Nicholls, Robert v The Sheep's Back Bar Pty Ltd
[1997] FCA 1041
•10 OCTOBER 1997
FEDERAL COURT OF AUSTRALIA
CORPORATIONS LAW - application pursuant to s 1094 and s 1096 requiring company to effect transfer of shares - whether order should be made - relevant considerations.
SECURITIES - share mortgage - mortgagee seeking to enforce - whether notice of default properly served on mortgagor.
Corporations Law s 1094, s 1096(4)
ROBERT NICHOLLS v THE SHEEP’S BACK BAR PTY LTD & ANOR
VG 3139 of 1997
GOLDBERG J
MELBOURNE
10 OCTOBER 1997
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 3139 of 1997
BETWEEN:
ROBERT NICHOLLS
APPLICANT
AND:
THE SHEEP'S BACK BAR PTY LTD
FIRST RESPONDENT
ADRIAN COHEN
SECOND RESPONDENT
JUDGE:
GOLDBERG J
DATE OF ORDER:
10 OCTOBER 1997
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
The application is dismissed.
The applicant pay the first and second respondents’ costs of the application including reserved costs.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 3139 of 1997
BETWEEN:
ROBERT NICHOLLS
APPLICANT
AND:
THE SHEEP'S BACK BAR PTY LTD
FIRST RESPONDENT
ADRIAN COHEN
SECOND RESPONDENT
JUDGE:
GOLDBERG J
DATE:
10 OCTOBER 1997
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
The applicant applies for an order pursuant to s 1094 and s 1096(4) of the Corporations Law requiring the first respondent to certify a transfer of two shares in its capital from Cohen Holdings Pty Ltd to the applicant, to enter the applicant’s name in its share register as the holder of those two shares and to complete and deliver to the applicant share certificates for those two shares. The applicant also seeks an order against the second respondent that he cause the first respondent to comply with such orders and that he pay the costs of the application.
The first respondent (“the company”) was incorporated on 20 May 1994 and it apparently has an issued capital of $21.00 comprising twenty‑one shares each of a par value of $1.00. I say “apparently” because the only evidence of its share capital is a search of the records of the Australian Securities Commission in respect of the company dated 2 July 1997.
The application arises out of a sale of shares agreement (“the agreement”) made on 28 September 1995 between the applicant as vendor, Cohen Holdings Pty Ltd as purchaser, John Kavanagh (a director of the company) and the company. At that time, according to recital A in the agreement the company had an issued capital of $7.00 comprising seven shares each of which had a par value of $1.00. By the agreement the applicant sold two shares in the capital of the company to Cohen Holdings Pty Ltd for $50,000.00 of which $10,000.00 was payable on the signing of the agreement and the balance was payable on 30 November 1995. Mr Kavanagh and the company were parties to the agreement for the purposes of agreeing to use their best endeavours to assist the applicant in obtaining his release from any guarantees he had given in respect of the company’s obligations and for the purpose of giving the applicant indemnities in respect of a number of matters not relevant for present purposes.
Clause 5 of the agreement was in the following terms:
“PAYMENT OF DEPOSIT
(1)Upon payment of $10,000.00 referred to in clause 3(1)(a) hereof the vendor will provide to the Purchaser:
(a)Share Certificate in respect of the Shares;
(b)duly executed transfer of the Shares to the Purchaser;
(2)Upon payment of the deposit the Vendor will:
(a)resign as a director of the Company;
(b)hand to the Company all keys, books of accounts, correspondence and all other documentation and things that are the property of the Company.
(c)resign as licensee of the Company.
(3) The Purchaser will hand to the Vendor:
(a)a Share Certificate showing the Purchaser as the holder of the shares;
(b)a signed blank transfer of Shares;
(c) a share mortgage of the Shares.”
