Iron Horse Machines Pty Ltd v Olmate Holdings Pty Ltd
[2024] WASC 383
•18 OCTOBER 2024
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: IRON HORSE MACHINES PTY LTD -v- OLMATE HOLDINGS PTY LTD [2024] WASC 383
CORAM: LUNDBERG J
HEARD: 17 OCTOBER 2024
DELIVERED : 18 OCTOBER 2024
FILE NO/S: CIV 1671 of 2024
BETWEEN: IRON HORSE MACHINES PTY LTD as trustee for THE CROSS CV TRUST
Plaintiff
AND
OLMATE HOLDINGS PTY LTD as trustee for THE VERWIJMEREN CV TRUST
Defendant
OLMATE HOLDINGS PTY LTD
First plaintiff by counterclaim
ASHLEY SCOTT VERWIJMEREN as executor of the estate of THE LATE DARREN WAYNE VERWIJMEREN
Second plaintiff by counterclaim
NIGEL ALISTER VERWIJMEREN as executor of the estate of THE LATE DARREN WAYNE VERWIJMEREN
Third plaintiff by counterclaim
IRON HORSE MACHINES PTY LTD
First defendant by counterclaim
JAMES WILLIAM CROSS
Second defendant by counterclaim
Catchwords:
Practice and procedure - Plaintiff's application for summary judgment pursuant to Order 14 r 1 of the Rules of the Supreme Court 1971 (WA) - Specific performance and injunctive relief sought by the plaintiff - Business Succession Agreement entered into by the parties, the provisions of which were triggered by the death of one of the business partners - Agreement includes call and put option mechanisms - Dispute between the parties as to purchase price for transfer of equity to the surviving business partner - Counterclaim pleaded by the defendant - Whether obligation to transfer equity and obligation to pay purchase price interdependent or independent contractual obligations - Whether leave to defend should be refused - Summary judgment refused - Turns on own facts
Legislation:
Property Law Act 1969 (WA), s 9
Rules of the Supreme Court 1971 (WA), O 14 r 1, O 32 r 4, O 59 r 3
Result:
Application for summary judgment refused
Unconditional leave to defend the action granted
Category: B
Representation:
Counsel:
| Plaintiff | : | G J Douglas |
| Defendant | : | A J Tharby |
| First plaintiff by counterclaim | : | A J Tharby |
| Second plaintiff by counterclaim | : | A J Tharby |
| Third plaintiff by counterclaim | : | A J Tharby |
| First defendant by counterclaim | : | G J Douglas |
| Second defendant by counterclaim | : | G J Douglas |
Solicitors:
| Plaintiff | : | Douglas Lawyers |
| Defendant | : | Bennett |
| First plaintiff by counterclaim | : | Bennett |
| Second plaintiff by counterclaim | : | Bennett |
| Third plaintiff by counterclaim | : | Bennett |
| First defendant by counterclaim | : | Douglas Lawyers |
| Second defendant by counterclaim | : | Douglas Lawyers |
Case(s) referred to in decision(s):
CBP Centre Pty Ltd v VentureCrowd Pty Ltd [2024] QSC 139
Coplin v Al Maha Pty Ltd [2019] NSWCA 159
Fancourt v Mercantile Credits Limited [1983] HCA 25; (1983) 154 CLR 87
Field Camp Services Pty Ltd v Site Accommodation Pty Ltd [No 2] [2012] WASCA 27
Gardenisle Pty Ltd v Johnson [2019] WASC 271
Gerovich v Gerovich [2018] WASC 153
Hadouken Pty Ltd v D Comm Infrastructure Pty ltd [2024] WASC 330
Hillam v Iacullo [2015] NSWCA 196; (2015) 90 NSWLR 422
HP Mercantile Pty Ltd v Hartnett [2016] NSWCA 342
HSBC Bank Australia Ltd v Mavaddat [2015] WASC 153
Kay v Playup Australia Pty Ltd [2020] NSWCA 33
Noahs Rosehill Waters Pty Ltd v Centreplex Pty Ltd [2023] WASC 57
NRW Contracting Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2020] WASCA 107
Pipikos v Trayans [2018] HCA 39; (2018) 265 CLR 522
PS Holdings Ltd v Verheggen [2000] WASC 31
Sugar Australia Limited v Conneq [2011] NSWSC 805
Westpac Banking Corporation v Anderson [2017] WASC 106
Table of Contents
A. Introduction
B. The Business Succession Agreement
C. A dispute emerges following Darren's death
D. Application for summary judgment
E. Relevant legal principles
F. The summary final relief sought by the plaintiff
G. How should the plaintiff's application be determined?
H. Conclusion and orders
LUNDBERG J:
A. Introduction
This action concerns two good mates from Bunbury, Mr James Cross and the late Mr Darren Verwijmeren.
They were born less than 6 months apart, met each other on the first day of high school, and remained friends from that point. Later, they went into business together, through their corporate alter egos, Iron Horse Machines Pty Ltd and Olmate Holdings Pty Ltd.[1] Those corporate vehicles are respectively the plaintiff and defendant to this action.
