FEDERAL COURT OF AUSTRALIA

Quotila Pty Ltd v South Australian Marine Products

Industries Pty Ltd [2010] FCA 1141

THE COURT ORDERS THAT:

The parties be heard further as to the terms of the appropriate orders.

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

1    This is an application for an interlocutory injunction pending trial. Subject to any further submissions about the undertaking as to damages, in my opinion, the interlocutory injunction should be granted.

2    The plaintiff is a shareholder of the first defendant. The first defendant has 100 shares on issue of which 45 are held by the plaintiff. FishTrade International Pty Ltd (“FishTrade”) owns 45 shares in the first defendant and Discovery III Pty Ltd (“Discovery”) owns the remaining 10 shares.

3    The plaintiff is owned and controlled by Mr Peter Laughton. He is a director of the first defendant. FishTrade is a company in which the second defendant has a substantial interest. The second and third defendants are directors of FishTrade and they are the other two directors of the first defendant.

4    FishTrade is a creditor of the first defendant. A special purpose financial report for the first defendant for the financial year ended 30 June 2009 shows a debt owed by the first defendant to FishTrade of $692,467 and a debt owed by the first defendant to Mr Laughton of $500. An account transactions report of the first defendant put before me shows further loans by FishTrade to the first defendant between January and August 2010 totalling $358,562.79.

5    On 27 August 2010, there was a directors’ meeting of the first defendant at which a resolution was passed that the first defendant make a pro rata rights issue of 100 shares at $5,555 per share. The second and third defendants voted in favour of the resolution. Mr Laughton voted against the resolution. The interlocutory injunction sought by the plaintiff will restrain the defendants from taking steps to implement the terms of the resolution.

6    The plaintiff puts its case against the defendants on two grounds. First, it contends that the resolution was passed for an improper purpose. The improper purpose alleged by the plaintiff is the dilution of the plaintiff’s shareholding in the first defendant. The plaintiff relies on s 181 of the Corporations Act 2001 (Cth) (“Corporations Act”) which provides that the directors of a company must exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose. Secondly, it contends that the resolution is contrary to the interests of the members of the first defendant as a whole or oppressive or unfairly prejudicial to the plaintiff and, in this respect, it relies on s 232 and s 233 of the Corporations Act. I am satisfied that there is a prima facie case or serious question to be tried in relation to the improper purpose ground and it is not necessary for me to consider at this stage the oppressive conduct ground.

7    The evidence before me consists of an affidavit of Mr Laughton, an affidavit of the second defendant and an affidavit of Mr Daniel McRorie. Mr McRorie is the manager of Fish Trade and he undertakes administrative duties on behalf of the first defendant.

8    The test for an interlocutory injunction is well-known. A Court must consider whether there is a serious question to be tried or a prima facie case, whether damages will be an adequate remedy if the interlocutory injunction is not granted and where the balance of convenience lies: Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 at 153 per Mason ACJ. It is not necessary for me to examine the differences between the test of a prima facie case and the test of a serious question to be tried (see Australian Broadcasting Corporation v Lenah Game Meats (2001) 208 CLR 199; Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57) because I am satisfied that the plaintiff has established a prima facie case.

9    The first defendant was incorporated in early 2004 as the vehicle whereby Mr Laughton and the second defendant would carry out a joint venture upon which they had agreed. Each brought different items of property into the joint venture. The first defendant carries on business as a producer of fertilisers and fish bait. It leases a premises at Port Lincoln in the State of South Australia from which it conducts its business. On the incorporation of the first defendant, the plaintiff and FishTrade each held 50 shares in the first defendant. In June 2007 the plaintiff and FishTrade each sold five of their shares in the first defendant to Discovery III Pty Ltd for $35,000 for each parcel of five shares. Discovery III Pty Ltd is an independent third party investor which has taken no part in the day-to-day conduct of the business.

10    Since 2005 FishTrade has provided substantial funds to the first defendant by way of loans.

11    The first defendant’s lease on the premises at Port Lincoln was due to expire in June 2009. The second defendant wanted the first defendant to relocate to other premises. Mr Laughton did not want the first defendant to relocate to other premises. This disagreement led to other disagreements between Mr Laughton and the second defendant and to a substantial deterioration in the relationship between them. The question of whether the first defendant should relocate to other premises came to a head in late 2009. At a directors’ meeting on 2 February 2010 it was resolved that the first defendant relocate to new premises. Mr Laughton did not attend that meeting. The minutes of the directors’ meeting record that Mr Laughton was “inactive and unable to contribute financially or physically” and contain a reference to the fact that “not all shareholders were willing to provide capital …”. There is other evidence to support the conclusion that the second defendant knew that the plaintiff was unlikely to be in a position to contribute substantial funds to the first defendant. On 19 March 2010 Mr Laughton appointed a Mr Peter Lombardo as an alternate director. At a directors’ meeting held on 29 March 2010 it was agreed that the first defendant would grant to FishTrade a fixed and floating charge over its assets. Mr Lombardo attended that meeting.

