Hislop v Paltar Petroleum Ltd (No 3)

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FEDERAL COURT OF AUSTRALIA

Hislop v Paltar Petroleum Ltd (No 3) [2017] FCA 1253

File number: NSD 1383 of 2017
Judge: GLEESON J
Date of judgment: 26 October 2017
Catchwords: CORPORATIONS – application for leave under s 237 of the Corporations Act 2001 (Cth) to bring proceedings on behalf of and in the name of a company – allegations of equitable fraud, breaches of fiduciary duty, misleading and deceptive conduct and unconscionable conduct against directors and another – whether proposed proceedings in the best interests of the company – whether serious question to be tried – whether application brought in good faith – whether appropriate to grant leave in the absence of 14 days’ notice – leave granted
Legislation:

Corporations Act 2001 (Cth)

Evidence Act 1995 (Cth)

Petroleum Act 1984 (NT)
Cases cited:

Carpenter v Pioneer Park Pty Ltd (in liq) [2004] NSWSC 973; (2009) 51 ACSR 245

Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002

Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31 Huang v Wang [2016] NSWCA 164; (2016) 114 ACSR 586

Cooper v Myrtace Consulting Pty Ltd [2014] FCA 480

Damberg v Damberg [2001] NSWCA 87; (2001) 52 NSWLR 492

Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; (2005) 53 ACSR 732

Keenan v Bundaberg Port Authority [2016] FCA 134

Maher v Honesett & Maher Electrical Contractors [2005] NSWSC 859

MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367

Neilson v Overseas Projects Corporation of Victoria Ltd [2005] HCA 54; (2005) 223 CLR 331

Rafferty v Time 2000 West Pty Ltd (No 6) [2011] FCA 402

Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432

Swansson v Pratt [2002] NSWSC 583; (2002) 42 ACSR 313

Syndicate Mortgage Solutions Pty Ltd v El-Sayed [2010] NSWSC 348

Vigliaroni v Concrete Precast Systems Pty Ltd [2009] VSC 253

Heydon JD, Leeming HJ and Turner PG, Meagher, Gummow & Lehane’s Equity – Doctrines & Remedies (5th ed, LexisNexis Butterworths, 2015)  
Date of hearing: 18 and 20 September 2017
Registry: New South Wales
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: Commercial Contracts, Banking, Finance and Insurance
Category: Catchwords
Number of paragraphs: 149
Counsel for the Plaintiff: Mr A Leopold SC with Ms E Holmes
Solicitor for the Plaintiff: Johnson Winter & Slattery
Counsel for the Defendants: Mr M Henry SC with Mr DE Baran
Solicitor for the Defendants: Dentons

ORDERS

NSD 1383 of 2017
BETWEEN:

JOHN HISLOP

Plaintiff
AND:

PALTAR PETROLEUM LIMITED (ACN 149 987 459)

First Defendant

ROBERT MADZEJ

Second Defendant

MICHAEL CAETANO (and others named in the Schedule)

Third Defendant

JUDGE:

GLEESON J

DATE OF ORDER:

26 OCTOBER 2017

THE COURT ORDERS THAT:

1.Pursuant to s 237 of the Corporations Act 2001 (Cth), the plaintiff has leave to bring proceedings against the first to fourth defendants on behalf, and in the name, of the fifth defendant, in order to make the claim or claims set…

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Details
Case
[2017] FCA 1253
Decision Date

CaseChat Overview and Summary

The case of Hislop v Paltar Petroleum Ltd (No 3) involved a shareholder and director of Nation Wyoming, Mr Hislop, who sought leave to bring proceedings against Paltar Petroleum Ltd and its directors on behalf of Nation Australia. The application was made under section 237 of the Corporations Act 2001 (Cth) due to the company's refusal to initiate legal action. The allegations against the defendants included equitable fraud, breaches of fiduciary duty, misleading and deceptive conduct, and unconscionable conduct. The primary legal issues before the court were whether the proposed proceedings were in the best interests of the company, if there was a serious question to be tried, whether the application was brought in good faith, and if leave could be granted without the required 14 days' notice.

