SDS Corporation Ltd v Pasdonnay Pty Ltd
[2004] WASC 26
•5 APRIL 2004
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: SDS CORPORATION LTD -v- PASDONNAY PTY LTD & ANOR [2004] WASC 26
CORAM: ROBERTS-SMITH J
HEARD: 4-6, 10-11 NOVEMBER 2003 & 17 FEBRUARY 2004
DELIVERED : 27 FEBRUARY 2004
FILE NO/S: CIV 2435 of 2002
BETWEEN: SDS CORPORATION LTD (ABN 73 007 980 645)
Plaintiff
AND
PASDONNAY PTY LTD (ABN 86 009 131 622)
First DefendantIAN GRAEME REAR
Second Defendant
Catchwords:
Contract - Agreement to purchase business - Proposed merger of corporations manufacturing and supplying equipment and providing services to mining, oil and gas and construction industries - Specific performance - Whether plaintiff ready, willing and able to perform - Whether discretionary reasons for refusal of specific performance
Contract - Implied terms - Rectification - Whether payment of $1 million by purchaser required to be made by date certain if completion had not then occurred and assets not transferred
Trade Practices - Misleading or deceptive conduct - Failure to disclose - Test of reasonable expectation that relevant facts would be disclosed - Details of purchaser's financial position with its own banks and generally - Published reports and accounts - Whether further disclosure required
Contract - General contractual principles - Repudiation - Termination - Frustration - Whether contract incapable of performance - Obligation to comply with due diligence inquiry - Whether defendants in breach
Legislation:
Australian Securities & Investments Commission Act 2001 (Cth), s 12DA
Result:
Plaintiff's claim upheld
Specific performance ordered
Category: A
Representation:
Counsel:
Plaintiff: Mr M L Abbott QC & Mr D M Stone
First Defendant : Mr D H Solomon
Second Defendant : Mr D H Solomon
Solicitors:
Plaintiff: Williams & Hughes
First Defendant : Solomon Brothers
Second Defendant : Solomon Brothers
Case(s) referred to in judgment(s):
Anfrank Nominees Pty Ltd v Connell (1989) 1 ACSR 365
Bahr v Nicolay (No 2) (1988) 164 CLR 604
Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143
Byrne & Frew v Australian Airlines Ltd (1995) 185 CLR 410
Carr v J A Berriman Pty Ltd (1953) 89 CLR 327
Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd (2001) 3 VR 526
Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337
Concut Pty Ltd v Worrell (2000) 176 ALR 693
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
Eskin, Erenli & Balkaya v Trewin, unreported; SCt of Vic; 8307/91; 15 June 1995
Foran v Wight (1989) 168 CLR 385
Franich v Swannell (1993) 10 WAR 459
Fraser v NRMA Holdings Ltd (1995) 55 FCR 452
Frontier Petroleum NL v Anzoil NL, unreported; SCt of WA; Library No 970286; 4 June 1997
G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631
GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd (2001) 117 FCR 23
J C Williamson Ltd v Lukey (1931) 45 CLR 282
Mehmet v Benson (1965) 113 CLR 295
National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675
New Zealand Shipping Co Ltd v Societe des Ateliers et Chantiers [1919] AC 1
Nullagine Investments Pty Ltd v Western Australian Club Inc (1993) 177 CLR 635
Price v Strange [1978] Ch 337
Reiffel v ACN 075 839 266 Ltd [2003] FCA 194
Sandra Investments Pty Ltd v Booth (1983) 153 CLR 153
SDS Corporation Ltd v Pasdonnay Pty Ltd & Anor [2002] WASC 276
Spedley Securities Ltd (in liq) v Bank of New Zealand (1991) ATPR 41‑413
Sutton v A J Thompson Pty Ltd (in liq) (1987) 73 ALR 233
Suttor v Gundowda Pty Ltd (1950) 81 CLR 418
Warner v Elders Rural Finance Ltd (1993) 41 FCR 399
Case(s) also cited:
Acorn Consolidated Pty Ltd v Hawkslade Investments Pty Ltd (1999) 21 WAR 425
Alanbert Pty Ltd v Bulevi Pty Ltd [2000] NSWSC 261
Alghussein Establishment v Eton College [1988] 1 WLR 587
Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99
Australian Mutual Provident Society v 400 St Kilda Road Pty Ltd [1991] 2 VR 417
Automatic Fire Sprinklers pty Ltd v Watson (1946) 72 CLR 435
Bacchus Marsh Concentrated Milk Co Ltd (in liquidation) v Joseph Nathan & Co Ltd (1919) 26 CLR 410
Bethco Ltd et al v Clareco Canada Ltd (1986) 22 DLR (4th) 481
Bowes v Chaleyer (1923) 32 CLR 159
Breen v Williams (1996) 186 CLR 71
Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432
Castlemaine Tooheys Ltd v Carlton & United BReweries Ltd (1987) 10 NSWLR 468
CFA Group v Mars Trading [2001] NSWSC 112
Chappell v Times Newspapers Ltd [1975] 1 WLR 482
Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288
Coomera Resort Pty Ltd v Kolback Securties & Ors [2004] 1 Qd R 1
Darter Pty Ltd v Malloy [1993] 2 Qd R 615
Davis Contractors ltd v Fareham Urban District Council [1956] AC 696
Dougan v Ley (1946) 71 CLR 142
DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423
Electronic Industries Ltd v David Jones Ltd (1954) 91 CLR 288
FA Tamplin Steamship Co Ltd v AngoMexican Petroleum Products Co Ltd [1916] 2 AC 397
Fercometal SARL v Mediterranean Shipping Co SA [1989] AC 788
Firmin v Gray & Co Pty Ltd [1985] 1 Qd R 160
Fitzgerald v FJLeonhardt Pty Ltd (1997) 189 CLR 215
Fitzgerald v Masters (1956) 95 CLR 420
Gange v Sullivan (1966) 116 CLR 418
GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd (2001) 117 FCR 23
Gregory & Bradshaw v MAB Pty Ltd (1989) 1 WAR 1
Greydae Pty Ltd v Malilane Pty Ltd [2002] VSC 170
Hensley v Reschke (1914) 18 CLR 452
Hewett v Court (1983) 149 CLR 629
Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503
Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41
Hungry Jacks Pty Ltd v Burger King Corp (1999) 30 ACSR 551
ICT Pty Ltd & Buquebus International Ltd v Sea Containers Ltd (1995) 39 NSWLR 640
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896
Kershaw v Forster Pastoral Pty Ltd (1985) 3 BPR 9515
Kheng v Secola [2001] WASCA 3
Kimberley NZI Finance Ltd v Torero Pty Ltd & Ors (1989) ATPR (Digest) 46054
King v Poggiolo (1923) 32 CLR 222
King et al v Urban & Country Transport Pty Ltd et al (1974) 40 DLR (3d) 641
Kirk Contractors Pty Ltd v Lasnom Pty Ltd, unreported; SCt of WA (Owen J); Library No950262; 31 May 1995
Lacey v Hayden (2000) 10 BPR 18,199
Lam v Ausintel Investments Pty Ltd (1989) 97 FLR 458
Latec Investments Ltd v Hotel Terrigal Pty Ltd (In Liq) (1965) 113 CLR 265
Leda Holdings Pty Ltd v Oraka Pty Ltd [1998] ANZ Conv R 582
Lyford & Glenisia Investments Pty Ltd v Commonwealth Bank of Australia (1995) 130 ALR 267
Mackay v Dick (1881) 6 App Cas 251
Mahoney v Lindsay (1980) 33 ALR 601
Manufacturers' Mutual Insurance Ltd v Withers (1988) 5 ANZ Ins Cas 60853
Masters v Belpate Pty Ltd (2001) 10 BPR 18,527
McPhee v Zarb [2002] QCA 530
Nepean Carleton Developments Ltd v Hope et al (1977) 71 DLR (3d) 609
Newcombe v Chapple (1985) 3 BPR 9391
Newcombe v Newcombe (1934) 34 SR (NSW) 446
Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444
Parissis v Etna [1998] VSC 134
Pearson v Arcadia Stores, Gurya Ltd (No 1) (1935) 53 CLR 571
Perri v Coolangatta Investments pty Ltd (1982) 149 CLR 537
Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 527
Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235
Pottinger v George (1967) 116 CLR 328
Pukallus v Cameron (1982) 180 CLR 447
Re MAS Food Industries (Australia) Pty Ltd (In Liq); Ex parte Nilant [2000] WASC 155
Ridout v Fowler [1904] 1 Ch 658
Romanos v Pentagold Investments Pty Ltd (2003) 201 ALR 399
Rose v Watson (1864) HL Cas 672
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1989) 144 CLR 596
Shaw Industries Ltd v Greenland Enterprises Ltd (1991) 79 DLR (4th) 641
Stern v McArthur (1988) 165 CLR 489
Stickney v Keeble [1915] AC 386
Stirling Resources NL v Capital Energy NL (1996) 14 ACLC 1,005
Suttor v Gundowda (1950) 81 CLR 418
Tanwar Enterprises Pty Ltd v Cauchi (2003) 201 ALR 359
Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 883
Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326
Tucker v Bennett (1887) 38 Ch D 1
Upper Hunter District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429
Whitbread & Co Ltd v Watt [1901] 1 Ch 911
Whitbread & Co Ltd v Watt [1902] 1 Ch 835
Wily v St George Partnership Banking (1999) 84 FCR 423
ROBERTS-SMITH J: On 18 October 2002 the plaintiff, SDS Corporation Ltd ("SDS"), filed a writ of summons with statement of claim annexed ("SOC") against the first defendant Pasdonnay Pty Ltd ("Pasdonnay") and the second defendant Mr Ian Graeme Rear ("Mr Rear"), claiming breach of a Business Assets Sale Agreement made in July 2002 ("the Agreement") and claiming specific performance and damages.
By the time of trial from 4 to 11 November 2003, there had been extensive interlocutory proceedings and the pleadings had been subject to substantial amendment.
SDS and Pasdonnay are companies both incorporated in Western Australia. SDS carries on a mining supply and a hammer and bit manufacture business. Pasdonnay carries on a hammer and bit manufacture business. Mr Rear is a director of Pasdonnay and the owner of the patents which are used by Pasdonnay in the conduct of its business.
In July 2002 SDS, Pasdonnay and Mr Rear entered into the Agreement whereby SDS agreed to purchase the assets of Pasdonnay and assume certain liabilities of Pasdonnay on the terms and conditions contained in the Agreement and (conditional upon the sale and purchase of those assets) Mr Rear would enter into a licence agreement with SDS under which he would licence or transfer the patents to SDS.
SDS pleads that cl 4.1 of the Agreement provides (inter alia) that completion of the Agreement is subject to, and conditional upon the results of the due diligence investigations to be undertaken by or on behalf of SDS in relation to Pasdonnay in its absolute discretion. It further pleads that cl 4.1.4 of the Agreement provides (inter alia) that completion of the Agreement is subject to, and conditional upon, the Commonwealth Bank of Australia ("the CBA"), as financier of SDS, consenting to the sale and purchase of the business assets and the assumption of the assumed liabilities in accordance with the Agreement and, if consent is conditional, the conditions be satisfactory to SDS and to Pasdonnay.
SDS pleads cl 4.3.1 of the Agreement which provides that Pasdonnay and Mr Rear must provide all assistance required by SDS to enable SDS to conduct the due diligence investigations in accordance with cl 4.2.1 of the Agreement.
At [7] SOC (which description I shall use to refer to the statement of claim as amended to the date of trial) SDS pleads that Pasdonnay and Mr Rear have breached those terms of the Agreement by failing to provide information necessary for SDS to conduct due diligence and by impliedly refusing to perform it, as a consequence of which SDS has been unable to complete its due diligence investigation. It is pleaded that as a result, SDS is unable to take the benefit of the Agreement and has incurred expenses.
SDS pleads that it is ready, willing and able to comply with all its obligations under the Agreement but that Pasdonnay has failed and refused to perform any of its obligations.
