FEDERAL COURT OF AUSTRALIA

The Food Improvers Pty Ltd v BGR Corporation Pty Ltd (No 6)

[2007] FCA 1812

THE FOOD IMPROVERS PTY LTD (ACN 003 474 280) AND JOHN STEPHEN BAX v BGR CORPORATION PTY LTD (ACN 059 820 807), THE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD (ACN 002 688 897), CORDATO PARTNERS (SERVICES) PTY LTD (ACN 075 518 964), MAIN CAMP HOLDINGS PTY LIMITED (ACN 061 573 804), MAIN CAMP CORPORATION PTY LTD (ACN 054 989 516), SNP NATURAL PRODUCTS PTY LTD (ACN 094 464 490), ADVANCED TECHNOLOGY RESEARCH PTY LTD (ACN 088 655 163) AND BUSINESS & RESEARCH MANAGEMENT LIMITED (ACN 070 946 664)

NSD 1140 OF 2005

RARES J

22 NOVEMBER 2007

SYDNEY

THE COURT:

1.                  Pursuant to O 52 r 10(2A), extends to 7 days after today the time for filing any application for leave to appeal from the orders made on 26 October 2007 on the interlocutory application filed on 12 October 2007.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     On 12 February 2007 I made orders by way of final relief and published my reasons for decision on the principal issues in the substantive proceedings:  The Food Improvers Pty Ltd v BGR Corporation Pty Ltd (No 3) [2007] FCA 97.  Order 9 required the parties to file and serve written submissions as to the form of relief to be granted in respect of the distribution among its shareholders of the assets of the first defendant, BGR Corporation Pty Ltd.  Those shareholders were The Food Improvers Pty Ltd (the first plaintiff), The Triad Health Products Group of Companies Pty Ltd (the second defendant) and Cordato Partners Services Pty Ltd (the third defendant).

2                     I heard argument on those questions on 14 and 19 February 2007 and made further orders on the latter day.  I subsequently published my reasons for making those orders on 28 February 2007:  The Food Improvers Pty Ltd v BGR Corporation Pty Ltd (No 4) (2007) 25 ACLC 177;  [2007] FCA 220.

3                     Triad has moved on an interlocutory application pursuant to O 35 r 7(2)(e) and (3) of the Federal Court Rules to vary order 6 as made on 19 February 2007. That order was entered on 28 February 2007.  Order 6 provided that the Court :

‘Declares that, other than as provided in these orders, the first plaintiff and the second defendant have no subsisting entitlement to consultancy fees from any of the first, fourth, fifth, sixth, seventh and eighth defendants.’

4                     Triad seeks that order 6 be varied so as to read that the Court:

‘(a)      Declares that other than as provided in these orders, the first plaintiff and the second defendant have no subsisting entitlement to consultancy fees from any of the first, fourth, fifth, sixth, seventh and eighth defendants

            (i)         after 28 February 2006, and

(ii)               in an amount exceeding $15,000 (plus GST) per month in respect of the period 20 July 2005 to 28 February, 2006.

(b)        The Court orders that, subject to sub-paragraphs 1(i)(a) and 1(i)(b) above, and subject to the second defendant issuing to the first defendant proper tax invoices, the second defendant’s entitlements to payment of consultancy fees of $20,833.33 per month (plus GST) for the period 1 July, 2000 to 20 July, 2005 (to the extent they are payable) are not otherwise [affected] by sub-paragraphs 1(i)(a) and 1(i)(b) herein.’

5                     Order 6 was made as part of a series of orders designed to grant relief to the plaintiffs from conduct of the affairs of BGR, which I found to be oppressive.

6                     Triad argued that order 6 did not reflect the true intention of the Court, objectively ascertained, to give relief.  The basis of the argument was that in my principal judgment given on 12 February 2007 (Food Improvers (No 3) [2007] FCA 97 at [269]) I held that each of Food Improvers and Triad was entitled to render invoices so as to be paid over a million dollars each in consultancy fees which they had not then invoiced.  That finding had been made in a context that I had described in some detail earlier in those reasons.  Triad now argues that the effect of that finding in the principal judgment was that:

·                    Triad was owed a debt of over a million dollars for consultancy fees by BGR;

·                    all parties to the proceedings were bound by that finding;  and

·                    the finding limited the orders which could be made to provide relief to the plaintiffs.

