Southern Equity Holdings Ltd v Balmoral Corpn Ltd & Anor No. Scciv-99-752

SOUTHERN EQUITY HOLDINGS LIMITED (plaintiff)
v
BALMORAL CORPORATION LIMITED (respondent)
and
GRANVILLE TAYLOR (appellant)
[2004] SASC 122
Miscellaneous appeal

PERRY J: This is an appeal against what have been described as two interlocutory judgments of a Master made on 15 August 2003 and 5 November 2003 respectively.
The proceedings were instituted by Southern Equity Holdings Limited (“SEQ”) against Balmoral Corporation Limited (“Balmoral”) on 28 June 1999.
Balmoral issued a third party notice against Granville Taylor (“Mr Taylor”), who is the appellant in the present appeal.
SEQ and Balmoral settled the proceedings between them before trial, on terms which remain undisclosed. SEQ filed a notice of discontinuance of the action as against Balmoral on 1 March 2002.
Balmoral filed a notice of discontinuance of its third party claim against Mr Taylor on 28 February 2002.
If the situation then arising was to be governed by SCR r 52.03, one effect of the filing of the notice of the discontinuance of the third party proceedings would be to saddle Balmoral with a liability to pay the costs of Mr Taylor calculated up to the date of the delivery of the notice of discontinuance.
Ordinarily those costs would be taxed on a party and party basis.
However, Mr Taylor says that he is entitled as against Balmoral to costs on a more favourable basis than party and party costs. He asserts that this is so by reason of the terms of the document described as a “Deed of Indemnity” made on 28 August 1988 entered into between Balmoral, SEQ and certain individuals described as “directors”, one of whom is the appellant Mr Taylor.
In reasons for a ruling delivered on 15 August 2003, the Master dealt with Mr Taylor’s assertion that, rather than party and party costs, he was entitled to indemnity costs, by reason of the terms of the “Deed of Indemnity”.
Although described as a judgment, the reasons are really reasons which support a ruling on a preliminary issue which was raised at the commencement of, or before the commencement of, the taxation of a bill of costs lodged by Mr Taylor.
The Deed of Indemnity included a covenant by Balmoral to indemnify and keep indemnified SEQ and “the directors” (which as I have said includes Mr Taylor) from any actions, claims etc. including any “costs” which may be incurred by the directors “by reason of or in connection with or as a consequence of or on account of any materially incorrect or misleading statement or any material omission from the Balmoral Information Memorandum”.
The “Balmoral Information Memorandum” was a document generated by Balmoral which contained information material to the making of a decision by SEQ as to whether it would, by a deed of arrangement with its shareholders, agree to a merger with Balmoral.
The merger was approved by a meeting of the shareholders of SEQ. Subsequently Millhouse J sitting as a judge of this court, approved the merger pursuant to s 411 of the Corporations Law (as it then was). The order of approval was made on 18 November 1998.
Sengate Pty Ltd (“Sengate”), an interested party, appealed the approval of the Scheme of Arrangement (“the Sengate appeal”).
Both before Justice Millhouse and at the hearing of the Sengate appeal, Balmoral intervened and was represented by Counsel.
On 27 November 1998, the Full Court of the Supreme Court allowed the Sengate appeal and set aside the approval of the Scheme of Arrangement.[1]
[1] Sengate Pty Ltd v Southern Equity Holdings Ltd (1998) 200 LSJS 279.
It appears from the reasons for judgment of the Full Court, the leading judgment having been given by Lander J, that the setting aside of the scheme was ordered in consequence of what was perceived to be a failure by Balmoral of its obligations to make a full disclosure to SEQ or the shareholders of SEQ of certain transactions involving Balmoral which, if they had been made known, would have indicated to the shareholders of SEQ that the proposed merger was much less commercially attractive than otherwise might have been the case.
During the course of his judgment, with which the other members of the Court agreed, Lander J observed:[2]
“The substantial complaint made by Sengate is that SEQ failed to make disclosure in the explanatory memorandum and accompanying documents of matters which were material to shareholders of SEQ in their consideration of the proposed merger.
