Ubertini v Saeco International Group SpA (No 4)
[2014] VSC 47
•18 MARCH 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 9429 of 2006
| GIORGIO MASSIMO UBERTINI and UBERTINI INVESTMENTS PTY LTD (ACN 059 388 566) | Plaintiffs |
| v | |
| SAECO INTERNATIONAL GROUP SpA SOCIETA A SOCIO UNICO and SAECO AUSTRALIA PTY LTD (ACN 059 711 009) | Defendants |
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JUDGE: | ELLIOTT J | |
WHERE HELD: | MELBOURNE | |
DATES OF HEARING: | 26-29 AUGUST, 2-5, 9-11, 16, 19 SEPTEMBER 2013 | |
FURTHER WRITTEN SUBMISSIONS: | 26 SEPTEMBER, 3, 4 OCTOBER 2013 | |
DATE OF JUDGMENT: | 18 MARCH 2014 | |
CASE MAY BE CITED AS: | UBERTINI v SAECO INTERNATIONAL GROUP SpA (No 4) | |
MEDIUM NEUTRAL CITATION: | [2014] VSC 47 | |
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CORPORATIONS – Oppression – compulsory acquisition of minority shareholdings - parent company majority shareholder in subsidiary – demands for payment by parent company – non-supply of new range of stock to subsidiary – alleged failure or refusal by parent company to fill stock orders of subsidiary – appointment of administrators to subsidiary by parent company’s nominee directors on board of subsidiary – charging of penalty interest by parent company on outstanding debts of subsidiary – whether deliberate course of conduct by parent company to remove minority shareholder of subsidiary from management and acquire minority shareholdings in subsidiary without payment – whether parent company’s nominee directors on board of subsidiary failed to properly assist subsidiary – whether conduct of parent company contrary to the interests of members of subsidiary as a whole, or oppressive to, unfairly prejudicial to or unfairly discriminatory against minority shareholders of subsidiary – applicable legal principles – whether conduct of parent company conduct in the affairs of the subsidiary – prevention of board meetings – whether unauthorised transfer of funds, related party transfers and improper incurring of adviser fees by minority shareholder of subsidiary – whether alleged conduct of minority shareholder oppressive conduct – whether alleged failure by minority shareholder to cause subsidiary to pay debts to parent company oppressive conduct – whether oppressive conduct of minority shareholder should disentitle relief sought - Corporations Act 2001 (Cth), ss 53, 232, 233.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr E N Magee QC with Mr T Mitchell and Mr T Dowling | Foster Nicholson Jones |
| For the 1st Defendant | Mr P Solomon SC with Mr P Herzfeld | Allens |
| For the 2nd Defendant | No appearance |
TABLE OF CONTENTS
A. Introduction............................................................................................................................. 1
B. Background............................................................................................................................. 4
B.1 The Employment Agreement........................................................................................... 4
B.2 The Brand Management Agreement................................................................................ 4
B.3 The Shareholders’ Agreement.......................................................................................... 6
B.4 Saeco International............................................................................................................. 7
B.5 The Loan Agreement.......................................................................................................... 8
B.6 Events leading up to this proceeding............................................................................. 8
B.7 Events after the commencement of this proceeding................................................... 13
C. The pleaded cases................................................................................................................ 15
C.1 General matters................................................................................................................. 15
C.2 The Plaintiffs’ claims........................................................................................................ 16
C.3 Saeco International’s claims............................................................................................ 26
D. Determination of the factual issues.................................................................................. 30
D.1 The Plaintiffs’ claims....................................................................................................... 30
D.1.1 Claim under the Brand Management Agreement....................................................... 30
D.1.2 Non-supply of the New Range...................................................................................... 37
D.1.3 Alleged failure or refusal of Saeco International to fill orders................................. 48
D.1.4 Issues concerning the Returned Stock.......................................................................... 51
D.1.5 Demands for payment..................................................................................................... 63
D.1.6 Appointment of the Administrators to Saeco Australia............................................. 71
D.1.6.1 The proposed course of conduct.......................................................................... 72
D.1.6.2 Events leading up to the board meeting on 13 February 2007........................ 75
D.1.6.3 The board meeting on 13 February 2007............................................................. 78
D.1.6.4 Events after the Administrators appointed to Saeco Australia........................ 85
D.1.6.5 Conclusions in relation to the appointment of the Administrators................ 95
D.1.7 Penalty interest................................................................................................................. 98
D.1.8 Alleged course of conduct to remove Ubertini and obtain the Australian business 102
D.1.9 Saeco International’s nominee directors’ conduct..................................................... 103
D.1.9.1 De Gregorio’s role................................................................................................. 104
D.1.9.2 Egan’s role.............................................................................................................. 106
D.2 Saeco International’s claims.......................................................................................... 120
D.2.1 Prevention of board meetings of Saeco Australia..................................................... 120
D.2.2 Unauthorised transfer of funds.................................................................................... 128
D.2.3 Related party transfers.................................................................................................. 129
D.2.4 Adviser fees.................................................................................................................... 132
D.2.5 Debts to Saeco International and related entities...................................................... 133
D.3 Summary of findings..................................................................................................... 135
E. The relevant principles...................................................................................................... 136
E.1 Section 232....................................................................................................................... 136
E.2 Assessing commercial unfairness................................................................................ 138
E.3 Other considerations...................................................................................................... 139
E.4 When conduct of a company may be conduct in another company’s affairs........ 140
F. Further application of the principles to the circumstances......................................... 152
F.1 Saeco International’s oppressive conduct of the affairs of Saeco Australia........... 152
F.2 Ubertini’s oppressive conduct of the affairs of Saeco Australia.............................. 154
F.3 Relief................................................................................................................................. 155
G. Other matters....................................................................................................................... 155
G.1 The rule in Browne v Dunn............................................................................................ 155
G.2 Credibility of the Plaintiffs’ witnesses........................................................................ 158
G.3 Credibility of Saeco International’s witnesses........................................................... 159
G.4 The other minority shareholders................................................................................. 160
H. Conclusion.......................................................................................................................... 160
HIS HONOUR:
A. Introduction
The first plaintiff, (Giorgio) Massimo Ubertini (“Ubertini”), arrived in Australia in 1989. After 4 years in Perth, he moved to Melbourne and started up a business importing coffee machines from Italy. The business was successful.
Ubertini involved others in the business, but predominantly maintained ownership, both directly and indirectly. Ubertini and the 2nd plaintiff, Ubertini Investments Pty Ltd (“Ubertini Investments”) (collectively, “the Plaintiffs”), were the major shareholders of the company that ran the business; originally called CMS Coffee Machines Services Pty Ltd. This company changed its name to Saeco Australia Pty Ltd (“Saeco Australia”) in January 2002. Saeco Australia is the 2nd defendant.
In mid 1996, Saeco Australia obtained exclusive selling rights in Australia of products manufactured by the 1st defendant, Saeco International Group SpA Societa A Socio Unico (“Saeco International”). At all relevant times, Saeco International was a multinational company. It sold coffee machines throughout many parts of the world. Its operations included selling its products to subsidiaries. The subsidiaries then sold the products to the local markets. Saeco International also owned subsidiaries by which it conducted different divisions of its business. One such subsidiary was Saeco Vending SpA (“Saeco Vending”).
The success of Saeco Australia’s business continued. So much so that, on 25 March 2002, Saeco International purchased 60 per cent of the total share capital of Saeco Australia from Ubertini and others for $2,429,397.[1] After this transaction Ubertini held approximately 18 per cent of the shares, and Ubertini Investments held approximately 17 per cent of the shares, in Saeco Australia.[2]
[1]In fact, this amount was the total paid for the acquisition of 60 per cent of Saeco Australia, another related company based in New South Wales, and certain retained profits. However, it is unnecessary to expand on these details.
[2]According to the Shareholders’ Agreement (referred to in par 20 below), Saeco International held 667,333 shares, Ubertini held 200,200 shares and Ubertini Investments held 189,087 shares. In a report to creditors dated 27 March 2007 prepared by the Administrators of Saeco Australia the shareholding of Ubertini and Ubertini Investments was said to be 200,200 each. It is unnecessary to deal with this possible discrepancy at this point in time.
After Saeco International purchased its shares in Saeco Australia, it wanted Ubertini to remain as managing director. Ubertini agreed. However, by 2005 Ubertini had different ideas. He approached Saeco International stating that he and his wife wanted to return to his wife’s home country of Canada. Ubertini expressed a desire to sell the Plaintiffs’ shares and cease to be managing director.
In response, Saeco International said it was willing to purchase the shares. The basis of such a purchase was to be agreed in future discussions. In the meantime, Saeco International wanted Ubertini to continue as managing director for a transitional period. Again, Ubertini agreed.
Negotiations then ensued. For a while, the negotiations looked fruitful. However, they became drawn out. The relationship became strained. Conduct was engaged in by both camps to try and improve their respective negotiating positions. By August 2006, there was an impasse between the parties. By late October 2006 this impasse led to a falling out, in the sense that the negotiations between the parties ceased regarding the sale and purchase of the Plaintiffs’ shares. The respective parties continued to escalate their commercial and legal tactics in order to seek to obtain their desired outcomes. Further, this proceeding was commenced on 26 October 2006.
The Plaintiffs seek relief under the Corporations Act 2001 (Cth) (“the Act”). They allege that the conduct of Saeco International, including its tactics of negotiation, was oppressive conduct.[3] The Plaintiffs identify 9 different courses of conduct in this regard. Saeco International makes allegations of oppressive conduct in relation to certain conduct of Ubertini (and effectively, therefore, Ubertini Investments). Saeco International identifies 5 different courses of conduct to support its position.
[3]The term “oppressive conduct” is used in this judgment to refer to conduct “contrary to the interests of the members as a whole” or conduct which is “oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members” as those phrases are used in s 232(d) and (e) of the Act respectively.
On 13 February 2007, by a contracted majority vote,[4] Saeco Australia was placed into administration by the directors of Saeco Australia nominated by Saeco International. Ubertini and another director not nominated by Saeco International voted against the resolution. The remaining director in attendance abstained. On 24 April 2007, Saeco Australia entered into a deed of company arrangement, by which Saeco International (through a subsidiary) acquired the business of Saeco Australia. The Plaintiffs, amongst others, remain minority shareholders of Saeco Australia. Save for any relief the Plaintiffs may obtain in this proceeding, their shares are now worthless.
[4]See pars 22-23 below.
The questions for the court are:
(1)Whether Saeco International has engaged in oppressive conduct?
(2)If yes to (1), should Saeco International be required to acquire the shares of Ubertini and Ubertini Investments in Saeco Australia?
(3)Whether Ubertini has engaged in oppressive conduct?
(4)If yes to (3), should such conduct affect any entitlement of the Plaintiffs to obtain an order for the sale of their shares to Saeco International?
(5)In any event, whether Saeco Australia should be wound up?
Based on the reasons that follow, the answers to the questions are:
(1) Yes.
(2) Yes.
(3) Yes.
(4) No.
(5) No.
The parties agreed that if the court were to make findings in relation to issues (2), and (3) or (4) in favour of the Plaintiffs, and to find in the negative in relation to issue (5), then the proceeding would be the subject of a further hearing to determine the remaining issues in relation to any relief to be ordered in favour of the Plaintiffs.
B. Background
It is not necessary to set out exhaustively the factual history of this proceeding. Many of the relevant facts are identified below in discussing the pleadings and in the determination of the issues in dispute. However, there are some critical background facts, including arrangements and agreements between the parties, that it is convenient to specify presently.
B.1 The Employment Agreement
After Saeco International acquired 60 per cent of the total share capital of Saeco Australia, the agreement that Ubertini continue in his role as managing director of Saeco Australia was formalised. Saeco Australia and Ubertini entered into a document entitled “Executive Employment Agreement” (“the Employment Agreement”) on 24 January 2003. The Employment Agreement was for a term of 3 years commencing 1 January 2003. Either party could terminate the Employment Agreement by giving the other party 6 months’ written notice. The Employment Agreement also provided that Saeco Australia may elect to provide payment instead of the required notice, or a combination of notice and pay instead of notice.[5]
[5]Clause 13.1.