7                     At the same time as making order 6 I made other orders, including one for repayment of consultancy fees that I found had been overpaid to Triad by BGR.  Following delivery of the principal judgment, the parties agreed the amount overpayment due by Triad to BGR was $311,550.86.  No application was made at that time for any set-off between that overpayment and what Triad now claims it was owed.

8                     However, Triad argued that I failed to make any further findings to justify order 6.  And so, Triad contended that objectively, the orders cannot have been intended to negate my finding that Food Improvers and Triad were each owed by BGR over one million dollars in unrendered consultancy fees.  Triad further contended that my related finding, that Triad and its principal, Mr Gulson, did not wish to receive consultancy fees, was insufficient to affect the existence of its legal entitlement to seek payment for the unrendered fees or its enforceability.  In that context, it says that the formulation of order 6 cannot have truly reflected my intention, or the objective intention which must be imputed to the Court, when I made the orders.

9                     Senior counsel for Triad recognised that a consequence of acceding to these arguments may be that other orders which I made to deal with the oppression I had found would also need to be varied.  But, he said, that was a matter for other parties to raise.

10                  In my opinion, the arguments advanced by Triad cannot be correct.  If the consequence of ‘correcting’ one of a cognate series of discretionary orders produces the result that the balance of the orders would then operate in a manner substantively different to the objectively determined intention of the Court, then the correction cannot be made in isolation.  That is so for the following reasons.

11                  First, O 35 r 7(2)(e) does not authorise a correction which has the effect of distorting the intention of the Court in other, but cognate, orders.  If a correction be needed, and is authorised, by O 35 r 7(2)(e), it must be to make a correction that effects, rather than eschews or distorts, the actual expression of the Court’s intention in all relevant respects.  By proposing only a change to order 6, Triad has ignored the overall intention of the final orders made in February 2007.  That intention was to provide relief to Food Improvers and Mr Bax from the oppression which I had found and to resolve finally the disputes between the parties.

12                  Secondly, it would be unjust to distort the operation and effect of the final orders by changing one part of them and not making the necessary changes to others. It is essential that the whole of the orders, when perfected by the process under O 35 r 7 or any inherent power the Court may have, truly reflect the intention of the Court to do justice between the parties in the proceedings.

13                  One consequence of acceding to the application to amend order 6 in the form set out in Triad’s interlocutory application would be to negate the scheme for resolving the oppression and disputes which I found.  That scheme reflected the position adopted in negotiations between the protagonists from about September 2005 until early in 2006.  They were then consensually (but not enforceably) proceeding in accordance with what was described as Option B.  Option B had been proposed by Food Improvers and Mr Bax as a means of distributing BGR’s net assets to each of its shareholders by paying them, in substance, their entitlements in a de facto winding up of their partnership.  BGR’s principal asset was Main Camp Station, which all three shareholders agreed in September 2005 should be sold.  Once Main Camp Station was sold, BGR would have no ongoing business or operations except as a holding company.

14                  A substantial issue at the trial had been whether the entitlement of each of Food Improvers, Triad and Karcor Holdings Pty Ltd (Mr Reece’s company) to be paid consultancy fees from about March 2001 had been suspended until the fortunes of the BGR group improved rather than cancelled altogether.  In the proceedings, Food Improvers had claimed payment of those fees from March 2001.  Triad and Mr Gulson, on the other hand, with the support of Cordato Partners Services and Mr Cordato, argued that no such resolution had been made and that the right to claim consultancy fees for past services from the time of their suspension in March 2001 was lost forever, though the partners could agree that consultancy fees were to be payable again in the future.  The effect of that latter contention would have been that Mr Reece (while he was still working as a partner) and Mr Bax would have been working, in effect, for nothing while improving Mr Gulson’s company’s equity in their joint enterprise disproportionately to their own, given Triad’s larger shareholding.