Two matters were said not to be disclosed. The first complaint was that there was no disclosure of an agreement, arrangement or understanding between Mr Hayward and his associates and Balmoral which was entered into before the shareholders meeting and which was consummated after that meeting.
The second complaint on the part of Sengate is that Balmoral has been committed to purchase certain assets of the company known as Sakkara and at a purchase price of $1.6m or greater, a price which is regarded by Sengate as a gross over valuation of the assets concerned. Both facts were known to the directors of Balmoral at the time the meeting was held, but not known at the time to the shareholders of SEQ.
As the scheme contemplates the issue of shares in Balmoral to SEQ, it was argued that there should have been a full disclosure of all of that information to shareholders of SEQ in the explanatory statement.
It was further argued, that if the purchase proceeds, because of the transaction which is contemplated between Balmoral and Sakkara, the shares of Balmoral, including the shares in Balmoral acquired by SEQ, if this merger is to take place, would suffer a significant diminution in value.”
[2] Ibid 280.
Lander J further observed that:[3]
“… Balmoral should have brought to the attention of SEQ, that it proposed to enter into the transaction with the principal shareholder of Sengate, and it would do so after acquiring Sakkara’s assets.
It had that obligation, in my opinion, both at law and under the terms of the merger agreement. …
The Balmoral Information Memorandum was silent on the two matters complained of. The Balmoral Information Memorandum provided for the rectification of false or misleading information, and for the notification of change affecting a matter in the Memorandum or which arises and would have been required to be included. …
Balmoral, in my opinion, has failed in its obligations to bring to the attention of the shareholders of SEQ and this Court, information which is material.
The shareholders of SEQ were entitled to full and adequate disclosure of all information which may be material for the purposes of making a decision in relation to the merger.”
[3] Ibid 282.
In the present proceedings, SEQ claims against Balmoral a declaration that the conduct of Balmoral in failing to make the necessary disclosures as referred to in the judgment of the Full Court, constituted breaches of the agreement which provided for the implementation of the proposed merger (“the Implementation Agreement”), and also a breach of an undertaking contained in the document described as the “Information Memorandum”.
In addition to these declarations, SEQ claimed against Balmoral damages for breach of fiduciary and other duties, including damages for alleged misleading and deceptive conduct under the Fair Trading Act 1987 and the Trades Practices Act 1974.
In its Statement of Claim against Balmoral, SEQ refers to the judgment of the Full Court and the findings made by the Full Court as expressed in the reasons for judgment of Lander J. However, it does not plead any issue estoppel or res judicata with respect to the findings made in those reasons.
In its defence, Balmoral denies the factual allegations in SEQ’s Statement of Claim which are pleaded as the basis of the allegation that it was guilty of breaches of fiduciary duty or misleading or deceptive conduct. It denies that it breached the implementation agreement by the alleged failure to make the disclosures complained of by SEQ.
Balmoral further pleads in its defence that insofar as SEQ refers to the proceedings in the Full Court, it is “not bound by the orders, findings or reasons of the Full Court as it was not a party to those proceedings …”[4]
[4] Defence para 15.
Balmoral counter-claimed damages against SEQ alleging that SEQ had knowledge of the intended transactions by Balmoral, and failed to disclose that knowledge to its members.
In its reply to the defence and counter-claim, SEQ again does not plead any issue estoppel or res judicata by reference to the decision of the Full Court, although it denies all of the other material allegations in the defence and counter-claim.
The basis upon which the third party proceedings were issued by Balmoral against Mr Taylor, is that as a director of SEQ, Mr Taylor, being armed with information as to the transactions intended by Balmoral, breached fiduciary duties owed to SEQ by failing to disclose his knowledge of those matters to SEQ.
