FEDERAL COURT OF AUSTRALIA

Bioprospect Ltd v Solagran Ltd [2010] FCA 1081

THE COURT ORDERS THAT:

1.                  The application for an interlocutory injunction be dismissed.

2.                  The application to amend the applicant’s application be allowed on condition that further particulars are supplied within 7 days to clarify either the terms which would apply to the transactions contemplated in each of the amended paragraphs, or alternatively, a mechanism by which those terms would be assessed.

3.                  Costs of this application and of the initial return of the interim injunction on 15 September 2010 be reserved. 

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

INTRODUCTION

1                     This dispute concerns the making of alleged misrepresentations as to the status and effect of certain patents.  The alleged misrepresentations are said to have induced the applicant (Bioprospect) into entering an agreement which it now wishes to avoid.  It also seeks relief in relation to the issue of shares in Bioprospect to the first respondent (Solagran) as well as damages and other relief.  The parties have agreed, for reasons which will emerge below, that the substantial dispute between the two listed public companies, one of which (Solagran) holds almost 10% of the shares in Bioprospect, taken with surrounding announcements to the Australian Securities Exchange (ASX), has created a need for an urgent trial of the issues. 

2                     On 6 September 2010, I made orders on an interim basis restraining Solagran from transferring and the fifth respondent (Computershare) from registering any transfer of any of 45 million issued shares issued to Solagran under a Development Agreement between Solagran and Bioprospect.

3                     Those interim orders were made upon Bioprospect’s application for interlocutory relief supported by materials filed prior to an ex parte hearing of the application.

4                     On 15 September 2010 the parties argued (on a confined basis) the question as to whether the injunction should be extended.  The injunction was extended for a week, the matter being adjourned for hearing to 22 September 2010 for a substantive hearing of Bioprospect’s application for an interlocutory injunction until trial and for Solagran’s motion for an order that the conduct of the proceedings be transferred to the Victoria District Registry of the Court. 

5                     The interlocutory hearing which occurred on 22 September 2010 was directed to the question of whether or not there should, in effect, be a continuation of the interim relief.  I reserved my decision and continued the interim relief until delivery of these reasons.  For reasons set out below, I do not propose continuing the relief and have dismissed the application by Bioprospect for an interlocutory injunction until trial. 

6                     Solagran also initiated a motion to transfer the proceedings to the Victoria District Registry.  This was displaced by a request by Bioprospect that the matter be heard in that Registry, each of the parties agreeing that all of the witnesses would now be Victorian based.  There being no Victoria District Registry Judge available on an urgent basis for the hearing of a 10 day trial, I acceded to a request from the parties that I hear the trial in the Victoria District Registry to accommodate the convenience of all of the witnesses.  The trial will commence on 29 October 2010. 

BACKGROUND

7                     The factual material developed in these reasons is derived almost exclusively from the evidence adduced by Bioprospect.  At this stage such evidence has been untested, but subject to recording that qualification and in light of my intended disposition of the application, it is convenient to set out the facts relied upon by Bioprospect. 

8                     Bioprospect carries on the business of research, development and early stage commercialisation of natural plant extracts.  The second respondent (Mr Soultanov) is the Executive Chairman and Founder of Solagran.  He holds doctoral qualifications in both organic chemistry and biochemistry and is a registered medical practitioner in Russia.  The third respondent (Mr Kilroy) was a Director of Solagran between 25 August 2003 and 6 February 2009. 

9                     Since about 2003, Solagran has been involved in the development of a range of galenical extracts.  ‘Galenical’ is defined in the Oxford Dictionary as:

Of or pertaining to Galen, to his followers, to his principles and practice; esp. pertaining to vegetable preparations, as distinguished from chemical remedies’ and Galen as ‘A celebrated physician of the 2nd century A.D., born at Pergamus in Asia Minor’. 

10                  These particular galenical extracts are derived from green conifer needles.  Being trade marked as Bioeffectives, they are obtained from ‘live elements’ of trees.  Amongst others, the products are marketed as Bioeffectives A, K, X, S and I (BE products). 

11                  Mr Soultanov has been directly involved in the development of Bioeffectives and is named as the inventor of various extraction process patents relating to them. 

12                  Bioprospect and Solagran entered into a commercial agreement known as the Development Agreement (DA). 

