ILS Rehab Pty Ltd v Josephine Borg (as administrator of the estate of the late Damien Robert Borg)

[2017] NSWSC 442

Supreme Court

New South Wales

Medium Neutral Citation:	ILS Rehab Pty Ltd v Josephine Borg (as administrator of the estate of the late Damien Robert Borg) [2017] NSWSC 442
Hearing dates:	9 March 2017
Decision date:	21 April 2017
Jurisdiction:	Equity
Before:	White J
Decision:	Refer to para [41] of judgment.
Catchwords:	CONTRACTS – general contractual principles – construction and interpretation of shareholders agreement – no dispute that clause did not accurately reflect parties’ intentions –appropriate to make order for rectification – whether clause was void for uncertainty – clause not void for uncertainty as it was capable of being given meaning by the court – not necessary to imply a term – defendant’s construction of clause would not produce a commercial result and was not consistent with text and context
Legislation Cited:	Corporations Act 2001 (Cth)
Cases Cited:	Electronic Industries Ltd v David Jones Ltd (1954) 91 CLR 288; [1954] HCA 69 Hick v Raymond & Reid [1893] AC 22 Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429; [1968] HCA 8
Category:	Principal judgment
Parties:	ILS Rehab Pty Ltd (1st Plaintiff; 3rd Cross-Defendant) Ian Farquharson (2nd Plaintiff; 1st Cross-Defendant) Peter Neville Dangar Reid (3rd Plaintiff; 2nd Cross-Defendant) Josephine Borg (Defendant; Cross-Claimant)
Representation:	Counsel: J Giles SC with H Grace (Plaintiffs; Cross-Defendants) S O’Brien with J Nathan (Defendant; Cross-Claimant)   Solicitors: Somerville Legal (Plaintiffs) Business Lawyers (Liverpool) (Defendant)
File Number(s):	2016/121065

Judgment

1. HIS HONOUR:   This case concerns the construction of an agreement between shareholders in a proprietary company that provides for the purchase of the shares of a director who has died by the surviving shareholders. The question is whether, in the events that happened, the price to be paid for the shares is a multiple of the amount of the company’s earnings before interest, tax, depreciation and amortisation in the financial year ended 30 June 2014 or 2015.

2. The company, ILS Rehab Pty Ltd (“the Company”), was incorporated on 2 August 2011. It is common ground that it carries on the business of supplying mobility products for use by people with a medical condition or disability such as sophisticated wheelchairs. From its incorporation it had three directors and three shareholders, namely Mr Ian Farquharson, Mr Peter Reid and Mr Damien Borg. They also each held one share and they were the only shareholders.

3. Mr Borg died on 6 March 2015. The defendant is the administrator of Mr Borg’s estate. Letters of administration were granted on 26 August 2015.

The Shareholders’ Agreement

4. On 23 July 2012 Messrs Farquharson, Reid and Borg and ILS Rehab Pty Ltd entered into an agreement (“the Shareholders’ Agreement”). The Shareholders’ Agreement recited that “The shareholders have agreed that their relationship as shareholders in the company shall be governed by the provisions of this agreement.” Clause 13 provided:

“13.1    If a Director should die during the Shareholding Period, then the Shareholders that are not the Respective Shareholders of that Director shall purchase the shares held by the Respective Shareholder of that Director (‘the outgoing Shareholder’) upon the following terms:-

13.1.1   The purchase price shall be equal to 3 x EBITDA.

13.1.2   The Parties shall perform all such acts and execute all such documents as are necessary to effect the sale, purchase and transfer of shares pursuant to this clause.

13.1.3   The Company shall repay any loan account and accrued interest referred to in clause 4, to the extent that such loan account or interest relates to the deceased or incapacitated Director or that Director’s Respective Shareholder.”

5. Clause 1.1 relevantly provided:

“In this agreement, where the context permits, the following terms shall have the following meanings:-

…

’Directors’ means Farquharson, Reid and Borg.

‘EBITDA’ means, at any time, the earnings before interest, tax, depreciation and amortisation of the Company in the immediately preceding financial year, excluding any unusual or non-recurring items. Any dispute in relation to the interpretation or application of this definition shall be determined by the independent accountant.