B.2 The Brand Management Agreement
On 1 November 2003, Saeco Australia entered into an agreement (“the Brand Management Agreement”) with another wholly owned subsidiary of Saeco International, namely Saeco Strategic Services Ltd (“Saeco Strategic Services”). Saeco Strategic Services was based in Ireland and was said to be the “Service Provider”; and Saeco Australia was referred to as the “Distributor”. The term of the Brand Management Agreement was 5 years, commencing 1 July 2003. There was an option available for a further 5 years, apparently exercisable by either party.[6]
[6]The Brand Management Agreement was governed by Irish law. No submissions were made on how the option for a further period might be exercised. Nothing turns on the issue as the events relevant to the issues between the parties ceased in 2007.
The purpose of the Brand Management Agreement was for Saeco Strategic Services to provide “all global brand management services” and the right to use the “Trademarks” as that term was defined.[7] Essentially, the trade marks the subject of the Brand Management Agreement were those referable to the coffee machines sold by Saeco International to Saeco Australia. Prior to the Brand Management Agreement, Saeco Australia was not required to pay a fee to use the trade marks.
[7]Clauses 2.1 and 2.2.
The Brand Management Agreement also required Saeco Strategic Services to provide “the Services”. The Services, which were extensive in number, were specified in an annexure to the Brand Management Agreement.
In return for the use of the “Trademarks” and the provision of the Services, Saeco Australia was required to pay 3.5 per cent of the value of the net sales of the previous trading year (exclusive of any value added tax payable on those sales).[8] Ubertini gave evidence, which I accept, that Saeco Australia agreed to sign the Brand Management Agreement on the express basis that there would be a 3.5 per cent discount given to Saeco Australia in respect of products purchased, to offset the cost of the payments due under the Brand Management Agreement. Ubertini also said Saeco International agreed that the trading terms of 150 days would remain if Saeco Australia executed the Brand Management Agreement.
[8]Clause 5.1.
The Brand Management Agreement could be terminated by Saeco Strategic Services in certain circumstances. These included if Saeco Australia was unable to pay its debts as and when they fell due.[9] Further, neither party was entitled to assign or transfer any rights arising under the Brand Management Agreement without the prior written consent of the other party.[10]
[9]Clause 6.1.4.
[10]Clause 9.3.
A price list issued shortly after the Brand Management Agreement was entered into corroborates Ubertini’s evidence. On 1 January 2004, Saeco International sent a new price list for vending and other coffee machines. The covering letter sent to Saeco Australia stated the list had been approved by Saeco International. The list provided a 3.5 per cent discount in relation to all of the many products listed. However, after this price list was issued Saeco International failed to include such a discount. Saeco Australia did not receive any other discounts.[11]
[11]But see section D.2.3 below, pars 463-467, in relation to moneys paid in lieu of the discount being received by Saeco Australia.
B.3 The Shareholders’ Agreement
On 28 November 2003, a shareholders’ agreement was entered into between various parties, including Saeco International, Ubertini and Ubertini Investments (“the Shareholders’ Agreement”). The remaining shareholders were also parties to the Shareholders’ Agreement; namely, James Kremmer (approximately 2 per cent shareholding), Andrew Kremmer (approximately 1 per cent shareholding), Wayne White (“White”) (approximately 1 per cent shareholding) and Pennidan Pty Ltd (approximately 1 per cent shareholding). The recitals record that the Shareholders’ Agreement set out how the affairs of Saeco Australia would be conducted.
Each shareholder was required to do all acts and things as a shareholder to give full effect to the provisions of the Shareholders’ Agreement.[12] It is only necessary to refer to a small number of clauses in the Shareholders’ Agreement for the purposes of this proceeding.
[12]Clause 2.
There were particular limits upon the control that shareholders could exercise. Each shareholder was given the ability to appoint a director or directors, but such directors had specific and confined voting rights. Relevantly, Saeco International had the ability to appoint 2 directors, each to be called an “A” director. The Plaintiffs had the joint right to appoint 1 director, to be called a “B” director. For a quorum to exist at a board meeting, the 2 “A” directors and the “B” director were required to be present at all times.[13] A similar requirement existed in relation to a meeting of shareholders.[14]
[13]Clauses 4.1-4.4.
[14]Clauses 15.1-15.4.
The Shareholders’ Agreement provided that there would be 100 votes at any board meeting. Of those, the “A” directors would have 60 votes. The “B” director would have 35 votes. The remaining directors, representing the remaining shareholders, had different voting rights which totalled 5 votes in all. Obviously, this guaranteed a majority to the “A” directors at any duly convened board meeting.
Each shareholder was required, by exercise of its “Shareholder Control”,[15] to ensure that Saeco Australia carried on and conducted its business and affairs in a proper and efficient manner and for its own benefit.[16] A like obligation was imposed to ensure that Saeco Australia transacted its business on arm’s length commercial terms.[17]
[15]This term was defined to mean any voting power or other rights of a shareholder.
[16]Clause 7.1(1).
[17]Clause 7.1(2).
Both the Employment Agreement and the Shareholders’ Agreement were governed by the laws of Victoria.
B.4 Saeco International
Up until May 2004, Saeco International was a publicly listed company. In May 2004, Saeco International was acquired by PAI Partners, a private equity group based in France (“PAI”). Upon PAI acquiring Saeco International, Nicholas De Gregorio (“De Gregorio”) was appointed chief executive officer and president of Saeco International. Didier Schwartz (“Schwartz”) was appointed as sales and marketing director. Luca Moroni (“Moroni”) was appointed as the chief financial officer. Aldo Taddeo (“Taddeo”) was appointed export commercial director.[18] Taddeo reported to Schwartz. Schwartz and Moroni reported to De Gregorio. De Gregorio and Schwartz were called to give evidence by Saeco International. Taddeo gave evidence as part of the Plaintiffs’ case. Moroni was not called by any party.
[18]A reference to “director” in these titles does not equate to being a director of the company.
From May 2004 onwards the management of Saeco International was monitored and directed to a substantial extent by its private equity owner, PAI. De Gregorio answered directly to PAI. Generally speaking, this resulted in a gradual change of attitude and approach of Saeco International to Saeco Australia and its business. When it was suggested to Ubertini that the relationship was never as warm as it had been after PAI became the owner of Saeco International, Ubertini responded that it was the opposite to warm, and over time became colder and colder. However, Ubertini said he still considered that Saeco International and Saeco Australia remained “partners”.
B.5 The Loan Agreement
On 26 July 2004, a written loan agreement was entered into between Saeco Australia and Ubertini Investments (“the Loan Agreement”). The Loan Agreement recorded that Ubertini Investments had previously granted loans of $1,570,035 to Saeco Australia and that the parties had agreed that those loans would be subject to the terms and conditions of the Loan Agreement. Effectively, the terms of the Loan Agreement recorded that the outstanding loans were repayable upon demand.[19] The Loan Agreement was prepared on instructions from Ubertini and executed without any involvement of Saeco International.
[19]Clause 3.1, together with the definition of “Termination Date”.
B.6 Events leading up to this proceeding
On 21 December 2004, De Gregorio and Schwartz were appointed by Saeco International as directors of Saeco Australia.
Taddeo was told that from 1 January 2005, his responsibilities would be expanded to include responsibility for Saeco Australia. But he was not involved directly with Saeco Australia until after June 2005.[20]
[20]See par 33 below.
When Ubertini approached Saeco International in April 2005 and expressed his desire to sell his and Ubertini Investments’ shares, it was a complete surprise to De Gregorio. De Gregorio said Saeco International had wanted to keep a local managing director in Australia who was familiar with the market and could run the business. There was no desire to remove Ubertini until well after Ubertini had enlivened the issue of his departure and the terms upon which he was willing to leave and sell the Plaintiffs’ shares.
After the initial discussion, Ubertini wrote to De Gregorio on 22 April 2005 confirming he was willing to stay on for a further 12 months to assist the new manager to be nominated by De Gregorio to head Saeco Australia. Ubertini also offered to assist in a variety of other ways. With respect to the sale of shares, Ubertini invited De Gregorio to suggest “items which, to your judgment, may constitute the basis for a solid start of the discussion”. Ubertini further stated that an accountant, Dr Pier Marcucci (“Marcucci”), was available to negotiate on Ubertini’s behalf. Marcucci had attended a meeting on 6 April 2005 when Ubertini first raised the issue of selling the shares. Marcucci described himself as an accountant and a commercial economist.
Sometime before June 2005, Taddeo was told by Schwartz and De Gregorio that, because of the negotiation that was going on with Ubertini, the situation was delicate and they wanted to take care of the matter directly. Accordingly, Taddeo did not become involved with the business of Saeco Australia until after June 2005.
On 30 June 2005, a further meeting was held between De Gregorio, Ubertini and Marcucci. At this meeting it was agreed that Saeco International would purchase the Plaintiffs’ shares on the basis of the EBITDA[21] for the year ending 31 March 2005. It was agreed the Plaintiffs would receive the proportion representing their shareholding of a figure to be calculated by multiplying 5 times the EBITDA for that trading period.
[21]Earnings before interest, tax, depreciation and amortisation.
It was also agreed that the valuation method of Saeco Australia, using the calculation of 5 times EBITDA, would have the fees charged pursuant to the Brand Management Agreement added back into Saeco Australia’s revenue for the purposes of ascertaining the earnings figure. De Gregorio said these fees were to be reinstated “to the benefit of [Saeco Australia]”. Marcucci said this was De Gregorio’s proposal; which appeared to reflect the cooperative nature of the discussions at that time.
There was a conflict in the evidence as to whether the agreement struck on 30 June 2005 was made subject to Saeco International being able to reduce the purchase price arrived at, based on the agreed calculation method, to take into account the outstanding debts of Saeco Australia. De Gregorio said this proviso was discussed perhaps in April 2005,[22] but certainly in June 2005. Ubertini said it was not. I prefer Ubertini’s account for a number of reasons.
[22]When that month was put to De Gregorio, he said he did not know if that timing was correct.
First, De Gregorio’s account was not put to Ubertini in cross-examination. The cross-examination by Saeco International’s senior counsel was detailed and thorough in its presentation.
Secondly, Ubertini’s account is corroborated by Marcucci. Marcucci said it was proposed by De Gregorio, and then agreed, that the valuation was to occur on the basis of 5 times EBITDA, adding in the brand management fee to calculate the net profit. Although this account was put to Marcucci in a leading question in his evidence in chief, the question was not objected to and Marcucci was not the subject of any cross-examination.[23]
[23]T617.01, 618.20. See also T616.09, 623.01.
Thirdly, Ubertini’s evidence is also corroborated by Taddeo. Taddeo said De Gregorio told him that De Gregorio had some kind of understanding or agreement with Ubertini that Ubertini would get a minimum of 5 times EBITDA. Taddeo also said such an understanding for the purchase of a subsidiary shareholding “was habit in the company”.
Fourthly, Ubertini immediately went about retaining experts to make the calculation in accordance with his account of the discussions. The written report, dated 12 October 2005, provided by Grant Thornton included the following:
We understand following discussions with [Saeco International] that they are prepared to purchase your 36% shareholding based on a valuation of the shares in [Saeco Australia] equating to 5 times EBITDA at 31 March 2005. We note that the Brand Management Fee paid within the Saeco International Group is also to be an add back in terms of the EBITDA calculation. I note that the audited financial accounts for 31 March 2005 are a 15 month period and so these will have to be adjusted for a 12 month equivalent for the valuation calculation.
The calculation by the experts valued the Plaintiffs’ shares on this basis at approximately $6.4 million. If it had been agreed that the debts of Saeco Australia were to be taken into account in some manner, it would be expected that Ubertini’s instructions to the expert would have also incorporated this component, and the experts would not have purported to express a final figure on the relevant value without ascertaining and incorporating the relevant debts.[24]
[24]The report went on to record an analysis which involved extracting the tangible assets of the business to ascertain an assumed goodwill figure, but the value as calculated was the EBITDA figure (adjusted for the brand management fee and the 15 month period) multiplied by 5, without any other considerations.
