no adverse inference can be drawn from the failure to call a witness "until facts be proved requiring an answer". That is not this case: I believe Mr El-Raghy and Mr Kriewaldt.
163 In June 1996, faced with the pressing need to provide a letter of warranty for EGSMA, Mr El-Raghy and Mr Kriewaldt sought to borrow funds through Grubb Finance (Ex 173). I have referred above to the fact that funds from that source became available in September 1996. The loan was approved on 25 July 1996 (Exhibit 131).
164 The July and August share allotments were as follows:
on 10 July, 60,000 shares were allotted to Nordana for a total consideration of $6,000;
on 24 July 250,000 shares were allotted to El-Raghy Kriewaldt for a consideration of $25,000;
on 16 August 45,000 shares were allotted to El-Raghy Kriewaldt for a consideration of $4,500 and 20,000 shares were allotted to Nordana for a consideration of $2,000;
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- on 22 August, 15,000 shares were allotted to Nordana for a consideration of $1,500.
165 On each occasion the shares were allotted following meetings between Mr El-Raghy and Mr Kriewaldt as directors of PGM. They declared their respective interests in the allottees as appropriate.
166 It will be recalled that the advice given by Mr Pynt to Mr Kriewaldt in relation to the proposed allotment shares to EMC was that shareholder approval should be obtained because EMC was a party related to PGM. The question therefore arises: whether that course should have been followed in relation to the allotments to Nordana and El-Raghy Kriewaldt?
167 In 1976, the Corporations Law contained provisions in Part 3.2A which governed the giving of financial benefits to related parties of public companies. The object of that part, as set out in s 243A is:
" … to protect:
(a) a public company's resources (in particular, those available to pay the company's creditors; and
(b) the interests of its members as members;
by requiring that, in general, financial benefits to related parties that could diminish or endanger those resources, or that could adversely affect those interests, be disclosed, and approved by a general meeting, before they are given."
168 The Corporations Law did not contain an exhaustive definition of the term "financial benefit". However, examples were given in s 243G(4) which included the issuing of securities. On one view, therefore, the allotment of shares by PGM to Nordana and El-Raghy Kriewaldt constituted the giving of a financial benefit.
169 However, s 243G(2) provided that:
"In deciding whether an entity has given a financial benefit:
(a) the economic and commercial substance and effect of what the entity has done is to prevail over its legal form; and
(b) any consideration that has been or may be given for the benefit is to be disregarded, even if it is for or adequate."
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170 In the present case, the "legal form" of the allotments was the issue of 390,000 shares which had the effect of diluting the applicants' shareholding in PGM from 40 per cent to .0005 per cent. However, in my view, the "economic and commercial substance and effect" of the allotments was quite different.
171 In July and August 1996, PGM was in extremis. It was unable to pay its debts as they fell due. Although it was just able to meet its day to day operating expenses, it was not able to raise sufficient money to provide the letter of warranty which was an essential condition of the Concession Agreement. This was its only asset of any consequence. Indeed, for reasons which I shall set out shortly, the risk of failure became a virtual reality when EGSMA closed down PGM's operations on 24 July 1996.
172 I consider that in July and August 1996, PGM was worthless. I have reached that conclusion despite the fact that an independent geologist, Mr Alan John Maynard, on the instructions of Mr Kriewaldt, valued the Egyptian mineral deposits at $19.0 million in September 1996.
173 Mr Maynard was instructed in August 1996. He produced a preliminary report in the form of a letter dated 7 September 1996 addressed to the directors of Centamin (Exhibit 72).
174 Mr Maynard set out in his report the valuation methods which he had adopted and the various matters he had taken into account in arriving at his valuation.
175 In his evidence, Mr Maynard drew the distinction between measured, indicated and inferred resources (TS 258-9). He said that when resources have been measured, there is a 90-95 per cent confidence in their accuracy. Indicated resources are derived from drill hole assays, while inferred resources are based on general exploration data. Mr Maynard said his report was based on inferred resources, with perhaps two indicated resources in the tailings dumps.
