Valra Pty Ltd v Mag Men Holdings Pty Ltd
[2019] FCA 1897
•20 November 2019
FEDERAL COURT OF AUSTRALIA
Valra Pty Ltd v Mag Men Holdings Pty Ltd [2019] FCA 1897
File number: WAD 294 of 2016 Judge: BANKS-SMITH J Date of judgment: 20 November 2019 Catchwords: CONTRACT - contract interpretation - sale of shares under compulsory sale provision in shareholders agreement - where company in financial difficulty - where purchaser sought to acquire all shares - where come along clause utilised by company - where offer to shareholders must be on same terms - meaning of same terms - whether offer on arm's length terms - whether pre-conditions to execution of share transfer by company met - where no evidence that shares of any value
CONTRACT - whether oral contract established - whether terms sufficiently certain to comprise contractual relationship - where claimed obligation was to vote as block and cooperate
CONTRACT - whether good faith requirement in shareholders agreement breached - content of alleged duty - whether obligation of disclosure - whether duties of shareholders analogous to those of partners
CORPORATIONS - oppression - claim by former minority shareholder under s 232 of the Corporations Act 2001 (Cth) - whether shareholder entitled to involvement in management decisions - whether use of come along clause oppressive - whether failure to disclose terms of agreements with creditors to compromise debts oppressive - whether use of provision to transfer shares between relatives used improperly - whether commercially unfair
Legislation: Corporations Act 2001 (Cth) s 232 Cases cited: ACI Operations Pty Ltd v Berri Ltd [2005] VSC 201
Australian Competition and Consumer Commission v Geowash Pty Ltd (Subject to a Deed of Company Arrangement) (No 3) [2019] FCA 72
Australian Goldfields NL (in liq) v North Australian Diamonds NL [2009] WASCA 98; (2009) 40 WAR 191
Australian Institute of Fitness Pty Ltd v Australian Institute of Fitness (Vic/Tas) Pty Limited (No 3) [2015] NSWSC 1639
Clarence Property Corporation Ltd v Sentinel Robina Office Pty Ltd [2018] QSC 95; [2019] 1 Qd R 144
Cunningham v Resourceful Land Limited and Ors [2018] EWHC 1185 (Ch)
Dosike Pty Ltd v Johnson (1996) 16 WAR 241
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413; (1998) 28 ACSR 688
Healey v Commissioner of Taxation [2012] FCA 269
Hillas & Co Ltd v Arcos Ltd [1932] All ER Rep 494
HNA Irish Nominees Ltd v Kinghorn (No 2) [2012] FCA 228
Huppert v Stock Options of Australia Pty Ltd [1965] HCA 30; (1965) 112 CLR 414
Joint v Stephens [2008] VSCA 210
Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd [1938] HCA 66; (1938) 61 CLR 286
M&G Broad European Loan Fund Limited v Hayfin Capital Luxco 2 SARL [2017] EWHC 1756 (Ch)
Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268
Mayfair Property Holdings Pty Ltd v Southland Packers Pty Ltd [2016] QSC 27
McCausland v Surfing Hardware International Holdings Pty Ltd [2013] NSWSC 902
McCausland v Surfing Hardware International Holdings Pty Ltd (No 2) [2014] NSWSC 163
Moffatt Property Development Group Pty Ltd v Hebron Park Pty Ltd [2009] QCA 60
Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692
New South Wales v Stevens [2012] NSWCA 415; (2012) 82 NSWLR 106
Orrong Strategies Pty Ltd v Village Roadshow Ltd [2007] VSC 1
Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50
Re Bright Pine Mills Pty Ltd [1969] VR 1002
Schipp v Cameron [1998] NSWSC 997
Simsmetal Ltd v Wanless Metal Industries Pty Ltd (Unreported, NSWSC, 10 March 1997)
Valra Pty Ltd as Trustee for Abdul Rahim Valibhoy Family Trust v Mag Men Holdings Pty Ltd [2016] FCA 23
Wayde v New South Wales Rugby League Ltd [1985] HCA 68; (1985) 180 CLR 459
Date of hearing: 16-19 October 2018 Date of last submissions: 25 October 2018 (Applicant) Registry: Western Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 335 Counsel for the Applicant: Mr PD Lochore Solicitor for the Applicant: Dominion Legal Counsel for the Respondents: Mr J Garas with Mr TC Russell Solicitor for the Respondents: Pointon Partners ORDERS
WAD 294 of 2016 BETWEEN: VALRA PTY LTD (ACN 126 540 841) AS TRUSTEE FOR THE ABDUL RAHIM VALIBHOY FAMILY TRUST
Applicant
AND: MAG MEN HOLDINGS PTY LTD (ACN 114 559 296)
First Respondent
COMINTRA PTY LTD (ABN 068 778 905)
Second Respondent
SOFIAH VALIBHOY AS TRUSTEE FOR M A VALIBHOY SUPERANNUATION (ABN 92 121 854 645)
Third Respondent
JUDGE:
BANKS-SMITH J
DATE OF ORDER:
20 NOVEMBER 2019
THE COURT DECLARES THAT:
1.The first respondent acted in breach of the Shareholders Deed in utilising cl 15.2 to transfer the shares owned by the applicant to Tactracom Pty Ltd.
THE COURT ORDERS THAT:
2.Judgment in favour of the applicant against the first respondent in the sum of $100.
3.The applicant's claim is otherwise dismissed.
4.The parties are to confer as to costs orders and failing agreement are to provide outlines of submissions as to costs not exceeding five pages within 14 days, with costs to be determined on the papers, subject to further order.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
TABLE OF CONTENTS
Witnesses and parties [5] Facts [18] 2005 - MMH incorporated and Comintra becomes shareholder [18] 2006 - Mezzanine financing brings in SLP, Rahim and Amin [20] The 2006 Shareholders Deed [25] The alleged oral agreement between the brothers about their shares [33] 2007 to 2009 - MMH continues to seek funding [35] The September 2009 resolution: Comintra and SLP provide loans [43] September 2009 - Variation to Shareholders Deed [52] The 2010 Share Restructure Implementation Deed [55] August 2012 - breakdown in relationship between Shariff and Rahim [59] Comintra and SLP continue to provide support into 2011-2013 [60] October 2013 - MMH must re-assess its financial position [65] The New Zealand operation - Mega Mags divested to Vali and Ravi [68] The Australian position - Vali provides interim financial support [75] Shariff resigns as director of MMH [78] Rahim requests information about MMH [79] February 2014 - the tipping point for solvency [86] Vali sells his shares in MMH to Shariff ahead of offer [92] The offer: MMH circular to shareholders about Tactracom proposal [93] Shareholder responses to the 10 March 2014 email [99] The Share Sale Agreements - Comintra and SLP [101] The 13 March 2014 phone call with Rahim [104] Events of 18 March 2014 [113] The signing of Valra's share transfer form [116] Valra's response and letters of demand [118] The pleaded case [123] The alleged breach of contract (Valibhoy Agreement) by Sofiah and Comintra by failing to cooperate as shareholders [125] The alleged breach of contract (Shareholders Agreement) by MMH by use of the come along clause [126] The alleged breach of contract (Shareholders Deed) by Comintra by breach of its good faith obligation [128] The alleged oppression by MMH [129] Relief sought [133] The witnesses [137] Breach of the alleged Valibhoy Agreement [149] Breach of Shareholders Deed by use of come along clause [176] Clause 15 [177] Terms of Share Sale Agreement [185] Negotiation of terms of Share Sale Agreement [193] The 'same terms' [198] Arm's length terms [221] Valra's argument based on absence of failure on its part to execute documents [237] Breach of Shareholders Deed [243] Breach by Comintra - lack of good faith [244] Terms of the Shareholders Deed [244] The misplaced analogy with partners [251] Proper principles to apply [256] Consideration [262] Oppression [275] Financial context [276] Principles [279] The transfer of Valra's shares purportedly in accordance with cl 15 (the contractual breach by MMH) [284] Exclusion from management decisions [288] The Mega Mags transaction [296] Claim that Valra was not given the opportunity to provide funding to MMH on the same terms as other shareholders [307] Keeping the separate agreements with Comintra and SLP hidden [313] Claim that Vali transferred his shares to Shariff clearly in contemplation of seeking to invoke cl 15 to acquire all shares in MMH through Tactracom and was aware that Tactracom would obtain majority ownership of MMH and half ownership of Mega Mags [316] Conclusion - oppression not established [319] The alleged overarching conspiracy [322] Relief [327] REASONS FOR JUDGMENT
BANKS-SMITH J:
The applicant company (Valra) is a disgruntled former shareholder. It held shares in the first respondent, Mag Men Holdings Pty Ltd (MMH). MMH ran a magazine retail business in Australia and New Zealand through various subsidiary companies.
Valra alleges its shares in MMH were wrongly taken from it under compulsory share transfer provisions in a shareholders agreement, and it complains about that process by way of a number of different causes of action.
Valra seeks relief to the effect that the shares are returned to it. It concedes that the shares that were transferred were of nominal value only. It concedes (in effect) that any damages that flow from the relevant events are only nominal.
Behind that summary sits a breakdown in the relationship between brothers.
Witnesses and parties
At the heart of the dispute are the two surviving of three Valibhoy brothers. With their consent, and as they share the same surname, I will refer to the related family witnesses by a single name only.
The first brother, Abdul Rahim Valibhoy (Rahim), is a director of Valra. He is a retired engineer. Valra became the trustee of Rahim's family trust in 2007. The other director is his son, Arif Rahim Valibhoy (Arif), a doctor. Arif has had the principal role in instructing lawyers on behalf of Valra but had no significant role in the preceding events.
The second respondent (Comintra) is a company controlled by the second brother, Mohamed Shariff Valibhoy (Shariff). Shariff describes himself as a property developer.
Shariff's son, Vali Mohamed Shariff Valibhoy (Vali), started working for MMH whilst still a university student. He commenced as operations manager, eventually rising to the position of the Australian managing director of MMH in 2010. He remained involved in MMH at all relevant times.
The third respondent, Sofiah Valibhoy (Sofiah), is the trustee of a family superannuation fund named for her late husband, Mohamed Amin Valibhoy (Amin). Amin died in 2011. He was the brother of Rahim and Shariff.
The three brothers were born in Singapore but later moved to Australia.
In short, there is a divide between Rahim and Shariff. That divide is reflected in these proceedings, with Valra on the one side, and Comintra on the other. Whilst Valra complains about Vali's conduct, Vali is not a party to the proceedings.
Each of Rahim, Arif, Vali, and Shariff gave evidence at trial.
Sahil Merchant (Sahil) and Ravindra Pathare (Ravi) were the founding members and directors of MMH. They are not related to the Valibhoy family although the connection was originally made due to a friendship between Shariff and Sahil. According to a March 2007 MMH information memorandum, Sahil has degrees in law and commerce and was a managing consultant for McKinsey & Co before becoming managing director of MMH and taking on responsibility for its sales, marketing and financial and legal affairs. Ravi was a pathologist before spotting the opportunity to buy a business in New Zealand known as Mega Mags and becoming an expert in the magazine industry. He resides in New Zealand.
