Environmental Business Strategies Pty Ltd (in liq) v Phyto Services Pty Ltd
[2003] VSC 371
•3 October 2003
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 6887 of 2003
IN THE MATTER of Environmental Business Strategies Pty Ltd (In Liquidation)
| ENVIRONMENTAL BUSINESS STRATEGIES PTY LTD (in liq) | Applicant |
| v | |
| PHYTO SERVICES PTY LTD | Respondent |
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JUDGE: | Hansen J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 2, 3 and 4 September 2003 | |
DATE OF JUDGMENT: | 3 October 2003 | |
CASE MAY BE CITED AS: | Environmental Business Strategies Pty Ltd (in liq) v Phyto Services Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2003] VSC 371 | |
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CORPORATIONS – Winding up – Liquidator – Application for directions under Corporations Act 2001 s 479(3) – Treated as trial of issue between shareholders as to corporate structure of their venture.
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APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr I R Jones | Madgwicks |
| For the Respondent | Mr S W Stuckey | Rickards Legal |
HIS HONOUR:
This application for directions concerns Environmental Business Strategies Pty Ltd ("EBS"). When the originating process was filed on 28 July 2003 EBS was in the hands of administrators, Stirling Lindley Horne and Bruno Anthony Secatore, who were appointed as such on 6 May 2003. At a meeting of creditors on 31 July 2003 it was resolved that EBS be wound up and the administrators were appointed as liquidators. On 8 August 2003 the originating process was amended to reflect that change. As amended the originating process seeks directions under s 479(3) of the Corporations Act in relation to the following matters:
(a) Whether EBS is the beneficial owner of the 100% shareholding in Green Edge (IPCO) Pty Ltd ("IPCO") held by it.
(b) Whether EBS is the beneficial owner of the 100% shareholding in Werribee Project Pty Ltd ("WP") held by it.
(c) Whether the liquidators of EBS are entitled to sell the 100% shareholding in IPCO held by EBS to meet the claims of the creditors of EBS.
(d) Whether the liquidators of EBS are entitled to sell the 100% shareholding in WP held by EBS to meet the claims of the creditors of EBS.
At the first directions hearing on 8 August 2003 counsel appeared for the liquidators and for Phyto Services Pty Ltd ("Phyto"). I was informed that the liquidators wished to sell the shares in IPCO and WP and that they were opposed in that regard by Phyto. There was no other contradictor. It was indicated by counsel, and I accepted, that while Phyto would be heard it was not necessary that it be made a party. I directed that affidavits be filed and fixed the proceeding for trial on 2 September.
On behalf of Phyto an affidavit was sworn by a director, Paul James Tracey, and an affidavit in reply was sworn by a director of EBS, Robert Alexander Gell. Other affidavits had previously been filed on behalf of the liquidators.
While in form the application is one for directions, the hearing was conducted in the same manner as the trial of an action. With the exception of the liquidator Horne, who swore two affidavits, all deponents were cross-examined. The issue raised for determination is primarily one of fact. As appears below, the issue was readily identified and the cross-examination was much concerned with matters of credit. The parties concurred in the case being conducted in this way. In view of the clarity of the issue there was no need for pleadings. Furthermore, the extra expense and delay that would have been involved in an action commenced by writ was neither warranted nor desired. At the conclusion of final addresses I informed counsel that I considered it appropriate, in the circumstances, that Phyto be made a respondent to the proceeding. They concurred in that course, and I will so order.
EBS
EBS was registered in Victoria on 25 June 1993. Initially, and until 24 September 1995, its name was Environmental Business Consulting Pty Ltd. As its name suggests, EBS was established as an environmental consultancy to provide strategic environmental advice to the public and private sector. EBS operated successfully until 1998 when Gell decided to reduce its activity in order to establish a new business.
When EBS was registered two shares were issued. Those shares are held by Breakthrough Productions Pty Ltd ("Breakthrough") of which Robert Alexander Gell is a director.
The current shareholders of EBS are:
· Breakthrough 2 · Gellignite Pty Ltd ("Gellignite") 25,000 · Madeleine Isabel Hall 25,000 · Kasel Nominees Pty Ltd ("Kasel") 25,000 · Paul James Tracey and Julie Ann Tracey 25,000
Gell was a founding director of EBS. He has continued to be a director. It is stated by Horne that Gell is now the only director of EBS, although Exhibit SLH3 and some evidence of Gell indicates that Ian Peter Jarman has been a director since 15 January 1995. Gell and Thomas Kwok Boon Lee are secretaries of EBS. Lee is EBS's external accountant.
EBS registered Natural Capital Management ("NCM") as a business name on 22 March 2001, the nature of the business being stated on the ASIC historical extract as biobusiness consulting. EBS continues to be the proprietor of the name.
IPCO
IPCO was registered on 12 September 2001. The founding and present directors are Gell and John Sydney Hall, the latter of whom is also the secretary. There are 100 issued shares. They were issued at registration to EBS, which continues to hold them.
WP
WP was registered on 23 August 2001. The founding and present directors are Gell and Hall. Hall is secretary and the 100 issued shares were and are held by EBS.
The shareholders in EBS
Breakthrough is a company owned or controlled by Gell. He referred to it as "my company". Gellignite also is a Gell company and holds his interest. Madeleine Isabel Hall is married to John Sydney Hall. Where it is necessary for the purpose of clarity I refer to him as John Hall. Kasel is a nominee company of John Selak. Paul James Tracey and Julie Ann Tracey are married and hold their shares jointly. They are directors of Phyto. Where it is necessary for the purpose of clarity I refer to them as Paul Tracey and Julie Tracey.
