Re Barry Green
[1999] QSC 31
•26 February 1999
IN THE SUPREME COURT
OF QUEENSLAND
O.S. No. 10044 of 1998
BrisbaneBefore Mr Justice Muir
[Re Barry Green & Anor]
IN THE MATTER of an Application pursuant to Order 64 rule 1A of the Supreme Court Rules
and
IN THE MATTER of an agreement between Barry Green and Erica Maude Green, Harry Mackay Bolton and Valerie Glenda Bolton as Trustees for the Bolton Family Trust, Binbex Pty Ltd ACN 010 744 395 as Trustee for the Binbex Unit Trust, Trilby Holdings Pty Ltd ACN 010 014 856 as Trustee for the Trilby Holdings Trust, Taryn PJH Pty Ltd ACN 009 773 577 as Trustee for the Paul Hauritz Discretionary Trust and Barry Green and Erica Maude Green as Trustees for the Automatic Control Company Directors’ Superannuation Fund and as Trustees of the Automatic Control Company No. 2 Superannuation Fund and Automatic Control Company Pty Ltd ACN 009 073 705 and Grigor McPhee, Trevor Jeffrey, Ivan Board and Paul Hauritz
and
IN THE MATTER of an application by Barry Green and Erica Maude Green
REASONS FOR JUDGMENT - MUIR J.
Judgment delivered 26 February 1999
CATCHWORDS: CONSTRUCTION OF CONTRACTUAL TERMS - principles of contractual construction.
Counsel:Mr C.E.K. Hampson QC and Mr D.R.M. Murphy for the applicant
Mr Douglas SC for the respondent
Solicitors: M.F. Lyons & Associates for the applicants
Bowdens for the respondents
Hearing date: 27 January 1999
IN THE SUPREME COURT
OF QUEENSLAND
O.S. No. 10044 of 1998Brisbane
Before Mr Justice Muir
[Re: Barry Green & Anor]
IN THE MATTER of an Application pursuant to Order 64 rule 1A of the Supreme Court Rules
and
IN THE MATTER of an agreement between Barry Green and Erica Maude Green, Harry Mackay Bolton and Valerie Glenda Bolton as Trustees for the Bolton Family Trust, Binbex Pty Ltd ACN 010 744 395 as Trustee for the Binbex Unit Trust, Trilby Holdings Pty Ltd ACN 010 014 856 as Trustee for the Trilby Holdings Trust, Taryn PJH Pty Ltd ACN 009 773 577 as Trustee for the Paul Hauritz Discretionary Trust and Barry Green and Erica Maude Green as Trustees for the Automatic Control Company Directors’ Superannuation Fund and as Trustees of the Automatic Control Company No. 2 Superannuation Fund and Automatic Control Company Pty Ltd ACN 009 073 705 and Grigor McPhee, Trevor Jeffrey, Ivan Board and Paul Hauritz
and
IN THE MATTER of an application by Barry Green and Erica Maude Green
REASONS FOR JUDGMENT - MUIR J.
Judgment delivered 26 February 1999
The applicants, Barry and Erica Green, entered into an undated written agreement with the respondents (“the purchasers”) under which the applicants agreed to sell to the purchasers the issued shares in the capital of Automatic Control Company Pty Ltd (“the company”) for the consideration stated in the agreement. The company was also a party to the agreement.
A dispute has arisen between the parties as to the proper construction of those parts of the agreement which determine the moneys payable by the purchasers to the applicants on and after completion.
Relevant terms of the agreement
The provisions of the agreement of particular relevance for present purposes are as follows:
“1.2Completion of the sale and purchase by transfer of the shares shall be made upon payment by the Purchasers to Mr Green and Mrs Green and by the Company to Mr Green and Mrs Green of the balance of the Share Purchase Price and of the Employee Entitlements and of the Shareholder Entitlements provided for in this Agreement.
2.1The Purchasers shall pay to each of Mr Green and Mrs Green a purchase price for the shares in the sum of $42,500.00, so that the total Share Purchase Price payable to Mr Green and Mrs Green collectively shall be $85,000.00.