An independent New Zealand private equity investor known as St Laurence Private Ltd (later known as Knox Investment Partners Ltd) also invested in MMH. It did so through a special purpose vehicle entity, SLP Mag Nation Ltd (SLP). SLP's directors at the relevant times were Mr Bret Jackson and Mr Tim Sumner. Mr Jackson has an MBA from Harvard Business School, was the managing director of Knox Investment Partners Ltd and became a non‑executive director of MMH. By the time of the transfer of Valra's shares, SLP held 51% of the issued ordinary shares in MMH. It is not in issue that Knox Investment Partners and SLP are independent third party entities with no connection to the Valibhoy family.
The directors of MMH at the relevant times were as follows:
(1)Sahil - appointed 1 June 2005 and resigned 18 October 2010;
(2)Ravi - appointed 1 June 2005 and resigned 18 March 2014;
(3)Bret Jackson, appointed 20 April 2006, resigned 18 August 2008, re‑appointed 18 October 2010 and resigned 20 December 2013;
(4)Shariff - appointed 18 October 2010 and resigned 20 January 2014; and
(5)Vali - appointed 19 October 2010 and ongoing.
There were four subsidiaries of MMH. They were Mag Nation Pty Ltd (Mag Nation), Mag Nation Retail Services Pty Ltd (Mag Nation Retail Services) and Mag Nation Business Services Pty Ltd (Mag Nation Business), based in Australia, and Mega Mags Ltd (Mega Mags), based in New Zealand. Mega Mags in particular is relevant to some of the later events.
Tactracom Pty Ltd (Tactracom) is a company owned and controlled by Vali that was incorporated on or about 5 March 2014, and later came to acquire all the shares in MMH, including those obtained from Valra.
Facts
2005 - MMH incorporated and Comintra becomes shareholder
MMH was incorporated in 2005 and ran a business known as 'mag nation'.
MMH initially sought seed capital. Through his friendship with Sahil, Shariff came to invest in MMH through Comintra. Initially Comintra acquired 100,000 class B preference shares in MMH for $100,000.
2006 - Mezzanine financing brings in SLP, Rahim and Amin
In around February 2006, MMH sought mezzanine financing for its operations, and secured interest from third party investors, as well as from Comintra. Shariff informed Rahim and Amin about the opportunity to invest.
In summary, SLP invested $850,000.
As part of MMH's quest for mezzanine financing, Comintra was offered the opportunity to invest $400,000. Shariff at this time had a close relationship with his brothers, although he resided in Melbourne whilst they resided in Perth. Comintra did not take up the entire $400,000 offer: instead, each of the brothers participated. Rahim acquired 135,000 series B preference shares for $135,000. Amin also acquired 135,000 series B preference shares for $135,000. Comintra acquired an additional 130,000 series B preference shares for $130,000.
The shareholdings in MMH following the mezzanine financing were as follows:
Seed capital Mezzanine capital Shareholders Founding shares Series B preference shares Series B preference shares (with options attached) Ciutadella Pty Ltd 2,225,000 - 25,000 Candyfloss Ltd 2,225,000 - 25,000 Jassal Holdings Pty Ltd - 300,000 - Comintra Pty Ltd - 100,000 130,000 SR Nickless Pty Ltd - 100,000 - Urs Graf - 50,000 50,000 Amin and Sofiah - - 135,000 Rahim - - 135,000 James Baillieu - - 500,000 SLP - - 850,000
I note for completion that Ciutadella Pty Ltd (Ciutadella) is a company associated with Sahil, and Candyfloss Ltd (Candyfloss) is a company associated with Ravi. Amin, Sofiah and the corporate entities apart from SLP all hold the shares as trustees for various trusts.
The 2006 Shareholders Deed
The change in the shareholding in MMH following the mezzanine capital raising is reflected in a shareholders deed executed in February 2006 (Shareholders Deed). The parties to the Shareholders Deed are Sahil and Ravi as founding shareholders (defined to include their related companies and trusts) and each of the shareholders referred to in the table above.
The Shareholders Deed provides for the shareholders to approve by 75% majority certain conduct, being an increase in the amount of issued shares, an amalgamation or merger with another company or the disposal of its main undertaking of MMH or a change of the Business (defined as, relevantly, the sale of magazines and other products (cl 4)).
It provides for nomination of directors by particular shareholders (cl 5).
It includes the common provisions to the effect that whilst directors may convene a directors meeting, the directors may meet together, adjourn and regulate their meetings as they think fit. There is a requirement of at least four Board meetings per year (and Board is defined as the directors) (cl 6).
The directors may make decisions by simple majority other than in the case of specified strategic, policy and investment decisions, which require a special resolution. Some of those specified decisions include the disposal of fixed assets having a book value of more than 25% of the consolidated fixed assets of the company, the incurring of liabilities exceeding $250,000 and the grant of security to secure debts exceeding $250,000 (cl 7).
The Shareholders Deed regulates the transfer of shares. Relevantly, certain transfers are 'permitted' and not subject to the prescribed regime. Permitted transfers include transfers of shares to a spouse or relative (cl 8).
The Shareholders Deed is of significance in these proceedings. In 2014, the 'come along' provisions of the Shareholders Deed (cl 15) were utilised and brought about the transfer of Valra's shares to Tactracom, such transfer being the issue at the centre of these proceedings. The relevant terms of cl 15 are set out later in these reasons.
Valra also relies on a 'good faith' term in the Shareholders Deed, which is also in issue.
The alleged oral agreement between the brothers about their shares
Valra alleges that at about this point (late 2005 or 2006) the brothers also made an oral agreement. The alleged express terms of the oral agreement were that they would acquire shares in MMH and 'act as a block of shares' by voting collectively on their respective parcels of shares in relation to MMH. The alleged agreement was referred to as the Valibhoy Agreement.
The respondents deny any such agreement was made.
2007 to 2009 - MMH continues to seek funding
From early March 2007, MMH sought to raise further funds to expand its operations.
Its financial position is summarised, for example, in an Information Memorandum issued by MMH in about March 2007, that explained that the three stores then open had high rental; that it had incurred a net loss each year with continued forecast loss for the 2007 year; that it had raised $2.4 million in equity across two previous rounds of capital raising and was looking to raise between $3‑4 million to help achieve growth.
Between September 2007 and September 2009, Shariff, Rahim and Amin each invested further in MMH through their respective investment vehicles in consideration for a range of preference shares.
On 10 June 2008, Sahil wrote to Rahim (and presumably the other shareholders), inviting a contribution to the funding of MMH. The email read in part as follows (unedited):
We write to you at a critical stage in the evolution of mag nation. As you know, the last 2 and a half years have been a real journey, with successes, mistakes, lessons and accolades all thrown in together. The Board has just undertaken the biggest review of our overall strategy and direction in our short history, and amongst other things we want to communicate this to you.
On a very practical note, the other main reason for this communication is to inform you about our short term funding requirements, and offer you the opportunity to invest in Notes in the company that are convertible to Preference Shares at your option. As founders of the Company, Ravi and I remain incredibly excited about our prospects and the potential to deliver both you and us a substantial return on investment.
I am attaching to this email a detailed presentation that outlines where we are currently and where we aim to shepherd the company in the both the short and medium term. The presentation also outlines the case for investment in the Convertible Notes that are on offer. We request that you read over this presentation with care.
…
The 'top up capital proposal' attached to the email revealed that capital was needed to 'get us through to early 2009', that 'the current portfolio will break even once we cut loose the 2 non‑performing stores' and that the EBITDA (earnings before interest, tax, depreciation and amortisation) for the 2006‑2007 financial year was a loss of $731,703 and the expected EBITDA for 2007-2008 was a loss of $1,093,991.
The capital raising was not successful, with only SLP applying for convertible debt.
In September 2008 MMH proposed a $2.2 million capital raising, a proposal sent to all shareholders.
According to Shariff, up until September 2009 there were various capital raisings and each of Comintra and Rahim's and Amin's family trusts participated, investing various amounts and receiving certain preference shares.
The September 2009 resolution: Comintra and SLP provide loans
An important step in the chronology of events is the 2009 request for loan funds.
On 25 August 2009, Sahil and Ravi emailed the shareholders providing an update on the business, and proposed a resolution for MMH to raise $800,000 in debt from the shareholders.
The update explained, relevantly (as accurately summarised by the respondents), that:
(a)the 2009 financial year 'saw us undertake a complete review of our strategy. Our retail model was not working and we had to either change our approach or die. We have managed to do the former, and since we have closed [two stores], our trading portfolio has managed to break even for the first time in our history…';
(b)the EBITDA for 2008-2009 was a loss of $1,022,936;
(c)MMH was proposing to bring in $800,000 in loan capital, and that, as it involved equity, it had to be open to all shareholders and also had to be voted on and agreed to by the shareholders. The shareholders were asked to approve the resolution and invited to apply for loan units; and
(d)changes were being proposed to the Shareholders Deed to 'clean up … governance issues'. Those proposed changes included conferring on the Valibhoys as a group a right to appoint a director (equivalent to the right held by SLP) in certain circumstances and changes to the conditions for compulsory sale of shares, referred to as a 'come along' provision (cl 15).
The resolution to raise the $800,000 loan capital was passed, including by votes made in favour of the resolution by Valra, Comintra and Sofiah. The resolution included terms that MMH would issue a new class of shares (class D preference shares) to the shareholders who advanced funds to MMH.
Valra admits that despite being provided with the opportunity to do so, it declined to loan MMH funds at this time. According to Shariff, he had regular discussions at this time with Rahim and Amin, and he told them that MMH was facing financial difficulties and needed funds.
Both Comintra and SLP entered into loan agreements secured by fixed and floating charges granted by MMH by which they agreed to each provide $400,000. I will refer to those as the Comintra Loan and the SLP Loan. I note executed copies of the loan agreements were not in evidence but the fact of those loans was not in issue.
This is an important event in terms of the role of the shareholders from 2009 onwards. Both Comintra and SLP supported MMH as creditors, in addition to holding shares. Valra, on the other hand, did not. It was not a creditor. It will be necessary to return to the significance of this distinction.
Relevantly, it is not in issue that the $400,000 Comintra Loan was drawn down by MMH in four tranches between September 2009 and February 2010. A loan account for the SLP Loan was in evidence and showed an advance of $400,000 by four tranches between September 2009 and March 2010.
As anticipated by the terms of the loans, both Comintra and SLP subscribed for the class D preference shares in MMH.
September 2009 - Variation to Shareholders Deed
In September 2009 the Shareholders Deed was varied by a Deed of Variation.
Relevantly, the Shareholders Deed was varied by the introduction of a definition of 'Valibhoy' (which is defined as Comintra, Valra and (relevantly) Sofiah collectively and is set out in full below), by introducing a right for each of Valibhoy (as defined) and SLP to appoint a non‑executive director, by amendments to the come along clause (cl 15) and by providing that the Shareholders Deed may only be amended with an affirmative vote from, relevantly, SLP and Valibhoy (as defined).
The Deed of Variation was signed in counterpart, including by Valra.
The 2010 Share Restructure Implementation Deed
On 15 July 2010, Ravi and Sahil wrote to the shareholders of MMH, as follows:
We trust that you are well. While Ravi and I have been in touch with most of you over the last few weeks, there are a few shareholders who we have not been able to contact. This letter is intended to fill everyone in on the current funding situation with the company, and how we are going to restructure ourselves for the future.