The financial position of EBS
At 6 May 2003, the date of appointment of the administrators, the financial position of EBS was –
| Assets | ||
| Sundry debtors | $18,589.00 | |
| Cash at bank | $5,504.00 | |
| Shares in subsidiaries IPCO WP | $100.00 | $24,293.00 |
| Unsecured Creditors Glendora Commercial Services Smith Peacock Henshaw | $25,000.00 $3,500.00 | $50,402.00 |
| Deficiency | $26,109.00 |
The liquidator's preferred action
The liquidators wish to complete a process they commenced as administrators. That is to sell EBS's shareholding in IPCO and WP. Following advertisements seeking expressions of interest for the purchase of those shares the liquidators have received an offer which they wish to accept. In an affidavit Horne stated his belief that the sale of the shares will generate sufficient funds to pay the creditors of EBS in full. The liquidators have not proceeded with the sale because of objections from Phyto and its lawyer. In essence, the objection is that Phyto is beneficially entitled to one third of the issued shares in IPCO and WP. Whether that is so is the issue for determination in this proceeding. The administrators, now liquidators, brought the proceeding in order to achieve resolution of that issue. Phyto had threatened to commence legal proceedings but had not done so.
The personalities
Gell holds an honours degree in science and has long had an interest and involvement in matters to do with the environment. He presents weather information on television, has developed and presented numerous environmental documentaries, is involved in a number of associations and has been on various boards and published books and materials. He is experienced in the presentation of information, which was a particular skill that he brought to the project the subject of this litigation.
John Hall holds an honours degree in science from Adelaide University, specialising in biogeochemistry, and a PhD from Queensland University in the Faculty of Engineering, specialising in mineral processing. His experience, much of it gained over 20 years with the CSIRO, is in the area of geological exploration, mineral process engineering and systems engineering, environment, health and safety products, industrial research and development and commercialisation of technology.
Paul Tracey holds a degree in law from the University of Otago, New Zealand, but has never practised as a lawyer. Since 1994 he and Phyto have been involved in plant based technologies in collaboration with two persons at the Department of Natural Resources at Massey University. The principal areas in which these technologies have been developed are biogeochemistry, phytoremediation and phytomining. He explained these processes as follows. Biogeochemistry is a discipline which depends on an analysis of plants to identify (in particular) gold deposits which do not show themselves as outcrops. An analysis of the gold content within the fibres of certain plants can be used to show whether there is a gold deposit in the vicinity of the plant. This process is more economic than excavating. Phyto remediation is a process used to decontaminate sites. In this process plants are planted in contaminated ground. Some contaminants are taken up into the tissue of the plant. By regular harvesting contaminants are removed. This is cheaper than other remediation processes. Phytomining uses plants to extract valuable elements from the ground. This can be an economic process for extracting gold from terrain that would be uneconomic to mine conventionally. These techniques, Paul Tracey deposed, can be combined to produce environmentally effective commercial operations. For example, where a site is contaminated with heavy elements, phyto remediation can be used to remove heavy elements including gold and silver from the soil. The burning of the harvested plants can be used to generate electricity which in turn is used to extract gold, silver or other valuable elements after the plants have been burnt. This renders the remediated land valuable again and the valuable elements can be sold. I interpolate that I accept Gell's evidence that the techniques described by Paul Tracey have not been used on a commercial basis in Australia and that the development of the techniques is in its infancy internationally and mostly in the United States.
John Selak has practised as an accountant since 1979 and is a partner in corporate finance at Ernst & Young. His areas of specialisation include valuations, including business brand and intellectual property, and forensic accounting. He has regularly given expert evidence regarding valuations, economic loss and professional negligence.
The relationships
Gell and Selak were introduced approximately 20 years ago by Gell's then accountant, with whom Selak worked in the same firm. From time to time subsequently Selak provided Gell with professional advice regarding his financial and business affairs.
By coincidence John Hall used the same accountant as Gell. In or about March 1998 that accountant (who was not Selak) introduced them. They talked about their interests and about how they could combine their talents. Gell invited him to find a suitable project.
In April 1999 Paul Tracey, who was seeking to develop methods to use the techniques referred to above, met John Hall who was the principal scientist working for Geo2 Pty Ltd ("Geo2"). Hall expressed interest in Tracey's use of plants for explorative purposes. They met in July and Hall suggested that they consider some business dealings through his company Edge Cliff Pty Ltd ("Edge Cliff").
Tracey had been interested in the Western Treatment Plant at Werribee for some time. In terms of large scale waste the Plant is both a significant problem and opportunity. He came across a paper which estimated that the gold and silver reserves in the bio-solids at Werribee were worth approximately $50M. Bio-solids are the solid parts of sewerage. On these figures the Plant was an ideal place to test the potential of plants to hyper-accumulate precious metals and remediate contaminated land and water. He told Hall about the estimate and Hall expressed serious interest.
Tracey obtained permission to take samples of stockpiled bio-solids at the Plant and in October 1999 spoke with Hall who said that he would provide capital if independent assays confirmed the report in the article. With a consulting geologist whom he engaged, Tracey took samples from Werribee, the Eastern Treatment Plant and Black Rock which showed about twice the concentrations of gold found in many commercial mines. This, he said, confirmed the potential to extract commercially viable gold from the wastes.
The task, however, was to attract government and private interest in applying the plant based technology.
In late 1999 Hall introduced Gell and Tracey. He considered that Tracey would be enthusiastic about collaborating with Gell in the matter. He also believed that Tracey had skills that might be useful to the association between himself and Gell.
Following that introduction Gell, Hall and Tracey discussed their ideas as to how to develop the project concerning treatment of the bio-solid material including the concept of remediation. Tracey said in his affidavit, and Gell did not deny, that after their meeting in November 1999 it was informally accepted that they would form some sort of joint venture. I interpolate that the nature and terms of any relationship remained to be established. I accept Gell's evidence that he did not suggest that EBS be listed as a consultant to Phyto in a handbook Phyto published in December 1999.
Gell introduced Hall and Tracey to Bruce McDonald, the environmental sustainability officer of Melbourne Water Corporation. In December 1999 Hall and Tracey met officers of that Corporation, including McDonald, to discuss the matter. The Corporation wanted a proposal for management and reuse of the waste.