In accordance with clause 5.3 of the agreement on 28 September 1995 Cohen Holdings Pty Ltd provided the applicant by way of security with a share certificate recording Cohen Holdings Pty Ltd as the holder of the two shares, a signed blank transfer of those shares and an executed share mortgage over the shares dated 28 September 1995. By the share mortgage Cohen Holdings Pty Ltd agreed to repay the amount outstanding under the agreement (namely $40,000.00) to the applicant on 30 November 1995, and to secure the repayment of that sum Cohen Holdings Pty Ltd mortgaged its right, title and interest in the two shares to the applicant. The share mortgage provided, inter alia, that upon default in payment of the said sum of $40,000.00 the applicant would be entitled to register in its name the blank transfer of the two shares executed by Cohen Holdings Pty Ltd which had been delivered to the applicant, together with the share certificate in relation to the two shares.
On the same day, 28 September 1995, the second applicant, Adrian Cohen, guaranteed to the applicant the performance by Cohen Holdings Pty Ltd of its obligations under the agreement and indemnified the applicant against all losses, damages, costs and expenses which might be incurred by him by reason of any default on the part of Cohen Holdings Pty Ltd in the performance of its obligations under the agreement.
Cohen Holdings Pty Ltd did not pay the $40,000.00 due to the applicant under the agreement on 30 November 1995 and has still not done so.
The second respondent was appointed a director of the company on 19 October 1995 and remained a director until 28 July 1997. The applicant says that on 13 December 1995 he delivered to the second respondent a transfer of shares from Cohen Holdings Pty Ltd to the applicant (this being the transfer in blank signed by the applicant as transferee) and the share certificate for the two shares which it had previously received pursuant to the provisions of the agreement. In an affidavit sworn 15 September 1997 and in cross‑examination the second respondent said that he did not receive from the applicant or any other person on 13 December 1995 or at any other time a transfer of shares from Cohen Holdings Pty Ltd to the applicant or the share certificate for those two shares. He says that the last time he saw the instrument of transfer of the shares in blank signed by him on behalf of Cohen Holdings Pty Ltd was on or about the date the agreement was executed, namely 28 September 1995. He says that at the same time, in accordance with the agreement, the share certificate showing Cohen Holdings Pty Ltd as the holder of the two shares and the transfer of shares signed by Cohen Holdings Pty Ltd in blank was handed to the applicant’s solicitors.
On 14 December 1995 the applicant’s solicitors wrote to Messrs Oakley Thompson & Co who were the purchaser’s solicitors and the company’s solicitors notifying them that if the sum of $40,000.00 was not paid the following day the applicant required the company to register immediately the transfer of shares in the name of the applicant in accordance with clause 7(a) of the share mortgage. The contents of the letter are important and were as follows:
“We refer to previous correspondence and communications in the above matter and confirm that our client attended the business premises yesterday and handed the following documents (copies of which are enclosed) to Adrian Cohen:-
1. Transfer of shares from Cohen Holdings Pty. Ltd. To Robert Nicholls;
2. Share Certificate for two ordinary shares.
We also confirm that, without prejudice to his rights and remedies under the Sale of Shares Agreement, Guarantee and Indemnity and Share Mortgage, our client agreed not to exercise the same on the basis that a bank cheque in the sum of $40,000.00 will be available for collection tomorrow.
This letter is to advise that should the aforementioned bank cheque not be available for collection tomorrow, our client requires the Company to immediately register in his name the Transfer of Shares which was handed over to Adrian Cohen yesterday, in accordance with Clause 7(a) of the Share Mortgage.”
The $40,000.00 was not paid and on 10 January 1996 Messrs Oakley Thompson & Co wrote to the applicant’s solicitors making a proposal on behalf of the second respondent (presumably in his capacity as a director of Cohen Holdings Pty Ltd) for payment by instalments of all but $5,000.00 of the amount claimed. (The figures in the letter do not reconcile but that has no consequences for present purposes). On the following day 11 January 1996, the applicant’s solicitors by letter required the company to register immediately the transfer of the two shares in the applicant’s name in accordance with clause 7(a) of the share mortgage. The letter was in the following terms:
“We refer to previous correspondence and communications in the above matter and in particular to our letter of 14 December 1995.