It is convenient at this stage to set out in full the relevant terms of the Deed of Indemnity. They are as follows:
“DEED OF INDEMNITY
BETWEEN BALMORAL CORPORATION LIMITED (ACN 067 035 849) a company incorporated in the State of New South Wales and having its registered office at Level 1, Suite 102A, 156 Military Road, Neutral Bay, New South Wales (“Balmoral”)
ANDSOUTHERN EQUITY HOLDINGS LIMITED (ACN 008 031 034) a company incorporate din the State of South Australia and having its registered office at Level 3, 190 Flinders Street, Adelaide, South Australia (“SEQ”)
ANDCHARLES JOSEPH LATHAM, CHRISTOPHER ROBERT FENNELL and GRANVILLE RUSSELL TAYLOR all of care of Level 3, 19089 Flinders Street, Adelaide, South Australia (together and separately called the “Directors”)
RECITALS
ABalmoral and SEQ have entered into an agreement to effect a merger of the two companies subject to the terms of that agreement (“Implementation Agreement”).
BBalmoral has, pursuant to Clause 2.2.1 of the Implementation Agreement provided certain information (“the Balmoral Information Memorandum”) to SEQ.
CPursuant to Clause 2.2.2 of the Implementation Agreement, Balmoral agrees to enter into this Deed of Indemnity in relation to the Balmoral Information Memorandum.
NOW THIS DEED WITNESSES THAT:
1Balmoral undertakes to each of SEQ and the Directors (together jointly and severally referred to as “the indemnified) that the Balmoral Information Memorandum provided by it to SEQ pursuant to the Implementation Agreement”
1.1is in all material respects complete and accurate;
1.2contains no material omissions.
2Balmoral as a separate covenant undertakes and agrees at all times to indemnify and keep indemnified each of SEQ and the Directors against all actions, claims, proceedings, damages, demands, costs and expenses that either SEQ and/or the Directors or any of them may suffer by reason of or in connection with or as a consequence of or on account of any materially incorrect or misleading statement of any material omission from the Balmoral Information Memorandum. Balmoral agrees to pay a sum equal to the amount of any actions, claims, proceedings, damages, demands, costs and expenses to SEQ and/or the Directors as the case may be within 30 days of a written demand.
3Balmoral covenants to pay the costs and expenses including the legal costs referred to in Clause 2 within 30 days of receipt of accounts in respect of the recoverable costs of the Indemnified during any period when a claim is made or legal proceedings are commenced against the Indemnified.
4Balmoral agrees to pay all reasonable fees and expenses incurred by SEQ and/or the Directors or any of them in connection with the enforcement of this indemnity or the exercise of any right under this indemnity, including reasonable legal expenses on a solicitor and client basis.”
In his reasons for ruling, the Master held in effect that there was no material before him which established that the liability of Mr Taylor to pay costs beyond party and party costs with respect to the litigation, following the discontinuance of the proceedings against him, had been incurred “ … by reason of or in connection with or on account of any materially incorrect or misleading statement or any material or omission from the Balmoral Information Memorandum” within the meaning of Clause 2 of the Deed of Indemnity.
He held that claims were made to that effect, but that was all.
I digress to deal with some procedural matters.
Instead of lodging a Notice of Appeal from the decision of the Master made on 15 August 2003 which was to the effect which I have summarised, by a notice for specific directions filed on 4 September 2003 (FDN 58) Mr Taylor sought an order that the order of the Master made on 15 August 2003 be “set aside, recalled or cancelled”. That application was made pursuant to SCR r 84.12 which provides that “the court may vary or set aside a judgment or order at any time if the justice of the case so requires”. Alternatively the application invokes SCR r 101.19, which deals with powers which may be exercised on reconsideration of a taxation.
It is unnecessary for me to go into the circumstances which were said by Mr Taylor to support the making of an order in his favour pursuant to either rule. It is sufficient to note that in dismissing the application by a further order made on 5 November 2003, the Master ruled that there was no proper basis for him to exercise his discretion in favour of Mr Taylor’s application under either of the rules relied upon.
Subsequently, by notice of appeal dated 18 November 2003, Mr Taylor appealed against both the ruling made by the Master on 15 August 2003 confining Mr Taylor to costs on a party and party basis and refusing his claim for costs on an indemnity basis, and against the Master’s order made on 5 November 2003.