176 For that reason, Mr Maynard said, much more work would be required before a bankable report could be produced. Based on his experience, Mr Maynard was of the view that expenditure of several million dollars would be required: a minimum of $2-3 million and perhaps as much as $5-10 million would need to be spent before the project might reach a stage from which it could be progressed to exploitation.
177 Mr Maynard concluded his report by saying:
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- "There is considered to be an additional inherent value in the nature of the granting of the three concessions as it is by way of an Act of Parliament and must be considered to be a secure title. However, it is beyond the scope of this report (and the writer's expertise) to place a dollar value on these rights. This is best determined by the company itself within its corporative objectives."
178 This emphasises the fact that Mr Maynard was only valuing the deposits which, from the available geological data, could be inferred to be present in the ground. He considered it very important that the security of tenure be established before any capital raising was undertaken (TS260).
179 Although Mr Maynard was not called to give expert evidence, it is clear from the summary of his CV which formed part of his report that he is a geologist of very considerable experience who was well qualified to express the opinions which I have summarised above. Mr Maynard impressed me as a careful and conscientious witness whose independence is beyond question. I have no hesitation in accepting his evidence.
180 On the basis of Mr Maynard's evidence, I find that although the inferred resources which were the subject of the Concession Agreement were worth $19 million, that value was entirely dependent upon the continued existence of the Concession Agreement. In fact - although Mr Maynard had not been told -when he carried out his evaluation exercise, EGSMA had closed down PGM's Egyptian operations because of its failure to provide the letter of warranty required under the Concession Agreement. PGM had no resources of its own with which to retrieve the situation. Its prospects of raising capital were negligible because it did not have a bankable valuation and would require many millions of dollars before such a valuation could be produced.
181 It is for these reasons that Mr Maynard's valuation does not cause me to depart from my view that PGM was a worthless company as at July and August 1996.
182 To return to the question whether PGM gave a financial benefit to Nordana and El-Raghy Kriewaldt by the placement of shares: in my view, it did not. The "economic and commercial substance and effect" of the placement was negligible. Before the placement, Mr and Mrs El-Raghy and Mr Kriewaldt between them owned and controlled 60 per cent of a worthless company. Immediately after the placement, Mr and Mrs El-Raghy and Mr Kriewaldt between them owned and controlled
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- almost the whole of a worthless company. In substance, there was no change in Mr and Mrs El-Ansary's position. In my view, there is no practical difference between a 40 per cent interest in a worthless company and .00005 per cent interest.
183 I now turn to the evidence from which I find that EGSMA suspended PGM's operations in July 1996.
The suspension of PGM's Egyptian operations
184 Mr El-Raghy sought to give evidence that PGM's Egyptian operations were closed down by EGSMA in July 1996. However, as he had not been in Egypt at the time, objection was taken to this evidence on the grounds that it was hearsay.
185 Mr Youseff El-Raghy attempted to give similar evidence. However, it emerged that he had not been the in the field at the material time. Objection was therefore taken to his evidence also.
186 Mr Naim, as Chairman of EGSMA, gave evidence that on 22 May 1996, following negotiations between PGM and EGSMA, he informed PGM that EGSMA had agreed to accept a letter of guarantee for the year from 29 January 1996 in the sum of $US 1 million, less the cost of the previous period of exploration.
187 On 6 June, Mr Naim sent a fax to PGM's office in Alexandria asking for a fixed date for the provision of the letter of guarantee. On 3 July Mr Naim sent another fax to PGM's Alexandria office referring to earlier correspondence and noting that the letter of guarantee had not been received. He said that EGMSA would take the necessary legal action to cancel the Concession Agreement (Exhibit 136, p 58 and p 62).
188 Mr Naim went on to say:
"On about 21 July 1996, as a result of PGM having failed to provide the letter of guarantee to EGSMA, I directed the operations of PGM to be shut down on the concession area and caused a notice to be issued to the bailiff to seize the property of PGM, advising PGM that EGSMA was investigating cancelling the Concession Agreement."