Our client requires the company to immediately register in his name the Transfer of shares which was handed to Adrian Cohen on 13 December 1995, in accordance with Clause 7(a) of the Share Mortgage.
Could you please forward a new Share Certificate issued in the name of Robert Nicholls in connection with the said shares in the capital of the company to our office by return. Please note that in light of your client’s continued failure to remedy his default under the Sale of Shares Agreement and Guarantee and Indemnity, and in particular the contents of your letter of 10 January which border on the insulting, our client will not tolerate any delay in the delivery of the aforesaid Share Certificate.”
The $40,000.00 was not paid and the transfer of shares was not registered. By letter dated 20 September 1996 addressed to the company the applicant’s solicitors gave notice on behalf of the applicant in the following terms:
“TAKE NOTICE that you have in contravention of Section 1096(2) of the Corporations Law failed to register a transfer of shares in the company within one (1) month of the 13 December 1995 being the date such transfer was lodged with you for registration, and/or have failed to send or deliver to the transferee, Mr Robert Nicholls, the completed share Certificates.
AND FURTHER TAKE NOTICE that unless within 10 days after service of this Notice you fail to remedy the contravention referred to above, the transferee intends to make application to the Supreme Court of Victoria directing you to remedy such contravention and if necessary, to correct the share register of the company.”
The notice was not complied with.
By letter dated 27 August 1997 Messrs Oakley Thompson in their capacity as the company’s solicitors advised the applicant’s solicitors that the company would consent to orders sought by the applicant in relation to rectification of the share register of the company. They also said that an affidavit would be filed by the company stating that it did not receive the share transfer from Cohen Holdings Pty Ltd to the applicant. In an affidavit sworn on 29 August 1997 John Patrick Kavanagh said that he was the sole director and secretary of the company and that the transfer of shares which the applicant said he delivered to the second respondent on 13 December 1995 was never received by the company.
In his affidavit sworn 15 September 1997 the second respondent says that the applicant has not provided Cohen Holdings Pty Ltd with the notice required by either the agreement or the share mortgage specifying the defaults under those agreements and he says that until such notices are provided the security provided under the share mortgage is not enforceable and that the applicant is not entitled to exercise his rights and have registered in his name the blank transfer or the transfer of any shares in the company to the applicant. The second respondent also claims in the affidavit that there was a breach of a warranty in the agreement that the financial statements provided were accurate to the best of the applicant’s knowledge and belief and he says that the list of creditors annexed to the agreement was inaccurate as a number of creditors in the list were owed amounts greater than set out in the list. He also says that there were some three or four creditors amounting to approximately $30,000.00 ‑ $40,000.00 which were not set out on that list. He then says that the $10,000.00 deposit paid for the shares was a fair and equitable price and there has been no breach of the agreement and the breach of that agreement by the applicant prevents him from enforcing any rights he may have under the share mortgage.
In an affidavit sworn 24 September 1997, Bruce David Josem, a member of the applicant’s firm of solicitors, says that he spoke to the applicant on 13 December 1995 who told him that he gave the share transfer to the second respondent on the basis that if he did not receive $40,000.00 by 15 December 1995 he wanted the share transfer registered. Mr Josem says that the applicant told him that he wanted him to confirm this in writing to the company’s solicitors which he did on 14 December 1995. In my opinion the evidence in this affidavit as to what the applicant told Mr Josem is not admissible against the respondents and I reject it.
There is no doubt that the $40,000.00 was not paid on the due date provided by either the agreement or the share mortgage and that subject to complying with any relevant terms of the share mortgage the applicant was entitled to have the share transfer of the two shares registered in his name. The second respondent claims that there was in effect a breach of warranty by the applicant but that claim does not, in my opinion, vitiate or impinge upon the applicant’s right to have the share transfer registered. Cohen Holdings Pty Ltd is not a party to this proceeding or any proceedings in which it seeks to impugn or attack the validity of the agreement or the share mortgage.