The court determined that the proposed proceedings were indeed in the best interests of Nation Australia, as they sought to address significant claims of misconduct and breaches of duty by the defendants. The allegations, if proven, would result in substantial loss to Nation Australia. The court found that there was a serious question to be tried regarding the claims of equitable fraud, breaches of fiduciary duty, misleading or deceptive conduct, and unconscionable conduct. The defendants' actions, including the stacking of the boards with associates and the purported surrender of valuable rights under the earning agreements, raised legitimate concerns that warranted further investigation. The application was deemed to be brought in good faith, and the court granted leave despite the absence of the required 14 days' notice, considering the urgency and importance of the issues at hand.

The court granted Mr Hislop leave to bring the proceedings on behalf of Nation Australia, allowing him to make the claims outlined in the "Draft Outline of Proposed Claim (Revised)" annexed to the amended originating process. The defendants were ordered to pay Mr Hislop's costs of the proceeding. Additionally, the parties were required to submit proposed orders for a lump sum costs order within seven days, in accordance with the Court's Costs Practice Note.

Orders

Orders of the court

1. Pursuant to s 237 of the Corporations Act 2001 (Cth), the plaintiff has leave to bring proceedings against the first to fourth defendants on behalf, and in the name, of the fifth defendant, in order to make the claim or claims set out in the “Draft Outline of Proposed Claim (Revised)” annexed to the amended originating process (“Proposed Claim”) and any claim or claims arising out of the same or substantially the same facts as the claim or claims referred to in the Proposed Claim and claiming relief to the effect of, or to substantially similar effect as the relief referred to in the Proposed Claim against the first to fourth defendants.

2. The defendants pay the plaintiff’s costs of the proceeding.

3. Within seven days of the date of this order, the parties submit proposed orders with a view to hearing the plaintiff’s foreshadowed application for a lump sum costs order in accordance with the procedure set out in the Court’s Costs Practice Note (GPN-COSTS).