13                  Bioprospect contends that it was induced by misleading representations in contravention of s 52 and s 53(f) of the Trade Practices Act 1974 (Cth) (TPA) to enter into the DA on 22 August 2007 with Solagran and with the fourth respondent (Nova Vita).  The misrepresentations are said to have been engaged in by Solagran through Messrs Soultanov and Kilroy.  Bioprospect contends that both those persons are accessorily liable pursuant to s 75B and s 82 TPA for any loss and damage suffered by Bioprospect.  The interlocutory relief however was pursued only against Solagran and Computershare.  Computershare simply provides share registry services to Bioprospect (amongst others). 

14                  Bioprospect contends that the misrepresentations were in the form of written and oral statements and falsely conveyed to Bioprospect that it could only source BE products directly from Solagran or a third party licensed by Solagran to manufacture BE products or, alternatively, required a licence from Solagran in order to commercially exploit BE products.

15                  As will be seen below, central factors in my concluding not to extend the existing injunction and to dismiss the application for a further injunction were that the balance of convenience did not favour the extension and that Bioprospect could not establish that damages would not be an adequate remedy.  Bioprospect’s position is that an award of damages at trial would be sufficient to compensate it for ‘most but not all’ of the loss and damage it has suffered or is likely to suffer by the time the proceedings progress to trial.  It is said that an award of damages at trial would be inadequate in respect of the loss related to the allotment and issue of securities to Solagran pursuant to the terms of the DA.  More accurately put as argument developed, the loss is said to be the loss which would be occasioned if the securities issued to Solagran were now sold on the ASX or off market. 

16                  The allotment arose by virtue of provisions of the DA.  Solagran remains the registered owner of the 45 million shares it received under allotments.  Options were also allotted to Solagran but were not exercised.  The time by which exercise was required has now expired. 

17                  Bioprospect will seek final orders pursuant to s 87 TPA to have the DA declared void.  A novel consequential order to be sought will be that Bioprospect is entitled to cancel the securities issued to Solagran under the allotments.  As an alternative, it will be seeking an order of a mandatory nature that Solagran transfer the securities to Bioprospect or that they be forfeited. 

18                  On the ex parte application, Bioprospect advanced the argument that there was an appreciable risk that if Bioprospect commenced proceedings without obtaining an order to restrain Solagran dealing with the issued securities, that Solagran would dispose of the issued securities prior to trial. 

19                  Counsel for Bioprospect, Mr Coyle, makes the point that Bioprospect is seeking to sever its commercial relationship through these proceedings with Solagran.  The securities were allotted in contemplation of the two companies participating in a joint venture for the commercialisation of BE products.  The aim of the exercise at the outset was to issue shares to Solagran so that it would not only benefit directly from the success of the joint venture through its 30% free carried interest but also indirectly by the sharing in the profits made by Bioprospect by way of receipt of dividend as a shareholder.  Counsel contends that Bioprospect having signalled a clear intention not to proceed with the joint venture and the commercial relationship having soured, it is a distinct possibility that Solagran will seek to dispose of a large part, if not all, of its interests in Bioprospect. 

20                  Bioprospect contends that the relevant risk increased by the time of the inter-partes hearing because, despite the opportunity to do so, Solagran has not been prepared to give any assurances that it will not dispose of the securities.  However, an equally appropriate inference to draw would be that Solagran has not formed a view at this stage as to whether it will dispose of part or all of the securities and whether it would do so would very much depend upon other market conditions and a range of factors which are not presently known.  I do note, however, in the context of the likelihood of a sale of a large parcel of shares, that at present the share price of Bioprospect is not as high as it has been.  Indeed, 12 months ago the price was almost five times as high as the present price. 

APPLICATION TO AMEND

21                  Bioprospect seeks to amend its application and statement of claim by seeking a further alternative form of relief to the effect that Solagran do transfer any and all issued securities in which it retains a relevant interest as that term is defined in s 608 CA to Bioprospect, alternatively, an order pursuant to s 87(1A) TPA that Solagran forfeit to Bioprospect any and all issued securities in which Solagran retains a relevant interest (as that term is defined in s 608 CA) to Bioprospect. 

22                  Solagran strenuously opposes such amendments.  The opposition is based on grounds similar to those underlying its opposition to the existing ground of relief by the cancellation of the shares. 

23                  As a starting point, in my view, there are real drafting difficulties with the paragraph as presently formulated as they do not contain the detail and/or adequate mechanisms which would give Solagran sufficient clarity as to the case it is to meet in terms of the relief sought. 

24                  Solagran contends that despite the TPA providing innovative forms of relief, it cannot be used as Bioprospect would, to overcome the code for dealing with shares which is contained in the CA.  It argues that the transfer or cancellation of the shares would have to be a transfer within the province of the CA.  It argues that in Webb Distributors (Australia) Pty Ltd v Victoria (1993) 179 CLR 15 (at p 37) the High Court has recognised this position saying:

The Trade Practices Act is unquestionably a piece of innovative legislation.  But it is not to be seen as eliminating “by a side wind” the detailed provisions established for more than a hundred years to govern the winding up of a company.

