Pacific Dairies Ltd v Orican Pty Ltd
[2019] VSC 647
•26 September 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2019 01689
S ECI 2019 02449
IN THE MATTER of PACIFIC DAIRIES LIMITED
BETWEEN:
| PACIFIC DAIRIES LIMITED (ACN 095 821 971) | Plaintiff |
| and | |
| ORICAN PTY LTD (ABN 63159332788) & ORS | Defendants |
---
JUDGE: | Sifris J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 16-18 September 2019 |
DATE OF JUDGMENT: | 26 September 2019 |
CASE MAY BE CITED AS: | Pacific Dairies Limited v Orican Pty Ltd & Ors |
MEDIUM NEUTRAL CITATION: | [2019] VSC 647 |
---
CORPORATIONS – Requirement to hold meeting pursuant to request by members – Allegation by company of improper purpose – Relevant matters to be dealt with at forthcoming Annual General Meeting (AGM) – s 249D Corporations Act 2001 (Cth).
CORPORATIONS – Oppression – Whether share and option issues constitute oppression –Whether failure to call meeting constitutes oppression – Whether failure over a period of 4 years to obtain finance for projects constitutes oppression – Conduct in all of the circumstances not oppressive – s 232 Corporations Act 2001 (Cth).
CORPORATIONS – Oppression – Relief – Broad discretion – Even if oppression found no relief desirable beyond the holding of the AGM – s 233 Corporations Act 2001 (Cth).
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | GR McCormick | Goldsmiths Lawyers |
| For the Defendant | MD Tehan | DLA Piper Australia |
HIS HONOUR:
A Introduction
There are two proceedings before the Court.
The first proceeding (the Meeting Proceeding) is an application by Pacific Dairies Limited (the Company) under the Corporations Act 2001 (Cth) (the Act), seeking to set aside a request made on 19 March 2019 by certain members of the Company for the directors to hold a general meeting of the Company.
The second proceeding (the Oppression Proceeding) is an application by William John Timsbury Clarke (Clarke) under s 232 of the Act in respect of the conduct of the directors of the Company. A number of orders are sought, including the removal of the current directors of the Company, the subject of the request referred to in the Meeting Proceeding. Orders are also sought setting aside the issue of certain shares and options to the directors.
By order of Robson J made 26 July 2019, the proceedings were heard together and evidence in one proceeding is evidence in the other.
The parties have filed a number of affidavits which set out the relevant factual background:
(a) the Company has filed affidavits of Paul Duckett (Duckett) sworn on 15 April 2019 and 18 June 2019; and
(b) Clarke has filed two affidavits sworn on 3 June 2019.
B Relevant background[1]
The Company
[1]Most of the relevant background is uncontroversial and is taken from Mr Clarke’s Outline of Submissions.
The Company has been known as Pacific Dairies Limited since November 2016. Prior to that time, it was known as Australian Natural Proteins Ltd.
Until 17 May 2016, the Company was listed, and traded, on the Australian Securities Exchange. It was suspended from trading on that date, having last traded at a price of 2.9 cents per share. On 20 May 2019, the Company was delisted from the Australian Securities Exchange as a result of having been suspended from trading for a continuous period of more than three years.
The Company’s present Board comprises Duckett, who is the chairman, Ray Taylor (Taylor) and Trevor Kelly (Kelly).
Mr Clarke
Clarke was chief executive officer of Australian Natural Proteins (the Company’s predecessor) for about nine months, having resigned on 31 March 2014.
He holds 6,000,000 shares in the Company, which represents about 1.52 per cent of the shares in the Company.
The Company’s business
Since about 2015, the Company has attempted to undertake various investments in the dairy industry. The Company has made disclosures to the ASX about the following proposed investments:
(a) in February 2015, it announced a planned purchase of an aggregation of five dairy properties in northern Victoria and southern New South Wales;
(b) on 17 December 2018, it announced the entry into two memoranda of understanding to expand operations and assets to Fiji and New Zealand, in order to create a regional dairy group;
(c) on 25 January 2019, it included as part of an announcement a plan to ‘have two dairy farms on the east coast of Australia’, and stated that the Company had ‘negotiated contracts to purchase and manage two high-quality Australian dairy farms’.
The purchase of the five farms referred to in paragraph 11(a) above did not proceed. On 25 September 2018, the Company announced that ‘one of the original farms identified has been sold to another party, however another equally suitable farm has been identified as a replacement’. Clarke deposes in his affidavit that he is aware that two of the original farms are presently on the market for sale, and the other three farms have been sold.
