Re Cornwall Resource Corporation Nl Cornwall Resource Corporation Nl v Waraluck Ltd

[1997] FCA 410

CATCHWORDS

Corporations - contravention of s. 615 re purchases of shares - interlocutory order under s. 613 restraining exercise of voting rights attached to shares - principles - whether shareholders were “associates” within s. 609 - circumstances in which inference of concert could be drawn.

Corporations Law, ss. 9, 10, 12, 15, 31, 609, 613, 615, 737

Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533
Tidy Tea Ltd v Unilever Australia Ltd (1995) 32 IPR 405
Martin Engineering Co v Trison Holdings Pty Ltd (1988) 81 ALR 543
The Commissioner of Taxation of the Commonwealth of Australia v Lutovi Investments Proprietary Limited (1978) 140 CLR 434
Italiano v Barbaro (1993) 40 FCR 303

RE: CORNWALL RESOURCE CORPORATION NL; CORNWALL RESOURCE CORPORATION NL -V- WARALUCK LIMITED & ORS

NG 3096 of 1997

Burchett J
Sydney
22 May 1997

IN THE FEDERAL COURT OF AUSTRALIA       )
  )
NEW SOUTH WALES DISTRICT REGISTRY     )          NG 3096 of 1997
  )
GENERAL DIVISION  )

RE:               CORNWALL  RESOURCE   CORPORATION NL

BETWEEN:              CORNWALL RESOURCE   CORPORATION NL

Applicant

AND:              WARALUCK LIMITED

First Respondent

AND:              WESTPEARL PTY LIMITED

Second Respondent

AND:              SECURED FINANCIAL SERVICES   PTY LIMITED

Third Respondent

CORAM:       Burchett J
PLACE:        Sydney
DATE:           22 May 1997

REASONS FOR JUDGMENT

BURCHETT J:

On Friday 16 May 1997, I made interlocutory orders under s. 737 of the Corporations Law, reserving my reasons, which I now deliver. Section 737 enables the Court to make “such order or orders as it thinks just”, including “a remedial order”, in a case “[w]here a person has acquired shares in a company in contravention of s. 615”. The orders falling within the expression “a remedial order” include, by s. 613, “an order restraining the exercise of any voting or other rights attached to shares”. It was relief of this kind that I granted, on an interlocutory basis.

The material before me showed that there had been convened an extraordinary annual general meeting of the applicant, a publicly listed company, to be held on the following Tuesday, 20 May 1997. At that meeting, resolutions would be moved for the removal of some directors of the company and their replacement, particularly, by a Mr Lee and a Mr Leslie. The company alleged that contraventions of s. 615 of the Corporations Law had occurred in relation to the acquisition of shares in the company, and it sought urgent interlocutory relief restraining the casting of votes in respect of those shares at the meeting.

Section 615 contains a general prohibition on the acquisition of shares in a company (except as provided by chapter 6 of the Corporations Law, compliance with which, if required, was not suggested in the present case) in either of two situations, one of which is specified by s. 615(1)(b) read with s. 615(7), that is, if “any person who is entitled to not less than [20%], but less than 90%, of the voting shares in the company would, immediately after the acquisition, be entitled to a greater percentage of the voting shares in the company than immediately before the acquisition”. Any impression that a person’s entitlement to a percentage of shares is a straightforward concept cannot survive a reading of s. 609, by which, omitting matters not germane to the present case, it is provided that “shares in a body corporate to which a person ... is entitled include ... shares in which a person who is an associate of the first-mentioned person ... has a relevant interest”. To understand what is meant by the reference in s. 609 to “an associate”, it is necessary to go to ss. 10 et seq. Sections 10 and 12(1)(e) make it clear that, for the purposes of ss. 615 and 609, an associate includes a person “with whom the primary person has, or proposes to enter into, a relevant agreement ... for the purpose of controlling or influencing:

(i)        The composition of the body’s board” (ie,   the board of the relevant body corporate).                

Such a “relevant agreement,” by s. 9, is defined to mean “an agreement, arrangement or understanding:

(a)       whether formal or informal or partly formal            and partly informal;

(b)       whether written or oral or partly written and   partly oral; and

(c)       whether or not having legal or equitable                force and whether or not based on legal or                   equitable rights”.

