Minecom Australia Pty Ltd v Mine Radio Systems Inc
[1999] TASSC 116
•8 November 1999
[1999] TASSC 116
CITATION: Minecom Australia Pty Ltd & Ors v Mine Radio Systems Inc & Ors [1999] TASSC 116
PARTIES: MINECOM AUSTRALIA PTY LTD (ACN 066 491 807)
WILSON ELECTRONICS GROUP PTY LTD (ACN 009 475 580)
v
MINE RADIO SYSTEMS INC
WAYE, Patrick
MORRELL, Kenneth
MINE RADIO SYSTEMS (AUST) PTY LTD (ACN 065 821 021)
TITLE OF COURT: SUPREME COURT OF TASMANIA
JURISDICTION: ORIGINAL
FILE NO/S: 782/1999
DELIVERED ON: 8 November 1999
DELIVERED AT: Hobart
HEARING DATES: 18, 19 October 1999
JUDGMENT OF: Slicer J
CATCHWORDS:
Corporations - Constitution and legal capacity - Internal disputes - Remedies where oppression - What constitutes oppressive conduct - Removal of directors.
Corporations Law (Cth), s246AA.
R & H Electrical v Hasside [1995] 2 BCLC 280; Morgan v 45 Flers Pty Ltd (1986) 10 ACLR 692; Jenkins v Enterprise Goldmines NL (1992) 10 ACLC 136; Re M Dalley & Co Pty Ltd (1968) 1 ACLR 489; Thesus Exploration NL v Mining and Associated Industries Ltd [1973] Qd R 81; Mordecai v Mordecai (1988) 12 NSWLR 58, considered.
Aust Dig Corporations [29]
REPRESENTATION:
Counsel:
Plaintiffs: G Clarke
Defendants: D Collins
Solicitors:
Plaintiffs: Hand Ogilvie & Breheny
Defendants: Roberts & Partners
Judgment Number: [1999] TASSC 116
Number of Paragraphs: 21
Serial No 116/1999
File No 782/1999
MINECOM AUSTRALIA PTY LTD (ACN 066 491 807) and
WILSON ELECTRONICS GROUP PTY LTD (ACN 009 475 580) v
MINE RADIO SYSTEMS INC, PATRICK WAYE, KENNETH MORRELL
and MINE RADIO SYSTEMS (AUST) PTY LTD (ACN 065 821 021)
REASONS FOR JUDGMENT SLICER J
8 November 1999
The plaintiffs and the fourth defendant, are associated companies incorporated in Tasmania. The first defendant ("MRS Inc"), of which the second and third defendants are shareholders, is incorporated in Ontario, Canada. The shareholders of the fourth defendant ("MRS Aust") are the second plaintiff (with 499 shares) ("Wilson Electronics") and the first defendant (with 501 shares). The directors and shareholders, common to the first plaintiff ("Minecom") and Wilson Electronics, are Brian and Keith Wilson who are also joint directors of MRS Aust with the second and third defendants Patrick Waye and Keith Morrell. The majority shareholder and its directors of MRS Aust have sought an extraordinary general meeting of the company to vote on the following resolutions:
"1… 'That Mr Brian Wilson be and is hereby removed from his office as a director of the Company'
2… 'That Mrs Carol Wilson be and is hereby removed from her office as a director of the Company'
3… 'That Mrs Carol Wilson be and is hereby removed from her office as Secretary of the company'
4… 'That Mr Stuart Mann be and is hereby appointed Secretary of the Company'."
Wilson Electronics seeks interlocutory orders restraining the first three defendants from voting in favour of any of those resolutions until the hearing and determination of proceedings commenced by writ. Those proceedings claim:
(1)damages for breach of contract in the nature of a claimed joint venture agreement;
(2)damages for breach of contract in the nature of a claimed breach of distribution agreement;
(3)breach of fiduciary duty;
(4)breach of statutory duty imposed by the Corporations Law (Tas);
(5)oppressive conduct on the part of the majority shareholder of MRS Aust;
and seek:
"A A declaration that the joint venture agreement, alternatively the distribution agreement has been terminated and that MineCom, MRS (Aust) and MRS Inc do not owe any fiduciary duties to any other of them in relation to the joint venture project as from the date of service of the Writ endorsed with this Statement of Claim, save in connection with the completion of the MRS (Aust) Chinese contract.
