Ezishop.Net Ltd (In Liq) v Veremu Pty Ltd
[2003] NSWSC 156
•18 March 2003
Reported Decision:
(2003) 45 ACSR 199
Supreme Court
CITATION: Ezishop.Net Ltd (In Liq) & Anor v Veremu Pty Ltd & Ors [2003] NSWSC 156 HEARING DATE(S): 18/02/03 - 21/02/03, 27/02/03 JUDGMENT DATE:
18 March 2003JURISDICTION:
Equity Division
Commercial ListJUDGMENT OF: Nicholas J DECISION: Judgment for First Plaintiff; Cross Claim by Second, Third and Fourth Defendants be dismissed; Defendants pay Plaintiffs' costs of these proceedings (including costs of cross claim) such costs assessed on; (a) party and party basis up to and including 24/08/02; and (b) on an indemnity basis from and including 25/04/02 CATCHWORDS: CORPORATIONS - CONTRACT - SHARES - Effect of insolvency upon agreement to subscribe for shares - Effect of insolvency upon rights of shareholders - Effect of liquidation upon agreement to subscribe for shares - Effect of liquidation upon rights of shareholders - Whether breach of -Whether repudiation - Whether frustration - HELD: No defence to claim established on evidence - Debt due payable under Agreement LEGISLATION CITED: Corporations Act 2001 (Cth) s 437A(1)(d), s 474, s 477(1)(a), s 477(2)(d), s 483(4), s 506(1)(b), s 568(1)(f) CASES CITED: Baltic Shipping Co v Dillon (1993) 176 CLR 344
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143
Chapman v Shepherd (1866-67) LR 2 CP 228
Codelfa Construction Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337
Coles v Bristowe (1868) LR 6 Eq 149 - ChD 02/05/1868
Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696
Nicholl v Carey (1895) 11 TLR 526
Re JN 2 Ltd [1977] 3 All ER 1104
Roxborough v Rothmans of Pall Mall (2001) 76 ALJR 203
Sullivan v Henderson [1973] 1 All ER 48PARTIES :
Ezishop.Net Ltd (In Liq) - First Plaintiff
Anthony Milton Sims - Second Plaintiff
Scott Darren Pascoe - Third Plaintiff
Veremu Pty Ltd - First Defendant
CBM Mining Pty Ltd - Second Defendant
Galnom (No 1) Pty Ltd - Third Defendant
Jam Family Investments Pty Ltd - Fourth Defendant
Michael Gidman Hand - Fifth Defendant
Charles Brian Marheine - Sixth Defendant
Tim Efkarpidis - Seventh Defendant
Malcolm Donald Coleman - Eighth Defendant
CBM Mining Pty Ltd - First Cross Claimant
Galnom (No 1) Pty Ltd - Second Cross Claimant
Jam Family Investments Pty Ltd - Third Cross Claimant
Ezishop.Net Ltd (In Liq) - Cross DefendantFILE NUMBER(S): SC 50175/01 COUNSEL: B A Coles QC/R K Newton - Plaintiffs
R J Powell - Defendants and Cross ClaimantsSOLICITORS: Purcell Insolvency Lawyers - Plaintiffs
Bowring Stone Lawyers - First Defendant, Second Defendant/First Cross Claimant, Third Defendant/Second Cross Claimant, Fourth Defendant/Third Cross Claimant, Fifth Defendant, Sixth Defendant, Seventh Defendant, Eighth Defendant
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LISTNICHOLAS J
18 March 2003
050175/01 Ezishop.Net Ltd (In Liq) & Anor v Veremu Pty Ltd & Ors
JUDGMENT
Ezishop
1 HIS HONOUR: These proceedings arise out of an agreement between Ezishop.Net Ltd (the Company), the First Plaintiff, and other parties including the Defendants which is contained in the document headed Share Subscription Agreement made on 29 August 2000 (the Agreement). The Second and Third Plaintiffs are the liquidators of the Company, having been appointed pursuant to a resolution of its creditors on 1 November 2000 that the Company be wound up.
2 By the Agreement the Defendants Veremu Pty Ltd, CBM Mining Pty Ltd, Galnom (No. 1) Pty Ltd and Jam Family Investments Pty Ltd (the Subscribers) agreed to subscribe for shares in the Company. CBM Mining Pty Ltd is a company associated with the Sixth Defendant, Charles Brian Marheine. Galnom (No. 1) Pty Ltd is a company associated with Tim Efkarpidis, the Seventh Defendant. Veremu Pty Ltd is a company associated with Michael Gidman Hand, the Fifth Defendant. Jam Family Investments Pty Ltd is a company associated with Malcolm Donald Coleman, the Eighth Defendant. By the Agreement the Fifth to Eighth Defendants (the Guarantors) guaranteed the obligations of the Subscriber with which he was associated.