Section 15 then expands the reference to an associate even further, so as to include a reference to “a person in concert with whom the primary person is acting, or proposes to act”, and “a person with whom the primary person is, or proposes to become, associated, whether formally or informally, in any other way”, where the concert or association is in respect of the matter in question. (As to “relevant interest”, see s. 9 and Division 5, especially s. 31, by which the power to vote in respect of a voting share confers such an interest.)

In the circumstances of the present case, it was accepted by the respondents that these provisions had the effect of making them associates within the meaning of s. 609, and thus for the purposes of s. 615. What was disputed was whether Mr Lee, Mr Leslie and a Mr Hull were also associates of the respondents. The success or failure of the application for interlocutory relief turned on whether the applicant had made out a sufficient case on the facts in relation to these gentlemen, or some of them, and with respect to the discretionary considerations, including the balance of convenience.

The principles upon which I should decide questions of this kind in an application for an interlocutory injunction are well known.  The applicant must show “at least a serious question to be tried which if resolved in its favour would entitle it to final relief” (Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 535, per McLelland J); and the Court in deciding whether to grant or withhold relief will weigh the balance of convenience, it being impracticable to decide the outcome of the proceeding at the interlocutory stage. In considering whether there has been shown a sufficiently serious question to be tried, and in weighing the balance of convenience, the Court does not place these two questions in watertight compartments; rather, the strength or weakness of the case in one respect may be a factor affecting the decision upon the other: Tidy Tea Ltd v Unilever Australia Ltd (1995) 32 IPR 405 at 416 (leave to appeal refused 19 September 1995, unreported, Lockhart, Sheppard and Beazley JJ). Generally, it is not appropriate for the Court to attempt to decide, on an interlocutory application, a contested question of fact upon which further evidence may throw light at the ultimate hearing, although questions of law may sometimes be decided at the earlier stage: Martin Engineering Co v Trison Holdings Pty Ltd (1988) 81 ALR 543 at 547 et seq. 

The “relevant agreement” for the purposes of s. 12 need not be an enforceable contract, but may be an arrangement or understanding within the definition contained in s. 9. Such an arrangement may be “implied or inferred from the circumstances or the conduct of the parties”, and may be “something less than a binding contract or agreement, something in the nature of an understanding which may not be enforceable at law”; it “may be informal as well as unenforceable and the parties may be free to withdraw from it or to act inconsistently with it, notwithstanding their adoption of it”: The Commissioner of Taxation of the Commonwealth of Australia v Lutovi Investments Proprietary Limited (1978) 140 CLR 434 at 443, 444. In the present case, there being admittedly such an arrangement between the three respondents, pursuant to which Messrs Lee and Leslie were to be placed on the board of the company, it seems to me that evidence suggesting these gentlemen were themselves parties to that arrangement raises an inference which is, on the face of it, not at all improbable.

Documents placed before me emanating from one or more of the respondents (and it must not be overlooked that, concert between them being admitted, documents emanating from one may enable inferences to be drawn as regards others:  Italiano v Barbaro (1993) 40 FCR 303 at 322) plainly raise, in my opinion, a serious question whether Messrs Leslie, Lee and Hull were parties to the arrangement. I am not, of course, concerned to draw final conclusions, and I shall not analyse the whole of the evidence. I shall content myself with referring to some parts of it which are, I think, sufficient to explain my conclusion. A draft notice to shareholders transmitted by facsimile from the respondent Secured Financial Services Pty Limited to the respondent Waraluck Limited in March 1997 referred to “[t]he immediate goals of your new Board” - a statement suggesting that at least the proposed new members of the board had agreed goals.   The document went on to state:

“Your new Board are the major shareholders of the company.  They want the company to flourish and meet the expectations of all shareholders.  [Emphasis original.]  In this regard, they have approached other Cornwall shareholders to enlist support.  The following are just a few who have indicated that their support will be forthcoming: -

Waraluck Ltd            Shares           $9,000,000-00
  Hull  $5,000,000-00

...”