B A declaration that Wilson Electronics is entitled to bring this proceeding for damages against MRS Inc and Messrs Waye and Morrell in its own name but on behalf of, and for the benefit of, MRS (Aust).
C Alternatively to B, an order pursuant to s246AA(2)(g) of the Corporations Law that Wilson Electronics is entitled to commence and prosecute proceedings in the name of and on behalf of MRS (Aust) against MRS Inc for damages breach of the joint venture agreement, alternatively the distribution agreement, and of the joint venture fiduciary duties, and against Mr Waye and Mr Morrell for damages for breach of the MRS (Aust) fiduciary duties, and that such proceedings be heard and determined in this proceeding based upon the matters alleged in this Statement of Claim.
D An interlocutory and permanent injunction restraining MRS Inc from voting at a meeting of the shareholders of MRS (Aust) in favour of any resolution having the effect of removing Mr or Mrs Wilson as directors of MRS (Aust) and Mrs Wilson as secretary of MRS (Aust), without the leave of this Honourable Court.
E An award of damages in favour of MRS (Aust) against MRS Inc, and against Mr Waye and Mr Morrell.
F An order pursuant to s246AA(e) of the Corporations Law for the purchase by MRS Inc of Wilson Electronics' shares in MRS (Aust)."
A significant matter pleaded is that the plaintiffs accept the alleged repudiation of the joint venture and distribution agreements and, with one exception, the continued existence of a fiduciary duty.
History and basis of dispute
The directors have long been involved in a complex dispute and it is apparent that any continued relationship is unworkable. The resolutions notified for the extraordinary general meeting, if passed, will transfer effective control of MRS Aust to Waye and Morrell.
Wells Electronics has been involved in the provision of communication systems used in the mining industry. Some of the components were produced by MRS Inc which sold them to the Tasmanian company. There was an original agreement that complete systems were to be provided by the Canadian company, but it appears that it was never fully implemented. In October 1994, Minecom was incorporated and it continued with the arrangement. It was entitled to provide the Canadian sourced components to customers within Australasia and Papua New Guinea and was required to only purchase particular components from MRS Inc. MRS Aust was incorporated in May 1994 and was designed as a vehicle to expand the marketing of systems into Asia and the Pacific area. Capital and operating costs were introduced by both shareholders, although there is dispute as to which provided greater resource.
In 1998 MRS Aust entered into two contracts with the operators of mining ventures in the People's Republic of China. One of the contracts has been partly completed and the future of the other (binding or otherwise) remains uncertain. The return and allocation of moneys from the partially performed contract is a matter of dispute.
The interrelationship of the three companies, the marketing and geographic restrictions caused the directors, in 1999, to discuss a restructuring of the operation so that one entity could operate independently of geography. Problems, giving rise to acrimony, arose in relation to matters of valuations, allocation of past and existing operating expenses, accountability for moneys received, access to and accuracy of corporate records and the like. The parties paid regard to their respective perceived rights and interests and sought legal and accounting advice.
The first three defendants sought control of MRS Aust by means of the foreshadowed resolutions, whilst the plaintiffs commenced these proceedings. In the course of the interlocutory proceedings, each party endeavoured to persuade the Court of the cogency of their respective cases. Each adduced extensive material supportive of the competing claims and counsel dealt thoroughly with the merits of the legal position of the parties. It is not appropriate to determine these interlocutory proceedings on the basis that one party has demonstrated a stronger case or that the opponent's evidence and argument is deficient. In some circumstances, a court can discern that certain proceedings are commenced or resisted for tactical purposes designed to frustrate the inevitable or enhance negotiation, (Re Bellador Silk, Ltd [1965] 1 All ER 667). But where, on the pleadings and the material placed before the court, it appears that complex issues are raised, little purpose is served in an exhaustive analysis of the respective prospects of success. In this case, a determination will be made that both parties have a cogent basis for their respective cases. However, some analysis is required of those respective positions in the assessment of detriment or prejudice in the event of interim intervention or a refusal to maintain the status quo.