In approximately late July 2000 Gell sought from Selak general business and financial advice regarding EBS. He informed Selak that EBS was looking to sell to the government and corporate sectors an environmental infrastructure project and a system for recovering valuable constituents from the environment. Selak said that in mid August 2000 a meeting was held at Ernst & Young's office attended by Gell, Hall and Tracey representing EBS, and Selak and Peter Kempen of Ernst & Young. During the meeting Gell, Hall and Tracey explained the venture in broad terms. Kempen and Selak advised that it was essential they take immediate steps to protect the venture and, in particular, their ideas or intellectual property. Selak further said during the meeting, and over the following months, that he regularly advised Gell, Hall and Tracey regarding EBS and the venture, including advice as to the appropriate company structure. In that regard he stressed to Gell, Hall and Tracey on a number of occasions, that investors would only be interested in EBS if they could take an interest in all the assets of the company group, including the intellectual property. Selak advised that EBS, as the investment vehicle or holding company in the structure, would need to either have ownership of the intellectual property or hold 100% of the shareholding of the entity that owned the intellectual property. I note that the reference to EBS is understandable as the parties were working under, or representing the venture as, EBS or NCM.
Selak said that early in these discussions, Gell, Hall and Tracey explained that the intellectual property was originally owned by Breakthrough, Edge Cliff and Phyto. They subsequently informed Selak, again at an early stage, that it was their intention that the intellectual property would be owned by IPCO. They explained that Griffith Hack, patent attorneys from whom they had received advice, had advised that the owner of the intellectual property should be a separate corporate entity from EBS. I note from other evidence that the purpose of this was to protect the intellectual property in the event that the trading company failed. That advice was obtained from the patent attorney earlier in 2000, it would seem in March. I further note that in his affidavit Tracey states, and Gell does not dispute, that in October 2000 he prepared a draft patent application with input from Hall. Tracey further said that he and Hall briefed Greg Munt of Griffith Hack to prepare a patent application on the basis of the draft. An application was prepared and lodged in March 2001.
It is evident that from the outset the parties devoted much time to thinking and talking between themselves about the project, and speaking to people particularly in the public sector with a view to encouraging interest in the project. It is unnecessary to record all that they did in these respects. Tracey refers in his affidavit to the preparation, in October 2000, at the request of the Melbourne Water Corporation, of an expression of interest in relation to strategies for dealing with bio-solid management and reuse. He also refers to a meeting he and Hall had with executives of the City of Melbourne, in December 2000, to discuss possible technologies to reduce greenhouse emissions and the construction of wetlands. He states that at about this time Hall lost his employment with Geo2 and that Hall began to push the project.
Tracey stated that he and Hall discussed the need to formalise their relationship, that they put this to Gell, and that Gell agreed. I find that this evidence of Tracey, of agreeing to formalise the relationship, overstates the position. What occurred, I find, is better indicated by the evidence of Hall and Gell, which I prefer. It was Tracey's idea to "formalise the relationship" and he drafted the document that was produced, called the Statement of Intent. The document is important, indeed, central to Phyto's case, and I now turn to it.
Statement of Intent
The Statement of Intent is dated 29 June 2001, being the date of its execution, and was made between Edge Cliff (called Edgecliff in the document), Phyto and EBS. Doubtless, if the document had been prepared by a practising lawyer the drafting would have been different, but the substance is clear enough. The document commenced with a section headed Definitions and Principles followed by a series of clauses as agreements.
Under Definitions and Principles the following appeared:
"1. The Business Intent / Direction and Scope
The primary objective, intent and direction of the business is to give effect to Exhibits 1-5 and opportunities accreting out of these Exhibits namely:
Exhibit 1 – Australian Provisional Patent Application Number PR 3899 Titled : ' System for upgrading an environment and for recovering valuable constituents from the environment ' and registered in the names of: JOHN SYDNEY HALL and PAUL JAMES TRACEY and ROBERT ALEXANDER GELL
Exhibit 2 – Werribee Bioregion Project – " Werribee's Docklands"
PART 1: Executive SummaryExhibit 3 – Werribee Bioregion Project – "Sustainable Melbourne"
PART 2: Concept OverviewExhibit 4 – Werribee Project – ' Green Infrastructure Project '
PART 3: Terms of ReferenceExhibit 5 – Melbourne City – ' Green Precinct '
PART 4: Terms of Reference
2. The Principals
The Principals means The First Party; The Second Party and the Third Party who are signatories to The Statement of Intent.
3. The Separate Legal Entities
3.1 "Green Edge (IPCO) © " means a separate legal entity to Natural Capital Management Pty Ltd © and is a non trading entity and is the sole and exclusive holder of all Intellectual Property (I.P.) Such IP is presently contained in Exhibit 1 and Exhibit 2. Green Edge (IPCO) © will also be the exclusive holder of any I.P. accreted out of Exhibit 1 – Exhibit 5.
3.2 "Natural Capital Management © " means a separate legal entity charged with the business of managing and / or licensing the operation of various projects and / or businesses based on IP as licensed from Green Edge (IPCO) and all that entails and particularly relating to giving effect to Exhibits 1 – Exhibit 5.
4. Future Business Structure and Plans
The Principals will take the further and future business structures and plans under advisement from independent experts in areas relevant to the business."
Exhibits 2-4 refer to the possible Werribee Project and Exhibit 5 to the possible Melbourne City Council Project, which had been the subject of discussions. In relation to clause 3.1, there was neither then, nor later, a corporation called Natural Capital Management Pty Ltd.
Following these Definitions and Principles the document provided as follows:
"NOW THIS DEED DOES WITNESS that it is the intent to enter into a SHAREHOLDING AGREEMENT on the following terms:
1.That the Principals resolve that the Shareholders Agreement will not depart from the spirit and essence of this Statement of Intent and specifically that the following principles will be preserved:
1.1 Parity in shareholdings and remuneration in Natural Capital Management © Green Edge (IPCO) ©; for all the Principals; and
1.2 A continuing commitment to protecting the interests of Natural Capital Management © and Green Edge (IPCO) © and the reputations of the Principals.
1.3 Parity in contributions made to Natural Capital Management © and Green Edge (IPCO) © by all of the Principals exists over time; and
1.4 That the Principals act as each other counsellors, free of charge, in matters relating to objectives and scope of the business
1.5 That the business scope is to give effect to the fore said Definitions and Principles.
2.That Environmental Business Strategies Pty Ltd (EBS) is the temporary holder of the registered business names Natural Capital Management © and Green Edge (IPCO) © .