[1] Iron Horse is the trustee for a trustee known as Cross CV Trust and Olmate Holdings is the trustee for the Verwijmeren CV Trust: Statement of claim, [2] and [4].
James and Darren established an earthmoving and civil works business known as Cross Verwijmeren, which has provided services for exploration, mining and infrastructure projects throughout the State, including the 'wet hire' and 'dry hire' of equipment.
The business appears to have been very successful.[2]
[2] First Cross Affidavit, [15] - [35].
B. The Business Succession Agreement
As to the corporate structure, the plaintiff and defendant companies were at all material times the shareholders in equal shares in two companies, being Cross Verwijmeren Pty Ltd and Cross Verwijmeren Holdings Pty Ltd (which I will refer to as the Company and CV Holdings). The two business partners were the directors of these entities.
I have prepared a simple diagram which explains the corporate structure, which I will include within these reasons. The details in the diagram are drawn from the ASIC records which are attached to the First Cross Affidavit.
It appears that the capital assets of the business are owned by a partnership and by CV Holdings, and those capital assets are licensed to the Company, pursuant to an operating agreement. The Company appears to be the operating vehicle for the business itself. The partnership is the asset holding partnership between the plaintiff and the defendant.
At the heart of the dispute is an agreement James and Darren made in happier times. The agreement is found within the written instrument entitled 'Business Succession Agreement' and which is dated 10 December 2013 (Business Succession Agreement).[3] Although described as an agreement, the instrument itself has been drafted and executed using the language of a formal deed. There is a strong argument the instrument is a deed, given the provisions of s 9 of the Property Law Act 1969 (WA).
[3] First Cross Affidavit, Attachment JWC 5. There is an indication within the Business Succession Agreement that CV Holdings was intended to be a party thereto, but it is not identified as such in each location of the instrument one would expect, and it did not execute the instrument. Indeed, no execution clause for this purpose was included in the instrument.
The Business Succession Agreement embodies a contractual regime which is triggered if either of the business partners dies or becomes totally and permanently disabled. The regime employs call option and put option provisions, which I will explain in a moment. Within the recitals to the agreement the following statement appears:[4]
The Shareholders wish to make provision for the continuation of management of the Business in the event of the death or incapacity of either one of the Directors.
[4] Business Succession Agreement, Recital F.
The call option in cl 3.1 allows the surviving partner (defined as the 'Receiving Shareholder') to acquire the half interest of the other partner (the 'Selling Shareholder'), with such interest being referred to as the 'Equity'. The acquisition is to be undertaken at the fair market value calculated either by agreement, or through the valuation process in cl 4.
If the call option is not exercised within a particular period (being 90 days), the other partner has the opportunity through a put option in cl 3.5 to require the surviving partner to buy that 'Equity'.
The term 'Equity' is defined in cl 1.1 of the Business Succession Agreement to mean, in respect of a particular shareholder:
(A)all of its shares, options, convertible notes and other proprietary interest in the Company and in Holdings but excluding any sum owed by the Company or Holdings to that Shareholder or its Relevant Director; and
(B)all of its interest in the Partnership.
If either of the options is exercised, the surviving partner (that is, the 'Receiving Shareholder') will in effect acquire the entirety of the business which the partners had jointly built up over time, with the estate and family of the other partner being given financial benefit and protection through receipt of the fair market value of their 'Equity' in the business.
Integral to the payment structure for the 'Equity' under the Business Succession Agreement is an insurance arrangement whereby policies of life insurance were to be taken out in the names of the business partners, with the premiums paid by the business: cl 7.1 and cl 7.2. The proceeds of these generous life insurance policies would then be brought to account in reduction of the purchase price payable by the surviving partner: cl 5.1(a) and cl 5.1(d).
C. A dispute emerges following Darren's death
As a result of the early death of one of the business partners through mesothelioma (that is, Mr Darren Verwijmeren), the two corporate alter egos now find themselves in dispute, dealing with a difficulty which the Business Succession Agreement, at least on its face, seemed designed to avoid.[5]
[5] First Cross Affidavit, [12].
Unfortunately, the apparent intention of that instrument has not translated into reality.
The surviving partner (being Mr James Cross) insists, through his pleadings and affidavits, that the terms of the Business Succession Agreement have been honoured, that he has validly exercised the call option under cl 3.1, that he has been ready, willing and able to pay the fair market value of the 'Equity' calculated in accordance with the agreement, and he seeks relief in this action to have the 'Equity' of the defendant transferred to him.
The corporate alter ego of the late Darren Verwijmeren, and the executors of his estate, see the matter through a different prism.
They point to, among other things, issues as to the proper construction and effect of the Business Succession Agreement (including infelicities in the drafting of the instrument which may affect its meaning), errors in the parties' compliance with that agreement, errors in the valuation process, the existence of unexecuted (but nonetheless still valid, they say) variations to the agreement, and they also plead a counterclaim against the plaintiff.
