In the matter of GO Resources Pty Ltd
[2019] VSC 718
•25 October 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2019 02257
IN THE MATTER OF GO RESOURCES PTY LTD (ACN 165 327 033)
| TREVOR JOHN GAWNE | First Plaintiff |
| TANIHL HOLDINGS PTY LTD (ACN 169 611 670) | Second Plaintiff |
| v | |
| GO RESOURCES PTY LTD (ACN 165 327 033) and others according to the schedule | Defendants |
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JUDGE: | LYONS J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 18 October 2019 |
DATE OF RULING: | 25 October 2019 |
CASE MAY BE CITED AS: | In the matter of GO Resources Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2019] VSC 718 |
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PRACTICE AND PROCEDURE – Interlocutory injunction – Application to restrain consideration of proposed resolution to issue further shares in company – Prima facie case of oppression of minority shareholder and breach of shareholders’ agreement – Whether balance of convenience favours grant of injunction – Court not satisfied that company will not have sufficient funds to meet its liabilities without proposed resolution to issue shares – Damages not adequate remedy as the issue of further shares would dilute plaintiffs’ shareholding – Whether undertakings of plaintiffs sufficient – Interlocutory injunction granted
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A Kirby | Piper Alderman |
| For the 1st Defendant | No appearance | - |
| For the 2nd to 5th Defendants | Dr O Bigos | Minter Ellison |
HIS HONOUR:
Introduction
The plaintiffs are Trevor Gawne and his company, Tanihl Holdings Pty Ltd (‘Tanihl’). Tanihl is a 39 per cent shareholder of the first defendant, GO Resources Pty Ltd (the ‘Company’), of which Mr Gawne is a director. In this application, the plaintiffs seek an interlocutory injunction to prevent the further issue of shares in the Company, which they submit will have the effect of diluting Tanihl’s shareholding to below 25 per cent.
That is a critical level, given that certain decisions of shareholders of the Company, including to change the composition of the board of the Company, require the support of 75 per cent or more of the shareholders. A meeting of directors was called for 15 October 2019 in which it was proposed to resolve the issue of a further 23,285,784 shares in the Company, raising equity of $664,289. If the plaintiffs do not take up their share of the offer, it would have the effect of diluting Tanihl’s shareholding to 19.6 per cent.
Further, the plaintiffs also seek that the defendants be restrained from taking steps in relation to any rights, shares, options or note issues by the Company, otherwise than by agreement of all shareholders. They seek this standstill because the Company has issued about $500,000 of convertible notes, some of which are issued to companies associated with the defendants. If those notes are converted to equity, that will further dilute the shareholding of Tanihl.
The plaintiffs submit that they have a strong arguable case that the issuing of further shares is oppressive towards a minority shareholder, is in breach of the shareholders’ agreement between them dated 31 May 2016, and constitutes misleading or deceptive conduct. This is in circumstances where the plaintiffs allege that they have not been provided with relevant information and have been prevented from access to the Company’s books and records, in particular, documents relevant to the issues to be discussed at director’s meetings.
The Company has indicated that it will abide by the outcome of this application. The other defendants, the individual and corporate shareholders represented on the board, dispute any unlawful conduct or breach of the shareholders’ agreement. They submit no arguable case is made out.
Further, they contend that the balance of convenience does not favour an injunction. This is because they submit that having regard to the Company’s present liabilities and contractual commitments, it will be not able to meet these liabilities without a capital injection very soon and the board may have to consider appointing voluntary administrators. As a result, they submit that the further issue of shares in the Company will result in much-needed equity of $664,000, in circumstances where a further $750,000 is required in February 2020. This is in a context where the existence of this proceeding has caused potential large investors to defer their investment in the Company, at least until the proceedings have been resolved.
Further, the defendants question the ability of the plaintiffs to meet any undertakings as to damages they have offered.
In this application, the plaintiff has relied upon the affidavits of Mr Gawne affirmed 22 May, 14 October and 17 October 2019, and the affidavit of Ms Jane Kupsch sworn 11 October 2019. The defendants rely upon the affidavits of Mr Donald Clarke sworn 15 and 16 October 2019.
In order to determine this application, it is necessary to set out the facts and events giving rise to the causes of action alleged. I have prepared the following summary based on the affidavits relied upon by the parties. While I am conscious that it is only necessary for the plaintiffs to make out a prima facie case, in this summary I have also set out the response of the defendants to the principal events and allegations in the proceeding.
Background
The Company’s business relates to the development and production of renewable, biodegradable raw materials. The Company is commercialising a genetically modified crop that produces a unique vegetable oil called SHOSO, which it intends to bring to market.
Mr Gawne founded the Company in 2013. As set out above, other shareholders purchased shares in the Company, particularly in 2014 and 2016. Through Tanihl, Mr Gawne remains a substantial but minority shareholder in the Company.