2.1 The property in these business names is to be transferred to Natural Capital Management © and Green Edge (IPCO) © preceding the operation of these entities.
3.That for the purpose of recitals the entities can lay claim with permission from each Principal to past relevant experience and expertise (as relevant to Definition 1) of the Principals and that such experience and expertise can be cited by the entities as being those of the entities.
4.That 100% of the shareholding of Green Edge (IPCO) © is divided equally between the Principals
4.1 That Green Edge (IPCO) © is a non-trading Company but is empowered to license intellectual property, collect and distribute fees for such services.
4.2 That 100% of Intellectual Property developed by the Principals shown as Exhibits 1 and Exhibit 2 and accreted out of Exhibit 1 and Exhibit 2; is the property of Green Edge (IPCO) ©
4.3 That Green Edge (IPCO) will license its intellectual property to Natural Capital Management © on fair and commercial terms. The objective test being what a reasonable person in a like position would consider 'fair and commercial terms' in all the circumstances.
4.4 That in the case of any relinquishment of shareholding in Green Edge (IPCO) © for example to raise funds, there will be an equal relinquishment of shares by all the Principals.
4.5 That in the case of any relinquishment of shareholding in Green Edge (IPCO) © the other Principals will have the first right of refusal of those shares being relinquished.
5.Exit Strategy
5.1 That the Exit Strategy of separation of the Principals from the entities is by the relinquishment of shareholdings in those entities. This option is available to any or all of the Principals to the Green Edge (IPCO) © and Natural Capital Management by giving seven days written notice to the Company Secretary.
5.2 That the Exit Strategy is available at the option of any or all of the Principals to Green Edge (IPCO) © and Natural Capital Management © but subject to the provision that the remaining Principals (if any) retain the first right of refusal to purchase the exiting Principals shareholdings at fair and independent valuation.
6.That 100% of the shareholding of Natural Capital Management © is divided equally between the Principals and any entities that may accrete from this organisation.
6.1 That the business of Natural Capital Management © will be in managing and / or operating and / or licensing of the business as per Definition 1.
6.2 That the rights attached to the shares allocated in Natural Capital Management © to each of the Principals will be identical in every respect.
6.3 That in the case of any relinquishment of shareholding in Natural Capital Management ©, for example to raise funds, there will be an equal relinquishment of shares by all the Principals.
6.4 That in the case of any relinquishment of shareholding in Natural Capital Management © the other Principals will have the first right of refusal of those shares being relinquished.
7.That the Principals are Officers of the entities and as such owe a fiduciary duty to Natural Capital Management © and Green Edge (IPCO) © and will at all times:
7.1 Act in the utmost good faith in the interests of the entities(s); and
7.2 Comply with all prevailing regulations and legislation; particular reference is made to the Australian Corporation and Securities Act 1994 and a director's duty to prevent insolvent trading under Section 588G of that Act. Such legislation coming into effect if and when the entities are incorporated.
8.That any monies paid to Natural Capital Management © and Green Edge (IPCO) © will be held in 2 separate bank accounts.
8.1 That there will be parity in regard to the terms of remuneration between the Principals for services rendered or as negotiated between the Principals from time to time.
8.2 That Natural Capital Management © and Green Edge (IPCO) © will reimburse all reasonable expenses, consistent with an agreed budget and business plan currently being formulated, and incurred in the name of each entity as per Definition 3.
8.3 That expenses relating to Natural Capital Management © will be paid out of Natural Capital Management © bank account and that expenses relating to Green Edge (IPCO) © will be paid out of the Green Edge (IPCO) © bank account.
…
13.That upon formalisation of the business structure, and whether the business structure of Natural Capital Management © and Green Edge (IPCO) © is a trading company or a corporate trustee of a trading trust then the Principals will accept the following caretaker positions in those companies:
13.1 Robert Alexander Gell accepts the Position of Company Chairman.
13.2 John Sydney Hall accepts the position of the Company General Manager to be converted to caretaker Managing Director upon incorporation.
13.3 Paul James Tracey accepts the position of Company Secretary."
It is evident from the terms of the document that the parties were at an early stage of organising the structure in which they would move forward. The document was anticipatory in that sense. It is also to be noted that the placing of the intellectual property in an entity separate from the trading entity accorded with the advice given by the patent attorney. A central point of the document was the principle of equality, and parity of treatment, between the three principals.
The reference in cl 2 to EBS being the temporary holder of the business names should be explained. EBS's role in that regard arose after Gell suggested that EBS, which was inactive, could be used in this way, and Hall and Tracey agreed.
Phyto's case is based on the contention that the Statement of Intent establishes the fundamental relationship between the parties and their entitlement to equality of ownership of the property of the venture. The property would be held in two arms, one being the holder of the intellectual property and the other the trading entity. Phyto's case is that the structure described in the Statement of Intent was never varied and should now be recognised and enforced. On that basis, Phyto should be held to be entitled to one-third of the shareholding in IPCO and WP.
Gell and Hall did not regard the Statement of Intent in the same light as Tracey. Their approach was more pragmatic and less legalistic.
Hall described the preparation of the Statement of Intent in his evidence. It was drafted by Tracey at Tracey's instigation. It took two to two and a half months to be created. Tracey showed him drafts and Hall provided comments. Hall understood the purpose to have been to set down general principles applying between Gell, Tracey and himself until investors for the projects were found. The document expressed an understanding of what they might move forward from. Hall recalled that Gell had queried why it was needed, when everything was not in place and it might need to change.
Gell agreed with this evidence of Hall, saying that he understood the Statement of Intent to be a starting framework. He considered it to be a structure or a set of guidelines that were put in place in case there were disagreements while they were investigating and deciding upon the final and formal company structure. Gell did not see the Statement of Intent as binding in the long term. He had referred the Statement of Intent to his solicitor to ensure his understanding was correct. His solicitor advised that it was poorly drafted and suggested that he re-draft it. That was not done as at that stage of the project Gell did not want to spend a lot on legal costs creating a final form of document. The Statement of Intent was a starting framework and money could be spent on legal fees when a formal structure was in place. EBS signed the Statement of Intent on that basis.