2.2The Share Purchase Price shall be paid:
2.2.1as to a first instalment of $80,00.00 on or before 30 June 1996 (‘the Commencement Date’);
2.2.2as to a balance of $5,000.00 on or before 1 July 1999.
3.2Forthwith upon payment to Mr Green and Mrs Green of the last to be paid of the balance of the Share Purchase Price, the Shareholder Entitlements and the Employee Entitlements (‘the Completion Date’), Mr Green shall, unless otherwise agreed by all parties, retire as a director of the Company, and this Agreement may be treated as a form of notice of retirement by the Company, effective on that date.
4.1Title to and ownership of the shares shall be transferred by Mr Green and Mrs Green to the Purchasers on the Completion Date upon payment to Mr Green and Mrs Green of the balance of the Share Purchase Price, the Shareholder Entitlements, and the Employee Entitlements.
5.1The parties acknowledge and agree that the Company is indebted to Mr Green and Mrs Green jointly in the sum of $123,772.00 as at the date of this contract.
5.2The Company agrees to make payment of that entitlement to Mr Green and Mrs Green in the following instalments:
not later than 31 August 1996 $50,000.00
not later than 30 June 1997 50,000.00
not later than 30 June 1998 23,772.00
Total $123,772.006.Obligation to pay dividends to Mr and Mrs Green
6.1The Company shall pay dividends to Mr Green and Mrs Green from available profits in the amounts and at the times set out below:
by equal quarterly instalments during the year ending
30 June 1998 $76,228.00
by equal quarterly instalments during the year ending
1 July 1999 100,000.00
Total $176,228.00
9.0Purchasers to fund payment of Shareholder Entitlements and Employee Entitlements as necessary
9.1The Purchasers agree jointly to contribute by way of loan to the Company such money as is necessary (without further external borrowings by the Company) to enable the Company to make payment to Mr Green and Mrs Green of the Shareholder Entitlements and Employee Entitlements provided for in this Agreement.
9.2In the event that the Purchasers are required to contribute pursuant to clause 9.1, and that contribution has not been made within 30 days of Mr Green and Mrs Green having given to the Purchasers written demand requiring payment (specifying the consequences of failure to pay) then Mr Green and Mrs Green may terminate this contract by notice to the Purchasers in which case:
...
9.2.4the Purchasers shall, if necessary, re-transfer to Mr Green and Mrs Green the shares in the Company; and
11.Summary of all entitlements year by year, acceptance in satisfaction
11.1The entitlements of Mr Green and Mrs Green from the Company and from the Purchasers (other than payment of salaries and transfer of the Honda Accord motor vehicle) by way of Share Purchase Price, Shareholder Entitlements, and Employee Entitlement are set out in Schedule 2.
(Schedule 2 has a heading “Summary of payments to Mr Green and Mrs Green, year by year”. It sets out, in the form of a table, the dates upon which payments under the agreement are to be made, as well as the nature and amount of such payment. The payments specified total $1,080,000.)
11.2Mr Green, Mrs Green and the Superannuation Funds acknowledge and agree that, upon payment of the Share Sale Price, the Shareholder Entitlements, and the Employee Entitlements, they nor any company in which they have an interest, shall have any further claims or entitlements against the Company, whether as shareholders, employees, lenders or otherwise (other than the rights of the Superannuation Funds pursuant to the lease provided for in Part 7) and the amounts payable pursuant to this Agreement shall be received by them in full and final satisfaction of their rights against the Company.
12.Adjustments if reduction in profitability
12.1In the event that the profits of the Company (calculated adopting the same accounting policies as have been used in the Accounts, and subject to that according to accepted accounting principles and making all proper provisions and adjusting for abnormal and extraordinary items, but before deducting as an expense any of the Employee Entitlements provided for in Part 3 and any additional costs incurred by reason of the sale and purchase provided for in this Agreement including premiums on the life policy for Mr Green) in any of the three years ending 30 June 1997, 30 June 1998 or 30 June 1999, fall below $250,000.00, then the amount payable by the Company to Mr Green and Mrs Green on account of the Shareholder Entitlements provided in Part 2 (and if necessary the Employee Entitlements provided in Part 3) shall reduced, so that the total of the Shareholder Entitlements and the Employee Entitlements payable in that year shall not exceed the amount of the adjusted profit figure for that year.