Mr Clarke deposed that the Company is exploring opportunities to partner with commercial parties to bring SHOSO to market. The Company has engaged consultants to assist its activities, including:
(1) SGA Solutions to assist in research, development and commercialisation of the product. This company is associated with one of the Company’s directors, Mr Hudson;
(2) Kalyx Australia Pty Ltd to conduct field trials; and
(3) Baker Seed, a company which specialises in seed production and processing.
Mr Clarke deposed that the Company relies upon a mixture of capital injections from shareholders, third party investors and government funding. One of its largest sources of funding is the Cooperative Research Centres Project grant from the federal government, referred to as ‘CRC-P’. It matches funding of up to $3 million to companies developing important new technologies.
As I said, there is a shareholders’ agreement dated 31 May 2016. It provides, among other things, that a Shareholders Special Decision is required to change board composition and amend the shareholders’ agreement. A Shareholders Special Decision is a resolution or consent passed or given by shareholders, who together hold more than 75 per cent of the shares on issue and eligible to vote. As a result, at present, Tanihl can block a Shareholders Special Decision.
Further, under the shareholders’ agreement, a founding shareholder (such as Tanihl) so long as it has more than 15 per cent of the issued shares, may nominate one director. Finally, cl 14 of the shareholders’ agreement provides a regime for pre-emptive rights to existing shareholders in the case of sale or issue of securities.
Mr Gawne is now one of five directors of the Company. The others are Mr Kleinig, Mr Clarke, Mr Hudson and Mr Rathbone. Each of these directors own shares in the Company, either directly (the fifth defendant and his wife) or indirectly through a company (the second to fourth defendants).
Mr Kleinig is the Company’s chief executive officer and company secretary. He became a director in 2014. Mr Clarke is the chairman of the Company’s board of directors. He became a director in 2015. He is a lawyer and consultant for Minter Ellison, who act for the other shareholder defendants. Mr Kleinig and Mr Clarke have known each other for many years.
On 1 July 2015, Mr Gawne commenced employment with the Company as the Business Development Manager. In that role, he was responsible for the Company’s finances and bank accounts. In early-2017, he was removed from the Business Development Manager role, and he was soon after replaced in that role by an associate of Mr Kleinig. In October 2017, the Company terminated Mr Gawne’s employment and his financial responsibilities were assumed by Mr Kleinig and Mr Clarke.
I note that in February 2018, Business Synectics Pty Ltd, and an associate of Mr Clarke, a Mr Legg, were engaged to provide of financial services for the Company. Business Synectics Pty Ltd is a company of which both Mr Clarke and Mr Legg are directors.
While Mr Gawne has remained a director of the Company after his employment was terminated, his access to the Company’s documents, financial systems and computer accounts terminated at that time. As a result, Mr Gawne no longer has access to Company documents including business development strategies, and strategies to secure funding and investment to bring SHOSO to market.
Mr Gawne has deposed to a number of requests made in his capacity as a director for information from the Company and its directors, which have been denied. Further, Mr Gawne has deposed that, since March 2018, the Company has pursued at least five potential opportunities to secure external investments but that he has been excluded from all meetings and discussions with potential investors, except one introductory meeting. I note that, in the evidence before me are emails sent among the directors of the Company relating to investment opportunities, which were not sent to Mr Gawne. While some directors have an executive or consulting role in the Company, others do not. The reason why Mr Gawne was not copied to these emails was not explained in the affidavit material of the defendants or in written or oral submissions.
As a result of all these matters, the relationship between the plaintiffs and the defendants has broken down. Indeed, on the evidence before me, when Mr Gawne advised in April 2019 that he had no choice but to issue proceedings, Mr Clarke replied at a board meetings words to the effect that if the plaintiffs issued proceedings:
… I will make every effort humanly available to prevent you from doing it. I will be asking any court that interferes to require you to put up security for the costs. If you want to seek an injunction, I will be seeking in court, which I will get, an indemnity from you as to any loss incurred by this company that will, in my view, wipe you out.
Mr Clarke has not denied this conversation in the affidavit material before me in opposition to this application.
This proceeding was commenced in May 2019. The plaintiffs allege that the Company’s affairs are being conducted in a manner that is oppressive to and unfairly discriminatory against the second plaintiff. In this proceeding, the plaintiffs rely upon a number of matters, including those that I have set out above.
On 25 July 2019, Randall AsJ, over opposition from the defendants, required the defendants give the plaintiff access to some books and records of the Company prior to a judicial mediation.
July Board Meeting
On 23 July 2019, Mr Gawne received a notice of a meeting of directors of the Company to be held at 11.30 am on 31 July 2019 (the ‘July board meeting’). The agenda for the meeting included a discussion of a position with regard to a potential investor (called ICM), the cashflow forecast, alternative funding proposals and a rights issue to raise capital.