Mr Minahan who appeared for the applicant submitted that as the company was prepared to consent to the orders sought I should make the orders sought. However, Mr Harris, who appeared for the second respondent submitted that the application should be dismissed for two reasons. Firstly, he submitted that by virtue of clause 7 of the share mortgage the security was only enforceable, and the applicant was only entitled to register in his name the blank transfer, if clause 5 of the share mortgage had been complied with. Sub‑clause (a) of clause 5 provided that the security would become enforceable immediately at the option of the applicant:
“if default be made by the Mortgagor in the due and punctual payment of the Principal Sum or any part thereof or any interest thereon or any other monies hereby secured or in the observance or performance of any of the other covenants or obligations on the part of the Mortgagor to be performed or observed is herein contained or implied and if such default shall not be remedied by the Mortgagor within seven days after service of a notice upon the Mortgagor specifying the default and requiring that the same be remedied.”
Mr Harris submitted that no notice specifying the default had been served on Cohen Holdings Pty Ltd in accordance with clause 5(a) of the share mortgage. He also submitted that as the blank transfer had never been received by the second respondent and therefore had not been received by the company there was no default or failure in respect of which jurisdiction could be exercised by the Court under s 1094 or s 1096 of the Corporations Law. In the ordinary course the second respondent would not have had standing to make any submissions on the issues between the applicant and the company. However the applicant had joined the second respondent as a party and had sought orders against him and accordingly the second respondent was entitled to make submissions on the issues for the purposes of seeking to avoid any orders being made against him.
Mr Minahan relied upon the letter from the applicant’s solicitors dated 14 December 1995 addressed to the then solicitors for the company and Cohen Holdings Pty Ltd as a notice of default for the purposes of clause 5(a) of the share mortgage.
The difficulty with that submission is that the letter does not purport, in its terms, to be a notice of default addressed to Cohen Holdings Pty Ltd and it is very difficult to construe such an intent from the letter itself. It is true that the letter advises that if a bank cheque for $40,000.00 is not available for collection on the following day the applicant requires the company to register immediately the transfer of shares handed over to the second respondent on the previous day but it seems to me that what the applicant was seeking to do was to disregard the need to serve a notice of default in respect of which the mortgagor, Cohen Holdings Pty Ltd was to be given seven days within which to remedy its default. The only purposes for handing to the second respondent the transfer of shares from Cohen Holdings Pty Ltd to the applicant and the share certificate for two shares on 13 December 1995 was to have the company register the transfer in the name of the applicant.
Putting the matter another way, the letter of 14 December 1995 was written not to the solicitors for Cohen Holdings Pty Ltd notifying them of the purchaser’s default but rather was written to the solicitors for the company. That is why the letter required the company, in the absence of the availability of the bank cheque on the following day, to register the transfer immediately. The letter said the transfer had been handed to the second respondent the previous day “in accordance with clause 7(a) of the Share Mortgage”. That was for the purpose of the company registering the transfer in the name of the applicant. The whole tenor of the letter of 14 December 1995 was to put the company on notice of what was required of the company if the bank cheque was not available the following day. It does not purport to be a notice of default for the purposes of clause 5(a) of the share mortgage and it is not addressed either to Cohen Holdings Pty Ltd or its solicitors as such.
I cannot therefore construe the letter of 14 December 1995 as a notice addressed to Cohen Holdings Pty Ltd for the purposes of clause 5(a) of the share mortgage. The fact that on 10 January 1996 the solicitors for the second respondent and Cohen Holdings Pty Ltd informed the applicant’s solicitors that the second respondent was agreeable to paying instalments does not, in my opinion, waive the obligation to serve a notice of default on Cohen Holdings Pty Ltd pursuant to clause 5(a) of the share mortgage before the security created by the share mortgage was enforceable. Nor is the matter cured by the applicant’s solicitors’ letter of 11 January 1996 addressed to the solicitors for the company requiring the company to register immediately in the applicant’s name the transfer of shares handed to the second respondent on 13 December 1995 in accordance with clause 7(a) of the share mortgage. In my opinion, the contents of that letter demonstrate that no notice of default was given on 14 December 1995 or at all. A similar conclusion can be deduced from the notice in the letter of 20 September 1996 which refers to a failure to register a transfer within one month of 13 December 1995, that being the date on which the transfer was lodged for registration. If that is the enforcement of this security upon which the applicant relies, there was no notice specifying the default given before the date on which the applicant sought to exercise his security. In the absence of the service of a notice of default pursuant to clause 5(a) of the share mortgage the security had not become enforceable and the applicant was not entitled to seek to enforce his security under the share mortgage.