Fifthly, Ubertini said that after the calculations had been completed later in 2005, he went to Italy in the belief he was going to collect his cheque based on the calculations of 5 times EBITDA. I accept this evidence. If there had been some other component to be taken into account before the final figure could be arrived at, it could be expected there would be some correspondence touching on the issue before Ubertini travelled to Italy. There was none. In this regard, I reject Saeco International’s submission that De Gregorio’s account is corroborated by objective evidence, namely documents in existence at the time. The documents referred to[25] relate to events in November and December 2005, and are entirely consistent with Ubertini’s evidence of events in June 2005.
[25]A note from Marcucci to Ubertini dated 20 February 2006 and an email chain of communications with Moroni in December 2005. For completeness, I refer to a note of De Gregorio’s made in relation to the meeting on 30 June 2005. The Plaintiffs submitted this note supported Ubertini’s account of the meeting. In my view, the note and the circumstances in which it was taken, are too vague to provide any meaningful indication of what was said at the meeting.
Sixthly, Ubertini said that he was shocked when, in late 2005, De Gregorio sought to introduce a new component to the basis upon which Saeco International would pay for the shares. Marcucci had a like reaction.[26] To reiterate, Marcucci’s evidence was not the subject of any challenge by Saeco International. Further, contrary to Saeco International’s submission, the fact that Ubertini did not seek to sue on the agreement as previously reached is entirely consistent with this reaction. Ubertini seeking to advance further negotiations in order to try and achieve a satisfactory outcome amicably does not logically undermine his version of events in mid 2005.
[26]See par 46 below.
Finally, I accept the evidence of Marcucci, who explained the circumstances of the changed position of Saeco International. He said De Gregorio stated at a meeting in November 2005, also attended by Schwartz, and Ubertini and Marcucci, that Saeco Australia’s profits had reduced from March 2005 to November 2005. Therefore, De Gregorio proposed a further meeting in the future to be held with Moroni to identify the criteria to value the shares. At the time, the proposed changes to the criteria were not identified.
During this discussion in November 2005, De Gregorio also stated that he wanted the Employment Agreement renewed on the same terms as had previously been agreed. On 29 November 2005, the Employment Agreement was renewed for a further 3 year term commencing 24 January 2006.
Marcucci said that, after the meeting in November 2005 with Ubertini, De Gregorio and Schwartz, he repeatedly tried to speak with Moroni. He said it was very difficult to make contact. Ultimately, a meeting was arranged in early December 2005 at Gaggio Montano, Bologna.
At this meeting, Moroni conveyed that Saeco International wanted the commercial debts of Saeco Australia subtracted from the result of the calculation of 5 times EBITDA. Marcucci said he was “really shocked” by Moroni’s proposal. When this additional factor of the debts of Saeco Australia was incorporated into the valuation process, the Plaintiffs’ shares were valued at “zero practically”.
Marcucci said to Moroni such an approach was unacceptable. He told Ubertini of the proposed new criteria. Ubertini also said it was unacceptable.
Throughout 2006 negotiations ensued, further detail of which is referred to below. However, there is 1 matter that I refer to now.
As a result of Ubertini’s proposal to sell the Plaintiffs’ shares, Saeco International made inquiries about appointing a suitable replacement for Ubertini. They approached Christopher Egan (“Egan”) through a global recruiting firm. This occurred in late 2005. Eventually, on 15 May 2006, Egan was appointed as a consultant to Saeco International with respect to its business in both Australia and New Zealand. This was done with the intention of Egan being appointed as managing director once a deal with Ubertini had been completed. Egan was a person with considerable involvement in business in Australia. Before being retained by Saeco International, Egan had gained experience in management, finance and marketing. However, he had no previous experience in the business of selling coffee machines.
B.7 Events after the commencement of this proceeding
The conduct of the negotiations, and in particular the inability of the parties to reach a satisfactory conclusion, gave rise to this proceeding being commenced in October 2006. At the first directions hearing on 10 November 2006, Saeco International stated unequivocally to the court that it intended to acquire the shares of the Plaintiffs. Upon completion of the directions hearing, orders were made by the court which included orders for a valuer to be appointed. Such an appointment occurred in November 2006.[27]
[27]Valuations were duly prepared, but the parties were unable to resolve the proceeding after the valuations had been completed.
On 9 November 2006, Schwartz was replaced by Egan as an “A” director of Saeco Australia. Egan was still retained as a consultant of Saeco International and continued to act for Saeco International in relation to its issues with Saeco Australia. At around this time, Saeco International was seeking to have a board meeting of Saeco Australia. Because of the provisions of the Shareholders’ Agreement, such a board meeting could not form a quorum unless the “B” director, Ubertini, attended. Ubertini put forward various reasons as to why he could not attend a board meeting. Eventually, Ubertini proposed a board meeting be convened on 13 February 2007. Saeco International expressed doubts about whether Ubertini would attend. Ultimately, this resulted in Saeco International approaching the court to seek orders allowing a board meeting to proceed without Ubertini’s attendance.
On 9 February 2007, Ubertini gave an undertaking to the court that he would attend a board meeting scheduled to be held on 13 February 2007. A board meeting was duly held on that day. A tape recording of that board meeting was taken, which the parties accepted was accurate.[28] At the board meeting, the directors nominated by Saeco International (De Gregorio and Egan) used their voting majority to place Saeco Australia into administration and to appoint joint administrators (“the Administrators”).
[28]A transcript of the 13 February 2007 board meeting was tendered by agreement. It was largely complete, though some matters were not satisfactorily recorded.
On 21 February 2007, Egan ceased to be a director of Saeco Australia. However, he continued to act as a consultant for Saeco International.
On 27 March 2007, the Administrators provided a report to creditors (“the Report to Creditors”). That report contained a recommendation that the return to creditors would be greater under a proposed deed of company arrangement put forward by Saeco International rather than in a liquidation scenario.[29]
[29]Paragraph 1.2 and sections 17 and 18.
On 24 April 2007, a deed of company arrangement (“the DOCA”) was entered into between the Administrators, Saeco Australia, Saeco International and a wholly owned subsidiary of Saeco International, Saeco International Group (Australia) Pty Ltd (“the New Subsidiary”). Pursuant to the DOCA, the New Subsidiary acquired the business and assets of Saeco Australia.[30] Upon completion of the transfer, Saeco International agreed to reduce the amount of its “Admitted Claims” to a net asset value specified in a schedule to the DOCA.[31]
[30]What was acquired were “the Assets” as defined in the DOCA. It is unnecessary to set out the detail.
[31]Clause 3.9(b); schedule 9.
In relation to trade creditors other than Saeco International, it was agreed under the DOCA that they would be paid a dividend of 65 cents in the dollar up to a total of $1.3 million.[32] After this amount had been paid out, together with the other costs of the administration, the balance was to be paid to meet the “Admitted Claims” of Saeco International and its related entities.[33]
[32]If $1.3 million was insufficient to pay such a dividend in full, payment was to be made pro rata out of that sum: clause 9.2(c).
[33]Clause 9.2(d).
The sale of the business and assets of Saeco Australia to the New Subsidiary was completed on 1 May 2007. By that time, Egan had been appointed a director of the New Subsidiary.[34]
C. The pleaded cases
[34]He was appointed on 29 March 2007.
C.1 General matters
Prior to trial, the court ordered that pleadings be filed in this proceeding. The parties accepted that the trial was to be conducted on the pleadings. Consistent with this approach, on 2 occasions during the course of the trial, I allowed the Plaintiffs to amend their particulars of claim (which amendments included allegations previously pleaded by way of reply). The claims as made by the Plaintiffs are made in the Plaintiffs’ 2nd further amended particulars of claim filed 11 September 2013 (“the Particulars of Claim”). In response, Saeco International filed an amended particulars of defence on 13 September 2013 (“the Defence”). The Plaintiffs also rely upon a reply filed 15 December 2010 (“the Reply”).
A substantial part of the Particulars of Claim pleads background matters which pertain to the formal relationship and agreements between the Plaintiffs, Saeco Australia and Saeco International. As I have already set out the material aspects of this background, it is not necessary to refer expressly to those parts of the Particulars of Claim.
Further, not all of the claims made in the Particulars of Claim and the Defence were ultimately pursued by the parties.[35] I will confine my summary of the pleadings accordingly.
[35]A number of matters were pleaded and were the subject of evidence at trial, but were not identified as relevant matters for the purposes of the court’s considerations. The parties agreed to be confined to the lists of issues they produced respectively towards the end of the trial.
C.2 The Plaintiffs’ claims
The first issue identified by the Plaintiffs was stated in the following terms:
Whether the charging of fees and demanding payment under the Brand Management Agreement by Saeco International’s wholly owned subsidiary, Saeco Strategic Services, was contrary to s 232 of the Act.
The Plaintiffs allege that on 22 December 2006 Saeco Strategic Services, at the direction of Saeco International, demanded that Saeco Australia pay all moneys allegedly owing pursuant to the Brand Management Agreement by 12 January 2007. The demand was for Є1,166,771.48.[36]
[36]This allegation is in par 43 of the Particulars of Claim, which also refers to a breach of implied terms of the Brand Management Agreement. However, it is unnecessary to refer to this breach as the paragraph in the Particulars of Claim alleging the implied terms (namely par 23) was withdrawn and no longer forms part of the pleading.
In response, Saeco International admitted the demand was served by Saeco Strategic Services as alleged.[37] Accordingly, the only issue between the parties is whether or not the demand as made contravened s 232 of the Act.
[37]Defence, par 43.
The second issue referred to by the Plaintiffs was:
Whether Saeco International’s non-supply of the new range of coffee machines was contrary to s 232 of the Act.
In paragraph 31 of the Particulars of Claim it is alleged that, from late 2005, despite requests by Ubertini on behalf of and in the interests of Saeco Australia, Saeco International refused to supply Saeco Australia with stock of a new range of Saeco products, or samples of that range, styled “Linea Primea” (“the New Range”). It is alleged this conduct was in breach of the “Supply Agreement”[38] and also in breach of the Shareholders’ Agreement. The requests by Ubertini on behalf of Saeco Australia were alleged to be both oral and in writing and to have occurred from 10 March 2006 onwards. The last date given in the particulars of the requests is 11 January 2007.
[38]The Supply Agreement is defined in par 19 of the Particulars of Claim. It is alleged it was entered into between Saeco Australia and Saeco International on or about 28 November 2003. The terms of the Supply Agreement alleged are referred to in par 78 below.
The Particulars of Claim further allege that, from March 2006 until January 2007, concerns were expressed by Ubertini about Saeco International’s conduct. These concerns included repeated complaints about the non-provision of samples for the New Range. It was alleged that despite these concerns, Saeco International, and the directors of Saeco Australia nominated by Saeco International, failed to address or remedy the matters raised.[39] It was alleged that each aspect of this conduct was contrary to s 232 of the Act.
[39]Particulars of Claim, pars 51 and 53.
With respect to the New Range, the Defence raises a number of matters in response.[40] Saeco International alleges the New Range was made available in Australia in or about June 2007.[41] It also alleges that samples of the New Range were forwarded to Saeco Australia on or about 27 November 2006. Further, it admits that Ubertini sought the New Range from early 2006, but alleges there were delays throughout the world in launching the New Range unconnected with events in Australia. Saeco International further alleges that it required Saeco Australia to provide marketing plans and budgets for the New Range, but that Ubertini caused Saeco Australia not to provide such marketing plans or budgets to Saeco International until 1 February 2007. Finally, and in any event, Saeco International alleges that any delay in the supply of the New Range was not in contravention of s 232 of the Act.
[40]Defence, par 31.
[41]The New Range was made available to the New Subsidiary rather than Saeco Australia.
The third issue identified by the Plaintiffs was:
Whether Saeco International’s failure or refusal to fill orders was contrary to s 232 of the Act.