3 The Plaintiffs for whom appeared Mr B A Coles, QC and Mr R K Newton, seek to recover from the Subscribers as liquidated debts or as damages amounts alleged to be payable by each of them under the Agreement, and performance of the Guarantors of their obligations under the Agreement. In their Defence as pleaded the Defendants denied the claims on a number of grounds which raised issues as to whether the Defendants were induced to enter into the Agreement by misrepresentations of the Company, whether the Agreement was conditional upon all parties subscribing for the shares, whether the Agreement was repudiated by the Company, and whether the Agreement was frustrated by the insolvency and liquidation of the Company. There was also filed a Cross Claim by which the three Cross Claimants (being the Second, Third and Fourth Defendants) sought to recover from the Cross Defendant (the Company) the sum paid to it by each of the Cross Claimants as a consequence of the alleged misrepresentation of its financial position, in reliance upon which they entered into the Agreement and made payments pursuant to it.
4 However, during the hearing on 27 February 2003, Mr R J Powell, counsel for the Defendants and Cross Claimants, informed the court that the issues involving the alleged misrepresentations were no longer pressed and accordingly the matters contained in paragraphs C13 to 16 inclusive of the Defence, and the Cross Claim, were abandoned.
Background
5 In order to understand the context in which the Agreement was made it is desirable to recount some background.
6 The Company was incorporated as a proprietary company on 28 September 1998 and its status was changed to a public company on 12 May 2000. Mr John Scutt was a founding director and remained a director, and chief executive officer, until the appointment of the Second and Third Plaintiffs as administrators on 5 October 2000.
7 The Company commenced trading in February 1999. It sought to target opportunities through the convergence of television and the internet to develop cross-promotional strategies for electronic retailing in Australia. Its core business activities included producing television and radio (“infotainment” and “infomercial”) programs offering merchandise and services to consumers. It also operated what was described in the Administrator’s Report to Creditors as a “linked interactive internet portal offering traditional department store retailing for branded goods and services”.
8 During 1998, 1999 and 2000 shares were subscribed by, and issued to, a number of persons including the Subscribers. For the purpose of these proceedings it is not necessary to refer in any detail to the amounts of capital subscribed by shareholders from time to time, or to the dates upon which shares were issued to them. Suffice to observe that the Company, having commenced a new business venture (sometimes described as a “start up company”), was dependent upon ongoing capital investment by shareholders to fund the business to the point at which it would reach a break even trading position. From time to time the need for further capital arose to meet its trading losses and to fund its ongoing operations. Additional capital was sought in the form of both equity and debt at various times from both existing shareholders and other private investors. A proposal for funding included an initial public offering.
9 By about April 2000 the task of raising further capital, and of undertaking an initial public offering, became more difficult as a consequence of a severe downturn in the market for technology stocks.
10 By June 2000 the situation as to the raising of capital had become critical. The proposed initial public offering was delayed and was thought unlikely to occur for several months. The Company was incurring trading losses of about $180,000 per month and it was apparent to the Board that unless further capital was raised from shareholders it would be unable to continue trading and pay its debts. This unhappy situation did not improve, and by August the Company was in such serious financial difficulty that it would become insolvent unless further capital was raised. Board members and shareholders including the Defendants were informed from time to time of these matters.
11 During August 2000 Mr Scutt set out to raise funds from existing shareholders to enable payment of creditors so that the Company could carry on business. On 16 August 2000 a meeting was held of the Board and shareholders, including the Sixth and Eighth Defendants, with the Seventh Defendant participating by telephone. The main business of the meeting was to discuss a proposal for self-help capital raising from current shareholders. There was discussion as to the amount of cash required to enable the Company to continue trading and it was agreed to proceed to raise $2,000,000 from the shareholders. The Fourth Defendant and the Second Defendants subscribed and paid the sum of $125,000 and $5,000 respectively in advance for shares in accordance with the proposal discussed.
12 Subsequently, the Company’s solicitors were instructed to prepare a draft of the Agreement, a copy of which was distributed to the intended parties for consideration. The First, Second, Third, Fifth, Sixth and Seventh Defendants were advised by their respective solicitors in respect of the Agreement.
13 On 24 August 2000 the Company’s television infomercial booking on the Ten Network for the remainder of August and September 2000 was cancelled on the basis of an unfavourable credit report, and following some difficulty in meeting the payment requirements of its advertising agency. As it relied upon television infomercials for most of its revenue this event had a significant detrimental affect on the immediate trading position of the Company. The Defendants were advised of this situation the same day by e-mail from Mr Scutt in which, inter alia, he expressed disappointment that the Agreement had not been signed by all the parties. However, whether or not in response to this message, all parties had signed the Agreement by 29 August 2000, the date it bears.
14 Relevant provisions of the Agreement are considered later. At this point it is convenient merely to note that under it each Subscriber agreed to subscribe in accordance with Annexure 2. This Annexure is annexed to this judgment and from it the funding program agreed upon is apparent. It required the provision of funds to the Company between 31 August 2000 and 30 April 2001.
