Erceg v United Merchandising Pty Ltd - [2010] WASC 42

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: ERCEG -v- UNITED MERCHANDISING PTY LTD [2010] WASC 42

CORAM: LE MIERE J

HEARD: 16 FEBRUARY 2010

DELIVERED : 16 FEBRUARY 2010

FILE NO/S: CIV 1208 of 2010

BETWEEN: NED ERCEG
Plaintiff
AND
UNITED MERCHANDISING PTY LTD
First Defendant
RONALD GARY MAILER
JOSEPH LEAL
MICHAEL ERCEG
Second Defendants

Catchwords:

Interlocutory injunction - Sale of a business - Serious question to be tried - Sections 232 and 233 of Corporations Act 2001 (Cth) - Estoppel

Legislation:

Corporations Act 2001 (Cth)

Result:

Interlocutory injunction declined

Category: B

Representation:

Counsel:

Plaintiff:     Mr K A Dundo
First Defendant             :     Mr P Mendelow
Second Defendants       :     Ms M G Di Martino

Solicitors:

Plaintiff:     Q Legal
First Defendant             :     Anchor Legal
Second Defendants       :     Karp Steedman Ross-Adjie

Case(s) referred to in judgment(s):

Turnbull v National Roads and Motorists Association Ltd [2004] NSWSC 577
Waltons Stores v Maher [1988] HCA 7; (1988) 164 CLR 387