In paragraph 30 of the Particulars of Claim it is alleged that, in breach of the Supply Agreement and also in breach of the Shareholders’ Agreement, from about mid 2005, and again from mid 2006, Saeco International refused to fill Saeco Australia’s orders for supply of Saeco products. The particulars to paragraph 30 refer to 2 letters written by Ubertini dated 3 March 2006 and 23 June 2006. Further correspondence is particularised later in the pleading to support an allegation that Ubertini notified his concerns to the Saeco International directors on Saeco Australia’s board.[42]
[42]Particulars of Claim, par 50.
It is then alleged that, with the knowledge of the matters Ubertini had communicated, Saeco International and its nominated directors failed to address or remedy the concerns. This failure is alleged to have constituted oppressive conduct.[43]
[43]Particulars of Claim, pars 51 and 53. Senior counsel for Saeco International submitted par 51 did not incorporate allegations in relation to the directors of Saeco Australia nominated by Saeco International. I do not accept this submission. The submission appears to ignore the final words of par 51, namely “on behalf of [Saeco Australia] (the [Saeco International] directors’ omissions)”. In any event, par 51, especially when read in conjunction with pars 50, 52 and 53, was clearly directed to both the conduct of Saeco International itself and also to the directors it nominated.
In response to these allegations, Saeco International alleges that in or about December 2005 Saeco Australia did not follow established ordering procedures for the supply of Saeco products. Saeco International also alleges that an order placed by Saeco Australia in or about February 2006 was inadvertently (and not deliberately) undersupplied, with the remainder of the stock supplied within a matter of weeks.[44]
[44]Defence, par 30.
Saeco International accepted that in 2006 and 2007 Ubertini did express concerns about Saeco International’s conduct.[45]
[45]Defence, par 50.
The fourth issue pressed by the Plaintiffs was as follows:
Whether Saeco International’s refusal to accept the return of 7 containers of stock, or to give a credit for that stock, was contrary to s 232 of the Act.
The Plaintiffs allege that, on or about 4 April 2006, Ubertini informed Saeco International that Saeco Australia was returning defective and unsaleable stock (“the Returned Stock”). It is alleged that Ubertini so informed Saeco International by way of a letter dated 4 April 2006,[46] with the relevant invoices attached in relation to the Returned Stock.[47] The Plaintiffs further allege that, in breach of the Supply Agreement and also the Shareholders’ Agreement, on or about 29 August 2006 Saeco International refused to accept the Returned Stock, demanded payment by Saeco Australia of the invoices for the Returned Stock, and demanded Saeco Australia pay the storage costs that had been incurred.[48]
[46]In fact the letter was dated 5 April 2006.
[47]Particulars of Claim, par 34.
[48]Particulars of Claim, par 35.
Again, the Plaintiffs allege Saeco International and its nominated directors on the Saeco Australia board were informed of the relevant matters and failed to act in response. This was also said to be oppressive conduct.[49]
[49]Particulars of Claim, pars 51 and 53.
In its Defence, Saeco International admitted that Ubertini informed Saeco International that Saeco Australia had returned the Returned Stock, and that Ubertini claimed by letter that the stock was defective or “not saleable because of technical problems resulting in lost clientele”.[50] Saeco International alleges further that Ubertini had not obtained prior authorisation to return the Returned Stock. Saeco International also alleged the Returned Stock was not defective or unsaleable, and otherwise denied the allegations made.[51]
[50]Defence, par 34.
[51]Defence, par 35.
The fifth issue put forward by the Plaintiffs was:
Whether the demands by Saeco International, Saeco Vending (sic) and Saeco Strategic Services were contrary to s 232 of the Act.
This issue as identified overlaps with the first issue in relation to 1 of the demands made by Saeco Strategic Services. Accordingly, I will not repeat what I have said above.[52]
[52]See pars 61-63 above.
There were 3 demands made, 2 by Saeco Strategic Services and 1 by Saeco International (“the Demands”).[53] The demand made by Saeco International (“the Principal Demand”) was made pursuant to the Supply Agreement. That agreement was alleged by the Plaintiffs to be partly oral, partly written and partly to be implied. The terms of the Supply Agreement are alleged, relevantly, as follows:[54]
[53]There was also some evidence to suggest that Saeco Vending sent a demand. For example, Taddeo said demands were sent by each of Saeco International, Saeco Strategic Services and Saeco Vending. See par 354 below. However, the 3 demands the subject of the Plaintiffs’ allegations on this issue did not include any demand by Saeco Vending.
[54]Particulars of Claim, par 20.
(1) Saeco Australia would order Saeco products from Saeco International.
(2)Saeco International would supply Saeco Australia with Saeco products pursuant to the orders received from Saeco Australia.
(3)Saeco International would invoice Saeco Australia for the Saeco products.
(4)Subject to (5) below, Saeco Australia would pay Saeco International, pursuant to the invoices issued by Saeco International, within 150 days of the date of invoice.
(5)Whenever Saeco Australia’s working capital requirements demanded it, Saeco Australia could delay payment of the invoices issued by Saeco International for products supplied, such products constituting an advance of working capital by Saeco International.
The Plaintiffs alleged that between 2003 and 2006 Saeco International supplied Saeco Australia pursuant to these terms.[55]
[55]Particulars of Claim, par 21.
It is then alleged that, in breach of the Supply Agreement, and also the Shareholders’ Agreement, on 22 December 2006 Saeco International made the Principal Demand, namely that Saeco Australia pay all moneys owing in the amount of Є10,509,466.18 by 12 January 2007.[56] It is further alleged that, on the same day, at the direction of Saeco International, Saeco Strategic Services demanded Saeco Australia repay a loan in the sum of Є573,000 by 31 December 2006.[57]
[56]Particulars of Claim, par 42.
[57]Particulars of Claim, par 44. This is in addition to the demand for payment referred to in par 62 above.
Finally on this issue, it is alleged that on 22 January 2007, Egan, on behalf of Saeco International, sent an email to the board of Saeco Australia advising that he was concerned that Saeco Australia may not be able to repay its debts and that such an issue would be raised at the proposed directors’ meeting on 13 February 2007.[58]
[58]Particulars of Claim, par 49.
Saeco International denies the terms of the Supply Agreement as pleaded by the Plaintiffs. In stark contrast, Saeco International alleges that the terms of payment were 30 days (plus 10 days for netting).[59] Further, the Defence admits the Demands as alleged were made, but denies that the making of the Demands was oppressive. In addition, Saeco International alleges the following matters in response:[60]
(1)The Demands invited Saeco Australia to suggest a proposal for payment in the event that payment would not be made by the due date.
(2) The moneys the subject of the Demands were, in fact, overdue.
(3) No proposal for payment was ever received by Saeco International.
(4)Ubertini was informed on 22 December 2006 that the loan contract between Saeco Strategic Services and Saeco Australia was to mature on 31 December 2006 and that prompt payment was required on or by the due date. (In relation to the loan contract, this response effectively admits the facts pleaded by the Plaintiffs, but denies the conduct was oppressive.)
[59]Defence, par 20A(a).
[60]Defence, pars 42 and 44.
The sixth issue concerns the appointment of the Administrators to Saeco Australia. It is described as follows:
Whether resolving to appoint administrators to Saeco Australia and allowing Saeco International to obtain the full value of the Saeco Australia business without paying anything to the Plaintiffs was contrary to s 232 of the Act.
It is alleged that Egan, on behalf of Saeco International, requested a board meeting of Saeco Australia’s directors for the purpose of proposing a resolution to put Saeco Australia into voluntary administration.[61] Reliance was also placed by the Plaintiffs on the email sent by Egan on 22 January 2007.[62]
[61]Particulars of Claim, par 41.
[62]Particulars of Claim, par 49. See par 80 above.
Next, the Plaintiffs allege that, at the board meeting on 13 February 2007, Egan proposed that Saeco Australia be placed into voluntary administration on the basis that it was insolvent or likely to become insolvent in the future.[63] It is further alleged that another director of Saeco Australia, James Kremmer, proposed that the decision to place Saeco Australia into voluntary administration be deferred until after the next court hearing in this proceeding and/or after a response from Saeco International to implement a payment plan to be proposed by Saeco Australia.[64]
[63]Particulars of Claim, par 55(a).
[64]Particulars of Claim, par 55(b).
The Particulars of Claim allege that Egan and De Gregorio breached the Shareholders’ Agreement by voting for the proposal to place Saeco Australia into voluntary administration and by appointing the Administrators.[65] It is further alleged that the appointment of Egan, by Saeco International, as a director of the board of Saeco Australia, was done for the purpose of placing Saeco Australia into voluntary administration, and was not for the benefit of Saeco Australia. This was supported by particulars which noted that Egan resigned from Saeco Australia’s board shortly after Saeco Australia was placed into administration, namely on 21 February 2007.[66]
[65]At par 55(c).
[66]Particulars of Claim, par 56.
The Plaintiffs also rely upon events which occurred during the course of the administration as evidence of the intention of Saeco International at the time Saeco Australia was placed into administration. The Particulars of Claim allege[67] that subsequent to the administration, Saeco International, pursuant to the DOCA and through a wholly owned subsidiary (ie the New Subsidiary):
(1)Obtained the business conducted by Saeco Australia without paying the Plaintiffs anything for their shares.
(2)Disposed of the Returned Stock by selling it into the Turkish market (for which a credit, prior to the administration, would not be given by Saeco International to Saeco Australia and (presumably after the administration) the New Subsidiary).
(3)Received additional financial benefits by obtaining the stock of Saeco Australia at significantly discounted values and the book debts of Saeco Australia at values lower than their likely recovery.
[67]Paragraph 60(a)-(c).
By way of defence, Saeco International effectively admits Egan requested a meeting of the board of Saeco Australia on numerous occasions on and after 15 November 2006, and alleges that other directors had also made such requests since August 2006, but denies any purpose of proposing a resolution concerning voluntary administration of Saeco Australia.
In relation to events in 2007, there is little dispute on the pleadings as to what occurred prior to and at the meeting on 13 February 2007. However, it is denied that the relevant events constituted a breach of the Shareholders’ Agreement or were oppressive conduct on the part of Saeco International or its nominated directors of Saeco Australia.
In relation to the allegations made concerning events after 13 February 2007, Saeco International admits it accepted benefits conferred pursuant to the DOCA in exchange for a promise by Saeco International to accept those benefits in full and final satisfaction and complete discharge of all “Claims” as defined in the DOCA. Saeco International alleges that the Returned Stock was sold by Saeco International into overseas markets, but that Saeco International received less than half the promised consideration for the Returned Stock.[68]
[68]Defence, par 58B(b).
Saeco International further alleges that, subsequent to executing the DOCA, it wrote down in its own accounts the value of the asset comprising inventory sales to Saeco Australia by approximately a third.[69]
[69]Defence, par 58B(c).
The seventh issue raised by the Plaintiffs concerns penalty interest. The issue is:
Whether claiming penalty interest in the administration of Saeco Australia was contrary to s 232 of the Act.
The Particulars of Claim allege that Saeco International paid the purchase price for the assets of Saeco Australia (pursuant to the DOCA) by reducing the debt owed to it by Saeco Australia. However, it is alleged that the debt the subject of the reduction was overstated. The debt included penalty interest. The Plaintiffs allege it was not company policy of Saeco International to charge penalty interest and that it had not been the subject of a claim for penalty interest by Saeco International until Saeco International lodged its claim in the administration of Saeco Australia.[70] By way of defence, Saeco International admitted that it made a claim for penalty interest in the sum of Є1,150,589.30. It further stated that it had a legal entitlement to charge penalty interest in relation to the unpaid debt owed to it by Saeco Australia.[71]
[70]Particulars of Claim, par 60(d).
[71]Defence, par 58B(d).
The eighth issue as identified by the Plaintiffs overlaps with the sixth issue. The issue is defined as follows:
Whether Saeco International adopted a course of conduct to remove Ubertini (and Ubertini Investments) and take his (their) interest in the Saeco Australia business.
This allegation concerns a period of time from September 2005 to February 2007. It is alleged Saeco International developed and adopted a deliberate course of conduct over that time to remove Ubertini as managing director of Saeco Australia, to obtain control of Saeco Australia and to obtain the Saeco Australia business without paying anything to the Plaintiffs for their shares.[72]
[72]Particulars of Claim, par 59.