The four directors have been in some form of commercial arrangement since 1994. Mutuality of interest involved the supply of specialised technology from Canada which, when combined with local equipment, assembly and marketing in Australia, provided for greater market penetration. The development of contracts, reputation for reliability, access to capital or credit and management, were necessary for mutual success. The amount of money involved and the different geographical locations of management required trust and ready access to information. The decision to expand the prospective market, the development of Asian sources of demand and the pressure of competition and market forces are factors not easily assessed. It is clear that both parties intended a long term arrangement. At one stage, Brian Wilson became a director of MRS Inc, a decision unlikely unless MRS Aust was intended to be a vehicle for mutuality. The decision that MRS Inc hold a majority shareholding in MRS Aust demonstrates an overall intention that Waye and Morrell retain control of that vehicle. It is clear that continuation of the relationship is untenable.
Waye and Morrell incorporated a new company, MRS (Pacific) Pty Ltd in September 1999 which has been appointed as agent for MRS Inc in the Pacific and Australasian area. Former employees of Minecom have been recruited, immediately following resignation from Minecom. There is good reason to accept that the activity of MRS Inc and MRS Pacific will cause detriment to Mincom, MRS Aust and, hence, Wilson Electronics. Removal of Brian and Carol Wilson as directors will significantly limit their access to marketing information, contracts and capacity to monitor and influence commercial opportunities for both Mincom and MRS Aust. The conduct of Waye and Morrell has been swift and uncompromising. The directors of Wilson Electronics have justifiable cause for concern, a cogent case for an award for damages on the grounds of breach of contract, breach of fiduciary and statutory duty and have good reason to seek, as minority shareholders (through Wilson Electronics), the statutory remedy of a share purchase. In addition, they have a good basis for obtaining an order that their corporate entity be permitted to maintain an action for damages on the part of MRS Aust. The removal of Brian and Carol Wilson is likely, on the basis of the pleadings, and the material adduced, to cause significant, if intangible, detriment.
Waye and Morrell are residents of Canada. Through MRS Inc, they are majority shareholders and entitled to control and manage the company. They have invested considerable capital in the joint company and provide much of the advanced technology essential for future success. They have valid concerns about the allocation of moneys to corporate entities, the failure to provide proper accounting records and returns and the identity and location of stock, and have reason to doubt that their interests, through MRS Aust, are adequately protected by the continued operation of Minecom. They have expressed these concerns throughout 1999. The financial records of MRS Aust, on any analysis, show that it has suffered significant loss. Whilst that loss might be a necessary incident to the commencement of a new venture and the development of new markets, it remains a proper matter for their concern. On their case, Mincom has not remitted proceeds from the Chinese contracts and has improperly benefited, by reason of accounting methods, from the supply of components from the United Kingdom. Waye and Morrell claim that Brian Wilson wrongly attempted to make use of technical knowledge obtained by reason of his relationship with MRS Inc, to their detriment. The defendants' foreshadowed case would negate any claim of breach of contract or fiduciary duty. Continuance of effective management control by the Wilsons will increase their detriment.