15 On 31 August 2000 there was a Board meeting during which it was proposed that the parties to the Agreement be requested to accelerate an amount of $300,000 due under the Agreement in 2001 to meet the working capital deficiencies of the Company. The Third Defendant made the payment of $50,000 required to be made on or by that date under the Agreement. During September the proposal was discussed on a number of occasions with the Subscribers but attempts to persuade them to agree to it were unsuccessful.
16 Board meetings were held on 3 and 5 October 2000 during which the Subscribers advised they were not willing to either accelerate payment of the amount of $300,000 or pay the amount of $125,000 due on 30 September 2000 under the Agreement. As already noted, and it was common ground, the only payments made for shares under the Agreement were by the Second Defendant of $50,000, the Third Defendant of $50,000 and the Fourth Defendant of $125,000.
17 At the meeting of 5 October 2000 the Board determined that the Company was insolvent, and resolved that it be placed in voluntary administration and that the Second and Third Plaintiffs be appointed administrators.
18 By letters of 10 October 2000 to each of the First, Second and Fifth Defendants, demand was made for payment of the amount said to be due and payable under the Agreement as at 30 September 2000. These demands were rejected, and liability denied. The Subscribers have made no payments since 31 August 2000.
19 A meeting of creditors was held on 1 November 2000 at which it was resolved that the Company be wound up.
20 In their Summons the Plaintiffs contend:The claim
“C10 The first to fourth defendants failed to make the payments required to be made by them pursuant to clauses 2.1 and 3.1 of the Agreement respectively. In consequence thereof the first to fourth defendants became liable on the days immediately following the said due dates for the debts set out opposite thereto respectively in the particulars below.
Date due Defendant
of Debt30 September 2000 First 30 September 2000 Second 31 October 2000 Second 31 October 2000 First 31 October 2000 Third 30 November 2000 Second 31 December 2000 First 31 January 2001 First 31 January 2001 Fourth 31 January 2001 Third 28 February 2001 Fourth 28 February 2001 Second 28 February 2001 Third 31 March 2001 Fourth 31 March 2001 Second 31 March 2001 Third 30 April 2001 Fourth 30 April 2001 Second 30 April 2001 Third
C11. The first plaintiff has demanded payment of the several debts of the first to fourth defendants referred to in paragraph 10 hereof but the first to fourth defendants have refused to make payment of same. The said debts remain due and payable to the first plaintiff”.
22 In his affidavit sworn 21 January 2003 the Second Plaintiff said:21 The Defendants admit that none of the monies claimed by the Plaintiffs have been paid.
“2. At all times up to each of the due dates for performance specified on paragraph 10 of the summons filed herein, and at the present time, the first plaintiff was and is ready willing and able to issue and allot, and the third plaintiff and I have been and are ready willing and able to cause the first plaintiff to issue and allot, to the first to fourth defendants:
2.1 shares pursuant to clause 2.3 of the share subscription agreement dated 29 August 2000; and
2.2 options pursuant to clauses 2.4 and 3.4 of the said share subscription agreement”.
23 The Recitals include:The Agreement
24 Clause 1 contains the following definitions:
“A: The Subscribers and Lenders have collectively committed to provide funding of $2,000,000 to the Company, on the terms and conditions set out in this Agreement. All shareholders of the Company were given the opportunity to participate in providing this funding, but shareholders other than the Subscribers and Lenders declined to do so.
B: Each Subscriber agrees to subscribe for the relevant Shares set out in Annexure 2 by the dates specified in Annexure 2 and the Company agrees to issue to each Subscriber, the relevant Shares set out in Annexure 2, and to issue Options, on the terms and conditions set out in this Agreement”.
25 Clause 2 is headed “Subscription for and issue of Shares and Loans”. Thereunder are:
“ ”Funding Amount” means a total of $1,037,500 to be provided to the Company by each of the Subscribers and Lenders, as set out in Annexure 2, and for the following amounts:
Subscribers/Lenders CBM Mining Pty Limited Jam Family Investments Pty Ltd Galnom (No 1) Pty Ltd as trustee of the Efkarpidis Superannuation Fund The Lindfield Partners Pty Ltd Samcor Nominees Pty Ltd (or nominee) Michael Hand Ian Pryde Ken Tweedale Paul Collis
“Shares” means ordinary fully paid shares in the capital of the company;
“Subscription Date” means the date that each Subscriber must pay the total Consideration of the Company for the issue and allotment of the Shares, as set out in Annexure 2; and
“Total Consideration” means the consideration that each Subscriber must pay for their Shares as set out in Annexure 2”.