The plan to create a regional dairy group referred to in paragraph 11(b) above has not eventuated. The Company’s discussions with New Zealand Dairy Products Ltd were terminated in April 2019. The status of the Fijian limb of the plan is the subject of an exhibit in respect of which the Company seeks confidentiality orders. The Fijian investment is subject to the Company undertaking fundraising and re-listing on the ASX. Duckett’s 3 June 2019 affidavit stated that the process of obtaining fundraising was expected to be completed by the end of June 2019. Duckett gave evidence that it has not been completed and there is no indication as to when it will be.
The purchase of the ‘two high-quality Australian dairy farms’ referred to in paragraph 11(c) above has not occurred. The farms are presently on the market for sale. Duckett gave evidence that he is aware of the re-listing of the properties, and that the Company has not taken any proactive measures in respect of the re-listing of the properties. The purchase of the dairy farms is also conditional upon obtaining funding. At present as noted above, sufficient funds have not been raised.
The Company is effectively a shell.
The Company’s financial position
The Company is not in a strong financial position.
In the 2016 to 2017 financial year, the Company recorded a net loss of approximately $943,000 (with revenue of $57).
In the 2017 to 2018 financial year, the Company recorded a net loss of approximately $698,000 (with revenue of $4,500).
As at 30 June 2018, the Company recorded ‘biological assets’ of $290,500. Duckett’s affidavit clarifies that the biological assets are cows. The terms of their ownership are the subject of an exhibit over which confidentiality is claimed.
Payment of directors’ fees
Notwithstanding the financial position of the Company outlined above, the directors of the Company have received directors’ fees.
In the 2016 to 2017 year, the directors received $213,000 in fees. In the 2017 to 2018 year, the directors received $228,000 in fees.[2] The fees were paid by way of share issues.
Issues of shares to directors since the Company entered a trading halt
[2]The fees include an agreed salary payable to Duckett in the sum of $120,000 per year.
A number of shares and options have been issued to the directors and their related parties since the Company entered a trading halt:
(a) On 1 August 2016, over 6 million shares, and the same number of options, in Pacific Dairies were issued to three directors or their associated entities and related parties as ‘consideration for fees payable’. The shares were issued at a price of $0.035, the ASX share price at the time. The Company did not have the cash resources to pay the directors’ fees.
(b) In October 2018, further shares were issued to two directors or their associated entities and related parties: 14,000,000 to Duckett (through his related entity Meridian Fertilisers) and 3,000,000 to Taylor. These shares were issued at a price of $0.010 per share. The Company’s shares last traded for 2.9 cents per share prior to their suspension of trading. Duckett explained the basis of the $0.010 price, which was based on advice received by the board of directors.[3]
[3]According to Duckett the Company, as a shell, had a value of about $400,000, which translates to a share price of one-tenth of a cent. However, because the Company was in the course of raising funds for identified acquisitions, the directors considered that a much higher value of about $4 million was more accurate. This equates to approximately 1 cent per share.
Duckett gave evidence that shares were also issued at the same price to parties unrelated to the directors. Neither Clarke nor the shareholders in the Company at large were offered the opportunity to purchase shares as part of those share issues.
Recent meetings of the Company
In light of the financial position of the Company and the share issues outlined above, various shareholders have been agitating for changes in the governance of the Company.
On 23 October 2018, a group of shareholders (which did not include Clarke) called for the removal of the existing Company board.
A week later, the Company gave notice of its AGM to be held on 30 November 2018. By virtue of the remuneration report having been rejected by more than 25 per cent of shareholders at the previous AGM, the 2018 AGM included a ‘spill motion’ in respect of the Board.
At the 30 November 2018 meeting, the remuneration report was again rejected by more than 25 per cent of shareholders. On Christmas Eve 2018, the Company announced a spill meeting was to be held on 1 February 2019.
On 11 January 2019, a group of shareholders called for the Board to be removed. Clarke was a signatory to this request.
On 1 February 2019, a general meeting of the Company took place at which the existing directors were re-elected by an overwhelming majority. The nominees of the group of shareholders were overwhelmingly rejected.
On 19 March 2019, a group of shareholders (including Clarke) called for a meeting to be held and for resolutions to be passed removing the Board of the Company. The meeting has never been held; instead, the Company commenced the Meeting Proceeding.
The AGM is due to be held on 28 November 2019.
C Meeting Proceeding
Section 249D of the Act grants members the power to call for a general meeting. The section is in the following terms:
Calling of general meeting by directors when requested by members
(1)The directors of a company must call and arrange to hold a general meeting on the request of members with at least 5% of the votes that may be cast at the general meeting.
