Western Ventures Pty Ltd v Resource Equities Ltd

[2004] WASC 10

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

IN CHAMBERS

CITATION:   WESTERN VENTURES PTY LTD -v- RESOURCE EQUITIES LTD [2004] WASC 10

CORAM:   EM HEENAN J

HEARD:   23 JANUARY 2004

DELIVERED          :   23 JANUARY 2004

FILE NO/S:   COR 6 of 2004

BETWEEN:   WESTERN VENTURES PTY LTD

Plaintiff

AND

RESOURCE EQUITIES LTD
Defendant

Catchwords:

Ex parte injunction - Application for extension on notice to respondent - Order requiring retention of assets of corporation pending hearing of winding up application on grounds of alleged oppression - Prior contract for sale of certain investments - Injunction extended but varied to allow sale of investments subject to retention of proceeds of sale

Legislation:

Corporations Act (Clth)

Pooled Development Funds Act (1992) (Clth)

Result:

Injunction extended in varied form

Category:    B

Representation:

Counsel:

Plaintiff:     Mr M L Bennett

Defendant:     Mr J C Vaughan

Solicitors:

Plaintiff:     Bennett & Co

Defendant:     Christensen Vaughan

Case(s) referred to in judgment(s):

Nil

Case(s) also cited:

Nil

1. EM HEENAN J:  This is an application to extend an interlocutory injunction which was granted ex parte by Miller J on 16 January 2004.  The injunction, briefly stated, requires the defendant corporation to retain all its assets intact and not to embark on any transaction, other than in the ordinary course of business, pending further order or the final determination of the plaintiff's application for an order for winding‑up under s 233 of the Corporations Act on the grounds of alleged oppression, unfair prejudice to members of the company or because of actions alleged to be contrary to the interests of the members of Resource Equities Ltd.

2. Before me now there is a contest over whether or not the injunction should be continued on the original terms or subject to some variation which I will describe more fully in a moment.  There is no suggestion that the injunction generally should not be extended and I am satisfied that the factors referred to by Miller J in his reasons for decision justify the extension of the injunction after this inter partes hearing.

3. The issue, however, is as to whether the injunction as continued should include a series of variations, all but one of which have been agreed by the applicant.  The controversial proposed variation is in these terms:

   "The defendant may sell any of its shares in Mount Gibson Iron Ltd provided that (1) the transaction is conducted on market and (2) the net proceeds of the sale are subject to the injunction in paragraph 1."

4. The respondent corporation operates under the provisions of the Pooled Development Funds Act (1992) (Clth) which means that income and capital profits derived from its operations are not taxable in the hands of its shareholders.  As part of the portfolio of investments which the respondent owns there is a parcel of some 16,000,000 shares in a public listed company, Mount Gibson Iron Ltd, which until 17 January 2004 were held subject to the terms of an escrow agreement.

5. At the annual general meeting of the company held last year it was resolved that the respondent company would go into liquidation and distribute to the shareholders in specie its assets including, in particular, the shareholding in Mount Gibson Iron Ltd.  The implementation of that decision could not take place until the shares came out of escrow only a few days ago.  That resolution was passed and the records reveal that the officers of the company referred to it as being in winding‑up mode from then on.       Despite that, there has been a series of transactions which the applicant questions, and those questions form the grounds of its oppression proceedings.  These show that the company has purchased a large shareholding in another corporation, has made a share issue, has removed an independent director and has charged all its assets under a floating charge to secure advances of up to $3,000,000.  The escrowed shares in Mount Gibson Iron Ltd were excluded from the terms of this new charge until they came out of escrow, after which they became subject to the charge which was a fixed charge in relation to marketable securities.

6. The variation which the respondent corporation seeks to the injunction would allow the defendant, during the course of these proceedings, to sell all or any of its shares in Mount Gibson Iron Ltd so long as the transaction were to be conducted on market and the net proceeds of the sale were to be held and preserved subject to the terms of the injunction.

7. Accordingly, making that variation will not or should not diminish the capital of the respondent although it would permit some of its assets to be converted from shares to cash.  To the extent that this were to be done it would render impossible the full implementation of the resolution passed at last year's annual general meeting for the distribution of all of those shares in specie.  That is one of the consequences fastened upon by the applicant for its opposition to this proposed variation.