There is a claim for rectification of the Agreement in response to a pleaded contention by Pasdonnay that on its true construction, cl 11.1 of the Agreement obliged SDS to pay $1 million, part of the purchase price, to Pasdonnay on 30 October 2002 notwithstanding that certain conditions precedent to completion contained in cl 4.1 of the Agreement had not been satisfied, Pasdonnay had breached the terms of the Agreement and that completion had not occurred.
As to that, SDS pleads that SDS's obligation to pay the $1 million under cl 11.1 of the Agreement was not to arise unless completion first occurred and that the failure to stipulate that in the Agreement was an error and the Agreement should be rectified so as to state that expressly.
The defendants deny the breaches alleged, maintain that they have produced the information necessary for the plaintiff to conduct its due diligence investigations in relation to the business, the business assets and the patents as defined in the Agreement and contend the Agreement is subject to implied terms that the defendants need only provide all assistance reasonably required by the plaintiff and all information reasonably necessary for the plaintiff to conduct its due diligence investigations.
They further plead that the Agreement came to an end on 22 October 2002 because on that date HSBC Bank Australia Ltd ("HSBC") advised the defendants that it would not consent to the assumption of the assumed liabilities by the plaintiff in accordance with cl 4.1.3 of the Agreement ("the HSBC condition"), that being a condition of completion. Further, or alternatively, the defendants pleaded the Agreement came to an end on 8 November 2002 when they terminated it pursuant to cl 4.10.1 on the basis that a condition requiring CBA's consent to the sale and purchase of the business assets and assumption of the assumed liabilities had not been forthcoming.
Amongst other matters it is pleaded that since 30 October 2002 SDS has been in material breach of the Agreement because it has failed to pay $1 million due to be paid to the first defendant on 30 October 2002 under cl 11.1.
There are numerous other matters pleaded and it will be necessary to deal with them all in due course.
It is convenient to begin with the course of dealings between the parties.
Course of dealings
SDS is a manufacturer and supplier of equipment and services to the mining, oil and gas and construction industries. It has a number of subsidiaries, primarily one called SDS Digger Tools Pty Ltd ("Digger Tools") which is a manufacturer of down‑hole percussion hammers and drill bits and has a world‑wide retail sales network.
Another company in the group, SDS Ausminco, markets an extensive range of mining and construction equipment through branches located in the major mining centres around Australia.
SDS was publicly listed on the Australian Stock Exchange in May 1998, the business having been established some 20 years before at Broken Hill as a dealer in various mining products. The company and the SDS group progressed by taking over agencies and by virtue of its own patents, inventions and the manufacturer of its own products and is said to have gained pre‑eminence, particularly in the field of down‑hole percussion hammers and drill bits. The major shareholder of SDS is Mr Fred Moir. The company secretary is Mr Kevin Benson.
Pasdonnay, trading as International Drill Quip ("IDQ"), is engaged in similar lines of business although perhaps not as extensively as the SDS group.
Mr Rear is the major shareholder and the guiding force behind Pasdonnay and he, like Mr Moir, is the person who either invented, or is responsible for, the manufacture, through their various corporate entities, of various pieces of equipment which form part of the core businesses of each of the plaintiff and the first defendant.
In 1997 one of the SDS group of companies instituted proceedings against a company called Seismic Supply International and another company, Azuko Pty Ltd, in relation to the infringement of patents. These patents related to improvements and inventions in relation to down‑hole drilling. They were the subject of extensive litigation, eventually leading to what was described in the hearing as the Nautronix litigation.
The Nautronix litigation is now finalised. I am mentioning it is because that was one of the sources of funds that Mr Moir and Mr Benson from time to time referred to and it features in some of the correspondence that I will go to in due course. There was a lengthy action before a single Judge in the Federal Court, an appeal to the Full Court, and then a special leave application to the High Court. That was dismissed in the latter half of 2002.
In 1999 Digger Tools instituted proceedings (which were in part related to the Nautronix litigation) against Pasdonnay in the Federal Court claiming infringement of certain patents. Pasdonnay in response instituted proceedings in this court claiming that the plaintiff in one of its entities had breached the terms of a licence agreement by which it was entitled to use the patents.
There was an attempt under the Cross‑Vesting Act to remove the proceedings from the Federal Court into this Court. That attempt was resisted, with the result that effectively the Federal Court proceedings against Pasdonnay and Pasdonnay's proceedings in this Court against SDS have been in abeyance because of discussions which commenced in early 2002 which were designed to put an end to the litigation by what was effectively a merger of the two companies.
The documents show that there were discussions about that between Mr Rear and Mr Moir in mid‑February 2002.
On 5 March 2002 Mr Benson sent an email to Ted Rear, advising that he had spoken to Fred Moir and suggesting that to progress the merger discussions, the independent advisory firm of Gresham Partners be engaged to assess the relative values of both SDS and IDQ. Those valuations would not be extensive but would provide a global overview of each company's value. It was envisaged the valuation would take approximately four to six weeks and would exclude, inter alia, the patent litigation in respect of which the application for special leave to appeal to the High Court was then scheduled to be heard on 15 March 2002. He suggested that when relative values had been established, further discussions could be arranged to finalise the issuance of shares and cash in any proposed merger.
The structure proposed for the combined SDS/Drill Quip entity was the subject of a further email from Mr Benson to Mr Rear on 12 March 2002. That included a comment that should the special leave application be rejected by the High Court, then the expected recovery of damages and market share would need to be factored into the merger with Drill Quip.
Then followed a continuing exchange of correspondence by email. This focused largely on the proposed structure of the merged entities. One of Mr Rear's concerns was to ascertain whether, following the amalgamation, the manufacturing and marketing arms would become an integrated company or whether they would continue to be separate organisations.
By letter dated 25 March 2002, Mr Moir made a formal merger offer on behalf of SDS. He said that was based on the figures advised at a recent meeting. They included hammer and bit sales of $10 million for 2001 and profit after tax of $600,000. The letter continued:
"Heads of Agreement
1.Withdraw from all litigations between parties.
2.Digger will purchase business from Drill Quip/Air Drill (including all associated technology).
3.Consideration 'Net Asset Value' (approx. $5.5 million) by way of $1 million cash and remainder SDS shares @ $0.50.
4.Cash to be paid from Nautronix settlement or within 6 months. Shares to be held in escrow for 12 months.
5.Payment by way of share placement. Will require shareholders approval.
6.A formal sales agreement to be produced covering this 'Heads of Agreement' plus normal terms and conditions, and warranties.
7.Andrew Gilbert to be offered employment. Contract terms and conditions to be agreed.
8.Ted Rear to be offered part‑time employment and SDS board position while he is a significant shareholder.
9.Contract subject to bank approval (to take on debt of approx. $3 million) and reasonable and acceptable due diligence report.
10.Time Table
(1)This offer is open for acceptance till 5 p.m. Thursday, 2nd April 2002.
(ii)Settlement after due diligence but not later than 5 p.m. Monday, 1st July 2002."
Andrew Gilbert was the Pasdonnay Operations Manager at the time.
Mr Rear was obtaining financial advice from a Mr Lawrie Cook, a financial advisor. On 26 March 2002 Mr Cook emailed Mr Rear a copy of a draft reply from Mr Rear to SDS. Mr Rear emailed the response in the terms suggested, to Mr Moir. It was in the following terms:
"Set out below are my revisions of the proposed heads of agreement. I have excluded reference to AirDrill, as that entity was not included in my original discussions and the original price was based on Drill Quip alone.
1. Withdraw from all litigations between the parties.
2. Digger will purchase business from International Drill Quip (including all associated technology but see 4 below).
3. Consideration minimum of $5.5 million (after SDS assumes all external liabilities) payable by way of $3 million cash and the remainder as SDS shares at 50 cents each or other appropriate price (see 4 below)
This was basically in line with our original discussions, as I was basically contemplating a cash sale and would require a major portion of the consideration to be in cash.
4. $1.5 million cash to be paid on execution of the contract with the second $1.5 million cash to come from Nautronix settlement or within 6 months. Shares to be held in escrow for 12 months.
I anticipate the first $1.5 million can be recouped by the sale of excess plant and equipment very shortly after the agreement is signed. I would also require some form of guarantee that the shares will actually be worth at least 50 cents each in 12 months' time (after the escrow time). I will retain legal ownership of my patents, until the full consideration under the agreement has been satisfied and the guarantee satisfied. Digger will be entitled to exclusive use of the patents in the meantime.
5. I understand it will be necessary to obtain shareholders approval to the proposed share placement.
6. A formal sales agreement to be produced covering this 'Heads of Agreement' plus normal terms and conditions, and warranties.
7. Andrew Gilbert to be offered employment. Contract terms and conditions to be agreed.
8. Myself to be offered an appointment and engaged as a Consultant to the SDS Board and entitled to attend all Board Meetings while I remain a significant shareholder of SDS.
9. Contract subject to bank approval (to take on debt of approx. $3 million) and reasonable and acceptable due diligence report.
10. Timetable
(i) This offer is open for acceptance till 5 p.m. Tuesday, 2nd April 2002.
(ii) Settlement after due diligence but not later than 5 p.m. Monday, 1st July 2002."
On 27 March 2002 SDS responded with a counter offer. That was largely a reversion to the first offer made by SDS. One term was that $1 million cash would be paid from the Nautronix settlement or within three months.
The document which was executed by both parties was signed on 28 March 2002. It came from Mr Rear on behalf of IDQ and was addressed to Mr Moir. It began:
"Further to our discussions please find below the following proposal. I would like to discuss points 4/5/6 in addition as this or the final agreement is subject to legal and financial advice."
Then following the "Heads of Agreement" which relevantly included:
"1.Withdraw from all litigations (sic) between parties.
2.…
3.Consideration Net Asset Value of Drill Quip Business and additional patents in Ted Rear's name of approx. $5.5 million by way of $1.5 million cash, $1.0 million convertible notes and remainder SDS shares @ $0.50.
4.One million cash to be paid from Nautronix settlement or within 3 months. Five hundred thousand cash to be paid within 6 months. Shares to be held in escrow for 12 months.
Fred Moir to be given first option to purchase any shares that Ted Rear wishes to sell or to act as agent for sales of shares within 14 days of notice that Ted Rear wishes to sell such shares.
Ted Rear to undertake not to sell more than 2 million shares in each of the two financial years following the escrow period without the prior written consent of Fred Moir.
5.Vendor financing of $1.0 million by way of two secured convertible notes at $0.50 and interest rate of 7%, payable monthly.
Timetable for convertible shares or repayment of cash:
24 months 2.0 million shares @ $0.50 or $1,000,000
6.…
7.…
8.A formal sales agreement to be produced covering this 'Heads of Agreement' plus normal terms and conditions and warranties.
9.…
10.…
11.…
12.…
13.Contract subject to bank approval (to take on debt of approx. $3 million) and reasonable and acceptable due diligence report.
14.Time Table
(i)This offer is open for acceptance till 5 p.m. EST Thursday, 28th March 2002.
(ii)Formal Agreement to be completed at the earliest date preferably no later than EST 5 p.m. Friday, April 12th 2002.
(iii)Settlement after due diligence but not later than 5 p.m. EST Monday, 1st July 2002."
On 29 March 2002, Mr Rear sent an email to Mr Cook and Andrew Gilbert, setting out the terms of the Heads of Agreement document of 28 March, together with comments on it.
It is apparent from this email that Mr Rear had been obtaining advice and comments from a Mr Brent Bonadeo, Mr Rear's son‑in‑law, (who held a senior position in Westpac) and from Mr Rear's daughter Catherine. Mr Rear wrote in part that:
"Brent Bonadeo's Notes and Catherines (sic) Notes are worth reading I feel. Also we need to protect IDQ by making sure SDS have absolutely no knowledge of HSBC attitude of late. SDS could cancel agreement - drag everything out for 3 or 4 months and then try and get us for nothing. Peter Heaney must be kept under wraps in this regard and also any contact between SDS accountants and HSBC should be minimised in this respect."
The concerns and possibilities discussed in this email do justify the submission of Mr Abbot QC for the plaintiff that Mr Rear was not an uninformed vendor, but one who was considering every possible permutation which might flow from the transaction. He and his advisors knew the SDS shares were tightly held and that Mr Moir was the major shareholder. They were well aware of the fact that because of the thin spread of the shares, they were taking shares in a company effectively owned substantially by Mr Moir whose activities may or may not have had a relevance to the value of the shares Pasdonnay would be accepting as the major portion of the purchase price of Pasdonnay.