LE MIERE J: The plaintiff seeks an order:
1.The Defendants be restrained and an injunction granted restraining the Defendants from, whether by:
(a)themselves;
(b)their officers or servants; or
(c)any other means,
from, other than in the course of its normal operations, selling all or part of the First Defendant's fruit and vegetable wholesale business including, but not limited to:
(d)all tangible and intangible assets held by, or for the benefit of, the First Defendant;
(e)any chose‑in‑action held by, or for the benefit of, the First Defendant in relation to its fruit and vegetable wholesale business; and
(f)the First Defendants supplier and purchaser lists and information,
without giving the Plaintiff a reasonable opportunity to purchase that part, or the whole, of the First Defendant's fruit and vegetable wholesale business on terms more favourable to the First Defendant than those offered by a potential purchaser.
The plaintiff submits that he has made out a serious question to be tried on two grounds. The first is that the court may make an order under s 233 of the Corporations Act 2001 (Cth) (the Act) because the conditions for making such an order which are set out in s 232 are satisfied or at least that there is a serious question to be tried that they have been satisfied and hence that the plaintiff may obtain final relief in the form of an order under s 233 of the Act which would restrain the first defendant from selling its business or assets to Fresh Exchange. Section 232 provides that:
The court may make an order under section 233 if
(a)the conduct of a company's affairs; or
(b)an actual or proposed act or omission by or on behalf of a company; or
(c)a resolution or a proposed resolution, of members or a class of members of a company,
is either
(d)contrary to the interests of the members as a whole; or
(e)oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members, whether in that capacity or any other capacity.
The plaintiff says that the conduct of the company and the resolution of the directors on 2 February 2010 and its act or proposed act to sell the business to Fresh Exchange is both contrary to the interests of the members as a whole and unfairly discriminatory against Mr Erceg as a member of the company.
When the application was brought it was brought as a matter of urgency to restrain a sale which it was anticipated may occur very shortly. At that time the plaintiff's case was put in essence on the base that Fresh Exchange had made an offer to purchase the first defendant's business, that the company associated with the plaintiff, Erceg Holdings Pty Ltd (Erceg Holdings), had made an offer to purchase the business, the offer made by Erceg Holdings was a superior offer to that made by Fresh Exchange, but that notwithstanding that the first defendant company had or proposed to proceed with a sale to Fresh Exchange.
The plaintiff submitted that two of the second defendants, being the first and third‑named second defendants, Mr Mailer and Mr Michael Erceg, who are directors of the first defendant company, had an interest in the sale to Fresh Exchange and would derive a benefit from the sale to Fresh Exchange proceeding.
Since the plaintiff's application for interlocutory relief was made evidence has been put on by the defendants. There is evidence that neither Mr Mailer nor Mr Michael Erceg participated in the decision made by the defendant company to negotiate a sale of its business to Fresh Exchange. Importantly, the further evidence put on by the defendants is that a further offer, an improved offer, was made by Fresh Exchange. That offer offers an improved price by Fresh Exchange to purchase the defendant company's business. The offer by Fresh Exchange was contained in a letter of 1 February 2010 to the directors of the defendant company and is annexure ME1 to the affidavit of Michael Erceg sworn 16 February 2010. In that letter Fresh Exchange stated that the offer was open for acceptance until 5.00 pm on 3 February 2010 and that acceptance of the offer would constitute a legally binding agreement. The offer further provided that after acceptance of the offer the parties would negotiate the terms of formal contracts described as long form contracts.
On 2 February 2010 the directors of the defendant company considered the offers received from Erceg Holdings and the offer of Fresh Exchange of 1 February 2010. Mr Mailer and Mr Michael Erceg did not participate in the resolution of the board. The directors resolved to pursue Fresh Exchange's offer and reject Erceg Holdings' offer for reasons which are stated in the minutes. The directors resolved that authority be given to Mr Michael Erceg and Mr Mailer to negotiate with Fresh Exchange exclusively in the best interests of the company until 21 February 2010 or such later date as the directors consider prudent.
On 3 February 2010 the defendant company, through Mr Mailer, wrote to Fresh Exchange stating that the defendant company intends to pursue the transaction proposed by Fresh Exchange on the terms and conditions set out in their offer. The defendant company further stated that it did not wish to be legally bound pending the negotiation of the formal transaction documents. The letter stated that the defendant company had resolved and, quote:
… hereby undertake to undertake to deal exclusively with FreshExchange in respect of the sale of the Fresh Fruit Traders business until 21 February 2010, being the anticipated acquisition date specified under your revised Letter of Offer.
In the course of the hearing this morning counsel for the plaintiff stated that the plaintiff, through Erceg Holdings, offered to purchase the defendant company's business on essentially the same terms as previously but with a cash consideration of $20,000 more than that offered by Fresh Exchange. I must deal with the position as it presently is.
The position that was considered by the defendant company and its directors was that which existed on 2 February 2010. At that time there were two offers before the company. It cannot be concluded that the offer made by Erceg Holdings was clearly or necessarily superior to that made by Fresh Exchange. Indeed, on the face of it, the offer made by Fresh Exchange offered a greater consideration than that made by Erceg Holdings, albeit only by a small margin.
The offer made by Fresh Exchange was expressed to be open only until 3 February 2010. The action taken by the defendant company through its directors was not to accept the Fresh Exchange offer but to negotiate exclusively with that company until 21 February 2010. The defendant company has not legally bound itself to accept the offer made by Fresh Exchange. It has undertaken only that it will exclusively negotiate with Fresh Exchange until 21 February 2010.
The first question then is whether, in doing so, the defendant company acted in a way that was contrary to the interests of the members as a whole, or at least is there a serious question to be tried that it did so. I do not find that there is a serious question to be tried on that issue. The offer made by Fresh Exchange, on the face of it, is superior to, or at least not inferior to or obviously so, the offer made by Erceg Holdings.
The action to be taken by the company on 1 February 2010 when faced with what the directors then considered to be the superior offer, that of Fresh Exchange, which was only open to be accepted until 3 February 2010, was a matter for the commercial judgment of the directors. I am unable to conclude that in making the commercial judgment that they should exclusively negotiate with Fresh Exchange until 21 February 2010, the company acted in a way that was contrary to the interests of the members as a whole.
The second issue is whether in doing so the company acted in a way that was unfairly discriminatory against Mr Erceg, or at least whether there is a serious question to be tried that it did so. I find that there is not a serious question to be tried on that issue. As of 1 February 2010 the offer which had been made by Erceg Holdings through Mr Erceg was not clearly superior to or equal to the offer made by Fresh Exchange. In those circumstances, to make the commercial judgment to exclusively deal with Fresh Exchange until 21 February 2010 was not unfairly discriminatory against Mr Erceg. As I have said, the company has not legally bound itself to sell the business to Fresh Exchange. Mr Erceg, through his counsel, has stated that he makes a further offer to purchase the business, an offer which it is said is superior to that made by Fresh Exchange. It remains for the company to deal with that position. It is premature for me to consider what, if anything, might be the consequence of the defendant company proceeding with a sale to Fresh Exchange in the light of the statement that has been made on behalf of Mr Erceg.