The notice of appeal, insofar as it relates to the decision of 15 August 2003, is out of time. However, I do not think that Mr Taylor should suffer simply because a misguided application was brought seeking an order that the Master revise his earlier ruling, rather than a notice of appeal brought within time.
In the circumstances I think it proper to extend the time for the notice of appeal against the interlocutory order of 15 August 2003 and deal with the merits of the argument put forward in support of the appeal.
The arguments on appeal
The arguments advanced by Mr Rochow of Counsel for the Appellant on the hearing of the appeal may be shortly summarised.
He contended that the Full Court’s dismissal of the application for approval of the Scheme of Arrangement, was predicated upon findings that Balmoral was in breach of an obligation to disclose the transactions which affected the value of its shares, being an obligation which arose under the “Supplementary Information Memorandum”.
He contended that the respects in which the Full Court found that there had been a failure to make full disclosures by Balmoral corresponded with the allegations by SEQ in the present proceedings as to non-disclosure by Balmoral, which in turn were asserted by SEQ in the present proceedings to amount to a breach of the implementation agreement and of the indemnity agreement.
He contended further that Balmoral, having intervened in the proceedings in the Full Court, was bound by the findings made in the proceedings. This led to the submission that in the context of the argument before the Master as to whether or not Balmoral was obliged to pay costs on an indemnity basis to Mr Taylor, it was not open to Balmoral to deny that it had made an incorrect or misleading statement within the meaning of Clause 2 of the Deed of Indemnity; and that Balmoral, pursuant to that clause was therefore liable to pay the costs of Mr Taylor as a Director of SEQ with respect to the third party proceedings being costs suffered by Mr Taylor “…by reason of or in connection with or as a consequence of or on account of ” a “… materially incorrect or misleading statement” or a “… material omission from the Balmoral Information Memorandum”.
Mr Rochow contended that Balmoral was bound by the findings of the Full Court, by reason of its status as an intervener in those proceedings.
In support of that proposition he referred to the decision of the Court of Appeal of the Supreme Court of New South Wales in Corporate Affairs Commission v Bradley.[5]
[5] [1974] 1NSW LR 391
In that case, Hutley JA, with whose judgment the other members of the court agreed, said:[6]
“a person accepted as an intervener becomes a party to the proceedings with all the privileges of the party, thus he can appeal, tender evidence and participate fully in all aspects of the argument … interveners have been allowed to appeal”.
[6] Ibid at 396
Mr Rochow contended further that if Balmoral was to be regarded as a party to the proceedings in the Full Court, Balmoral should be regarded as bound by the findings of the Full Court bearing on its conduct with respect to the SEQ merger, and that in effect an issue estoppel arose preventing Balmoral from denying its liability under Clause 2 of the Deed of Indemnity in the present proceedings.
He buttressed that submission by reference to Blair v Curran and Anor[7] and Port of Melbourne Authority v Anshun Pty Ltd.[8]
[7] (1939) 62 CLR 464 at 531
[8] (1981) 147 CLR 589
In the latter case, Gibbs CJ, Mason and Dickson J said in their joint judgment:[9]
“It has generally been accepted that a party will be estopped from bringing an action which, if it succeeds, will result in a judgment which conflicts with an earlier judgment”.
[9] Ibid at 603
There are several answers to Mr Rochow’s contention.
The proceedings dealt with by the Full Court did not give rise to a lis inter partes vis-à-vis Balmoral, even though it is said that it appeared as an intervener. The finding that Balmoral had failed to make full and adequate disclosure of information relevant to the proposed merger, was made in the context of an application for approval by the Court of the merger.
At the outset of the hearing before the Full Court on 26 November 1998, according to the transcript, Dr O’Donovan, who appeared for Sengate, is recorded as saying:
“As a further preliminary matter, if I may, we would inquire, whilst Balmoral is represented the at the hearing, it is not a party to the appeal. It was represented at an earlier hearing before Millhouse J on 18 November, and it resisted the orders for discovery and other orders related to on 13 November, yet they are here today on the basis that they resisted the orders for discovery on the basis that they were not a party to the proceedings, and yet they are here today. We would wish to be heard on that matter if they propose to make any submission to this court.”