Mr Rear sent a further email to Andrew Gilbert and Lawrie Cook on 29 March 2002 forwarding another message from his daughter. She raised a number of points about the valuation, the consideration and whether warranties could dilute the amount payable significantly. She made suggestions about how the patents could be dealt with. She warned that the first $1 million payment should not be exclusively tied to the funds from the Nautronix deal. If that were to fail or be delayed or if there were prior claims to the funds, Pasdonnay could be left without recourse. She pointed out in relation to the shares, that as there was no open market trade for them, it was possible they would be unsaleable and hence worthless. She stressed the importance of Moir and/or SDS being obliged to buy Mr Rear out at the market price and for there to be a mechanism to protect him in the event the share price was to fall below a certain value.
SDS's lawyers were a firm of Adelaide solicitors, Messrs Thomson Playford ("Thomsons"). The particular solicitor in that firm with the general responsibility for this transaction was Mr Jamie Restas. Working with him was Ms Samantha Reidy. Mr Benson sent a copy of the Heads of Agreement to Thomsons for review by facsimile on 3 April 2002.
In an email to Andrew Gilbert and Lawrie Cook on Thursday 4 April 2002, Mr Rear set out in considerable detail numerous points for consideration about the proposal. This was in the context that Mr Moir had indicated to him that he wished to be ready to sign an agreement the following Friday and that Rear was proposing to Moir that a final meeting be held in Adelaide on Wednesday 10 April to iron out the final form of the agreement.
On Friday 5 April 2002, Mr Bonadeo sent Mr Rear an email in which he advised him to tell Moir that he was "… not interested in the deal as currently structured". The reasons for that he suggested as being that Rear was being offered $1.5 million in cash (when Nautronix settled) and $1 million in convertible notes subordinated and convertible into equity and/or cash plus $3 million in shares. Bonadeo suggested that the convertible notes and shares would be worthless having regard to the current structure and related party transactions. Presciently, he also suggested that the debt refinancing was another "deal breaker". He wrote that Moir was in trouble with his banks. He suggested Pasdonnay weigh the situation up against the position with HSBC. He opined that a disposal of the company aircraft and revised terms with HSBC would be the better way to go.
The aircraft referred to was a Gulfstream Aircraft used by Mr Rear for corporate business. In the end it formed no part of the transaction.
Exhibit P 17 is a long email from Ted Rear to Lawrie Cook dated 8 April 2002. The first part of the email is Mr Rear's communication with Mr Cook. He stated that he proposed to contact Blake Dawson Waldron ("Blakes") in relation to SDS after he had spoken to Cook. He would want to discuss how to frame the agreement. It was his feeling that they needed to frame their argument with Moir and the SDS representatives on the basis that they would sell IDQ. Rear then added:
"In a normal sale one would get the money at time of property asset transfer. That is not happening. What we are getting is nothing up front with a timetable of the first $1.5 million being a bit airy."
He noted that the sale for $1 million cash and $0.5 million cash should both be paid within a specific time regardless of Nautronix. He said the $3 million share value was questionable and mentioned a possible claim for bank interest plus 1 per cent.
The next part of the email appears to be an on‑forward of one from Catherine Rear which in turn was an email to her reporting generally on share trading in SDS and related entities. It was noted that trading in SDS seemed to have been relatively quiet since the beginning of the year with only approximately 150,000 shares traded since 1 December 2001. The trades occurred between 36 and 48 cents on 19 separate days. It noted there had not been a recent release pertaining to the top 20 shareholders but an Initial Directors' Notice dated 21 January 2002 listed holdings which included:
| Frederick Graham Moir Frederick Graham Moir Old Digger Pty Ltd Julie Moir Investments Pty Ltd | 626,405 ordinary shares 108,975 ordinary shares |
| Vincent Michael Rizzo Vincent Michael Rizzo Rosanna Rizzo | 5,000 Ordinary shares 5,000 Ordinary Shares |
| Kevin Vincent Benson Begaboys Pty Ltd | 23,300 Ordinary Shares |
The email also attached the SDS half‑yearly report for the period ended December 2001 and summarised the highlights of it. They included the observation that SDS recorded a net loss after tax of $1,427,000 for the period.
Relevantly it was noted that on 15 March 2002, SDS had announced that it had received a favourable decision from the High Court which had refused the special leave application. That had been sought by the infringers of two SDS owned patents which dealt with a reverse circulation drilling innovation. SDS successfully established infringement of those patents before von Doussa J in the Federal Court in May 2000. That decision was upheld by the Full Federal Court in August 2001. The order made by von Doussa J in June 2000 included an injunction restraining the Nautronix Ltd subsidiaries Azuko Pty Ltd and Seismic Supply International Pty Ltd from manufacturing and selling the infringing product. SDS was actively pursuing further orders including for delivery up for destruction of existing stocks of the infringing product, recovery of significant legal costs and the expeditious pursuit of lost profits and damages. It was noted that preliminary estimates by an independent expert for SDS was that SDS's claim for damages was in the range between $5 million and $15 million excluding interest and costs.
A progress report from Nautronix Ltd (apparently downloaded from the ASX) reflected the Nautronix view that the estimates were very high and well above the quantum of any damages which might be awarded and foreshadowed further litigation relating to the extent of the products to which the patent applied.
Further emails between Rear and Cook reflect their continuing concerns about the ability of SDS to make a cash offer for IDQ and the patents, the "thin" market for SDS shares and the means by which Mr Rear could be guaranteed a return of not less than 50 cents on the sale of the shares in due course.
In the meantime Mr Restas had been doing some preliminary work on a draft agreement. On 8 April 2002 he sent an email to Mr Benson attaching a first draft of the agreement. He made a number of general comments including that the draft was necessarily general and broad, given that he was unaware of the subject matter other than what was contained in the Heads of Agreement letter. He reiterated earlier advice that it was common practice to commence due diligence in relation to a proposed target business prior to finalising an agreement, and in some cases, before even commencing the drafting of an agreement. That was for two reasons - the first was that due diligence enquiries might uncover information which would "kill" the deal, and secondly, due diligence enquiries generally uncover issues which need to be specifically dealt with in the agreement. Mr Restas pointed out that given the due diligence enquiries had not been conducted, the draft was therefore subject to any matters that might be identified once it had been. His email concluded with him expressing his strong preference that the agreement not be distributed to Pasdonnay until he and Benson had had a chance to discuss its contents "… and some of the usual clauses that I have deliberately left out".
At the hearing, some attempt was made to suggest that there was something untoward about Mr Restas leaving out "some of the usual clauses", but in my view, and in light of the circumstances at the time, it seems to me he meant no more than that he had concentrated in his draft at that stage on the matters which were particular to the transaction and that the more usual or routine clauses could be added later.
Clause 4.5 of the draft of 8 April 2002 dealt with termination in the following terms:
"4.5Termination
4.5.1In the event that all of the Conditions have not been satisfied or waived by [insert date eg 30 June 2002] or such other date as the parties may agree in writing, then this agreement automatically terminates."
That provision was changed significantly by the time it appeared in the final agreement.
There was a meeting between Fred Moir, Ted Rear and Andrew Gilbert at Lawrie Cook's office on Friday 5 April 2002. Notes of that meeting were forwarded by Lawrie Cook to Kevin Benson by email on 9 April. According to those notes the intended timetable was for the draft of the agreement to be completed and signed off by 1 May, on which date due diligence would start, and that settlement would be on 1 July 2002.
The notes recorded that Mr Rear accepted SDS had been through difficult times and was not in a position to make a cash offer for IDQ and the patents. On that basis he was prepared to make concessions in considering the SDS offer. He also accepted the consolidated business had considerably greater likelihood of success than both entities as they presently stood. He was prepared to sell the business for $5.5 million. That price was originally based on a cash sale, but the proposal being considered at that stage involved no cash payment immediately, extended settlement dates, a temporary loan taking the form of secured convertible notes, plus what was another further deferred payment in the form of the issue of vendor shares to be held in escrow for one year.
Mr Abbott QC submits that the observation in the notes that the present proposal involved no cash payment immediately, is of particular significance in relation to the question whether or not the $1 million was payable before the completion date.
On 9 April 2002 Catherine Rear sent a further email to her father setting out a number of specific considerations which she suggested would require careful attention in the course of the negotiations. They included ways in which the value of Mr Rear's holdings could be protected subsequent to the transaction and included the suggestion that Mr Moir should be required personally to guarantee to buy back Rear's shares at a certain value, indexed.
In the meantime Mr Moir was also giving instructions to and taking advice from Thomsons. On 9 April 2002 he spoke to Ms Reidy whose file note reflects a number of matters were discussed including the need to insert in the draft agreement that the conduct of due diligence was to be a condition precedent so that the completion date of 1 July was acceptable but only provided due diligence had then occurred.
Other matters noted as conditions precedent were to be the consent of SDS's own bank (CBA) and Pasdonnay's bank's consent (of which details were needed). There is a note in relation to cl 11 and what was described as "deferred purchase price". It was that the solicitors needed to know "who would get the dollars - $1 million to the company, $500,000 to Mr Rear."
It is apparent from the notes that the solicitors were under considerable pressure. Mr Moir wanted the agreement finalised the following day and signed then or the day after that.
The second draft agreement was dated 9 April 2002. Exhibit P 24 is a copy of that draft with hand‑written notations by Mr Cook.
Clause 4 of this draft specified a number of conditions precedent to which completion was subject. They were that the results of the due diligence investigations to be undertaken by or on behalf of the purchaser be satisfactory to the purchaser, the necessary resolution being passed at an extraordinary general meeting of the purchaser shareholder, the vendor's third party financier consenting to the sale and purchase of the business assets in accordance with the agreement and the third party financier of the purchaser consenting likewise. Mr Cook's notes indicate that the vendor's third party financier was HSBC and the purchaser's third party financier was CBA.
Clause 11 was headed "DEFERRED PURCHASE PRICE". In this draft that clause read as follows:
"The Purchaser shall pay the $1,500,000 balance of the Purchase Price by cash as follows:
11.1$1,000,000 will be paid to Pasdonnay on:
11.1.1the date that is 3 months after the Completion Date; or
11.1.2the date that the Nautronix Litigation is settled to the complete satisfaction of the Purchaser; or
11.1.3the date that the Federal Court of Australia awards damages in relation to the Nautronix Litigation,
whichever is earlier; and
11.2$500,000 will be paid to Rear on the date that is 6 months after the Completion Date."
A file note by Mr Restas of a telephone conversation between him and Mr Benson on 10 April 2002 makes the comment that Mr Rear was "quite okay" about most of the agreement but would like a guarantee buy‑back by Mr Moir at 56 cents in two years time. That price would take into account an interest component for the fact that Mr Rear would have to hold on to the shares for two years.
Further documentation was in the course of preparation. On 10 April 2002, Samantha Reidy forwarded to Kevin Benson a draft Deed of Release between Digger Tools and Pasdonnay concerning the proceedings by Digger Tools against Pasdonnay in this Court and the Federal Court.
An email from Kevin Benson to Ms Wenderoth, a solicitor employed by Blakes, with copies to Lawrie Cook and Ted Rear on 11 April 2002 indicated that Mr Moir wished to sign the agreement the following day. On Friday 12 April he forwarded an amended Put Option Deed between Pasdonnay and Fred Moir.
An email from Lawrie Cook to Mr Benson on the morning of 12 April was circulated to Ted Rear and others with Benson's comments. There is nothing of note in that except the observation that the prospect of signing the document by midday looked highly optimistic.
Later that day Mr Benson emailed Blakes (with a copy to Mr Rear) enclosing the amended draft agreement dated 12 April 2002.
There is a file note by Mr Restas bearing a date (not in his writing) of 14 April 2002 which appears to be a list of matters requiring attention in the final agreement. A number of those matters go to the issue of due diligence. Against the word "timetable" there is a note:
"Advise not to enter any agreement until DD has been completed - report could result in either (1) SDS pulling out in entirety or (2) SDS negotiating a lower price."