By way of defence, Saeco International alleges that on 4 August 2006 it offered to pay the Plaintiffs $2.5 million for the Plaintiffs’ shares in Saeco Australia (to be paid in 2 instalments), together with a further potential payment of $250,000, subject to future performance hurdles. The offer also included a termination payment to each of Ubertini and his wife.[73] Saeco International further alleges that in October 2006 it remained prepared to compromise on terms no less favourable than the offer made on 4 August 2006. It otherwise denies the allegations.
[73]Defence, par 58A(b). Although this defence was pleaded, Saeco International did not advance a case that the existence of this offer, and its rejection by Ubertini, precluded a finding of oppressive conduct against Saeco International: cf Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 84 ACSR 121, 173-175 [226]-[237] (Campbell JA, with whom Macfarlan JA agreed), 193 [331(C)] (Young JA).
The ninth issue concerns the conduct of the directors of Saeco Australia nominated by Saeco International. It was referred to as follows:
Whether Egan’s and De Gregorio’s conduct in failing to assist Saeco Australia and acquiescing in the conduct of Saeco International (identified in the previous issues) up to the time of administration, and then resolving to appoint administrators based on the effects of the identified conduct, was contrary to s 232 of the Act.
The Plaintiffs allege that the directors nominated by Saeco International omitted to address or remedy concerns of Saeco Australia and that such omissions, and further or alternatively their actions of resolving to appoint administrators, were oppressive, unfairly prejudicial to, or unfairly discriminatory against the Plaintiffs.[74] Saeco International generally denied the conduct alleged, and denied any such conduct came within the conduct referred to in any of the paragraphs of s 232 of the Act. By this defence, Saeco International raised the issue of whether its conduct and any of the alleged omissions of the 2 directors nominated by Saeco International was conduct of any of them in the company affairs of Saeco Australia.
[74]Particulars of Claim, par 53 (incorporating the relevant paragraphs of the Particulars of Claim preceding it which identified the relevant conduct) and par 58.
C.3 Saeco International’s claims
As noted above, in response to the Plaintiffs’ allegations, Saeco International makes its own allegations of oppressive conduct against the Plaintiffs. The first such allegation was described as follows:
Conduct designed to prevent board meetings.
The Defence refers to the provision in the Shareholders’ Agreement[75] which recorded that, for there to be a quorum at a directors’ meeting of Saeco Australia, there must be a “B” director present at all times during the meeting. The Plaintiffs alone held the right to appoint the “B” director, who at all material times was Ubertini.[76] It is further alleged that on many occasions commencing (at the latest) in August 2006, and continuing until February 2007, Ubertini deliberately took steps which had the effect that a meeting of the board of directors of Saeco Australia could not occur.
[75]See par 22 above.
[76]Defence, par 60.
In response, the Plaintiffs pleaded a series of events commencing 6 April 2005.[77] The Reply then continued:[78]
In those circumstances, the refusal of Ubertini to attend directors’ meetings was the result of his belief that [Saeco International] wished to hold the meeting of directors for an improper purpose, namely to remove him from his position as managing director and take control of Saeco Australia, to his exclusion and to the detriment of Saeco Australia and/or the Plaintiffs, which belief was reasonable and accurate.
As can be seen, the Plaintiffs accepted there was a refusal on the part of Ubertini to attend board meetings; though, at trial, this was put on the basis that the refusal was only for some of the relevant period. It was further alleged that the non-attendance by Ubertini at formal directors’ meetings did not adversely affect the operation of the business of Saeco Australia.
[77]Reply, par 4.
[78]Reply, par 4(g).
The second allegation made by Saeco International was as follows:
Unauthorised transfer of funds.
By way of 2 transfers on 5 February 2007 and 13 February 2007, a total of $5.6 million is alleged to have been transferred from Saeco Australia’s bank account into an account styled “Ubertini Investments Pty Ltd”. It is alleged this account was controlled by Ubertini. It is further alleged that the transfers were not authorised by Saeco Australia and there was no valid basis for those transfers.[79]
[79]Defence, pars 62-65.
In response, the Plaintiffs admit the transfers occurred as alleged, but plead that those transfers were to a specific account set up for Saeco Australia. The Plaintiffs allege that the purpose of the transfers was to avoid $5.6 million being unilaterally applied by Saeco International for its own purposes. Finally in this regard, it is alleged by the Plaintiffs that the funds were returned, together with interest earned, on 19 March 2007. In the circumstances, it was pleaded that the transfers did not adversely affect the operation of Saeco Australia.[80]
[80]Reply, par 5.
The third issue identified by Saeco International was described as:
Related party transfers.
Broadly speaking, it is alleged that some time prior to February 2007 Saeco Australia, and a subsidiary company, Saeco South Australia Pty Ltd, paid “significant management fees” to a company related to Ubertini. It is alleged that, despite requests, Ubertini never provided a valid explanation for the payment of the management fees.[81]
[81]Defence, pars 66-70.
It is further alleged by Saeco International that, without proper authorisation, Ubertini authorised, directed and/or procured the payment by Saeco Australia of a sum of $1.5 million to Ubertini Investments as trustee of the Ubertini Family Trust.[82]
[82]Defence, par 71.
No substantive pleading in response was provided to the allegations concerning the payment of management fees to the related company.[83] In response to the allegation concerning the payment of $1.5 million to Ubertini Investments, it was alleged that Saeco Australia was truly and justly indebted to Ubertini Investments for that amount and that the loan had been the subject of a written loan agreement (ie the Loan Agreement), which provided that the loan was repayable on demand.
[83]Reply, par 6. It was contended in the pleading that the Plaintiffs could not plead to the allegation until further and better particulars were provided. At trial, this issue was dealt with as a matter of evidence without objection from any party.
The fourth issue raised by Saeco International was simply defined as:
Adviser fees.
In the Defence, Saeco International alleges that approximately $100,000 was paid improperly to a legal firm, Maddocks, by Saeco Australia in circumstances where Maddocks were acting for Ubertini both personally and for entities associated with Ubertini.[84] In addition, it is alleged that approximately $30,000 was paid to Grant Thornton by Saeco Australia notwithstanding Grant Thornton was acting for Ubertini and associated entities.
[84]At pars 72-73.
In relation to the fees paid to Maddocks, the Plaintiffs allege in response that those fees were the subject of a proceeding in the County Court which was settled on a confidential basis.[85] As to the Grant Thornton fees, it is alleged that they were also the subject of a legal proceeding. This proceeding is alleged to have been brought by the Administrators of Saeco Australia, and to have been resolved on the basis that Ubertini was released from all claims relating to payments to Grant Thornton.
[85]Reply, par 8.
The fifth issue raised by Saeco International is described as follows:
Debts to Saeco International and related entities.
This aspect of Saeco International’s case was only pressed in relation to the allegations contained in paragraph 79 of the Defence. That paragraph alleges that, in the period commencing 2004 and continuing until February 2007, Ubertini deliberately chose to cause Saeco Australia to pay creditors of Saeco Australia other than Saeco International and its related entities in a timely manner, while at the same time not paying the debts to Saeco International in a timely manner.
In response, the Plaintiffs allege as follows:[86]
[86]Reply, par 10.
[I]n the period September 2005 to February 2007, [Saeco International] developed and adopted a deliberate course of conduct, to remove Ubertini as managing director of the company, to obtain control of Saeco Australia, and to obtain the Saeco Australia business without paying anything to the Plaintiffs for their shares in business (sic) conducted by Saeco Australia. Such conduct by [Saeco International] justified the non-payment by Saeco Australia of disputed [Saeco International] invoices, until the dispute between [Saeco International] and Saeco Australia concerning:
(a) those invoices; and
(b) the providing of a credit for returned defective stock,
had been resolved.
The conduct of [Saeco International], by its representative directors placing Saeco Australia into administration on 13 February 2007, prevented this from occurring.
Further allegations were made in the same paragraph of the Reply. These allegations are now, in substance, contained in the Particulars of Claim.[87] These further allegations are not pleaded as a basis to justify the Plaintiffs’ conduct. They cannot properly be characterised as matters for reply. Accordingly, they need not be repeated here.
D. Determination of the factual issues
[87]See par 58 above. Most of what is quoted above also appears in the Particulars of Claim to support the case against Saeco International of oppressive conduct.
D.1 The Plaintiffs’ claims
The Plaintiffs submit the 9 matters which they have raised, both individually and collectively, are evidence of oppressive conduct on the part of Saeco International. Presently, I will determine whether the facts as alleged have been established.
D.1.1 Claim under the Brand Management Agreement
As noted above,[88] the Brand Management Agreement imposed a fee of 3.5 per cent on net sales, but this agreement was entered into on the basis that a 3.5 per cent discount would be given to Saeco Australia to offset these fees. Self-evidently, the overall arrangement meant that Saeco Australia was to be subsidised for the cost imposed by reason of the Brand Management Agreement.
[88]At pars 14-19.
The evidence discloses that the Brand Management Agreement was not performed by Saeco Strategic Services in accordance with its terms almost from the outset. I have already referred to the fact that the relevant annexure to the Brand Management Agreement listed a large number of Services. The Services were to be performed so that Saeco Strategic Services would “manage and co-ordinate the worldwide advertising of the Trademarks”. In this regard, the Services were as follows:
(1)Providing advice and assistance to advertising agencies for brand recitals, non-fictions, presentation.
(2)Work, with the advertising agencies, on the layout of advertising for storyboards, TV, radio and print.
(3)Work, with the advertising agencies, on the production of advertising (that is all investments for the creation of TV and radio adverts).
(4)Managing public relations.
(5)Overseeing the website design.
(6)Overseeing photographic releases.
(7)Conducting work on product placement and cross marketing.
(8)Overseeing the production of videos.
(9)Arranging and overseeing advertising events.
(10)Manag[ing] relationships with TV, radio and the press.
According to Ubertini, with the exception of item (5) concerning the overseeing of the website design, none of the Services were ever provided to Saeco Australia by Saeco Strategic Services (or anyone else on behalf of Saeco Strategic Services). No evidence was led by Saeco International to contradict this evidence. Saeco Strategic Services was based in Ireland. No one from that office was called to give evidence. Taddeo gave evidence that Moroni was the managing director of Saeco Strategic Services. As already noted, Moroni did not give evidence. Schwartz, the director of sales and marketing for Saeco International, simply did not know whether or not any of the Services referred to in the preceding paragraph were provided.
Additionally, the Brand Management Agreement required Saeco Strategic Services to “conduct market research in relation to [Saeco International’s] products and marketing positioning in co-operation with prime advertising agencies”. Saeco Strategic Services was also required to provide data from its market research. Ubertini gave evidence that this was not done and that Saeco Australia paid its own subscription for a market research report published in the industry.[89]
[89]The evidence of Ubertini was not entirely clear on this issue. He said that Saeco Strategic Services provided 2 reports per year, but they were not complete, and that Saeco Australia was required to pay for its own reports (known as GFK reports) because it could not run the business without them. From this evidence I infer that the obligations of Saeco Strategic Services were not met and Saeco Australia was required to incur the costs of obtaining relevant market research for the purposes of marketing its products: see T258.23-259.06. Schwartz was unable to say whether or not Saeco Strategic Services provided any reports.
Another Service required to be provided by Saeco Strategic Services was the sponsoring of a cycling team in Australia, and other sponsorships, including of clubs and associations. Historically, Saeco International had sponsored a cycling team in January of each year which, according to Ubertini, provided “fantastic exposure”. At the time the Brand Management Agreement was signed, the cycling team had come to Australia for the previous 3 or 4 years.
However, in January 2004, being the first January after the execution of the Brand Management Agreement, no cycling team was sponsored by Saeco Strategic Services. Ubertini said he understood the cycling team would still be coming to Australia at the time he agreed to the Brand Management Agreement, but that Saeco International “sold” the cycling team shortly thereafter. In short, no Services were provided by Saeco Strategic Services by way of sponsorship.
The final Service to be provided was headed “Exhibitions”. This required Saeco Strategic Services to co-ordinate the participation of the Saeco group of companies in all major trade exhibitions worldwide. It seems some Services were provided in relation to this aspect of the Brand Management Agreement, but they were minimal. Schwartz was unable to give any evidence as to the Services provided concerning exhibitions. Saeco International led no evidence as to what Services were provided in this regard.