As all of you will know, Sahil is ending his day to day involvement with the company as of the 16th of July. Subject to the completion of legal requirements, he will soon retire as a director of Mag Men Holdings and all of its subsidiaries.
Our two largest shareholders, Knox Investment Partners [SLP] and Comintra Pty Ltd are going to continue to support the company and extend further funding via the existing debt facility that they currently have in place with the company. We are very grateful for this ongoing support. As a condition of this continued support, we are undergoing a complete share restructure. The shareholders are required to vote in favour of this share restructure. If the vote is not successfully passed, it is likely that funding will not be forthcoming and that the company would in that case need to be liquidated.
As part of the restructure, the following things are occurring:
1.All series B, C and D shares will be cancelled, leaving only ordinary shares in the company - the idea is to simplify our share structure
2.The existing ordinary shares in the company, as well as new ordinary shares (on the same terms as the existing ordinary shares) will be re‑distributed …
…
Both Ravi and Sahil acknowledge that this is not the outcome that anyone would have hoped for when making their initial investment. That said, the company is performing better than ever before, and both management and the largest shareholders can see light at the end of the tunnel. It is a survival imperative that the company immediately finds new funds for the business (ongoing attempts over the last 12 months at finding an exit have not been successful).
As part of the restructure, we will soon be asking you to vote in favour of this proposed plan via a shareholders resolution, and sign a Share Restructuring Deed that will set out all of these changes. We want to be clear at this point in that the consequences of this restructure not being successfully executed will most likely mean that the company would then be put into administration, with little to zero return to both shareholders and debtholders.
…
On 26 August 2010 Sahil (who was then still assisting MMH) wrote to the MMH shareholders attaching various documents, including a shareholders memo, a formal share buy‑back letter, a Share Restructure Implementation Deed with an annexure deed particular to each shareholder, and a circular shareholders resolution for signing. The shareholders memo included the following relevant information:
This memo explains a proposed simplification of our share structure. It is set within the context of the business looking for additional funding, but needing a more manageable share structure to attract that funding.
The business has improved over the last 12 months in very trying retail conditions. At an operational trading level, the business continues to make money and performance at that level is still growing. However, we are still not covering our corporate overheads, although the monthly burn is decreasing and expected to continue to decrease.
Based on a simplified structure and improved trading, our largest shareholders have agreed to continue debt funding the business via an extension of the commercial loans they have made to the Company.
To this end, our lawyers have prepared a Share Restructure Implementation Deed (SRID) which sets out all terms relating to the simplification of the share structure of the Company, buy-backs and transfers and issue of new shares, conversion of existing Company debt and other necessary transactions. Going forward, our share structure will be easier to manage as we will not have varying share classes with differing rights attached to each class.
...
The Share Restructure Implementation Deed was executed by, relevantly, Rahim on behalf of Valra. It was a condition of that deed that each shareholder separately execute a deed of agreement that provided for the issue of ordinary shares in consideration for the relinquishment to MMH of its preference share. Valra executed such a deed. The separate agreements also provided for the forgiveness of certain debts owed by some shareholders (Sarah Merchant and Graf as to debts to MMH, and Ciutadella and Candyfloss as to debts to SLP). Further, as part of the restructure, in addition to selling its various class B, C and D preference shares back to MMH, Comintra acquired additional shares from Ciutadella and Candyfloss, so that after the reconstruction it owned some 21.06% of all issued ordinary shares in MMH.
The following table reflects the share holdings after the Share Restructure Implementation Deed:
Post Completion Shareholders Ordinary Shares Percentage of Ordinary Shares SLP 5,100,000 51.00% Comintra 2,106,000 21.06% Valra 647,000 6.47% Amin & Sofiah 647,000 6.47% SR Nickless 15,910 0.1591% Sandra 12,240 0.1224% Graf 48,940 0.4894% Sarah Merchant 159,060 1.5906% Nishat Merchant 13,850 0.1385% Candyfloss 750,000 7.50% Vali 500,000 5.00% Total 10,000,000 100.00%
August 2012 - breakdown in relationship between Shariff and Rahim
It is not in issue that from about August 2012 Shariff and Rahim ceased liaising with each other on MMH matters, and rarely otherwise. They have different perspectives as to the reasons for the breakdown in the relationship but little turns on that.
Comintra and SLP continue to provide support into 2011-2013
Meanwhile MMH continued to trade with the support of Comintra and SLP.
That support was provided by extending the term of both the Comintra Loan and the SLP Loan and by providing further advances, adopting many of the original terms of the loans. The term of the pre-existing loans was extended by first extension letters (dated 1 September 2010) to September 2011 and then was further extended by second extension letters to September 2012. The extension letters also refer to the advance of further funds. The further advances are evidenced by loan ledgers and bank records.
Relevantly, Shariff gave evidence that in accordance with the first extension letter, Comintra advanced a further $350,000 by various tranches, with the final tranche paid on 17 May 2011. Comintra then agreed in accordance with the second letter to advance further tranches, and it did so (providing a further approximately $95,000) with the final payment made in June 2012. Shariff understood that SLP made similar advances under the September 2011 and September 2012 letters in the same proportion to its original loan.
Further, on around 3 October 2012 Comintra made an additional one-off advance of $100,000. Between April 2013 and July 2013, Comintra advanced an additional $190,000 in four tranches.
I note that although Vali had been a director of Comintra at various times, he resigned as at May 2013, leaving his parents as its only directors.
October 2013 - MMH must re-assess its financial position
There were some discussions during 2013 with a New Zealand entity known as Opus about the prospect of it buying MMH. By October 2013, the discussions with Opus had not resulted in any proposal. MMH was left seeking further funding from Comintra and SLP to survive.
The following table, based on the unchallenged financial reports of MMH, indicates the profit and loss before income tax position for the business and, for reasons that will become relevant, including as at 17 March 2014 (losses in parentheses):
FY 2010 FY 2011 FY 2012 FY 2013 Year to 17.3.2014 MMH (49,117) (286,859) (300,483) (1,247,777) (9,100,354) Mag Nation (557,293) (242,882) (216,706) (3,212,265) Mag Nation Business Services 287 169 44 Mag Nation Retail Services (41,682) (57,002) (443,577) Mega Mags
NZ (283,594) (NZ 206,511)
As to major receivables, as at 30 June 2013 MMH was owed NZ$1,007,180 by the New Zealand subsidiary Mega Mags and AU$4,394,820 by Mag Nation. Relevantly, according to Vali, the directors of MMH considered the likelihood of recovery of the loan from Mega Mags to be 'non‑existent'. According to Vali, Mr Jackson had talked about a preparedness to wind up Mega Mags.
The New Zealand operation - Mega Mags divested to Vali and Ravi
It is worth noting that the directors of Mega Mags as at October 2013 were Ravi, Shariff, Vali and Mr Jackson.
At that time, the position of the New Zealand operation was such that Ravi requested an urgent injection of cash from MMH. Ravi emailed Mr Jackson, Mr Sumner, Shariff and Vali on 10 October 2013 informing them that he had received a call from Mega Mags' landlord to the effect that if the September 2013 arrears were not cleared then they would issue a notice and take possession. Ravi noted that Mega Mags would incur a make good obligation, might not have a store and would have debts to clear, plus the October rent was due on 16 October 2013.
Comintra and SLP were not prepared to fund the New Zealand arm of MMH any longer, and were prepared to see it wound up. Vali gave evidence to this effect. Shariff also gave evidence to the effect that as at October 2013 he (Comintra) was not prepared to provide further finding to MMH and he understood SLP had the same view. Vali and Ravi considered that they could make the New Zealand operation of the business work, and offered to take over the liabilities of Mega Mags by buying its shares from MMH. One of the terms was that the loan from MMH to Mega Mags (considered by the MMH directors to be in effect irrecoverable) be forgiven.
According to Vali, in October 2013 the MMH board decided to divest and sell the shares it held in Mega Mags to Vali and Ravi.
According to Vali, he and Ravi each injected AU$25,000 into Mega Mags in November 2013 to keep it running. The transaction itself did not complete until March 2014.
Vali's evidence was that the delay in completion was caused by the need to obtain Australian and New Zealand legal advice, and the lawyers took some time to respond and prepare the documentation. There is documentary evidence consistent with this explanation. For example, a draft Agreement for Sale and Purchase of Shares in Mega Mags prepared by New Zealand lawyers was emailed to Vali by Ravi on 16 January 2014. The draft names MMH as the vendor, with Vali and Ravi as purchasers, and includes confirmation by MMH of the discharge and release of the shareholder loan made by it to Mega Mags.
The sale and purchase of the shares and the release of the MMH debt was documented some time later. The loan debt forgiveness form was followed up by Ravi in January 2014 and signed by MMH on 21 February 2014. The Agreement for Sale and Purchase of Shares in Mega Mags made between MMH, Tactracom and Ravi was signed on 11 March 2014. Relevantly, in this final copy references to Vali as purchaser were struck through and references to Tactracom substituted. The share transfer forms were not completed until the MMH board meeting of 18 March 2014. This timetable for completion was the focus of some attention from the respondents and it will be necessary to consider it further.
The Australian position - Vali provides interim financial support
The issue of ongoing financial support for the Australian arm of the business remained. By October 2013 Comintra and SLP had refused to provide additional funding. Vali offered to advance up to $250,000 but on terms. Those terms were that the Comintra and SLP loans to MMH would be subordinated to his loan, and that his loan to MMH would be repayable by 28 February 2014. Vali said his intention was that the loan would be repaid by 28 February 2014 from sale proceeds, if a sale to Opus went ahead. According to Vali, the funds were advanced for working capital purposes and to fund trading losses over the Christmas period.
The loan was documented by way of a written loan agreement made between MMH and Vali, a general security agreement made between MMH and Vali and a written priority deed whereby Comintra and SLP agreed to regulate the security priorities such that the security in favour of Vali ranked first. The copies of all documents in evidence do not bear a date but according to Vali the finance was made available from late 2013. In each case Vali has signed the documents before a witness who is named and is described as an accountant. Presumably if there were some issue as to the date of signing, the accountant could have been asked by Valra to confirm the relevant date. Vali's evidence was that the loan was originally omitted from the financial records of MMH because he omitted to provide copies of the suite of documents to MMH's accountants. That position was later rectified and there is no basis upon which I would reject Vali's evidence that the loan facility was available from late 2013.
The evidence was not clear as to how much of the $250,000 advance was drawn down, but certainly some of it was, as evidenced by bank account statements and Vali's evidence that he used his personal credit card to pay the expenses of the business.
Shariff resigns as director of MMH
In January 2014 Shariff resigned as a director of MMH, leaving Vali and Ravi as its only directors. This is relevant in that at the time of the pending events in 2014 relating to the sale of MMH shares, Shariff was no longer a director and was only involved through Comintra.
Rahim requests information about MMH
On 5 December 2013, Rahim sent an email to Ravi headed 'Mag Nation', requesting 'whatever shareholder information that may be available' and noted that:
Shariff Valibhoy no longer represents me in any matter. Therefore, I would like to receive communications directly …
It can be inferred that Rahim was referring to the fact that Shariff was the 'Valibhoy representative' under the Shareholders Deed as amended.