‘Fair Value’ The fair value of all of the shares in the company shall be a sum equal to 3 x EBITDA.

‘Independent Accountant’ means such accountant as all of the parties may unanimously agree, or failing such agreement, such accountant as is appointed by the President of the Institute of Chartered Accountants in Australia, NSW Division.

…

‘Outgoing Shareholder’ means the shareholder who serves the Sale Notice pursuant to clause 5.

‘Respective Shareholder’ means, in relation to a Director, the Shareholder nominated by that Director to hold shares in the Company.

…

‘Shareholders’ means Farquharson, Reid and Borg, and any other acquirer of shares in the company in accordance with the items of this agreement.

…

‘Shareholding Period’ means the period commencing on the date of this agreement, and continuing so long as shares in the company are held by two or more of the parties, or other persons by whom they are replaced pursuant to this agreement.”

6. Clause 5 provided:

“5.1   At any time during the Shareholding Period a Shareholder may serve a notice on the Company to the effect that they desire to sell their Respective Shareholding (‘the Outgoing Shares’) to the other Shareholders (‘the Remaining Shareholders’).

5.2   Within 30 days after the Sale Notice Date:

5.2.1   Each of the Remaining Shareholders shall notify each other Shareholder that they agree to join the other Remaining Shareholders in purchasing the Outgoing Shares, and advising as to whether such Remaining Shareholding will:

5.2.1.1   Join the other Remaining Shareholders in purchasing the Outgoing Shares in such proportion as to ensure that the Agreed Ratio does not change as between the Remaining Shareholders; or

5.2.1.2   Agreeing to purchase a smaller proportion of the Outgoing Shares.

5.3   If, according to Purchase Notices served by each of the remaining shareholders, the Remaining Shareholders indicate that the Remaining Shareholders all agree to purchase the Outgoing Shares in the Agreed Ratio as between themselves, then Clause 5.5 shall apply to such purchase collectively.

5.4   If the number of shares agreed to be purchased collectively by the Remaining Shareholders is less than the amount of Outgoing Shares, then one or more of the other Remaining Shareholders can serve a notice on the company to the effect that they agree to purchase the balance of the Outgoing Shares. If more than one of the other Remaining Shareholders offers to purchase such shares, then they shall be deemed to have agreed to purchase such shares in the Agreed Ratio, as between each other, and Clause 5.5 shall apply.

5.5   Settlement of the sales of shares referred to in this clause shall take place 90 days after the Sale Notice. The purchase price of the shares shall be the Fair Value of such shares as at the date of the Sale Notice. The Shareholders and Directors shall expeditiously perform such acts and execute such documents as are necessary to effect the sales of shares referred to in this clause.

5.6   If, within 60 days after the date of the Sale Notice, there remains Outgoing Shares that the Remaining Shareholders have not offered to purchase, then none of the sales of shares referred to in this clause will take place, and the Shareholders will expeditiously perform such acts and execute such documents as are necessary to sell the Business for the best price reasonably obtainable, with the proceeds to be divided between the Shareholders in the Agreed Ratio.”

Rectification

7. It was common ground that the parties did not intend cl 13.1.1 to have its literal meaning, that is, that the purchase price for the shares of the outgoing Shareholder should be equal to three times EBITDA. Three times EBITDA was the agreed Fair Value of all of the shares in the company. The plaintiffs sought rectification of cl 13.1.1 so that the clause provided that:

“The purchase price shall be equal to the percentage shareholding of the outgoing Shareholder in the Company multiplied by 3 x EBITDA”

In submissions counsel for the plaintiffs accepted that the words “in the Company” were otiose and could be omitted.

8. The defendant did not oppose the substance of the rectification sought. She submitted that on the proper construction of cl 13.1.1 the price payable was equal to three times EBITDA divided by three, or alternatively that the clause ought to be rectified to state that the purchase price should be equal to three times EBITDA divided by three. The difficulty with that submission is that it does not address the position if there were more or fewer than three shareholders, as for example, if one of Mr Farqurharson or Mr Reid were to die.