15                  Options A and B were presented by Mr Bax to the meeting with Mr Lombardo to which I referred to in my principal judgment (Food Improvers [2007] FCA 97 at [162]-[180]).  The scheme of Options A and B was to distribute BGR’s net assets after receipt of the proceeds of sale of Main Camp Station.  Each first provided for the payment of external creditors of BGR.  Option A was designed to reflect what Food Improvers and Mr Bax were asserting was the legal position, namely that each of Food Improvers and Triad were entitled to claim all of the consultancy fees under their consultancy agreements for the period in which payments had been suspended.  The plaintiffs had claimed over a million dollars for consultancy fees in the proceedings well before the meeting with Mr Lombardo.  Triad and Mr Gulson were asserting, with Cordato Partners Services’ and Mr Cordado’s support at that time, that no consultancy fees were payable during that period. 

16                  Option A provided that each of Food Improvers and Triad would be paid $1,040,849 in unpaid consultancy fees together with $276,001 interest and then the balance of BGR’s cash would be paid to the three shareholders as fully franked dividends.  The consultancy fees would be taxable in the hands of the payees.  Next, each shareholder would use the cash received to repay its shareholder’s loan accounts.  BGR would then have further cash and it would pay that to the shareholders as a fully franked dividend, thus distributing practically all its assets.

17                  In contrast, Option B followed the same steps but provided only for a $500,000 consultancy fee payment to Food Improvers alone.  I explained in Food Improvers (No 3) [2007] FCA 97 at [170]-[174], that under Options A and B the after tax case position of the shareholders, assuming $6,345,000 was available in cash from the sale of Main Camp Station, cattle and stock, following payment of BGR’s external liabilities, was as follows:

18                  Thus, the compromise effected in Option B gave Triad a benefit of receiving after tax, fully franked dividends of about $0.5 million more cash than if it had charged BGR for the full amount of unrendered consultancy fees and interest.  One thing is certain, under Option B BGR would not have retained a further $1.28 million in assets with which to pay any unrendered consultancy fees due to Triad once it had paid the proposed distributions and Food Improvers’ $500,000 consultancy fee.  And, if Triad were still owed consultancy fees not all of the dividends could have been declared and paid out of profits in accordance with Part 2H.5 and especially s 254T of the Corporations Act 2001 (Cth) (see Food Improvers (No 3) [2007] FCA 97 at [176]) without providing for payment of the $1.28 million liability if it existed:  Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 at 578-579 per Mason J with whom Stephen, Murphy and Aickin JJ agreed.

19                  Mr Lombardo’s advice to the parties, as I found, was that they should not seek to receive the moneys from the sale of the Main Camp Station by way of consultancy fees since they would be taxable.  But Mr Bax resisted that suggestion and sought a compromise figure of $500,000 to be paid to Food Improvers, as provided in Option B.

20                  In those circumstances, the parties came to the arrangement, which I found not to be legally enforceable, that they would proceed in accordance with Option B in distributing the net assets of BGR, following receipt of the proceeds of sale of Main Camp Station.  That plan involved Food Improvers giving up any claim to anything over the $500,000.  The distribution of the net proceeds of the sale of Main Camp was the only substantive source from which any of these fees could have been payable.  I found that the parties were discussing the final distribution of BGR’s net assets and undertaking after paying its liabilities (Food Improvers (No 3) [2007] FCA 97 at [174]-[176].  By informally agreeing to distribution in accordance with Option B the parties were adopting a position that neither wished to assert their full legal rights to be paid under Option A.  All would benefit:  Mr Gulson’s company, Triad, and Mr Cordato’s company, Cordato Partners Services, each would receive a tax effective distribution better than under Option A.  Mr Bax and Food Improvers would be willing to accept a slightly less tax-effective position but they would receive a benefit, from Mr Bax’s point of view, by giving up the balance of claim for consultancy fees.  Since Mr Gulson was positively asserting there was no such entitlement, I found that he had indicated that he and Triad did not wish to receive those consultancy fees (Food Improvers (No 3) [2007] FCA 97 at [269]).  That finding was inevitable given the joint rejection of distributing in accordance with Option A.

21                  It was for those reasons that I concluded that what was discussed in Option B was a compromise of the contested rights, namely, Mr Bax’s assertion that Food Improvers was entitled to be paid and Mr Gulson’s and Mr Cordato’s denial that Food Improvers or Triad were entitled to be paid consultancy fees.  Agreeing to that compromise resulted in all the shareholders accepting the method of distribution of the net assets of BGR as provided in Option B and giving up their right to insist on or vote on some other method of distribution.  And, they were accepting how the net assets were to be calculated.  The consequence of paying a dividend solely in accordance with the shareholdings, as occurred in February 2006, disproportionately favoured Triad because it held almost 68% of the shares in contrast to Food Improvers holding of about 24% of the shares.  I found that to be oppressive to Food Improvers in the circumstances.