Among the documents provided for that meeting included a cashflow summary for the financial year 2019/20, which has been referred to as the ‘BOD cashflow forecast’. It provided four different scenarios. All four scenarios are based on common factors, which include no capital injection and no CRC-P cash income in the relevant period. Each scenario predicted that the Company would, at various points of time, between July 2019 and July 2021, have significant cashflow difficulties and a negative cashflow balance. Under the worst scenario in the BOD cashflow forecast (which is scenario 1), in March 2020 the Company would have an opening balance deficit of $1,895,188 and a closing balance deficit of $3,249,897.
Mr Gawne has deposed that no explanation was provided at the July board meeting or before about the likelihood of the scenarios modelled in the BOD cashflow forecast, and, in particular, that there would be no cashflow at all from CRC-P during the relevant period. It would appear that the BOD cashflow forecast was part of the basis upon which the board determined at the July board meeting that there should be a rights issue.
Mr Gawne has deposed that he did not have sufficient information to understand the basis of the proposed rights issue and the price at which the shares were proposed to be issued for the purposes of the July board meeting. In this context, he noted that the Company had refused to audit accounts despite his request. Mr Gawne deposed that he requested that the July board meeting be adjourned so that he could be given full disclosure of the Company’s financial position. His request was refused.
The minutes of the July board meeting record that there was discussion of a proposed invested by ICM Agribusiness (‘ICM’), which had been ‘deferred’ its opportunity to invest in the Company. I note that Mr Gawne deposed in his second affidavit that the deferment of the ICM investment was only, in fact, disclosed after the July board meeting: that is to say the July board meeting minutes are not accurate.
The minutes record that there was also a discussion of the BOD cashflow forecast and alternative funding proposals, including from Intergrain, Artesian, Delta AG and AGR Partners. I will say more about these companies shortly.
The minutes record discussion of the rights issue to raise capital. They record that, based upon the review of BOD cashflow forecast, Mr Clarke suggested a capital raising of a minimum of $300,000, and that Mr Rathbone believed a capital raising of $500,000 was more appropriate ‘as it provided a buffer to the Company if the external investor discussions were delayed’. That was the amount resolved at the meeting.
The minutes record that the offer price of $0.05 per share was based upon the fact that:
(1) there was a pro-rata offer open equally to all shareholders;
(2) the Company had not been able to raise capital externally at the ICM offer price of $0.085 per share; and
(3) there were real risks associated with the investment in the Company at the time.
Mr Gawne did not vote on the resolution for a rights issue. The resolution was passed, and the meeting was adjourned to 29 August 2019.
Mr Clarke deposed about the circumstances of the July board meeting and the decision made at the meeting in his first affidavit. Mr Clarke deposed that, prior to the commencement of the proceeding, the Company had had discussions with ICM which was then considering investing around $1 million in the Company, in exchange for approximately 12.4 million new shares. In addition, it was proposed to grant ICM an option to subscribe before the shares. In paragraph 11 of his first affidavit, Mr Clarke deposed this opportunity ‘fell through’, in part as a result of this proceeding. Later in his first affidavit, he deposed that the ICM investment failed. Of course, the minutes record only that it was deferred at that time.
Mr Clarke deposed that, as a result, the board was concerned that it would not have sufficient working capital to continue its business while it concluded discussions with other potential investors. He deposed that the other potential investors were Intergrain, a Western Australian joint venture, which had expressed interest in investing $1 million, and Artesian, a private investor looking to invest $500,000 as a joint investor.
In paragraph 14 of his first affidavit, Mr Clarke deposed that, in these circumstances, the board resolved at the July board meeting to seek $500,000 in equity funding to tide the Company over for the following two or three months. He deposed that by that time, the Company expected to conclude its discussions with Intergrain and/or Artesian. Together with a rights issue, the Company would then have working capital of approximately $2 million.
Mr Clarke deposed that the share price was chosen because of recent attempts to raise capital from ICM at $0.085 per share had failed. He deposed that, although there was an expectation at the time that Intergrain and Artesian would invest at that price, there was no certainty they would do so.
Mr Clarke deposed that, following the July board meeting, offers were sent to existing shareholders in accordance with the pre-emptive rights clause (clause 14) of the shareholders’ agreement. As a result of those offers, nine existing shareholders subscribed for new shares, committing $277,385.95, and 10 existing shareholders declined. Tanihl did not take up shares because of the lack of disclosure by the other directors of the financial position of the Company.
August and September 2019
There was a further board meeting of the Company on 29 August 2019 (the ‘August board meeting’). A board pack was circulated on 22 August 2019. Draft minutes of the August board meeting have now been prepared. Mr Gawne has disputed their accuracy, including that Mr Rathbone and Mr Hudson were not present at the meeting but are recorded in the draft minutes as being present.