9. The defendant’s concern was that the rectification sought, if granted, might have an adverse impact upon the defendant’s principal argument on the construction of cl 13.1 because the amendment sought would refer to the “outgoing Shareholder” rather than to the “Outgoing Shareholder”. The defendant submits that in cl 13.1 the words “outgoing Shareholder” refer to an “Outgoing Shareholder” in the sense defined in cl 1.1 as being the shareholder who serves a Sale Notice pursuant to cl 5. From this the defendant argues that the time for determining the “immediately preceding financial year” in the definition of “EBITDA” is the time of service of a Sale Notice, not the time of death of the outgoing Shareholder.

10. However, that concern is misplaced. If cl 13.1.1 is rectified in the way proposed by the plaintiff, the words “outgoing Shareholder” will have the same meaning as they do in cl 13.1, whatever that meaning may be.

11. The defendant does not dispute that it was the common intention of the parties that if one of them should die, the price payable for that party’s share would be that party’s percentage shareholding in the Company multiplied by three times EBITDA. There was clear evidence to that effect. I do not think that that conclusion can be reached purely as a matter of construction. In any event rectification can be ordered for more abundant caution. Clause 13.1.1 should be rectified accordingly as ultimately sought by the plaintiffs.

12. It is common ground that if the “immediately preceding financial year” for which EBITDA is to be determined for the purposes of cl 13.1.1 is the year ended 30 June 2014, then the purchase price payable for the shares is nil or a nominal sum. The defendant accepts that EBITDA in that financial year was negative. That was not the case in the year ended 30 June 2015. There is a dispute between the parties as to what EBITDA in that financial year amounted to. If the year ended 30 June 2015 is the relevant financial year, the parties are agreed that the dispute as to the quantum of EBITDA should be determined by an independent accountant. The Shareholders’ Agreement provides for the identification of the independent accountant.

Correspondence Regarding Share Transfer and Institution of Proceedings

13. On 15 January 2016 Somerville Legal, solicitors for the Company, wrote to the solicitor for the defendant attaching a share transfer form for execution by the defendant. The form provided for her to transfer the share formerly held by Mr Borg to Messrs Farquharson and Reid for $1. Correspondence ensued between the solicitors as to the proper construction of the Shareholders’ Agreement. The defendant has refused to sign the share transfer proffered.

14. These proceedings were commenced on 20 April 2016. The only plaintiff was the Company. It sought an order that the Shareholders’ Agreement be specifically performed. Messrs Farquharson and Reid were not joined as co-plaintiffs. The suit was deficient for want of parties.

15. On 15 June 2016 the defendant served a notice said to have been given pursuant to cl 5.1 of the Shareholders’ Agreement. The notice was given to the Company with copies to Messrs Farquharson and Reid. The notice stated that the defendant had been appointed as administrator of the estate of the late Mr Borg on 26 August 2015. The notice stated that pursuant to cl 5.1 of the Shareholders’ Agreement the defendant wished to sell the one ordinary share previously held by the late Mr Borg to the other Shareholders. The notice referred to cll 13.1 and 13.1.1 and recited that there was a lacuna in cl 13 as it failed to stipulate a date from when the value of the shares was to be determined. The notice stated that cl 5.5 stipulated a time from when the value of the shares for a share buyback was to be determined for the purposes of the settlement of a sale and that this provision filled the lacuna in cl 13 because the purchase price of the shares was to be the Fair Value of such shares as at the date of the Sale Notice. The notice stated that service of the notice constituted the requisite Sale Notice under cl 5.1 and the “immediately preceding financial year” for the purpose of determining EBITDA was the financial year ended 30 June 2015.

16. On 24 June 2016 the defendant filed a cross-claim joining both the Company and Messrs Farquharson and Reid as cross-defendants. In her cross-claim the defendant sought, amongst other relief, a declaration that on the proper construction of cl 13, the date to be used in calculating the purchase price using the EBITDA formula is the date when a Sale Notice is served by the Outgoing Shareholder pursuant to cl 5. She sought an order that Messrs Farquharson and Reid take all necessary steps to enable an independent accountant (as defined under the Shareholders’ Agreement) to determine the purchase price of the shares under cl 13 in accordance with the declaration sought and that they specifically perform cl 13 by paying the purchase price, so determined, to her.