Tracey took issue with this evidence of Hall and Gell, stating that the document was intended to govern their dealings and to be binding until any further formal agreement replaced it. Even then, however, "the spirit and essence of the agreement was to be maintained".
Selak becomes an investor
In summary, at this time, in about mid 2001, Gell, Hall and Tracey had spent much time discussing how they might move the project forward. They had also sought to attract the interest of government and public authorities. Their pursuit of interest in the project was ongoing. Although Gell, Hall and Tracey had signed the Statement of Intent, there was still no business and no income, and there would not be until they could attract interest, particularly of government, in the project. Moreover, at this stage the matter was proceeding on a shoestring, in need of investors to introduce capital to be able to carry the project forward. Thus, there was a problem at two levels, and each had to be confronted and overcome. First, government and public authorities had to become interested and prepared to involve themselves in the project. Secondly, there was a need to attract investors to inject capital in the venture.
In his affidavit Selak said that sometime around July 2001 Tracey showed him the Statement of Intent. Selak said that he told Tracey, and subsequently Hall and Gell, that in his view the Statement of Intent was poorly structured and would need to be revamped if they wanted to introduce investors to the project. He explained that unless EBS was re-structured as he had previously suggested, investors would not invest in EBS. Selak said that Tracey, Hall and Gell told him that the Statement of Intent was a starting framework and that they understood it was essential that EBS be the 100% beneficial owner of the intellectual property, or of the shares in whichever entity in the EBS structure owned the intellectual property. Gell and Hall agreed with that evidence. This is the evidence that Selak gave in his affidavit. It is also necessary to refer to his oral evidence, but before doing so, it is appropriate to refer to Tracey's affidavit evidence.
In his affidavit, Tracey denied the above evidence of Selak, saying that he believed he did not speak to Selak in July 2001, let alone show him a copy of the Statement of Intent. At that time, Tracey stated, the arrangement between the parties was none of Selak's business. Moreover, there was no suggestion at that time that EBS would be anything other than Gell's vehicle in the project. Selak did not lecture him as Selak suggests.
Now I refer to oral evidence of Selak and Tracey in relation to their evidence referred to at [43] and [44]. In his evidence in chief Selak said that he had spoken to Tracey in July 2001 with reference to a statement of intent. He believed that Tracey initiated the conversation. Selak said he was aware that there was a statement of intent, and that Tracey was going to send him a copy to look at with a view to receiving Selak's opinion on it. Tracey emailed the Statement of Intent to him on 30 July 2001.[1] After reading it Selak spoke to Tracey and indicated that there were significant shortcomings in it, that it was uncommercial in some respects, and that it was not the sort of document he would be prepared to sign on the basis of a go-forward investment. In cross-examination Selak explained that in referring to EBS in the way he did in his evidence outlined at [43], he was referring to the project and not so much to the particular entity EBS or NCM. He said further that the Statement of Intent did not cause him to change his advice. He agreed that the structure in the Statement of Intent did not accord with his advice. He was referred to the matter of speaking to Tracey at about the time of the 30 July email and said that Tracey wanted his views on the Statement of Intent. It is to be noted that counsel for Tracey did not challenge Selak's evidence that Tracey had sent him the Statement of Intent, or that he had spoken to Tracey.
[1]Exhibit B.
That conduct of the cross-examination of Selak, and its contrast with Tracey's affidavit evidence, presaged evidence of Tracey in cross-examination. He did not dispute sending the Statement of Intent to Selak on 30 July 2001. Tracey stated that if the email had his name on it, he sent it. Although differently expressed, his answers as to whether he had spoken to Selak before and after the email did not dispute that he had done so. He said that Selak "could well have said to" him that the Statement of Intent was badly drafted, uncommercial, and would not work.
I have set out the evidence on that issue as an example of an issue which, having been created by Tracey in his affidavit by a denial of the evidence of a deponent, evaporated in Tracey's cross-examination. The evidence of the witness on the other side was true.
Selak said in evidence that during a meeting with Gell, Hall and Tracey in approximately late August 2001 he was asked if he was interested in investing some funds in EBS. Selak said that he was interested and suggested an advance of $15,000 as an unsecured loan and a capital investment of $15,000 in return for an equal share. On that basis he would have an equal 25% shareholding in EBS which, in turn, would hold 100% of IPCO, and that IPCO would own 100% of the intellectual property. However, Hall said that this was not enough and proposed a $25,000 loan and a capital investment of $25,000 in return for an equal share. Selak agreed on the basis, stated by him, that the loan and investment would be by Kasel and that Kasel would not provide the investment unless and until the structure he had recommended (as referred to above) was in place. He said that he stated the following, or used words to similar effect: "You know that Kasel won't invest a cent in EBS until the correct structure is in place. EBS has to own 100% of the shares in the entity that owns the intellectual property". Selak agreed that a formal loan agreement could be settled in due course. It is Selak’s evidence that Hall, Gell and Tracey agreed to his terms. Hall and Gell agreed with Selak's evidence. However, Tracey did not.
In his affidavit Tracey said that in late August 2001 he was aware that Gell and Hall were trying to get Selak to invest in the project, although he was not involved in the negotiations. He said that he was not present at the conversation recounted by Selak. Tracey also stated that Selak did not make the statements referred to in [48] to him, that Selak's loan would be through Kasel and that Kasel would not provide the investment unless and until the structure he had recommended was in place. Tracey made the following further statements. Gell and Hall decided that "we" should take up Selak's proposal to come in with us. He denied that Selak ever said to him, or in his presence, that he required a direct interest in the intellectual property. He said "I was never advised of such a requirement". Tracey also said that he "would not have been prepared to give him (Selak) such a share for the amount of money he was proposing to invest". Selak was to obtain an equal interest in the trading company but there was no suggestion put to Tracey that Selak would obtain any rights to the intellectual property.