26 Clause 4 contains provisions relevant to the contemplated initial public offering. Clause 4.1 is as follows:
“2.1 Subscription for Shares
Subject to clause 3, the Subscribers each agree to file with the Company a duly executed Application for Shares for the number of Shares set out in Annexure 2 by or on each applicable Subscription Date and to subscribe the Total Consideration by bank cheque for the Shares by or on that date. The Company acknowledges that CBM Mining Pty Ltd and Jam Family Investments Pty Ltd have already subscribed for total of 17,500 Shares as noted in Schedule 2.
…
2.3 Issue of Shares
In consideration for each Subscriber agreeing to pay the Total Consideration to the Company, the Company will allot and issue to each Subscriber the Shares on the Subscription Dates, and free of Security Interests and credited as fully paid, which Shares will rank equally with and have the same rights (including entitlement to dividends and distribution) as the Company’s other issued fully paid “A” and “B” ordinary shares from their date of issue.
…
2.5 Subscriber bound
Each Subscriber agrees to be bound by the Company’s Constitution upon allotment of Shares to that Subscriber.
2.6 Entry in register
The Company must register each Subscriber as the holder of the relevant Shares in its register of members immediately upon the issues of the Shares to it under clause 2.3.
2.7 Debt due to the Company on default by Subscriber or Lender
Subject to clause 3, each Subscriber and Lender agrees that they are legally bound to subscribe for the Shares and make Loans as set out in Annexure 2, and that if they fail to comply with these obligations, the amount that they should have subscribed or lent will be a debt due to the Company and immediately recoverable as such, notwithstanding that an Application has not been lodged and/or that Shares and/or Options have not been issued in respect of the amounts that should have been subscribed or lent as set out in Annexure 2”.
27 Clause 8 is the guarantee in the following terms:
“The parties in Annexure 2 acknowledge that it is proposed that the Company will make an initial public offering, which is currently intended to raise about $3 million, with the ain of listing the company on the ASX in November 2000 and by no later than 30 June 2001. The Subscribers and Lenders acknowledge that they will continue to be obliged to provide the Funding Amount and, subject to clause 3, the Further Funding Amount even if the listing of the Company on the ASX is delayed or ultimately does not proceed”.
28 Clause 9 contains general provisions of which the following are relevant:
“8 Guarantee
In consideration of the Company entering into this Agreement, each Guarantor severally guarantees the due and punctual performance of all the obligations under this Agreement of the Subscriber or Lender listed against his name below:
Guarantor Subscriber/Lender Brian Marheine CBM Mining Pty Limited Malcolm Coleman Jam Family Investments Pty Ltd Tim Efkarpidis Galnom (No 1) Pty Ltd as trustee of the Efkarpidis Superannuation Fund John Scutt The Lindfield Partners Pty Ltd Larry Smith Samcor Nominees Pty Ltd (or nominee)”
“9.1 Entire agreement
This Agreement is the entire agreement of the parties about the subject matter of this Agreement and supersedes all other representations, negotiations, arrangements, understandings or agreements and all other communications. The Subscribers, Lenders and Guarantors have carried out their own due diligence on the Company and no party has entered into this Agreement relying on any representations made by or on behalf of the other, other than those expressly made in this Agreement.
9.2 Further assurances
Each party must, at its own expense, whenever reasonably requested by the other party, promptly do or arrange for others to do, everything reasonably necessary to give full effect to this Agreement”.
29 Annexure 1 is the Form of Application for Shares to be executed by the Subscriber pursuant to clause 2.1 and lodged with the Company.
The Plaintiffs’ submissions
30 The Plaintiffs say they are ready, willing and able to issue and allot shares to the Subscribers and perform the Agreement for their part.
31 The power of the Second and Third Plaintiffs acting as either administrators or liquidators to allot and issues shares was not really in issue. Although the Defendants did not concede power, it was not argued there was any lack of power to do so. The Plaintiffs’ submission that there is nothing in the Corporations Act 2001 (Cth) which operates to prevent the liquidators from attending to the allotment and issuing of shares pursuant to clause 2.3 and registering each Subscriber in the register of members pursuant to clause 2.6 is clearly correct.
32 That they may do so seems clear from at least s 506(1)(b) Corporations Act which empowers a liquidator to exercise any of the powers conferred by the Act on a liquidator in a winding up in insolvency or by the Court. Those powers are to be found in s 477. Of present relevance are those under subs (1)(a) which enables them to carry on the business of the company so far as is necessary for the beneficial disposal or winding up of that business, and subs (2)(d) which enables a liquidator to do all acts and execute in the name and on behalf of the company deeds, receipts and other documents and for that purpose use when necessary a seal of the company.
33 The Plaintiffs’ further submitted, correctly in my view, that the contractual rights of a company, including rights to enforce a subscription agreement which remain after winding up are choses in action which are part of the property of the company within the control of a liquidator under s 474. Section 483(4) makes provision for the recovery by a liquidator of monies due to a company. For completeness, reference should be made to s 437A(1)(d) which enables an administrator to perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the Company were not under administration, which plainly would allow for the allotment and issuing of shares in the Company, and the registration of shareholders.