I deal with this argument in more detail below (at [63] to [68]).

25                  Solagran argues this principle applies equally to govern the law concerning the maintenance of capital and the dealing in that capital by a company. 

26                  Bioprospect, however, argues that Webb deals with nothing other than the question of the Houldsworth principle (Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317), that is, that s 87 cannot be used to defeat long established rules dealing with the competition or priorities between creditors and shareholders in a winding up situation.  Bioprospect rejects the argument that Webb actually stands for a much wider proposition about the CA being a code dealing with shares.  Further, s 259A CA itself, expresses a basis upon which a court might make orders in relation to the acquisition of shares by the company; in particular, s 259A(c), ‘under a court order’. 

27                  I will allow the amendment on conditions.  Consistent with principles which would preclude the shutting out of an applicant’s case at an early stage in circumstances where the law may still be developing and the case cannot be said to be hopeless, I would be disinclined to altogether disallow the amendments.  I will, however, require that the amendments be suitably refined to give adequate notice to Solagran of the case that it is required to meet. 

28                  My attitude to the amendment, that is, permitting this aspect of the relief to be pleaded and pursued, applies equally to the existing form of relief against which similar arguments are raised.  The relief claimed is novel, raises some difficult questions but should not at a preliminary stage be treated as being unarguable given the width of the language in s 87 TPA (see [56] below).  That approach is relevant to the next consideration as to the appropriate test for injunctive relief. 

THE GRANT OF AN INTERLOCUTORY INJUNCTION

29                  Section 23 of the Federal Court of Australia Act 1976 (Cth) provides that the Court has power in relation to matters in which it has jurisdiction to make orders of such kind including interlocutory orders as the Court thinks appropriate.  Principles governing the grant or refusal of an interlocutory injunction are found in a handful of key cases including Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 where Mason ACJ said (at 153):

In order to secure such and injunction the plaintiff must show (1) that there is a serious question to be tried or that the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief; (2) that he will suffer irreparable injury for which damages will not be an adequate compensation unless an injunction is granted; and (3) that the balance of convenience favours the granting of an injunction.

30                  In Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57, the Court noted that the reference to a ‘prima facie case’ is intended to convey that there is sufficient likelihood of success to justify, in the circumstances, the status quo being preserved until trial (at [65]).  As Solagran observe, this injunction would not be preserving the status quo but imposing restraints on Solagran dealing with its own property. 

31                  I am not satisfied that the injunction should continue.  I am not satisfied on the other limbs of the ‘organising principles’ also referred to by Gleeson CJ and Crennan J in their joint reasons in Australian Broadcasting Corporation (at [19]), that Bioprospect has shown that it is likely to suffer injury for which damages will not be an adequate remedy and that the balance of convenience favours the grant of an injunction.  It should be acknowledged that the examination of the prima facie case is one of the main enquiries and certainly a deal of argument has focussed on that as I will indicate below.  But while for present purposes it may be assumed that there is a prima facie case, nevertheless the remaining limbs have, in my view, not been satisfied. 

TRIABLE ISSUE

32                  As a preliminary evidentiary note, in the course of the interlocutory hearing on 22 September 2010, many objections were taken by Solagran to the evidentiary material relied upon by Bioprospect.  To the extent that I am outlining in these reasons the case Bioprospect seeks to make, it should not be thought that I am necessarily accepting the conclusions reached in the evidence on which Bioprospect relies.  I have ruled on the objections for the purpose of the interlocutory hearing and it may reasonably be inferred that consistency in ruling would be expected at trial subject, of course, to additional evidence being supplied.  The purpose of these reasons is to outline the nature of the case Bioprospect seeks to advance. 

Mr Warwick Dowse

33                  Bioprospect relies on affidavit evidence of its former Managing Director, Mr Warwick Dowse who contends that various oral and written statements were made by Solagran through its officers which conveyed to Mr Dowse that Bioprospect required a licence from Solagran in order to develop and subsequently commercially exploit products which contained CGNC as a constituent.  At the time of the representations, Mr Dowse was General Manager of Bioprospect.  He remained in this position until 12 April 2007 and was the appointed Managing Director until his resignation on 25 September 2008. 

34                  At the material time Mr Dowse was responsible for negotiating the terms of the DA and also its precursor, the Heads of Agreement between Bioprospect and Solagran dated 14 April 2007 (HA).  He recommended to the Bioprospect Board of Directors after completing due diligence as prescribed by the HA that Bioprospect should proceed to execute the DA. 

