Ryan v Wright

[2003] NSWSC 1011

CITATION:	Ryan & Anor v Wright & Anor [2003] NSWSC 1011 revised - 10/11/2003
HEARING DATE(S):	30 October 2003
JUDGMENT DATE:	6 November 2003
JUDGMENT OF:	McDougall J at 1
DECISION:	See para 46 of judgment
CATCHWORDS:	INTERLOCUTORY INJUNCTIONS - alleged breach of non-competition clause in shareholders' agreement - whether interlocutory injunctions previously granted should be continued or discharged - question on cross-claim as to validity of extraordinary general meeting and appointment of directors - whether cross-claimants are entitled to summary judgment - whether estoppel by deed arises - costs
CASES CITED:	Young v Jackman (1986) 7 NSWLR 97 Brimaud v Honeysett Instant Print Pty Ltd (19 September 1988, unrep)
PARTIES :	Michael Ryan and DeMorgan Information Security Systems Pty Limited v Craig Wright and Lynn Wright
FILE NUMBER(S):	SC 4638/03
COUNSEL:	J G Renwick (Plaintiffs) G B Colyer (Defendants)
SOLICITORS:	KPMG Legal (Plaintiffs) Michie, Shehadie & Co (Defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

McDOUGALL J

6 November 2003

4638/03 MICHAEL RYAN & ANOR v CRAIG WRIGHT & ANOR

JUDGMENT

HIS HONOUR:

Introduction and factual background

1 The first plaintiff (“Mr Ryan”) and the defendants (respectively “Mr Wright” and “Mrs Wright”) are members of the second plaintiff (“the company”). The company’s business includes the provision of information technology consulting services in general, and specifically the monitoring of computer systems to guard against “hackers” or other unauthorised intruders.

2 Mr Ryan’s case is that he agreed to invest $50,000 in cash in the company, in exchange for an allocation equivalent to 5% of the company’s issued shares. At that time, Mr Ryan understood that Mr and Mrs Wright and their company, Ridge’s Estate Pty Ltd (“Ridge’s Estate”), held about 65% of the issued shares in the company.

3 On about 30 June 2003 Mr Ryan, Mr and Mrs Wright, the company and a Mr David Dornbrack entered into an “agreement to purchase shares” and a “shareholders’ agreement”. By the former of those agreements, Mr Ryan acquired his initial shareholding in the company. By the latter of those agreements, the parties sought to define their rights and obligations as shareholders. It included a non competition clause.

4 From 1 July 2003 until 8 August 2003, Mr Ryan and Mr and Mrs Wright were the directors of the company. On 8 August 2003, Mr Wright and Mrs Wright resigned as directors. Each appointed Mr Ryan “as my replacement Director”.

5 Mr Ryan and the company seek to enforce the non competition clause of the shareholders’ agreement against Mr and Mrs Wright. Mr and Mrs Wright claim to have called an extraordinary general meeting of the company and that they have been reappointed as directors. They have filed a cross-claim seeking declaratory relief as to the validity of that meeting and their alleged appointments.

6 On 29 September 2003, Barrett J ordered, among other things, that Mr and Mrs Wright be restrained until further order from holding themselves out as directors or office holders of the company. On 23 October 2003, I ordered that Mr and Mrs Wright be restrained up until 30 October 2003 from, in effect, competing with the company, approaching the company’s customers, or providing consulting services to a major customer of the company, namely the Australian Stock Exchange Ltd (“ASX”). On 30 October 2003, after a contested interlocutory hearing, I ordered that those orders continue until further order, so that the existing state of affairs would be maintained whilst I considered my decision.

7 The issues to be decided are:

1. Whether the interlocutory injunction granted by Barrett J on 29 September 2003 should be discharged;

2. Whether the interlocutory injunctions granted by me on 23 October 2003 and continued on 30 October 2003 should be discharged; and

3. Whether Mr and Mrs Wright are entitled to summary judgment on their cross-claim.

8 Initially, the plaintiffs sought indemnity costs in respect of the hearing before me on 25 and 26 September 2003 of Mr and Mrs Wright’s notice of motion filed 19 September 2003 to set aside the “Anton Piller” orders that had been made earlier by J C Campbell J and varied by Windeyer J. However, in the course of argument, that application was not pressed.

9 Mr and Mrs Wright say that the fundamental question, the answer to which will effectively determine the outcome of all three issues, is whether the doctrine of estoppel by deed prevents Mr Ryan from denying that the shareholding in the company is as Mr and Mrs Wright maintain it is. However, they concede that as to the third issue (i.e., summary judgment on their cross-claim), there is a factual issue as to the outcome of the relevant meeting.