34 The Plaintiffs maintain that the Agreement is enforceable notwithstanding the voluntary administration and subsequent winding up of the Company. Their claim is simply put. Under clause 2.1 of the Agreement each Subscriber agreed to apply for the number of shares set out in Annexure 2 by or on each applicable Subscription Date, and to subscribe the total consideration by bank cheque for the shares by or on that date. By clause 2.7 it was agreed that the consequence of failure to comply with those obligations was that the amount which should have been subscribed or lent became a debt due to the Company and immediately recoverable as such, notwithstanding that an application had not been lodged and/or that shares and/or options had not been issued in accordance with Annexure 2.
The Defendants’ submissions35 Thus, the Plaintiffs sue to recover debts due and payable under the Agreement, alternatively damages consequential upon the repudiatory breach by the Subscribers being their failure to make the payments under it.
An implied condition
36 It was pleaded as a defence that the obligation of the Subscribers to subscribe for shares was conditional upon all the Subscribers to the Agreement subscribing for shares on the dates provided for in it. A submission to that effect was maintained in reliance upon evidence of correspondence and statements said to show that the Agreement was signed by the Subscribers and Guarantors on an understanding to that effect.
37 It may be accepted that the individual parties entered into the Agreement on the understanding that the other parties would apply and pay for shares on the dates each was required to do so. However, this is to say no more than each understood that each other would honour the Agreement. The evidence did not go beyond that. There was simply no evidence to support a finding that it was the understanding of any party that in the event that another failed to make a payment on the prescribed date his liability, and the liability of all the others, would be discharged. In the circumstances it seems to me unnecessary to deal with each item of evidence relied upon in support of the submission because considered as a whole it falls short of establishing that there was in fact a common intention or understanding between all the parties to the Agreement to the effect alleged.
38 In any event, the proper and common sense construction of the Agreement makes plain that the liability of each Subscriber is several, and is unqualified by performance, or non-performance, by other Subscribers. This conclusion is supported by reference to for example, ”each Subscriber” in Recital B, the definitions of “Funding Amount”, “Subscription Date” and “Total Consideration”, and the terms of each of clauses 2.3 and 2.7. The provisions of clause 2.1 when read with Annexure 2 demonstrates the distinct obligation of each Subscriber to apply and pay for, by or on the applicable date, the number of shares referable to it. Consistently, the guarantee provision in clause 8 provides that “…. each Guarantor severally guarantees the due and punctual performance of all the obligations under this Agreement of the Subscriber or Lender listed against his name below” and thereafter is listed each Guarantor and the Subscriber/Lender the obligations of which he guarantees.
39 No submission was made to the effect that any evidence established a basis for reading into the Agreement the alleged condition in the face of clause 9.1, the entire Agreement clause. Absent evidence to support a different view, in my opinion clause 9.1 precludes argument that the parties intended that contractual effect should be given to an intention or understanding not stipulated in the Agreement. Furthermore, it was not submitted that the evidence relied upon established any of the conditions necessary to ground the implication of a term, being those summarised in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 and referred to in Codelfa Construction Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337 at 347.
40 The above considerations lead inevitably to the conclusion that this ground of defence must fail.
Repudiation
41 The Defendants also plead that the Company was unable to perform the Agreement due to its insolvency and liquidation and thus repudiated the Agreement.
42 It is submitted that the Company was insolvent on or by 27 September 2000. So far as I understand it, the argument is that the Agreement having been repudiated as a result of the Company’s insolvency, the liability of each relevant Subscriber to pay amounts due on 30 September 2002 was discharged as the Company was either unable or unwilling to perform its obligations under it.
43 On behalf of the Plaintiffs it is submitted that even if the Company was insolvent prior to 30 September 2000 that did not constitute a repudiation of the Agreement by it, nor did its winding up, and that there could be no breach or repudiation by it whilst the evidence established that it remained at all times ready willing and able to allot shares upon receiving the required subscription monies.
44 I have already come to the view that the Plaintiffs, as a matter of law, are able to perform the Agreement. As a matter of fact, the unchallenged evidence of the Second Plaintiff (para 22 above) shows that the Second and Third Plaintiffs are ready, willing and able to perform it.
46 It is thus necessary to consider the evidence relied upon. It will be remembered that on 31 August and during September 2000 consideration was given to the proposal that the Subscribers accelerate an amount of $300,000 due in 2001 to meet the Company’s capital deficiencies but all the Subscribers would not agree. The circumstances of the sending and return of Mr Hand’s cheque for $25,000 are described in his statement thus:45 However the Defendants submit that the recognition by the directors on 26 September 2000 that the Company was insolvent led to the repudiation of the Agreement when it demonstrated either inability or unwillingness to perform its obligations. This is said to be evidenced by the return by the Company of Mr Hand’s cheque for $25,000 which Mr Hand had given on or prior to 28 September 2000.