Mr Clarke deposed that at the August board meeting, the board resolved to offer the shares not taken by the existing shareholders to third parties in accordance with clause 14.8 of the shareholders’ agreement. Mr Gawne raised an objection. He was invited to put forward a proposal for alternative funding; he did not do so. This is reflected in the draft minutes.
As noted, Mr Gawne has disputed the accuracy of the draft minutes of the August board meeting. He deposed that, when he requested that the rights issue not proceed until the Company had made full disclosure to the board including of the status of potential investments, the true nature of a $1.85 million receivable (of which he became aware as a result of accessing documents in early July 2019) and the current financial state of the Company.
The proceeding returned to Court on 12 September 2019. On that day, the defendants resisted an order that the Company’s accounts be produced prior to the valuation. Gardiner AsJ made orders granting the plaintiff access to the Company books. His Honour also ordered a valuer be appointed for the purposes of valuing the shares in the Company by 6 July 2019. Pursuant to those orders, Mr Gawne has now been provided with in excess of 50,000 documents. He has identified a number of documents that he says are missing from the documents produced for inspection and has identified a number of anomalies.
Further, in paragraph 32 of Mr Gawne’s second affidavit, he deposed that he had located in that inspection documents not previously disclosed which contained information relevant to the decision of the board to make a rights issue at the July board meeting. Those documents indicate that that information in them was within the knowledge of the other directors at the time of that meeting. I will deal with each document in turn.
First, there are emails on 23 July 2019 between Mr Hudson and AGR Partners, copied to all directors of the Company except Mr Gawne, referring to a unique technology opportunity which the Company was negotiating with Agriculture Victoria.[1]
[1]Exhibit TG-7 to the affidavit of Trevor John Gawne affirmed 14 October 2019 (the ‘second Gawne affidavit’).
Second, there is a document entitled ‘Intergrain cashflow’, sent by Mr Kleinig to Mr Hudson on 24 July 2019, and then onto Intergrain on 25 July 2019.[2] The Intergrain cashflow was markedly different from the BOD cashflow forecast tabled at the July meeting. For example, it did not predict the Company’s closing balance would be in deficit at any time. Further, it refers to the receipt of income of $390,000 from CRC-P ($195,000 in each of October 2019 and February 2020). It also refers to a $300,000 capital receipt in August 2019, and $3 million capital receipt ($1.5 million in October 2019, and again in January 2020).
[2]Exhibit TG-8 to the second Gawne affidavit.
As I said, the Intergrain cashflow was sent onto Intergrain on 25 July 2019. It was also relied upon by the Company for the purpose of the audit of the Company’s accounts, by being provided to its accountants on or about 24 July 2019.[3] Mr Clarke did not attempt to explain this document, how it was prepared, the reason why it differed from the BOD cashflow forecast, or why it was sent to the Company’s accountants for the purpose of the audit of the Company’s accounts.
[3]Exhibit TG-9 to the second Gawne affidavit.
In oral argument, counsel for the defendants argued that $300,000 was the anticipated amount of the rights issue as at 24 July 2019, and the capital investment of $3 million from Intergrain ‘would be an explanation’ for the $3 million entry. Of course, Mr Clarke did not go on oath about this. However, counsel’s submission seems inconsistent with the email to Intergrain, forwarding the Intergrain cashflow, which refers to a subscription agreement with Intergrain, contemplating a total investment of $1 million (in two tranches of $500,000) with a subscription price of 0.085 cents per share.
It is also inconsistent with Mr Clarke’s first affidavit (set out above) where he deposed that Intergrain had expressed an interest of investing $1 million, and Artesian had expressed an interest of investing of $500,000. I note for completeness, there is an email from Mr Kleinig to Mr Rathbone, dated 26 July 2010,[4] which records a receipt of $1 million each from Intergrain, Artesian and Delta AG for rights issues to each of them at $0.085 per share.
[4]Exhibit TG-10 to the second Gawne affidavit.
Third, there was a further cashflow forecast (the ‘US cashflow’) sent to Deborah Robinson on 10 September 2019.[5] On the evidence before me, Ms Robinson was a representative of US-based Rehab Restructure Partners LLC and the Company had signed an agreement with that entity to raise capital in the US.
[5]Exhibit TG-12 to the second Gawne affidavit.
The US cashflow is different to both the BOD cashflow forecast and the Intergrain cashflow. All figures are in US dollars. It predicts the Company’s closing balance will not be in deficit in March 2020. Rather, it predicts a credit balance of US$936,683. I note the document refers to receipt of capital of US$350,000 in September 2019, US$525,000 in November 2019, and US$2.625 million in January 2020. Once again, this document was not explained by Mr Clarke. Counsel for the defendants suggested that the reference to US$350,000 is likely to reflect the equity investment approved at the July board meeting, and the other amounts are likely to reflect investments from potential investors.