The shareholders’ agreement

10 The document is in terms an agreement: it is so described and recital F and cl 1 (and other clauses) so refer to it. The attestation clause records that it is “executed as an agreement”, although it has been signed, sealed and delivered by each of Mr Ryan, Mr Wright, Mrs Wright and Mr Dornbrack in the presence of a witness.

11 Recital A states that the company “has total issued capital of 2,784,400 ordinary shares”. Recital C states that the beneficial shareholding in the company before completion is as specified in item 1 of the schedule. Recital D states that the beneficial shareholding in the company after completion will be as specified in item 2 of the schedule.

12 To jump ahead: item 1 of the schedule shows the beneficial shareholding as being:

Mr Wright 150,000 shares

Mrs Wright 250,000 shares

Mr Dornbrack 330,000 shares

Ridge’s Estate 636,000 shares

13 Item 2 shows the same details but with the addition of Mr Ryan, shown as holding 139,220 shares.

14 Clause 6 of the agreement provides relevantly as follows:

“6. EVENTS OF DEFAULT
6.1. Event of Default
A party is in default under this Agreement (“Event of Default”) if:-
…
(b) that party continues to breach after any obligation under this Agreement for 14 days after receiving notice from another party of that breach; or
…
6.3 Entitlements Suspended
(a) If an Event of Default occurs, the rights and entitlements attaching to that Shareholder’s Ordinary Shares will be immediately suspended.
(b) Obligations of the suspended Shareholder under this Agreement shall continue to bind the suspended Shareholder notwithstanding suspension pursuant to this clause.”

15 Clause 13 of the agreement provides relevantly as follows:

“13. RESTRAINT
13.1. Competition
(a) … the Shareholders must not do any of the following things during the period commencing on the date of this Agreement and ending three (3) years after a Shareholder ceases to be a Shareholder or a Director ceases to be a director of the Company, without the prior written approval of the holders of at least 90 percent of the Shares:-
(i) directly or indirectly carry on a business in competition with the business of the Company or its Associates;
(ii) directly or indirectly approach an agency who is a customer of the Company or its Associates.
…
13.2. Value of the Business
Each Shareholder agrees that a failure to comply with clause 13.1 would reduce the value of the Shares and the undertakings in that clause are reasonable and necessary to protect the business of the company.
13.3. Equitable Relief
The parties acknowledge that:
(a) monetary damages alone would not be adequate compensation for the Company and each other Shareholder for a breach of clauses 12 and 13; and
(b) the Company or a Shareholder is entitled to seek an injunction from a court of competent jurisdiction if:
(i) a Shareholder breaches sub-clauses 12 or 13 or threatens to do so; or
(ii) the Company or another Shareholder has reason to believe a Shareholder is about to breach sub-clauses 12 or 13.”

16 Clause 16.10 provides as follows:

“16.10. Legal Advice
Each party acknowledges that it has received independent legal advice about this Agreement or has had the opportunity of receiving independent legal advice.”

The share purchase agreement

17 As with the shareholders’ agreement, the document is described throughout as an “agreement”, and its attestation states that it is executed as an agreement, although Mr Ryan, Mr and Mrs Wright and Mr Dornbrack are to sign, seal and deliver the document in the presence of a witness (I put the matter this way because the copy in evidence is unexecuted).

18 Recital C sets out “the legal and beneficial interest” in the issued share capital of the company as follows:

Mr Wright 250,000
Mrs Wright 250,000
Ridge’s Estate 636,900
Mr Dornbrack 330,000
Rob Wilmot 100,000
David Jensen 78,000
Mr Ryan 139,220
Anthony Wilkes 19,500
“unallocated” 980,780

19 All those shares are said to be ordinary shares. This matter, and apparent inaccuracies in the records of the Australian Securities and Investments Commission, are dealt with in Recitals D and E. They read as follows:

“D. Australian Securities and Investments Commission (‘ASIC’) records incorrectly show that Craig Wright is registered as the holder of 5,000 Class I and 125,000 Class II ordinary shares in the Company and Lynn Wright is registered as the holder of 5,000 Class I and 125,000 Class II ordinary shares in the Company.
E. Following lodgment of the next annual return of the Company, the ASIC records will confirm that the shareholding is as set out in Recital C, and reflecting that there is only one class of shares, being ordinary shares, in the Company.”

Breaches of cl 13: risk to the company

20 Both because of the way the parties approached the issues, and because this is an interlocutory decision, it is unnecessary to set out in detail the evidence, let alone to express concluded views on it. I shall deal with the evidence only so far as it is necessary to do so for the purpose of deciding the interlocutory issues that the parties have posed.

21 As I have said, Mr and Mrs Wright resigned as directors on 8 August 2003. They claimed that they were reappointed, and that Mr Robert Wilmot (see para [18] above) was appointed, as directors with immediate effect at a meeting held on 22 September 2003.