- Mr Naim exhibited a copy of the notice (Exhibit 136, p 44 – in the translation).
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189 The notice is not in fact the notice to the bailiff but to PGM. After reciting the history of the matter and the breach of PGM's obligation to provide the letter of guarantee the notice continued (again, in the translation):
"The Claimant Authority notifies (PGM) that it is important to hurry up in fulfilling its commitments and to submit a Letter of Guarantee to (EGSMA) in the amount of 495,575.03 Dollars within 4 days of the date of this letter, otherwise (EGSMA) shall, regretfully, take action as mentioned hereinbefore and any other action that might be required."
190 In the course of his evidence, Mr Naim said that the notice requiring PGM to provide the letter of guarantee within four days, had been issued by the Court. Mr Naim said that when PGM did not comply within the four day period he gave orders to all EGSMA's mining inspectors to shut down all the activities of PGM with the help of the police (TS 381).
191 In cross-examination, Mr Naim said that in fact the document, which he had described as having been issued by the Court, was issued by EGSMA through its legal department "to go through the Court". This confusion, I think, resulted from Mr Naim's poor command of English.
192 A little later in the course of cross-examination, it was put to Mr Naim that the first stop-work order on the Concession Agreement was given on 15 October 1996. Mr Naim answered "No".
193 Mr Naim was then taken to the translation of a document which he had signed on 15 October 1996 and which was addressed to PGM's Alexandria office. The document informed PGM that:
"It has been decided to stop work under the Agreement, and that necessary steps contained therein are being taken to cancel it and carry out all results as per its terms and conditions."
194 Leading counsel for the applicants then asked Mr Naim the following question:
"Would you accept from me that that was the first stop-work order the Minister put on them? He had given them lots of grace periods and then he finally ran out of patience and he put a stop-work order on them on 15 October 1996. Is that how I read this?"
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195 As I have said, it was apparent to me as Mr Naim gave his evidence, that he did not have a good understanding of English. I also had the impression that this was something he did not care to admit. In answer to the rolled-up question and comment which counsel had put to him rather quickly, Mr Naim said "I can't get you". The following exchange then took place:
"Q. You don't understand me? --- Yes.
Q. Would you agree with me that this was the first stop-work order the Minister issued? --- Yes."
196 Mr Naim gave the last answer immediately after that extremely leading question had been asked. The answer completely contradicted his earlier evidence that the first stop-work order had not been issued on 15 October 1996. I place no weight on Mr Naim's last answer because I do not think he understood the question. I had the impression that he was agreeing with counsel because he was embarrassed to say, yet again, that he had not understood.
197 In re-examination, Mr Naim said that after 3 July, when PGM had failed to provide the letter of warranty, he gave instructions to the mining inspector for a stop-work order (TS 401-2).
198 Later in the trial I admitted, pursuant to s 79C of the Evidence Act, duly executed affirmations of two EGSMA mining inspectors who deposed to the fact that on 23 July 1996 they had each been instructed to suspend PGM's operations at its various sites in Egypt. The inspectors said they had done so, and that they had prepared minutes and inventories of PGM's equipment on the same day.
199 I see no reason to doubt the evidence of these two inspectors which, taken together with that of Mr Naim, leads me to find, on the balance of probabilities, that PGM's exploration activities in Egypt were closed down by the authority of EGSMA on 23 July 1996. I find that the operations remained closed until 21 September, when EGSMA permitted work to recommence on the basis that a letter of warranty would be provided by 7 October. This was as a result of the funds becoming available from Grubb Finance.
200 I accept also Mr Kriewaldt's evidence that he did not know about the closure in July 1996. I accept that Mr El-Raghy was aware of this matter and I find that he did not tell Mr Kriewaldt. I draw that inference from the fact that I believe Mr Kriewaldt's evidence. This was not a matter which
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- was put directly to Mr El-Raghy during the course of his evidence. However, when Mr Kriewaldt was asked in cross-examination whether he could offer any explanation for the fact that Mr El-Raghy had not informed him of the closure, he said that Mr El-Raghy may not have told him "… because he doesn't like me worrying … he protects me" (TS 890). I accept that evidence. I can see from the very different personalities of Mr El-Raghy and Mr Kriewaldt, and the fact that Mr Kriewaldt is the much older man, that their business relationship may well have involved that protective element.