12.2If any reduction is made in any year pursuant to clause 12.1 above, then the amount of the reduction shall be payable in the next year, or the year after that, to the extent that the profits in that next year or that year after exceed $250,000.00.”
Clause 21.1 contains the following definitions -
“‘Shareholder Entitlements’ shall mean the entitlements of Mr Green and Mrs Green to the paid dividends as shareholders of the Company, and to be repaid loan account entitlements, as provide for in Part 2 of this Agreement;
‘Employee Entitlements’ shall mean the entitlements of Mr Green and Mrs Green to be paid in respect of long service leave, superannuation contributions, and retirement benefits as provided for in Part 3 of this Agreement; Employee Entitlements hall not include the entitlement to salary, wages or consultancy fees of Mr Green or Mrs Green;
‘Completion Date’ shall mean 1 July 1999, or such earlier date as the Purchasers and the Company have paid to Mr Green and Mrs Green the whole of the Share Purchase Price, the Employee Entitlements, and the Shareholder Entitlements;
‘Commencement Date’ shall mean 1 July 1996;”.
The point in issue
Clause 12.1 provides, in effect, that where the profits of the company in any of the years ending 30 June 1997, 30 June 1998, or 30 June 1999 fall below $250,000, then there is to be a reduction in amounts payable by the company to the applicants on account of Shareholder Entitlements and, if necessary, Employee Entitlements so that the total of the Shareholder Entitlements and the Employee Entitlements payable in that year do not exceed the company’s adjusted profit figure for that year. By operation of cl. 12.12, any such shortfall in payment is to be caught up in the following year if the profits exceed $250,000 by a sum sufficient to make up the amount of the shortfall. Failing that, any outstanding amount is carried forward to the next year and paid if the adjusted profits are in excess of $250,000 and sufficient to provide for the payment of the entitlements due in such year and to meet any arrears in entitlements. There is a two year limit on the right or ability to carry forward outstanding payments For convenience, I will refer to Shareholders Entitlements and Employee Entitlements collectively as “the Entitlements”.
“Completion” is expressed to take place on payment of the balance Share Sale Price and the Entitlements. The term “Completion Date” is defined by reference to payment of those moneys. There is no express provision for any reduction of the “Entitlements” on completion to take into account the operation of cl.12. The point at issue is whether or not the moneys payable on completion are to be reduced by operation of cl.12.
The applicants’ contentions
The applicants contend that the operation of cll. 12.1 and 12.2 do not affect the amount payable to the applicants on completion. They argue that the adjustments required by those clauses are to be made only in respect of sums payable in specified years so as to ensure that, in the event of profits falling below $250,000, in any year or years, no prepayment of the balance or purchase moneys takes place. It is asserted that the Entitlements are, in substance, part of the purchase price.
Clause 12 does not provide for a permanent reduction and there is no provision in the contract which abates any part of the purchase price, whether it be by way of Share Purchase Price, Shareholder Entitlements or Employee Entitlements.
Clause 4.2 requires the applicants to transfer their shares only on payment of “the last of those amounts”, i.e. “the balance of the Share Purchase Price, the Shareholder Entitlements, and the Employee Entitlements”. There is no qualification to such obligations in cll. 3.2 or 4.
If a later clause cannot be reconciled with an earlier one creating an obligation or if its destroys the obligation, it must be treated as void: Australian Guarantee Corporation Ltd v Balding (1930) 43 CLR 140 at 151. Clauses 12.1 and 12.2 cannot be reconciled with cll.1.2 and 11.1.
Respondents’ Arguments
There is nothing in the language of cl. 12 which limits its operation to a time prior to completion.
Clause 12 is a component of Part 5 of the agreement which contains two circumstances in which an adjustment is to be made to “the Green’s accruing entitlements”. Clause 12 deals with one circumstance, cl. 13 the other. Where there is a loss of a distributorship, cl. 13.1.1 provides “... no further payments (were) to be made by the Company or by the Purchasers to Mr Green or to Mrs Green pursuant to this Agreement ... and ... shall accept payments made to that point in satisfaction of their rights”.