At this point in his affidavit Tracey also referred to a proposal from an organisation named Rbz ecoGroup ("Rbz") and, because he mentioned it at this point, so do I, although it takes the account a little ahead of the order of events. The Rbz proposal was to project manage the development of a business plan, raise funds to undertake detailed feasiblility studies and to detail preparation works, in return for an exclusive licence to use the intellectual property and 5% of the shares in a project development company. Tracey referred to a meeting with Rbz on 7 September 2001. Tracey said that he believed the proposal was so good it was worth undoing the "fire wall" around the intellectual property which the patent attorney had recommended. Accordingly, on 8 September 2001 he sent an email to Gell, Hall and Selak indicating that he was prepared to do so. In the email he said:
"I acknowledge that IP Co should not be quarantined as a separate legal entity as this would make the proposed environmental technology consortia less attractive as an investment opportunity. If I remember correctly it was a Mr Benny Browne of Griffith Hack that advised that IP Co should be a separate legal entity?"
This advice represented an acceptance of Selak's long-standing advice.
Tracey said that Gell and Hall were not prepared to accept the Rbz proposal and that it was dropped. Gell provided an explanation in his answering affidavit. He pointed out that Selak was involved at the Rbz stage, in other words he had agreed to invest by then. Gell referred to meetings with Rbz, which Tracey attended. Gell said that Rbz had been introduced by Lee as a business facilitator, and as a potential investor in EBS or perhaps a business partner. However, Gell stated, Rbz lost interest and did not invest as EBS had not been able to secure any government contracts and there was no certainty that the government would proceed with an environmental infrastructure project at Werribee in the short term. Gell rejected, correctly, the use by Tracey in his affidavit of the word "offer" as a description of Rbz's proposal. (Tracey also used the word "offer" in his cross-examination.)
I return to the meeting in late August 2001 referred to at [48]. As noted, in their cross-examination, Selak, Gell and Hall were questioned as to whether Tracey was present at the meeting when Selak stated the terms on which he would invest, and the investment was agreed.
Dealing with Selak first, in oral evidence in chief he said that he had conversations with Tracey, Gell and Hall in which the matter of him investing was raised. Hall first suggested that he invest in the project. Hall seemed to be doing the negotiating on behalf of Gell and Tracey. Selak suggested an investment of $15,000 for the loan and for the shares. Hall said that was not adequate and nominated instead $25,000 for the loan and for the shares. Selak agreed to invest those amounts. Selak said that he stated his terms as to the structure and that Tracey "accepted it, as did the other two". Selak further said that Gell raised the question of using EBS as a corporate vehicle in the structure, in the presence of Hall and Tracey, and that he agreed. He could not recall anybody objecting to EBS being used. In cross-examination Selak said that EBS was settled upon as the vehicle for the venture "probably around July/August 2001". That provided the "common vehicle" in which to invest. He was first approached to invest by Hall in around July/August 2001 "at one of our meetings". As to whether he could recall if Tracey was present on that occasion, he said "I believe that he was but I can't be a hundred per cent certain he was". He agreed to invest at the meeting when Hall first asked him to do so. He was not able to categorically say that Tracey was present at that meeting. He did not think that there was a subsequent meeting which just dealt with the question of his investing. The only thing that was outstanding was having the structure in place. He recalled them asking him where his money was and he advised that he would put his money in once the structure was in place.
I now refer to Gell's evidence. In oral evidence in chief Gell said that it was agreed by all, including Tracey, that EBS be used as "the vehicle going forward for the operations of all of us". He said that Selak held back his investment because he wanted to make sure the money invested was going to go into the correct structure "so that he knew he had a share of the intellectual property". In cross-examination Gell said that he could not recall the month in which the meeting was held at which Hall asked Selak to invest. He would have to consult his diary. He did not have a specific recollection of Tracey being present at the meeting. The negotiation was complete at that meeting. Selak said he would need to make sure he had an equal share in the major assets of the group. Gell was not sure if that meeting discussed how that was to be achieved. It was at or around that time. He recalled discussions taking place but he could not be sure that all parties were there at any one time and exactly when the meeting was. He did communicate to Tracey that a structure different to that in the Statement of Intent was to be adopted, but he could not give an exact date when. It was about the time that they organised to issue 25,000 shares in EBS to Hall, Tracey and himself with a view to Selak coming into the company. That was subsequent to the arrangement being made with Selak to inject capital and, "since we'd agreed on that, we then had to have the company structure correct. We'd already agreed to use [EBS] so we then had to change the shareholdings and we asked Thomas Lee to do that". It was understood that EBS would own the intellectual property, "[w]e were all discussing that". The purpose of WP was for outside investors to be able to come in and invest in a particular project "we" might develop, whereas EBS was to have the four shareholders. As to whether he had told Tracey that EBS was to hold all of the shares in IPCO rather than as set out in the Statement of Intent, he could not recall specific dates but he could recall that
"the conversations went on, that Paul was definitely party to the conversations and that the conversations occurred. The issue at stake was we wanted to get Selak in and he knew that Selak's money wasn't going to come into the company until the structure suited that purpose".
He could not point to a specific conversation where he told Tracey that EBS would own 100% of IPCO but he could "definitely say that the conversation was held at some time". He could recall conversations "amongst all of four of us when that conversation was held". Tracey was pushing for an injection of money. He recalled a breakfast meeting at his home, at which he was sure Tracey was in attendance, before IPCO was established and before Kasel advanced funds, at which it was stated that EBS would hold 100% of the shares in IPCO. It was not until "we had that agreement that we were able to give Thomas Lee the go ahead for the issue of shares and transfer of the intellectual property to IPCO and to have the structure in place". This is a sufficient reference to Gell's evidence; I do, of course, have regard to all of his evidence.
I now refer to Hall's oral evidence. Hall was not able to say when agreement was reached with Selak to invest. Everything happened between July and October 2001. There was a conversation, Tracey being present, in which Selak said he was not interested in the Statement of Intent, and in which he said the deal was
"a coming together of parties, that he would organise the finance and we could put the intellectual property in. That would enable us then to take $5,000 each to cover out of pocket expenses".
Hall believed that he and Tracey "acceded to it". He said that Selak had on various occasions said that he required an interest in the intellectual property. He said that he discussed with Tracey using EBS and they were both in favour. In cross-examination Hall agreed to a suggestion that Tracey was not present at the meeting attended by Gell at which Hall asked Selak to invest. He said that the agreement with Selak was reached in the absence of Tracey. He believed that he went home and telephoned Tracey and told him that the investment had been lifted from $15,000 to $25,000 and what had been agreed. He told him that the basis was that "we put in the IP and so that our expenses were going to be $5,000 each and he put in the money". "Those discussions occurred many times in many different ways". He went on in his evidence to say that Tracey was aware of the corporate structure that was put in place, in particular that EBS held 100% of the shares in IPCO. Although I have regard to all of Hall's evidence, this is a sufficient reference for the present.