22 There is evidence that, between 8 August 2003 and 22 September 2003, Mr Wright approached, or was approached by, and dealt with a number of customers of the company, including the ASX and the Rail Infrastructure Corporation (RIC). It was submitted for Mr Wright that, to the extent that he approached customers, he did so in some cases pursuant to requests from them, and in any event on behalf of the company. It was further submitted that, to the extent that he dealt with customers of the company, he did so on behalf of the company and in an attempt to preserve its goodwill and reputation.

23 I am satisfied, particularly having regard to the evidence relating to an alleged e-mail approach by Mr Wright to Mr Dave Spencer of the RIC, and to Mr Wright’s dealings with Mr Tristan Geering of the ASX, that there is a serious question to be tried in relation to the alleged breaches by Mr Wright of cl 13 of the shareholders’ agreement. There is evidence that would show, if accepted, that the approaches made by Mr Wright to, or the dealings between Mr Wright and, the ASX and the RIC were conducted not for the benefit of the company, but for the benefit of Mr and Mrs Wright, either directly or through Ridge’s Estate.

24 The evidence shows that Mr Ryan gave Mr and Mrs Wright notice under cl 6.1(b) of the shareholders’ agreement, asserting that Mr Wright had breached his obligations under cl 13. On any view, if Mr Wright had breached his obligations under cl 13, that breach was not rectified; indeed on the plaintiffs’ case, it was continued or compounded.

25 I am satisfied that there is a real threat that, unless restrained, Mr Wright will continue to approach, or deal with, customers of the company. Indeed, Mr and Mrs Wright assert that this is precisely what they are entitled to do, and that it is for this reason that they seek to have the relevant injunctions discharged.

26 I am further satisfied, both on the basis of cl 13 of the shareholders’ agreement and on the basis of the evidence as a whole, that damages would not be an adequate remedy to the company for the alleged breach by Mr Wright of cl 13, and that the balance of convenience favours the continuation of interlocutory relief. I do not think that it is inappropriate to take cl 13 at face value, particularly having regard to the provisions of cl 16.10.

27 Further, having regard to the clandestine nature of the dealings between Mr Wright and the company’s customers, I am satisfied that it would not be appropriate to permit Mr Wright to deal with customers of the company on the basis that he do so as the company’s agent and for the benefit of the company. I think that there is a real risk that Mr Wright, if permitted to deal on a limited basis with customers of the company, might seek to undermine the company and its business. In this context, Mr Anthony Wilkes, a system administrator employed by the company and, perhaps, a member (see para [18] above), says in an affidavit that on 15 October 2003 he met and had lunch with Mr Geering of ASX. He says that in the course of that lunch Mr Geering confirmed that Mr Wright “is still working in the ASX”. Further, he says, Mr Geering said that Mr Wright “said openly that he would spend over a million dollars to see DeMorgan go under”. I should note that although objection was taken to this evidence on the ground of relevance, no objection was taken to it on the basis that it was hearsay.

28 It should be noted that Mr Wright was formerly employed by the ASX and that there is evidence that would suggest that he maintains a good relationship with employees of ASX in its IT department.

29 I am therefore satisfied that, subject to the issues relating to the meeting of 22 September 2003, the plaintiffs have made out a case for continuation of the interlocutory injunctions granted by Barrett J on 29 September 2003 and by me on 23 and 30 October 2003.

The meeting of 22 September 2003

30 The accounts of this meeting are so disparate that, it might be thought, two separate meetings occurred, at the same place, at the same time, on the same day and involving the same persons. The parties however, although they are agreed on very little in this litigation, are agreed that only one meeting took place on that day.

31 It is not possible for me to resolve the conflict in the evidence, nor is it appropriate that I seek to do so. No relevant witness was cross-examined. It is, I think, sufficient to say that if the plaintiffs’ evidence was to be accepted, then no meeting of the kind described by Mr Wright and witnesses called by him took place on 22 September 2003, and no resolutions of the kind asserted by Mr Wright and those witnesses were passed at any such meeting.

32 I should make it clear that this dispute is not one that can be resolved simply by reference to the question of estoppel. The issue is one of fact as to whether a meeting was held as asserted by Mr Ryan or as asserted by Mr and Mrs Wright, who was present and who voted, not one as to who would have been entitled to vote if, for example, the asserted estoppel ran against Mr Ryan. To put it another way, I am satisfied that, even if the estoppel question were to be decided in favour of Mr and Mrs Wright, there is still a real and substantial dispute of fact as to whether the meeting upon which they rely was held in the manner that they assert, and whether the resolutions upon which they rely were passed, either in the manner which they assert or at all.