As to the other potential investors in the Company, Mr Clarke deposed that on 12 September 2019, Mr Kleinig sent an email to the directors advising that Intergrain was not, at that time, intending to pursue its proposed investment in the Company. Further, he deposed in his affidavit, that Artesian withdrew its interest because it had only expressed interest in investing as a joint venturer; that is it withdrew its interest when Intergrain was not investing.
Mr Gawne disputed this. He exhibited an email from Mr Kleinig to Mr Hudson and others on the management team of the Company also dated 12 September 2019.[6] It attached an information pack for the management meeting scheduled for 13 September 2019. The management pack includes the CEO monthly report, which records that the Intergrain proposal was then ‘currently being presented to shareholders, namely GRDC & WA Government’. It also records that Delta AG remains an interested party. It also refers to the US trip with potential investors. It records that Mr Kleinig continues to discuss the Company’s investment opportunities with at least five genuinely interested parties.
[6]Exhibit TG-17 to the affidavit of Trevor John Gawne affirmed 17 October 2019 (the ‘third Gawne affidavit’).
I note that that document is headed ‘Monthly CEO Report - 05/2019 (130919)’. I thought on reading this document it might relate to May 2019. However, from the last date, 13/09/19, and the date of the email itself (12 September) I have concluded that this report was prepared and intended for the 13 September management meeting. This document is inconsistent with Mr Kleinig’s email to the directors dated 12 September 2019 referred to at [52] above.
The Proposed October Resolution
On 8 October 2019, the plaintiffs received a notice of board meeting scheduled for 15 October 2019. Item two of the board pack records the proposed resolutions:
1.That the Board resolves to extend the Rights Issue to, in total, accept up to $1,164,289.20 by way of an issue of an additional 23,285,784 ordinary shares at a price of $0.05 per share.
2.That the Board resolves to issue the shares to the listed subscribers as the funds are received.
In paragraph 20 of his first affidavit, Mr Clarke deposed that, following the August board meeting, Mr Kleinig, Mr Hudson and Mr Rathbone approached a number of existing shareholders and third parties to inquire whether they would be interested in taking up the shares that were not taken up by existing shareholders. The basis upon which these approaches were made (such as why the third parties were chosen; what offers were made, and what quantity of shares was offered) is not otherwise explained by Mr Clarke.
Mr Clarke deposed that there have been firm expressions of interest for investment from 20 parties, for a total investment of $886,903.25. This is in excess of the $500,000 buffer approved by the July board meeting. It would require the addition of approximately 13,285,000 shares beyond those which the Company resolved to approve in July. Mr Clarke deposed that it was for this purpose that the 15 October meeting was called.
I note that the meeting pack listed the shares to be issued and the amount to be received in third party investors. Most were from small investors. The largest was Delta AG, a potential investor referred to in the July board meeting minutes. The meeting pack listed the effect of the rights issue, which would dilute Tanihl’s entitlement from 31.9% to 19.6%.
Mr Gawne deposed that the majority of the proposed new investors appeared to have an association with one or more of the Company’s directors. Further, he deposed that he had not seen documents which would support offers to purchase from many of these third parties. As noted, Mr Clarke has not deposed to the defendants’ relationship with the parties who agreed to take up these shares or the circumstances in which they were offered.
I note that the plaintiffs assert it would be a breach of the processes set out in clause 14 of the shareholders’ agreement for these shares to be issued to the third parties approached by the defendants. This is because the July board meeting only authorised the issue of $500,000 worth of shares to existing shareholders. The issue of further shares would need to be offered to existing shareholders under clause 14 of the shareholders’ agreement because they could be sold to third parties. By contrast, Mr Clarke deposed that, if the proposed resolutions are passed, then the additional component of third party commitment will first be offered to existing shareholders, pro rata, in accordance with clause 18.
Legal Principles
I will now turn shortly to the legal principles. The principles to be applied in determining this application are not in dispute. First, the plaintiff must make out a prima facie case in the sense of showing a sufficient likelihood of success to justify, in the circumstances, the preservation of the status quo, pending trial.[7]
[7]ABC v O’Neill [2006] 227 CLR 57, 65.
Second, the balance of convenience must favour the grant of an injunction. The issue is whether the injury or inconvenience, which the applicants would be likely to suffer if any injunction were refused, outweighs or is outweighed by the injury or inconvenience which the defendants would suffer if the injunction were granted. It is a question of which course would entail the lesser risk of injustice.[8] In this context, one must consider the adequacy of damages and any other discretionary considerations like the sufficiency of the undertakings.
[8]Bradto Pty Ltd v the State of Victoria [2006] 15 VR 65, 33.
Prima facie case
On the evidence before me, I am satisfied there is a prima facie case that there is continuing conduct on the part of the defendants to the plaintiff, which constitutes oppression, at least in the period from April 2019. This includes the circumstances surrounding the decision to issue shares at the July board meeting, and the circumstances of the August board meeting and the proposed resolutions.