22                  In my opinion, it would have made no sense to have ordered repayment of moneys subsequently paid to Triad by way of consultancy fees for Mr Gulson’s services following Mr Bax’s removal as a director if part of that repayment were liable again to be disgorged by BGR or set off by Triad in satisfaction of any then subsisting entitlement of Triad to receive consultancy fees for the period from March 2001.  For those reasons, I formulated the relief cognately in the orders that I made between 12 and 28 February 2007.  In making the cognate orders, I sought to determine the rights of the parties, including the remedy for the oppression caused to Food Improvers and Mr Bax in the conduct of the affairs of BGR as recorded in my reasons of 28 February 2007:  Food Improvers (No 4) [2007] FCA 220 at [8]-[12] in particular, in [12].

23                  I am of opinion that to accede to Triad’s application would require a substantive reworking of the ultimate relief which I gave in a way that Triad does not seek, notwithstanding the fact that it indicated it was content to have other parties apply in that respect.  It would require a reworking of the distribution in a way which I did not and do not consider meets the justice of the case.  I do not consider that to be appropriate.  In the absence of significant reworking of the other orders, acceptance of Triad’s application to vary order 6 would frustrate the intention to which I was seeking to give effect.  It therefore does not seem to me to be appropriate to invoke O 35 r 7(3).  I do not consider that any clerical mistake or an error from an accidental slip or omission occurred in this matter in respect of order 6 as entered.

24                  The orders which I made, including order 6, were deliberately framed to bring to an end a dispute between the parties in fulfilment of the Court’s statutory function under s 22 of the Federal Court of Australia Act 1976 (Cth) by settling as completely and finally as I could the issues in dispute between the parties.  Nor do I consider it to be appropriate to invoke O 35 r (2)(e).  In my opinion, the orders which I made, and in particular order 6, have not been shown to have failed to reflect the intention of the Court as reflected in the reasons for judgment, objectively read, in the context of the dispute between the parties.

25                  Moreover, in Food Improvers (No 4) [2007] FCA 220 at [15]-[18] I elaborated on the matters which I had in mind in relation to the dispute as to consultancy fees.  I explained at [18] that I had found that Food Improvers was entitled to claim its consultancy fees in full, but that in the exercise of my discretion under s 233 of the Act the appropriate way of remedying the oppression which I found was to limit Food Improvers’ entitlement to what it had sought under Option B and to distribute the balance by way of fully franked dividends.  In coming to that conclusion, I was mindful that from September 2005 to February 2006 the parties had seen Option B as a fair and appropriate way in which to effect an informal dissolution of their quasi partnership.

26                  As I recognised in Food Improvers (No 4) [2007] FCA 220 at [18], I was rejecting the different claims made by each side that they had made a contract for distribution of the proceeds of the sale of Main Camp Station.  Instead, I sought to apply what had appeared, for a time, to have been common ground:  that the distribution of the proceeds from the sale of Main Camp Station should proceed along the lines of Option B.  In my opinion, to accede to the present application of Triad would be to work a radical departure from that intention as reflected, objectively, in my earlier reasons for judgment.

27                  On 26 October 2007 I dismissed Triad’s interlocutory application with costs.  I then made the following orders:

THE COURT:

1.         Orders that the interlocutory application filed on 12 October 2007 by the second defendant and returnable today is dismissed.

2.         Orders that the second defendant pay the plaintiffs’ and the first defendant’s costs of its interlocutory application.

3.         Notes that the third defendant, though served, did not seek to be heard on the interlocutory application and does not seek costs.

28                  On 26 October 2007 I delivered ex tempore reasons for arriving at these conclusions.  I reserved the right to revise those reasons and ordered that my order dismissing Triad’s interlocutory application with costs not be entered until I published these reasons in final form.  Given that these are more extensive reasons than I gave ex tempore, I will extend the time under O 52 r 10(2A) in which Triad may seek leave to appeal to 7 days after today.

Associate:

Dated:         22 November 2007