Until that day, Rahim had not requested any information from Vali in relation to the financial performance of MMH and its subsidiaries. Rahim's evidence was that he had not received any information about MMH after the 2010 restructure, but that he had not paid any particular attention to the lack of information. He also said he had not been asked to assist MMH by providing loan or equity funding. He said he spent much of 2013 'getting his affairs in order' and recovering from Amin's death. His first communication with MMH after that time was the email to Ravi of 5 December 2013.
Vali responded on the same day by email, asking what information Rahim was after and offering to call Rahim. Rahim replied, stating that he was after routine shareholder information on performance and plans.
On 6 December 2013, Vali sent a further email to Rahim in which he provided a brief update on the performance of Mag Nation:
With regards to mag nation, there really hasn't been much positive news to update. We've had 2 consecutive years of decline in sales. It has been a difficult environment for retail in general, and doubly so for retailers that deal in printed reading matter. The company has been struggling along for the past couple of years, and really has only been kept afloat by loans from the main NZ shareholder and Papa (Comintra.)
The NZ based shareholder, Knox, (which owns approximately 51 % of the company) is also a majority shareholder in a large printing company and they are exploring the possibility of this company possibly taking over mag nation, to at least keep the business running. This plan is taking a long time to come to fruition, and in the meanwhile, the business exists on a sort of hand to mouth basis.
It's the busiest time of the year for the business at the moment with Christmas fast approaching. If it's alright with you, I will put together a comprehensive report of the past 2-3 years and send it through to you after Christmas. In the mean time, I will forward you the filed accounts until 30 June 2012 (We won't file 30 June 2013 figures till next year) for your records, or if you rather, I can send them to you together with the report that I prepare.
Vali then provided information to Rahim as follows:
(a)on 9 December 2013, tax returns and financial statements, including the financial statements for MMH and the Australian subsidiaries covering the 2010, 2011 and 2012 financial years;
(b)on 19 February 2014, a shareholder update, discussed further below;
(c)on 19 February 2014, further financial statements for the 2010, 2011 and 2012 financial years (being accounts forwarded from the external accountant); and
(d)on 24 February 2014, tax returns for Mega Mags for the 2010, 2011 and 2012 financial years.
I return to the issue of the information provided to Rahim at this time when addressing the credibility of Rahim's evidence. In short, Rahim said under cross-examination that he did not review the financial statements when he received them or in December 2013, January 2014, February 2014 or March 2014. However, I note that the financial information contained in the documents that were provided was not at any point impugned by Valra.
February 2014 - the tipping point for solvency
On 19 February 2014 Vali wrote to the shareholders.
Relevantly, the update to shareholders read as follows:
As you are aware, it has been a long while since you've received an official update with regards to Mag Men Holdings. The last official communication you would have had would have been in mid 2010, when the previous Managing Director, Sahil Merchant, left the company.
To jog your memories, in July 2010, we had 3 stores in Australia (Elizabeth St and Greville St. in Melbourne, King St in Sydney) and 3 stores in Auckland (Sylvia Park, Ponsonby and Queen St.).
The company has had an especially difficult time these past few years. Apart from facing a general retail environment that has been extremely difficult for bricks and mortar stores to operate in, we have had to contend with the decline of many parts of the publishing industry. The latter has come about as a result of changes in the way in which information is consumed. The public is increasingly using e‑readers and tablets to read publications which they would have previously bought physical copies of.
Any expansion plans were shelved, and our focus was squarely on cutting costs. We have substantially reduced corporate staff and costs over this period. In addition to this, as leases have expired on loss making stores, we have shut them down. Specifically, we have closed 2 stores in Auckland - Queen St. in 2012 and Sylvia Park in 2013.
As the remaining New Zealand operations continue to incur a loss, we have made the decision to separate and divest all New Zealand operations from Mag Men Holdings. What this means is that Mag Men will no longer be responsible for the existing New Zealand operations of the company. Ravi Pathare and Vali Valibhoy feel that they can make this operation viable, and accordingly, have taken over the liabilities and ongoing costs pertaining to Mega Mags Ltd. The Board considered the only viable alternative to this was to shut down the NZ business entirely.
The King St store in Sydney continues to make a loss, and when the lease for that store expires in July this year, we are likely to shut down that store too.
Given the difficult environment and circumstances that we have been operating in, the company has continued to make a substantial loss over the last few years and has survived mainly as result of drawing on the existing working capital loan facility with two shareholders, Comintra and Knox Partners, that has been in place since September 2009. More recently, Vali Valibhoy has provided the company with a secured loan for further working capital requirements.
We are currently exploring being acquired by another, larger company that operates within the print and publishing industry. An acquisition of this nature would result in synergies for both parties. This line of action is very much in its infancy, and may well not eventuate at all. Should this be the case, then we will need to consider an extensive restructure of the company.
Two directors of Mag Men Holdings have recently resigned, Bret Jackson, and Shariff Valibhoy.
Ravi Pathare and Vali Valibhoy are continuing as directors of Mag Men Holdings.
If you have any question, please do not hesitate to contact me or Ravi on the following email addresses or phone numbers …
According to Vali, by late February 2014 or early March 2014, it was apparent that any dealing with Opus would not proceed in a timely manner that would allow MMH to keep trading. No formal offer had been received from Opus. The agent for the landlord of the store referred to as the Elizabeth Street store in Australia told Vali that the landlord had passed away, and his estate wanted all rent and outgoings to be paid in full up to March 2014, as well as an increase in the bond that was part of the lease renewal. The agent told Vali that a default notice would be issued if the payments were not made in one week. Those liabilities totalled about $100,000. Vali said that MMH's cash flow at that time was insufficient to meet those payments and there were several other outstanding bills. He was concerned as to MMH's solvency. Vali said there were discussions between him and Ravi as directors about the alternatives of putting MMH into administration or liquidation.
At that time, MMH owed approximately $1.8 million to Comintra and $1.6 million to SLP. MMH had never repaid any principal or interest on those loans. Vali formed the view as a director of MMH that MMH was not financially able to repay the loans it owed to Comintra or SLP.
Vali gave evidence that during early 2014 he also sought advice as to options for MMH relating to insolvency, including administration, from an accounting firm, Worrells. He said he approached banks to seek support but nothing was forthcoming.
Vali said he was prepared to provide further funding to MMH (in addition to the $250,000 already documented), but only if he were able to take over MMH, the only real alternative being administration or liquidation.
Vali sells his shares in MMH to Shariff ahead of offer
On 7 March 2014 Vali transferred his 500,000 shares in MMH (5% of issued shares) to Shariff. Such a transfer between relatives was permitted by cl 8.2 of the Shareholders Deed. Vali accepted that he undertook that course because by this time he had decided to make an offer to purchase all of the shares in MMH through his newly-incorporated company, Tactracom.
The offer: MMH circular to shareholders about Tactracom proposal
On 10 March 2014 Vali and Ravi wrote to all shareholders about a restructure of MMH. The covering email read:
Dear Shareholders,
Please find attached details regarding a proposed extensive re‑structure of Mag Men Holdings. If you agree to the terms proposed, simply reply to this email, saying
'I accept the proposal by Tactracom Pty Ltd to buy all shares in Mag Men Holdings'
OR tick the appropriate box on the Acquisition Term Sheet and email a scanned copy of that document back to his email address after signing and dating it.
Regards
Vali and Ravi
The attached details read as follows:
Dear Shareholders,
I hope you are all well. We mentioned to you in our last update that Mag Men holdings was exploring being acquired by another larger company within the print and publishing industry. It has become clear that this transaction will not eventuate in a viable time frame, leaving the company with a substantial unfulfilled funding requirement.
Accordingly, we have had to consider an extensive re‑structure of the company. We also mentioned in our last update that Vali Valibhoy had recently provided the company with a secured loan. It is apparent that further funding is required by the company, which Vali is prepared to provide. Other avenues of funding were examined, but apart from Vali, no other party was willing to provide any further funding.
To secure this further funding, a proposed acquisition is outlined in the attached term sheet. Please note that the proposed purchaser - Tactracom Pty Ltd is owned by Vali Valibhoy.
Upon approval of the re-structure, documentation will follow.
If you have any question, please do not hesitate to contact Ravi or Vali on the following email addresses or phone numbers: …
The proposed term sheet (also attached) read:
Key Terms for the proposed re-structure of Mag Men Holdings Pty. Ltd.
1.Tactracom Pty Ltd A.C.N. 168 381 637 proposes to purchase all the shares in Mag Men Holdings Pty Ltd A.C.N. 114 559 296 for $100 with effect from Friday 7 March 2014.
2.Mag Men Holdings Pty Ltd and its Australian subsidiaries will be purchased with all existing assets and all existing liabilities including outstanding tax liabilities.
3.By separate agreement, the major debt holders in Mag Men Holdings, have come to terms for treatment of their loans.
Regards
Vali Valibhoy and Ravi Pathare
I accept this acquisition offer
I do not accept this acquisition offer Signature:
Date:
Name:
Mr Jackson had seen the email in draft in advance (on 7 March 2014). Mr Jackson indicated acceptance that day but subject to transaction documentation. The draft email was also copied to Mr Sumner and Shariff.
A follow up email invited the recipients to also indicate by reply email if they rejected the offer.
Vali also spoke to shareholders by telephone following the 10 March 2014 email (including Rahim) in order to discuss the proposal.
Shareholder responses to the 10 March 2014 email
In response to the email dated 10 March 2014:
(a)SLP accepted the offer on the same day (by email from Bret Jackson at 12.45 pm);
(b)Comintra accepted the offer on the same day (by email from Shariff at 1.31 pm);
(c)Sofiah accepted the offer the same day (by email at 9.20 pm);
(d)Shariff accepted the offer on 11 March 2014 (by email at 11.04 am);
(e)Candyfloss accepted the offer on 11 March 2014 (by email from Ravi at 9.05 am);
(f)Sara Merchant accepted the offer on 12 March 2014 (by email at 11.03 am);
(g)Ciutadella (which based on the transfer then held 19,576 shares) accepted the offer on 12 March 2014 (by email at 8.10 am);
(h)Nishat Merchant accepted the offer on 13 March 2014 (by email at 12.52 pm); and
(i)Sandra Nickless confirmed her acceptance of the offer on 17 March 2014 (by email at 9.23 pm).
Shariff said that by this time he had accepted the loans advanced by Comintra to MMH would be written off. He did not communicate with Sofiah or Rahim about his decision to accept the Tactracom offer. There was no other evidence of communications between Shariff or Sofiah at this time.
The Share Sale Agreements - Comintra and SLP
Meanwhile, Vali had also been liaising with the creditor stakeholders, Comintra and SLP.
Email exchanges between Vali, Shariff and Mr Jackson of 6 March 2014 indicate that they were then in discussion with Vali about the terms of a proposed issue of preference shares to them as part of the takeover. Those discussions culminated in the execution of a Share Sale Agreement by each of Comintra and SLP.
The Share Sale Agreement between Comintra as vendor, Tactracom as purchaser and Intracom Pty Ltd (as guarantor) provided for the transfer by Comintra of its shares in MMH to Tactracom on condition that Comintra agrees to cancel the loan otherwise due by MMH, and in consideration of such cancellation Comintra would be issued redeemable preference shares in the capital of Tactracom with a face value equivalent to the extent of the loan. A similar deed was entered into between SLP as vendor and Tactracom as purchaser. The drafts of the agreements were considered by lawyers, amended and finally executed on 18 March 2014. Further attention is given below to the specific provisions of the agreements in the course of examining their proper construction and effect.