It is seen that the oral evidence of Selak, Gell and Hall included some uncertainty as to whether Tracey was present at the meeting at which Selak agreed to invest, and as to when the meeting occurred. They referred to numerous meetings, telephone discussions and emails over the whole period of the project, and to an inability to be precise as to the actual day, place and time when a particular conversation occurred. However, what was clear, as a matter of substance, was that if Tracey was not present at the meeting at which Selak agreed to invest he was promptly informed of the agreement (including Selak's terms), and, furthermore, the fact of Selak's decision to invest (and the terms and basis thereof) was thereafter referred to in discussions and was common ground between the parties.
Of course, the cross-examination of Selak, Gell and Hall was based on Tracey's account in his affidavit. It might have seemed that the cross-examination had dented the strength of their evidence. It is necessary however, to now refer to evidence given by Tracey in cross-examination. In this oral evidence Tracey said that in about September 2002, after the Rbz meeting, he met with Gell and Hall who told him of Selak's offer. Tracey said he knew what Selak's terms were, but he agreed to accept the amounts offered on the basis that Selak would receive an interest in the trading company but not in the intellectual property. He was questioned as to when he told Selak that, and he said that he did so between 8 and 27 September 2002, "presumably at Rob Gell's House" and in the presence of Gell and Hall. That is, the four of them were present and, while together, Tracey rejected Selak's terms and stated that the investment was acceptable provided that Selak did not receive an interest in the intellectual property. According to Tracey, Gell said that Tracey's response was consistent with the Statement of Intent and that Hall concurred. Tracey said that Selak agreed with his position, that is, to invest on the basis that he not receive an interest in the intellectual property. Selak made his first payment subsequently. On this evidence, Selak did not invest on his terms, but on Tracey's terms. Hence, in summary, Tracey established by his own evidence in cross-examination that, contrary to his affidavit evidence, he was present at a meeting with Selak, Gell and Hall during which Selak stated his preparedness to invest on his own terms (being those referred to by Selak, Hall and Gell) and that Tracey rejected Selak having an interest in the intellectual property. Consequently, Selak agreed to invest, and invested, on Tracey's terms. This oral account contradicted Tracey's affidavit evidence.
Selak's offer to invest having been accepted (by Gell and Hall, if not by Tracey, as to which I find the fact below), it was necessary to establish a corporate structure that accorded with Selak's requirements. This took some time. I referred earlier to the registration of WP on 23 August 2001 and to the registration of IPCO on 12 September 2001. WP was to be the trading company, or face of the venture, for the Werribee project, while IPCO was to hold the intellectual property. Under that structure other persons interested in doing so could invest in the Werribee project by investing in WP. That left the intellectual property in IPCO.
The intellectual property was placed in IPCO by means of Breakthrough, Phyto and Edge Cliff executing individual deeds of assignment to IPCO, dated 5 October 2001, of their interest in the pending provisional patent application. Tracey said in evidence that Phyto executed the assignment under the belief that it was a one-third share holder in IPCO as agreed in the Statement of Intent. Indeed, Phyto would not have executed the assignment if he had been aware that EBS held all of the shares.
On the registration of IPCO and WP, 100 shares were issued to EBS which thus stood as a holding company. This satisfied Selak's requirement as to ownership of the assets. I have already identified the shareholders in EBS. Kasel received 25,000 $1 shares for the payment of $25,000. The other recipients of 25,000 shares did not pay for their shares. It is reasonable to say that they received their shares in consideration of the services previously provided by the three principals in establishing the venture including the assignment of the patent rights to IPCO.
The establishment of the structure took some time and Selak delayed in providing funds until he was reasonably satisfied that his requirements would be met. The structure he required was ultimately put in place. Before it was, however, he provided the capital investment of $25,000 in return for shares on or about 27 September 2001. He did not provide the loan of $25,000 until 6 December 2001. I accept Selak's evidence that he pressed for formalisation of the loan agreement. It was not until 25 November 2002 that Gell provided written confirmation of an agreement with Selak that the loan be for a term of 12 months, be interest free and unsecured, and be repaid on 6 December 2002. There is no dispute as to those being the terms of the loan.
The need of Tracey, Hall and Gell for funds was demonstrated by their immediate use of the $25,000 provided by Selak in September 2001. In late September each of Breakthrough, Phyto and Edge Cliff submitted an invoice to EBS for $5,000 for, in summary, professional services and out of pocket expenses. EBS paid the invoices. EBS also reimbursed Edge Cliff for two invoices from Griffith Hack totalling $2,849.00.
It is convenient to mention that on several subsequent occasions Tracey sought more money for himself.
(a)In March 2002 he made a request to Hall for a further $5,000 which Hall paid personally as he, Selak and Gell were reluctant to draw further funds from EBS.
(b)In or about July 2002, Tracey requested an additional payment. Out of concern for Tracey and his circumstances, Selak, Gell and Hall agreed to the request and paid an additional $5,000 to Phyto out of the funds provided by Kasel.
(c)On 26 August 2002 he sent Selak a draft business case document and an invoice for his services in regard to drafting the document. The invoice sought payment of $15,000 or an additional 2.5% shareholding in EBS such interest to be relinquished from the shareholding currently held by Selak or nominee. In a covering letter Tracey referred to his understanding, and he believed that of his colleagues, that in consideration of his 25% shareholding in EBS, Selak would not only contribute $25,000 (plus the $25,000 loan) but also make a significant physical contribution to the commercialisation of NCM projects. Tracey said that he had been performing work which was originally intended to fall within Selak's brief and that it was now time "to balance the ledger". Selak refused to make the payment. He considered the request to be so inappropriate that he offered to relinquish his shareholding and withdraw from the venture.