This action would ordinarily proceed to trial, so the evidence and the respective cases of the parties can be appropriately tested. A trial of the action is some time away given its current status, bearing in mind the pleadings have not yet closed, and various interlocutory steps remain to be completed, including discovery and the exchange of the parties' evidence. Alternatively, of course, the dispute which underlies the action may be settled on commercial terms, either through the parties' own endeavours or through an assisted mediation.
D. Application for summary judgment
The plaintiff contends that it does not, and should not, need to wait until trial in order for the transfer of the defendant's 'Equity' to the plaintiff to occur. The plaintiff asserts that, whatever issues the defendant and the executors may have as to valuations and price, there is no good legal defence to the immediate transfer of the defendant's 'Equity' to the plaintiff, to enable the plaintiff to move forward and run this successful business.
Accordingly, the plaintiff has brought the present application for summary judgment of its claim, pursuant to O 14 r 1 of the Rules of the Supreme Court 1971 (WA) (RSC).[6] Order 14 r 1(1) provides:
Where in an action to which this Order applies a statement of claim has been served on a defendant and that defendant has entered an appearance, the plaintiff may, on the ground that that defendant has no defence to a claim included in the writ, or to a particular part of such claim, or has no defence to such a claim or part except as to the amount of any damages claimed, within 21 days after appearance or at any later time by leave of the Court, apply to the Court for judgment against that defendant.
[6] Chamber summons dated 16 July 2024. The plaintiff's claims are set out in the statement of claim dated 7 June 2024.
In support of that application, Mr Cross has sworn two affidavits[7] which provide detailed factual background to the claims and explain the course of events between the parties and their communications over the relevant period, commencing in around 2022 in particular. Among other matters, Mr Cross has deposed that, unless and until the defendant's interests are transferred to and fully vested in the plaintiff, it is not possible to refinance or raise further capital, or generally manage the business in the way the plaintiff sees fit.[8]
[7] First Cross Affidavit sworn 16 July 2024 and Second Cross Affidavit sworn 10 September 2024.
[8] First Cross Affidavit, [101].
In opposition to the application, one of the executors, Mr Nigel Verwijmeren, has affirmed an affidavit which details matters concerning the asserted variations to the Business Succession Agreement and various other matters raised in the pleaded defence and counterclaim dated 20 August 2024.[9] Two additional documentary exhibits were tendered by the defendant without objection during the hearing, which I understand had been obtained by the defendant through the issue of a subpoena.[10]
[9] Verwijmeren Affidavit affirmed 26 August 2024.
[10] Exhibit D1 is a letter from Oakmont Financial Group to Mr Cross dated 18 May 2022. Exhibit D2 is a letter from BT (Westpac) to CV Holdings dated 18 May 2022.
As is typically the case, neither of the deponents of the affidavits was called to be cross-examined on the contents of the affidavits. The evidence before the Court, at present, thus remains unchallenged and untested.
Although the parties are in dispute, and although the defendant strongly opposes the plaintiff's application for summary judgment, it is clear that all parties are singing from the same hymn sheet as to the ultimate, practical outcome of the ownership of the business. That is, the parties accept that, once the dust settles on the disputes, the plaintiff will be entitled to acquire full ownership of the defendant's 'Equity' in the business, such that the plaintiff will have complete ownership and control of the 'Cross Verwijmeren' business.
The parties are all sophisticated persons of commerce, ably represented by commercial law firms. It is undoubtedly within the gift of the parties to reach a commercial accommodation by which the defendant's 'Equity' is immediately transferred to the plaintiff, with such additional terms they may agree including as to security, with the residue of any insoluble price and valuation issues (including the misleading or deceptive conduct claim and the oppression claim pleaded in the counterclaim)[11] to be held over for determination by the Court at trial. That has not occurred.
[11] Defence and counterclaim, [60] and [69].
Instead, the Court is now moved by the plaintiff to grant final relief on its claims for both specific performance and injunctive relief, by way of the present summary application. The plaintiff accepts that the balance of the claims, including the counterclaim, would then be left for trial which would, at least, narrow the aperture of the dispute between the parties. I pause to observe that the application which has been brought is not for interlocutory injunctive relief, pending trial. The relief, to be clear, is final in nature.
The parties have filed detailed submissions in relation to the present summary judgment application, dated 16 September 2024 (in the case of the plaintiff) and 1 October 2024 (in the case of the defendant). I had the opportunity to review those submissions ahead of the hearing and heard oral submissions from both counsel at the hearing yesterday in amplification of those submissions. I have also had the opportunity to review the current pleadings in the action.
Before turning to explain my reasons and my view as to the outcome of this application, it is appropriate to confirm the principles of law which should be applied in this regard, and to briefly set out the relief which is sought and the basis therefor.
E. Relevant legal principles
The relevant principles for the determination of a summary judgment application such as this are well established. The principles were summarised by the Court of Appeal in NRW Contracting Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd.[12] I respectfully adopt the Court of Appeal's recitation of the principles. It is sufficient to emphasise the following matters for present purposes.
[12] NRW Contracting Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2020] WASCA 107 [54]. See, further, the recent summary of the principles by Whitby J in Hadouken Pty Ltd v D Comm Infrastructure Pty Ltd [2024] WASC 330 [17] - [21].