The respective claims of future detriment are cogent. However, in relation to the action of the plaintiffs, that detriment can be met with an appropriate award for damages and an order of the purchase of the minority shareholding. The plaintiffs have accepted the claimed repudiation of contract and the breach of fiduciary (if based on contract) duty. Any oppression or withholding of required information can be met by means of statutory remedy. Their action, if sustained, can be categorised in the following manner:
(1)Mincom has certain legal rights against MRS Inc directly;
(2)Wilson Electronics has certain rights as against MRS Aust;
(3)Waye and Morrell, as directors, owe fiduciary duties to Wilson Electronics and are in breach of these duties;
(4)MRS Inc has declined to supply component parts to either Minecom or MRS Aust;
(5)Minecom has accepted the repudiation of contract;
(6)Minecom has, given the refusal of supply of components, no real future prospect of sales involving MRS Inc technology and acceptance of repudiation in Australasia and Papua New Guinea;
(7)MRS Aust has, given the refusal of supply of components, no real future prospect of sales in Asia;
(8)the plaintiffs' remedy for breach of contract and duty is one of damages;
(9)the second plaintiff's remedy for oppression is that of purchase of its minority shareholding.
The directors are unable to work together in the management of the company. It is inappropriate to require them to do so (R & H Electrical v Haside [1995] 2 BCLC 280). The Corporations Law, s246AA provides:
"246AA(1) An application to the Court for an order under this section in relation to a company may be made:
(a) by a member who believes:
(i) that affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members, or in a manner that is contrary to the interests of the members as a whole; or
(ii) that an act or omission, or a proposed act or omission, by or on behalf of the company, or a resolution, or a proposed resolution, of a class of members, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or was or would be contrary to the interests of the members as a whole;
…
(2) If the Court is of the opinion:
(a)That affairs of a company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in this section called the 'oppressed member or members') or in a manner that is contrary to the interests of the members as a whole; or
(b)that an act or omission, or a proposed act or omission, by or on behalf of a company, or a resolution, or a proposed resolution, of a class of members of a company, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in this section also called the 'oppressed member or members') or was or would be contrary to the interests of the members as a whole;
the Court may, subject to subsection (4), make such order or orders as it thinks fit, including, but not limited to, one or more of the following:
(c)an order that the company be wound up;
(d)an order for regulating the conduct of affairs of the company in the future;
(e)an order for the purchase of the shares of any member by other members;
(f)an order for the purchase of the shares of any member by the company and for the reduction accordingly of the company's capital;
(g)an order directing the company to institute, prosecute, defend or discontinue specified proceedings, or authorising a member or members of the company to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company;"
A court, especially at an interlocutory stage, ought not lightly intervene in the exercise of corporate power on the basis of a claimed breach of a particular provision equivalent to the Act, s246AA. In Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692, consideration was given to the equivalent and earlier provision of the Companies (NSW) Code, s320. Young J accepted the analysis that:
"… as a result of the decision in New Zealand in Thomas v H W Thomas Ltd [1984] 1 NZLR 686; 2 ACLC 610; in England in Re Bovey Hotel Ventures Ltd (Chancery Division, Slade J 31 July 1981 unreported); Re R A Noble & Sons (Clothing) Ltd [1983] BCLC 273 at 290; and Re London School of Electronics Ltd [1985] 3 WLR 474 and in Australia in Wayde v NSW Rugby League Ltd (1985) 10 ACLR 87; 61 ALR 225, it has been accepted that one no longer looks at the word 'oppressive' in isolation but rather asks whether objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair: see Wayde's case per Brennan J at ACLR 94 and at ALR 235; per majority at ACLR 91 and at ALR 231. In my view a court now looks at sub-s2(a) as a composite whole and the individual elements mentioned in the section should be considered merely as different aspects of the essential criterion, namely commercial unfairness."
The "balancing exercise" referred to by Mason ACJ, Wilson, Deane and Dawson JJ in Wayde (supra), is made complex in interlocutory proceedings if the decision of the majority is clearly within power and has a foundation based on commercial need. In this case, whilst the exercise of power by the majority might disadvantage the minority, it has not been shown that it is more probable than not that the exercise of power would not be bona fide in the interests of the company as a whole (Theseus Exploration NL v Mining and Associated Industries Limited [1973] Qd R 81). Whilst the conduct of the majority might advance the interest of MRS Inc (Re Spargos Mining NL (1990) 8 ACLC 1218), the current managerial position of the company will not be enhanced by the continuation of the Wilsons as directors. The operations of the company will continue to be inhibited by the present composition of the Board. The breach of duty claimed against Waye and Morrell can be compensated by damages (Mordecai v Mordecai (1988) 12 NSWLR 58), rather than injunctive relief.