35                  As at early 2006, Bioprospect says that Solagran’s Conifer Green Needle Complex product (CGNC) had obtained Therapeutic Goods Administration (TGA) approval in Australia as a complementary medicine substance for both topical and internal use.  Having learned of the CGNC product and its properties Mr Dowse formed the opinion that there was a potential for CGNC to be used in animal health, animal nutrition and agricultural markets.  He entered into negotiations with Solagran to ascertain terms, if any, on which Solagran would be prepared to grant Bioprospect a licence to develop and commercialise CGNC.  In those negotiations, Messrs Soultanov and Kilroy participated on behalf of Solagran.

36                  The thrust of the evidence from Mr Dowse was that from an early time in the negotiations, he understood, as a result of representations made by Messrs Kilroy and Soultanov, that Solagran was the registered owner of the Russian extraction process patents (Russian EP patents) for the manufacture of the BE products; that the intellectual property rights that Solagran held in relation to the BE products in Russia, and would eventually hold in other jurisdictions including Australia and the USA by the filing of international patent applications claiming priority from the Russian EP patents, would cover all known commercially viable methods of manufacturing each of the BE products.  These representations have been defined in the pleadings and submissions as the First IP Coverage representation.

37                  Mr Dowse also contends that Messrs Kilroy and Mr Soultanov conveyed to him that any third party wanting to manufacture or commercially exploit BE products in those jurisdictions including Australia and the USA would need a licence from Solagran to do so (this has been defined as the First Licence Requirement Representation and the two representations together have been defined as being the IP Representations). 

38                  Mr Dowse refers to having received from Mr Kilroy a PowerPoint slide by email which contained a flowchart entitled ‘Solagran Solvent Extraction Process’ (the flowchart).  The flowchart contained references to Bioeffectives A, N, V, L, X, K, P, B, S, F, R and B.  The relevance of this flowchart was said to be that Mr Kilroy explained that the substances from the Solagran products shown in the flowchart were all covered by very comprehensive patents registered in six countries which Solagran was considering as manufacturing sites.  Bioprospect contends that similar representations were made on the Solagran website.  Messrs Kilroy and Soultanov allegedly informed Mr Dowse that the Solagran patents were ‘impossible to get around’ and that no one could manufacture the BE products without infringing the patents which purportedly covered the BE products including CGNC.  Bioprospect contends that it was on the strength of these representations that Mr Dowse caused Bioprospect to enter into the HA for the purpose of developing and commercialising BE products by way of a joint venture. 

39                  Under the proposed joint venture, Solagran was to grant Bioprospect an exclusive global licence to use Bioeffective products for the purpose of evaluating and commercialising such products.  Additionally, Bioprospect first would be required to evaluate products sold and promoted by Solagran under the trademark Bioeffectives.  Bioprospect had thirty months from the date of the DA to undertake its evaluation (defined as the Evaluation Period).  Solagran would be required to exclusively supply Bioeffectives to Bioprospect at cost price for the purpose of the evaluation.  Bioprospect would be required to allot and issue a total of 45 million shares and 45 million options at 5 cents per share to Solagran.  At any time during the evaluation period, Bioprospect would have a right to elect to enter into the commercialisation phase of the DA and would be able to do so by giving Solagran written notice of exercise of that right.  On the giving of that notice, Bioprospect would acquire a 70% interest in the intellectual property associated with each of the Bioeffective products.  Bioprospect would be required to bear all the costs of the evaluation and commercialisation and the Solagran share of the commercialisation would come out of its share of the commercialisation profits. 

40                  There was also a condition precedent to the HA requiring that the parties undertake due diligence and that they each be satisfied of the outcome of that due diligence.  If a party was not satisfied, then there was a right under cl 3.3 of the HA to terminate it, thereby voiding the joint venture. 

41                  During the due diligence period, Mr Dowse sought further clarification from Messrs Soultanov and Kilroy as to the nature and extent of Solagran’s intellectual property rights over the BE products.  His evidence is that he was told by each of them that the extraction process patents Solagran held or would eventually acquire or be granted covered all of the BE products.  Further, he was told that the extraction process covered by those patents could ‘not be gotten around’ and as such, no third party could produce the BE products without infringing the respective patents.

42                  Bioprospect will say that this reaffirmed Mr Dowse’s belief that if Bioprospect wanted to source, develop and ultimately commercialise CGNC, then it needed to enter into a commercial arrangement with Solagran both for the supply of CGNC and to obtain a licence to develop and commercialise it. 