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

I am satisfied that, while not necessary parties to the application, the first to fourth defendants are proper parties to the application as each of them is within the scope of the categories qualified to apply for leave under s 237: Paltar is a “member … of a related body corporate” of Nation Australia within the meaning of s 236(1)(a)(i) of the Act; the second to fourth defendants are “officers” of Nation Australia within the meaning of s 236(1)(a)(ii).BACKGROUND FACTS Mr Hislop has been a shareholder and director of Nation Wyoming since June 1999. During various times from 2003 to earlier in 2017, Mr Hislop served as the chief executive officer (“CEO”), president and chief financial officer (“CFO”) of Nation Wyoming. In about September 2013, Mr Hislop commenced discussions with Marc Bruner, the founder and then majority shareholder of Paltar. Mr Bruner has been a director of Paltar since its registration as a company in March 2011.Agreement to issue Nation Wyoming shares to Paltar Following the discussions between Mr Hislop and Mr Bruner, in October 2013, Nation Wyoming and Paltar entered into a written agreement regarding the transfer and sale by Paltar of certain oil and gas permit and application assets, initially including EP231, EP232, EP234 and EP237 (“Paltar/Nation Wyoming share agreement”). Among other things, the agreement provided for the issue of 600 million shares in Nation Wyoming to Paltar. The agreement was amended and restated on numerous occasions, and in its most recent form provided for the issue of 900 million shares in Nation Wyoming to Paltar. In early 2015, there were discussions between Mr Bruner, David Siegel and others concerning a capital raising of up to US$165 million to fund development costs in relation to Paltar’s exploration permits. David Siegel was appointed as a director of Nation Wyoming on 15 September 2015. By a document dated 30 August 2015, Nation Wyoming and Paltar agreed a “Third Amended and Restated Agreement regarding Paltar Petroleum Limited Australia Permits & Applications”. The agreement provided for the issue of 600 million shares in Nation Wyoming, referred to as “Earning Agreement Shares” on certain terms, including cll 11 and 12 on which Mr Hislop now relies. As subsequently amended, cl 11 provides:All of the Earning Agreement Shares or, in the event that an Exchange Transaction is consummated, all shares of the common stock of Nation issued to the Paltar shareholders pursuant to the terms of the Exchange Documentation (the “Exchange Shares”), shall be held in an escrow account subject to the terms of an escrow agreement. The escrow agreement shall provide, among other things, that (A) in the event an Exchange Transaction is consummated on or prior to December 16, 2015, the Exchange Shares issued in connection therewith shall be held in the escrow account for a period of at least 3 years, or (B) upon the issuance of the Earning Agreement Shares, all of the Earning Agreement Shares shall be held in the escrow account for a period of at least (1) with respect to a percentage of Earning Agreement Shares then beneficially held by Bruner, 5 years, and (2) with respect to a percentage of Earning Agreement Shares beneficially held by persons other than Bruner, 3 years, in each case subject to earlier release by the escrow agent. The escrow agreement shall provide that the escrow agent will be a newly formed Delaware limited liability company that shall be managed by a board of managers. The board of managers shall be composed of the following 4 members, each of whom shall have equal voting rights under the terms of the escrow agent’s governing document:(a)2 managers appointed by Bruner and David Siegel, an individual resident of Denver, Colorado (“Siegel”); so long as each of them continues to hold directly or indirectly at least 1/2% of the issued and outstanding shares of Nation’s common stock, or, if one or both of them does not hold at least 1/2% of the issued and outstanding shares of Nation’s common stock, 1 or 2 managers, as the case may be, appointed by the Nation Board (as defined below) that does not hold any equity securities of Paltar;(b)1 manager appointed by Hislop, so long as he continues to hold directly or indirectly at least 1% of the issued and outstanding shares of Nation’s common stock, or, if Hislop does not hold at least 1% of the issued and outstanding shares of Nation’s common stock, 1 manager appointed by the Nation Board that does not hold any equity securities of Paltar; and(c) the Independent Director (as defined below).In the event of deadlock among the members of the board of managers of the escrow agent , the chairman of the board of managers shall possess an additional tie-breaking vote. The governing document of the escrow agent shall provide that the chairman of the board of managers of the escrow agent be Bruner or, if Bruner ceases to serve on the board of managers, then a person elected by the board of managers after the vacancy created by Bruner’s departure has been filled.

Evidence

Evidence Before The Court

On 15 August 2017, Mr McTavish sent an email to Mr Liveseley, saying: “I’m told that the Paltar/Fortem transaction is on pause for the time being so we haven’t pursued a term sheet at this time.”Mr Caetano’s evidence Mr Caetano gave the following affidavit evidence:No agreement of any kind has ever been entered into between Fortem, on the one hand, and Nation, Nation Australia, Paltar or third parties on the other hand, regarding the provision of any financing relating to the Exploration Permits or meeting Nation Australia’s obligations under the Earning Agreements. Fortem has never entered into an agreement pursuant to which it might or could be transferred, assigned or receive any rights under or in connection with the Earning Agreements. Fortem has not been transferred, assigned or received any rights under or in connection with the Earning Agreements. In my current position as chief executive officer of Fortem, I am aware that Fortem has no interest at this time in entering into any negotiations with Paltar in relation to any rights or interests under the Earnings Agreements. Mr Caetano also gave evidence of his evaluation of the draft settlement agreement and of his conclusion that it was in the best interests of Nation Australia to accept the settlement agreement. Mr Caetano’s considerations included his belief that there had been “a clear, and essentially inarguable default” of the payments terms found in cl 5.3(2)(b)(ii) (or cl 5.2(2)(b)(ii)) of the earning agreements. At the hearing, senior counsel for the defendants, Mr Henry SC, did not rely on this provision to argue that there had been default. Mr Caetano also referred to a valuation of the ORRI for “EP136 contingent resources” prepared by Sigma Cubed, an oil and gas engineering firm. The valuation concluded that a 5% portion of the ORRI was worth US$17.8 million (risked) and US$342 million (unrisked). That evaluation was provided by letter dated 11 July 2017 to Mr Caetano as CEO of Nation Wyoming, apparently on the basis of a list of assumptions entitled “Paltar-Fortem Australia 50/50 Joint Venture as of 7/1/2017”. Senior counsel for Mr Hislop, Mr Leopold SC, noted that this valuation appears to relate to only a fraction of the 75% ORRI contingent rights under the six earning agreements. In his affidavit, Mr Caetano’s stated considerations included:[T]he fact that under Settlement Agreement the ORRI would provide value to Nation Australia without requiring the expenditure of any working capital now or in the future. In evidence in chief, Mr Caetano corrected this evidence to refer to Nation Wyoming. However, he did not seek to correct his statement that:Based upon my 20 years of business experience, including 10 years in the oil and gas industry, I concluded that Nation Australia was likely to receive significantly greater value if it (i) accepted the Settlement Proposal, and obtained the ORRI and (ii) allowed Paltar to raise funds necessary to meet its obligations under the Exploration Permits, thereby generating revenues that would accrue in part to Nation Australia (pursuant to the terms of the ORRI).