The second basis upon which it is said there is a serious question to be tried is that of an estoppel. The matter is summarised in [4] of the plaintiff's submissions in this way:
… the Plaintiff has a reasonable prospect of succeeding in an estoppel action where he has stated to the first-named Defendant on many occasions that he wished to buy the Business, or at least take a greater shareholding in the First Defendant. The first named Defendant has not responded to the Plaintiff in terms that excluded that possibility. The Plaintiff, believing that such a proposal was open, has not looked at other options to acquire a business of the same kind as the Business.
In the course of submissions counsel for the plaintiff has referred me to the decision of the High Court in Waltons Stores v Maher [1988] HCA 7; (1988) 164 CLR 387. In that case Brennan J summarised the oft‑repeated criteria necessary to be established to make out an estoppel. It is summarised in the head note in this way:
To establish an equitable estoppel it is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal relationship then existed between him and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the defendant induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the defendant's action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid the detriment whether by fulfilling the assumption or expectation or otherwise. For the purposes of the second element, a defendant who has not actively induced the plaintiff to adopt an assumption or expectation will be held to have done so if the assumption or expectation can be fulfilled only by a transfer of the defendant's property, a diminution of his rights or an increase in his obligations and, knowing that the plaintiff's reliance on the assumption or expectation may cause detriment to the plaintiff if it is not fulfilled, he fails to deny the plaintiff the correctness of the assumption or expectation on which the plaintiff is conducting his affairs.
In my view neither the first nor second element summarised by Brennan J have been made out on the evidence presently before the court. The evidence from the plaintiff is to the effect that he has, on numerous occasions, informed the defendants or some of them that he wished to purchase shares in the defendant company or the business of the defendant company. The plaintiff relies upon an affidavit sworn by him on 12 February 2010. In [11] of that affidavit he says:
On or about 16 January 2010, I told the third‑named Second Defendant that I wanted to acquire the business and it was my understanding that the shareholders would have an opportunity to do so if other shareholders wanted to exit the company, as is now the case. Since 18 January 2010, I have sought on numerous occasions to contact the third-named Second Defendant to discuss the matter but have been unsuccessful in doing so.
The first observation I make is that in its terms what the plaintiff says was his understanding is that the shareholders were to have an opportunity to, it would appear, acquire the business if other shareholders wanted to exit the company. Precisely what the legal relationship which the plaintiff assumed existed between the plaintiff and the defendants is not clear. The second defendant has a number of shareholders. It is not in terms put by the plaintiff that he assumed that the defendant company would, in effect, give him a first right of refusal to purchase the business or that if the first defendant desired to or considered selling the business, it would give to the plaintiff the first opportunity to do so or that it would negotiate with the plaintiff the sale of the business.
In any event, there is no evidence to make out the second required element summarised by Brennan J; that is, there is no evidence that the defendants or any of them induced the plaintiff to adopt the assumption or expectation to which the plaintiff refers. At most the evidence currently before me is to the effect that the plaintiff informed the defendants or some of them on many occasions that he wished to acquire shares in the company or the business of the company and the defendants or some of them made no response.
There may be circumstances in which the conduct of a defendant might induce an assumption but merely to not respond to a statement that the plaintiff wished to purchase the business or shares in it in the circumstances of this case cannot give rise to the assumption or expectation referred to. It is not necessary to go through all of the elements referred to by Brennan J. In this case there is no serious question to be tried on the evidence as it presently stands that the defendants or any of them are estopped from negotiating to sell the business to Fresh Exchange.
If, contrary to my findings, there is a serious question to be tried that the plaintiff is entitled to relief under s 233 of the Act, the question would arise whether the court should exercise its discretion to grant an interlocutory injunction to restrain the defendant company from selling the business or continuing to negotiate the sale of the business to Fresh Exchange. In Turnbull v National Roads and Motorists Association Ltd [2004] NSWSC 577 Campbell J expressed the view that the court should be reluctant to exercise the power conferred upon it by s 233 of the Act. Campbell J said at [51]:
The power of the court to make an order under ss 232 and 233 Corporations Act 2001 (Cth), on the ground that something prescribed by the Corporations Act 2001 (Cth) is contrary to the interests of the members as a whole, is a power which must be exercised with the greatest of care. The court is extremely reluctant to interfere, in advance, with the ordinary processes of company democracy. It is a well‑established rule of thumb that a court will, only in the rarest of circumstances, injunct the holding of a company meeting. Questions of what is, or is not, in the interests of the members as a whole are often best left to be decided by the officers, organs and procedures of the company itself, or by the court deciding, after events have happened, whether those events fall short of a legally required standard of conduct by virtue of them not having occurred in the interests of the members as a whole. If the court is asked to make an order under s 233 on the ground that some proposed course of conduct is contrary to the interest of the members as whole there will frequently be factual difficulties in demonstrating with sufficient certainty that that course of conduct is indeed contrary to the interests of the members as a whole. All these matters combine to show that it is likely to be only in a very rare case that a Court will decide to order that a company meeting validly requisitioned need not be held, or that a resolution validly proposed need not be put to a meeting.
In the circumstances of this case, even if I was satisfied that the plaintiff had made out a serious question to be tried that he was entitled to relief under s 233 of the Act, I would not exercise the power to injunct the defendant company from pursuing its negotiations with Fresh Exchange. As I have said, the defendant company is not at this time legally bound to sell the business to Fresh Exchange. It is, as a consequence of the exercise of a commercial judgment by the directors, negotiating with Fresh Exchange the sale of the business.
If new circumstances arise in the form of a further offer from Erceg Holding then that is a matter which will have to be considered by the defendant company and its directors as that arises. It is premature to consider what the defendant company or its directors might do in response and what action should flow from that. In all the circumstances I decline to grant the interlocutory injunction sought.