Jonathon Nigel Walden v Foodco Group Pty Ltd & Ors
[2008] NSWSC 636
•19 June 2008
CITATION: Jonathon Nigel Walden v Foodco Group Pty Ltd & Ors [2008] NSWSC 636 HEARING DATE(S): 16/06/2008
JUDGMENT DATE :
19 June 2008JUDGMENT OF: Rein J at 1 DECISION: At [27]. CATCHWORDS: Application to extend interlocutory relief - Inunctive relief granted on interim basis CATEGORY: Procedural and other rulings CASES CITED: Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618
Australian Broadcasting v Lenah Game Meats [2001] 8 HCA 63; 208 CLR 199TEXTS CITED: Meagher, Gummow & Lehane; Equity Doctrines and Remedies PARTIES: Jonathon Nigel Walden (Plaintiff)
Foodco Group Pty Ltd (Defendant)FILE NUMBER(S): SC 6070/07 COUNSEL: J.J Garnsey QC (with M. Condon) (Plaintiff)
B.A. Coles QC (with K. Richardson) (Defendants)
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
Rein J
19 June 2008
6070/07 Walden v Foodco Group Pty Ltd & Ors
JUDGMENT
1 Rein J: The plaintiff, for whom Mr Garnsey QC, with Mr Condon, appears, is a director of Foodco Group Pty Ltd (“Foodco”), which is a trustee for a unit trust. The plaintiff holds 10% of the units in that trust. The trust runs food-related franchise businesses.
2 In late 2004 there were moves to buy the plaintiff out with informal agreement between Mr James Fitzgerald, a director of Foodco, on a price and process, but which did not lead to any concluding binding agreement. Waker Holdings Pty Ltd (“Waker”), a company then controlled by Mr Fitzgerald or his family, owned 80% of the units. A Mr Infanti, through his company Saher Pty Ltd (“Saher”) is said, by the defendants, to have acquired 10% of the units. Mr Coles QC, with Ms Richardson, appears for all of the defendants.
3 The plaintiff was subsequently removed as a director against his wishes, but since he commenced these proceedings he has been reinstated as a director.
4 When the proceedings commenced, the plaintiff complained about a number of steps taken by the trustee and other defendants, relating to his removal as director, drawings by other directors, allocation of the units to Saher and appointment of Mr Infanti and matters which cumulatively could, if established, amount to oppression of a minority shareholder or unit holder. The plaintiff by his originating process seeks in 11(d), an order for the purchase of the shares in the defendant companies.
5 A regime of interlocutory orders were put in place by consent until Monday 16 June at 4pm, extended by consent until today at 5pm to allow for this judgment to be delivered. The plaintiff seeks orders in similar but expanded terms to take into account recent developments to which I shall refer – the defendants do not consent to the continuation of the orders beyond today.
6 The defendant is willing to give undertakings that the defendants submit will adequately protect the plaintiff pending final hearing.
7 To understand the nature of the undertakings, it is necessary to say a little more about the position of the parties.
8 The defendants assert that the trustee is entitled to purchase by way of redemption the plaintiff’s units (it is agreed that shares in Foodco follow the fate of the units) but accept that the plaintiff is entitled to a fair price for the units.
9 In this connection, a meeting of directors was recently called to determine whether the plaintiff’s shares should be redeemed and if so, at what price and to that end consider a report of an accountant engaged to report on the value of the units. Mr Brad Halligan provided his report and he estimated that all of the units in the trust had a value of between $15.26 million and $16.44 million which would lead to the plaintiff’s shares being worth, after applying a discount of the kind that Mr Halligan thought appropriate due to small size of the unit holding, $920,000-$990,000. This report was served on the plaintiffs about 14 days ago.
10 The plaintiff was given notice of the meeting of directors but did not attend. The directors attending the meeting resolved to redeem the plaintiff’s units at $1.585 million i.e. a mid-way point between the upper and lower estimate of Mr Halligan and without any discount of the type articulated by Mr Halligan.
11 The plaintiff has not yet determined whether that amount is acceptable but Mr Garnsey points out that it is distinctly possible that it will not be acceptable even if redemption were the appropriate course because of:
- (1) questions as to the veracity of accounting information relied on by Mr Halligan
(2) a question of the approach (Mr Halligan has utilised a capitilsation of earnings approach)
(3) the question of whether any alleged wrongdoing by the trustee has reduced the value of the units.
12 The defendants complain that the plaintiff has had all of the information necessary to form a view about the redemption figure since at least April this year, and that he has done nothing to advance an alternative figure. The defendants however, accept that having now received the Halligan report, the plaintiff does need some further time to obtain expert advice on the report and to posit, if he wishes, an alternative amount of unit value. The defendants have in a number of letters (see Tabs 1, 3, 11, 12 and 14) of Exhibit to Mr Henson’s affidavit of 16 June 2008) made clear their willingness to provide further information should it be sought and it has not been: see paragraph 5 of Mr Henson’s affidavit.