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

Consequently, and despite Mr Caetano’s affidavit evidence, I do not accept that Mr Caetano ever determined that it was in the best interests of Nation Australia to accept the settlement agreement.CONSIDERATION The defendants did not dispute that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them. Accordingly, I am satisfied as to s 237(2)(a).Is there a serious question to be tried? It is not in dispute that Nation Australia had the opportunity to earn a significant revenue stream pursuant to the earning agreements. In cross-examination, Mr Caetano accepted that under the settlement agreement, Nation Australia gave up very valuable potential rights in relation to each of the six earning agreements. Mr Leopold SC submitted that the Court should ask itself the following question: If the default notice was legitimate and defensible, then why did Paltar (through Mr Bruner) have to stack the Nation Wyoming board and the Nation Australia board with associates of Paltar, Mr Bruner and Fortem? Mr Henry SC did not offer an answer to this question. I accept Mr Leopold SC’s submission that, at least at a “serious question to be tried” level, the answer is that the surrendering of all of Nation Australia’s assets in the manner described above was the product of equitable fraud; statutory unconscionable conduct; breach of directors’ duties (including fiduciary duties – a failure by Mr Caetano to avoid a conflict between his duties to Nation Australia and his duties to and interest in Fortem); knowing receipt by Paltar of benefits accruing from breaches of fiduciary duty; and misleading or deceptive conduct. These claims, and the appropriate corresponding relief, are articulated in the Proposed Claim. On the facts set out above, Mr Hislop has established a serious question to be tried in relation to the Proposed Claim, including in relation to the following matters. To be clear, the findings in [109] to [122] below are not made on a final basis: my finding is that there is a serious question to be tried in relation to each of the matters set out in those paragraphs. The Paltar/Nation Wyoming share agreement The Paltar/Nation Wyoming share agreement set out the rights and obligations of Paltar and Nation Wyoming in respect of the issuance to Paltar of 900 million earning agreement shares in Nation Wyoming. It contained terms relating to voting rights in the earning agreement shares as set out in the Proposed Claim.The voting restrictions Pursuant to cl 11, there were voting restrictions on Paltar’s earning agreement shares, having the effect that Paltar was not entitled to or could not conscionably vote the shares alone. The voting restrictions arose from the requirement to place the shares in an escrow account to be managed by a newly formed company, to be managed by a board of managers who would have voting rights in relation to the shares. Although the arrangements referred to in cll 11 and 12 of the Paltar/Nation Wyoming share agreement were never formalised, there is a serious question as to whether, by agreeing to cl 11, the parties intended to restrict the way in which Paltar could utilise the earning agreement shares. Mr Henry SC acknowledged that “there could be a dispute” about whether cll 11 and 12 of the Paltar/Nation Wyoming share agreement have the effect that Paltar was not entitled to vote in respect of its 900 million shares.The earning agreements