8. It is necessary, therefore, for me to examine the possible consequences of the sale of some or all of the Mount Gibson Iron Ltd shareholding.  As the date for the termination of the escrow conditions has already passed, that shareholding, as I understand the position, has already become subject to the charge and in respect of this particular asset the charge is fixed.  Therefore these shares which were previously unencumbered are now encumbered and, while that in certain circumstances might possibly be prejudicial to the shareholders, it is not an event which could have been prevented in the light of the terms of the charge.  Nothing which is contained in the earlier injunction or nothing which I might order today could have affected that consequence.  It seems to me therefore that the fact that these shares have since become subject to that charge is not a factor which is material when determining whether or not this variation should be permitted.

9. Another factor raised in opposition to the proposed variation is that there may be some taxation disadvantage if the shares were to be realised.  However, on closer examination of the papers, it becomes evident that if the shares were to be distributed in specie no immediate taxation liabilities or consequences would flow to the shareholders, although the receipt of the shares would be an acquisition of those shares by the person or persons to whom they were distributed and an acquisition for capital gains tax purposes at the market value at that date, thus rendering any subsequently realised profits taxable in the hands of the persons to whom the shares had been distributed.

10. If, however, the shares are sold by the company it is not certain whether the proceeds would be distributed to the shareholders or not.  If they are not distributed to the shareholders, then those controlling the company may have to face demands for an explanation as to why the resolution passed at the general meeting was thereby frustrated.  Those in charge of the company may have to face those consequences in any event if the shares are sold.

11. If the proceeds of the sale are distributed to the shareholders, then the cash which they receive will not be taxable in their hands because of the special status of this company but any future revenue or capital appreciation resulting from the re‑investment of that cash in other assets which are then subsequently realised at a profit would produce that effect.  It seems to me that there is no material difference, from a taxation viewpoint, for shareholders as to whether the shares are distributed in specie or are sold and the cash proceeds distributed.

12. However, it is clear that there is one potential consequence to shareholders if the shares are sold and not distributed in specie.  It is that the company and the shareholders will be deprived of the opportunity for any further income by way of dividends from Mount Gibson Iron Ltd, if there were ever to be dividends, and would be excluded from any opportunity to realise greater profits by selling the Mount Gibson Iron Ltd shares if its share price were to continue to appreciate.  That happens whenever shares or any income producing asset is sold.  The shareholders would, however, have the cash or the company would have the cash resulting from the sale.  Hence, the variation could deprive the shareholders of that opportunity to participate in future capital appreciation in the event of a distribution in specie.

13. Nevertheless, that does not seem to me to be a particularly substantial advantage, nor a secure one.  It is not appropriate in these circumstances, nor is there any evidence before me upon which such an attempt could be made, to try and foresee what the future market value of shares in Mount Gibson Iron Ltd might be.  That seems to be something which I simply should not contemplate under any circumstances but rather I should accept that at any particular time, they have a value determined by the market and that this is the best value, or the best reflection of the true value, of the shares which can be obtained in the circumstances so that sale at market value would secure appropriate realisation at any particular time.

14. One then comes to the interests of this applicant.  Of an issued shareholding in Resource Equities Ltd of many millions of shares, the applicant holds some 21,000 shares which is approximately 0.06 per cent of the issued capital.  The value of that shareholding on present market value of the shares in Mount Gibson Iron Ltd is something in the order of $2000.  $2000 is, of course, $2000.  It is not insignificant but it is a very small shareholding in this corporation.

15. When it is appreciated that refusing the variation which is sought may involve the company in a variety of commercial difficulties, perhaps not serious ones, but that this course would nevertheless constitute an intrusion on the continuation of its management, some balance needs to be struck.  If the company were to proceed to sell the shares in an irresponsible fashion or unnecessarily, no doubt it would have to answer to the applicant in these proceedings later and there would be an opportunity for relief in the nature of compensation to be awarded by the Court.

16. When I isolated the relatively limited interest of the plaintiff in the consequences of this controversy, counsel for the applicant sought an adjournment of the proceedings to allow notification to be given to other shareholders whom he submitted could be expected to support the plaintiff's position and who would represent a much more significant proportion of the issued capital of the company.  The fact of the matter is that no other shareholders have come forward or joined in these proceedings to date.  Unless other shareholders were to join in supporting the application for winding up and in offering their undertakings for any damages which might result, the prospect offered by counsel for the applicant is at best uncertain.

17. It seems to me that in the end the variation which is proposed is only likely to have a potential to prejudice an expectation of the plaintiff and then to affect a relatively small shareholding.  In the circumstances I propose to extend the injunction on the terms sought including the variation which has been the subject of this controversy; that is, the variation contained in par 1(b) of the minute before me and which is referred to as par 1A of the injunction as varied.