First, the jurisdiction of the Court to award summary judgment should be exercised with great care and not be exercised unless it is clear that there is no real question to be tried. The Court should refuse leave to defend and grant summary judgment where the facts which are established are conclusive such that it is possible to say, without doubt, that there is no question to be tried: Fancourt v Mercantile Credits Limited.[13]
[13] Fancourt v Mercantile Credits Limited [1983] HCA 25; (1983) 154 CLR 87, 99.
Second, a plaintiff who applies for summary judgment bears the onus of persuading the Court that the claim is a good one and that there is no defence. If the plaintiff's affidavit in support of the application makes out a prima facie case, an evidentiary burden will pass to the defendant to show that there is a defence to the action. However, the overall legal burden remains with the plaintiff to persuade the Court that the relief should be granted: Westpac Banking Corporation v Anderson.[14]
[14] Westpac Banking Corporation v Anderson [2017] WASC 106 [102].
Third, the question whether a claim is so untenable that it cannot possibly succeed may require extensive argument. Summary judgment is not to be confined to cases where it is apparent at a glance that the claim is untenable: NRW Contracting Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd.[15]
[15] NRW Contracting Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [54] (Murphy JA).
Fourth, notice of a proposed defence or notice of the actual defence, will not disqualify a plaintiff from asserting the belief that there is no defence to the claim: Westpac Banking Corporation v Anderson. Whilst leave to defend ought to be given where there is a counterclaim that could be raised as an equitable set off, a counterclaim merely amounting to a cross‑action does not provide a defence to the plaintiff's claim so as to prevent the award of summary judgment: Field Camp Services Pty Ltd v Site Accommodation Pty Ltd [No 2].[16]
[16] Field Camp Services Pty Ltd v Site Accommodation Pty Ltd [No 2] [2012] WASCA 27. See also HSBC Bank Australia Ltd v Mavaddat [2015] WASC 153 [89].
Fifth, if there is a conflict of evidence on the affidavits, the Court should approach the application for summary judgment on the assumption that the facts set out in the affidavits relied upon by the party resisting the application (in the present, the defendant) will ultimately be accepted at trial: Gerovich v Gerovich.[17]
[17] Gerovich v Gerovich [2018] WASC 153 [32] and Hadouken Pty Ltd v D Comm Infrastructure [21].
These principles must be applied by the Court in resolving the plaintiff's application and I will proceed on that basis.
F. The summary final relief sought by the plaintiff
Turning then to the application itself, the plaintiff seeks the following relief, as detailed in the chamber summons (which I observe was drafted and filed by the solicitors for the plaintiff who were previously on the record prior to the present solicitors):
(i)Specific performance of the Agreement, by way of the transfer to the plaintiff of the defendant's Equity, free of all encumbrances, where the defendant's Equity comprises:
(A) the defendant's shares, options, convertible notes and other proprietary interest in the Company … and in … [CV Holdings]; and
(B) the defendant's interest in the Partnership between the plaintiff and the defendant.
(ii) An injunction to command the defendant, by its lawfully appointed officers, to cause the defendant to transfer to the plaintiff, the defendant's Equity, free of all encumbrances, including without limitation thereto by:
(A) executing all necessary instruments;
(B) delivering up to the plaintiff all property comprising the defendant's Equity;
(C) cooperating with the plaintiff to give effect to the transfer.
(iii) Further or other relief as the Court may deem fit and proper; and
(iv) Costs.
Within the chamber summons itself the plaintiff has expressly set out the grounds for the application. That has been done in compliance with O 59 r 3(3) RSC, a provision which, regrettably, not all drafters of chamber summonses appreciate is a mandatory requirement of the Rules. The grounds are stated in the following terms:
The plaintiff is the equitable owner of the defendant's Equity, by virtue of the operation of the express terms of the Agreement, whereby the plaintiff having exercised the option under clause 3.1 of the Agreement, the defendant is obliged to immediately transfer to the plaintiff the defendant's Equity.
The plaintiff has an accrued and indefeasible right to the specific performance of that part of the Agreement, immediate performance of which by the defendant is not conditional upon payment of the Balance Price, nor the performance by the plaintiff of any other obligation whatsoever, notwithstanding that the plaintiff remains ready, willing and able to pay the defendant the Balance Price in any event.
The defendant has no defence to the claim.
As already noted, a procedure for transfer of the 'Equity' is contained within the operative provisions of the Business Succession Agreement. The plaintiff alleges that the call option procedure in cl 3.1 has been followed and has put on evidence to this effect.[18]
[18] First Cross Affidavit, [56] - [101].
Indeed, it does not appear to be in dispute that the plaintiff exercised the call option by written notice on or around 16 August 2023.[19] The plaintiff submits that it is not in dispute that two valuations were then conducted (allegedly pursuant to cl 4 of the Business Succession Agreement) to determine the Purchase Price, but it nonetheless recognises that the defendant has raised issues as to whether the valuations included everything they ought to have.[20]
[19] Statement of Claim, [12]. The written notice dated 16 August 2023 is Attachment JWC 7 to the First Cross Affidavit.