At the top of the second page of those notes there is a heading "Completion Items" under which is listed a number of items including the litigation between the parties, the issue of shares and convertible notes and the consultancy agreement for Ted Rear.
Below that there is a further heading "Post Completion Items" under which the first point noted is "payment of cash".
This note is part of the basis upon which the plaintiff contends the payment of cash was always intended to be something which occurred following completion.
On 13 April 2002 the parties signed a set of documents including the Agreement. One document was headed "Appendix to Business Assets Sale Agreement dated 13 April 2002", the short substance of which was:
"It is agreed that the intent of the Heads of Agreement previously executed by the parties is contained in the Business Asset Sale Agreement and that Agreement constitutes a legally binding agreement.
It is further agreed that any technical or legal points will be resolved by the lawyers for each of the parties within the next seven days.
Failing agreement to any amendments to the Business Asset Sale Agreement, the matter will be decided by an agreed arbitrator, or failing agreement an arbitrator appointed by the Legal (sic) Society of WA."
It might reasonably be thought that the reference to "… any technical or legal points" was intended to allow for amendment or further agreement of a quite limited nature; however, the continuing communications between the parties and their solicitors dealt with matters of considerable substance.
On the strength of the documents signed on 13 April 2002, the parties gave public notification of the merger. A standard letter on IDQ letterhead and dated 15 April 2002 signed by Mr Rear on behalf of IDQ and Mr Moir on behalf of SDS, announced that the SDS Group had made an offer to purchase IDQ and that both companies had signed a sale agreement conditional upon, and subject to, due diligence. On the same date Mr Benson sent an announcement to the ASX to similar effect and concluding that the sale agreement was conditional upon "outstanding issues" which it was hoped would be finalised prior to 30 June 2002.
Also on Monday 15 April 2002, Lawrie Cook sent an email to Mr Benson attaching draft documents showing changes proposed on Mr Rear's behalf by his solicitors, Blakes. He expressed concern that some of the changes seemed fairly major but he expected there were valid legal reasons for them.
Mr Neil Cowie was the Manager, Group Risk Management, of the CBA. Responsibility for SDS accounts with CBA had been passed to his section because the bank was concerned at the level of risk to which it was exposed with SDS. On 17 April 2002 Mr Cowie sent an email to Mr Benson referring to the ASX announcement of the merger and making certain specific requests for further financial information. A copy of the ASX announcement had been sent to him by Mr Benson the previous day.
Mr Cowie's interest in the proposed transaction logically enough was to ascertain what, if any, impact it might have on the bank's position with SDS. He specifically informed Mr Benson that it would be necessary for SDS to obtain CBA approval for the transaction.
On 17 April 2002 Mr Benson, on behalf of SDS, made a further announcement to the ASX. That was:
"Further to the company's announcement dated April 15, 2002 concerning the merger with International Drill Quip, set out below are further details of the transaction:
1.The purchase price will be dependent upon the outcome of the due diligence process. It is expected that the price will be approximately $5.5 million however, adjustments may be made based upon the Net Tangible Asset position of International Drill Quip after the Due Diligence process has been completed.
2.Settlement of the purchase price will be a combination of a share placement from SDS of $3 million, a convertible note issue of $1 million and a cash component of $1.5 million.
3.The purchase agreement allows for conditions to be satisfied such as financier approval, shareholder approval and due diligence.
It is expected that the due diligence and necessary approvals will be completed by May 31, 2002 with a settlement date of July 1, 2002."
Blakes wrote to Mr Restas at Thomsons on 17 April 2002. They noted that they had not as yet received his comments on the draft agreement of Saturday 13 April 2002. In light of that, they advised that their client (Rear) intended to extend the period of negotiation referred to in the Appendix by a further seven days. They drew attention to a number of issues which still required amendments to the Agreement and the Put Option.
Mr Benson had a meeting with Mr Restas and Ms Reidy at Thomsons on 26 April 2002 to review the requested amendments by Blakes to the agreements signed on 13 April. Shortly thereafter, Mr Benson sent a memo to Mr Moir advising of the meeting and detailing a summary of amendments requested by Blakes. He added:
"It should be noted that the amendments below relate to commercial matters rather than legal matters. The supplementary documents signed on April 13, 2002 whilst validating the agreements, allowed for changes to technical or legal points within the seven days to April 20, 2002. The requested changes below are outside this timeframe and do not constitute legal points."
In passing I note that item 20 on Mr Benson's list was that Blakes had made it SDS's obligation to obtain HSBC consent for the sale, whereas in his view that should be Pasdonnay's obligation.
On 7 May 2002 there was a meeting between Mr Gilbert (for Pasdonnay), Mr Benson (for SDS) and Mr S Munrowd‑Harris (for HSBC), to discuss the proposed transaction in general terms. Mr Munrowd‑Harris asked SDS to provide further financial information to HSBC to enable the bank to consider the matter further. I not Munrowd‑Harris left the employ of HSBC shortly afterwards.
On 16 May Mr Benson had a conference with Mr Restas and Ms Reidy, details of which were recorded on a file note made by Ms Reidy. Some of the changes proposed by Blakes were accepted; in respect of others it was decided to adhere to the Thomsons' draft. In relation to the timetable, Ms Reidy noted that if the new agreement were to be signed late the following week, that would give SDS one month to do due diligence and that Mr Benson thought that would probably be enough time.
By this time Mr Rear and those working with him for IDQ were becoming unhappy with Blakes' services. On 15 May 2002, Alexandra Wenderoth sent, attached to an email, a "Due Diligence Checklist" prepared to assist Pasdonnay to prepare for the due diligence to be performed by SDS. This was an extensive and detailed list. In an email dated 26 May 2002 Lawrie Cook took it to be a list of what Blakes thought IDQ should be addressing. His criticism was that on his understanding of due diligence, it would encompass anything SDS might require, not what Blakes nor Pasdonnay might think appropriate. He added that IDQ would no doubt be charged "… for this unsolicited (and probably irrelevant) advice".
The need for IDQ to get started on the due diligence exercise as soon as possible was pointed out by Lawrie Cook in an email to Mr Rear on 28 May 2002. In that he said that he did not think it would be necessary to have Ernst & Young prepare accounts, particularly given the legal costs Rear had already incurred. He opined that SDS should have the accounting knowledge and experience to analyse IDQ internal accounts without incurring further accounting costs and suggested Rear should agree that with Benson as soon as possible. This was clearly a reference to Ernst & Young preparing Pasdonnay (IDQ) accounts for the purpose of the due diligence being conducted by or for SDS.
A copy of the agreement with amendments to that date was sent by Mr Restas to Mr Benson by email on 29 May. Restas noted that he had added the concept of conducting a stocktake prior to completion (as a condition precedent) to determine the "initial stock value". The purchase price would then be adjusted to reflect any difference between the "initial stock value" and $5,020,980 (the "difference"). He then added:
"I have also provided that the 'Adjustment Amount' take account of the Difference. This impacts on the number of 'Adjusted SDS Shares' that are issued 3 months after completion. When making this change I have assumed that the Difference will not be greater than $1 million (the 'Adjusted SDS Shares' is based on 2 million $0.50 SDS shares being issued). If you think that the Difference could exceed $1 million then you need to consider whether the cash component of the purchase price or the amount of the 'Completion Shares' is to be decreased."
Once again, it is Mr Abbott's submission that this was a clear indication that the plaintiff at least regarded the cash component as payable after completion.
The same submission was made in respect of file notes made by Mr Benson on 29 May 2002 in relation to the agreement. These included a notation that of the purchase price, $1 million was to be paid three months after completion date or on settlement with Nautronix or on the damages award from the Federal Court, whichever be the earlier.
Mr Benson forwarded the amended draft agreement of 29 May 2002 to Lawrie Cook and Mr Rear by email on 31 May, with a request that they review the amendments.
Clause 11 of that draft read:
"11.DEFERRED PURCHASE PRICE
The Purchaser shall pay the balance of the Purchase Price as follows:
11.1$1,000,000 will be paid to Pasdonnay on:
11.1.1the date that is 3 months after the Completion Date; or
11.1.2the date that the Nautronix Litigation is settled to the complete satisfaction of the Purchaser; or
11.1.3the date that the Federal Court of Australia awards damages in relation to the Nautronix Litigation,
whichever is earlier; …"
Mr Cook's comments on the amendments were sent to Mr Benson by email on 9 June 2002, a copy of which was also sent to Mr Rear. He drew attention to clauses which he saw as needing adjustment. Clause 11 of the draft of 29 May was not one of them.
Mr Benson had another meeting with Mr Restas and Ms Reidy on 17 June 2002. It was at that meeting that Mr Benson gave firm instructions to write the aircraft out of the draft. Other matters discussed included introduction of the concept of "Pre-completion Accounts" and the giving of a loan of $150,000 to Mr Rear. That last was the subject of a draft letter forwarded by Mr Restas to Mr Benson on 18 June. The letter stated that the purpose of the loan was to enable Rear to pay for his costs associated with the Agreement. The loan was to remain available until it expired on the "repayment date" defined as the date that was three months after the completion date, or that on which the Nautronix litigation was settled or that the Federal Court of Australia awarded damages in relation to the Nautronix litigation, whichever be the earlier. The letter also contained a provision that Mr Rear unconditionally and irrevocably authorised and directed SDS to deduct the repayment from all moneys payable to him under the Agreement.
On 24 June 2002 Mr Cowie wrote to Mr Martin Jones of the accounting firm Ferrier Hodgson requesting that firm to undertake an investigation of SDS on behalf of the CBA. Mr Cowie detailed the current exposure of the bank to SDS as $10,993,852. With the estimated value of securities at $7,377,000, the "estimated risk" to the bank was $3,616,852.
The letter noted that SDS had been under the control of the bank's Credit Management Unit since March 2000 and in that period the bank had cancelled both overdraft and trade facilities, with the company operating its trading account on a "credit only" basis. He noted that SDS had met all interest payments on the outstanding loans "with a small reduction in principal outstanding". He further noted that in the same period SDS had unsuccessfully tried to sell some of its freehold assets, achieve a share placement and refinance its facilities with another bank. He drew attention to a number of events currently being considered or undertaken by SDS which would impact on its future operations. These included the Nautronix litigation, the purchase of IDQ and the company's trading performance. As to the last, he wrote that SDS's financial performance had improved since November 2001 but it had only been able to generate sufficient cash to meet its interest commitments and other operating commitments. It had not generated sufficient cash to meet any capital expenditure for principal reductions.
Mr Cowie specifically requested Ferrier Hodgson to review and comment on the SDS Group profit and loss budgets, cash flow forecasts and projected balance sheets for the year ended 30 June 2003, with and without the proposed purchase of IDQ. He also asked for the accountants to review and comment on the proposed IDQ purchase and related agreements.
A draft of the Agreement dated 25 June 2002 was forwarded by Mr Restas to Mr Benson by email on 26 June. In a covering email, Mr Restas explained that the purchase price mechanism embodied in that draft was now that the starting purchase price was $5 million, which could be amended by reference to the "net assets" in the Pre-completion Accounts. The first $2 million was to be paid at completion and $1 million cash was to be paid as a deferred amount.
The draft of 25 June was sent by email from Kevin Benson to Lawrie Cook on 26 June. No change had been made to cl 11, dealing with the deferred purchase price.
On 26 June 2002 Moir and Rear had a dinner meeting at the Witches' Cauldron restaurant in Subiaco ("the Witches' Cauldron meeting"). By that time Mr Rear was becoming concerned about the ability of Moir and SDS to complete the Agreement. His specific concern was that they would not have the funds to do so. According to Rear, he asked Moir and Benson several times during April, May and June, where the funds would come from, but was told by them words "to the effect" that he should not worry as SDS was trading profitably, was about to be awarded significant new contracts and would shortly be awarded significant damages from the Nautronix litigation. Rear had discussed his concerns about SDS's ability to complete the transaction with Cook.