This seems to imply both that the proposed new members of the Board were actively involved, and that Mr Hull, as well as Waraluck Limited, had agreed to support what was proposed.  Handwritten notes emanating from the third respondent refer to Mr Hull as “Jeff Hull”, and contain the statement “Jeff will vote for Neville.”  Weight is added to this assertion by a note in the same document:

“Spoke to Jeff Hull.”

“Neville”, in this context, would appear to be Mr Neville Brice, one of the proposed new directors  who was aligned with Waraluck Limited, and was acting on its behalf.  The document bears the date 24 March 1997. 

A few days later, on 27 March 1997, the documents indicate that Mr Brice produced a memorandum, referring to an earlier notice under s. 246 of the Corporations Law aimed at the appointment, in addition to another person, of Messrs Leslie and Lee, and at the removal of three directors of the company, and made a note every word of which appears to be a clear echo of prior arrangements:

“It is suggested that Waraluck now write to the Hull, Leslie and Lee groups to obtain exact Shareholdings, whether they will attend meeting or use proxies and confirmation of their position.”  [Emphasis added.]

Annexed to this document was a further document headed with the name of the company, referring to s. 246, and bearing the words “WARALUCK LTD. SUPPORTERS AS AT 27TH MARCH, 1997”. Listed among the supporters were Messrs Leslie and Jeffrey Hull (shown as individual shareholders) and a number of companies shown as related to Messrs Leslie, Hull and also Lee. The shareholdings were totalled and the percentage “37.4%” was noted against the total.

Also on 27 March 1997, it appears that letters were sent by Waraluck Limited to each of Messrs Lee, Leslie and Hull in a common form.  The letters commence:

“This letter is to keep you informed with the Section 246 Notice served on Cornwall. It also seeks confirmation of your position and actions in the lead up to the Shareholders meeting.”

The letter to Mr Lee notes what is said to be his “group shareholding”, naming four companies, while the letter to Mr Leslie refers to what is called his “group shareholding”, naming himself and another individual.  The letter to Mr Hull refers to an individual shareholding in his own name, another shareholding in a company name and a shareholding in another individual name, the total being described as his “group shareholding”.  Each letter contains the statement:

“It is of importance to comply with substantial shareholder provisions and our solicitors advise that compliance by ‘friendly’ shareholders is very important.”

Each letter also contains the request:

“If there are other shareholders whose support will be forthcoming, could you also provide details, i.e. their name, shareholding and whether they are likely to attend or need a proxy.”

Other documents confirm that the drafting of a curriculum vitae for each of Mr Leslie and Mr Lee was a matter to which Waraluck Limited gave attention, and that Mr Leslie did respond to a reiteration on 2 April 1997 of the request for details of other shareholders whose support would be forthcoming.  He stated he expected them to appoint his own attorney under power as proxy, and that Waraluck “can rely on him”.

I concluded at the hearing that this material, together with some further material to similar effect found in the documents tendered, enabled me, in the circumstances of this case, to draw inferences establishing a serious question to be tried.  Counsel for the respondents argued that nevertheless what was shown was a weak case.  In my opinion, although several (but not all) of the actors swore affidavits containing general denials, the documents raise a quite strong, rather than a weak, case against the respondents.  This is particularly so in relation to Messrs Leslie and Lee, but I think it is also so in respect of Mr Hull.

I considered the balance of convenience.  The usual undertaking was given as to damages, but plainly there might be some difficulty in the assessment of any damages to be awarded in the event that the applicant is ultimately unsuccessful.  However, in the event of the ultimate success of the applicant’s claim, if no interlocutory relief were granted in a case of this kind, it could be extremely difficult, or impossible, to unscramble the eggs.  In my opinion, a proper evaluation of the evidence demanded a grant of the
interlocutory relief that was sought.  Accordingly, I made the orders mentioned at the beginning of these reasons.

I certify that this and the preceding nine (9) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Burchett.

Associate:

Date:  22 May 1997

Counsel for the Applicant:  Mr D.M.J. Bennett QC
  with Mr D.J. Hammerschlag

Solicitors for the Applicant:             Norton Smith & Co

Counsel for the Respondents:  Mr J.S. Douglas QC

Solicitors for the Respondents:                  Messrs Hopgood and Ganim

Amicus Curiae:  Ms  R. Webb (Australian Securities   Commission)