17. Eventually, an amended statement of claim was filed joining Messrs Farquharson and Reid as co-plaintiffs. The plaintiffs sought a declaration that the purchase price for the purpose of the transfer of shares by the defendant to Messrs Farquharson and Reid pursuant to cl 13 of the Shareholders’ Agreement was to be calculated by reference to the EBITDA (as defined) of the Company for the year ended 30 June 2014. They sought an order for specific performance.

Superfluous Issues

18. As well as raising the issue of the proper construction of the Shareholders’ Agreement identified in the purported Sale Notice, the defendant submitted that it was an implied term of the agreement that the date to be used in the EBITDA is the date when the Outgoing Shareholder serves a Sale Notice as provided in cl 5.

19. In her cross-claim the defendant sought as alternative relief a declaration that cl 13 was void for uncertainty.

20. The defendant also alleged that the plaintiffs’ attempt to compel the transfer of the defendant’s share for $1 or less based on the 2014 financial year earnings was unfairly prejudicial to the defendant since she would be required to sell at an undervalue. The request that she execute the transfer for $1 was said to constitute oppressive, unfairly prejudicial or unfairly discriminatory conduct against her in contravention of s 232(e) of the Corporations Act 2001 (Cth). She said that the construction contended for by the plaintiff would give the remaining shareholders a windfall gain and deprive Mr Borg’s estate of the value of the start-up work which only began flowing through as profit in the financial year ended 30 June 2015.

21. The only real issue is the question of construction. The fact that more than one meaning of cl 13 may be available does not mean that the clause is void for uncertainty. The clause is not incapable of being given any meaning. It will have the meaning determined by the court (Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 436; [1968] HCA 8).

22. If the clause has the meaning for which the plaintiffs contend, there can be no implied term to the contrary. If it has the meaning for which the defendant contends, there is no necessity for an implied term.

23. The defendant accepted that if the contract has the meaning for which the plaintiffs contend, the plaintiffs did not engage in conduct in contravention of s 232(e) of the Corporations Act by seeking to enforce the contract. If the contract has the meaning for which the defendant contends, the defendant has her remedy without the need to have recourse to s 232.

Proper Construction of Clause 13.1 and Definition of EBITDA

24. The defendant argued that in cl 13.1 “outgoing Shareholder” should be read as “Outgoing Shareholder” and thus referred to the definition of “Outgoing Shareholder” as meaning the shareholder who serves a Sale Notice pursuant to cl 5. It was said that the use of the lower case in the o of “outgoing” was an obvious typographical error and that the brackets and quotes around the outgoing Shareholder in cl 13.1 were also an obvious typographical error.

25. In support of this submission the defendant pointed to the fact that nowhere in the Shareholders’ Agreement is there any reference made to the defined term “Outgoing Shareholder”, except in cl 13 where the lower case o in “outgoing” is used. Clause 5 refers to “Outgoing Shares” which is defined in cl 5.1 as being the Respective Shareholding that a shareholder who serves the notice on the company desires to sell. It does not use the expression “Outgoing Shareholder”.

26. There are two clear instances in which the drafter or typist of the agreement did not use the upper case when using a defined term. As noted above, “Shareholding Period” is a defined term and is used in cl 5.1 and cl 13.1. It means:

“[T]he period commencing on the date of this agreement, and continuing so long as shares in the company are held by two or more of the parties, or other persons by whom they are replaced pursuant to this agreement.”

27. Clause 2.2 provides that:

“Throughout the shareholding period, the directors of the company shall be Farquharson, Reid and Borg, subject to the provisions of this agreement.”

28. In that clause, notwithstanding the use of the lower case, “shareholding period” is clearly referring to the defined expression.

29. The definition of EBITDA provides for a dispute to be determined by “the independent accountant”. “Independent Accountant” is defined in clause 1.1. Clearly enough in the definition of EBITDA the reference to “the independent accountant” is to the defined expression even though the lower case is used.