201 It seems that Mr El-Raghy did not tell Mr Bocso either, about the closure of PGM's operations on 23 July. On 24 July, Mr Bocso wrote to Mr Masel of Reliance Finance and Mortgage Services for the purpose of obtaining bridging finance until the end of September 1996 when the Grubb loan would become available (Exhibit 53). Mr Bocso said that PGM had been granted the Egyptian concessions. However, he made no mention of the fact that the operations had been closed down.
202 Mr El-Raghy was asked in cross examination whether he had thought it appropriate to inform Mr Bocso and to let prospective lenders know that the work in Egypt had been stopped by an order of the Court. Mr El-Raghy answered:
"We were quite sure that we will be able to raise the cash to get that thing going." (TS 526)
203 Although Mr El-Raghy did not answer the question directly, I accept that he was optimistic about raising funds to enable PGM to resume its Egyptian operations. That being so, I accept that he did not disclose to Mr Bocso that the operations had been suspended. Given Mr El-Raghy's optimism, it would have been prudent to keep that information confidential.
Were the share placements oppressive?
204 The applicants contend the share placements of July and August 1996 constituted oppressive conduct because they claim that the sole, or predominant purpose of the placements was to dilute their shareholding in PGM in the sense that the shares would not have been placed but for that purpose.
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205 The question arises in the context of what was then s 246AA (now s 232) of the Corporations Law which permits the Court to grant relief if an act such as the placement of shares in the present case is:
"oppressive to unfairly prejudicial to or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity."
206 Much has been written about the law relating to oppression. I adopt the following statement made by the Full Court (Malcolm CJ, Rowland and Franklyn JJ) in Jenkins v Enterprise Goldmines NL (1992) 10 ACLC 136 at 145-6:
"The applicant must show either that the affairs of the company or an act or omission of the company was or would be oppressive to, or unfairly prejudicial to, or unfairly discriminatory against members, or contrary to the interests of members of the company as a whole. Whether the word 'oppression' connotes more than unfairness it would seem to include unfairness where the unfairness results from abuse of majority power or control (see, for example, [Scottish Co-operative Wholesale Ltd v Meyer [(1959) AC 324] at 342; Re Jermyn Street Turkish Baths [1971] 1 WLR 1042 at 1060 per Buckley LJ; Re Tivoli Freeholds Ltd [1972] VR 445 at 452 per Menhennitt J; and De Terri Co Pty Ltd (1988) 12 ACLR 457). It is now enough to show that the relevant conduct was 'unfairly prejudicial': Re Dalkeith Investments Pty Ltd (1985) 9 ACLR 247 at 253 per McPherson J; and see Parker v NRMA (1989) 1 ACSR 227. The key word is 'unfairly': Wayde v New South Wales Rugby League Ltd (1985) 59 ALJR 798] and see Re Spargos Mining NL (1990) 3 ACSR 1 at 43 per Murray J; and Morgan v 45 Flers Avenue Pty Ltd (1987) 10 ACLR 692.
In our opinion the application of the test involves a question of fairness. It is for the court to decide whether in balancing the interests of the company as a whole against minority interests the directors have acted so as to unfairly prejudice the interests of the minority. The court decides this 'according to ordinary standards of reasonableness and fair dealing'. Whether the conduct is unfairly discriminatory will be judged on standards which reasonable directors with such skills as directors should have, acting bona fide, would think to be fair."
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207 That passage was adopted recently by Owen J in Shamsallah Holdings Pty Ltd & Anor v CBD Refrigeration and Airconditioning Services Pty Ltd & Ors (2001) 19 ACLC 517.