33 The immediate consequence is that it is not appropriate to grant summary judgment on Mr and Mrs Wright’s cross-claim. There is another consequence. Absent evidence of a properly constituted meeting of the company held after 8 August 2003 at which Mr and Mrs Wright were appointed as directors of the company, there is no basis to conclude that they are, or should be permitted to hold themselves out as, directors.

The asserted estoppel

34 Although the parties appeared to see the question of estoppel as determinative, I do not think that it is. Mr and Mrs Wright do not dispute that they resigned as directors on 8 August 2003. I have found that there is sufficient evidence of apparent breaches of cl 13 of the shareholders’ agreement to justify the continuance of interlocutory relief. They can only avoid this consequence if there were a valid meeting of the company on 22 September 2003 at which, as they contend, they were appointed (or reappointed) as directors. I have found that there is a serious factual issue in relation to this. The result must be that there is no basis upon which I can conclude that they are, and have at least since 22 September 2003 been, directors of the company. This is the only basis upon which they claim that (for example) they are entitled to hold themselves out as directors, to perform the duties of directors, and to contact customers of the company on behalf of the company.

35 It follows from this that Mr and Mrs Wright have not made out either a factual basis for discharging the injunction granted by Barrett J on 29 September 2003, or a factual basis for discharging the injunctions granted by me on 23 October 2003 and continued on 30 October 2003.

36 In those circumstances, I do not think that it is appropriate for me to deal with the merits of the estoppel argument, or of the “Greer v Kettle” response. Nor do I think that it is appropriate for me to canvas the substantial body of evidence that the parties have adduced relating to these matters.

Other issues

37 I should however note a number of other arguments that were raised.

38 The plaintiffs submitted that Mr and Mrs Wright were in contempt of the injunction granted by Barrett J on 29 September 2003 and that, therefore, I should not hear them: Young v Jackman (1986) 7 NSWLR 97. It was that argument that led to Mr and Mrs Wright’s notice of motion to set aside those orders.

39 Secondly, in relation to that application, the plaintiffs relied on the decision of McLelland J in Brimaud v Honeysett Instant Print Pty Ltd (19 September 1988, unrep, but see Ritchie’s Supreme Court Practice Vol 2, Practice Decisions, at 13047). It was submitted that there had been no material change of circumstances since 29 September 2003, nor had there been adduced any evidence that could not have been available, with the use of reasonable diligence, by that date.

40 Thirdly, the plaintiffs relied on cl 6.3 of the shareholders’ agreement to support the proposition that, Mr and Mrs Wright being (so the plaintiffs said) in default, the entitlements attaching to their shareholders were suspended.

41 In view of the conclusion to which I have come, I do not think that it is appropriate for me to express a view upon these submissions.

Conclusions

42 It follows from what I have said in para [29] above, coupled with what I have said in paras [34] and [35] above, that the interlocutory injunctions referred to in para [29] should be continued, and that Mr and Mrs Wright’s notice of motion for discharge of the injunctions granted by Barrett J on 29 September 2003 should be dismissed. I have indicated in para [33] above that Mr and Mrs Wright’s notice of motion for summary judgment on their cross-claim should fail.

43 Because the injunctions granted by Barrett J and me are presently in force until further order (and were, of course, granted and continued upon the plaintiffs giving to the Court the usual undertaking as to damages), it is not necessary to make any formal order in relation to the continuance of those injunctions. It will however be necessary to dismiss Mr and Mrs Wright’s notices of motion and to dismiss the plaintiffs’ application for indemnity costs.

44 That leads to a consideration of the question of costs of the applications with which I am dealing.

45 The plaintiffs have in large measure succeeded. Their application for indemnity costs was withdrawn in the hearing. Although it was originally a cause of the matter being relisted before me, it is the fact that since then until now, the other matters with which I am dealing have been in issue. The fundamental proposition was, as Mr and Mrs Wright submitted, that they were properly elected as directors of the company on 22 September 2003. Nonetheless, the indemnity costs application has required attention and I think that this in turn should be recognised in the costs order to be made.

Orders

46 I make the following orders:

(1) I order that the plaintiffs’ application for indemnity costs of the hearing before me on 25 and 26 September 2003 be dismissed;

(2) I order that the defendants’ notice of motion filed in Court on 20 October 2003 be dismissed;

(3) I order that the defendants’ notice of motion filed in Court on 30 October 2003 be dismissed;

(4) I order the defendants to pay 80% of the plaintiffs’ costs of the hearings before me on 23 and 30 October 2003;

(5) I stand the matter over to the Registrar’s Corporations List at 11.30 am on Monday 10 November 2003 for directions.

47 In relation to this last order: it is my tentative view that the matter should proceed on pleadings, but that is a matter that, if not agreed, can be decided by the Registrar.

******

Last Modified: 11/11/2003