Tan Hung Luu v 888 Links Group Pty Ltd & Ors

[2006] NSWSC 1127

CITATION:	Tan Hung Luu v 888 Links Group Pty Ltd & Ors [2006] NSWSC 1127
HEARING DATE(S):	28/09/06
JUDGMENT DATE :	28 September 2006
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	White J
EX TEMPORE JUDGMENT DATE:	09/28/2006
DECISION:	1. Refuse the relief sought in the interlocutory process filed on 26 September 2006; note the undertaking of the defendants to the court referred to above; order that the costs of the interlocutory process be the defendants’ costs in the proceedings.
CATCHWORDS:	CORPORATIONS – Share capital – Shares – Issue of shares – Validity – Plaintiff holds 2/5 of issued shares in first defendant (“the company”) – Second and third defendants directors of company – Second and third defendants resolved that company would issue 200,000 ordinary shares – Plaintiff seeks interlocutory injunction to restrain issue of shares – Whether serious question to be tried that second and third defendants do not have power to cause shares to be issued – Whether serious question to be tried that second and third defendants exercising power with improper purpose of diluting plaintiff’s shareholding in company – Where serious question to be tried – Balance of convenience – Where plaintiff’s position can be protected by orders to be made at final hearing – Application for interlocutory injunction refused.
LEGISLATION CITED:	Corporations Act 2001 (Cth) Civil Procedure Act 2005 (NSW)
CASES CITED:	Whitehouse v Carlton Hotel Pty Limited (1987) 162 CLR 285
PARTIES:	Tan Hung Luu v 888 Links Group Pty Limited (ACN 089 009 147) & Ors
FILE NUMBER(S):	SC 5141/05
COUNSEL:	Plaintiff: G George Defendants: R D Marshall
SOLICITORS:	Plaintiff: Holding Redlich Defendants: Lyon Lawyers

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

WHITE J

Thursday, 28 September 2006

5141/05 Tan Hung Luu v 888 Links Group Pty Limited (ACN 089 009 147) & Ors

JUDGMENT

1 HIS HONOUR: This is an application for an interlocutory injunction to restrain the first defendant from issuing 200,000 ordinary shares pursuant to a resolution of the directors made on 15 September 2006.

2 The plaintiff is currently the holder of 2,000 of 5,000 issued shares in the first defendant. The second defendant, Mr Lee San, is currently the holder of a further 2,000 of the issued shares. A Mr Jason San holds the remaining 1,000 shares. The third defendant, Mr Bao San is a director of the first defendant, or has purportedly acted as a director of the first defendant.

3 On 15 September 2006, Mr Lee San and the third defendant, Mr Bao San, resolved, as directors of the first defendant, that the company would issue 200,000 ordinary shares and that the shares would be offered to the existing shareholders in accordance with the proportion of their shareholdings.

4 There are already proceedings on foot between the plaintiff, Mr Luu, the company, Mr Lee San, and Mr Bao San. Those proceedings were commenced on 27 September 2005. Mr Luu seeks an order that the company be wound up pursuant to s 461 of the Corporations Act 2001 (Cth), apparently on the ground that the affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, him, or in a manner that is contrary to the interests of the members as a whole; or on the ground that the directors have acted in affairs of the company in their own interests, rather than in the interests of the members as a whole; or on the ground that it is just and equitable that the company be wound up. There is an alternative claim that the company be wound up under s 233 of the Corporations Act, and a further claim for an order under s 233 of the Act that the second defendant, Mr Lee San, purchase the plaintiff's shares.

5 The proceedings have continued on pleadings. A cross-claim has been filed against the plaintiff claiming that he breached his duties as a former director and employee of the company. Orders have been made for affidavits in chief to be filed and served by 13 October 2006.

6 The third defendant, Mr Bao San, is Mr Lee San's brother. The plaintiff was advised of the directors' resolution of 15 September 2006 on or about 21 September 2006. The notice which he received advised that the directors had decided, on 15 September 2006, "in accordance with clause 47 of the Constitution", to issue 200,000 ordinary shares at a dollar each. He was advised that the shares were being offered to members in accordance with the proportions of their existing shareholdings.

7 The proposed issue of shares is attacked on two grounds. First, it is claimed that the directors do not have the power which they have purportedly exercised to cause the shares to be issued.

8 Secondly, it is claimed that if the directors do have the power which they are purportedly exercising, they are exercising that power with the improper purpose of diluting the shareholding of the plaintiff in the company.

9 I do not think that the first ground is reasonably arguable. Clause 15 of the company's constitution provides that shares in the company may be issued by the directors. Clause 47 provides that unless the company, by ordinary resolution passed at general meeting, authorises the directors to make an issue of shares of a particular class, the directors must, before issuing shares of a particular class, offer them to existing holders of shares of that class.

10 Subject to clause 47(v), the number of shares to be offered to each member must be in proportion to the number of shares of that class that the member already holds. The directors are acting in accordance with clause 47 by offering the shares to be issued to the shareholders in accordance with the proportions in which shares are currently held. It was submitted that the directors' power to issue shares arises under clause 15 of the constitution, and that clause 47 regulates the manner in which that power may be exercised. I accept that submission.

11 It was then submitted that the directors erroneously understood the source of their power to issue shares to be a power arising under clause 47 of the constitution. Whether that is so or not, it would not invalidate, or arguably invalidate, the directors' resolution.