43                  The Bioprospect case is that the individual and cumulative effect of all the statements that were made to Mr Dowse caused him to enter into the HA and subsequently recommend to the Board of Bioprospect that it execute the DA. 

44                  Bioprospect’s case will be that had he been aware that Solagran did not hold any intellectual property rights over the process for manufacturing CGNC, then he would have taken steps to ensure that Bioprospect did not execute the DA. 

45                  Bioprospect asserts that various representations were false.  It relies upon evidence from Dr Stuart Boyer who will contend that the relevant process is not a process protected by any Australian or American patents nor will it be protected upon the grant of any pending application for patents either in Australia or the United States of America. 

46                  Specifically, Dr Boyer expresses the view that the process for manufacturing Bioeffective A (CGNC), was not a process protected by any existing or pending Australian or United States of America patents.  Bioprospect says that CGNC was the only BE product it was really interested in exploiting at the time of entering into the DA.

47                  The case for Bioprospect is that the false representations were made throughout late December 2006, prior to execution of a HA and between 17 April 2007 and until 22 August 2007 on execution of the DA.

48                  If all of the evidence sketched above is ultimately admitted and accepted then, for present purposes, it may be assumed that the statements were misleading representations in trade and commerce so as to contravene s 52 and s 53(f) TPA.  It is unnecessary at present to analyse the case in greater detail in light of my conclusion on other grounds that there should not be an interlocutory injunction. 

49                  Bioprospect point to loss and damage at several levels including, amongst others, expenses incurred in conducting negotiations with Solagran in relation to the HA and the DA, in performing its due diligence, in purchasing CGNC from Solagran under the DA, in engaging consultants to research and develop products utilising Bioeffective A, in applying for trade marks in relation to products utilising CGNC and in undertaking market investigations in the United Arab Emirates and Europe in relation to products utilising CGNC.  I say ‘amongst others’ because it is clear that the damage claimed under the application, in original or proposed amended form is at large.  This is a point I will discuss in more detail below.  

50                  Bioprospect puts its case on the basis of Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 (at [48]) per McHugh, Hayne and Callinan JJ where the majority explained that the concept of loss or damage arising from a plaintiff’s inducement into a contract by a defendant’s misleading or deceptive conduct was to be approached as follows:

[48]      A party that is misled suffers no prejudice or disadvantage unless it is shown that that party could have acted in some other way (or refrained from acting in some way) which would have been of greater benefit or less detriment to it than the course in fact adopted. Thus, the party that is misled will have suffered loss if a chose in action which was acquired was worth less than the amount paid for it. …

51                  On application of those principles, Bioprospect contends that it has paid valuable consideration under the DA for the intellectual property rights in relation to the CGNC that Solagran does not own and is now locked into a joint venture in which it is forced to pay for the entire development costs of the joint venture and to carry the commercialisation costs, only being able to recoup Solagran’s share of those costs from Solagran’s share of the commercialisation revenue. 

52                  It may also be accepted for present purposes that there is a prima facie case that loss has been sustained.

Mr Kris Knauer

53                  Bioprospect adduced evidence as to the broader nature of its loss and damage.  The evidence was by affidavit of Mr Kris Knauer.  Extensive objection was raised to the evidence Mr Knauer who is a stock broker, professional investor and a graduate holding Bachelor of Applied Science with honours and a Securities Institute of Australia Graduate Diploma in Applied Finance and Investment.  In the course of the hearing I indicated that I proposed to allow those parts of the evidence of Mr Knauer which did not on their face rely upon the abandoned assumption that there had been a sale of 4 million Bioprospect shares by Solagran.  I indicated that I may give further reasons in conjunction with these reasons.  In light of my dismissal of the injunction application on balance of convenience and on the basis that damages would be an adequate remedy, it is has been unnecessary to record in these reasons most of the content of the affidavit of Mr Knauer and therefore my reasons for concluding that, with the exception of those excised paragraphs (16 and 46) the affidavit is admissible.  No doubt, however, the grounds of the objection (based upon Makita (Aust) Pty Ltd v Sprowles (2001) 52 NSWLR 705 per Heydon JA (at [89])) will be taken into account in the presentation of the evidence at trial. 

54                  A further reason for not focussing on this material is that there is a degree of commercial sensitivity about the matters on which he comments.  Some of the observations expressed as an expert are in relation to continuing ongoing retention of the shares by Solagran and the difficulties such retention may occasion and some are directed towards a sale of the shares by Solagran.  In the interests of commercial sensitivity, it seems unnecessary to dwell further on this topic at present.  If the views of Mr Knauer are sustained at trial, then there will be questions going to the appropriate relief (assuming liability is established). 