Mr Rear testified that at the Witches' Cauldron meeting he told Mr Moir words to the effect that if the sale were to proceed he had to be assured of IDQ receiving the first $1 million of the cash component of the consideration by the end of August 2002. That was because he had made financial commitments on behalf of IDQ based on settlement of the sale by 30 June 2002.
In his evidence Mr Rear said Mr Moir told him he was not willing to commit to payment of the $1 million by the end of August, although he thought he would be able to pay it by the end of September 2002. When Rear said he wanted that to be in the contract, Moir said if that were to be written in he would want a further month to make the payment. Rear said he accordingly agreed to accept the end of October 2002 "as the latest date for settlement of the transaction and payment of the $1 million".
Shortly after the meeting Mr Rear asked Mr Cook to have this agreement as to payment of the $1 million incorporated in the Agreement.
In his evidence Mr Moir generally agreed with Mr Rear's account of their conversation about the $1 million, but said that the reason they pushed the date out to the end of October was to ensure the payment was made after completion. He said he could not recall if they actually expressed that, but that was his understanding. In cross‑examination he conceded that was the date that they agreed to put in the contract.
In his cross‑examination, Mr Rear initially said they were both very clear that the $1 million was to be paid on 30 October 2002 because they were under the impression "completion would be finished", yet a little later he said that he never regarded that payment to be part of the balance of the purchase price but that it had to be made by the date specified in the contract whether or not completion had occurred.
Correspondence and documentation continued to be exchanged between the parties over the next few days. These included amendments to the proposed licence agreement for the payment of cash and shares and a patent licence agreement as well as further amendments to the agreement itself.
In an email to Mr Benson on 1 July 2002, Mr Cook raised a number of further issues following his further review of the agreement as drafted to that date. Included in those was the comment that there was still a problem as to how the HSBC charges would be satisfied by the completion date and that it had to be borne in mind that Mr Rear had no capacity to satisfy the charges.
Another observation he made was the timing of the sale and payment to Mr Rear needed to be made certain and he added:
"Fred indicated it might be possible to make the $1 million cash payment by 30 October."
That appears to be the first written reference to that particular date.
By the end of June 2002 Mr Rear and IDQ had terminated their relationship with Blakes and had instructed a new solicitor, Mr Peter Bogue.
In an email to Mr Rear of 1 July 2002, Mr Cook suggested a number of matters which required consideration. In the same email he set out how he understood the consideration would be payable and when. That was:
"On signing:
$1.5M in shares - (3M shares).
Sale agreement = 2M plus licence agreement = 1M
$1.0M in convertible notes at 7% interest
These notes are either to be repaid after 2 years or are to be converted into shares at that time.
If converted, the shares will not be subject to the Put Option arrangements but are subject to pre‑emptive rights.
At completion date (or just after):
$2M (maximum) in shares (4M shares) subject to adjustment per the sale agreement
3 Month's after Completion Date
$1M cash (reduced by any amounts paid under the loan agreement).
6 Months after Completion Date
$0.5M cash"
What was said to be the final draft of the agreement was a document dated 2 July 2002 forwarded by Samantha Reidy to Kevin Benson by email. It was in this document that the date of 30 October 2002 appeared in cl 11 for the first time. So far as is pertinent, the clause read:
"The Purchaser shall pay the balance of the Purchase Price as follows:
11.1$1,000,000 will be paid to Pasdonnay on:
11.1.130 October 2002; or
11.1.2the date that is 3 months after the Completion Date; or
11.1.3the date that the Nautronix Litigation is settled to the complete satisfaction of the Purchaser; or
11.1.4the date that the Federal Court of Australia awards damages in relation to the Nautronix Litigation,
whichever is earlier; and …" (Underlining in the original).
Copies of the final Agreement were circulated by Mr Benson on 2 July 2002 for execution the following day.
Some minor changes were subsequently suggested and made to some of the documents but there were no changes to any of the clauses relevant to these proceedings.
The Agreement was signed by the parties on 5 July 2002.
It is apposite at this point to refer to the particular provisions of the Agreement which bear upon these proceedings, before turning to the course of dealings between the parties following its execution and in compliance (or alleged non‑compliance) with it.
Terms of the Business Asset Sale Agreement
The Agreement is between Pasdonnay, Rear and SDS.
In the recitals it is stated that:
"A.Pasdonnay conducts a hammer and bit manufacture business in Western Australia (the 'Business').
B.Pasdonnay owns the Business Assets and Rear owns the Patents which are used by Pasdonnay in the conduct of the Business.
C.Pasdonnay has agreed to sell, and the Purchaser has agreed to buy, the Business Assets and Pasdonnay has agreed to be released from, and the Purchaser has agreed to assume, the Assumed Liabilities, on the terms and conditions contained in this agreement.
D.Conditional upon completion of the sale of Business Assets, Rear wishes to enter into a licence agreement with the Purchaser under which Rear will licence the Patents to the Purchaser and, depending on the circumstances, transfer the Patents to the Purchaser (the 'Licence Agreement')."
The term "Assumed Liabilities" is defined in cl 1.1.8 as meaning trade creditors' debts, the HSBC debt and employee entitlements.
The term "HSBC debt" is further defined in cl 1.1.37 as meaning the total amount owing by Pasdonnay to HSBC as at Completion. "Completion" is defined in cl 1.8.18 as meaning the completion of the sale and the purchase of the business assets and the assumption of the Assumed Liabilities pursuant to the Agreement and "Completion Date" is the date that is 10 business days after the satisfaction of the conditions or such other date agreed by the parties (cl 1.1.19).
Clause 2 is of some significance. It reads:
"2. SALE AND PURCHASE
2.1Business Assets
Pasdonnay shall sell, and the Purchaser shall buy, the Business Assets free of all Encumbrances subject to the terms and conditions set out in this agreement.
2.2Assumed Liabilities
Pasdonnay shall assign and be released from, and the Purchaser shall assume, the Assumed Liabilities subject to the terms and conditions of this agreement."
Completion was subject to a number of conditions precedent, as set out in cl 4:
"4. CONDITIONS PRECEDENT
4.1Conditions
Completion is subject to and conditional on:
4.1.1the results of the due diligence investigations to be undertaken by or on behalf of the Purchaser in relation to the Business, the Business Assets and the Patents being satisfactory to the Purchaser in its absolute discretion (for the avoidance of doubt, the due diligence investigations will include a review of the matters (if any) set out in the Disclosure Letter from the Asset Holders);
4.1.2If required by the listing rules of Australian Stock Exchange Limited, the Resolution being passed at an extraordinary general meeting of the Purchaser's shareholders;
4.1.3HSBC, as financier of Pasdonnay, consenting to the sale and purchase of the Business Assets and the assumption of the Assumed Liabilities in accordance with this agreement and, if consent is conditional, where such conditions are satisfactory to Pasdonnay and the Purchaser;
4.1.4Commonwealth Bank of Australia, as financier of the Purchaser, consenting to the sale and purchase of the Business Assets and the assumption of the Assumed Liabilities in accordance with this agreement and, if consent is conditional where such conditions are satisfactory to the Purchaser and Pasdonnay; and
4.1.5the Pre‑Completion Accounts and the Certificate being prepared in accordance with clause 4.4."
By cl 4.2.2 SDS was obligated to use its best endeavours to procure the satisfaction of the conditions in cl 4.1.2, cl 4.1.4 and cl 4.1.5.
By cl 4.2.3 Pasdonnay was obliged to use its best endeavours to satisfy the conditions in cl 4.1.3 and cl 4.1.5.
The purchase price for the business assets were stated to be the total value of the net assets which the parties estimated at $5 million (cl 3).
In addition, cl 4.3 provided that:
"4.3 Assistance
4.3.1The Asset Holders must provide all assistance required by the Purchaser to enable it to conduct the due diligence investigations to be conducted by the Purchaser in accordance with clause 4.2.1. Without limiting the generality of this clause 4.3.1, the Asset Holders will give the Purchaser:
(a)access to all information necessary for the Purchaser to conduct due diligence investigations in relation to the Business, the Business Assets and the Patents, such information to be all information necessary for the Purchaser to make an informed decision as to whether or not to purchase the Business Assets and enter into the Licence Agreement;
(b)access to all relevant personnel, officers and advisers and to the Business Assets; and
(c)responses to any queries raised by the Purchaser in relation to the Business and/or the Business Assets and/or the Patents.
4.3.2The Asset Holders must provide all reasonable assistance to the Purchaser in procuring the satisfaction of the Conditions in clause 4.1.2 and clause 4.1.1.
4.3.3The Purchaser must provide all reasonable assistance to Pasdonnay in procuring the satisfaction of the Condition in clause 4.1.3."
The Agreement contemplated the preparation of Pre-completion Accounts and a certificate. The certificate was to be provided by Pasdonnay's accountant certifying that the Pre‑completion Accounts had been prepared in accordance with the approved accounting standards and the Agreement and presented a true and fair view of the assets and liabilities of Pasdonnay as at 5 pm on the date of the Agreement.
Clauses 4.4 and 4.5 imposed obligations on Pasdonnay to give full assistance together with complete access to all assets and information as may be requested by Pasdonnay's accountant.
On provision of the Pre‑completion Accounts and certificate, the purchase price would be reduced or increased (as the case may be) by $1.00 for every $1.00 by which the value of the net assets was greater or less than $5 million (cl 4.8).
By cl 4.9 the purchaser is required to promptly notify the asset holders (Pasdonnay and Rear) in writing as soon as the due diligence investigations are completed and whether or not Pasdonnay either wishes to purchase the business assets on the terms of this Agreement or does not wish to purchase them at all. Clause 4.9 also provided that the purchaser may request that the terms of the Agreement be amended in the event that the due diligence investigations reveal a fact that in Pasdonnay's opinion had an adverse effect on the business, the business assets and/or the patents.
Clauses 4.10 and 4.11 deal with termination and waiver respectively:
"4.10 Termination
4.10.1In the event that the Conditions in clause 4.1.2 or clause 4.4.4 have not been satisfied or waived by 30 September 2002 or such other date as the parties may agree in writing, then this agreement may be terminated by either Pasdonnay or Rear giving the other parties notice of such termination.
4.10.2In the event that the Conditions in clause 4.1.1, clause 4.1.3 or clause 4.1.5 have not been satisfied or waived by 30 September 2002 or such other date as the parties may agree in writing, then this agreement may be terminated by the Purchaser giving the other parties notice of such termination.
4.10.3If this agreement is terminated under this clause 4.10, then in addition to any other rights provided by law:
(a)each party is released from its obligations to continue performance under this agreement; and
(b)each party retains the rights it has against any other party in respect of any past breach.
4.10.4Notwithstanding clause 4.10.3, if this agreement is terminated under this clause 4.10, the provisions of clauses 15, 16, 17 and 18 shall survive such termination and remain in full force and effect.
4.11Waiver
4.11.1The Conditions in clause 4.1.1, clause 4.1.2 and clause 4.1.4 may only be waived by the Purchaser in writing.
4.11.2The Condition in clause 4.1.3 may only be waived by Pasdonnay in writing.
4.11.3The Condition in clause 4.1.5 may only be waived with the agreement of the parting in writing."
The Agreement contemplates that certain activities shall be conducted prior to completion, certain activities shall be undertaken at completion and certain activities will be conducted post‑completion.
Completion is covered by cl 6 of the Agreement. Clause 6.2 provides that at Completion Pasdonnay shall deliver, or cause to be delivered to SDS (inter alia) possession of the Business Assets (cl 6.2.1), a list of the Assumed Liabilities (cl 6.2.4) and evidence of the discharge of all encumbrances over any business asset including, but not limited to, discharge of Australian Securities and Investments Corporation registered charges 578163 and 629914 (cl 6.2.15). Those two numbered charges were the HSBC floating charges over Pasdonnay's assets.
The obligations imposed on the purchaser for the completion procedure are set out in cl 6.3.
That provides that subject to the asset‑holders complying with their obligations under cl 6.2, at Completion the purchaser must (inter alia), pay $2 million of the purchase price by issuing completion shares and SDS convertible notes to Pasdonnay free from all encumbrances (cl 6.3.1).
Clause 6.4.1 provides that at Completion the purchaser agrees to issue the completion shares to Pasdonnay at 50 cents per share "… in part satisfaction of the purchase price".
