Snow Factories SA v Bucceri
[2005] QSC 174
•5 July 2005
SUPREME COURT OF QUEENSLAND
CITATION:
Snow Factories SA & Anor v Bucceri & Ors [2005] QSC 174
PARTIES:
SNOW FACTORIES SA (INCORPORATED IN BELGIUM)
(first applicant)
and
SNOW FACTORIES PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) ACN 104 643 209
(second applicant)
v
ALFIO BUCCERI
(first respondent)
and
BUCCERI CONSULTING PTY LTD ACN 091 427 100
(second respondent)
and
HYDRO-TURBINE DEVELOPMENTS PTY LTD
ACN 107 964 965
(third respondent)FILE NO:
BS3698 of 2005
DIVISION:
Trial Division
PROCEEDING:
Application
DELIVERED ON:
5 July 2005
DELIVERED AT:
Brisbane
HEARING DATE:
26 June 2005
JUDGE:
Wilson J
ORDER:
Dismiss the application
CATCHWORDS:
TRADE AND COMMERCE – ENFORCEMENT AND REMEDIES – INJUNCTIONS – INTERLOCUTORY AND “INTERIM” INJUNCTIONS – GENERALLY – restraint of trade – construction of agreement – validity, reasonableness and enforceability of restraint clause – whether serious question to be tried
TRADE AND COMMERCE – ENFORCEMENT AND REMEDIES – INJUNCTIONS – INTERLOCUTORY AND “INTERIM” INJUNCTIONS – BALANCE OF CONVENIENCE – restraint of trade – where goodwill in the applicants’ business and livelihood of respondents at stake – whether undertaking adequate security – where respondents undertake to keep full accounting records – complexity of proceeding and timing of trial dates
Geraghty v Minter (1979) 142 CLR 177, applied
COUNSEL:
PL O’Shea SC and DG Clothier for the first and second applicants
RG Bain QC and JW Peden for the first, second and third respondentsSOLICITORS:
Freehills for the first and second applicants
Russell and Company for the first, second and third respondents
Wilson J: In this proceeding the applicants claim permanent injunctions to restrain breach of a restraint of trade covenant. The present application is for an interlocutory injunction.
The first applicant is a foreign company and the second applicant is a company in liquidation. In support of their undertaking as to damages they offer a bank guarantee in the sum of $200,000.00.
It is not disputed that the first respondent either personally or through the second and third respondents has engaged in and proposes, unless enjoined, to engage in conduct which constitutes breach of the relevant obligation. The respondents offer to keep full accounting records if the injunction is refused.
The first respondent (“Mr Bucceri”) is an inventor of snow making and related technologies. He has a worldwide reputation. Before May 2003, he and Select Contracts Ltd (“Select”) owned a number of companies which carried on business developing and commercially exploiting those technologies throughout the world. Select is a company based in Dubai and controlled by Ms Fiona Sutton.
The principal companies involved in the business were Bucceri Technologies Pty Ltd (a research and development company) and the second respondent. Mr Bucceri and Select owned 30% and 70% of Bucceri Technologies Pty Ltd respectively. Mr Bucceri owned 100% of the second respondent. These and other associated companies owned significant intellectual property including about 30 worldwide patents.
Before May 2003 MKM Commercial Services Co (“MKM”) was an indirect funder of the business. It is controlled by Sheikh Mana Bin Khalifa al Makhtoum of Dubai. By late 2003 the business required further funding and MKM was approached. Negotiations ensued and agreement was reached about a restructuring of the business. The restructuring involved:-
(a) the incorporation of the second applicant;
(b) the purchase of the business by the second applicant;
(c) the shares in the second applicant being held by MKM (70%), Mr Bucceri (15%) and Select (15%);
(d) representatives of MKM, Mr Bucceri and Ms Sutton being appointed as directors of the second applicant.
This restructuring was effected by series of agreements and related documentation executed in May 2003. The deal structure was outlined in a Memorandum of Understanding dated 5 May 2003. It provided (inter alia) for the execution of a shareholders agreement covering funding, board representation, shareholdings, and a restraint of trade clause. It also provided for Mr Bucceri to be engaged on a consultancy basis for three years.
The subscription and shareholders agreement was made on 28 May 2003. It provided in clause 9:-
“9. Non Competition
(a)No Shareholder must do and each Shareholder must ensure that none of its Related Bodies Corporate or Associates does any of the following anywhere in the world until 2 years after the Shareholder has ceased to hold any Shares:
(1)directly or indirectly conduct (whether alone or in partnership or joint venture with anyone else) or otherwise be concerned with or interested in (whether as trustee, principal, agent, shareholder, unit holder or in any other capacity) any business which is similar to or competitive with the Business including any planned expansion or diversification of the Company’s business (so long as the planned expansion or diversification still falls within the definition of Business in this agreement) which has been the subject of consideration by the Board prior to the Shareholder ceasing to hold any Shares; or
(2)accept from any person or corporation which is a customer or client of the Company or any of its subsidiaries, or who was in the previous year a customer or client of the Company or any of its subsidiaries, any business of a kind which forms or may ordinarily form part of the Business.