30. In the defendant’s submission the position is the same with the use of the expression “outgoing Shareholder” in cl 13.1.

31. The defendant submitted that although the event of the death of a shareholder determined the application of cl 13.1, the event of death did not set the date by which the immediately preceding financial year was to be determined for the purposes of determining EBITDA. She argued that cl 13.1 used the phrase outgoing Shareholder in the defined sense in cl 1 to mean the shareholder who served the Sale Notice pursuant to cl 5. By cl 5.1 the Outgoing Shareholder could serve a notice “[a]t any time during the Shareholding Period” on the Company to the effect that the Outgoing Shareholder desired to sell. Clause 13.1 modified cl 5 by compelling the other shareholders to purchase the Outgoing Shareholder’s share following service of a Sale Notice, rendering subclauses 5.2, 5.3 and 5.4 otiose. Under cl 5.5 settlement of the sale of the shares was to take place 90 days after the Sale Notice. The mechanism for service of a Sale Notice fixed a certain date from which the “immediately preceding financial year” could be determined.

32. The defendant argued that if the event of death was the event that established the date for use in the EBITDA and not the Sale Notice date, there would be no contractual mechanism to determine when the purchase of shares was to take place. She submitted that if cl 5 did not apply, then the purchase transaction would be required to take place immediately upon a director’s death which would be a practical impossibility as there would be no personal legal representative with authority to transfer the share. The value of the business would not be known, but if the purchase did not take place immediately, damages and interest would potentially accrue on an unpaid sum. Hence she submitted that the plaintiffs’ construction would not produce a commercial result.

28. But this argument is flawed. Where an agreement requires something to be done without fixing a time by which it is to be done, either expressly or by necessary implication, then it is to be implied that the thing to be done shall be done within a reasonable time (Hick v Raymond & Reid [1893] AC 22 at 32). Moreover, both the Remaining Shareholders and the legal representative of the deceased shareholder would be subject to the implied duty of co-operation that would require them to comply with reasonable requests for performance made by the other party (Electronic Industries Ltd v David Jones Ltd (1954) 91 CLR 288 at 297-8; [1954] HCA 69). If necessary the Remaining Shareholders could apply for a grant of letters of administration so as to enforce the agreement.

29. I do not accept the defendant’s construction of cl 13. On the defendant’s construction the legal personal representative of the deceased shareholder could, but would not be required to, give a notice saying that she had decided to sell the estate’s shares. She could do so at any time of her choosing. Clause 5 is facultative, not mandatory. But the clear intent of cl 13 is that the shareholders who are not associated with the deceased director “shall purchase” the shares held by the shareholder for that director (in this case, the director held the shares). Clause 13.1.2 requires the parties to do all that is necessary to effect the sale, purchase and transfer of the shares. It appears from cl 9 that the parties contemplated the possible listing of the Company. It is clear that the Company was established on the basis that all of the directors would be active in the affairs of the Company. As directors they were all responsible for the management of the Company. Clause 3.1 provided that any personal liability which fell on any of the directors in their capacity as officers of the Company or in respect of any liability of the Company that was incurred without dishonesty or negligence would be borne by the directors equally. Clause 4.1 provided that each of the shareholders should lend the Company such moneys as it might require by way of operating capital as might be agreed unanimously by the directors from time to time (that is, the three individuals) equally or in such other proportion as they might agree in writing.

30. On the defendant’s construction the legal personal representative of a deceased director would not be required to sell the shares formerly held by the director (or that might be held by a company on his direction), but could wait to see how the Company fared under the direction of the two survivors. That is not a commercial construction of the agreement and is inconsistent with cll 13.1 and 13.1.2 which contemplate that on the death of a director, that director’s shares will be purchased by the survivors and the parties will do everything necessary to effectuate that transfer. The defendant’s construction in effect reads into clause 13.1 the words “if so requested” before “shall purchase”. There is no warrant for that construction.