13 There is a further important matter, and that is that Mr James Fitzgerald, whilst still a director, died in 2007. He had arranged keyman insurance for the trustee on his life in an amount of $9 million and on the plaintiff’s life in an amount of $1 million (although there is a suggestion that the policy on the plaintiff’s life was cancelled). The monies due on Mr Fitzgerald’s death have been received by Foodco. The plaintiff alleges that the $9 million received cannot be used for general debts of the business run by the trustee for the trust. Mr Garnsey outlined a claim that the funds are to be used to redeem units held by Mr Fitzgerald or at least his interests as in fact, the units are held by Waker.
14 The plaintiff failed to file a Statement of Claim by 5 May, as required by the timetable set in the consent orders. As at Monday morning, he still had not done so, but a draft Statement of Claim had been prepared and was awaiting verification. It is Exhibit A on this application. It refers to an Amended originating process, but that has not been provided.
15 The defendants assert that there is only one issue in the case, and that is what is a fair price for the redemption of the units. The plaintiffs agree that that is a very important matter, but do not agree that it is the only issue. The issues which Mr Garnsey identifies are broadly:
- (1) Have the defendants acted in an oppressive manner towards the plaintiff?
(2) Has the trustee permitted drawings by the Fitzgerald interests that ought not to have been permitted?
- (4) Is the unit holder agreement of 28 March 2000 (“the March agreement”) in effect?
(5) Is the second unit holder agreement, by which Saher became a unit holder, valid?
(6) What is the appropriate relief to be given to the plaintiff should he succeed in his claims?
16 The March agreement was executed and it was conditional on execution of a service agreement between the plaintiff and the trustee, a copy of which was annexed. That service agreement was never executed, but the plaintiff did in 2000 commence as Information Technology director and it is his case that everyone proceeded as if the service agreement was executed. Of particular relevance, says the plaintiff, is the clause which provides that a unit holder who wishes to dispose of his units must offer the units to other unit holders on terms. If the offer is not accepted, he can then sell the units to a third party on the same terms (clause 17.2, p 204 of GL1).
17 The plaintiff asserts that the provision in the trust deed clause 5.2 which permits the trustee to redeem any unit “by paying the unit holder thereof the price to be determined in accordance with the provisions hereinafter contained” is inconsistent with clause 17.2, and thus resists the redemption of shares.
18 Mr Coles QC explained that the defendants are keen to have the dispute finalised and that the process of redemption brings matters to a head. If redemption occurs, the plaintiff will cease to be a director, and will no longer have an interest in the business of the trustee. There is no pressing reason advanced for the redemption at this stage, at a time when the plaintiff has not yet had a full opportunity to investigate the approach and assumptions of the defendant’s valuer. Valuation of the units, on the defendant’s case, is critical and on the plaintiff’s case, is at the very least important to a position it may ultimately adopt, or be forced by the Court to accept.
19 The defendants assert that the plaintiff must accept redemption of his shares because it is said even if the March agreement is effective, the termination of the plaintiff as an employee under the service agreement leads to the same result as clause 5.2 of the Trust Deed, see clause 11.4, p 229 Exhibit GL1. That short answer however, is insufficient, the plaintiff maintains, because in fact his employment has not been validly terminated. There is no evidence that the plaintiff resigned or accepted termination outside of an understanding in respect of payment of $1.4 million for his units and accordingly it is at least open to doubt as to whether clause 17.2 applies at all. Mr Coles, in his submissions, argued that there was no serious case to be determined on whether the plaintiff was required to accept redemption and but I do not accept that contention.
20 To obtain the interlocutory relief sought, the plaintiff must satisfy the Court of three matters:
- (1) That there is a serious question to be tried at the hearing for final relief;
(2) That the plaintiff will suffer irreparable injury for which damages will not be an adequate compensation, unless an injunction is granted; and
(3) That the balance of convenience favours the granting of an injunction:
21 It may well be that there will be adequate explanations and effective rebuttals of the plaintiff’s evidence but prima facie there is evidence of irregularities in the conduct of the trustee – the plaintiff’s removal as director without notice, (although he has been reinstated), drawings by directors which were not approved by the plaintiff, evidence of differing treatment of significant sums in material provided by the plaintiff and to Mr Halligan, and the failure to adhere to the interim arrangements to which the plaintiff deposes in his affidavit and was reflected in email correspondence.
22 So far as irreparable injury (or put another way, whether damages would be an adequate remedy) is concerned, I am inclined to think that to the extent that the plaintiff’s remedy is to receive a fair price for his shares, there is no real need for any interlocutory relief – the defendants wish to redeem the units and they will pay $1.585 million for these units. The defendants accept that should the plaintiff establish that a fair price for the 10% interest of the plaintiff is a higher figure, they will have to meet it. They are willing to hold $2.5 million of the keyman policy proceeds in an account to cover that eventuality. They undertake to provide information and assistance to help in determining the fair price of the units.