The 13 March 2014 phone call with Rahim
On 13 March 2014 Vali and Rahim engaged in a lengthy phone conversation (some 36 minutes) that was recorded by Rahim (unbeknownst to Vali). Both the audio and transcript were in evidence.
Vali's tone during the conversation is at all times helpful and respectful.
Rahim indicated he had not read the emails or documents that had been provided by Vali and he had just scanned them. Vali then provided a history to Rahim of the events that had led to the email of 10 March 2014 being sent.
Vali explained to Rahim, among other things, that the business had been losing money; that the New Zealand investor (SLP, but referred to as Knox) had invested but did not want to provide further funds; that Shariff (Comintra) had been matching SLP by providing funds when MMH needed working capital; that there had been conversations with Opus (introduced through SLP) but nothing had come of it and time was running out; creditors were chasing MMH through Vali; effectively the only solution if Vali was to keep going with MMH was to try a few things 'but I'm not going to keep going unless I have control of the company' so the proposal from Tactracom was put to shareholders; that shareholders holding more than 90% of the issued shares in MMH had already agreed to Tactracom's offer, which was sufficient to trigger a come along provision in the Shareholders Deed; that Tactracom did not need Valra's acceptance of its offer, however Vali would have preferred for Rahim to agree on behalf of Valra; that Vali had transferred his 5% shareholding to his father so he could make the offer and that transfers between family members were permitted under the Shareholders Deed; that there remained about $850,000 by way of liabilities such as tax and superannuation payments to be managed and assumed by Vali; that there was director approval to divest assets and that he had asked if shareholder approval was required but understood that it could be done with director approval; that it was agreed earlier in about November that Mega Mags would be divested, and Ravi was to keep half of Mega Mags; MMH could not repay the loans it owed to SLP and Comintra and the alternative if the shareholders had not accepted the proposal was that MMH and its subsidiaries would be put into liquidation.
Rahim complained during the call that he had not received information regularly over the years and in particular asked Vali if it was open to MMH to divest itself of assets without shareholder approval. He asked whether when loans were taken, shareholders needed to be informed. Vali said that as he understood it, it was not necessary to inform shareholders and that lawyers were involved, and he assumed they would have told him if it were necessary to inform shareholders.
It was clear that Rahim understood what was being put to him by Vali, because he said things during the telephone call such as 'basically what you're saying is that all the shareholders write off their shares', and that if less than 10% of shareholders do not want to sell their shares they 'basically don't have any rights' and must do so according to the Shareholders Agreement.
At the end of the call Vali agreed to provide copies of further documents to Rahim.
It is fair to say that during the telephone call Vali did not tell Rahim that MMH would exercise its power to sign the transfer form regardless of any further response from Rahim. Vali did, however, clearly state that MMH did not need Rahim's consent to do so. Further, I note at this point that the information given by Vali to Rahim during the phone call accords with the evidence generally.
Later that evening Rahim sent Vali a follow up email repeating his request for documents to be provided, including a copy of the Shareholders Deed. He also wrote that he was only then looking over the information that Vali had already sent to him, and he was not in a position to respond to the proposal.
Events of 18 March 2014
As noted above, on 18 March 2014 the Share Sale Agreements with Comintra and SLP were finalised and executed.
Also on that day, Vali and Ravi attended a board meeting of MMH. The minutes record as follows:
The directors considered all the Share Transfer terms were on arm's length basis in that every shareholder received the same consideration for their Share Transfer. The 2012 Financial Accounts were reviewed and subsequent trading position. Based on the substantial trading losses and substantial corporate debt, the current market value of Mag men Holdings Pty Ltd was nil.
Table signed Share Transfers in favour of Tactracom Ply Ltd - totalling more than 90%
- Comintra Pty Ltd
- SLP Mag nation Ltd
- Mohamed Amin Valibhoy & Sofiah Valibhoy
- Candy Floss Pty Ltd
- Nishat Merchant
- Sarah Merchant
- Cuitadella Pty Ltd- Mohamed Shariff Valibhoy
Tactracom Pty Ltd was not controlled (within the meaning of section 50AA of the Corporations Act) by any of the shareholders.
Confirm more than 90% Shareholders have signed share transfer giving effect to rights under Clause 15.1 of the deed.
The terms of the share transfers were all the same.
Valra Pty Ltd, S R Nickless Pty Ltd, and Sandra Teresa Nickless failed or declined to execute share transfers.
It was noted that SR Nickless Pty Ltd and Sandra Teresa Nickless had accepted the terms of the offer; however they had not provided signed Share Transfers by the date of this meeting.
Director of the company, Vali Valibhoy signed the remaining share transfers:
- Valra Pty Ltd
- S R Nickless Pty Ltd- Sandra Teresa Nickless.
The ASIC form 484 updating the share holdings was signed and lodged.
New share certificate was issued to Tactracom Pty Ltd.
The Share Sale Agreement of March 2014 was tabled and following completion of the terms of the Agreement the loans from Comintra Pty Ltd and Knox Investment Partners were cancelled.
Later on 18 March 2014 Vali sent the following email to Rahim (with attachments):
I have attached the following to this email:
1. Shareholder Register, indicating which shareholders have agreed to my proposal.
2. Original Loan Agreement between Comintra and Mag Men (2009) - SLP's loan agreement was the same, but with their Entity's name rather than Comintra's. (Note that this is the same as the working capital agreement).
3. A fixed and floating charge relating to the above loan agreement - again, there was one for SLP as well.
4. The loan extension letter which was issued to Knox [SLP] and Comintra5. Shareholders' Deed
As discussed last week, shareholders representing more than 90% of all shares in the company have agreed to my proposal, and have now transferred their shares in Mag Men Holdings to Tactracom P/L. As per the conditions in the shareholder's deed, I have proceeded to transfer the remaining shares, including yours to Tactracom.
The signing of Valra's share transfer form
After receipt of acceptances, Vali circulated standard share transfer forms to each of the shareholders who had communicated their acceptance. He did not send a form to Valra as Valra had not indicated acceptance of the offer.
MMH, purporting to utilise the power under cl 15 to execute transfer forms on behalf of Valra (as a come along transferor), signed its transfer form on 18 March 2014. This was a matter hotly contested by Valra, who claimed that the form was executed on 14 March 2014 and before the pre-conditions for the exercise of the signing power were met. For reasons detailed below with respect to the alleged wrongful exercise of cl 15, I have found that Vali signed the form on behalf of MMH on 18 March 2014.
Valra's response and letters of demand
On 19 March 2014 Rahim sent an email to Vali and Ravi referring to the restructure proposal of 10 March 2014 and stating that he did not consent to the transfer of his shares to Tactracom.
By email of 7 April 2014 Rahim wrote to Vali as follows:
Further to my email of 19 Mar 2014, shown below here, we have received a sum of $6.47 into Valra Pty Ltd's account with the description 'DEPOSIT TACTRACOM P/L MAGMEN SHARES'.
We have not consented to the transfer of VALRA's shares in Mag Men and would like to return this $6.47. Please provide bank account details to do this.
For now, until we hear from you regarding the return of this unsolicited transfer, we will hold the $6.47 without prejudice to our rights in the matter of the transfer of our shares without our consent.
On 8 April 2014 Vali replied as follows:
I refer to your email dated 7 April 2014 regarding the transfer of 647,000 ordinary shares in Mag Men Holdings Pty Ltd (MMH) from Valra Pty Ltd (Valra) to Tactracom Pty Ltd (Tactracom) in consideration for $6.47. I confirm that the share transfer was registered on 18 March 2014 pursuant to clause 15 of the Shareholders Deed dated 28 February 2006 (as previously advised by email that day).
Valra's consent was not required to effect the share transfer. Valra became contractually obligated to transfer its shares in MMH under clause 15.1 when MMH's shareholders holding more than 90% of the issued shares agreed to sell their shares on arm's length terms to Tactracom. Tactracom was not controlled by any of those shareholders. Under clause 15.2. MMH was authorised to act as agent for Valra for the purpose of executing all such documents required to effect and complete the share transfer in accordance with Valra's obligations. The terms on which Valra's shares were transferred to Tactracom were the same as the terms on which all other MMH shareholders transferred their shares to Tactracom.
Accordingly. Valra is entitled to retain the sum of $6.47 and you do not need to return it to MMH.
On 3 July 2014 the law firm Williams & Hughes wrote to Vali and Ravi on behalf of Valra alleging that the shares in MMH had been sold at an undervalue and that the terms of cl 15 of the Shareholders Deed had not been complied with. That was the precursor to this litigation.
Eventually Valra brought an application for preliminary discovery, which was allowed in part: Valra Pty Ltd as Trustee for Abdul Rahim Valibhoy Family Trust v Mag Men Holdings Pty Ltd [2016] FCA 23 (Valra v Mag Men No 1). In the determination of that application, Siopis J observed that in light of financial information that had been disclosed to Rahim between 9 December 2013 and the February 2014 update to shareholders, it was apparent that the continued financial viability of MMH depended entirely on the continuing support of Comintra and SLP (at [74]‑[82] and incorporated for ease of reference below).
The pleaded case
The statement of claim in this matter was refined on a number of occasions, with some claims abandoned during the course of the hearing. Proposed evidence on behalf of Valra that entailed irrelevant personal attacks on family members remained in witness statements despite pre-trial conferral as to objections, and was ruled inadmissible during the hearing. The claims were at times convoluted, with some addressed towards persons or entities who are not parties to the proceedings (such as Candyfloss and SLP), and lacked clarity as to the manner in which any relief was expected to operate. Had Valra properly considered the admissibility of evidence and questions as to the appropriate parties and relief earlier in these proceedings, the proceedings would have been much simpler for everyone involved and may have enhanced the prospect of settlement. Against that backdrop, there still remain many issues in this action to be determined.
The pleaded causes of action that remain can be summarised as follows.
The alleged breach of contract (Valibhoy Agreement) by Sofiah and Comintra by failing to cooperate as shareholders
Valra alleges that Sofiah and Comintra failed to comply with obligations under the Valibhoy Agreement in that they failed to consult and act collectively with Valra in relation to the 'extensive restructure' planned by MMH.
The alleged breach of contract (Shareholders Agreement) by MMH by use of the come along clause
Valra claims that MMH acted in breach of its fiduciary duty as an agent under cl 15.2 in executing a transfer of Valra's shares in MMH because it could not have been satisfied that the threshold conditions for the exercise of such powers were met.
Valra claims that as a result its shares should be reinstated or MMH should pay it damages.
The alleged breach of contract (Shareholders Deed) by Comintra by breach of its good faith obligation
Valra alleges that Comintra breached its duty of good faith under the Shareholders Deed by entering into the Share Sale Agreement and concealing that agreement from Valra and says that as a result it suffered loss and damage, as but for the breach it would have retained its shares in MMH.
The alleged oppression by MMH
Valra alleges that MMH's conduct was oppressive and unfairly discriminatory towards Valra within the meaning of s 232 of the Corporations Act 2001 (Cth).
The act in the conduct of MMH said to be oppressive is the transfer of Valra's shares purportedly in accordance with cl 15 (the contractual breach by MMH already pleaded).