Whilst this Court has inherent power to prohibit the removal of the Wilsons as directors, the exercise of such power ought be governed by the interests of the corporation as a whole and its creditors.
The test relevant to the issues of oppression and unfairness were considered by the Full Court of the Supreme Court of Western Australia in Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC 136. The test is whether the conduct is "unfairly prejudicial" which requires a course of conduct designed to advantage the interests of the majority directors to the detriment of the company or minority shareholders. In that case, the controlling directors had entered into transactions which warranted investigation and involved conflict of interest, and their conduct required the appointment of a receiver/manager. In this case, the position is the reverse. The majority shareholders claim to require information within the province of the minority and any disadvantage suffered by the company will disadvantage the majority. Acceptance that the majority might obtain advantage through the operation of another company, MRS Pacific Pty Ltd, does not disentitle the minority to a claim for damages nor permit the majority to disregard statutory obligation. In the circumstances of this case, the minority seeks to preserve its controlling position at the expense of the majority. Assuming that the company MRS Aust as a whole will suffer detriment as a result of the intended action of the majority, the position remains that at this stage (ie, that of interlocutory proceedings), none of the first three defendants has done anything which constitutes prejudicial conduct which cannot be met by the remedy of damages. It is likely that the minority shareholders will suffer prejudice by reason of loss of control but, on balance, that prejudice will not be to the detriment of the company as an entity (re M Dalley & Co Pty Ltd (1968) 1 ACLR 489 at 492). Given the claimed breaches on the part of the first three defendants, it is unlikely that continued control by the Wilsons will enhance the prospects of MRS Aust. It is not obvious that retention of the existing management of MRS Aust by the Wilsons will advantage its future prospects, nor its capacity to meet its obligations. Retention might enhance the interests of Wilson Electronics in relation to the value of its shareholding, but that detriment is best met by an award of damages (see generally Fexuto Pty Limited v Bosnjak Holdings Pty Limited [1998] NSWSC 413).
MRS Inc is the majority shareholder. It will likewise suffer detriment if MRS Aust suffers future loss. Whilst the court acknowledges that detriment occasioned by loss of contracts, inability to control strategy and the like, are intangibles, corporate governance still requires financial accountability. Assuming that Wilson Electronics is successful in its case, there remains the position that as of September 1999, MRS Aust was operating at a loss. The completion of the second Chinese contract remains problematic and a future refusal of supply of technology with further inhibit the capacity of the company to operate. Continued management by the Wilsons is unlikely to enhance the financial viability of the company. MRS Aust is able to complete its first Chinese contract and in the event of non-disclosure of relevant material (to that contract or otherwise), the plaintiffs have the remedies, including those of discovery in the course of legal proceedings. Further, it is unlikely that a court would, in the final determination of the action, make a permanent order prohibiting the removal of the Wilsons as directors. The majority of shareholders is exercising its strict legal power (O'Neill v Phillips [1999] 1 WLR 1092).
The majority shareholders have no statutory recourse in relation to the provision of information. Whether or not its claim that attempts made so far have been obstructed, is relevant but not conclusive. Its right to obtain statutory relief is restricted because of its status. It is entitled to protect its own interests and the approval of the resolution will not result in irredeemable commercial unfairness, (Jenkins (supra) and Morgan v 45 Flers Avenue Pty Ltd (supra)).
Conversely, an order for interim injunctive relief might have the consequence of commercial unfairness.
The application for interlocutory relief ought be refused. The interlocutory application is dismissed.
0
3
1