(b)Bucceri must not and must ensure that none of his Associates:
(1)use the name “Bucceri” in connection with the words “Snow Making” or “Snow” for any reason; or
(2)uses any name suggesting an association between the name “Bucceri” and snow making machines manufactured or distributed by or any intellectual property rights of the Company,
anywhere in the world until 2 years after Bucceri has ceased to hold any Shares.
(c)Select must not and must ensure that none of its Associates or Related Bodies Corporate:
(1)use the name “Bucceri” in connection with the words “Snow Making” ” or “Snow” for any reason; or
(2)uses any name suggesting an association between the name “Bucceri” and snow making machines manufactured or distributed by or any intellectual property rights of the Company,
anywhere in the world until 2 years after Bucceri has ceased to hold any Shares.”
Relevantly “Business” was defined as:-
“… … the business of:
(a)researching, developing and commercialising snow production technology; and
(b)manufacturing, marketing, distributing, licensing and selling snow making products and related products,
and all related activities carried on by the Company anywhere in the world”
There was provision for loan funding by MKM and for the second applicant to execute a charge in favour of MKM: see clause 3. In discharge of that obligation the second applicant executed a fixed and floating charge in favour of MKM.
At about the same time a consultancy agreement was executed between Mr Bucceri and the second applicant. It provided for Mr Bucceri to provide consultancy services (clause 2.1) for a period of three years (clause 6.1) in return for remuneration as follows:-
“3.1 The Consultant’s remuneration shall be A$180,000 per annum (excluding GST), payable monthly on the 15th of each month. In addition, a bonus of A$220,000 per annum (excluding GST) will be payable in respect of any Year in which the Company sells snowmaking machines with an aggregate price of at least A$600,000 (excluding GST). Any bonus earned is payable one month after the end of the Year to which it relates.”
In consequence of the restructuring:-
(a) MKM paid $1.4 million by way of subscription price for its shares. Part of this was used to pay the purchase price for the business. This was not secured by the charge;
(b) MKM advanced funds to pay for the balance of the purchase price of the business;
(c) as a result of certain directions and forgiveness of debt, some of the purchase price for the business was returned to MKM by the recipients of it and the debts owing from Select to MKM and from the vendor companies (including Bucceri Technologies Pty Ltd and the second respondent) to Select were forgiven or satisfied;
(d) part of the funds paid or advanced by MKM were used to pay approximately $160,000.00 to the second respondent for certain equipment.
On 7 October 2004 MKM appointed receivers and managers to the second applicant. With further funding from MKM, the receivers continued to operate the business, paid all unrelated creditors and took steps to sell the business. The receivers did not adopt the consultancy agreement.
On 14 April 2005 the receivers sold the business to the first applicant, which is a related entity of MKM. The first applicant took an assignment of the restraint of trade clause in the subscription and shareholders agreement. Notice of the assignment was given to Mr Bucceri.
By clause 6.2 of the business sale agreement:-
“6.2 Contracts Referred to in Part B of Schedule 6
(a)The Seller assigns to the Buyer the benefit of any rights, powers and benefits conferred on the Seller pursuant to the contracts referred to in Part B of the Schedule 6 including the benefit of any restrictive covenants contained in those contracts to the maximum extent possible under law.”
The subscription and shareholders agreement was one of those listed in Part B of Schedule 6. A deed of assignment was executed on 14 April 2005. The operative provision was clause 2 in the following terms:-
“2 Assignment
(a)The Assignor absolutely and unconditionally assigns the benefit of the Contract to the Assignee with effect on and from the Effective Date.
(b)The Assignee accepts the assignment in clause 2(a).
(c)The Assignee indemnifies the Assignor and agrees to keep the Assignor indemnified from and against any Claims arising directly or indirectly in relation to the Contracts or Assets Leases after the Effective Date.”
A notice of the assignment was given to Mr Bucceri on 5 May 2005.
On 15 April 2005 the Supreme Court made a winding up order against the second applicant on the application of the second respondent.
It is for the applicants to establish that there is a serious question to be tried. The reasonableness of the restraint of trade is to be assessed as at the time the subscription and shareholders agreement was made.