The act in the conduct of MMH said to be unfairly discriminatory is that:
(a)Valra was wrongfully excluded from MMH's management decisions that led to the invocation of cl 15;
(b)Valra was not given the opportunity to participate in the divestment of MMH's shares in Mega Mags;
(c)Valra was not given the opportunity to provide funding to MMH on the same terms as other shareholders;
(d)MMH failed to disclose the forgiveness by MMH of the loan due by Mega Mags on 21 February 2014, or to disclose that the MMH shares in Mega Mags were sold to Tactracom and Ravi;
(e)MMH implied by the March 2014 Memorandum and the 10 March 2014 email, alternatively by silence, that the separate agreements dealing with the loans due to Comintra and SLP were not part of the extensive restructure of MMH;
(f)MMH kept hidden the fact that Comintra and SLP had agreed to sell their shares on the terms of the Share Sale Agreement;
(g)Vali transferred his shares to Shariff clearly in contemplation of seeking to invoke cl 15 to acquire all shares in MMH through Tactracom and was aware that Tactracom would obtain majority ownership of MMH and half ownership of Mega Mags; and
(h)the Shareholders Deed reflected that shareholders would have a level of participation in the management of MMH and Valra was given no such reasonable opportunity.
By reason of such conduct Valra contends that its shares were transferred to Tactracom against its wishes.
Relief sought
In the end, the relief sought by Valra is limited. It sought no relief against Vali (based on any conflict of interest or otherwise) or Tactracom, who in any event are not parties to the proceedings.
As to MMH, Valra seeks a declaration that the transfer of Valra's shares was invalid and of no effect. It seeks to be reinstated as a member of MMH and seeks other undefined relief.
As to Comintra, the relief sought is for damages for breach of the good faith provision in the Shareholders Deed and other undefined relief. The suggestion, first made during the course of trial, that there might be an account of profits was properly abandoned by Valra's counsel.
The only relief sought against Sofiah was for damages with respect to the alleged breach of the Valibhoy Agreement.
The witnesses
There is no doubt that Rahim feels aggrieved at the course of events that saw him lose his investment in MMH and because of MMH's financial failure. I am inevitably drawn to the conclusion that Rahim's grievance arises out of issues more complex than the loss of the shares, and is tied up in soured family relationships. Whilst I do not consider he was deliberately dishonest, in my view his grievance has clouded his objectivity and in turn coloured the credibility of his evidence.
I did not find Rahim to be a reliable or credible witness. His memory of events was imprecise, but I take into account that at the time of giving evidence he was 76 years old and the events were some time in the past. More troubling was his reluctance to accept propositions that were put to him that were not contentious on their face. Rahim seemed determined to doubt or challenge any proposition that he perceived as damaging to his case and seemed determined to arouse suspicion about Vali's and Shariff's conduct if the opportunity arose.
Two examples reveal Rahim's approach to giving evidence.
First, it was not in issue that Rahim did not tell Vali that he was taping the telephone call of 13 March 2014. When asked about the phone call during cross‑examination, the following exchange ensued:
You concealed it, didn't you?---I just didn't - didn't - I did not - I did not say I was recording it.
Yes, you didn't disclose to him that you were recording?---I did not disclose it, yes.
And there's no way he could have known that you were recording it?---I wouldn't know what he knows or what he doesn't.
Come, now, Mr Valibhoy. You recorded the call?---Yes.
And you didn't disclose that to him?---Yes.
He's not in the same room with you, is he?---No, he's not.
So he's not going to know that you're recording the call, is he?---Look, you have to ask him, please.
Second, the email exchanges indicate clearly that Vali obtained copies of financial accounts for the group from its external accountants (Carrington Myers) by email and on 19 February 2014 forwarded the email that attached those accounts to Rahim.
The following exchange occurred in cross‑examination:
--I received nine pages of signed - nine signed pages.
Yes, which Vali told you and which the email, on its face, shows came from the external accountant; correct?---Yes, but they were not for all the companies. They were not for all the - - -
The ones - - -?---There were just nine pages. Yes.
That's fine. But the ones he gave you - - -?---Yes.
You accept, don't you, that they came from the external accountant?---I accept that Vali says they came from the external accountants.
So you don't believe that they came from the external accountant?---I - I - I - - -
You think Vali was lying to you in the email?---I just have to - I - I am not suggesting, I just can only go by what's on the record.
…
Do you see where it starts saying, after Vali's name, Begin Forwarded Message?---Yes.
And do you see again it's an email from Michael Mazey from Carrington Myers?---Mmm.
And if you look at the content of the email?---Mmm.
He says:
Hi Vali, as discussed, find attached financials for 2010, 2011 and 2012 as requested.
?---Mmm.
And the accountant has attached those financial statements and Vali has forwarded that email to you with those financial statements; correct?---Vali forwarded an email with some financial statements, but in a forward, you can - you can change attachments and all this kind of stuff.
So you're suspicious that Vali has changed the attachments?---No. I - no. I - I - I cannot say I was suspicious at all. I can just look at what I received. When I saw the inconsistencies, anomalies, I get concerned.
But you don't accept that these were the accounts that came from the external accountant: yes or no?---I received accounts - financial statements in December. I'm receiving financial statements in February.
Yes?---When I look at the two of them, there are inconsistencies between the two.
Just answer the question that I've asked, Mr Valibhoy?---Yes.
Do you accept that on 19 February 2014 you received a forwarded email from the external accountant attaching all of these financial statements that you see behind this tab?---Yes. I am sorry, but what I can accept is that on that - on this date Vali sent me this email together with - I think if - yes, with these financial statements.
Rahim went on to say that he only scanned the financial documents and did not review them because he did not consider them to be formal accounts or because there were inconsistencies.
The inconsistencies that were revealed during cross‑examination rose no higher than changes in signature clauses and some formatting of dates. Vali explained that the financial statements were prepared by the external accountant, MMH retained electronic copies, and Vali signed and emailed only the signature pages to the external accountants, and then posted the original. The inconsistencies were not as to substance and were explicable on the basis that the signature pages were at times detached and sent separately to the balance. Importantly, no inconsistency in any content - the actual accounts - was revealed.
It seems to me that Rahim sought to justify his resistance to reviewing the accounts on a very thin basis and because he perceived that it would support his argument that he did not receive sufficient information or time to consider Tactracom's offer to purchase his shares.
Shariff also had some difficulties with recollection, but in general was not evasive, and gave his evidence in a genuine and thoughtful manner. He understood the significance of some of the conflicts that might have arisen in the dealings, as was evidenced by the fact that he deferred to the majority shareholder SLP for the running of certain negotiations. It was apparent that he was concentrating carefully when giving evidence and cooperated in the process. I found him to be a credible witness.
The cross‑examination of Vali was wide ranging. I found him to be an intelligent and careful witness who did his best to understand and answer the questions asked of him. He did not shy away from disclosure about any aspect of the transaction and readily made concessions. I found him to be a credible and reliable witness.
Much of Valra's case is documented. However, to the extent it is necessary to rely on oral evidence and to the extent that there is a conflict in the evidence between Rahim, on the one hand, and Shariff or Vali on the other, in light of my concerns as to the reliability and credibility of Rahim's evidence, I have preferred the evidence of Shariff and Vali.
Breach of the alleged Valibhoy Agreement
Valra pleads that in around December 2005, Rahim for and on behalf of the A Rahim Valibhoy Trust, Comintra and Amin on behalf of the trustees of the MA Valibhoy Trust entered into an oral agreement which contained express terms that they would (i) invest in MMH by each purchasing a parcel of shares in MMH; and (ii) act collaboratively and cooperatively in respect of their parcels of shares and in particular that they would 'act as a block of shares by voting collectively on their respective parcels of shares in relation to MMH'.
Certain particulars of the alleged agreement were sought and provided. It was said that the Valibhoy Agreement was reached over the course of several discussions in person in Perth and over the telephone in or about December 2005 between Rahim for and on behalf of the A Rahim Valibhoy Trust, Shariff on behalf of Comintra and Amin on behalf of the MA Valibhoy Trust. When asked for further particulars of the alleged face‑to‑face discussions in Perth and the phone discussions, Rahim's response was that he does not recall what was said at each meeting and/or during each discussion but recalls the terms as alleged.
Shariff denies any agreement was entered into between the brothers, whether to the pleaded effect or at all, as to how they would vote or otherwise retain, sell or deal with the respective shares owned by the relevant entities.
In order to assess whether Valra has established the existence of an agreement and its terms, it is necessary to consider the competing oral evidence and look to any documentary or other evidence that might shed light on those matters. It is then necessary to consider whether the evidence is sufficient to establish that there was contractual intention and sufficient certainty of terms.
It is well established that the courts strive to uphold bargains: Hillas & Co Ltd v Arcos Ltd [1932] All ER Rep 494. To that end, the courts will construe the terms of an agreement with an inclination to give effect to the intention of the parties, even if that intention has been obscurely expressed: Australian Goldfields NL (in liq) v North Australian Diamonds NL [2009] WASCA 98; (2009) 40 WAR 191:
[6]There are two limbs to the uncertainty doctrine. A contract (or a term thereof) is void for uncertainty if (1) all the essential and critical terms of the bargain have not been agreed upon or (2) the language used is so obscure and incapable of any precise or definite meaning that the court is unable to attribute to the parties any particular contractual intention: Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 436-437; Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101. Under the first limb, the contract is incomplete. Under the second limb, the court is unable to attribute a meaning to the language used by the parties. I refer to the latter as linguistic uncertainty. Both limbs apply only to essential terms.
[7]Where, as in this case, contractual intention is proven, courts should be astute to adopt a construction which will preserve the validity of the contract: Meehan v Jones (1982) 149 CLR 571; Anaconda Nickel.
[8]The appellant claimed that the expressions 'a price equal to at least ninety percent (90%) of the average closing prices for buying of Shares' and 'similar to' in cl 10.2 are linguistically uncertain. The claim is without merit for the reasons given by the trial judge and Buss JA.
Where the absence of an express provision in an agreement can be supplied by implying a term in order to give efficacy to the bargain, the courts will make the necessary implication: Moffatt Property Development Group Pty Ltd v Hebron Park Pty Ltd [2009] QCA 60 at [51].
Rahim's evidence‑in‑chief was that:
At some point in early 2006 Mohamed Shariff told me that Mohamed Amin and I should start with an initial investment of $135,000 each.
Mohamed Shariff told me that the company was called Mag Men Holdings Pty Ltd (MMH).
Mohamed Shariff also told me that his, Mohamed Amin's and my collective MMH shareholding would be large enough to prevent a unilateral takeover by a majority shareholder.
Mohamed Shariff also said that we would act collectively as one voting block or unit on all matters in relation to MMH and that he would manage the investment for the three of us.
I verbally agreed with Mohamed Shariff's proposal as did Mohamed Amin.
Shariff gave evidence that he made no such statement as to acting collectively as one voting block and that there was no such agreement as alleged. In particular, Shariff said that he:
did not enter into any agreement with Rahim and Amin in around December 2005 or at any other time in terms to the effect … that we would invest in MMH by each purchasing a parcel of shares, and act collaboratively and cooperate in respect of our parcels of shares, including voting collectively.
Under cross‑examination, Shariff expressly denied on a number of occasions making any such agreement. This was not something about which he had any hesitation.