To limit cl. 12 in the way contended for by the applicants would be contrary to the objective intent of the clause that any deficiency (below $250,000 a year) in profits over the three year term would adversely impact upon the applicants’ Entitlements.
There is no disharmony between cl. 12 and the balance of the agreement. Completion is to occur on 1 July 1999. The applicants’ right on completion to the “balance” “last” or “whole” of the Entitlements is qualified by the operation of Part 5. The Entitlements due on 1 July 1999 are those then outstanding after “adjustment” under either cl. 12 or 13.
Whilst on completion the transfer of the applicants’ shares will occur, they retain the right to call for payment of Entitlements in the two previous financial years in the event that profits of the company recover in the two financial years following completion, namely 2000 and 2001.
After completion, the applicants retain, pursuant to cl. 9, a right to compel the purchasers to contribute to the company to effect payment during these post-completion years. In this respect, consistent with the respondents’ contended construction, cl. 9.2.4 contemplates that cl. 9.2 has operation after completion providing as it does for the purchasers “if necessary, to re-transfer to Mr Green and Mrs Green the shares in the Company”. Such shares are only transferable, in the first place, on completion.
To adopt the applicants’ construction is to assume the parties effected agreement with
the intention that, in the event of profit deficiency in the 1999 financial year -
20.1the company would contravene s. 102(1) (now s. 254T) of the Corporations Law by paying dividends ($176,228 in cl. 6.1 of the Shareholder Entitlements) other than from profits;
20.2the directors of the company would contravene s. 588G of the Corporations Law by borrowing funds (from the purchasers) such that the company would then be insolvent.
Matters favouring the applicants’ construction
The obligations to transfer the shares and for the applicants to retire as directors arise only on payment of “the balance of the Share Purchase Price, the Shareholder Entitlements and the Employee Entitlements” and “on the Completion Date”.
The terms “Shareholder Entitlements” and “Employee Entitlements” are defined by reference to the provisions of Part 2 of the agreement in the case of the former and Part 3 of the agreement in the case of the latter. Clause 12 is in Part 5 and neither clause 12 nor Part 5 is referred to in the definitions.
“Completion Date” is defined by reference to the payment of “the whole of the Share Purchase Price, the Employee Entitlements and the Shareholder Entitlements”.
The Shareholder Entitlements include loan moneys owing by the company to the applicants. Under cl. 5.2 those moneys are payable in three instalments, the last of which is to be paid “not later than 30 June 1998". If the respondents’ construction is correct, the loans will, in effect, cease to be repayable if the company’s profits fall below $250,000 in relevant years. Acceptance of the respondents’ construction could operate quite harshly to the prejudice of the applicants in this and other respects.
Also, no dividends may be payable to the applicants, by operation of cll. 12.1 and 12.2 for the years ending 30 June 1998 and 30 June 1999, even if the company makes a profit in those years . Under cl. 6.1 dividends are payable only “from available profits”. However, it might be thought a little curious that, unless profits exceeded $250,000 per annum for the financial years after the year ending 30 June 1997, the applicants would be expected to forego all dividend rights. It is even more surprising that the applicants would forego long service leave, superannuation and retirement benefits under cll. 7 and 8 in such circumstances.
Clause 11 expressly states that the Entitlements of the applicants “are set out in Schedule 2". Neither the Schedule nor cl. 11 qualifies the applicants’ rights to payment and the release given by the applicants in 11.2 is triggered by “payment of the Share Sale Price, the Shareholder Entitlements, and the Employee Entitlements”.
Matters favouring the respondents’ construction
If the applicants’ construction is correct, the language of cl. 12.2 is singularly inappropriate. For example, if the company’s profits are less than $250,000 in the year ending 30 June 1998 and if they are not such in the year ending 30 June 1999 as to enable the Entitlements for the year ended 30 June 1998 and for the year ended 30 June 1999 to be met, they become payable on Completion rather than in the year ended 30 June 2000. On this construction , if there is a shortfall in profits in the year ended 30 June 1999, there is no scope at all for the operation of cl. 12.2 even though cl.12.2 purports to make provision in respect of the years ending 30 June 1997, 1998 and 1999.
The considerations which I have just mentioned are strong indications that cl. 12.1 was not intended to operate merely by way of postponement of Entitlements until the date of completion.