The next relevantly important provision is cl 11:
"11. DEFERRED PURCHASE PRICE
The Purchaser shall pay the balance of the Purchase Price as follows:
11.1$1,000,000 will be paid to Pasdonnay on:
11.1.130 October 2002; or
11.1.2the date that is 3 months after the Completion Date; or
11.1.3the date that the Nautronix Litigation is settled to the complete satisfaction of the Purchaser; or
11.1.4the date that the Federal Court of Australia awards damages in relation to the Nautronix Litigation.
whichever is earlier; and ... "
Clause 11.2 provided that the balance was to be paid on the adjustment date by the purchaser issuing further adjusted STS shares to Pasdonnay.
The parties' post‑completion obligations are set out in cl 13, but as those do not impact on these proceedings I do not trouble with them further.
The only other provision it is necessary to note cl 19.1 which stipulates that each party must do or cause to be done all acts and things necessary or desirable to give effect to the Agreement.
Course of events – post execution of the agreement
I have already referred to the letter from Mr Cowie of the CBA instructing Ferrier Hodgson to conduct a review of the SDS Group.
On 9 July 2002 Mr Jones of Ferrier Hodgson wrote to Mr Benson advising SDS of those instructions and forwarding a copy of the CBA letter of engagement dated 24 June 2002. Mr Jones wrote that Ferrier Hodgson envisaged that they would be able to report to the CBA within one month of receipt of their information requirements and advised that in accordance with their normal practice, a draft of the report would be provided to the directors of SDS for comment prior to submission to the CBA. The proposed fee was to be the lower of the time cost or $50,000. Acceptance of that was requested. Although the review was being conducted for the CBA, the accountant's fees were of course to be paid by SDS. A document setting out the information requirements in respect of each entity of the SDS Group – and IDQ – was annexed.
The accountants engaged by SDS to conduct the due diligence investigation of Pasdonnay were Deloitte Touche Tohmatsu ("Deloittes").
Deloittes set out the terms on which they were to act in that capacity in a letter to SDS dated 23 July 2002. The principal staff member at Deloittes with responsibility for the conduct of the due diligence investigation was Ms Rochelle Armstrong.
In mid‑July 2002 Mr Rear telephoned Mr Aaron Natoli, a Credit Analysis at HSBC, who was responsible for the Pasdonnay account. Rear advised Natoli of the proposed sale and arranged an appointment to discuss it with the State Manager for HSBC, Mr Geoffrey Farr.
Messrs Rear and Gilbert met with Messrs Farr and Natoli about 22 July 2002. They gave the HSBC representatives a presentation on Pasdonnay's current financial and business performance. In relation to the proposed sale, Mr Rear told them that part of the sale to SDS would involve HSBC needing to extend Pasdonnay's existing facilities (some $3.2 million) to SDS. Mr Natoli says he told them it was a term of the Agreement that SDS would take over Pasdonnay's debt with HSBC.
Farr's response was that SDS would first have to put a proposal to HSBC which would then consider it, but he warned that it was unlikely HSBC would extend the existing facilities to SDS.
So far as Mr Farr is aware, SDS never did put a written proposal to HSBC although there were some discussions with Mr Natoli.
On 29 July 2002 Ms Armstrong sent to Mr Peter Heeney at IDQ a copy of an information request list for his attention.
It is apparent at least some information had been provided by Pasdonnay to Deloittes reasonably promptly because there was a draft report in existence dated August 2002. Although obviously incomplete, that flagged a number of areas in which further information was required. Some of those were addressed in a fax from Ms Armstrong to Andrew Gilbert of IDQ on 2 August 2002.
In the meantime, probably towards the end of July 2002, Mr Natoli had a telephone conversation with Mr Benson. According to Natoli, Benson confirmed that SDS was looking for an arrangement whereby HSBC would allow Pasdonnay's liabilities to be assigned to SDS as part of the sale agreement.
As the figures in its interim financial statement suggested SDS was heading for a substantial loss for the full year to 30 June 2002, Natoli was reinforced in his view that HSBC was unlikely to assist SDS. He told Benson that. They arranged for Benson to attend to discuss the situation further with Natoli.
A few days later Mr Benson called on Mr Natoli at the bank. Amongst other things, Benson told Natoli about the Nautronix settlement and said SDS was expecting to receive between $10 million and $15 million by the middle of 2003.
In his statement (tendered without objection) Natoli said he asked Benson if SDS would pay out HSBC once the Nautronix settlement had gone through. He states Benson replied that SDS would make it a priority to repay that debt once settlement had been finalised. He said he asked Benson what would happen if the bank was unwilling to agree to the assignment of Pasdonnay's debt to SDS and that Benson replied they would have to look for another lender elsewhere.
Arrangements were subsequently made for Farr and Natoli to attend the SDS manufacturing facility at Canning Vale.
Prior to that Natoli made further enquiries about SDS. He was not reassured. He ascertained from the most recent SDS annual report (to 30 June 2001) that CBA was treating SDS debt as "current", from which he concluded CBA had concerns about SDS's ability to repay it. He also noted that SDS had significant debt at the time, in the order of $10‑13 million.
Mr Natoli reported all this to Mr Farr.
A couple of days later (it seems on 7 August 2002) they both went to the SDS factory at Canning Vale to meet Moir and Benson. Far told them that HSBC would not be able to assist SDS. The bank's preferred option was to rid itself of the Pasdonnay debt and it was not prepared to agree to any assignment of that debt to SDS. Farr asked Moir if he could get CBA to finance the takeout of the HSBC debt. He replied that CBA would not lend SDS any more money. Farr has not spoken to Moir or Benson since that meeting. However, in cross‑examination he made it clear what the bank was not prepared to do was rollover the Pasdonnay liability to SDS - it would have no difficulty giving its consent to a proposal that the bank be paid out at Completion. That, of course, is hardly surprising.
On 9 August 2002 Mr Benson sent by fax to Mr Gilbert a copy of the financial results for the SDS Group to June 2002. He requested details of IDQ's cash flow so that he could complete the consolidation for the new group for 2002‑2003.
Despite continuing exchanges of correspondence and information between the parties, problems were developing. They began to be apparent at a meeting between Ted Rear, Andrew Gilbert, Fred Moir, Kevin Benson and Lawrie Cook on 21 August 2002. Mr Cook's notes of that meeting are Exhibit P85.
Mr Cook began by suggesting that it would be convenient to discuss the progress and difficulties with the due diligence process.
Mr Benson said the process was to determine the net tangible asset position of IDQ and SDS was looking to convert trading stock quickly into cash. There was concern that the prospects of doing so did not appear good.
Other issues specifically referred to were a substantial increase in the reported value of work in progress, reported stock‑on‑hand (in particular, items of stock which were described as "test account" which were either used equipment or had been lost or disposed of) and an issue of obsolescence.
Mr Rear spoke of the background to the Agreement. He said that he had chosen to sell the business to SDS although he had at that time been approached by another party willing to invest in IDQ and Air Drill as a group. He said that he had recently again been approached by that person (that was in fact a Mr Thompson, although Mr Rear did not mention his name at the time) with a view to that person putting cash into IDQ. Such an injection of funds would have meant IDQ would not have its current cash flow difficulties.
After some other discussion about IDQ's cash situation and the company aircraft, Mr Cook said that led directly to Mr Rear's purpose in calling the meeting. He said that from an early stage in the negotiations for the proposed sale of assets Rear and Gilbert had been concerned about the ability of SDS to meet the cash commitment of $1,000,000 payable by 31 October 2002. He said the recent inability or unwillingness of SDS to provide interim funding to IDQ had again raised their concerns.
This was a reference to an earlier request by Mr Rear that SDS make a payment of $300,000 to Pasdonnay to alleviate problems Pasdonnay was having with its creditors. Moir and Benson told Rear that SDS had no obligation under the Agreement to make the payment and did not wish to do so.
At the meeting, Mr Benson explained that the problem SDS had with the request for interim funding was that IDQ had no unencumbered security against which it could be provided. SDS was not prepared to advance money at that stage and rank as a secured creditor behind the HSBC.
Mr Cook conceded that was a reasonable explanation for SDS not being prepared to advance additional moneys at that time.
There was further discussion about stock values and the financial structure of the Agreement. That culminated with Mr Cook saying that IDQ and Mr Rear were "very concerned" about SDS's ability to produce the $1,000,000 and now required evidence of SDS's ability to pay it.
Mr Moir said there were several possible sources of funds and repeated what he had said on earlier occasions that if necessary, he would personally provide the funds. Despite that, and notwithstanding mention of a possible sale to Boral of land at Welshpool owned by the SDS group and leased to Boral (the Welshpool property"), Mr Cook reiterated that the question remained whether SDS had the ability to meet its obligations and that IDQ and Mr Rear required evidence the funding was in place for the $1,000,000.
Mr Moir repeated that the funds would be available when required. He mentioned a verbal offer from a financier to provide a $1,000,000 advance against the Welshpool property or other sources, such as the Nautronix litigation.
It is clear none of this was satisfactory to the IDQ representatives – they wanted to know where the $1,000,000 would be coming from. According to the notes, at that point Mr Moir said he would be able to say where the money was coming from as soon as Mr Gilbert and Mr Rear answered the matters being raised in the due diligence process, which he thought could reasonably be expected in seven to ten days time. Mr Cook repeated the need to know the intended source of funds and requested written confirmation of the arrangements.
The notes record that Mr Benson then said SDS had an obligation under the Agreement to fund the money by 30 October and that was SDS's only obligation.
Mr Rear said he wanted assurance SDS was able to pay the $1,000,000 as he presently had the third party investor as a "fall back position". He was concerned that SDS could wait until the last minute and then simply advise that it did not wish to proceed. That was why he wanted to see where the money was coming from and why he wanted something in writing. Again, the notes record that Mr Benson said it did not matter where the money was coming from.
Finally, the notes record that Mr Cook explained the concern about SDS's ability to make the payment was heightened because the Agreement provided for handing over of the assets prior to the payment of the $1,000,000 on 31 October. He suggested a settlement date on which the assets would be handed over contemporaneously with the payment of the $1,000,000. To that, Mr Benson said he did not have a problem with such an arrangement, bearing in mind the completion date now looked like being within several weeks of 31 October. (It was common ground that the reference to 31 October was a misunderstanding – the contractual date was 30 October 2002.)
The plaintiff's contention is that this final reference in the notes reflects "a direct admission", well after the Agreement was executed on 5 July 2002, that Mr Cook and Mr Rear understood its provisions to require Completion first and payment of $1,000,000 subsequent to that. The plaintiff argues this view is emphasised by the content of Mr Cook's letter to Mr Moir dated 26 August 2002 under cover of which he forwarded a copy of the notes of the meeting, and in which he concluded:
"It is necessary to have the Sale Agreement altered to provide for the handover of IDQ assets at the time of payment of the $1,000,000 to IDQ on 31 [sic] October as discussed at the meeting."
It was Mr Rear's evidence that not only was he not told the extent of SDS's difficulties with CBA, but he asked Mr Moir about the position because he had heard rumours that SDS's bank had put restrictions on it. Mr Moir's response was that the problems with the bank had been addressed and were in the past. He conceded that he did not tell Mr Rear from what position the improvement was. In cross‑examination Mr Moir agreed that he did not tell Mr Rear that a condition had been imposed requiring a $2 million reduction in the CBA debt by 30 June 2002, that SDS had no assurance of any banking facility after that date, nor that the SDS account was being managed through the CBA Credit Management Unit in Melbourne and not through normal arrangements with the bank because the bank was concerned about the information it was receiving from SDS.
Mr Solomon submitted that not only did IDQ have the risk of being an unsecured creditor to SDS for $1 million for two years, but it also had the risk that, if SDS collapsed, Mr Moir's wealth (based largely on a huge shareholding in SDS) would diminish or disappear as well so that he either could not, or would not, perform under the Put Option at that time. Thus it is said that the first defendant (by Mr Rear) was induced to enter into the transaction to accept shares and convertible notes in consequence of the misleading and deceptive conduct of SDS (by Mr Moir) with respect to SDS's position with CBA.