As already indicated, I have reservations about the reliability and credibility of Rahim's evidence generally. He was unable to give any detailed evidence of the circumstances in which the alleged conversations took place or the timing. Rahim said he 'imagined' that it was entered into in about 2005 because 'that's around the time we went in'. Allowing for the passage of time, it is perhaps not surprising that particular details were not remembered, but it would then seem surprising, in the absence of any explanation for the difference in recall, that Rahim claimed to specifically recall the alleged terms of the agreement.
I also have no reason to doubt Shariff's evidence. In such circumstances, I would not be satisfied that Rahim has established on the balance of probabilities that any agreement was reached unless there is reliable corroborating evidence by way of documents or conduct that supports such a finding and undermines Shariff's evidence.
In my view, there is no such documentary or other reliable evidence that corroborates the making of any such agreement. There were no emails or other written communications between 2006 and 2014 that referred to any such agreement (noting it is permissible to have regard to evidence that post-dates the entry into a contract in order to assess whether or not any such contract exists). Rahim conceded as much in cross‑examination.
In reaching this conclusion the matters I take into account include that:
(a)there is no evidence that the shares were sold at an undervalue and Valra accepts their value was nominal only;
(b)Vali responded quickly and in a forthcoming manner in providing information to Rahim (and other shareholders) when it was requested;
(c)there is no suggestion that Valra received less or different information to that received by other non‑creditor shareholders;
(d)there is no evidence that MMH sought to influence Sofiah or other shareholders to support the transaction to ensure that a 90% threshold was reached;
(e)there is no evidence other shareholders conspired or communicated as to the manner in which they might vote or that they sought to achieve a 90% majority position so that cl 15 might be utilised; and
(f)there was a commercial imperative for MMH to consider and implement cl 15 in order to facilitate the takeover which would potentially avoid an inevitable insolvency regime: the evidence does not establish it was seeking to utilise the clause for any ulterior purpose.
Exclusion from management decisions
There is overlap between the allegation that Valra was wrongfully excluded from MMH's management decisions that led to the invocation of cl 15, and its submission that the Shareholders Deed reflected that shareholders would have a level of participation in the management of MMH and Valra was given no such reasonable opportunity.
The right of shareholders to be involved in decisions affecting the company are determined by the constitution and, in this case, the Shareholders Deed. The complaint relied upon by Valra is based on a lack of evidence of formal board meetings, a lack of reports to shareholders so that it was difficult for the shareholders 'to exercise any control or influence over the management of the company', and an assertion that there was an expectation that there would have been open disclosure by the directors 'for instance of the fact that the takeover was structured the way that it was to try to fit into the terms of the come along condition'.
Valra had no entitlement to participate in the day to day management of MMH. The matters that were required to be voted upon by shareholders were prescribed in the Shareholders Deed. This was not purely a family company or quasi-partnership where family members might have some expectation of a position of employment or decision making: the majority shareholder was an independent investment body and it was appropriate that the company be managed having regard to the Shareholders Deed.
It is also important to remember that pursuant to the Shareholders Deed, Shariff was the Valibhoy Representative. The directors of MMH were entitled to a point to assume that information was provided to Rahim as relevant by Shariff, and indeed the evidence of both Rahim and Shariff was that prior to their falling out, Shariff did speak to Rahim about the business of MMH regularly. Despite having fallen out with Shariff in around August 2012, Rahim did not inform Vali until December 2013 that Shariff no longer represented him and he did not seek information from Vali until that time.
Having said that, as Vali freely acknowledged, there was a lack of formal information flowing to shareholders after Comintra and SLP had put in place their facilities and were funding MMH. The imperative to make contact with shareholders again in 2013 appears to have been the indication that such financial support would not continue. That seems to have been the catalyst for the report of 19 February 2014. It appear that the directors of MMH took the approach that until and unless there was a need to report on some significant event, they did not provide regular formal reports to shareholders.
I note that MMH was not obliged to report to shareholders on the day to day management of MMH. Valra contends, for example, that it should have reported on the divestment of a 'significant asset', being the debt due to Mega Mags. However, that was not a significant asset but rather one of apparently no value at all.
I accept that MMH could have done more in terms of updating shareholders, even if just to indicate over the years that there was nothing of significance to report. But the question is whether the flow of information was such as to comprise unfair or oppressive treatment of Valra.
The following are relevant:
(a)Vali accepted under cross‑examination that the directors did not conduct four formal Board meetings a year. However, the directors were also entitled to meet informally and such a meeting still comprises a meeting of directors. They were entitled to meet together, adjourn and regulate their meetings as they think fit. There is no evidence that decisions were made by the directors without meeting with each other at all or other than with regard to the terms of the Shareholders Deed as to the types of matters that require shareholders' resolutions or without the appropriate majority voting of directors;
(b)having said that, there is no doubt that even where meetings were convened informally, there should have been a process for recording minutes and the directors seem to have relied instead upon email records. The lack of proper governance in terms of minutes does not reflect well on MMH, but I am not persuaded that decisions were made without proper consensus of the directors;
(c)I would not be persuaded that a historical or general assertion of a lack of information evidenced oppression or unfairness. For such serious allegations, there needs to be some nexus between the alleged lack of information and the impugned conduct;
(d)as to the allegation that Valra was denied the opportunity to provide funding on the same terms as other shareholders, the documentary evidence indicates that it was invited to invest and was invited to loan funds to MMH. This is addressed further below;
(e)as to the allegation that it was not provided with information or enough time to consider information about the Tactracom proposal to acquire shares, that assertion is not made out on the facts. Valra received financial information from Vali from December 2013, at the time that Rahim disclosed that Shariff no longer represented him in any matter. Vali responded quickly and provided the 6 December 2013 update, tax returns and financial statements, the 19 February 2014 shareholder update and additional tax returns and financial statements. Rahim chose to only scan the financial documents. That was his choice, just as it was his choice to doubt the veracity of the financial statements provided and to fail to read them in detail or take any advice about them; and
(f)as already noted, there was no entitlement on the part of a minority shareholder to participate in management decisions on the part of MMH, and that includes a decision by MMH about the proposal by Tactracom to purchase the shares. For example, it was not for a minority shareholder to determine whether or not MMH should pass on the proposal made by Tactracom to the MMH shareholders, or determine the manner in which MMH should deal with such an offer. The proposal was made to the shareholders. The Shareholders Deed provided for the relevant regime that applied to any such acquisition offer. MMH was obliged to have regard to the Shareholders Deed and the shareholders were bound by that deed.
The Mega Mags transaction
Of the matters particularised and referred to at [131] above, three can be dealt with together as relating to the Mega Mags sale. The first is the contention that Valra was not given the opportunity to participate in the divestment of MMH's shares in Mega Mags. This can be dealt with together with the issue of failure to disclose the forgiveness by MMH of the loan due by Mega Mags on 21 February 2014, and failure to disclose that the MMH shares in Mega Mags were sold to Tactracom and Ravi.
The starting point is that I accept the evidence to the effect that Mega Mags was unable to pay its debts as and when they fell due without continued financial support. Creditors were demanding payment, and SLP and Comintra were prepared to wind up Mega Mags rather than continue to prop it up. As noted by Siopis J in Valra v Mag Men No 1 at [79], the tax returns for Mega Mags showed that it had up to 30 June 2012 incurred accumulated losses in excess of $3 million. There was no prospect of it being in a position to repay the debt it owed to MMH. Therefore, the receivable was of no value to MMH. Whilst it is true that the directors of MMH decided to write off that debt, in so doing they did not divest any asset of value. That was not the type of management decision that needed to go to shareholder approval, having regard to the terms of the Shareholders Deed.
Similarly, the shares held by MMH in Mega Mags had no real value, having regard to its financial position. Valra evinced no evidence to the contrary. There is no suggestion that the Mega Mags shares were sold at an undervalue and no evidence that supports an inference that MMH was depleting its asset pool by anything of value.
Viewed pragmatically, leaving aside the debt due to MMH, Mega Mags was continuing to incur trading debts and rent in circumstances where it was seemingly unable to meet those debts. There was a benefit to MMH in divesting itself of that arm of its business in such circumstances, in that it would no longer be called upon to support Mega Mags in circumstances where there was no prospect of repayment. Again, the decision to sell such non‑performing assets was a decision for management, having regard to the terms of the Shareholders Deed. The sale of the shares in one subsidiary and the release of the debt due by one subsidiary did not constitute the sale of the main undertaking of MMH. Having regard to the financial circumstances of Mega Mags, that is not a transaction that prejudiced the MMH minority shareholders and it had the benefit that the prospective purchasers were willing to assume the third party liabilities.
I am satisfied that the MMH directors decided in October 2013 to release the Mega Mags debt and sell the shares to Vali and Ravi. This finding is of some importance because Valra contends that the divestment of Mega Mags was part of the same transaction or restructure that resulted in the transfer of its MMH shares to Tactracom.
Having carefully considered the evidence, I accept the respondents' position that the Mega Mags deal was agreed some four to five months before the Tactracom proposal to acquire all shares was advanced.
I have formed that view because it is supported by the following evidence:
(a)Ravi's email of 10 October 2013 is a clear signal of the serious financial situation that Mega Mags was in, with repossession of their tenancy threatened;
(b)the fact that both Vali and Ravi injected $25,000 in November 2013 is explicable on the basis that they had agreed by that time to take over the third party liabilities of Mega Mags if no deal with Opus was secured;
(c)Vali's evidence as to the decision having been made by the board of MMH in October 2013 is credible and not seriously challenged;
(d)Vali's explanation for the delay in settlement is supported by documentary evidence, being the draft sale documents prepared by lawyers in January 2014;
(e)the removal of Vali under the Agreement for Sale and Purchase of Shares and substitution of Tactracom as purchaser is explicable on the basis that during the delay in settlement Vali commenced and pursued negotiations for the acquisition of the MMH shares and incorporated Tactracom in March 2014;
(f)the release of the Mega Mags debt to MMH was signed in February 2014, prior to the negotiation of the terms of the Share Sale Agreement; and
(g)there is nothing in the Agreement for Sale and Purchase of Shares that makes it conditional on the acquisition by Vali/Tactracom of the shares in MMH.
At the time of the decision to divest the New Zealand operations, Mr Jackson was still a director of MMH, along with Shariff, Vali and Ravi. The shareholders (including Valra) were informed by the 19 February 2014 update that MMH had decided to divest the New Zealand operations to Ravi and Vali. Tactracom did not exist at that time and the information provided was therefore accurate. The fact that Tactracom and not Vali was the ultimate purchaser makes no real difference in the scheme of things. Either way, Vali's involvement was disclosed. Taking into account the disclosure of the divestment and the parties in the 19 February 2014 update, I do not consider that there was any relevant failure to disclose the involvement of Ravi and Vali.
Shareholders were also informed that Ravi and Vali were by then (February 2014) the remaining directors of MMH (no issue of quorum was run in the proceedings). Rahim complains that Valra was not provided with information about the divestment, and it is true that no shareholder approval was sought (or required), but as already noted, prior to completion MMH disclosed that Vali and Ravi were acquiring the New Zealand interests. Whilst the precise terms were not disclosed, it ought to have been no surprise to a shareholder that to achieve the stated positon that MMH would no longer be responsible for the New Zealand operations involved Vali and Ravi taking over the operations including by acquiring the shares from the parent, MMH. There is no evidence Rahim asked any questions about the divestment until the 13 March 2014 phone call, almost a month later. He been provided with financial information about the group. There is no evidence he indicated any interest in assuming any role with Mega Mags, whether as funder, shareholder or otherwise.