“23. …However on 27 September 2000 Larry Smith telephoned me and said:
“ Unless $300,000 can be found immediately Ezishop won’t be able to go on. Some of the other subscribers have agreed to bring forward their payments under the Share Subscription Agreement. Can you bring forward your $25,000 from next January to now ?”
I said: “ I would find it difficult. I might be able to pay some of the amounts a bit earlier but it would depend on cash flow. If it helps to get agreement from the others to bring their payments forward I could give you the September 30 payment now ”.
Larry Smith said: “Great” and I wrote a cheque for $25,000 payable to Ezishop and sent it to Larry Smith.
24. Late in September 2000 Larry Smith telephoned me and said:
“ I’ve been to Ezishop Board meetings and we couldn’t reach agreement on everyone bringing their payments forward. I didn’t take your cheque out of my pocket because without agreement the company is insolvent ”.
25. Sometime after Ezishop went into administration Larry Smith handed me the cheque and I tore it up”.
47 By letters from its solicitors to the Company of 22 September and 27 September 2000 CBM Mining Pty Ltd advised that it did not agree to accelerate subscriptions under the Agreement. At the Board meeting held on 28 September 2000 it was proposed that an attempt be made to persuade Mr Marheine to reconsider. If he did not agree a decision would have to be made as to the appointment of a voluntary administrator.
48 At its meeting on 26 September 2002 the Board proposed to proceed to place the Company in voluntary administration unless all shareholders agreed to accelerate a total contribution of $300,000.
49 The evidence establishes that by 26 September 2000 the Board realised that unless it received from shareholders funds to the amount of $300,000 the Company would be unable to pay its creditors and continue trading. It also realised that the funds would not be forthcoming unless all shareholders agreed to contribute. In these circumstances, it is argued that the Board would have realised that the Company was insolvent when it received confirmation on 27 September 2000 that CMB Mining Pty Ltd refused to contribute.
50 The evidence concerning Mr Hand’s cheque does no more than show that he handed the cheque for $25,000 to a director, Mr Larry Smith, on 27 September 2000 payment thereby being conditional upon the other Subscribers agreeing to bring their payments forward. The condition was not fulfilled. The cheque was not presented. Mr Smith returned the cheque to Mr Hand sometime after the Company went into administration.
51 As is apparent, this evidence does not establish that the Company had engaged in conduct which manifested an unwillingness or inability to perform the Agreement, and hence the Defendants’ entitlement to terminate. The proper conclusion is that there was, and has been, no repudiation by the Company of the Agreement either on or about 27 September 2002 or at any time thereafter. This ground of defence is not made out.
Frustration
52 The Defendants pleaded that it was an implied term of the Agreement that the shares for subscription would be shares in a solvent company and that, by reason of its insolvency, the Company was unable to fulfil that condition. It was further pleaded that upon being put into liquidation by the appointment of the liquidators on 1 November 2000, the Company was unable to issue any shares to the Subscribers. It was then pleaded that, accordingly, the Agreement was frustrated by the insolvency and/or the liquidation of the Company.
53 The Defendants submitted that there were three frustrating events being separate occasions on which the Company was insolvent. The first occurred on 27 September 2000 when, so it was said, the directors recognised that as a consequence of the Subscribers’ refusal to agree to accelerate funding of the amount of $300,000 the Company was insolvent and should be placed in administration. The second was the appointment of the administrators on 5 October 2000, and the third was the appointment of the liquidators on 1 November 2000.
55 Nevertheless, the issue raised should be dealt with. It now seems that the notion of the implied term as the basis of the doctrine of frustration has been rejected. In Codelfa Construction at 376 Aickin J observed:54 Although the defence as pleaded based frustration upon an implied term that the Company remained solvent, the thrust of the submissions seemed to be directed towards the change in circumstances by reason of its insolvency, and the effect thereof upon the obligations of the parties under the Agreement.