The issue with respect to the payment of $1 million on 30 October 2002 may be shortly disposed of. The plaintiff accepts that the representation was made, but says it was in fact in a position to pay $1 million to Pasdonnay on 30 October 2002.
That submission is borne out by the evidence.
F Moir Holdings Pty Ltd had arranged a facility with St George Bank from which $1,950,000 was available. Mr Benson's unchallenged evidence about that was the sum could be found from cashflow. Mr Cowie said CBA was prepared to consider the grant of a $1 million facility to F Moir Holdings Pty Ltd.
As to the second representation, Mr Moir testified he told Mr Rear the company was making a cash profit and he believed the shares would go up because of the activity and the general upswing in the market.
Pasdonnay and Mr Rear are, in my view, to be taken as sophisticated purchasers. They were fully aware of SDS's trading performance from SDS's annual reports, ASX six monthly reports and other public information. Pasdonnay's knowledge of SDS's accounts extended to April 2002 management accounts of SDS's manufacturing subsidiary.
The accounts showed a year to date loss of $1,576,564 before tax and of $1,251,585 after tax. Mr Bonadao had told Pasdonnay that SDS was "in trouble" with its banks. That fact was also clear from its annual report - particularly that for 2001 and the note to balance sheet 20.
It was apparent from the documents available to Mr Rear that SDS was not trading profitably although, its six monthly report at 31 December 2001, disclosed that it was trading at a "cash surplus". That is the sense in which Mr Moir seemed to use the word "profitable" when speaking to Mr Rear. Mr Cook testified that he told Mr Rear in May 2002 that SDS was not trading profitably, and indeed was making losses.
I am satisfied there were quite extensive discussions between Mr Cook and Mr Rear concerning the SDS financial documents and reports available to them, which clearly revealed the SDS position. Indeed, it is quite likely that his appreciation of that significantly fuelled Mr Rear's concerns about whether SDS could perform.
On 8 April 2002, Mr Rear forwarded to Mr Cook an email from his daughter Catherine, extracting the SDS figures to 31 December 2001. They showed significant operating losses, a very poor liquidity position, and a very large increase in current borrowings.
In cross examination Mr Cook accepted that the published SDS annual report for 2001 "gave a very full disclosure of the fact that SDS has moved certain liabilities from non‑current into current". Note 20B to the item "Interest bearing liabilities" read:
"As a result of trading losses, the company's banking arrangements were reviewed and subsequently the bank borrowings were classified as repayable and included as a current liability".
Mr Cook agreed that in effect meant that the bank had decided it was going to treat the non‑current borrowings as current; and that it had in effect called up SDS's borrowings.
The management accounts to the end of 2002 likewise showed that both SDS and SDS Digger Tools had traded at a substantial loss to the end of April 2002. They too were the subject of discussion between Mr Cook and Mr Rear.
In the circumstances, and on the evidence as a whole, I am not satisfied that Mr Rear relied on any assertion by Mr Moir that SDS was trading profitably.
Nor am I persuaded that in the circumstances there was an obligation on Mr Moir to disclose the defendants those specific matters identified at [26.2] of the defence or at [4.6] of the defendants' amended outline closing submissions, to which I have already referred. SDS's financial position was sufficiently disclosed by material already published by it in the public domain and in fact available to the defendants. The circumstances of their dealings did not give rise to any reasonable expectation that the further precise or particular details identified would be disclosed.
So far as the pleading the plaintiff should have disclosed the CBA had exposure in excess of $3.6 million beyond the value of its securities is concerned, it is to be appreciated that was an internal assessment by the bank made for its own purposes. There is no evidence the plaintiff was aware of it. One cannot fail to inform of, or disclose, a matter of which one was not aware (Spedley Securities Ltd (in liq) v Bank of New Zealand (1991) ATPR 41‑413 at 53,065).
Paragraph 26 of the defence is not made out.
Relief
The plaintiff claims specific performance or damages in lieu.
The defendants rely on discretionary defences set out at [20] of the defence.
The first is that the plaintiff has been, and remains, in material breach by its failure to pay the $1 million by 30 October 2002. I have already dealt with that claim.
Alternatively, the defendants claim prejudice to IDQ through the set‑off arrangements between Ausdrill and SDS for the borrowing of up to $2 million to enable the plaintiff to repay the HBSC debt on settlement. It is said the defendants will be prejudiced because allowing the advance to be offset against moneys owing by Ausdrill or any of its related entities to the plaintiff or its related entities, could harm the interests of the first defendant as a creditor for the balance of the price and that cl 11 of the Agreement by interfering with the cashflow of the plaintiff.
I do not accept this. That outcome was always a possibility on performance of the Agreement. The fact that the Agreement may be performed according to its terms but with consequential financial effects thought by the defendants to be undesirable from the point of view of their interests, when that has always been a possibility, is not something which ought to lead to the discretionary refusal of an order for specific performance. In any event, the contention is essentially speculative, the evidence does not show the apprehended harm to the defendants' interests in that way would be a necessary, or even likely, outcome.
The defendants argue that the Agreement is not suitable for specific performance because of the need for Pre‑completion Accounts and the certificate under cl 4.4 and the question how HSBC is to be settled consistently with the Agreement "because HSBC will not consent to the assignment of liability performance is impossible". I have already dealt with the last point. HSBC will consent to being paid out at settlement. That is the effect of what is provided for in the Agreement.
It may be accepted as a practical matter, that the Pre-completion Accounts would best have been done prior to the commencement of the due diligence inquiry, or at least in conjunction with it, as Mr McPharlin said both in cross‑examination and re‑examination. But the fact is it was not done that way. That does not mean the process cannot now be completed as contemplated by the Agreement. Furthermore, as Mr McPharlin agreed in re‑examination, preparation of the Pre-completion Accounts would require the vendor to provide the purchaser with details of the assets, liabilities, gross turnover, expenses and all other details that one would see in a balance sheet and profit and loss account and in that way the burden would accordingly be substantially on the vendor. The point advanced does not stand in the way of specific performance.
The issue whether SDS is ready, willing and able to perform is to be determined in light of all the relevant circumstances. In Bahr v Nicolay (No 2) (1988) 164 CLR 604 at 619, Mason CJ and Dawson J, having acknowledged that in general, the plaintiff in an action for specific performance must establish that he has performed the contractual obligations to be performed on his part before the commencement of the action and that he is ready and willing to perform his future obligations under the contract, noted that:
"But the plaintiff is not required to show that he has complied strictly with all his obligations under the contract (Fullers' Theatres Ltd v Musgrove (1923) 31 CLR 524, at p 550) or that he is ready and willing to comply strictly with his future obligations. As Barwick CJ pointed out in Mehmet v Benson ((1965) 113 CLR 295, at p 307):
'The question as to whether or not the plaintiff has been and is ready and willing to perform the contract is one of substance not to be resolved in any technical or narrow sense. It is important to bear in mind what is the substantial thing for which the parties contract and what on the part of the plaintiff … are his essential obligations.'
See also the comment of Windeyer J that readiness and willingness 'relates only to essential terms' (1965) 113 CLR, at p 314). In that case the purchaser obtained specific performance despite his failure to pay an instalment of the purchase price in time, a failure which would have entitled the vendor, had he chosen, to terminate the contract. Specific performance secured to the vendor the consideration promised to him by the purchaser, namely the purchase price, compensation being awarded for the purchaser's delay in making payment. See as well the remarks of Lord Radcliffe in Australian Hardwoods Pty Ltd v Commissioner for Railways [1961] 1 WLR 425, at p 432; [1961] 1 All ER 737, at p 742), which may state the position too adversely to a plaintiff in so far as they may be taken to suggest that a plaintiff who is in breach of an interdependent obligation cannot obtain specific performance."
At 621 their Honours noted that the statement that the plaintiff bears the onus of proof of readiness and willingness may need some qualification insofar as it relates to the plaintiff's ability to perform by paying the purchase price at some indefinite time in the future. Their Honours referred to Mehmet v Benson (1965) 113 CLR 295 at 315 in which Windeyer J was prepared to participate in ordering specific performance, even though he was not convinced that the plaintiff was then ready and willing to complete the contract. That was because his Honour thought the order should have contained a proviso to meet the situation if the plaintiff had proved unready to complete by payment in full.
I am satisfied that SDS has demonstrated it is ready, willing and able to complete as at the date of trial, which I take to be the relevant time (see Spry "Equitable Remedies", 6th Ed, 217‑218, J C Williamson Ltd v Lukey (1931) 45 CLR 282, 298 and Price v Strange [1978] Ch 337).
Byrne J expressed the position with clarity in Eskin, Erenli & Balkaya v Trewin, unreported; SCt of Vic; 8307/91; 15 June 1995:
"The requirement that a party who seeks specific performance should be ready and willing to perform is, in a case such as this, another way of saving (sic) that where a plaintiff seeks to obtain specific performance of a contract, the court must be satisfied that the defendant is also obtaining performance of the obligation on which the plaintiff's right depends, a question which must be considered at the time of trial."
SDS will be able to pay out HSBC if ordered to complete. It has a facility of $2 million from AusDrill Ltd and Mr Benson's unchallenged evidence was that the balance may be funded out of cashflow. I accept the plaintiff's submission that it is material to bear in mind that because Pasdonnay refused to provide SDS with the necessary due diligence information, the occasion for SDS to make application for other facilities never arose.
I turn to the defendants' final submission against an order for specific performance. It is that specific performance should be refused on the grounds that the plaintiff's affidavits in support of the interlocutory injunctions misled the court, and were false.
Mr Solomon refers in that regard first to Mr Benson's affidavit sworn 15 November 2002 (ex D1). At [9] Mr Benson deposed that on 12 June 2002, SDS's directors, Fred Moir, Vincent Rizzo and he met with Mr Cowie, SDS's Account Manager, and Gary Butcher, a Senior Manager of CBA, to review SDS's financial position and to discuss the Drill Quip purchase transactions. He deposed that at that meeting Mr Cowie and Mr Butcher said in effect, that CBA was likely to support the Drill Quip purchase subject to SDS satisfying CBA that the transaction was viable. Mr Solomon says that last statement was false.
It was Mr Cowie's evidence that at that meeting he said words to the effect that CBA was likely to support the proposed acquisition of Pasdonnay's assets by SDS if SDS satisfied CBA that its cashflows after Completion (that is, the cashflows of the merged businesses) would be satisfactory. Mr Benson's statement correctly reflected that position.
At [17] of his affidavit of 15 November 2002, Mr Benson referred to a meeting between Mr Moir, Mr Rizzo and him with Mr Cowie and Mr Butcher on 22 October 2002 for the purpose of providing the CBA representatives with an update of SDS's financial performance and to discuss amongst other things, the Drill Quip purchase. He stated that at that meeting Mr Cowie and Mr Butcher said, in effect, that CBA required Deloittes' due diligence investigations for SDS to be completed and that Ferrier Hodgson would then review Deloittes' due diligence report and then report to CBA, before CBA would provide consent to the Drill Quip purchase as contemplated by cl 4.1 of the Agreement.
The notes of that meeting (ex P166) read in relation to the purchase of IDQ:
"The purchase of the competitor, Drill Quip, has been deferred, as the directors of Drill Quip have not been prepared to provide Deloittes with all relevant information to complete the due diligence. Fred Moir stated that he had instructed his solicitors to commence legal action for breach of contract against Drill Quip".
Under the heading "MOIR PRIVATE GROUP OF COMPANIES" appears item 3:
"Purchase of Drillquip business - $1m. The existing contract between SDS and Drillquip states that SDS has to pay Drillquip $1m after 90 days of the contract being signed. While the existing contract is in dispute and is now the subject of legal action, Fred Moir wishes to have the availability of the $1m in case the dispute is resolved and he has to prove to the Court that he can complete the conditions of the contract."
Mr Solomon submits that apparently the second and third paragraphs of Annexure KVB‑12 to Mr Benson's affidavit are false. That annexure is a facsimile message from Thomsons to Mr Peter Bogue dated 8 November 2002. The impugned paragraphs read:
"Commonwealth Bank of Australia ('CBA') has been unable to complete its assessment of the purchase because your clients have failed to comply with their obligations under Clause 4.3.1 of the Business Asset Sale Agreement ('the Agreement') - that is, because SDS is not, absent the completion of due diligence, able to satisfy CBA it should give its consent.