By paragraph 10 of their defence the respondents pleaded:-
“As to paragraph 13 of the statement of claim, subject to the matters pleaded in this defence, and in the premises:-
(a)the respondents admit that all of the parties to the SSA had a legitimate interest in making the restrictive covenant in clause 9 thereof; and
(b)the respondents admit that the restrictive covenant in clause 9 thereof was reasonable, save that they deny that the length of time in the restraint was reasonable; and
(c)the respondents admit that the restrictive covenant in clause 9 thereof was capable of assignment in conjunction with a sale of the Business provided that:-
(i)the sale was an arms length sale; and
(ii)the purchaser took both the burden and the benefit of the said covenant or, if the purchaser was unable or unwilling to take the burden, Snow Factories Australia remained willing and able to discharge the burden.”
The respondents contend that the restraint is unreasonable because it is for 2 years after a shareholder ceases to hold any shares, and in the case of a winding up, a shareholder would continue to be such until the liquidation was completed and the company deregistered. Thus, the respondents submit, the shareholder would be left with useless shares but bound to the restraint for a time that was both indeterminate and excessive. The applicants submit that the nature and scope of the business, the transactions, and Mr Bucceri’s reputation objectively make the restraint a reasonable one. There is sufficient disagreement here for me to conclude that this issue is one which ought to be tried.
Then the respondents submit that the applicants are not entitled to an interlocutory injunction because they have denied him work as a consultant and payment of consultancy fees. The consultancy agreement was between the second applicant and Mr Bucceri. The respondents’ contention is that even if the obligations contained in the restraint of trade on the one hand and the consultancy agreement on the other were not conditional upon one another, the two obligations were sufficiently related for the applicants to be denied injunctive relief. They relied upon the principle summarised by Gibbs J in Geraghty v Minter (1979) 142 CLR 177 at 187:-
“He who comes to equity must do equity, and parties who seek equitable relief by injunction to enforce a covenant in restraint of trade ‘cannot obtain such relief unless they allege and prove that they have performed their part of the bargain hitherto and are ready and able also to perform their part in the future’: Measures Brothers Ltd v Measures [1910] 2 Ch 248 at 254, cited in Kaufman v McGillicuddy (1914) 19 CLR 1 at 10-11. The same principle was recently applied by the Court of Appeal in Shell UK and Co v Lostock Garage Ltd [1976] 1 WLR 1187 at 1199, 1202, 1206.”
Senior counsel for the respondent submitted that this was a case of one element of an integrated set of elements making up a single transaction no longer being able to be performed because one of the venturers saw fit to appoint receivers to the business, to cease to conduct the business, and to cease to allow the opportunity for the consultancy agreement to be performed. Mr Bucceri had, he submitted, been left out in the cold, and this was impermissible.
In my view there clearly is a serious question to be tried as to the inter dependence of these obligations.
There was then a question of the proper construction of the restraint, the respondents submitting that the first applicant is itself in breach of the restraint because it is a company related to MKM. The applicants drew attention to the definition of “Business” set out above, submitting that the words “carried on by the company” are descriptive of the business. They submitted that to purchase the business is not to compete with it but to conduct the business itself. Counsel for the respondents submitted that what had been made over to the first applicant was no longer the Business, and no longer the subject of or supported by the restraint clause. These are matters properly for determination at trial.
In principle the benefit of a restraint of trade can be assigned along with the goodwill of the business; see Geraghty v Minter at 180 per Barwick CJ. To overcome argument at this stage that the restraint could not be assigned, the second applicant (in whose favour the restraint was originally given) became a party to the proceeding. Further, the first applicant had a contractual right given by clause 6.2(c) of the business sale agreement to bring the proceeding as agent of the second applicant to protect the rights of them both.
I have concluded that there are serious issues to be tried as to the validity and enforceability of the restraint. I turn then to the balance of convenience.
The applicants submitted that unless an injunction were granted, goodwill in the business would be eroded, third party rights might intervene, and there might be an adverse effect on the final relief claimed in the proceeding. They offered a bank guarantee in support of their undertaking as to damages in the sum of $200,000.00.
The respondents submitted that if an injunction were granted Mr Bucceri would be kept out of his livelihood. They pointed out that if the respondents made arrangements with third parties, they did so at their own risk. Further, Mr Bucceri was not seeking to make use of any existing intellectual property but to start afresh. He was prepared to keep full accounting records. They submitted that $200,000.00 was inadequate security in support of the undertaking compared with the potential gain to Mr Bucceri under the consultancy agreement. They wanted any injunction conditioned on payment of consultancy fees to Mr Bucceri (to be refunded in the event the applicants were ultimately successful). There was dispute as to the complexity of the proceeding and how soon a trial might be heard.
There is force in the respondents’ submissions. In my view the balance of convenience is against the grant of an injunction.
I dismiss the application, on condition that the respondents keep full accounting records.
I will hear counsel on the form of the order and on costs.
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