12    There is an ongoing dispute about whether Mr Laughton has been given access to the financial records of the first defendant. Mr McRorie’s affidavit is directed to that question.

13    FishTrade has acquired alternative premises in Port Lincoln and it is the second defendant’s wish that the first defendant relocate to those premises.

14    On 27 July 2010 the plaintiff’s solicitors wrote to the first defendant and asked that a shareholders’ meeting of the first defendant be held.

15    The resolution under challenge was passed at a directors’ meeting on 27 August 2010. The minutes of that meeting record the following:

Future funding requirements of the Company    

Mr Franchina proposed that the Company raise $555,500 by way of a pro rata rights issue to:

(a)    retire debt of $358,052 owed to FishTrade International Pty Ltd; and

(b)    provide additional working capital of $197,438 to fund future business activities in accordance with cashflow tabled at the meeting.

Mr Franchina stated that FishTrade International Pty Ltd had provided additional funding since 30 June 2009 to the Company to enable it to establish new premises. He suggested that it was in the best interests of the Company to reduce the loan to FishTrade International Pty Ltd to the level existing as at 30 June 2009 therefore, maintaining debt levels at an appropriate level in accordance with the cashflow tabled. Also, in accordance with the cashflow tabled at the meeting, he recommended that further funds be raised to ensure the Company had adequate working capital for on-going operations.

Resolution

Mr Franchina put the resolution regarding the future funding requirements of the Company as set out above.

Mr Romaro seconded the Resolution.

Mr Laughton voted against the [R]esolution

The Directors resolved that the Company undertake a pro rata rights issue, pursuant to clauses 4 and 35 of the Constitution, by the issue of 100 fully paid ordinary shares at $5,555 per share to raise a total sum of $555,500, the purpose of which would be to:

(a)    retire debt of $358,052 owed to FishTrade International Pty Ltd;

(b)    provide additional working capital of $197,438 to fund on-going business activities; and

(c)    the Company Secretary be authorised to issue a letter to shareholders in the form attached hereto notifying the shareholders that they are entitled to apply for their pro rata share entitlement by 5pm on 16th September 2010.

The plaintiff has not taken up its pro rata entitlement.

16    I am of the opinion that, having regard to the above matters, I can infer on a provisional basis that a substantial purpose of the resolution was to dilute the plaintiff’s shareholding in the first defendant. The relationship between the two major shareholders in the first defendant has broken down and they cannot agree on a fundamental matter about the future conduct of the company’s business. It may be that the second defendant, who has a great deal more at stake in terms of the success of the business, believes that his wishes should prevail and are in the best interests of the first defendant. However, that is not to the point where an improper purpose is alleged. I can infer on a provisional basis that the second defendant knew that the plaintiff was unlikely to participate in the pro rata rights issue. He knew that the plaintiff or Mr Laughton was asking for a shareholders’ meeting of the first defendant to be held. He knew that if the plaintiff did not take up its entitlement its shareholding would be diluted and if, as happened, FishTrade took up its entitlement it was likely that FishTrade would gain a majority interest in the first defendant. In fact, the only circumstances in which that would not occur is if the directors, including the second and third defendants, allocated the plaintiff’s entitlement to a completely independent third party.

17    In his affidavit, the second defendant claims the rights issue will raise capital to reduce the debt to equity ratio of the first defendant and “to provide sufficient working capital to enable [the first defendant] to pursue its business plan (including payments to trade creditors as and when they fall due)”. That evidence is to be weighed in the balance and is not to be rejected at this stage. My findings at this stage can only be provisional and it may be that there will be sufficient evidence at trial to counter the plaintiff’s improper purpose case. However, I note that there is no evidence before me of any particular reason to “correct” the first defendant’s debt to equity ratio in August 2010 or of the degree of urgency associated with the raising of working capital.

18    I am satisfied that the plaintiff has a prima facie case.

19    I am satisfied that the interlocutory injunction should not be refused on the basis that damages or compensation will be an adequate remedy. The issue of the shares and actions consequent thereon including the holding of shareholders’ meetings may lead to damage which cannot be compensated for by an award of damages or compensation.

20    I am satisfied that the balance of convenience favours the granting of an interlocutory injunction. The allotment of the shares and actions consequent thereon may be very difficult to “unwind”. The issues in dispute should be capable of determination within a relatively short time frame and I do not think any hardship or inconvenience to the defendants outweighs the hardship or inconvenience to the plaintiff.

Associate:

Dated:    22 October 2010