When Dr Baxter’s appearance was noted, he was described as “Dr Baxter for Balmoral Corporation, Interested Party”.
There is no record in the transcript of any application to intervene, or of any order to that effect.
After the other parties had put their submissions, Dr Baxter said that he did not seek to address the court.
In these circumstances, I doubt that Balmoral should be regarded as an intervener. The most that can be said is that it appeared at the hearing but did not participate.
The transcript of the hearing before the Full Court was not placed before me on the hearing of the appeal. I had regard to it after I reserved judgment, as it is part of the records of the Court. I was concerned to check whether any order had been made which might have affected Balmoral’s status on the hearing of the appeal.
I would have given counsel an opportunity to address me on the matter if it had any effect on my decision.
However, I am able to reach my decision without reference to that transcript, and I have not taken it into account.
There was no finding by the Full Court as to the liability of Balmoral to any person or entity for damages for breach of the implementation agreement, or for any breach of the indemnity or the undertaking contained in the Information Memorandum, or for any breach of a fiduciary duty; or as to whether any failure to make relevant disclosures constituted misleading or deceptive conduct within the meaning of the Fair Trading Act 1987or the Trade Practices Act 1974.

Furthermore, although in its Statement of Claim in the present proceedings SEQ referred to the decision of the Full Court, the allegations in its Statement of Claim of material non-disclosure were denied in Balmoral’s defence. SEQ did not by way of reply raise any question of res judicata or issue estoppel, or in any other way attempt to advance a plea that Balmoral is not, in the present proceedings, entitled to deny that it had failed to make the relevant disclosures.
In those circumstances, it is difficult to conceive that if the present proceedings had gone to trial, SEQ could have relied on any estoppel or res judicata.
It follows that as between SEQ, Balmoral and Mr Taylor, the issue raised in these proceedings as to whether Balmoral was guilty of any material non-disclosure within the meaning of the Deed of Indemnity, remained unresolved. It could only have been resolved, if the matter had gone to trial.
In any event, irrespective of those matters, the costs which Mr Taylor has incurred in defending the third party proceedings are not costs which he has incurred by reason of any deceptive or misleading conduct on the part of Balmoral vis-à-vis Southern Equity.
They are costs which he incurred because Balmoral set up a case against him that he had knowledge of the relevant information and had failed to disclose it to SEQ.
While it is true that the words “by reason of or in connection with or as a consequence of or on account of any materially incorrect or misleading statement or any material omission” in the Deed of Indemnity are of wide import, I do not think that they are wide enough to be capable of being extended to the costs incurred in the third party proceedings by Balmoral against Mr Taylor.
If Mr Rochow’s contentions were correct, Balmoral would be powerless to defend proceedings brought by anyone for damages said to arise by reason of Balmoral’s alleged failure to make full disclosure. That would be a surprising, and in my view, untenable consequence of Balmoral’s unsuccessful intervention in the appeal from the order approving the Scheme of Arrangement.
Having regard to the views which I have expressed, it is unnecessary to deal with a further point taken by Balmoral through its counsel Dr Baxter, who contended that as the Master’s attention was not drawn to the decision of the Full Court, it could not now be raised on appeal.
For the reasons which I have given, even if the Master’s attention had been drawn to the decision of the Full Court, the conclusion which he reached should have been the same.
I would extend the time for the filing of the notice of appeal to and including 18 November 2003, but I would dismiss the appeal.
JUDGMENT CITATIONS
LISTED IN ORDER OF APPEARANCE IN JUDGMENT
1.    Sengate Pty Ltd v Southern Equity Holdings Ltd (1998) 200 LSJS 279.
2.    Ibid 280.
3.    Ibid 282.
4.   Defence para 15.
5.   [1974] 1NSW LR 391
6.   Ibid at 396
7. (1939) 62 CLR 464 at 531
8. (1981) 147 CLR 589
9.   Ibid at 603

[2004] SASC 122

4 May 2004