[20] Plaintiff's submissions, [24].
In simple terms, cl 4.1 provides that the 'Purchase Price' of the 'Equity' must be determined on the basis of the fair market value of the 'Equity' at the date of 30 July 2023. The parties have a period of 28 days to agree on the valuation.
It is not in dispute that the time period for agreeing the valuation was extended by the agreement of the parties (and the effective date for the valuation was also modified). Ultimately, even with an extended period, no agreement was reached. The terms of the agreement provide a process for addressing this scenario.
Clause 4.2 provides that if the plaintiff and the defendant are unable to agree upon the fair market value of the 'Equity' then the fair market value will be determined by the accountant of the Company, who is Mr Reon Tither of Breathe Accounting. In undertaking the valuation, the agreement provides that the accountant must assume a willing purchaser and a willing vendor, have regard to the factors referred to in cl 4.3, and act as an expert and not as an arbitrator.
Despite being described as an expert within the agreement, the accountant is not in fact called upon to exercise valuation expertise. Rather, by cl 4.3, the accountant must appoint two independent and suitably qualified accountants to determine the fair market value of the 'Equity'. In doing so, he must instruct them to have regard to the various specific factors which are expressed in cl 4.3, and any factors which they believe should properly be taken into account. Those factors include the prospects of the business and the value of the estimated future maintainable earnings of the Company, at a specified capitalisation rate appropriate to the Business. The accountant must, however, ignore the effect of any 'Insurance Payment', as that term is defined.
It is not in contest that the accountant appointed the accounting firms RSM and Pitcher Partners as the valuers to value the fair market value of the 'Equity' for the purposes of the Business Succession Agreement.[21]
[21] Statement of Claim, [20]; Defence and Counterclaim [14] and [15].
The Accountant then determined the fair market value of the 'Equity' as the average of the two values determined by the appointed valuers, being the figure of $23,429,261. It is pleaded by the plaintiff that this was undertaken pursuant to cl 4.5.[22]
[22] Statement of Claim, [21].
By email sent on 15 December 2023, the accountant then provided the plaintiff and the defendant with the determination of the fair market value of the 'Equity'. It is further pleaded by the plaintiff that this was undertaken pursuant to cl 4.6.[23] The accountant also provided the plaintiff and the defendant with a copy of the valuations performed by the valuers.[24]
[23] Statement of Claim, [22].
[24] Statement of Claim, [23] and [24].
Thereafter, it is evident that the accountant issued two further valuations for the purposes of the price determination process under the Business Succession Agreement.[25] That is prima facie inconsistent with the requirements of the agreement.
[25] Defence and Counterclaim, [18], which pleads the email communications from Mr Tither sent on 3 January 2024 and 5 February 2024 which contain adjusted determinations. I refer to the relevant communications which are found at Attachment JWC 14 and Attachment JWC 17 to the First Cross Affidavit.
G. How should the plaintiff's application be determined?
In summary, the plaintiff submits that by its exercise of the option which was granted by cl 3 of the Business Succession Agreement, it is entitled to the transfer of the defendant's 'Equity'. It does not appear to be in dispute that the majority of the consideration (being the sum of $10,551,581) has been paid for the transfer of the 'Equity' by way of the proceeds from the insurance policy. It is said by the plaintiff that all that remains in dispute is the amount of the balance of the payment.
The plaintiff says that the relevant amount to be paid is $1,998,021 and that it is ready, willing and able to pay this sum. In contrast, the defendant says the relevant amount still to be paid is $4,497,544 (making the relevant difference the sum of $2,499,523). To state the obvious, there is quite a sizeable difference between the parties.
The plaintiff asserts it is, and has been, ready, willing and able to perform the contract at all times. The plaintiff says it has been ready, willing and able to pay the defendant the 'Balance Price' from the date of finalisation of the determination of the fair market value of the 'Equity'. The plaintiff asserts it remains ready, willing and able to pay the defendant the 'Balance Price', as deposed to in the First Cross Affidavit.[26] As counsel for the defendant has correctly observed, there is no direct evidence that the plaintiff has formally tendered the amount remaining to be paid.[27]
[26] First Cross Affidavit, [101].
[27] ts 61.
The plaintiff properly acknowledges in its submissions that the defendant has raised several issues in opposition to the Application, although it invites the Court to conclude that those issues do not preclude the summary relief which is now sought. The defendant maintains these are triable issues. In broad terms, the issues are described below.
The defendant asserts that the Business Succession Agreement was materially varied by the parties, albeit no further version of the varied agreement was executed by the parties. The defendant points to the subsequent conduct of the parties which is said to be consistent with the variations (and to constitute part performance of the varied agreement), and has produced in evidence a marked-up version of the original agreement which was prepared by solicitors and was circulated to the parties.[28] As I say, a written instrument embodying those terms was never formally executed.
[28] Verwijmeren Affidavit, Attachment NV 49.