There is certainly a tension between cll. 12.1 and 12.2 on the one hand and the clauses which provide for or are predicated upon payment of the Share Sale Price, the Shareholder Entitlements and the Employee Entitlements. In Australian Guarantee Corporation Ltd v Balding (supra) Isaacs J, referring to Forbes v Git [1922] 1 AC 256, said that the case -
“... stated very distinctly the principle of construction where repugnant provisions exist in a contract. If a latter clause cannot be reconciled with an earlier one creating an obligation, then if it altogether destroys the obligation it must be treated as void, but if it only qualifies the former the two are to be read together and effect given to the intention of the parties as disclosed by the instrument as a whole.”
In my view, it is difficult, although not impossible, to reconcile cll. 12.1 and 12.2 with the other provisions of the agreement if the agreement is regarded as a whole and an attempt is made to give effect to all of its provisions. That is of course the orthodox approach to construction of contracts: McEntyre v Crossley Bros [1895] AC 457 at 462-463 and 467.
Part 5 of the agreement provides for reductions in the Entitlements in certain circumstances. Mr Douglas SC argues that it is the Entitlements, as reduced, which become those provided for in Parts 2 and 3 of the agreement, having regard to the definitions of “Shareholder Entitlements” and “Employee Entitlements”. Thus, he argues, by way of illustration, when cl. 3.2 is considered, there is a payment of “the Share Purchase Price, the Shareholder Entitlements and the Employee Entitlements” when there is a payment of the Share Purchase Price on the one hand and the Entitlements reduced by operation of cll. 12.1 and 12.2 on the other. That approach is not without difficulty. Clauses 3.2 and 4.1 refer to payment of “the balance of the Entitlements”. Clause 4.4 uses the words “upon payment of the last of those amounts” i.e. “the balance of the Share Purchase Price” and the Entitlements. For the argument to succeed, the “balance” of the Share Purchase Price and the Entitlements must be treated as meaning the balance existing as at 1 July 1999. Further, the words “the whole of ... the Employee Entitlements and the Shareholder Entitlements” in the definition of “Completion Date” must be treated as meaning the Share Purchase Price and the Entitlements reduced by operation of cll. 12.1 and 12.2. As if these were not complexities enough, there are two definitions of “Completion Date”- one in cl. 3.2 and the other in cl. 21. “Completion Date” in cl. 3.2 has the meaning given it in that clause. However, presumably, “Completion Date” in cll. 4.1, 8.10 and 14.2 has the meaning conferred by the definition in cl. 21.
If the reference to the Entitlements in cl. 11.2 is also to be treated as the Entitlements existing as at 1 July 1999 as a result of adjustment by operation of cll. 12.1 and 12.2, the applicants will be treated as having relinquished all rights against the company, even though large sums of money may be payable in future years by operation of cll. 12.1 and 12.2.
Despite the above difficulties I have concluded that all of the provisions of the agreement can be given effect if the clauses in Part 5 are treated as having a general overriding or qualifying operation. Clause 1.2 presents no great difficulty as it provides for Completion on payment of, inter alia, the “Entitlements provided for in this Agreement”. Those are the Entitlements adjusted in accordance with cl.12 and payable on the Completion Date. Clause 1.1 favours the respondents’ approach by relating the purchase price to the purchase price of the shares. The references to Entitlements in cll. 3.2, 4.1 and 4.2, when those clauses are read in the light of cll. 1.2 and 12, can be sensibly understood as Entitlements reduced by operation of cl.12. Clause 9.2.4 points clearly in that direction.
Proposed orders
The declarations I propose to make, unless the parties wish to make further submissions on the form of declaratory relief is -
“That on the proper construction of the agreement referred to in the
summons -
(a)the moneys payable on the completion date in respect of Employee Entitlements and Shareholder Entitlements may be varied by operation of clauses 12.1 and 12.2;
(b)clause 11.2 of that agreement does not operate to prevent the applicants from claiming or recovering after the completing date any part of the Shareholder Entitlements or the Employee Entitlements which may become payable after the completion date by operation of clauses 12.1 and 12.2 of the said agreement.”
I will hear submissions on costs.
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