23 If the plaintiff accepts that the trustee is entitled to redeem his units pursuant to clause 5.2, then the issue of the March agreement falls away. The keyman proceeds will be relevant to the valuation of shares, Mr Halligan’s valuation treats the keyman proceeds as general funds of the trust but characterisation of the proceeds will or may determine whether the units are to be redeemed from the plaintiff are to be valued. The plaintiff has not irrevocably committed himself to accepting redemption of the units, and it appears, wants to argue that the keyman proceeds must be used to buy out the units owned by Waker. That process would lead to the plaintiff, alone or perhaps with Mr Infanti, controlling Foodco. If that argument is maintained and fails, the plaintiff would, it appears, seek redemption of his units by the trustee. There may well be difficulties in the path of the buyout argument of the type that the defendants outline, but it is not appropriate at this stage to attempt to determine the likely outcome of these arguments, particularly as they involve questions of fact as well as legal issues.
24 The matters that support injunctive relief are:
- (1) There has been in place a regime until now and there is no evidence it has caused any difficulties for the defendants;
(2) There is evidence from the plaintiff which points to irregularities in the conduct of affairs of the trustee, and there is a question as to how the keyman proceeds are to be applied;
(3) the redemption of shares at a price fixed by the valuer as adjusted by the trustee (favourably to the plaintiff it should be said) pre-empts the determination that will need to be made by the Court in due course. There are, at least potentially issues in approach to valuation and some assumptions made that may be challenged by the plaintiff once he has had the benefit of expert opinion;
(4) the plaintiff at this stage puts forward a case that would entitle him to continue as a unit holder. To permit the redemption to proceed without him having the opportunity to determine whether he wishes to pursue the claim that the keyman proceeds should be used to purchase the units of Waker and make the claim for sale of the units an alternative claim, would impact upon that position;
(5) There is an issue as to whether clause 5.2 operates in the face of clause 17.1 of the March agreement and it is not answered by termination of the plaintiff’s employment because that is itself contested.
(6) There is no compelling urgency to effect a redemption. No evidence of specific prejudice to the company has been put forward either in delaying the redemption or precluding use of the keyman proceeds without notice to the plaintiff. The plaintiff is a director, unit holder and shareholder, and can continue as a director pending the outcome of the hearing.
(7) The plaintiff has, through Mr Garnsey, proffered the usual undertaking as to damages.
25 Against injunctive relief are these matters:
- (1) the plaintiff himself agreed in 2004 that purchase of his units was the appropriate course (see Tab 19, Exhibit CH1 and the plaintiff’s affidavit, paras 41-44);
(2) the plaintiff seeks an order for sale of the units in the originating process and as one on the orders in the proposed amended originating process;
(3) the defendants accept that the amount which they propose to pay may not be the final amount if the Court determines that it is not a fair price, and undertakes to assist in providing information to assist in reaching a valuation of the units;
(4) the defendants undertake to retain the sum of $2.5 million of the keyman proceeds;
(5) the plaintiff has not complied with the timetable and has taken no action to have a ‘fair price’ determined by any expert. He has had access to all documents at least since April, and has sought no further documents nor made enquiries
(6) a restraint on the freedom of the trustee to do as it wishes is a significant impediment
26 I do not regard the delay on the part of the plaintiff in filing the Statement of Claim as being of itself sufficient to disentitle the plaintiff to interlocutory relief, although it is a factor to be considered. I think there is some force in the defendant’s point that the plaintiff has done nothing about obtaining a valuation or putting forward of a figure – the death of his mother-in-law is not an adequate explanation, nor Mr Garnsey’s assertion that the plaintiff did not want to speculate on what the accounting documentation of Foodco meant. I think the fact that the plaintiff has previously accepted the appropriateness of a buyout is not particularly significant given the fact that it did not proceed and further information has come to light and events have occurred to which the plaintiff is entitled to have regard given the defendant’s failure to progress the purchase. The delay of the defendants in organising the buyout tends to reduce the significance of delay on the part of the plaintiff.
27 Weighing all these matters I am of the view that it is appropriate to maintain the status quo, and make the orders sought by the plaintiff, but I am not persuaded that it is appropriate to extend the relief until hearing of the matter. I say this because I see an inconsistency in the plaintiff seeking an order for sale of his units whilst at the same time asserting that the trustee should purchase the Waker units as a form of relief. Should the plaintiff accept that redemption of his units is appropriate, the issue of the application of the keyman proceeds and other alleged breaches will either become irrelevant or sound in damages. A timetable needs to be formulated that will allow the plaintiff a reasonable time to obtain expert opinion, formulate his position both as to redemption and or its price and to serve any report supporting a different price than that contended by the defendants, and I propose to make orders for injunctive relief up until a date subsequent to that process being completed. I will hear the parties further as to that date.
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