LEAFMONT Investment Pty Ltd v The Reject Shop (Aust) Pty Ltd

SUPREME COURT OF VICTORIA

CAUSES JURISDICTION

Not Restricted

No. 2056 of 1998

LEAFMONT INVESTMENT PTY LTD &	Plaintiff
ANOR
v THE REJECT SHOP (AUST) PTY LTD & ORS

Defendant

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JUDGE:	Chernov, J.
WHERE HELD:	Melbourne
DATE OF HEARING:	30 July 1998
DATE OF JUDGMENT:	30 July 1998
MEDIA NEUTRAL CITATION:	[1998] VSC 27

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INJUNCTION - Interlocutory injunction - Whether enforcement of service agreement - Serious issue to be tried - Balance of convenience - Adequacy of damages - The justice of the case in all the circumstances.

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APPEARANCES:

Counsel

Solicitors

For the Plaintiff

Mr C. Scerri, QC,

Arnold Bloch Leibler

with Mr P. Solomon

For the Defendant

Mr A. J. L. Bannon, SC,

Arthur

Robinson

with Mr D. Studdy

Hedderwicks (agent for
Gilbert Tobin)

For the Third Defendant

Mr A.J.L. Bannon, SC,

Freehill Hollingdale & Page

with Mr D. Studdy

HIS HONOUR:

By a summons dated 16 July 1998, the plaintiffs seek an interlocutory injunction to restrain the first defendant from acting upon certain resolutions made by its board on 1 July 1998 and the second and third defendants from appointing any person as director of the first defendant.
The first defendant, according to the evidence, operates, by all appearance successfully, a number of shops or a chain of shops which specialise in selling clothes at the "higher ground of the lower end of the market".
The second plaintiff, Earle Sacher (Sacher), joined the organisation in about 1989 and, on one view, has worked diligently to make it a successful operation. He is now, effectively, the managing director of the first defendant and is the controller of the first plaintiff.
As at about 1990, the shareholding in the first defendant was divided between the interests associated with Sacher and the interests associated with John Shuster (Shuster), who controlled and still controls a company called Racey Racoon Pty Ltd. Not long thereafter, Robert Galombik (Galombik), through Rovaniem Pty Ltd (Rovaniem), the third defendant, acquired shares and became involved in the management of the first defendant. Each of them executed a service agreement with the first defendant, pursuant to which they were employed by it.
So far as is relevant, the service agreement relating to Sacher provides that after 30 June 1996, his employment by the company will continue until terminated by it or by him at the expiration of six months' prior written notice.
In 1994, interests associated with Macquarie Direct Investment Pty Ltd (Macquarie) (formerly Bond Street Management), through the second defendant, purchased a substantial interest in the first defendant. In December 1994, the interests associated with Sacher, Shuster, Galombik and Macquarie executed a shareholders' deed, which was subsequently amended as other parties became involved. Its final version was executed in December 1995.
The compendious deed which was tendered as exhibit 9 to Sacher's affidavit, provides for the appointment by the parties of six directors to the board of the first defendant.
So far as is relevant, by cl.4.2, Rovaniem is entitled to appoint one director; the first plaintiff, two directors and the Macquarie interests, two directors. There was provision in cl.4.2(d) for appointment by agreement of independent directors.
The same deed contained cl.5.3, which governed, on the face of it, the right of the members to agree on adjustments to the terms of appointment of any executive, and provided, so far as is relevant, that if there was a disagreement between the directors nominated by Macquarie and the directors nominated by the executive shareholders, as to the terms of any executive service contract, that was to be referred to an independent expert for determination.
Counsel for the defendants referred to the definition of "independent expert" in the definition clause of the deed, and highlighted the fact that it indicates that the clause was concerned with the terms and conditions of employment of executives, including Sacher, rather than their status within the hierarchy of the organisation. I will come back to that point later.
Clause 6.2 of the deed is a critical provision for present purposes. It provides, in effect, that the employment of an executive may be terminated (only) with the approval of a majority of at least 70 per cent of the board.
It will be noted that, insofar as the board of the first defendant was concerned, as at December 1994, there were six directors, so that the board could muster 70 per cent of its members to give notice to Sacher under the relevant provision of the service agreement.
In June 1997, Galombik, through Rovaniem, sold 8 per cent of its shareholding in the first defendant, to Macquarie. As a result, the interest of Macquarie in the first defendant increased to almost 47 per cent. The evidence shows that Sacher was concerned that the sale not produce the result whereby Macquarie or the Macquarie interests would acquire an extra seat on the board. See, for example, the letter of 11 June 1997 from Macquarie's solicitors to Macquarie and Sacher, in which they seek confirmation that the Macquarie interests would not be entitled to have an additional director on the board of the first defendant as a result of its increased shareholding.
There is further evidence in the form of Sacher's affidavit, which shows that there were discussions between him and Michael Traill about the position of Macquarie and the possibility of it appointing another person to the board.
In my view, the plaintiffs' evidence shows that there is at least a serious issue to be tried as to whether at or about that time, Macquarie represented or promised to Sacher, in the context of obtaining the approval of his company to the sale, that it would not cause or procure Rovaniem to appoint a Macquarie director under cl.4.2(a) of the shareholders' deed.
I note that the evidence shows that during the initial stages of the negotiations between Rovaniem and the Macquarie interests concerning the sale of the shares, it was contemplated that Rovaniem would sell all its interests in the first defendant to Macquarie. As events turned out, however, Rovaniem retained 5 per cent in the first defendant.
Galombik was permitted to set up a business which operated in opposition to the first defendant, but this was conditional on him resigning from the board of the first defendant. Consequently, the agreement for the sale of shares that was executed by Rovaniem and the Macquarie interests on 23 July 1997, provides that Galombik would resign as director of the first defendant. There was, however, no change to cl.4.2(a) of the shareholders' deed, so that on the face of it, Rovaniem retained the right to appoint one director to the board of the first defendant.
It is also relevant to mention, that for the sale by Rovaniem to have been effective, consent to the transaction had to be obtained from, inter alia, Sacher and his company. Such consent was given by means of a deed that was executed on 23 July 1997. By that deed, Sacher also affirmed the provisions of the shareholders' deed, which, as I have said, left cl.4.2(a) unaltered.
The plaintiffs' case is that, having regard to the terms of the agreement for sale of shares and, more particularly, the resignation of Galombik from the board and the relevant circumstances surrounding his departure, it was intended by the parties that after the sale, Rovaniem not exercise its power under cl.4.2(a) of the shareholders' deed to appoint a director to the board of the first defendant.
The evidence does not show that Rovaniem agreed in terms, not to exercise its rights under cl.4.2(a) of the shareholders' deed. Such a conclusion may, however, be inferred when one examines all the circumstances surrounding the sale. The position in relation to Macquarie, however, is different. There is evidence that discussions took place between Sacher and Macquarie representatives and that Sacher obtained an assurance that it would not seek to obtain an extra seat on the board. Sacher's evidence is that he gave his consent to the sale on the basis of such an assurance.