208 The test as stated above is objective. However, it is relevant to know why the company, by its directors, acted in the way they did. In the present case, that matter was explored in some detail with Mr Kriewaldt during the course of his cross-examination.
209 Mr Kriewaldt said, and I accept, that he and Mr El-Raghy, through their companies, paid $39,000 for shares "in dribs and drabs as money became available" (TS 862). Mr Kriewaldt went on to say that share placements were taken, rather than making further loans to PGM, because they were trying to capitalise the company. He said:
"It was a $1 company and we were trying to capitalise it so that we would get other venture capitalists in there. It would have some capital. Otherwise we would be drowned out." (TS 862)
210 A little later in his evidence, Mr Kriewaldt was asked whether he had a concern about being "drowned out". Mr Kriewaldt said he wanted to retain as high a percentage as possible in PGM: enough to maintain control. He said he and Mr El-Raghy had to maintain control "otherwise we would be giving the company away as a gift". While that was not a matter which was foremost in his mind, it was a consideration (TS 866-7).
211 These matters were not explored with Mr El-Raghy. However, I draw the inference, on the balance of probabilities, since Mr Kriewaldt appeared to speak for Mr El-Raghy as well himself, that their motives and intentions were the same. Indeed, I find that it was Mr Kriewaldt, armed as he was with the advice from Mr Pynt, who was the instigator of the share placements.
212 I have referred earlier in these reasons, to my acceptance of various parts of Mr Kriewaldt's evidence. In the course of a searching cross-examination, Mr Kriewaldt impressed me generally as a witness of integrity, who was to be believed on his oath. I accept Mr Kriewaldt's evidence about these matters.
213 That being so, I find that the share placements to Nordana and El-Raghy Kriewaldt were taken in July and August 1996 to provide working capital when PGM was in urgent need of funds. I do not attach any significance to the fact that Mr Kriewaldt referred to "seed capital": the funds were used as working capital. Nordana and El-Raghy Kriewaldt
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- took shares in PGM, rather than advancing funds to it, because it was desirable to commence the capitalisation of the company as a means of encouraging investors when there had been no interest from investors hitherto for the reasons I have already outlined.
214 Mr Kriewaldt and Mr El-Raghy wanted to maintain their control of PGM if possible, but they recognised that if (as they hoped) others invested in PGM, their shareholdings would inevitably be diluted.
215 When asked whether he wanted to retain majority interest in PGM whatever funds were obtained from prospective investors Mr Kriewaldt said:
"As high a percentage as possible, yes, enough to control, if possible, and eventually you end up getting diluted and diluted and diluted. You end up without control." (TS 866)
216 I find that although the effect of the placements was to dilute the applicants' shareholdings, that was not the dominant purpose. Mr Kriewaldt and Mr El-Raghy both said that if Mr El-Ansary had wanted to purchase shares in PGM at the time, he could have done so, although they preferred that he did not. That was because, as Mr Kriewaldt said, he regarded himself and Mr El-Raghy as "the company". Mr El-Ansary, he said, had "voted with his feet. He had resigned as a director. He was doing everything to shut the company down, to throw … sticks into the spokes" (TS 895). Indeed, Mr Kriewaldt told Mr Pynt in May 1996 that he did not see the applicants having any future in the company (TS 912, 916).
217 In all the circumstances, I consider that the position adopted by Mr Kriewaldt (and, inferentially, by Mr El-Raghy) was commercially reasonable and was not oppressive, or unfairly prejudicial to or unfairly discriminatory against the applicants. As I have already found, the placement of shares to Nordana and El-Raghy Kriewaldt had no practical impact on the value of the applicants' interest in PGM. Furthermore, PGM was not a company which had been acquired in the expectation that the proportions of the original shareholding would be maintained. I find that the original shareholding was designed merely to hold the position until the company could be capitalised. When that happened, PGM would be owned by its members in proportion to their respective contributions. It was entirely a matter for the applicants how much they wished to invest. For that reason I think Mr Kriewaldt was correct when he said of the applicants "although the black and white letter of the registered shares
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- show 40 per cent, that's not his (sic their) real interest" (TS885). That observation is supported by the terms of the Acquisition of Assets Agreement in which only Mr El-Raghy and Mr El-Ansary out of the five shareholders were described as the vendors of PGM. It is supported also by the fact (to which Mr El-Ansary referred in his memorandum of 24 January 1996) that it had been proposed to raise $15 million to capitalise PGM.