The variations to the Business Succession Agreement identified by the defendant concern, principally, the Key Man Insurance Policy and the Trauma Policy provisions. The variations, if they are given legal effect, would not materially alter the obligation to transfer the defendant's 'Equity' to the plaintiff, but would impact value and price issues.
As to the legal effectiveness of the variations, the defendant points to the evidence of the conduct of Mr Darren Verwijmeren in reducing his life insurance policy benefit and the conduct of both partners in causing CV Holdings to take out a key person life insurance policy for Mr Verwijmeren as evidence of partial performance by the parties of what is described by the defendant as the 'Varied Agreement'.[29] I accept these matters raise triable issues.[30]
[29] Defendant's submissions [32].
[30] Pipikos v Trayans [2018] HCA 39; (2018) 265 CLR 522 [3] and [49] (Kiefel CJ, Bell, Gageler and Keane JJ).
The defendant also maintains that the valuations conducted by RSM and Pitcher Partners were erroneous in that they were not based on all the necessary information, and that Mr Tither's determinations were based on incomplete and admittedly wrong information, and without regard to the insurances at all. It is contended that the purchase price calculated as being payable by the plaintiff must also be increased to take account of the insurance proceeds. The defendant's contentions in this regard are detailed in the defence and counterclaim which has been filed,[31] and summarised in the submissions.[32] As I have noted already, there appear to be three determinations made by the accountant, rather than the single determination contemplated by the Business Succession Agreement.
[31] Defence and Counterclaim, [15], [18], [25] - [41], [42] - [59], [60], [65] and [69].
[32] Defendant's submissions [22] - [44].
It is unnecessary to say much more about these contentions in the context of the present application. I am satisfied the contentions present arguable issues which are incapable of resolution on a summary basis. They are factual and legal matters to be tested at trial. This includes whether or not the purported variations are of any legal effect, notwithstanding the 'no oral modifications' clause in the Business Succession Agreement.[33]
[33] Business Succession Agreement, cl 14. I refer to the observations of Archer J in Gardenisle Pty Ltd v Johnson [2019] WASC 271 [244] in this regard. The contrary position in the UK has not yet been followed in Australia: Noahs Rosehill Waters Pty Ltd v Centreplex Pty Ltd [2023] WASC 57, [15] (Sanderson M).
I should pause to make mention of one of the authorities relied upon by the plaintiff, being PS Holdings Ltd v Verheggen.[34] In that case, the Master was in a position to comfortably reject the defendant's arguments that the principal agreement, being an Option Agreement, had been varied. The defendant had erected those arguments in opposition to a summary judgment application brought seeking monetary judgment on the Option Agreement. The Master concluded not only that the purported variations were not in writing, contrary to the express stipulation to this effect in the agreement, but that the variations would be inconsistent with the agreement and so ineffective as a collateral contract, and further, that the defendant's claim was 'inherently incredible'.[35] The case may be distinguished accordingly.
[34] PS Holdings Ltd v Verheggen [2000] WASC 31 (Sanderson M).
[35] PS Holdings Ltd v Verheggen [11] - [13] (Sanderson M).
Quite apart from the matters I have identified above, there is an obstacle of greater significance which I consider stands in the way of the relief which the plaintiff seeks through this application. This issue is whether, on a proper construction of the Business Succession Agreement, the obligation which rests on the defendant to transfer the 'Equity', and the obligation on the plaintiff to pay the Purchase Price, are interdependent or not.
The issue is an important one given the essence of the final relief now sought by the plaintiff is for specific performance of only part of the extant obligations arising under the Business Succession Agreement, namely the transfer of the 'Equity'.[36]
[36] The issue was recognised by McDougall J as creating difficulties in an interlocutory injunction setting in Sugar Australia Limited v Conneq [2011] NSWSC 805, [20].
The question of interdependency is one that I raised with both counsel during the course of the hearing yesterday.
At least initially, counsel for the plaintiff put the application on the basis that any questions of payment would need to await trial, in the event the plaintiff's summary judgment application was upheld.
Ultimately, however, I accept that counsel for the plaintiff made it clear to the Court in the course of argument that the plaintiff accepts the grant of the relief may be conditioned on the payment by the plaintiff of the amount it says it has been ready, willing and able to pay.[37] This is the amount calculated under the Business Succession Agreement, which is pleaded as being the sum of $1,998,021.[38] It will be recalled that the sum pleaded by the defendant as being correct is much higher, being $4,497,544.[39]
[37] ts 81 - 82.
[38] Statement of Claim, [33].
[39] Defence and Counterclaim, [64].
For my part, I do not think the plaintiff's proposal would cure the difficulty.
Even if the Court was to approach the summary judgment application on this basis, and the relief was moulded accordingly to require immediate payment of the lesser amount prior to the orders for the transfer taking effect, it could not be said in my view that the grant of the equitable relief which is sought is unassailable. Given the discretionary considerations relevant to the exercise of the equitable jurisdiction in this regard, it would be (and, indeed, it is) a difficult task for the plaintiff to persuade the Court that there are no discretionary factors which would preclude the grant of this relief.