At least one year passed after the sale of the shares by Rovaniem to the Macquarie interests, before Rovaniem appointed or purported to appoint under cl.4.2(a) of the shareholders' deed, Patrick Francis Elliott (Elliott) to the board of the first defendant. Although it is not clear precisely when that appointment was made, the probability is that it took effect, if at all, some time in July 1998. That Elliott is a person closely associated with the Macquarie interests is probably not in dispute. If it is in dispute, I take the view that the evidence establishes, at least for present purposes, that he is so associated.
The plaintiffs' case is that it was the Macquarie interests that procured the appointment of Elliott to the board. They say that it is more than mere coincidence that Rovaniem so appointed a Macquarie representative. The defendants, on the other hand, contend that Galombik, on behalf of Rovaniem, exercised his free will in appointing Elliott to the board. Clearly, the persons who could give evidence of and concerning the circumstances of the appointment of Elliott and whether he was appointed at the behest of Macquarie, include Elliott himself, the Macquarie representatives and Galombik. No such evidence, however, has been forthcoming from Macquarie or Rovaniem and no explanation was given as to why they were not called.
In my view, given the inferences that may arguably be drawn from the absence of such evidence, namely, that it would not have assisted those defendants, and given that Elliott is clearly a Macquarie representative, a serious issue arises as to whether Macquarie has procured his appointment. If so, was it procured in breach of the assurance given by its representatives to Sacher that it would not seek to obtain another seat on the board of the first defendant?
The evidence shows that in about mid-1998, the chairman of the board of the first defendant gave general notice of meetings of the board concerning Sacher. It is sufficient, for present purposes, to mention only the meeting of directors that was held on 1 July 1998, at which resolutions were passed which sought to alter the status of Sacher in the hierarchy of the company. The minutes that have been tendered in evidence, show that Elliott was not present at that meeting. The minutes also show that the resolutions were not passed by the required 70 per cent majority, and were, therefore, ineffective to authorise the giving of a notice to Sacher, to terminate his employment with the first defendant. They also establish that at least arguably, there has been an attempt by the board of the first defendant to alter Sacher's status in the hierarchy of the company without regard to cl.5.3 of the shareholders' deed.
It is trite that, in order for the plaintiffs to make good their application for an interlocutory injunction, they must satisfy the court that there is a serious issue to be tried, and that the balance of convenience favours the preservation of the status quo. In my view, there are a number of serious issues to be tried. They include the following: (a) whether Rovaniem has the right to appoint a director to the board of the first defendant under cl.4.2(a); (b) if it has such a right, is Macquarie estopped from procuring it to appoint a Macquarie director to that board; (c) whether in the circumstances, the appointment of Elliott was in breach of a representation or a promise made by Macquarie to Sacher not to cause or procure the appointment of a Macquarie man to the board; and (d) whether the board can change the status of Sacher within the company hierarchy without regard to cl.5.3 of the shareholders' deed.
I now turn to the question of the balance of convenience. I agree with Mr Bannon, senior counsel for Macquarie and Rovaniem, that if the consequence of the injunction that is sought is merely to force the company to employ Sacher, that would be a powerful argument against the granting of it. Courts of equity do not enforce service agreements. But in my view, Sacher arguably has a contractual right not to be dismissed otherwise than by a vote of 70 per cent of a properly constituted board. There is also, in my view, arguably the right not to have his status within the hierarchy of the company altered without compliance with cl.5.3 of the deed. It is those rights which Sacher is seeking to preserve until the trial of the proceeding, and in my view, their enforcement constitutes more than mere enforcement of a service agreement.
On the question of whether damages are an adequate remedy, which is another difficult and important issue in this case, I refer to Belgrave Nominees Pty Ltd v Barlin-Scott Airconditioning Pty Ltd [1984] VR 947. Although the case dealt with the question of a mandatory injunction, Kaye, J., at pp 954-955, considered how one determines whether damages are an adequate remedy. His Honour considered that the issue is to be resolved by reference to the question: is it just, in all the circumstances, that the plaintiff should be confined to his remedy in damages? I will not go through the authorities to which His Honour referred. They are fairly well known. The question posed by His Honour has often been asked and considered in the context of the submission that damages are or are not, as the case may be, an adequate remedy.
The question that one can properly pose here is: is it just in the present circumstances and at this stage of the proceeding, to determine that the plaintiffs should be confined to their remedy in damages? In my view, it would not be just to do that, not because damages will be difficult to calculate, but principally because if the plaintiffs succeed in their argument, particularly as to the operation of cl.5.3, in the context where no injunction has been granted so as to restrain the status quo, one may ask, how is the second plaintiff to be compensated for the loss of his status in the company over the many months?
In any event, here, perpetual injunctions will be sought by the plaintiffs. If the status quo is not preserved and the board proceeds as it has indicated, there is a real risk that such injunctions may not be granted because it will not be practically possible to restore the status quo after trial. On the other hand, it seems to me, that the prejudice that will befall the Macquarie interests if an injunction is granted, will not be of the same magnitude.
In reaching my conclusion on this point, I have taken into account the significant disharmony in the relationship between Sacher and at least some of the other controllers of the company. That is a weighty factor to be considered in this context, but it is not determinative of the issues under consideration.
I am mindful that all the parties involved in this proceeding are commercial people and I am sure that they will see it in their common interest to put aside their differences, at least temporarily, and to do their best to operate the company in its commercial best interests. I have no doubt that they will act accordingly.
For these reasons, I propose to restrain the first defendant from acting on the resolutions of the board of directors of 1 July 1998 until the hearing and determination of this proceeding or further order. Prima facie at least, that resolution, as I have said, was contrary to cl.6.2 and cl.5.3 of the shareholders' deed.
For reasons I have briefly mentioned, there is no or no sufficient evidence against Rovaniem, so far as estoppel is concerned. Moreover, there is also no evidence that the board is threatening to meet with Elliott. Therefore, an injunction is not required to restrain the board from acting in the way that the plaintiffs may otherwise be fearful of.

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[1998] VSC 27

30 July 1998