55                  Mr Pendergast, Chartered Accountant from Ernst & Young (on whom Bioprospect also relies) generally agrees with most of the opinions expressed by Mr Knauer but each of them also comments on aspects of the current financial position of Bioprospect.  Again, it is unnecessary, in light of the conclusions I have reached, to dwell on this evidence. 

THE ULTIMATE RELIEF

Width of s 87 of the TPA

56                  The relief sought by Bioprospect is based on s 87 TPA which relevantly provides:

87        Other orders

(1)        Subject to subsection (1AA) but without limiting the generality of section 80, where, in a proceeding instituted under this Part, or for an offence against section 44ZZRF or 44ZZRG or Part VC, the Court finds that a person who is a party to the proceeding has suffered, or is likely to suffer, loss or damage by conduct of another person that was engaged in (whether before or after the commencement of this subsection) in contravention of a provision of Part IV, IVA, IVB, V or VC, or of the Australian Consumer Law, the Court may, whether or not it grants an injunction under section 80 or makes an order under section 82, 86C, 86D or 86E, make such order or orders as it thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (2) of this section) if the Court considers that the order or orders concerned will compensate the first mentioned person in whole or in part for the loss or damage or will prevent or reduce the loss or damage.

(1A)     Subject to subsection (1AA) but without limiting the generality of section 80 or 87AAA, the Court may:

(a)        on the application of a person who has suffered, or is likely to suffer, loss or damage by conduct of another person that was engaged in in contravention of Part IVA, IVB, V or VC, or a provision of the Australian Consumer Law; or

(b)        on the application of the Commission in accordance with subsection (1B) on behalf of one or more persons who have suffered, or who are likely to suffer, loss or damage by conduct of another person that was engaged in contravention of Part IV (other than section 45D or 45E), IVA, IVB, V or VC, or a provision of the Australian Consumer Law; or

(ba)      on the application of the Director of Public Prosecutions in accordance with subsection (1BA) on behalf of one or more persons who have suffered, or who are likely to suffer, loss or damage by conduct of another person that was engaged in in contravention of section 44ZZRF or 44ZZRG;

make such order or orders as the Court thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (2)) if the Court considers that the order or orders concerned will:

(c)        compensate the person who made the application, or the person or any of the persons on whose behalf the application was made, in whole or in part for the loss or damage; or

(d)        prevent or reduce the loss or damage suffered, or likely to be suffered, by such a person.

…

(1D)     For the purpose of determining whether to make an order under this section in relation to a contravention of Part IVA, the Court may have regard to the conduct of parties to the proceeding since the contravention occurred.

(2)        The orders referred to in subsection (1) and (1A) are:

(a)        an order declaring the whole or any part of a contract made between the person who suffered, or is likely to suffer, the loss or damage and the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct, or of a collateral arrangement relating to such a contract, to be void and, if the Court thinks fit, to have been void ab initio or at all times on and after such date before the date on which the order is made as is specified in the order;

(b)        an order varying such a contract or arrangement in such manner as is specified in the order and, if the Court thinks fit, declaring the contract or arrangement to have had effect as so varied on and after such date before the date on which the order is made as is so specified;

(ba)      an order refusing to enforce any or all of the provisions of such a contract;

(c)        an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct to refund money or return property to the person who suffered the loss or damage;

(d)        an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct to pay to the person who suffered the loss or damage the amount of the loss or damage;

… (emphasis added)

57                  Bioprospect’s submission is that orders may be sought under s 87 in conjunction with other remedies under the TPA, such as damages (s 87(1)) and the Court may, by a combination of monetary and non-monetary orders permitted by the broad scope of s 87, be able to effectively place the parties in the position they were in prior to the impugned conduct being engaged in (Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281 at 298 per Brennan, Deane, Dawson, Gaudron and McHugh JJ). 

58                  Bioprospect says that it will be likely to succeed in having the DA set aside as being void ab initio, first because Solagran’s misrepresentations were not innocent in that Solagran knew or ought to have known that the scope of its intellectual property rights was not as broad as was represented.  Secondly, the order will be timely, just and fair in all the circumstances.  Thirdly, it would be practicable and possible following the making of an avoidance order to restore the parties to the positions they would have been in had they never entered the DA and; fourthly, no innocent third party’s rights would be adversely affected by the making of an order declaring the DA void ab initio. 