Whilst MMH did not inform shareholders in the 19 February 2014 update that MMH had agreed to release the Mega Mags debt (the release had not occurred by that date), that was not an egregious or unfair omission in my view. It may have been prudent for MMH to have disclosed that information, but that alone does not make the conduct unfair or oppressive towards minority shareholders in circumstances where there was no prospect of recovery of the debt and the conduct was not detrimental to minority shareholders. Vali said that the omission of a reference to that information was an oversight but that he considered it obvious (in effect) that no‑one would seek to resurrect Mega Mags with such a debt still in place.
Taking into account all of those circumstances, I do not consider that Valra has established that the conduct of MMH in releasing the debt due by Mega Mags and selling the Mega Mags shares to Vali/Tactracom and Ravi on terms that they would assume responsibility for Mega Mags' liabilities was conduct detrimental to it as a minority shareholder.
Claim that Valra was not given the opportunity to provide funding to MMH on the same terms as other shareholders
The assertion that Valra was denied the opportunity to provide funding to MMH on the same terms as other shareholders, and in particular Comintra and SLP, is not established.
As recorded above, the opportunity to loan funds was raised in an email to shareholders in August 2009. Valra and the other shareholders were invited to lend money to MMH, and passed a resolution to raise $800,000. Valra admitted by way of its pleaded reply that it declined to loan funds to MMH.
Both Comintra and SLP agreed to lend money to MMH pursuant to that resolution, which gave rise to the establishment of secured loans that were subsequently extended and increased, and funded MMH's trading losses and existence up to late 2013. Those are the same loans that Comintra and SLP wrote off in March 2014, in exchange for the redeemable preference shares in Tactracom under the Share Sale Agreement.
In short, Comintra and SLP assumed the burden and risk of funding MMH's trading losses over that time. Valra did not advance funds despite the invitation to do so and, as it happens, avoided suffering the losses ultimately incurred by Comintra and SLP in respect of their unrecoverable loans to MMH.
In any event, Valra was well aware of MMH's poor trading and financial position. It could have at any time (including on receipt of financial information in December 2013) offered to provide financial assistance, but did not do so.
The fact that Valra did not receive redeemable preference shares in Tactracom was a consequence of the fact that unlike Comintra and SLP, Valra did not provide financial accommodation to MMH and therefore was not a creditor. The other minority creditors did not receive such shares either. Those shares were offered to Comintra and SLP because of their status as creditors.
Keeping the separate agreements with Comintra and SLP hidden
Valra contends that MMH implied by the 10 March 2014 circular and attachment, alternatively by silence, that the separate agreements dealing with the loans due to Comintra and SLP were not part of the extensive restructure of MMH. It also contends that MMH kept hidden the fact that Comintra and SLP had agreed to sell their shares on the terms of the Share Sale Agreement.
It is true that the precise terms of the Share Sale Agreement (to which neither MMH nor other shareholders were parties) were not disclosed by MMH. However, I am not satisfied that MMH portrayed the deals with Comintra and SLP as something other than part of the proposed 'extensive restructure'. The key terms for the proposed restructure as circulated to the shareholders expressly referred to the major debt holders in MMH having come to terms for treatment of their loans. Sensibly, that can only have been a reference to Comintra and SLP, being the creditors who provided the working loan facilities that MMH expressly referred to in the 19 February 2014 update to shareholders. Comintra and SLP were always in a different position to other shareholders. It was clear that they would no longer support MMH as MMH informed its shareholders that apart from Vali, no‑one was willing to provide further funding. It would be objectively unsurprising that terms were reached with major creditors in order for any acquisition proposal to go ahead. Further, presumably it was open to an interested shareholder to seek further details about the specific terms of the separate agreements.
It follows that I do not accept the contention that the agreements with Comintra and SLP were 'kept hidden'.
Claim that Vali transferred his shares to Shariff clearly in contemplation of seeking to invoke cl 15 to acquire all shares in MMH through Tactracom and was aware that Tactracom would obtain majority ownership of MMH and half ownership of Mega Mags
Vali was quite upfront about the fact that he transferred his shareholding in MMH so that he could then seek to pursue an acquisition of the shares. He had by that time invested a further $250,000 in MMH and was willing to invest more but only on terms. He was looking for a solution to avoid liquidation. He held only a relatively small parcel of shares. There was nothing improper about utilising the terms of the Shareholders Deed, which expressly permitted a transfer between relatives, in order to place himself in a position where he could seek to effect an acquisition of shares, whether it was necessary to use the cl 15 come along clause or not.
Valra underplays the significance of the obligations assumed by Tactracom. Both Mega Mags and MMH had external third party creditors (leaving aside SLP and Comintra) and those debts were not released by the respective companies as part of the transactions. Tactracom did not acquire interests in the companies free from debt. It assumed the risk with respect to those debts, in that failure to meet them would return MMH and Mega Mags to a vulnerable solvency position without ongoing support.
The fact that a shareholders deed permits a certain course of conduct does not mean that there might not still be a finding of oppression or commercial unfairness. Conduct must still be assessed taking into account all of the circumstances. Taking into account the matters that have already been addressed as to the allegation of oppression and the Mega Mags transaction and the utilisation of cl 15, I do not consider the conduct of Vali that is complained of established commercial unreasonableness on the part of MMH. Vali's involvement in Tactracom was also disclosed to shareholders.
Conclusion - oppression not established
Having viewed the impugned conduct both separately and collectively, I am not satisfied that Valra has established its case under s 232 of the Corporations Act.
Taking into account the matters raised by the oppression claim and the above reasons, bad faith on the part of Vali or Shariff is not established. It cannot be said that the decisions made by the MMH directors in the financial situation in which it found itself were decisions that no reasonable director would have made. I have not ignored the position of Vali and his role as a director of MMH, but his interest in Tactracom was disclosed, his actions did not prejudice minority shareholders whose shares had no established value, his financial support of MMH during a period where it had no other feasible option was in the interests of MMH, and there was no sale of shares at an undervalue. The shareholders were on notice of the financial position of MMH and that the directors had formed the view that there was no real option but liquidation. The conduct was not discriminatory towards Valra. Valra was in the same position as other minority shareholders. Valra's own conduct is not determinative but is not irrelevant. Whilst its conduct does not alter the outcome, it chose to refrain from considering financial information and did not seek out information until December 2013, at which point that information was readily provided.
Even if Valra had established its case under s 232, Valra did not establish any loss. The relief sought against MMH for breach of the Shareholders Deed is addressed below and Valra has not established a basis for any additional relief nor sought anything additional in the prayer for relief.
The alleged overarching conspiracy
By way of submissions that in part covered ground beyond its pleaded case, Valra sought to connect a number of events and portray them as a deliberate plan. Some of the allegations were confined and abandoned at trial, but the theme appeared to remain alive in closing submissions. I will briefly explain why I do not consider Valra has established that MMH or Vali had any grand plan to deprive Valra of its shares.
Sometimes a hindsight view tends to misplace emphasis. This case is an example of that. Whilst the delay in settlement of the Mega Mags divestment perhaps gave the appearance of a staged plan for Vali to acquire the business of MMH, I do not consider that was the intent at the time. Rather, MMH at that time was still hoping for alternate funding or purchasing opportunities. That did not come to pass and Vali, who had already provided an advance, was looking for a way to avoid liquidation. The dire financial circumstances of MMH were no secret to its shareholders. It is not surprising that in such circumstances the directors then looked to the interests of both shareholders and creditors in trying to find a way to save MMH from inevitable liquidation or administration.
Valra places weight on a comment by Vali during his phone call with Rahim about Mega Mags being the 'start' of the whole thing and suggests that such comment evidences that Mega Mags was part of the planned extensive restructure. Vali's comment does not refer to the start of any plan, and as clarified by Vali in re-examination was no more than a reference to the start of the chain of events as discussed. Furthermore, the 'extensive restructure' is referred to by MMH in the 19 February 2014 circular and the Mega Mags divestment is not included as part of that extensive restructure.
The restructure followed the Mega Mags divestment, and as a result of the failure to find options for MMH. Valra has not established the Mega Mags divestment was undertaken as part of a predetermined or staged plan.
With an external majority shareholder and creditor such as SLP and with other shareholders such as Sofiah who had not (it would seem) disclosed any particular position on a sale of their shares, there could be no certainty that Vali's acquisition proposal would be accepted. Nor was there any suggestion that Vali assumed that Valra would not acquiesce to the proposal. He hoped that Rahim would in fact acquiesce. Vali faced unknowns in making his acquisition offer. Shariff stood back and let SLP drive negotiations. Shariff did not conspire with Sofiah. Those matters undermine Rahim's contention that the whole course of events was part of a calculated and deliberate plan.
Relief
It follows that the only relief to which Valra is entitled is against MMH and relates to the wrongful exercise of its power under cl 15.2 of the Shareholders Deed to execute the share transfer form relating to Valra's previous shareholding.
Valra's contention that the relevant shares should be re‑transferred to it and the register rectified is flawed. It seeks to have shares owned by Tactracom transferred to it although Tactracom is not a party to these proceedings. I would decline any such relief.
The appropriate relief, if any, is damages. However, the damages that flow from that breach are only nominal. The relevant principles for the assessment of damages are not in issue. Valra is to be put in the position it would have been in with respect to damages as if the contract had not been breached.
The issue of quantification of damages was raised directly during the trial. It is not seriously in issue that as at 18 March 2014 the MMH shares were of only nominal value and accordingly any damages that flowed from their transfer would be at best nominal. This follows from the apparent insolvency of the company at that time, as foreshadowed and addressed by Siopis J in Valra v Mag Men No 1, and as to which Valra evinced no evidence.
In the absence of any proof as to loss, it is inevitable that any damages arising from the transfer of Valra's shares would be nominal: Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd [1938] HCA 66; (1938) 61 CLR 286 at 301; and Huppert v Stock Options of Australia Pty Ltd [1965] HCA 30; (1965) 112 CLR 414 at 424, 431. As to quantum, the award should be a 'token amount': New South Wales v Stevens [2012] NSWCA 415; (2012) 82 NSWLR 106 at [77].
That any damages would be only nominal was in any event expressly conceded by counsel for Valra. Valra had the opportunity to put on expert evidence as to the value of the MMH shares, was on notice from Valra v Mag Men No 1 (at least) that value was in issue in the proceedings, chose not to put on any expert evidence and disclosed its concession as to any damages being nominal only late in the proceedings.
In short, there was no evidence that the shares were of any value. There was no evidence as to loss. Accordingly, Valra has failed to establish any loss, and I would assess damages at the nominal sum of $100.00.
Valra is entitled to a declaration as to the breach: McCausland v Surfing Hardware International Holdings Pty Ltd (No 2) [2014] NSWSC 163 at [14]‑[17].
As to costs, I anticipate that the parties will be far apart in their views as to who should be regarded as the successful party and where costs should fall. Accordingly, I will hear the parties as to costs.
I certify that the preceding three hundred and thirty-five (335) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Banks-Smith. Associate:
Dated: 20 November 2019
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