12 The directors' power to issue shares is a fiduciary power which must be exercised bona fide in the interests of the company, or the members as a whole. Directors cannot ordinarily exercise the fiduciary power to issue shares for the purpose of defeating the voting power of existing shareholders. As the High Court said in Whitehouse v Carlton Hotel Pty Limited (1987) 162 CLR 285 at 290:

“ It is simply no part of the function of the directors as such to favour one shareholder or group of shareholders by exercising a fiduciary power to allot shares for the purpose of diluting the voting power attaching to the issued shares held by some other shareholder or group of shareholders. ”

13 The plaintiff pointed to the following matters as giving rise to a serious question to be tried that the directors were purporting to exercise their power for an improper purpose. First, the plaintiff pointed to the fact that no reason for the proposed share issue was provided by the directors when the plaintiff was notified of the directors' resolution. Nor had the directors responded to a request by the plaintiff's solicitors of 25 September 2006 to be provided with a full explanation as to that purpose.

14 Secondly, it was submitted that the company had no need of additional capital. In support of this contention, the plaintiff pointed to correspondence between the parties' solicitors on 10 July 2006. The defendants, who are the directors of the company, advised through their solicitors that they believed it might be in the commercial interests of the company for it to sell its farm, the farm assets, and an investment property of the company located in Melbourne. If those sales proceed, then presumably after discharging the debt secured over the properties, the company will be in receipt of cash. So far as the correspondence which has been tendered discloses, it is not known when the sale of these properties will proceed, or indeed whether those sales will proceed.

15 The plaintiff also pointed to the company's balance sheet and profit and loss statement as at 30 June 2005 which show a surplus of current assets over current liabilities, and which also show that, to 30 June 2005, the company had been trading profitably, notwithstanding expenditure on farm maintenance, farm machinery and farm management fees, which the plaintiff contends are excessive. The plaintiff contends that it can be inferred that these expenses have been incurred not for the purpose of the company, but for the benefit of one or more of the directors who, through an associated entity, are interested in a lease of the farm in the Northern Territory.

16 The plaintiff also submits that it should be inferred that the company has generated profits, notwithstanding that, so far as the financial statements disclose, it has not received or accounted for rent due from the lessee of the property in the Northern Territory of some $200,000 per annum.

17 The minutes of the directors' meeting of 15 September 2006 record that the company was having problems with its cash flow and was in need of funds to improve its cash flow. The second defendant, Mr Lee San, deposed that the reason the directors resolved to raise capital by way of issue of shares, rather than by borrowing, was that if the capital were raised through borrowing from a bank, the company would be liable to make principal and interest repayments, which was not considered to be in the best interests of the company, given that it is presently in stretched financial circumstances. There is evidence that, in April of this year, the company reached arrangements with one of its major creditors to pay a trade debt of $248,748 by monthly instalments of $35,000 over seven months.

18 It is not the Court's function, on an application for an interlocutory injunction, to conduct a preliminary trial of an action, or to resolve conflicts of evidence. If the evidence of the second defendant were accepted at a final hearing, and if the Court accepted that his evidence of the reasons for raising capital was the true explanation for the directors' resolution, then the plaintiff would, in all likelihood, fail in his attempt to impugn the share issue. On the other hand, I accept that there is a serious question to be tried that the real purpose, or at least a substantial and impermissible purpose, of the share issue, is to dilute the plaintiff's shareholding. However, notwithstanding that there is a serious question to be tried, the balance of convenience does not favour the grant of the interlocutory relief sought.

19 The defendants, without admissions, proffer two undertakings to the Court. The first is that no shares will be issued, otherwise than for cash. The second is that if the share issue is not fully taken up by the members to whom the shares are offered, the shares will not be issued otherwise than to the existing shareholders or the third defendant, without further order.

20 Assuming that the share issue proceeds, it will be open to the plaintiff to amend his statement of claim to challenge the validity of the directors' resolution and the share issue. It will be open to him to apply for leave to amend the statement of claim to add such a cause of action, notwithstanding that the cause of action arises after the commencement of the proceedings (Civil Procedure Act 2005 (NSW), s 64(3)). I see no ground upon which such an amendment would be likely to be refused. It is clear, from the attitude taken by the defendants to the present application, that they could not properly oppose such leave being given. If, at a final hearing, the plaintiff succeeded in establishing that the directors improperly exercised their power to issue shares, then such an issue will be voidable. The plaintiff would either be entitled to orders setting aside the share issue, or to other relief pursuant to s 233 of the Corporations Act, to put him in as good a position as he would be if the issue of shares had not occurred.

21 On the other hand, if the share issue were restrained but it were held at a final hearing that the directors were acting properly, then the company may well suffer loss by reason of being unable to raise capital, at no cost to it.

22 Whilst the plaintiff proffers the usual undertaking as to damages, there is no evidence to satisfy me that the undertaking would be sufficient to meet any damages which the company, or indeed either of the defendants, or any third party, might suffer if an injunction were issued but dissolved at a final hearing. It is relevant that the plaintiff, through his counsel, has advised that he is not in a position to raise the sum of $80,000 which he would be required to raise if he were to take up the shares offered to him.

23 As the plaintiff's position can be protected by orders to be made at a final hearing if he ultimately succeeds in his challenge to the share issue, and given the other relevant considerations on the balance of convenience to which I have just referred, I am of the view that the interlocutory injunction sought should not be given. Accordingly, for these reasons, I refuse the relief sought in the interlocutory process filed on 26 September 2006.

24 I note the undertaking of the defendants to the court referred to above.

25 I order that the costs of the interlocutory process be the defendants’ costs in the proceedings.

******