As matters stand, to order the specific performance of the transfer obligation only upon payment of an amount far less than that sought by the defendant, with no alternative security or accommodation mechanism in place (assuming one could be fashioned) to protect the interests of the defendant, would be for the Court to tip the balance of the interests too far in favour of the plaintiff and may arguably result in hardship to the defendant and its interests.
In my respectful view, final equitable relief should not be granted on the basis that the plaintiff would receive all that it is entitled to under the instrument (namely, the transfer of the defendant's 'Equity') in circumstances in which the defendant receives the lower amount to which it may be entitled.
Let me return to the question of the interdependency of the obligations, which I mentioned a moment ago. At least at this stage, on an interlocutory application such as this, I consider it appropriate to proceed on the basis that, absent clear words, a construction should be favoured of a commercial instrument such as this by which obligations, such as the transfer of a business interest and the payment of valuable consideration for that transfer, are characterised as being interdependent, rather than independent. I refer in this regard to the observations of Leeming JA in Hillam v Iacullo[40] as to the modern approach in this regard. A fulsome constructional exercise is needed to address this question, for which the present application is an inapt vehicle.
[40] Hillam v Iacullo [2015] NSWCA 196; (2015) 90 NSWLR 422 [93] - [109], and at [107] in particular (Leeming JA, with Basten and Ward JJA agreeing).
As the detailed analysis undertaken by Leeming JA demonstrates, the constructional exercise may not be straightforward. Authorities such as NRW Contracting Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd, to which I have earlier referred, explain why the summary judgment procedure can be unsuitable for the resolution of construction questions which require full argument and a consideration of the key terms of the instrument in the context of the contract as a whole, as well as by reference to the broader context.[41] There are other procedural mechanisms by which such issues can be resolved, including the determination of a preliminary issue pursuant to O 32 r 4 RSC, or by making application for the final trial of the action to be expedited. Proper grounds must be demonstrated to engage either of these mechanisms.
[41] NRW Contracting Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [93] - [94] (Murphy JA), [123] (Beech and Vaughan JJA).
One authority in which a conclusion of contractual independence was reached, following trial, is Kay v Playup Australia Pty Ltd.[42] The facts of that case have some broad similarities to the present. It involved the sale of a shareholding in an online gambling company for consideration which was structured to be paid on the basis of an upfront payment when the buyer entered into possession, with the deferred payment payable in monthly instalments. Various warranties were included in the agreement, including as to the financial condition of the business. There were also provisions requiring the seller to agree, or to make, adjustments to the purchase price.
[42] Kay v Playup Australia Pty Ltd [2020] NSWCA 33.
The trial judge's conclusion that the buyer's obligation to make the deferred payment was dependent on the seller fulfilling his obligations (to agree or make adjustments to the price and to deliver updated lists of liabilities and debtors) was overturned on appeal. Brereton JA, with whom Macfarlan and Simpson JJA agreed, concluded that on the proper construction of the agreement, the buyer's obligation to pay the deferred payment was not suspended by the seller's failures. It was said that there was an insufficient connection between the obligations, such that they ought be regarded as independent.[43]
[43] Kay v Playup Australia Pty Ltd [55] - [81] (Brereton JA), especially at [67] and [80].
It is submitted by the plaintiff in the present case that, on a proper construction of this instrument, it should be concluded that the obligation to transfer the 'Equity' is independent of the contractual obligation to pay the 'Purchase Price'. There are some indicia in the Business Succession Agreement to this effect, including recital F, as well as the overall timing of the steps in the agreement, the final and binding nature of the valuation, the structured payment provision,[44] and the inclusion of a guarantee provision.[45]
[44] Business Succession Agreement, cl 5.1(d).
[45] Business Succession Agreement, cl 5.4.
The structured payment provision in cl 5.1(d) provides that the 'Receiving Shareholder' must have paid at least 50% of the 'Balance Price' within 120 days of the triggering event. The remainder is to be paid by 12 equal quarterly instalments (which translates to a three year period), with the first such instalment due 210 days after the triggering event (being 3 months after the 120 day time period). On its face, this payment regime may tend to suggest the transfer of the business interest was not objectively intended to be delayed until full payment was effected by the 'Receiving Shareholder'. At the outer point, full payment would not be due for some three years after the death of one of the business partners. The evident intention of the agreement is unlikely to have been to delay transfer of control for such a lengthy period.
However, when the time periods under the Business Succession Agreement are chronologically explicated, some uncertainty arises, in my view, as to whether the timing stipulated in cl 5.1(d) dovetails, or clashes, with the timing in cl 3, cl 4 and cl 5.2. For example, it is unclear how the 'Receiving Shareholder' could satisfy the payment obligation in cl 5.1(d)(i), to pay 50% of the balance within 120 days of the death of his fellow partner, if the call option in cl 3.1 was not exercised within 90 days but the put option in cl 3.5 was then exercised on the 179th day following the triggering event. In this scenario, the obligation to pay the amount of 50% would appear to arise at an anterior point in time to the fair market value being determined.