In those circumstances, your clients are not entitled to terminate the Agreement for non satisfaction of condition precedent 4.1.4 and our client rejects your clients' purported termination."
It seems to me the first of those paragraphs could not be said to be a false statement of the position at that time. The second of them merely asserts the plaintiff's view of the legal position in light of what is said in the preceding paragraph.
Mr Solomon then refers to Mr Benson's affidavit sworn 17 October 2002 (ex D51). He asserts that [19] and [22.3] are false.
Paragraph [17] of that affidavit reads:
On 7 August 2002, Mr Moir and I met Geoff Farr, the Western Australian State Manager of HSBC and Mr Natoli. Because, as appears from the paragraphs above, Pasdonnay has effectively prevented SDS from completing its due diligence investigation, SDS has not been able to make a proposal to HSBC so as to enable it to obtain the Bank's consent to the sale and purchase."
Certainly that meeting did occur. What was discussed at that stage was the possibility of HSBC consenting to SDS taking over Pasdonnay's liability to HSBC. Mr Farr made it quite clear HSBC would not be interested in that. The paragraph makes no mention of that. It was true that as at October 2002 SDS had not made a formal proposal to HSBC for the purpose of obtaining its consent to the transaction and at that time Pasdonnay had effectively prevented SDS from completing its due diligence investigation, the two were not necessarily linked in quite the way that paragraph implies. There would have been no real point in SDS making a formal proposal to HSBC before completion of the due diligence inquiry - the outcome might have been that SDS chose not to proceed. What is in the paragraph is not incorrect, but it is artfully drawn and comes close to demonstrating less than the degree of frankness required on an application of that kind. Ultimately, however, I take the view it should not carry me to the point of a discretionary refusal of the relief claimed.
In [22.3] Mr Benson deposed that SDS had the capacity to raise funds to re‑finance, or to satisfy HSBC it could perform all the obligations under Pasdonnay's HSBC loan and to meet all its other obligations under the Agreement including that under cl 11.1. He deposed that the obligation under cl 11.1 would be satisfied by a facility offered by St George Bank to F Moir Holdings Pty Ltd. In that regard he annexed as "KVB9" a copy of an offer of facility from the bank to F Moir Holdings Pty Ltd dated 4 October 2002. In that letter, St George Bank offered F Moir Holdings Pty Ltd a bill acceptance and discount facility of $1,950,000. Mr Solomon refers to Mr Cowie's notes at p 65 of exhibit P166 of the meeting on 22 October 2002. Those notes show the Moir Group had existing debts of $2.84 million and that Mr Moir was seeking further borrowings from CBA, including to enable payment of the $1 million under the Agreement. Whatever Moir's dealings with CBA at that time may have been, the evidence does show that the St George facility was available. I am not satisfied the assertion of falsity has been made out.
Finally, for the defendants, it is said that the statements at p 3 of Thomsons' letter to Mr Bogue dated 30 September 2002 (p 110 of Mr Benson's affidavit of 17 October 2002), concerning the status of dealings with HSBC at that date, particularly at point 4, were false.
The matters referred to are a mix of responses by Thomsons to earlier assertions in correspondence on behalf of the defendants, and requests for further information or material. It is not apt to characterise them as false statements.
None of the matters advanced on behalf of the defendants in support of their contention that specific performance should be refused as a matter of discretion have been made out. I am satisfied that an order for specific performance should be made.
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: SDS CORPORATION LTD -v- PASDONNAY PTY LTD & ANOR [2004] WASC 26 (S)
CORAM: ROBERTS-SMITH J
HEARD: 4-6, 10-11 NOVEMBER 2003 & 17 FEBRUARY 2004
DELIVERED : 27 FEBRUARY 2004
PUBLISHED : 5 APRIL 2004
SUPPLEMENTARY
DECISION :17 FEBRUARY 2004
FILE NO/S: CIV 2435 of 2002
BETWEEN: SDS CORPORATION LTD (ABN 73 007 980 645)
Plaintiff
AND
PASDONNAY PTY LTD (ABN 86 009 131 622)
First DefendantIAN GRAEME REAR
Second Defendant
Catchwords:
Practice and procedure - Civil trial - Chamber summons for leave to reopen trial - Application to reopen after completion of evidence and addresses but before judgment
Legislation:
Nil
Result:
Application dismissed
Category: B
Representation:
Counsel:
Plaintiff: Mr D R Kilpatrick
First Defendant : Mr D H Solomon
Second Defendant : Mr D H Solomon
Solicitors:
Plaintiff: Williams & Hughes
First Defendant : Solomon Brothers
Second Defendant : Solomon Brothers
Case(s) referred to in judgment(s):
SDS Corporation Ltd v Pasdonnay Pty Ltd & Anor [2004] WASC 26
Smith v New South Wales Bar Association (1992) 176 CLR 256
Urban Transport Authority v Nweiser (1992) 28 NSWLR 471
Watson v Metropolitan (Perth) Passenger Transport Trust [1965] WAR 88
Case(s) also cited:
Nil
ROBERTS-SMITH J: The trial of this action was held in November 2003. Judgment was reserved.
On 10 February 2004, whilst judgment was still pending, the plaintiff filed a chamber summons by which it sought orders that the trial be re‑opened and the plaintiff have leave to adduce further evidence.
The chamber summons was supported by the affidavit of Mr Ken Vincent Benson sworn and filed on 9 February 2004 and that of Laura Anne Del Fuoco sworn and filed on 10 February 2004. the defendants filed an affidavit of Ian Kenneth Bellamy sworn and filed 11 February 2004 in opposition.
The chamber summons came on for hearing on 17 February 2004. Judgment was for the plaintiff.
Having heard the submissions of counsel, I refused the plaintiff's application, with costs.
Judgment in the action proper was delivered on 27 February 2004.
When dismissing the plaintiff's application to re‑open on 17 February 2004, I did not give reasons and indicated I would not do so unless requested by the parties.
Counsel for the plaintiff at that time requested that I publish reasons.
These are those reasons.
I shall not set out the details of the action nor the evidence. They are set out in my judgment delivered 27 February 2004 (SDS Corporation Ltd v Pasdonnay Pty Ltd & Anor [2004] WASC 26). These reasons should be read with that.
In his affidavit Mr Benson deposes that SDS sought to lead evidence of capital raising it had undertaken. He considers that the capital which SDS had raised is relevant to the question of SDS's ability to perform its obligations pursuant to the Business Assets Sale Agreement ("the Agreement") which it entered into with the defendants.
He deposes that the prospect of capital raising and placement was first raised in a meeting on 19 November 2003 with the representatives of Bell Potter Securities in Adelaide. In December 2003 SDS secured commitments from investors to contribute the sum of $16.5 million by way of the issue of 30,000,000 fully paid ordinary shares in SDS at an issue price of 55 cents. The commitments from the investors were expressed to be subject to SDS obtaining shareholder approval for the capital raising at an extra‑ordinary general meeting of SDS which was scheduled for 23 January 2004. The resolution for placement of the new shares to the investors was passed at that meeting. An announcement to that effect was subsequently made to the ASX on 27 January 2004.
According to Benson, on 28 January 2004 SDS received $16,046,250 representing the proceeds of the issue of 13,000,000 fully paid ordinary shares in SDS less costs associated with the capital raising. On 28 January 2004, SDS issued 30,000,000 full paid ordinary shares.
He deposes that the sum of $1,500,000 has been set aside and is held on deposit by SDS as part of a larger sum that SDS has held on deposit. With it SDS is able to satisfy its obligations under the Agreement in the event the court makes an order for specific performance.
Benson further deposes that SDS seeks to lead evidence in relation to the movement in its share price on the ASX since judgment was reserved on 11 November 2003. He attaches a schedule disclosing SDS's share price for the period 11 November 2003 to 4 February 2004, and states that SDS's then current share price was 69 cents. Finally, he deposes to his belief that SDS's share price is relevant to the question whether the defendants are likely to suffer loss as a consequence of reliance on the alleged representations pleaded in the defence and in particular whether the discretion to grant relief has been enlivened.
The purpose of Ms Del Fuoco's and Mr Bellamy's affidavits was simply to annex copies of correspondence between the solicitors for the parties, as to the plaintiff's intention to seek an order re‑opening the trial, the evidence sought to be led and the reasons for the defendants' opposition to that.
However, it is from that correspondence that the evidentiary issues sought to be raised by the plaintiff and the defendants' response to them, may be discerned.
For the plaintiff it is said that SDS has recently raised $16.5 million by way of share issue and that is relevant to its ability to settle pursuant to the Agreement. Further, it is said the then current (February 2004) share price is 75 cents and it has been at similar levels for three months or so. That is relevant to the question whether the respondents suffered or are likely to suffer any loss as a consequence of the representations pleaded in the defence and in particular whether the relief sought should be granted.
For the defendants it is said that evidence concerning the share issue and its impact on the share price is not fresh evidence. That position is argued because it is contended the plaintiff must have taken steps or developed a strategy concerning that before the trial ended and that was the time for the issue to have been litigated. It is further argued that evidence concerning the recent share price is no answer to the defendants' claim of loss. That was said to be because recent trading at a particular price is not evidence of the volume of shares traded each day in the relevant period, and the parties who traded (and in particular whether any buyer or seller had any connection with Mr Moir) or whether the defendants would be able to sell the shares to be granted to them, at particular prices, at all, or without collapsing the market.
The arguments of the solicitors for the parties descended to greater particularity than this, but what I have already said is sufficient for the purposes of this application.
There are no affidavits from deponents who would give the further evidence the plaintiff is seeking leave to adduce. For that reason, Mr Kilpatrick, who appeared for the plaintiff, applies to have the chamber summons adjourned to a special appointment so that witness statements can be filed and discovery given. The programming directions suggested by the plaintiff mean the trial could not be re‑listed until early March 2004. I am listed to be on circuit that month and otherwise listed, committed or out of the jurisdiction until the end of September 2004. Then there would be the time taken for the further actual hearing.
Mr Kilpatrick submits that notwithstanding the listing difficulties, the proper time for determining the application would be when all the witness statements were before the court and the position could not properly be assessed until then.
Alternatively, Mr Kilpatrick submits that if the application were to be dealt with today, it would have to be on the basis the plaintiff's evidentiary case was taken at its highest.
In the further alternative, he submits that I could hand down "preliminary reasons" and if the outcome turned on either a lack of liquidity or the representations regarding the share price pleaded in the defence, then at that stage I could consider whether to allow the plaintiff to re‑open, on the basis the application to do so had been made at the first available opportunity.
Mr Solomon points out the action has been tried in the Expedited List, the defendants are under continuing serious interlocutory restraint of their business and there is the very serious health issue of the second defendant. He submits that any delay would be extremely prejudicial to the defendants. There are likely to be evidentiary issues which would need to be canvassed and they could take some time. Further discovery might be required and there may be a need for the defendants to issue third party subpoenas.
The relevant principle in determining an application for leave to re‑open is "whether the interests of justice are better served by allowing or rejecting the application" (Urban Transport Authority v Nweiser (1992) 28 NSWLR 471 at 478, per Clarke JA (with whom Mahony and Maher JJA agreed).
Different considerations may apply depending upon whether the case is simply one in which the hearing is complete (Watson v Metropolitan (Perth) Passenger Transport Trust [1965] WAR 88) or one in which reasons for judgment have already been delivered. In the former situation (which is this case) the primary consideration is that of the embarrassment or prejudice to the other side (Smith v New South Wales Bar Association (1992) 176 CLR 256 per Brennan, Dawson, Toohey and Gaurdron JJ at 267).
To my mind, the circumstances referred to by Mr Solomon carry substantial weight. They demonstrate very real prejudice to the defendants should the application be granted. In the circumstances, and even taking the proposed evidence for the plaintiff at its highest, the interests of justice are in my view clearly better served by rejecting the application.
The plaintiff's chamber summons will be dismissed.
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