I should also point out that in my opinion to the extent that reliance is sought to be placed on the letter of 14 December 1995 as a notice of default it was not served in accordance with the service provision contained in clause 12 of the share mortgage. In my opinion that provision required the service of any notice to be delivered to Cohen Holdings Pty Ltd at the address set out in the share mortgage. The service provision in the agreement is of no relevance to notices to be served under or for the purposes of the share mortgage and it is not appropriate to read the two documents together for this purpose.
There is a conflict in the evidence as to whether the transfer of shares from Cohen Holdings Pty Ltd to the applicant and the share certificate in relation to the two encumbered shares was delivered to the company on 13 December 1995. Apparently Mr Kavanagh is now the only director of the company and he denies that the company ever received it. Mr Cohen the second respondent, was a director on 13 December 1995 but he denies that he received the documents whereas the applicant asserts that he gave them to him. Notwithstanding the conflict of evidence I am satisfied on the balance of probabilities that the documents were handed to Mr Cohen by the applicant on 14 December 1995. The applicant was not cross‑examined on his affidavit and accordingly I have no basis on which to reject his evidence. Although the second respondent maintained that he did not receive the documents, he had no specific recollection of being at the company’s business premises on 13 December 1995, the day on which, and the place at which, according to the applicant’s solicitors’ letter of 14 December 1995, the documents were handed to the second respondent. The second respondent said he saw that letter at the time it was received or the next morning and if he had not been given the documents at that time I would have expected a response or reply to that effect. No such response or reply occurred. Although the second respondent maintained his denial of receipt of the documents it seems to me that it is more probable than not that the documents were received by him. The letter of 14 December 1995 from the applicant’s solicitors to the company’s solicitors refers to the fact that Mr Nicholls handed the documents to Mr Cohen and this is not disputed by the solicitors acting for Mr Cohen in their reply of 10 January 1996 when Mr Cohen resisted paying the full amount claimed. It was not suggested in that letter that he had not received the relevant documentation.
If there had been a proper notice of default served I am satisfied that it would have been appropriate to have made an order pursuant to s 1094 ordering the registration of the transfer and pursuant to s 1096 ordering the issue of the certificate. Although there is some suggestion that the share register never recorded the initial transfer from the applicant to Cohen Holdings Pty Ltd I accept the applicant’s evidence that he received, in the course of the settlement on 28 September 1995, a share certificate recording Cohen Holdings Pty Ltd as the holder of the subject shares. The second respondent agrees in his affidavit that in accordance with the agreement the share certificate showing Cohen Holdings Pty Ltd as the holder of the shares was handed to the applicant’s solicitors at the time of the settlement on 28 September 1995. In those circumstances if there had been a proper notice of default I consider it would have been appropriate to make orders which made it clear that the applicant was being registered as the transferee of the shares pursuant to a transfer from Cohen Holdings Pty Ltd.
The application will therefore be dismissed. The applicant should pay the respondents’ costs of the application.
I certify that this and the preceding eleven (11) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg
Associate:
Dated: 10 October 1997
Counsel for the applicant: Mr S Minahan Solicitor for the applicant: Aroni Colman Counsel for the first respondent: Mr M Grey Solicitor for the first respondent: Oakley Thompson & Co Counsel for the second respondent: Mr R A Harris Solicitor for the second respondent: Smith Solicitors Date of Hearing: 6 October 1997 Date of Judgment: 10 October 1997
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