I cannot properly form the view, at this stage at least, that the plaintiff's construction of the instrument and the independence of the transfer and payment obligations, is the only construction which is open and available on the terms of the instrument. Further, and more fundamentally, I am not satisfied the construction posited by counsel for the defendant is unarguable. I am also conscious that the Business Succession Agreement contains drafting errors[46] which, although not necessarily impacting the functionality of the instrument, at least encourage a cautious approach to the construction exercise.[47]
[46] For example: the possible inclusion of CV Holdings as a party; the misdescription of cl 4.7 as cl 4.5; the error in the reference to cl 5(d) in the definition of 'Insurance Payment' (which may have been intended to refer to cl 5.2(d)); the erroneous reference to cl 5 in the definition of 'Purchase Price' (which may have been intended to be a reference to cl 4); and the absence of any details in Column 2 to Schedule 1.
[47] As to internal inconsistencies and drafting infelicities, see HP Mercantile Pty Ltd v Hartnett [2016] NSWCA 342 [135] (Leeming JA, with Bathurst CJ and Payne JA agreeing) and Coplin v Al Maha Pty Ltd [2019] NSWCA 159 [74] (Payne JA, Macfarlan and Leeming JJA agreeing).
In my view, it is at least arguable that the transfer and payment obligations in question have a relationship of interdependency. That is perhaps most clearly found in the chausette to cl 5.1 which refers to the 'transaction' constituting good and full consideration for the transfer of the 'Equity' from the 'Selling Shareholder'.
I have extracted the terms of cl 5.1 below:
5.MANNER OF PAYMENT OF PURCHASE PRICE
5.1Purchase Price on Death or Total & Permanent Disability
If upon or as a result of the happening of an event referred to in clause 3.1(a) or 3.1(b) ("the trigger event"), the Receiving Shareholder purchase the Equity of the Selling Shareholder then:
(a)the Selling Shareholder must apply the Net Payment towards payment of the Purchase Price (as though the Insurance Payment had been paid to the Selling Shareholder) and any surplus must be the property of the owner of that Policy absolutely;
(b)if the relevant Policy fails to pay to the policy owner, through no fault of the selling Director, or the Net Payment is less than the fair market value set under clause 4, then clause 5.1(d) will apply without amendment.
(c)If the relevant Policy fails to pay to the Policy owner, the full sum insured of the Policy as a direct consequence of some act or omission of the Director, then the Selling Shareholder will be deemed for the purposes of clauses 5.1(a) and 5.1(d) of this agreement to have received the full sum insured.
(d)the Receiving Shareholders must pay to the selling Shareholder any portion of the Purchase Price which has not been received by the Policy owner from the Insurer (“the Balance Price”) on the following terms:
(i)the Receiving Shareholder must have paid at least fifty percent (50%) of the Balance Price within one hundred and twenty (120) days of the relevant Triggering Event;
(ii)the Receiving Shareholder must pay the remainder of the Balance Price by way of twelve equal quarterly instalments, with the first such payment falling due three (3) months from the date on which the payment under clause 5.1(d) falls due.
and the Parties hereby agree that the abovementioned transaction will constitute good and full consideration for the transfer of the Equity from the Selling Shareholder to the Receiving Shareholder or Shareholders. (emphasis added)
The 'transaction' to which reference is made in the clause appears to be a reference to the matters set out in pars (a) to (d) of sub-clause 5.1, which includes the process for payment of the 'Purchase Price'. So, the language of the clause arguably supports the construction promoted by counsel for the defendant, which would require the Court to approach the matter on the basis that the transfer and payment obligations are interdependent or concomitant obligations (and not independent).[48]
[48] See, by way of analogy, the recent analysis in CBP Centre Pty Ltd v VentureCrowd Pty Ltd [2024] QSC 139 [47] - [49] (Freeburn J).
As I had earlier noted, the plaintiff had grounded this application on the central contention that the immediate performance of the transfer obligation was 'not conditional upon payment of the Balance Price, nor the performance by the plaintiff of any other obligation whatsoever'.[49] I cannot accept that this central contention is as unassailable as the plaintiff submits.
[49] See the grounds in the plaintiff's chamber summons extracted at [39] above.
The conclusion that the obligations are interdependent has a necessary adverse effect, in my view, on the plaintiff's ability to sustain the claim for final summary relief on one aspect of the extant obligations, where the other material obligation as to payment would remain unsatisfied, even if I accept the plaintiff is ready, willing and able to comply.
H. Conclusion and orders
For these reasons, I am of the view that the plaintiff has failed to discharge its ultimate onus of establishing there is no serious question to be tried in respect of the specific performance and injunctive relief which is sought on this application and, further, I am satisfied that the defendant has established there are a number of issues to be tried.
It is appropriate that the application therefore be dismissed and I will grant the defendant unconditional leave to defend the action.
Given the nature of this application, I should emphasise, if it is not obvious, that nothing in these reasons should be taken as a final finding of fact or legal conclusion for the purposes of any ultimate trial of this matter.
I will hear from counsel as to the appropriate orders which should now be made.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
TL
Associate to the Honourable Justice Lundberg
18 OCTOBER 2024
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