I mention also that in his affidavit Tracey stated that he believed that the shares in IPCO were held equally by EBS, Phyto and Edge Cliff as was provided for in the Statement of Intent. He stated that no one had suggested to him that there be any departure from that agreement. There was certainly no agreement between them that EBS should own all of the shares in IPCO. He also believed that he was the secretary of IPCO as this was the agreement in the Statement of Intent. He said that he fulfilled the role of secretary in 2001 and for much of 2002. He now knew that Hall and Gell were made directors and that Hall was made the secretary.
This evidence as to non-departure from the Statement of Intent was critical to Phyto's case. As to the office bearers in IPCO (and WP), Gell acknowledged that Tracey was never formally appointed the secretary. Secretarial services were provided by the accountant, Lee.
During 2002 the parties continued to work on the project. In February Melbourne Water Corporation granted EBS an option to purchase 20% of Melbourne's sewage. On 22 March 2002 Griffith Hack lodged a complete application for a standard patent associated with the provisional patent application. The application was lodged in the name of IPCO. Tracey stated in evidence that he believed that Phyto was a one-third shareholder in IPCO. Also in March, EBS prepared a tender with Connell Wagner to the Wyndham City Council proposing an alternative to construction of a landfill cap. In or about May 2002 the State Government called for expressions of interest in relation to a Vision for Werribee which involved remediation. EBS lodged an expression of interest. In July 2002 EBS was involved in "proof of concept" trials at Werribee.
In June and July 2002 EBS retained Anthony Jude to prepare a draft business plan and this was distributed. The plan recorded the company structure disclosed by the records of ASIC. Tracey stated that it was on reading the plan that he discovered that IPCO was wholly owned by EBS and that he was not the secretary of EBS and IPCO. He raised this when the parties next met. He told the others that it was contrary to the Statement of Intent. It was not suggested to him that he had agreed to the change or been told about it. In his evidence Gell said that Tracey's evidence as to statements at the meeting was not correct. According to Gell, Tracey had not said that he never agreed to the arrangement or that it was contrary to the Statement of Intent.
In their evidence Gell and Tracey referred to negotiations in August 2002 with Bio Resources Pty Ltd, and to an announcement by the Premier of the Werribee Plant Project and the subsequent lodging of an expression of interest.
It is apparent that over a period of time relations between Tracey on the one hand and Gell, Hall and Selak on the other hand, deteriorated. The argumentative, obsessive and delusional tendencies Tracey manifested in the course of giving evidence doubtless led to conduct on his part, in his dealings with Gell, Hall and Selak, that variously irritated, annoyed and discomforted them. In addition to their frequent meetings and telephone discussions, Tracey produced much paper which had to be scrutinised carefully to ensure an erroneous statement did not go unnoticed. I accept the following evidence of Hall in his affidavit:
"21. Throughout the course of my involvement in EBS Tracey would send me volumes of documents and lengthy emails. These emails and documents often contained embedded statements and notes which present in his written material as factual records of events or agreements. In reality, these documents were often only drafts. Often these documents contained fragments of canvassed possibilities or outlined the way Tracey wished or hoped things might conclude or illustrated a failure by Tracey to grasp key matters."
I observed Tracey to be a prickly person, argumentative and inclined to be non-responsive when he considered it served his purpose. As an example, his insistence that he had seen a share certificate dated 5 October 2000 in the name of Phyto issued by IPCO, was untrue and was corrected when he was carefully led by counsel in re-examination. The share certificate was the certificate issued by EBS to his wife and himself in about February 2002. Another example was his plainly incorrect description of the Rbz proposal as an offer. With each piece of evidence he attempted to bolster Phyto's case.
Tracey said that Gell began to exclude him from the operation of the company. He instanced a document which explained EBS's operations and which was prepared for Gell in September 2002. It referred to Gell and Hall as involved in EBS but it did not refer to Tracey. Gell explained that the document was prepared by EPS Consultants with whom EBS provided an expression of interest to the Victorian Government concerning Werribee. Gell pointed out that the project had nothing to do with remediation.
In my view, having observed Tracey, it would not be surprising if the other parties had preferred to keep Tracey in the background in their dealings with third parties. He has a volatile temperament and would not by nature have been the ideal person in the group to present the project or any submission to third parties. It was common ground that Gell's expertise was as a presenter or front man, and it was understandable that he and Hall be mentioned as they were. While I accept that Gell did not write the document in question I am satisfied on the evidence that by the latter part of 2002 Gell and Hall preferred that Tracey be in the background as they attempted to move the project forward.
Tracey referred to some other matters in this regard including an email from Gell on 9 October 2002, and stated that since that date Gell and Hall had not permitted him to participate in the operations of EBS.
In late 2002 a potential investor was located. This was Pemacel Nominees Pty Ltd. After discussions, Peter Gandolfo, the owner of Pemacel, agreed to contribute $100,000 to EBS, payable as to $50,000 for shares and as to $50,000 as an unsecured loan for a 20% equal share in EBS. Gandolfo's investment was conditional upon a due diligence and shareholder approval. Kasel's loan was to be repaid out of the $100,000. Kasel agreed not to press for repayment of its loan until after the annual general meeting when the shareholders would be asked to approve the issue of shares to Pemacel.
(g)Exhibits JSH11 and 12 to Hall's affidavit, both prepared by Tracey, are inconsistent with Tracey's case. IPCO and WP are referred to as fully owned subsidiaries of EBS.
In these circumstances, and having regard to my findings, it does not matter whether the case is regarded as an agreement to vary or discharge the Statement of Intent to the extent required to implement the Selak investment, or as a change to the understanding referred to in that document or otherwise as existed between the parties, for either way the result is the same. Tracey agreed with Gell and Hall to accept the investment offered by Selak and on Selak's terms. He clearly understood those terms and that their implementation required that Selak have an equal interest in the assets of the venture including the intellectual property. He was aware of, and concurred in, the steps taken in accordance with Selak's requirements including the transfer of the intellectual property to IPCO. Save for the continued existence of the two founders shares, which Gell had overlooked, there was equality and parity between the four venturers.
Conclusion
There will be an order adding Phyto as a respondent, and each question will be answered yes. I will hear counsel on the question of costs.
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