56 His Honour quoted the following passage from the speech of Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 728-729:
“The manner in which the doctrine of frustration is generally expressed has undergone some change, though it has not been suggested that its content has changed. When it was first developed it was usual to express it as arising from an implied term: see, for example, F A Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd , per Lord Loreburn, Scanlan’s New Neon Ltd v Tooheys Ltd , where Lathan CJ adopted this view, but the other two members of the Court adopted a view much closer to that now prevailing. See also British Movietonews Ltd v London and District Cinemas Ltd . The doctrine is now generally expressed as depending on changes in the significance of the obligations undertaken and the surrounding circumstances in which the contact was made. This development was explained by the House of Lords in Davis Contractors Ltd v Fareham Urban District Council ; see especially per Lord Reid, and per Lord Radcliffe”. (footnotes omitted)
57 The passage in Lord Reid’s speech to which His Honour referred in Davis Contractors Ltd at 720 included the following:
“Lord Loreburn ascribes the dissolution to an implied term of the contract that was actually made. This approach is in line with the tendency of English courts to refer all the consequences of a contract to the will of those who made it. But there is something of a logical difficulty in seeing how the parties could even impliedly have provided for something which ex hypothesi they neither expected nor foresaw; and the ascription of frustration to an implied term of the contract has been criticized as obscuring the true action of the court which consists in applying an objective rule of the law of contract to the contractual obligations that the parties have imposed upon themselves. So long as each theory produces the same result as the other, as normally it does, it matters little which theory is avowed (see British Movietonews Ltd v London and District Cinemas Ltd , per Viscount Simon). But it may still be some importance to recall that, if the matter is to be approached by way of implied term, the solution of any particular case is not to be found by inquiring what the parties themselves would have agreed on had they been, as they were not, forewarned. It is not merely that no one can answer that hypothetical question: it is also that the decision must be given ‘irrespective of the individuals concerned, their temperaments and failings, their interest and circumstances ‘ ( Hirji Mulji v Cheong Yue Steamship Co Ltd ). The legal effect of frustration ‘does not depend on their intention or their opinions, or even knowledge, as to the event’. On the contrary, it seems that when the event occurs ‘the meaning of the contract must be taken to be, not what the parties did intend (for they had neither thought nor intention regarding it), but that which the parties, as fair and reasonable men, would presumably have agreed upon if, having such possibility in view, they had made express provision as to their several rights and liabilities in the event of its occurrence’ ( Dahl v Nelson per Lord Watson).
By this time it might seem that the parties themselves have become so far disembodied spirits that their actual persons should be allowed to rest in peace. In their place there rises the figure of the fair and reasonable man. And the spokesman of the fair and reasonable man, who represents after all no more than the anthropomorphic conception of justice, is and must be the court itself. So perhaps it would be simpler to say at the outset that frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do”. (footnotes omitted)
“It appears to me that frustration depends, at least in most cases, not on adding any implied term, but on the true construction of the terms which are in the contract read in light of the nature of the contract and of the relevant surrounding circumstances when the contract was made….. On this view there is no need to consider what the parties thought or how they or reasonable men in their shoes would have dealt with the new situation if they had foreseen it. The question is whether the contract which they did make is, on its true construction, wide enough to apply to the new situation: if it is not, then it is at an end”.
58 His Honour, at 378, also referred to and adopted all that Stephen J said in Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143 at 160-163.
60 On behalf of the Defendants it was put that each event of insolvency and administration and liquidation of the Company was one which:59 Furthermore there are insurmountable obstacles in the path of the Defendants in seeking to persuade the Court to hold that there was implied a term that the shares would be shares in a solvent company or, put another way, that the obligation to apply and pay for shares was conditional upon the Company remaining solvent. No submission was made that the evidence met the necessary conditions for implication as summarised in BP Refinery (Westernport) . No submission addressed the application of clause 9.1, the entire Agreement provision already referred to. In my opinion there is no basis for the implication of the term alleged.
(b) Amounted to a failure to sustain itself of the state of affairs contemplated as a basis for the payments.
(a) So radically altered the situation of the parties as to amount to the frustration of the Agreement.
61 Essentially it was put that no party to the Agreement contemplated, and no fair and reasonable man could have contemplated, that he/it would be paying money for shares in a company which was unable to trade, had negative assets, and in which the shares were virtually valueless. Central to this case was the proposition that as a consequence of the insolvency and liquidation of the Company valuable and essential rights which would have attached to its shares when solvent no longer existed. As it was put by Mr Powell, “… the share is no longer a share”.
62 The circumstances which led to the making of the Agreement have been referred to. It should also be mentioned that each of the Guarantors, namely Messrs Marheine, Efkarpidis, Hand and Coleman, gave evidence which demonstrated that he was a person of extensive commercial experience and acumen. Evidence given in cross examination left me in no doubt that in the period prior to signing the Agreement (sometimes described as the “Survival Proposal”) each knew of, and accepted, the uncertainty of the Company’s future trading prospects, the risk that the Company might fail, and that failure might result in the loss of the investment in it. It is to be remembered that it was to save the Company from inevitable solvency that each agreed to provide funds in the expectation that to do so would enable the Company to continue trading. I am satisfied that, as for example advised by Mr Scutt in his e-mails of 15 August 2001, they well knew that even with such funding the Company’s trading future could be neither predicted nor guaranteed.
63 As Lord Reid and Lord Radcliffe have pointed out, frustration depends upon the true construction of the contract read in light of the relevant circumstances existing when the contract was made, and the events which have since occurred.
64 With regard to the shares, the Agreement defines them to mean ordinary fully paid shares in the capital of the Company. Pursuant to clause 2.3 the Company was obliged to “… allot and issue to each Subscriber the Shares on the Subscription Dates each free of Security Interests and credited as fully paid, which Shares will rank equally with and have the same rights (including entitlements to dividends and distribution) as the Company’s other issues fully paid A and B ordinary shares from their date of issue”. Pursuant to clause 2.6 the Company was obliged to register each Subscriber as the Holder of the relevant Shares in its register of members immediately upon the issue of the Shares to it under clause 2.3.