It is abundantly clear from what is set out above that there was almost a complete failure on the part of Saeco Strategic Services to provide the Services in accordance with the Brand Management Agreement. The failure to provide the Services occurred almost from the very outset. Certainly, Saeco Strategic Services could not justify the fee of 3.5 per cent of net sales based on this aspect of the Brand Management Agreement.
In addition to the Services, Saeco Strategic Services granted Saeco Australia the right to use the “Trademarks” and the use of the name “Saeco” in Saeco Australia’s name. This part of the Brand Management Agreement was performed. However, there was no delineation between this aspect of the Brand Management Agreement and the provision of the Services, to provide a means by which to allocate what part of the 3.5 per cent fee was attributable to the different features of the Brand Management Agreement.
Another factor relevant to consideration of the fairness of Saeco Strategic Services making the demand on 22 December 2006, is the manner in which the fees were treated by the parties at a time when they were not at loggerheads. Not only was there an arrangement put in place at the time the Brand Management Agreement was entered into for Saeco Australia to receive a 3.5 per cent discount on prices charged by Saeco International, but accommodation was also made in favour of the Plaintiffs when discussions commenced on how the Plaintiffs were to be paid for their shares.
As noted above,[90] De Gregorio himself proposed that the 3.5 per cent fee not be taken into account adversely to any valuation of the shares in Saeco Australia. He said the agreement was that this fee would be treated as revenue of Saeco Australia, rather than as an expense. Perhaps this might be explained, at least in part, by reason that Saeco Australia already had the right to use the name “Saeco”, and the relevant trade marks as part of its business,[91] before it signed the Brand Management Agreement, coupled with the fact that most of the Services were not provided.
[90]At par 35 above.
[91]Ubertini agreed with the proposition put to him in cross-examination that he thought it was an existing contractual right.
There was no evidence explaining why De Gregorio took the approach that he did. In any event, it is plain that the parties did not consider the 3.5 per cent fee was an unconditional debt due and payable in the usual way.[92] There was conflicting evidence as to whether and, if so, to what extent the fee had been paid by Saeco Australia in the past. De Gregorio claimed that, although it was recorded in the accounts of Saeco Australia,[93] the brand management fee was not paid by Saeco Australia from the beginning. Contrastingly, Ubertini said Saeco Australia paid the fee until he realised Saeco Strategic Services was not honouring the Brand Management Agreement. This was said to be in 2004 or 2005. The Report to Creditors suggested the fee had not been paid since December 2004.[94]
[92]See also section D.2.3 below, pars 463-471.
[93]For example, for the 15 months ended 31 March 2005, $808,330 was recorded as an expense for “Brand management fees”. Further, for the year ended 31 December 2003 (which only consisted of 6 months in relation to the fee, which was imposed from 1 July 2003: cl 3.5), the amount was $387,512. I also note the report to the directors for the period ended 31 March 2005 records the fees as having been “paid to Strategic Services for the full year”, but Ubertini gave evidence he could not recall it actually ever being paid. This evidence is to be contrasted with earlier evidence in which Ubertini said (after reading extracts from the accounts) that it had been paid. It is clear he was not sure of the precise details, however, he gave evidence which indicated certainly some fees were paid: see pars 463-471 below. (The relevant records of any payments were not produced by any party.)
[94]Report to Creditors, section 5, p 5.10.
Certainly, there was no evidence to suggest that the fee was paid beyond the period ended 31 March 2005. This becomes an issue in the context of the Plaintiffs alleging that the demand for payment made on 22 December 2006 was contrary to established business practices and was unreasonable.
It is also alleged that De Gregorio knew that there was a dispute between Saeco Australia and Saeco Strategic Services as to whether or not the Services had been provided, and, further, whether stock purchased by Saeco Australia from Saeco International ought to have had a 3.5 per cent discount. Both of these issues were said to give rise to De Gregorio knowing there was a dispute as to whether or not the sum demanded on 22 December 2006 was truly due and payable.
There was no letter from Saeco Australia or Ubertini specifically setting out the basis upon which Saeco Australia was declining to pay the brand management fee after 22 December 2006. But it is clear De Gregorio did know there was a dispute in relation to the sums claimed under the Brand Management Agreement.
On 19 January 2007, De Gregorio sent a letter to Ubertini specifically directed to whether fees were payable under the Brand Management Agreement as demanded by Saeco International. In so doing, he rejected accusations that had been made by Ubertini about “profit transfers to off-shore subsidiaries”. Further, on 24 January 2007, Ubertini sent an email to Egan, which was copied to De Gregorio and the 3 other directors of Saeco Australia, which challenged Egan’s inactivity as a director of Saeco Australia concerning various issues. One of the issues raised was the fees claimed by Saeco Strategic Services under the Brand Management Agreement. Ubertini alleged improper transferring of company profits overseas in circumstances where “no service at all” was being provided by Saeco Strategic Services (with the minor exception of provision of the so-called GFK reports).[95]
[95]See fn 89 above.
(Emphasis added.)
Lord Keith then stated that the fact that the subsidiary might have secured its supply of product from the parent company by a contract, but had not done so, was “beside the point”.[277]
[276]At 363.4.
[277]At 363.8.
Lord Keith rejected a submission that the subsidiary ought to be wound up. This submission was put on the basis that the subsidiary’s business had been successfully destroyed by the parent company. In so doing, his Lordship stated:[278]
But, that means that if oppression is carried to the extent of destruction of the business of the [subsidiary] no recourse can be had to the remedies of the section. This would be to defeat the whole purpose of the section. The present position is due to the oppression and but for the oppression it must be assumed that the [subsidiary] would be an active and presumably flourishing concern. The section is, in my opinion, very apt to meet the situation which has arisen.
Accordingly, although there may ordinarily be no proper basis for orders to be made pursuant to s 233 of the Act if the oppressive conduct has ceased,[279] if the impugned conduct has brought about the destruction of the company’s business, it may be appropriate for relief (other than winding up the company) to be granted.[280]
[278]At 364.3. See also Lord Denning at 368.5, 368.9-369.2.
[279]See, for example, Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, 361-362 [180]-[182] (Gummow, Hayne, Heydon and Kiefel JJ).
[280]See also par 515 below; and Tomanovic v Global Mortgage Equity Corp Pty Ltd (2011) 84 ACSR 121, 193 [329] (Young JA, agreeing with Campbell JA, with whom Macfarlan JA also agreed), Szencorp Pty Ltd v Clean Energy Council Ltd (2009) 69 ACSR 365, 382 [72]-[76] (Goldberg J), Re Hollen Australia Pty Ltd [2009] VSC 95 [66] (Robson J), Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359, 387 [123], 387-388 [125]-[126] (Giles JA), 401-404 [191]-[204] (Basten JA), cf 431-433 [366]-[386] (Young JA).
Lord Morton held that although the parent company adopted a strategy to oppress the subsidiary, such conduct was not conduct of the subsidiary’s affairs.[281] His Lordship then considered the position of the directors of the subsidiary. In that regard, he said:[282]
As these directors of the [subsidiary] were also directors of the society, they must, no doubt, be treated as parties to the oppression by the society in the conduct of its own affairs; but I have had great difficulty in arriving at a conclusion upon the question just posed, which is directed only to the affairs of the [subsidiary] … My difficulty is that the conduct of which complaint is made consists rather of sins of omission than of sins of commission, and the day to day affairs of the [subsidiary] appear to have been “conducted” by [the executive directors of the subsidiary] without any active interference by the other directors …
After referring to 2 possible exceptions to the last statement in the passage quoted above, his Lordship continued:[283]
Suffice it to say that in the end I have reached the conclusion that there is evidence to justify the view that the affairs of the [subsidiary] were “conducted in a manner oppressive” to the [petitioners].
[281]At 346.7.
[282]At 347.4.
[283]At 347.8.
Lord Morton did not elaborate in relation to how he reached this conclusion beyond stating that he was not disposed to give a narrow meaning to the words in the section.
Lord Denning also delivered a separate judgment. He posed the question as to how the conduct of the parent company could touch the manner in which the affairs of the subsidiary were conducted,[284] and then said, “[t]he answer is, I think, by their impact on the nominee directors”. Accordingly, his Lordship focussed on the position the nominee directors found themselves in. In so doing, he made the following observation:[285]
So long as the interests of all concerned were in harmony, there was no difficulty. The nominee directors could do their duty by both companies without embarrassment. But, so soon as the interests of the two companies were in conflict, the nominee directors were placed in an impossible position. Thus, when realignment of the shareholding was under discussion, the duty of the three directors to the [subsidiary] was to get the best possible price for any new issue of its shares, whereas their duty to the co-operative society was to obtain the new shares at the lowest possible price – at par, if they could.
(Citations omitted, emphasis added.)
[284]At 366.3.
[285]At 366.7.
Having elaborated further on the conflict that the nominee directors found themselves in, Lord Denning continued:[286]
It is plain that, in the circumstances, these three gentlemen could not do their duty to both companies, and they did not do so. They put their duty to the co-operative society above their duty to the textile company in this sense, at least, that they did nothing to defend the interests of the [subsidiary] against the conduct of the co-operative society. They probably thought that “as nominees” of the co-operative society their first duty was to the co-operative society. In this they were wrong. By subordinating the interests of the [subsidiary] to those of the co-operative society, they conducted the affairs of the [subsidiary] in a manner oppressive to the other shareholders.
(Emphasis added.)
[286]At 367.3.
Lord Denning then observed that conduct may be oppressive even if it only involves inaction. Having made this observation, Lord Denning suggested that, at the very least, the nominee directors could have protested against the conduct of the society.[287] In response to a submission that any protest by the nominee directors would not have altered things, Lord Denning made a further observation, which is apposite to the circumstances of this case:[288]
The answer is that no one knows whether [the protest] would have done any good. They never did protest. And it does not come well from their mouths to say it would have done no good, when they have never put it to the test.[289]
Finally, Lord Denning considered the appropriate remedy, expressing views consistent with those made by Lord Keith, namely that an order winding up the subsidiary was inappropriate in the circumstances.[290]
[287]At 367.7.
[288]At 367.9.
[289]See also Heywood v Wellers [1976] QB 446, 459D (Lord Denning); Coldman v Hill [1919] 1 KB 443, 457.7 (Scrutton LJ).
[290]At 368.4-369.6. See par 510 above.
Turning to the submissions made, with respect, I do not agree with the summation of what was contended to be the different approaches taken by the law lords (as set out in paragraph 503 above). On my reading of the judgments:
(1)There was a broader approach taken (by Viscount Simonds) and a narrower approach propounded (by Lord Morton). The broader approach may permit a court to treat the conduct of a parent company to be the affairs of a subsidiary company if the conduct affects the subsidiary’s affairs, regardless of whether the parent company’s conduct is being engaged in by its nominee directors on the board of the subsidiary. In contrast, Lord Morton decided the conduct of the parent company, even if oppressive towards its subsidiary, would not, per se, be in the subsidiary’s affairs. His Lordship found it required wrongful conduct,[291] whether action or inaction, on the part of the nominee directors before the parent company’s conduct could be characterised as of the subsidiary’s affairs.
(2)Lord Keith did not confine himself to the narrower approach in deciding the case. The passage set out in paragraph 509 above demonstrates this; see “I would go further” and following. The conduct referred to by Lord Keith in the last sentence of this passage speaks of the conduct of the parent company independent of any conduct of the nominee directors.
(3)Lord Denning’s position does not make it clear whether he would have rejected the broader approach if he had been required to consider it. In light of the question posed and answered,[292] his judgment is directed towards the conflict that the nominee directors faced as providing the basis for establishing their conduct, on behalf of the parent company, was of the subsidiary’s affairs.
(4)Even if I am incorrect in this understanding of Lord Denning’s comments, it does not follow that the majority of the law lords decided the case on the narrower basis, and thereby rejected the broader approach.
[291]Lord Morton referred to the conduct in question as “sins of omission”: at 347.6.