In relation to the July board meeting, there are a number of issues which arise including:
(1)the limited information put forward in relation to the BOD cashflow summary and whether it was accurate (for example, why the CRC-P income was not included in the BOD cashflow forecast?);
(2) why the other cashflow summaries then in existence were not put forward or discussed, particularly given they had been circulated to at least some other directors but not the plaintiffs; and
(3)why information relevant to the July board meeting which had been requested by the plaintiffs was not addressed and provided prior to the meeting. I also refer to the matters set out in paragraph 32 of Mr Gawne’s second affidavit set out above.
This is in circumstances where Mr Gawne challenges the accuracy of the July board meeting minutes and says the issue of ICM’s investment being deferred was not raised at the July board meeting.
These issues, in turn, relate to the rights issue, the price at which the shares were issued, and the quantity of shares issued at the July board meeting. I am of the opinion there are real issues about whether the share price of $0.05 per share and whether the increase to $500,000 was appropriate or necessary. In addition, it is arguable that some or all of this conduct on the part of the defendants may constitute misleading and deceptive conduct.
Further, in relation to the proposed resolution, I am satisfied there is a prima facie case that the conduct of the defendants constitutes oppression towards the plaintiffs. This is in circumstances where there remain real issues about the need for equity in the amount referred to in the proposed resolution and the share price at which those shares are to be offered. These issues arise from the material put forward on the July board meeting and the further documents obtained by reason of the court orders, including the Intergrain cashflow and the US cashflow which, in my view, have not been adequately explained. It also arises from the other matters relating to the current financial position of the Company, which I will consider in the context of the balance of convenience.
It suffices to say that I am satisfied that there is a more than arguable case that the plaintiffs have been subject of oppressive conduct on the part of the defendants in relation to the proposed resolution at the 15 October board meeting.
Further, in my view, there is an arguable case that the defendants intended to issue shares to a value of $668,000 without first making an offering to the other shareholders under clause 14 of the shareholders’ agreement. I note that counsel for the defendants submitted that it was always the intention of the defendants to comply with clause 14. I acknowledge that, in response to the threat of this application, the defendants in correspondence said they would comply with clause 14. However, that intention was not made plain in the notice of the 15 October board meeting or the proposed resolution. Further, the intention does not appear consistent with the email correspondence produced before me in this application.
For example, Exhibit TG19 is an email exchange between Mr Kleinig and Katie Winter, one of the third parties, on 23 and 24 September 2019. Mr Kleinig’s email dated 23 September 2019 requests the deposit of investment funds into a particular bank account of the Company and he notes that, ‘Upon receipt of funds, shares will be issued and a share certificate will be sent to you electronically’. In her response dated 24 September, Ms Winter notes that the funds have already been deposited. As a result, I consider there is an arguable case that the defendants intended to issue shares to a value of $668,000 without first offering them to existing shareholders as they were required to do under clause 14.
Balance of Convenience
I will now turn to the balance of convenience. First, much was made by the defendants of the fact that the decisions of the directors of the Company relating to its financial position (including to have a rights issue) are properly decisions within the discretion of the directors, and the Court should allow the meeting to proceed and examine the results.
However, consistent with the principles relating to interlocutory injunctions, the Court will prevent resolutions being put to a meeting which are not in accordance with the lawful and contractual obligations of the parties. Many authorities were cited by counsel for the plaintiffs which support this principle including the decision of Sifris J in Strategic Management Australia AFL Pty Ltd v Precision Sports & Entertainment Group Pty Ltd,[9] the decision of Barrett J in Hopkins Professional Services Pty Ltd v Foyster Holdings Pty Ltd[10] and of Goldberg J in Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd.[11]
[9](2016) 114 ACSR 1.
[10](2001) 39 ACSR 519.
[11](2005) 55 ACSR 583.
In my view, the real issue relating to the balance of convenience turns on the current financial position of the Company. This is because, as noted above, the defendants contended that having regard to the Company’s present liabilities and contractual commitments, the Company will not be able to meet its liabilities without a capital injection ‘very soon’ and the board may have to consider the appointment of administrators.[12]
[12]Affidavit of Donald Ian Clarke sworn 15 October 2019 (the ‘first Clarke affidavit’) [26]. See also [33].
Counsel for the defendant submitted that there was uncontroverted evidence before the Court that the Company required further funding of $664,000 as well as a further $750,000 in early February 2020. I do not accept that the evidence supports such a submission.
The evidence presented by the defendants about the Company’s current and potential position was of short compass and conclusionary. I understand this was an urgent interlocutory application. However, I am bound to determine this application on the basis of the evidence before me.
As noted above, the Company obtains funds from a mixture of capital injections from shareholders, third party investors and government funding. One of the largest sources of funding is the CRC-P moneys. However, the CRC-P moneys were not included in the BOD cashflow forecast in the July board papers. The basis for this has not been adequately explained before me.