65 Clause 2.3 makes plain the rights and entitlements which attach to the shares. They rank equally with, and have the same rights as the Company’s other issued fully paid “A” and “B” ordinary shares. Upon its proper construction this provision must mean that the shares issued under the Agreement have the same rights and entitlements as the other issued fully paid “A” and “B” ordinary shares have from time to time, the nature and extent of which will depend upon the varying fortunes of the Company, including insolvency and liquidation.
66 In exercising the judgment the Court is required to make as to whether insolvency and liquidation has brought about the frustration of the Agreement there are a number of matters to be taken into account. Firstly, on the evidence as to the circumstances in which the Agreement was made, I am satisfied that the prospect of loss of their investment by reason of insolvency and liquidation was within the contemplation of the Defendants when the Agreement was made. Secondly, I am satisfied that the obligations of the parties to the Agreement are not affected by the event complained of, nor has it been shown that the event in any relevant way has altered the situation of the parties, radically or otherwise. Thirdly, it is plain that the event complained of does not result in the impossibility of performance of the Agreement in that the shares (and the rights and entitlements attaching to them) have been neither destroyed nor changed. It is not enough to demonstrate that the event may have had a detrimental effect upon the value of the shares. According to Lord Radcliffe, it is not hardship or inconvenience or material loss itself which calls the principles of frustration into play.
67 In my opinion the Agreement, on its true construction, is plainly wide enough to apply to the situation brought about by the Company’s insolvency and liquidation. Accordingly, when all the circumstances are considered, the insolvency and liquidation of the Company did not bring about the frustration of the Agreement.
69 Bound up with the submissions as to frustration was the submission that:68 In the course of his submissions Mr Coles QC referred the Court to analogous cases in which contributories were held liable for unpaid calls on shares in a company in liquidation, and to other cases in which it was held that it was no answer to the contractual liability of a purchaser of shares that the Company had become insolvent prior to completion of the contract. Those to which reference was made included Chapman v Shepherd (1866-67) LR 2 CP 228, Coles v Bristowe (1868) LR 6 Eq 149 – ChD 02/05/1868, Nicholl v Carey (1895) 11 TLR 526, Re JN 2 Ltd [1977] 3 All ER 1104 and Sullivan v Henderson [1973] 1 All ER 48. These cases provided considerable assistance in deciding the issues raised by this ground of defence, and support for the conclusion to which I have come.
“6. An alternative approach is that there has been a complete “failure of consideration” by Ezishop in terms discussed by Gummow J in Roxborough v Rothmans of Pall Mall (2001) 76 ALJR 203 at 224-225 paras [100]-[104]. Gummow J notes that the term “failure of consideration” is used in law to mean several things including (as in Roxborough) the “failure to sustain itself of the state of affairs contemplated as a basis for the payments the appellants seek to recover”.
7. Roxborough followed Baltic Shipping Co v Dillon (1993) 176 CLR 344 where McHugh J said (at 389) “Failure of the consideration for a payment … means that the state of affairs, contemplated as the basis or reason for the payment, has failed to materialize, or, if it did exist, has failed to sustain itself.””.
70 As I understand it, what was being put was that the event complained of brought about a total failure of consideration in that the state of affairs contemplated, to use Justice McHugh’s words, had failed to sustain itself and as a consequence the Agreement has been frustrated. Having regard to my finding that insolvency and liquidation was within the contemplation of the parties it follows that in this case there has been no failure of the state of affairs contemplated as the basis or reason for payment, and the submission should be rejected.
71 In any event, it seems to me that the statement of each of Justice McHugh and Justice Gummow, when read in the context of the judgment from which it is taken, provides no support for, and is irrelevant to, the argument on frustration in this case. Those judgments are concerned with a claim for the recovery of payments made where there had been a total failure of consideration, and are outside the field of discourse raised by the issues in this case.
72 In the result, the ground of defence based on frustration must fail.
73 The Defendants have failed to establish any defence to the claim. The Plaintiffs are entitled to recover the monies claimed from each Subscriber as a debt due and payable under the Agreement. The liability of each of the Guarantors is established by the liability of the related Subscriber.Conclusion
74 I expect the parties to agree on the amount(s) of interest, if any, payable in respect of each claim. In the circumstances it is appropriate that I direct the Plaintiffs to bring in short minutes of orders which give effect to the reasons for decision. If necessary, the short minutes may include a declaration as to the liability of the Guarantors. The parties may also address me in relation to costs. Arrangements should be made with my Associate by 21 March 2003 for the relisting of this matter.
I would dismiss the Cross-Claim.
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Last Modified: 03/28/2003
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