[292]See par 513 above.
Saeco International submitted that, consistent with the ratio for the decision being the narrower approach, Australian authorities had followed this narrower view. With respect, I do not accept this submission. I do not read any of the subsequent decisions, referring to Scottish Co-operative Wholesale Society Ltd v Meyer when considering conduct of parent companies and subsidiaries, as necessarily confining the meaning of “’affairs’ of a company” in this context to conduct that is performed by the nominee or common directors on the board of the other company (ie the company whose affairs are not the subject of the application).
The earliest of the Australian cases referred to in the closing submissions of the parties was Re Cumberland Holdings Ltd.[293] In that case the broader approach of Viscount Simonds was expressly referred to with approval.[294]
[293](1976) 1 ACLR 361.
[294]At 376.7 (Bowen CJ in Eq).
The next case, Re Norvabron Pty Ltd (No 2),[295] was decided on the narrower approach. That approach was sufficient for there to be a basis to find oppressive conduct in the affairs of the company the subject of the application. (In that case, it was successfully established that conduct in the subsidiary was conduct in the affairs of the parent company.) Derrington J found that the directors of the holding company knew what was happening to the subsidiary, as they were directly involved as directors of the subsidiary, and were in breach of their duties as directors to fail to remedy the wrongful conduct in question.[296] His Honour refers to this as the “technical answer” to the submission that the conduct was not in the affairs of the holding company.
[295](1986) 11 ACLR 279.
[296]At 292.3.
On my reading of the judgment of Derrington J, there is nothing stated which suggests his Honour was rejecting the broader approach. Indeed, Derrington J refers[297] to Scottish Co-operative Wholesale Society Ltd v Meyer, by reference to the judgment of Viscount Simonds.[298]
[297]At 291.8.
[298][1959] AC 324, 342.4. However, equally, I do not understand this as preferring Viscount Simonds’ approach as the reference is confined to the meaning of “oppressive”.
The trial in Re Norvabron Pty Ltd (No 2) was heard after the defendants had successfully argued a demurrer, both at first instance and on appeal.[299] Saeco International submitted that the Full Court of the Supreme Court of Queensland concluded that a case could only be pleaded properly with the narrower approach in Scottish Co-operative Wholesale Society Ltd v Meyer.[300] This position, it was contended, applied in relation to the affairs of a parent company or the affairs of a subsidiary, by reason of conduct of its subsidiary, or its parent company respectively. I do not agree that such a finding was made.
[299]Re Norvabron Pty Ltd (1986) 11 ACLR 33 (Andrews CJ, Macrossan and Carter JJ).
[300][1959] AC 324.
The criticisms of the statement of claim in the appeal before the Queensland Full Court, which were upheld, were that the conduct pleaded was confined to the conduct of the board of the subsidiaries.[301] As was stated by Macrossan J (who delivered the leading judgment of the court), given the way in which the case had been pleaded “the argument turned on a very narrow point and did not necessarily involve any matter of substance”.[302] In referring to Scottish Co-operative Wholesale Society Ltd v Meyer, Macrossan J expressly referred to each of the judgments, including Viscount Simonds.[303] Having done this, Macrossan J said, “even accepting all of what was decided in the Scottish Co-operative case” and then went on to give his ruling. That ruling makes clear that the case stands for no wider proposition than this:[304]
[I]f a case is to be made of oppressive inactivity within the affairs of the [parent] company, it cannot be effectively pleaded solely by a statement, however extended, of the activities in the affairs of the subsidiaries. It requires as well to be accompanied by a statement of activity in the affairs of [the parent company] (or it seems that a correlative “inactivity” may be relied on) because this is the basis for relief in the jurisdiction concerned with oppression.
(Emphasis added.)
[301]More specifically it was submitted there was no express pleading “of any conduct, either positive or negative, or any act or omission of [Norvabron] or by the directors of [Norvabron] as such or by members of [Norvabron] or by persons on its behalf …”: at 34.9-35.1.
[302]At 36.3.
[303]At 36.6.
[304]At 36.9.
The last Australian case referred to by the parties was Re Dernacourt Investments Pty Ltd.[305] In that case, Powell J proceeded on the basis that conduct of a holding company may be in the affairs of its subsidiary, and, conversely, conduct of a subsidiary may be in the affairs of its holding company.[306] The case involved allegations of oppressive conduct of a parent company in refusing to procure its wholly owned subsidiaries to make available certain records to shareholders of the parent company.
[305](1990) 20 NSWLR 588.
[306]At 615E-F; see par 524 below.
In determining the issues before him, Powell J adopted the approach of Derrington J in Re Norvabron Pty Ltd (No 2).[307] However, Powell J was not seeking to make any determination about the extent to which the conduct of a subsidiary may be of the affairs of its holding company, or vice versa. So much is clear from the following:[308]
Although some of the authorities would suggest that the phrase “the affairs of the company are being conducted”[309] requires, prima facie, that the relevant plaintiff must establish both a continuing course of conduct, and that that conduct is still continuing at the time when the court’s aid is invoked, I am content to proceed on the basis that, in an appropriate case, a refusal to do some act, or to permit some act to be done, which refusal is persisted in at the relevant time, may constitute such a continuing course of conduct. Further, although the relevant plaintiff must demonstrate that it is the relevant company’s affairs which are being so conducted, I am prepared to proceed upon the bases, first, that, in an appropriate case, the conduct of a holding company, or of such of its directors who happen to be directors of the relevant subsidiary, towards a subsidiary, may constitute conduct in the affairs of that subsidiary, and, secondly, that, in an appropriate case, the conduct of a subsidiary, or of some or all of its directors who happen as well to be directors of the holding company, may be regarded as part of the conduct of the affairs of the holding company.
(Citations omitted, emphasis added.)
[307]At 616C.
[308]At 615C-F.
[309]This language is taken from the Companies (New South Wales) Code, s 320(1)(a)(i).
As may be seen, in dealing with the position of each of a subsidiary and a holding company, Powell J directed his observations to both the conduct of the holding company and the subsidiary respectively and, in addition as an alternative, to the common directors in each situation. Powell J then proceeded to decide that the case before his Honour was concerned with inaction, rather than action, and that, as the directors in question had no duty to act, the inaction comprising the conduct complained of was not conduct of the parent company.[310] In my view, this finding does not indicate any rejection of the broader approach in an appropriate case.
[310]At 616E-F.
The passage from Re Dernacourt Investments Pty Ltd set out above was quoted with approval in Rackind v Gross.[311] I do not read reference to this passage in Rackind v Gross as a suggestion by the Court of Appeal in that case that the narrower approach was the correct approach. On the contrary, as I have stated, the passage referred to with approval appears to entertain the possibility of either the narrower or the broader approach being adopted.
[311][2005] 1 WLR 3505, 3513-3514, [29] (Nourse J, with whom Keene and Jacob LJJ agreed).
In the leading judgment in Racklind v Gross, having considered both Re Norvabron Pty Ltd (No 2) and Re Dernacourt Investments Pty Ltd, amongst other Australian cases,[312] Sir Martin Nourse said the following:[313]
In my judgment none of the … further authorities can be said to diminish the persuasive value of the decisions in In re Norvabron (No 2) and In re Dernacourt. Those were considered judgments of the Supreme Courts of Queensland and New South Wales respectively and they are directly in point. I would follow them accordingly.
(Citations omitted.)
There was nothing said by Nourse J which qualified this endorsement of these 2 Australian cases.
[312]One of the other Australian cases considered was Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692, in which Young J held that the conduct of a director of a subsidiary, who had been appointed to the board of the subsidiary by the holding company, was not conduct in the affairs of the holding company. As was expressly acknowledged by Young J (at 704.3), his Honour’s observations in relation to what comprised the affairs of the holding company was obiter dicta (albeit “considered obiter”: see par 495 above) for a number of reasons, including that the conduct in question was held not to be oppressive conduct: at 705.8. Further, the decision is confined to a finding that the mere fact that a person is a nominee director “is [not] sufficient for one to conclude that when so taking part in a board meeting on a company one is acting in the affairs of the appointor company”: at 705.7.
[313]At 3514 [32].
In summary, I do not understand the authorities to limit a court’s approach, when considering whether conduct is “conduct of a company’s affairs” in the context of a relationship of a holding company and a subsidiary, to the narrower approach taken by Lord Morton in Scottish Co-operative Wholesale Society v Meyer. As has been noted, the issue as to the extent of the meaning of “affairs” in this context is not settled.[314]
[314]Austin and Ramsay, Ford’s Principles of Corporations Law (15th Ed, 2013), 719 [10.445]. In adopting this statement of the present position, I am not ignoring cases such as Hough v Hardcastle [2005] EWHC 1415 (Comm) (Sir Donald Rattee). In that case, the 2 companies in question were not parent and subsidiary, but related companies (see at [2]-[15] for the company structures in place). It was held that conduct of 1 of the companies could not possibly be in the affairs of the other company. For this reason, and others, the petition was struck out summarily.
F. Further application of the principles to the circumstances
I have set out my conclusions at the end of each part of section D above. The findings in section D demonstrate that the Plaintiffs have largely been successful in establishing the facts upon which they seek relief. It is now necessary to ascertain which of those findings might support the relief sought.
As the relevant authorities indicate, in considering this issue, the court must also take into account the facts as proven by Saeco International against Ubertini. These facts show that Ubertini’s conduct during the relevant period was not without blemish. In those circumstances, the court is required to consider the extent to which Ubertini’s conduct might lead the court to not granting any relief, or alternatively making orders other than those sought by the Plaintiffs.
F.1 Saeco International’s oppressive conduct of the affairs of Saeco Australia
The conduct of Saeco International in relation to the making of the Demands,[315] accompanied by the decision to obtain control and ownership of the Australian business then conducted by Saeco Australia, and in continuing with that strategy up to and including 13 February 2007 when the Administrators were appointed, was clearly conduct that was oppressive to the affairs of Saeco Australia. For the reasons stated, such conduct, when viewed objectively, was commercially unfair to the interests of Saeco Australia.
[315]The Principal Demand was made by Saeco International itself: see par 78 above. In relation to the demands other than the Principal Demand, Saeco International caused, or at least permitted, its wholly owned subsidiary, Saeco Strategic Services, to send these demands.
As to whether the conduct referred to in the preceding paragraph was of Saeco Australia’s affairs, there is no need to go beyond the narrower basis of the decision in Scottish Co-operative Wholesale Society Ltd v Meyer.[316] The evidence discloses that De Gregorio and Egan were actively involved in, and had full knowledge of, the strategy intended to be, and in fact, implemented by Saeco International. The evidence also demonstrates that this strategy, which was to be implemented to allow Saeco International to gain outright control and ownership of the Australian business, was concealed from Ubertini and the independent directors. Such conduct was of the affairs of Saeco Australia.
[316][1959] AC 324.
As already noted, the implementation of the strategy involved positive steps being taken by De Gregorio and Egan, which they duly took. To the extent the allegations concern inaction on the part of the nominee directors, each of De Gregorio and Egan plainly owed a duty to Saeco Australia to disclose the harmful intentions of Saeco International. This inaction was also conduct of the affairs of Saeco Australia.
It is not necessary to make any finding in relation to what other courses might have unfolded if De Gregorio and Egan had not simply implemented Saeco International’s strategy, but had acted consistent with their duties as directors of Saeco Australia.[317] It is sufficient for the court to find, and I so find, that Saeco International has not established that if De Gregorio and Egan had acted differently the outcome which would have eventuated in any event would have been the same or substantially similar to the outcome of the meeting on 13 February 2007, and the events that subsequently followed. On the contrary, De Gregorio gave evidence that with a different subsidiary, and with different personalities involved, he, on behalf of Saeco International, may have been prepared to not require payment of the working capital component of the debts claimed in the Principal Demand.
[317]See par 515 above.