(2) The request must:
(a) be in writing; and
(b) state any resolution to be proposed at the meeting; and
(c) be signed by the members making the request; and
(d) be given to the company.
(3)Separate copies of a document setting out the request may be used for signing by members if the wording of the request is identical in each copy.
(4)The percentage of votes that members have is to be worked out as at the midnight before the request is given to the company.
(5)The directors must call the meeting within 21 days after the request is given to the company. The meeting is to be held not later than 2 months after the request is given to the company.
Section 203D of the Act empowers a company to remove a director by resolution.
Section 249Q of the Act states that a meeting of a company’s members must be held for a proper purpose.
Section 1322(4)(d) of the Act grants the Court the power to make orders extending the period for doing any act, matter or thing under the Act.
Clarke submits that s 249D of the Act obliges the Company to call a meeting when the requirements of that provision are otherwise met. As a result, the Company must bear the onus of establishing circumstances which render the requested meeting improper.
The Company submits that the meeting was in the circumstances not required and that its calling was an abuse of process and entirely improper.
Courts have rightfully been wary of interfering with a member’s right to call a meeting. So, for example, in Humes Ltd v Unity APA Ltd (in liq) Beach J stated:[4]
In my opinion this Court should be very reluctant to interfere with a minority shareholder’s statutory right to requisition a general meeting. I consider it should only do so when it is clear that the purpose for calling the meeting is something other than the passing of the resolutions contained in the requisition.
[4](1986) 11 ACLR 641, 647.
That is a high bar for the Company to meet. Indeed, it has been held that a resolution which addresses the composition of the board of a company is a proper purpose for a meeting to be requisitioned.
However, in the circumstances of this case, given the pending AGM, at which the composition of the board will be decided, there is no need to requisition any meeting. Accordingly, I will not make any of the declarations sought in the Meeting Proceeding.
D Oppression proceeding
Sections 232 and 233 of the Act grant the Court a very broad discretion in respect of identifying and remedying oppressive conduct by a company. While ultimately the question of whether a company has acted oppressively is assessed by reference to all of the circumstances, it is sufficient at this point to note that:
(a) a company’s failure to call meetings can constitute oppressive conduct;
(b) payments of fees to directors can be oppressive where the fees are paid improperly and are excessive without any bona fide basis for their calculation; and
(c) the issue of shares by a company can constitute oppressive conduct.
In Exton v Extons Pty Ltd,[5] I reviewed the authorities and set out the legal principles relevant to ss 232 and 233 of the Act. In summary, s 232(d) which covers conduct ‘contrary to the interests of the members as a whole’, is an independent ground of oppressive conduct, distinct from s 232(e) which covers conduct that is ‘oppressive, unfairly prejudicial or unfairly discriminatory’.[6] Conduct under the former ground may not necessarily involve commercial unfairness,[7] whereas the critical issue under the letter is whether there has been commercial unfairness, judged objectively.[8]
[5][2017] VSC 14; (2017) 118 ACSR 411 (‘Extons’).
[6]Ibid [35]-[39].
[7]Ibid [39].
[8]Ibid [48].
In Catalano v Managing Australia Destinations Pty Ltd, Siopis, Rares and Davies JJ considered the nature of the test of unfairness required by s 232(e). Their Honours said:[9]
The test of unfairness requires an objective assessment of the conduct in question with regard to the particular context in which the conduct occurs. The question is whether objectively in the eyes of the commercial bystander there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair. As the test is objective, whether or not the conduct is oppressive will not depend upon the motives for what was done. It is the effect of the acts that is material: Wayde 180 CLR at 472-473; Campbell 238 CLR at 360 [176].
[9][2014] FCAFC 55; (2014) 314 ALR 62 [9].
Directors and officers may engage in conduct, which is contrary to the interests of members as a whole even though it is not unfair, if it involves for example, pointlessly wasting company resources or a breach of statutory or fiduciary duty.[10] Of course, a case alleging oppression by conduct said to constitute a breach of duty must be alleged clearly and supported by sufficient proof to establish that breach. It must be articulated what duty the officers owed, how that duty had been breached, and how or why the conduct and breach was contrary to the interests of members.
[10]Extons [2017] VSC 14; (2017) 118 ACSR 411 [36], [39] (Sifris J); Turnbull v National Roads and Motorists Association (2004) 50 ACSR 44; [2004] NSWSC 577 [32] (Campbell J).
In Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd,[11] Young J said:
(a)‘mere failure to agree between the majority and the minority is not usually itself sufficient to demonstrate oppression: see Re Five Minute Car Wash Service Ltd [1966] 11 WLR 745 at 751’;[12]
(b)‘I must assess the totality of the allegations to see if there is oppression. The authorities show that this type of case has to be judged on all the circumstances’;[13]
(c)‘[b]ecause it is easily overlooked, it is necessary to repeat that a plaintiff must actually prove oppression before obtaining relief. Oppression is not normally established merely by showing that the majority are in control of the company, that the applicant is consistently outvoted nor because the majority have made some decisions which were questionable from a business point of view or have later turned out to be disastrous’.[14]
[11](1998) 28 ACSR 688.
[12]Ibid.
[13]Ibid, 739.
[14]Ibid, 740.
Mansfield J expanded upon that last point in Territory Realty Pty Ltd v Garraway:[15]
The authorities indicate that the Court should not readily find either s 232(d) or (e) is made out: Edwards v Idaville Pty Ltd (1996) 22 ACSR 1. Such a finding requires consideration of all the circumstances, viewed cumulatively, but not with a hypercritical approach, as the measure is the standard of reasonable directors: De Tocqueville Private Equity Pty Ltd v Linden & Conway Ltd (2006) 59 ACSR 587. It is not a finding to be made because the Court may, on the information available, disagree with the decision of the directors, or because the wisdom of hindsight may show that the decision of the directors was unwise and perhaps grossly so, or because the directors or management did not conduct the affairs of the company as well as the Court considers they may have: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688. As Murray J said in Re Spargos Mining NL (1990) 3 ACSR 1 at 44, the Court should not in substance adopt an approach to those provisions without clear justification, so that it does not simply take “over the management of the company”.
[15][2009] FCA 292 [312].
Clarke contends that the conduct of the Company reveals that since at least 2015 it has essentially achieved none of its goals. It has regularly announced various initiatives, but none have come even close to fruition.
Instead, the Company has paid (by way of the issue of shares and options) extremely high directors’ fees in circumstances where its financial position is rapidly deteriorating, and has made selective share issues to directors and others without offering such issues to the shareholders at large.
In those circumstances, Clarke submits that it is appropriate for the Court to grant relief under the Act.
The Company opposes such relief and denies that such conduct constitutes oppression. I agree.
Despite some concerns, I do not consider that, either individually or collectively, the conduct complained of relevantly and at this stage amounts to oppression for the purpose of enlivening the jurisdiction under s 232 of the Act.
Much of the conduct may fairly be criticised, but that does not mean that it constitutes oppression. Inadequate and poor stewardship, management and decisions by directors and any consequent dissatisfaction by shareholders does not of itself necessarily give rise to oppressive conduct. It is necessary to carefully examine the conduct and assess whether it constitutes commercial unfairness or discrimination against some members or whether the conduct is in the interests of the members as a whole.
In my opinion, and in the particular circumstances of this case, there is no conduct that constitutes unfairness or discrimination against any members. Further, the conduct complained of does not constitute conduct that is contrary to the interests of members as a whole.
In my opinion, the evidence does not establish that the various share and option issues were improper.
The issue of shares (and options) as consideration for the payment of directors’ fees does not amount to oppressive conduct. The amounts were owing. The company did not have the cash resources to pay the fees. Further, the Company received advice that conversion to equity was far more preferable than accruing an (increasing) liability, particularly in the circumstances where the Company was trying to raise funds. There is no evidence, other than assertion, that the fees were too high. They were agreed to as between the Company and the directors. For what it is worth, they do not appear to be excessive. Finally, the conversion rate, based on the quoted share price at the time, was entirely appropriate, particularly in the absence of any evidence to the contrary. I do not consider that the position is affected by the issue of options. That is what was agreed. The certainty of receiving money, which was owing, due and payable was exchanged for ‘risky’ shares. In this context the option ‘sweetener’ cannot be considered oppressive.
The same may be said in relation to the issue of shares as consideration for the repayment of loans in October 2018. The only difference is the conversion rate. The explanation for the rate has not been contradicted by other evidence and I am inclined to accept it. If anything it seems high and if the Company had followed the advice received, the directors and their associated entities would have received more shares. Their decision not to do so was reasonable and again, there is no oppression.
The remaining selective share issues were not oppressive. Much needed funds were raised and the conversion price was appropriate. The selective approach was also satisfactorily explained. Private placements are permitted and there is no evidence to the effect that such placement was only to those who supported the directors. In the circumstances, given the cost and administrative, regulatory and compliance issues, a rights issue to all shareholders was not required. It is obvious that if Clarke was approached he would not have subscribed further capital.