Mr Clarke deposes in paragraph 26 of his first affidavit that the BOD cashflow forecast is accurate, although he says it should refer to a further $195,581 from CRC-P in September 2019. That statement is inconsistent with the Intergrain cashflow, which refers to the receipts of income of $195,000 in September 2019 and February 2019, presumably from CRC-P. Again, the Intergrain cashflow has not been explained on oath before me.
Paragraph 26 of Mr Clarke’s affidavit is also inconsistent with the draft profit and loss report for the Company for September 2019 sent to the directors on 13 October 2019.[13] It records the receipt of grants in the month of September 2019 from CRC-P of $251,428 and a non-cash participant’s contribution at $74,808. I note that the Company cashflow also sent on 13 October 2019 records the receipt of approximately $195,000, presumably from CRC-P, in September 2019 and the same amount again in April 2020. Once again, none of this was disclosed in the BOD cashflow forecast and the discrepancy between all different amounts of income was not explained by Mr Clarke. Further, Mr Gawne has deposed that on 17 September 2019, the Company increased its commitment to the CRC-P program from $3,023,000 to $4,848,000.
[13]Exhibit TG-22 to the third Gawne affidavit.
The Court is left in a position in this application where the evidence of Mr Clarke is at best inconsistent with the draft accounts of the Company sent to its directors on 13 October. In addition, other Company documents before the Court indicate further inconsistencies which have not been explained.
As noted above, Mr Clarke deposed that the ICM investment has ‘failed’ or ‘fallen through’. However, it appears that this investment opportunity was deferred, at least in July 2019. In my view, the affidavit of Mr Clarke overstates the position.[14]
[14]I am prepared to accept for the purpose of this application that the ICM funding has been deferred until a resolution of this proceeding.
This is in circumstances where in his second affidavit, Mr Clarke produces documents relating to the negotiation of a loan agreement between the Company and ICM for the advance of $4.5 million in tranches. The draft ICM loan agreement provides funds for a limited purpose, namely ‘[t]o fund the Harvest and the subsequent Processing of the SHO Safflower grain derived from the Harvest and to fund the capitalisation of any interest under clause 5.2’.
The draft ICM loan agreement provides the facility will be used to pay all payments due to farmers contracted by the Company in respect of the harvest and processing costs incurred by the Company in respect of the grain derived from the harvest. The relevant harvest is the 2019/2020 year.
I note that the draft ICM loan agreement was not produced in the first Clarke affidavit. Indeed, it was only referred to in passing in paragraph 25, where he noted that ICM had agreed to lend money to the Company only for the purposes of contracted grain in February/March 2020 and that this unsecured loan was provided by ICM in the context of deciding whether or not to provide equity funding.
In my view, it is significant that the draft ICM loan agreement is still being negotiated and is about to be executed. There is no reference to any drawdown under this contract in the BOD cashflow forecast or any other cashflow which was drawn to my attention. In any event, it was not made clear to me why it was not included.
On the evidence before me, ICM were ready to sign the loan agreement subject of a few outstanding issues on 23 July 2019. The Company did not reply until 6 September 2019 to advance the execution of this important loan agreement. The draft agreement and the state of the negotiations shows that it is likely that there is funding for at least some of the core activities of the Company in the near future.
As to the potential investment by Intergrain, Artesian, Delta AG and AGR Partners, on the evidence before me, I am unable to form any concluded view that they have abandoned their intention to invest in the Company. This is particularly in circumstances where Delta AG appears to be one of the investors of $300,000 in the proposed rights issue.
The position of Intergrain and Artesian, as expressed in the 12 September 2019 email from Mr Kleinig to the directors, is inconsistent with the management team papers distributed on the same day, which I referred to above. In any event, the difference was not explained to me.
At paragraph 23 of his first affidavit, Mr Clarke deposed that the Company’s current bank balance as at 15 October was approximately $613,000, of which approximately $253,000 was funds subscribed by existing shareholders. He deposed the Company is due to pay $177,870 to Kalyx Australia on 15 October 2019, and $374,121 to the Department of Primary Industries (WA) ‘within the next month’ in respect of a crop in Kununurra. He deposed that the Company with incur approximately $193,000 for transport and processing costs associated with that crop and is continuing to incur liabilities to its other consultants.
I note in passing that, in his affidavit, Mr Clarke did not indicate whether any of these sums are covered by the draft ICM loan agreement. In oral argument, I was informed by counsel for the defendants that they were not.
In any event, Mr Gawne disputed many of these amounts. Relevantly, he disputed that there is any current liability to pay approximately $374,000 to the Western Australian government. This is a substantial liability relied upon by Mr Clarke to establish the Company’s need for funds. It does not appear to be reflected in the Company’s current financial statements.