31. Moreover, cl 5 is not obviously applicable at all. Under cl 5.1 it is a “Shareholder” who may serve a notice on the company. “Shareholders” was defined to mean Farquharson, Reid and Borg, and any other acquirer of shares in the Company in accordance with the items of the agreement. A legal personal representative of a director is not a “Shareholder” within the meaning of cl 5.1.

32. Further, as the defendant’s submission recognised, the substance of cl 5 is inapplicable to a sale and purchase under cl 13. Under cl 5 the Remaining Shareholders are not required to purchase the shares of an outgoing shareholder. If the Remaining Shareholders do not agree to purchase all of the Outgoing Shares then under cl 5.6 the business of the Company is to be sold. None of cll 5.2, 5.3, 5.4 or 5.6 could be applicable to a sale and purchase under cl 13. The defendant submits that by necessary implication cl 13 applies to the exclusion of cll 5.2, 5.3, 5.4 and 5.6. The better view is that cl 5 is simply not engaged. The expression “outgoing Shareholder” in cl 13.1 is not a reference to the defined term “Outgoing Shareholder” in cl 1.1. Rather, it is a description of the “Respective Shareholder” of the Director who has died. It is true that the expression “outgoing Shareholder” is not used later in cl 13, nor elsewhere. Nonetheless, neither the text nor context of cl 13 supports the defendant’s construction. That construction is also opposed to the evident commercial considerations underlying cl 13.

33. In principle, there remains a question as to whether in the definition of EBITDA the reference to the “immediately preceding financial year” is to the financial year immediately preceding the death of the director, or the financial year immediately preceding the time for completion of the purchase of the shares under cl 13.1. The defendant did not argue that the time for completion of the purchase under cl 13 was a reasonable time after the director’s death and the reference to the “immediately preceding financial year” was to the financial year immediately preceding the time at which the parties, acting reasonably, were required to complete the purchase. No doubt there was good reason for that forensic decision. In my view that would not be the preferred construction of cl 13.1 because what would be a reasonable time for completion of the purchase following the death of a director would necessarily be uncertain. The definition of EBITDA assumes that the relevant financial year can be identified with certainty. I agree with the plaintiffs’ submission that it is the date of death that determines which financial year is the “immediately preceding financial year”.

34. As it is common ground that EBITDA in the year ended 30 June 2014 was negative it follows that the defendant is required to transfer the share of the late Mr Borg to Messrs Farquharson and Reid for nominal consideration.

35. The defendant complains that this works a hardship because the Company was a start-up company that was only becoming profitable. Clause 13.1.1 and the definition of EBITDA sought to achieve simplicity in the fixing of the value of the shares of a deceased director, thus avoiding a potentially complex valuation exercise if the goodwill or future prospects of the Company were to be assessed in determining a fair value for the shares. No doubt there is an arbitrary element in the provision. But the parties contracted for relative certainty. The defendant does not rely upon hardship as a separate defence to a claim for specific performance. Nor is there evidence that would support any such defence, and any such defence would in any event leave the estate exposed to a claim for damages.

36. For these reasons I make the following declaration and orders:

1. Order that clause 13.1.1 of the Shareholders’ Agreement made between the plaintiffs and the late Damien Robert Borg be rectified so that it reads “The purchase price shall be equal to the percentage shareholding of the outgoing Shareholder multiplied by three times EBITDA”.

2. Declare that for the purpose of the transfer by the defendant to the second and third plaintiffs of the share in the first plaintiff formerly held by the late Damien Robert Borg pursuant to clause 13 of the Shareholders’ Agreement, the purchase price is calculated by reference to the EBITDA (as defined) of the first plaintiff in the year ended 30 June 2014.

3. Order that the Shareholders’ Agreement dated 23 July 2012 be specifically performed and carried into execution.

4. Order that within 14 days the defendant deliver to the plaintiffs an executed form of transfer of the said share in or substantially in the form of transfer which is annexure Q to the affidavit of the defendant dated 2 September 2016.

5. Order that the cross-claim be dismissed.

6. Liberty to apply to the duty judge on three days’ notice for any further order that may be required to give effect to these orders.

42. I will hear the parties on costs.

**********

Decision last updated: 21 April 2017