Regarding the findings made above in relation to the New Range, the Returned Stock and the claims by Saeco International for penalty interest, these matters have been taken into account in arriving at the court’s overall conclusions. But it is not necessary to make any findings as to whether those matters would also form a further basis upon which the Plaintiffs might be entitled to relief. Save to note that such matters might be relevant to the basis upon which the Plaintiffs’ shares in Saeco Australia might be valued, it is not necessary to address these matters further. Based on the court’s findings in sections D.1.5 and D.1.6,[318] in the circumstances of the commercial relationship that prevailed at the time, the Plaintiffs have established their case that orders ought to be made by the court under s 233 of the Act.
[318]See pars 236-352 above.
The findings made bring this case squarely within the conduct referred to in s 232(e) of the Act. In those circumstances, it is not necessary to decide whether s 232(d) has also been contravened. As the focus of the Plaintiffs’ submissions is almost entirely on s 232(e), I do not propose to address s 232(d) separately.
F.2 Ubertini’s oppressive conduct of the affairs of Saeco Australia
The failures of Ubertini in relation to the non-payment of Saeco International’s debts from June 2006 to February 2007, the non-provision of a repayment plan from late December 2006 until 13 February 2007 and the prevention of board meetings of Saeco Australia from late 2006, do not provide any proper basis for Saeco International resisting orders that ought to be made concerning the purchase of the Plaintiffs’ minority shareholdings in Saeco Australia.[319] Although such conduct by Ubertini was materially unfair, any response which had the effect of totally destroying Saeco Australia’s ability to conduct the Australian business was totally disproportionate and commercially unfair. As I have found, this was the intended effect, and the actual result, of the conduct of Saeco International.
[319]This is an order that may be made under the Act: s 233(1)(d).
Further, the conduct of Ubertini from mid 2006 onwards cannot be characterised as conduct that would inevitably, or even reasonably, lead to a response such as the response by Saeco International.[320] There are numerous other ways in which Saeco International might have responded, which would not have involved engaging in oppressive conduct. Given that Saeco International had the majority vote on the board, once a board meeting finally could be held, various other options might have been taken which did not involve effectively destroying Saeco Australia’s ability to conduct the Australian business.[321]
[320]Cf Tainsh v Barber (1997) 23 ACSR 158, 177.5 (Foster J), referred to with approval in Saykan v Elhan [2006] VSCA 230, [29] (Nettle and Ashley JJA and Smith AJA).
[321]See par 534 above.
F.3 Relief
Saeco International submitted that in the event that the Plaintiffs successfully established that Saeco International had engaged in oppressive conduct of the affairs of Saeco Australia, Saeco Australia ought to be wound up. In my view, to make a winding up order would be to allow Saeco International to successfully complete its strategy. To echo the words of Lord Keith,[322] to make such an order would deprive the Plaintiffs of any recourse in circumstances where the oppressive conduct has effectively caused the destruction of Saeco Australia. Such an order would defeat the whole purpose of the section.
[322]See par 510 above.
Accordingly, no order will be made for the winding up of Saeco Australia. Rather, the appropriate relief is that Saeco International be ordered to purchase the shares of the Plaintiffs held in Saeco Australia, on terms to be decided in due course.
G. Other matters
G.1 The rule in Browne v Dunn[323]
[323](1894) 6 R 67, 70.5-71.5 (Lord Herschell LC), 75.8, 76.9-77.1 (Lord Halsbury), 79.5 (Lord Morris).
Saeco International submitted that substantial parts of the evidence of Taddeo should not be accepted because that evidence was not put directly to either Schwartz or De Gregorio when those witnesses were cross-examined by the Plaintiffs. The evidence referred to in section D above shows that I have not accepted this submission as I have referred to, and relied upon, evidence given by Taddeo the subject of this submission.
As has been stated on numerous occasions, the rule in Browne v Dunn is not a rigid rule, but rather is a rule of fairness. The rule generally requires a party or a witness to be put on notice that evidence may be used against a party or a witness, or the court will be invited to draw an adverse inference or make an adverse comment about a witness, so that the party or the witness may respond to the issue and have the opportunity to give an explanation.[324] As has also been repeatedly recognised, the rule does not apply, and will not be treated as being transgressed, notwithstanding a witness’ version is challenged, an inference may be drawn against her or him, or an adverse comment may be made, if the witness is on notice by reason of the contents of the pleadings, an opening in the case or the manner in which the case is conducted.[325]
[324]See, for example, Lord Buddha Pty Ltd (in liq) v Harpur [2013] VSCA 101, [204] (Vickery AJA, with whom Weinberg and Tate JJA agreed); White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169, 216.9 (Goldberg J).
[325]White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169, 218.5, and the cases there cited.
Further, in commercial litigation, where issues have been clearly defined, there is often little or no point in formally challenging every aspect of the evidence which is contested. This is particularly so in a case like this where there is a large number of matters in respect of which it ought to be apparent from the pleadings and particulars that there is clearly a contest on the issue or issues in question. If this is the case, the rule need not be applied in an unduly technical way.[326]
[326]See, for example, Raben Footwear Pty Ltd v Polygram Records Inc (1997) 75 FCR 88, 101E-F (Tamberlin J).
In this case, Taddeo gave his evidence 6 days before any evidence was called on behalf of Saeco International. In my view, there was no inability on the part of Saeco International to address the evidence raised by leading evidence in chief from De Gregorio and Evans on the matters now the subject of challenge.[327]
[327]This can readily be done properly by counsel without infringing any order for witnesses out, such an order having been made in this case.
There also can be little doubt that Saeco International would have fully appreciated the use to which the evidence now the subject of challenge would be put. At the close of evidence at the trial, the parties were given a short time to prepare written submissions. Given the limited time allowed, written submissions were exchanged rather than served sequentially. In the written submissions of Saeco International,[328] Saeco International said it apprehended that the Plaintiffs would seek to rely on the evidence now referred to “in relation to the issues in the case and, in addition, as to the credit of Schwartz and De Gregorio”. Given Saeco International was able to accurately apprehend the position of the Plaintiffs at the time written submissions were exchanged, it is highly likely such apprehension was capable of materialising at the end of the evidence led by the Plaintiffs, as it ought to have been.
[328]Paragraph 64.
In any event, to the extent the rule is directed towards the position of a witness rather than a party, there can be little doubt that if the substantive matters the subject of this submission were put to Schwartz and De Gregorio respectively, they would have denied the matters raised. In substance, much of the evidence in question goes to the case that, broadly speaking, Saeco International had a plan or desire to obtain control of the business conducted by Saeco Australia either at a reduced price, or by the means or similar means to those which ultimately transpired. Both Schwartz and De Gregorio were emphatic in their denial of such suggestions when they were put by counsel for the Plaintiffs.[329] In short, the fact that some matters were not expressly put to some witnesses has been taken into account in reaching the conclusions set out above.[330]
[329]Cf Raben Footwear Pty Ltd v Polygram Records Inc (1997) 75 FCR 88, 102B (Tamberlin J).
[330]Cf Burke v Corruption and Crime Commission (2012) 289 ALR 150, 188 [192] (Buss JA, with whom Martin CJ and Mazza JA agreed).
In the preceding paragraph, I refer to “substantive matters”, rather than all the evidence the subject of objection. I have not been exhaustive in my reference to the evidence objected to because I am of the view that some of this evidence is not of any great moment. For example, objection was made to evidence by Taddeo that he was asked to step aside in dealing with Australia until June 2005 because Schwartz and De Gregorio wanted to take care of what was said to be a delicate situation. This evidence seems to be of little moment in circumstances where the real issues for consideration concern the second half of 2006 and early 2007. It is not apparent to me why such peripheral matter needed to be put to either Schwartz or De Gregorio.
Equally, to the extent that objection is taken to evidence that Saeco International’s position was that Ubertini would have to go as managing director, this appears to be uncontroversial. From the time that Ubertini expressed his desire to have the minority shareholdings of the Plaintiffs sold to Saeco International, there does not seem to be any real issue that Ubertini was to ultimately cease to be managing director. The real issues pertained to the circumstances in which that role would cease.[331]
[331]In making this observation, I am not ignoring the evidence concerning the proposed resolution to remove him at a board meeting in late 2006. In any event, the intention to remove Ubertini at this point in time is also uncontroversial as the evidence makes it clear that Ubertini knew at the time of Saeco International’s intentions in that regard.
For completeness, I also note that some of the evidence sought to be excluded pursuant to the rule in Browne v Dunn included evidence of matters to which it was said by Taddeo that Moroni was also privy. Obviously, the rule is inapplicable to that evidence insofar as it related to Moroni because Moroni was not called by Saeco International.
G.2 Credibility of the Plaintiffs’ witnesses
Saeco International submitted that, save for the specific criticisms made of Taddeo’s evidence, the witnesses called on behalf of the Plaintiffs should be accepted as “generally having attempted to give truthful evidence”. With respect, this was an entirely appropriate submission. As will be apparent from the findings I have made above, I found each of the witnesses called on behalf of the Plaintiffs to be truthful, and generally credible.
It was suggested by Saeco International that Taddeo’s evidence was very vague and in general terms in a number of respects. I accept that this is an appropriate description in relation to some of his evidence, but I cannot agree with the submission that “much” of his evidence was of this kind. Further, my assessment of Taddeo was that he made frank admissions when he could not actually remember the details of conversations that occurred in 2006 or 2007. In my view, this added to his credibility, as he did not gratuitously give evidence based on speculation or reconstruction, but was only willing to express his recollection when he had one.
G.3 Credibility of Saeco International’s witnesses
As may be seen, I have not accepted various matters put forward by each of the witnesses called on behalf of Saeco International. Given the delay in bringing this matter to trial, each witness was asked to give evidence about matters that occurred 6 to 9 years before the time of giving the evidence. In these circumstances, with the passage of this length of time, the ability of witnesses to give evidence not reconstructed, but rather from actual recollection, is necessarily impaired.[332] Although this observation applies to all witnesses in this case, speaking generally I found that the quality of the recollection of each of the Saeco International witnesses’ recollection in relation to critical events was substantially impaired. This is particularly so in relation to their inability to recall, with any specificity, when it was that the intention to place Saeco Australia into administration was formed, or at least initially discussed. In contrast, although Taddeo could not remember the precise dates, he was able to recall the surrounding events in relation to when the prospect of an administration was first discussed, amongst other significant matters.[333]
[332]See, for example, Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541, 551.6 (McHugh J), referring with approval to R v Lawrence [1982] AC 510, 517B.
[333]See par 267 above.
Although I have not accepted the evidence of Saeco International’s witnesses in significant respects, I do not accept the submission made on behalf of Saeco International that it was necessary for the court to find conduct of any of the Saeco International witnesses was “deceitful and in substance fraudulent” in order to find in favour of the Plaintiffs.[334] In this regard, I note that lawyers were heavily involved in every stage of the dispute between Ubertini and Saeco International.[335]
[334]Saeco International’s written submissions, par 58.
[335]Saeco International made submissions about the case being put at the level of fraud as the basis for a submission that when considering the standard of proof as prescribed in s 140(1) and (2) of the Evidence Act 2008 (Vic), the level of satisfaction required equated to that stipulated in Briginshaw v Briginshaw (1938) 60 CLR 336, 362.2 (Dixon J). Although I have not accepted the premise upon which the submission is made, if I had been required to be satisfied on the balance of probabilities to such a level, on the critical issue of whether or not Saeco International, De Gregorio and Egan intended Saeco International to take control of the Australian business before or at the time the Principal Demand and the other demands were sent, and continuing until 13 February 2007, and then conducted themselves to achieve that end, I would have been so satisfied.
G.4 The other minority shareholders
I have not been asked to consider the position of the minority shareholders of Saeco Australia beyond the position of the Plaintiffs. The remaining minority shareholders are not parties to the proceeding.[336]
[336]Cf Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692, 705.1 (Young J).
As presently advised, it is not apparent how the remaining minority shareholders are in any different position to the Plaintiffs in relation to the conduct of Saeco International the subject of the findings made by the court. However, as no submissions have been made in relation to the other minority shareholders other than in the most general terms, I do not propose to say anything further on this topic.
H. Conclusion
For the reasons stated, the Plaintiffs are entitled to an order that their shares in Saeco Australia be purchased by Saeco International. The form of any such order will now be the subject of further submissions if the parties are otherwise unable to agree upon the disposition of the proceeding.
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