218 The actions taken by Mr El-Raghy and Mr Kriewaldt from January 1996, when Pharaoh Metals cut off supplies, until September 1996 when the loan from Grubb Finance became available, saved PGM from what would otherwise have been certain failure. In the extremely difficult circumstances in which they found themselves, Mr El-Raghy and Mr Kriewaldt risked their own funds not only for their benefit, but for the benefit of PGM and all those persons who might invest in it subsequently. They included the applicants who, at the time, showed no interest in investing in PGM.
219 Mr El-Ansary must have known, when his application for an interlocutory injunction to restrain share placements was partially unsuccessful, that the resolution to place shares for the purpose of raising $500,000 would be likely to be carried. The result was, as Mr El-Ansary acknowledged in cross-examination, that placements would then be available for anyone who wanted to invest (TS 122). Despite that, Mr El-Ansary made no attempt to enquire about the outcome of the meeting or the extent to which shares had been taken up. He explained his inaction by saying that he could not have invested if he was not invited to participate and because he did not know the manner in which any funds raised by the placement might be applied.
220 I do not accept that explanation. Had the parties been on speaking terms, there would have been no difficulty. I am satisfied that Mr El-Ansary made no such enquiry because of the animosity which existed between him and Mr El-Raghy and Mr Kriewaldt. Mr El-Ansary both personally in his own action and as a director of Pharaoh Metals, was pursuing a course calculated to bring down PGM. I do not think he would have invested money in PGM in the circumstances as they existed in July and August 1996, even if he had been invited to do so. For that reason, I do not accept Mr El-Ansary's contention that he and his wife should have been offered a pro-rata share placement.
221 The consequence is, that Mr El-Ansary took the risk that his shares would be diluted by the issue of shares to independent investors. I do not
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- think he regarded that as a very great risk because it was highly improbable that any sensible investor would support PGM at that time. To do so, would have been an act of faith. Mr El-Raghy and Mr Kriewaldt had that faith and they took the risk. However, I am not persuaded that in all the circumstances, their conduct was oppressive to the applicants.
222 In reaching that conclusion, I am mindful that I am required only to answer the preliminary question identified by Master Bredmeyer. It is not necessary to consider whether, if I am wrong, the applicants should now be granted relief. Leading counsel for the respondents submitted that I should take account of the applicants' delay in bringing these proceedings, which were not commenced until December 1998. In the interim, PGM has become a wholly owned subsidiary of Centamin.
223 Counsel for the respondents relied on the decision of the Full Court in Nullacourt Pty Ltd v Walker, unreported; Library No 950249A; 19 May 1995 for the proposition that the applicants should not be allowed to stand by, taking no risk, in the knowledge that the respondents have been taking those risks and after it has become apparent that PGM's prospects have improved considerably and then take proceedings.
224 In Nullacourt (supra) these considerations were the subject of a claim that relief should be denied on the grounds of laches. In the present case, it is contended on behalf of the applicants that equitable defences, such as laches, cannot be raised against a statutory cause of action such as that embodied in s 246AA of the Corporations Law.
225 In my view, it is inappropriate for me to consider questions such as this when I am concerned only with the preliminary issue. On the view I take, the question whether or not the placement of shares in July and August 1996 was oppressive can be determined only by reference to the circumstances as they existed at that time. Subsequent events are relevant only to the question whether relief should be granted, an issue about which a great deal more evidence will be required if I am wrong in my conclusion thus far. That is, that in all the circumstances, the placement of the relevant shares was not unfairly prejudicial to the applicants, having regard to ordinary standards of reasonableness and fair dealing. The application will therefore be dismissed.
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