I do not regard the failure to call a meeting pursuant to the 19 March 2019 request as conduct constituting oppression. A meeting for the very purpose of appointing directors had taken place a short time earlier on 1 February 2019. The existing directors were voted in by a substantial majority and the position of the Company was well known and the directors were entitled to take the view that no meeting was required notwithstanding developments between 1 February 2019 and 19 March 2019.
At various stages over a period of four-and-a-half years, the Company has sought to paint an optimistic picture of the state of its attempts to raise finance:
(a) on 15 August 2016, the Company announced that the application for re-listing (which was contingent on obtaining finance) ‘should occur in late September or October [2016]’;
(b) in the 2016 to 2017 Annual Report, the Company stated that ‘the underlying value of our project was held up and we are hopeful to complete the debt funding during the first half of the 2018/2019 year’;
(c) in the 2017 to 2018 Annual Report, the Company stated that it was ‘pleased to have finally entered final discussions for a debt financing arrangement with Pramana Capital Pty Ltd’;
(d) on 25 September 2018, the Company stated that ‘Pramana Capital has made significant progress in identifying international interest in both the proposed Australian acquisitions and Fiji Dairy Project. Due diligence has been completed and the Board is confident that Pramana Capital will provide a Debt Facility to initiate both projects in the near future’;
(e) in or about early April 2019, Bluemount Capital released an investment document which contained an offer to invest in the Company said to close on 31 May 2019;
(f) in his affidavit dated 18 June 2019, Duckett indicated that ‘closure [of finance to be provided by the AQUILA Fund] is expected by the end of June’.
It was submitted accordingly that the Company has been labouring for four-and-a-half years to obtain finance, yet the directors have obviously failed to give any thought to steps which might be taken in the absence of obtaining such finance. The directors are, it was submitted, content to rely on ‘hope’ and ‘optimism’, rather than engage in any critical analysis of the state of the Company and financial markets. In those circumstances, the director’s conduct of the fundraising has reached a stage where it is contrary to the interests of members, and therefore oppressive. I do not agree. If shareholders are not satisfied they can vote for the removal of directors. The fact is the Company does not have any underlying business or financial resources. Inaction or hope and optimism is, in the circumstances, not contrary to the interests of members as a whole and no application has been made to wind up the Company.
I do not consider that any of the other suggested grounds amount to oppression.
The failure to endeavour to keep the unconditional contracts, in relation to the two dairy farms, on foot was a management decision open to the directors in circumstances where they did not have the funds to settle the acquisitions. Although they were hopeful, a decision to permit the farms to sell to others if the opportunity arose before the availability of capital should not be unduly criticised. Although it may be part of an emerging feature of failed management, it has not, in my view, reached the stage of oppression.
I do not consider the employment of Duckett’s son, Matthew Duckett, as oppressive. On the evidence, I am unable to assess the extent of his work or analysis for the company or the reasonableness of his remuneration for such work. Duckett said that he was not involved in the decision to employ Matthew and that he performed various services and was paid accordingly. There was no evidence to the contrary and I am not prepared, for the purposes of and given the nature of the application, to draw any adverse inferences.
The fact that a company associated with Duckett benefited from the sale of fertiliser to the vendors of the farm properties is also of little or no relevance so far as the oppression case is concerned.
Finally, it is not without relevance to note that this is not a claim for breach of fiduciary or statutory duty or a derivative claim by members alleging such a claim. It is a claim alleging oppressive conduct and the Court is entitled to take all of the matters, facts and circumstances into account in determining first, whether there has been oppression and second, if there is oppression, what the appropriate remedy is. As pointed out, although I have some concerns in relation to management and the financial state of the Company, the point of oppression has not been reached.
In any event, if I am wrong and the jurisdiction is enlivened, I would not, in the exercise of my discretion and in the circumstances, and in particular given the forthcoming AGM, make any of the orders. The main order sought, namely the removal of directors (which in any event was not pressed by Clarke), can and is best decided by the fully informed shareholders at the AGM. Shareholder democracy should take its course. I will not interfere. Further, there is no basis to set aside the various share and option issues.[16] Finally, a not insignificant discretionary matter is that of delay. It is self-evident and indeed part of Clarke’s case that the directors have, to the knowledge of the shareholders, done or achieved nothing in over four years. While this is not meant as a criticism, it appears that the claim for oppression has been instituted defensively as a response to the Company commencing the Meeting Proceeding.
[16]There is no basis or evidentiary foundation to reduce the directors’ fees to $10,000 per annum per director, or reduce Duckett’s salary to $60,000.
Both proceedings will be dismissed and I will reserve costs and liberty to apply.
7
2
0