Cancellation of the Shares

59                  Pursuant to s 87 TPA and the grounds set out above, Bioprospect seeks a declaration of entitlement to cancel the 45 million Bioprospect shares allotted and issued to Solagran pursuant to cl 6.1 and cl 6.2 of the DA on the basis that Solagran’s continuous substantial shareholding in Bioprospect is likely to cause Bioprospect loss or damage not otherwise compensable by a monetary award. 

60                  In support of that relief, Bioprospect places reliance on Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470 where the majority of the Full Court (Lockhart and Gummow JJ) upheld an order, amongst others, that it be declared that: ‘to the extent the Second Applicant is allotted shares to the First Respondent … the Second Applicant is entitled to cancel the allotment’.  In Accounting Systems, the applicant had entered into an agreement to licence various intellectual property rights.  In consideration for that licence, it had, amongst other things allotted and issued shares to the licensor.  At first instance, it had been found that the applicant had been induced to enter the licence agreement and other collateral agreements by misleading and deceptive conduct.  It had suffered loss and damage because it did not obtain the rights it bargained for.  Pursuant to s 87 TPA, the various agreements were declared void ab initio and the applicant was declared to be entitled to cancel the shares allotted and issued to the licensor.

61                  It must be said that the issue of cancellation of an allotment was far from central to the appeal in Accounting Systems.  The s 87 point in Accounting Systems was whether the primary judge should have granted any relief at all under s 87.  It was a loss and damage point rather than a question about the nature of the relief. 

62                  For reasons discussed in relation to the proposed amendment for relief that Bioprospect may transfer or forfeit Solagran’s shares, Solagran strenuously submits that relief to cancel the issue could not possibly be granted. 

63                  Solagran strenuously argues that an order for cancellation would not be available.  It relies upon Webb where the avoidance of an allotment of shares was refused because the relief would have conflicted with s 360(1)(k) of the then Companies Code (now s 563A of the Corporations Act 2001 (Cth) (CA)). 

64                  In a joint judgment, Mason CJ, Deane, Dawson and Toohey JJ held (at 28) that:

Underlying the conclusion reached by the Appeal Division [and upheld by the High Court] are two related streams of authority. The first is epitomised by Trevor v Whitworth (1887) 12 App Cas 409 and Ooregum Gold Mining Co of India v Roper [1892] AC 125; the second by Oakes v Turquand (1867) LR 2 HL 325 and Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317. These cases were decided after the enactment of the Companies Act 1862 (UK) which consolidated the Joint Stock Companies Acts and became the parent of modern companies legislation.

65                  The Court examined two other cases, Trevor v Whitworth (1887) LR 12 App Cas 409, which established the principle that (at 423):

One of the main objects contemplated by the legislature, in restricting the power of limited companies to reduce the amount of their capital as set forth in the memorandum, is to protect the interests of the outside public who may become their creditors. In my opinion the effect of these statutory restrictions is to prohibit every transaction between a company and a shareholder, by means of which the money already paid to the company in respect of his shares is returned to him, unless the Court has sanctioned the transaction.

66                  What was in issue in Webb was the rule in Houldsworth as a relevant entity was in liquidation.  Their Honours said (at 33) (footnotes omitted):

… the critical question is not whether Houldsworth is right or wrong but whether the proposition which the House of Lords distilled in the case from the provisions of the Companies Act 1862 is incorporated in the provisions of the Code. That proposition, namely, that a shareholder may not, directly or indirectly, receive back any part of his or her contribution to the capital of the company, cannot now be supported in absolute terms. A direct return of capital may be effected with the approval of the court having regard, inter alia, to the interests of creditors.

The statutory provisions authorizing the return of capital are not inconsistent with the Houldsworth proposition. Indeed, they proceed on an acceptance of part of the reasoning which underpinned the decision in that case. They permit a return of capital to shareholders when it is established to the satisfaction of the court that the return of capital will not prejudice the interests of creditors or when it is consented to by creditors. Hence, the statutory provisions treat the subscribed capital as a protection to creditors and accept that the capital should not be returned directly to shareholders otherwise than pursuant to a permissible reduction of capital.

67                  In short, Solagran argues that, as set out in s 254Y, the CA provides for the cancellation of shares in defined circumstances only, none of which would apply in this situation.  Nor can any order be made for reduction of a company’s capital other than in circumstances prescribed under the CA, none of which is presently applicable. 

68                  I accept the claims by Bioprospect are relatively novel and that they face some difficulty.  Bioprospect has extensive arguments to raise against the contentions advanced by Solagran but in the end, the basis for refusal to extend the injunction is that I am not satisfied that damages are not an adequate remedy nor that the balance of convenience favours extending the injunction. 