Further, Mr Gawne deposed there are other means of obtaining funding, in particular, utilising a facility against the R&D tax incentive refund in 2020, estimated to be in the order of $325,000.
Mr Clarke estimated that the Company, in addition to the equity funding, will require another $750,000 by early 2020 in order to meet its business expenses. The bases for this assertion were not entirely clear to me. He deposed that the current position of the Company is reflected in scenario 1 in the BOD cashflow forecast, with the exception of the funding of $195,000 from CRC-P in September 2019. However, as noted above, that seems inconsistent with the other documents of the Company.
In oral argument, reference was made to the draft cashflow for September 2019 sent to the directors on 13 October 2019[15] to support the assertion of the need for $750,000. I note the document was not exhibited by Mr Clarke. It is true that document refers to a capital receipt of $750,000 in January 2020, but that document has not been adequately explained to me by Mr Clarke or in submissions. Further, as noted above, that document is inconsistent with other cashflow summaries relied upon before me.
[15]Exhibit TG-22 to the third Gawne affidavit.
In all these circumstances, I am unwilling to place significant weight on Mr Clarke’s evidence about the Company’s need for funds or the ability to obtain funds actually required other than by the issue of the shares under the proposed resolutions. As a result, I am not satisfied on the evidence before me that, if the proposed resolutions are not passed, the Company will not have sufficient funds to meet its commitments.
I am conscious that the Company, like all companies, has a need for funds by way of income or equity to continue to operate. However, the defendants have not established on the evidence before me that the Company is not in a position to have or raise sufficient funds to meet its commitments. Additional evidence would be required, perhaps supported by an independent expert, before I would be prepared to form a view about this. This is in circumstances where the effect of the rights issue under the proposed resolution would be to severely prejudice the plaintiffs’ position in circumstances where they have made out a prima facie case that the Company is being conducted in an oppressive manner.
In this regard, I consider that damages are unlikely to be an adequate remedy, given the significant involvement of the plaintiffs in the development and management of the Company and the fact that the effect of the rights issue would be to reduce the plaintiffs’ interest in the Company to below 25 per cent. As noted above, that percentage is significant. It would mean the plaintiff would lose the right to prevent changes to composition of the board and to amend the shareholders’ agreement.
Finally, the defendants submitted that the plaintiffs did not have sufficient assets to meet any undertaking as to damages. The defendants relied upon the fact that the second plaintiff has only shares in the Company and the first plaintiff has only a property valued at between $150,000 and $200,000. In my view, consistent with authority, this is a factor to be taken into account but is not a determinative factor in the balance of convenience.[16] In this case, the plaintiffs are prepared to put up all they have as security for the undertaking as to damages. Further, I am unsure of the true value of the shares of the second plaintiff. That will need to await the valuation in December.
[16]See, eg, Organic Marketing Australia Pty Ltd v Woolworths Ltd [2011] FCA 279 [69].
Having regard to all the matters set out above, I have formed the view that the balance of convenience favours the granting of the injunction to prevent the proposed resolution at the foreshadowed meeting, (which may result in the dilution of the plaintiffs’ shareholding) until trial or further order.
As to the expanded form of order sought to ensure a standstill until trial or further order, there is a risk some parties may suffer prejudice should they not be able to convert their debt into equity pursuant to issued convertible notes. The evidence before me is there are eight such lenders whose debts total $467,000. They include two defendants in this proceeding.
Counsel for the plaintiffs informed me that the plaintiffs sought details of these parties from the defendants and/or their solicitors to inform these lenders of this application, but the details were not provided.
In all the circumstances, I am minded to grant the further relief sought by the plaintiffs. The purpose is to avoid further dilution of the shareholdings of the plaintiffs in the Company in the circumstances of the alleged oppression. It may be that some of these lenders are materially prejudiced by this order. If that is so, they are entitled to come back pursuant to a liberty to apply and have their particular circumstances considered.
As a result, the interlocutory injunction sought will be granted until trial or further order. There will be liberty to apply.
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SCHEDULE OF PARTIES
S ECI 2019 02257
IN THE MATTER OF GO RESOURCES PTY LTD (ACN 165 327 033)
BETWEEN:
| TREVOR JOHN GAWNE | First Plaintiff |
| TANIHL HOLDINGS PTY LTD (ACN 169 611 670) | Second Plaintiff |
| - and - | |
| GO RESOURCES PTY LTD (ACN 165 327 033) | First Defendant |
| KLEIMAC PTY LTD (ACN 119 381 270) | Second Defendant |
| DONSOL INVESTMENTS PTY LIMITED (ACN 007 021 945) | Third Defendant |
| GRAPEFULL PTY LTD (ACN 131 623 357) | Fourth Defendant |
| DAVID JOHN HUDSON AND ANN HUDSON | Fifth Defendant |
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