WHETHER DAMAGES WILL BE AN ADEQUATE REMEDY

69                  This is one of the most important considerations at present.  It is argued that Bioprospect’s application for a final order pursuant to s 87 TPA that it be entitled to cancel (or have transferred) the 45 million Bioprospect shares allotted and issued to Solagran will be futile if Solagran is not restrained by an interim injunction and sells its shareholding in Bioprospect prior to trial. 

70                  Bioprospect accepts that there is no reason to doubt Solagran’s capacity to meet an award in damages in these proceedings.  It has also accepted that most of its loss and damage can be compensated in a damages award.  In the event, which is far from clear, that Solagran chose to sell its substantial parcel of Bioprospect shares, such that either the share price in Bioprospect dropped or difficulties in fundraising or capital raising were occasioned, then to the extent, if any, that those ‘losses’ were losses sustained by Bioprospect as a result of a breach by Solagran, then it would be possible to quantify them.  Solagran has the capacity, it is accepted, to meet an award.  (If such hypothetical losses cannot be causally connected with any breach by Solagran, then the problem does not arise).  There may be difficulties encountered in assessing the damages to the point that some estimation is involved but difficulty in computing damage does not mean that damages are not an appropriate remedy or that they should not be assessed. 

71                  Bioprospect also contends that Solagran’s continued substantial shareholding in Bioprospect is likely to adversely impact on Bioprospect’s ability to raise capital in circumstances where the dispute is continuing and the market is likely to perceive Solagran as a disgruntled shareholder selling or likely to sell its shareholding in Bioprospect.  If Bioprospect is unable to raise capital, it will suffer permanent and irreparable damage such as direct impact on is ability to continue as a going concern, prejudice to its listing on the ASX and damage to its commercial reputation and loss of commercial opportunities.  This submission is one which may be relevant for trial but does not appear to bear on the question of interlocutory relief.  There is no suggestion at this stage that Bioprospect should be able to cancel or purchase Solagran’s shares.  Further, it is clear that if the shares are still held by Solagran by the time of trial, Bioprospect will seek the foreshadowed relief in respect of them.

BALANCE OF CONVENIENCE

72                  I am not persuaded at this stage, having had the benefit of inter-partes argument, that there is a sound basis for forming the view that it is probable that Solagran will, in effect, dump its large parcel of shares for the relatively modest share price they could currently attract.  As against that, there seems to be no good reason, given that damages should be an adequate remedy, why Solagran should be restrained from being able to deal as it sees fit with its property. 

73                  To the extent that it is sought to restrain Solagran from dealing with its shares, the principles applicable to a freezing order seem apposite.  Those principles would require that there must be a ‘real risk’ or real danger of Solagran’s assets being dissipated or put beyond the reach of the Court if an injunction is not granted:  Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 per Gleeson CJ at 325, Meagher JA at 326.  At the commencement of these proceedings there was a perception that Solagran had started selling off parcels of shares (some 4 million shares).  It transpired, as counsel made clear on the ex parte application, that this fear was not well-founded and accordingly there has been no evidence at all of a propensity to shift assets, whether to defeat a judgment or otherwise. 

74                  Bioprospect argues that any loss to Solagran arising from a drop in the Bioprospect share price (by Solagran being effectively locked in as a shareholder) is easily measurable and compensable by an award of damages.  It argues that Solagran is protected against any risk of financial loss by virtue of the undertaking as to damages given by Bioprospect.  I am not persuaded as to this submission.  Solagran complains that, in effect, the orders would be of the nature of a ‘freezing order’ pursuant to r 25A of the Federal Court Rules which would be an extraordinary remedy.  While I was satisfied on a short term interim basis that the risk of prejudice to Solagran was minimal, I am not satisfied that it is appropriate to extend the injunction until trial so as to prevent Solagran from exercising all or any rights in relation to its property. 

75                  As a postscript I note that there was debate between the parties as to whether the application for the injunction should be based on O 25 or f 25A of the Federal Court Rules or some other provision.  In light of my reasons for dismissing the injunction application, in the end nothing turns on this point.

CONCLUSION

76                  In those circumstances the orders that will be made are:

1.                  The application for an interlocutory injunction be dismissed.

2.                  The application to amend the applicant’s application be allowed on condition that further particulars are supplied within 7 days to clarify either the terms which would apply to the transactions contemplated in each of the amended paragraphs, or alternatively, a mechanism by which those terms would be assessed.

3.                  Costs of this application and of the initial return of the interim injunction on 15 September 2010 be reserved. 

Associate: 

Dated:         1 October 2010