FEDERAL COURT OF AUSTRALIA

Guvera Limited v de Vere [2015] FCA 1141

On the Applicant providing the usual undertaking as to damages, THE COURT ORDERS THAT:

1.    Until further order the Respondent, save to the extent required for the payment of ordinary living expenses and reasonable legal expenses, shall be restrained from disposing of, dealing with, diminishing the value of, or otherwise encumbering:

(i)    shares held by the Respondent, personally or through any corporate vehicle, in any company including shares held in Guvera Ltd;

(ii)    94 Holyrood Road, Maudsland, in the State of Queensland, 4210;

(iii)     any beneficial interest that the Respondent has in any property held subject to any trust the beneficiary of which is, or one of the beneficiaries of which is, the Respondent;

(iv)     any bank accounts held in the name of the Respondent.

2.    In respect of any sale of shares held in the Applicant for the purposes of ordinary living expenses and/or reasonable legal expenses in accordance with Order 1, the Respondent must provide the Applicant’s registry services provider and the Applicant with a copy of the share transfer request form and an accompanying letter setting out:

(i)    that the shares are being sold at fair market value;

(ii)    how the proposed transaction is required for the payment of ordinary living expenses and/or reasonable living expenses; and

(iii)    the expected period of time for which the monies received by the Respondent as a result of the proposed sale of shares will meet the Respondent’s ordinary living expenses and/or reasonable legal expenses.

3.    Costs of this application be costs in the cause.

4.    The matter to be docketed to a docket judge and listed for directions in the week of 2 November 2015.

5.    Liberty to apply on 24 hours’ notice.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    When this matter came before me on an urgent basis on 8 October 2015 I made interim freezing orders, the purpose of which was to hold the position until the respondent, who is in the UK, could file and serve evidence disclosing his assets. The respondent took up that opportunity and has filed four affidavits relevant to the interim relief which the applicant seeks in its interlocutory application.

2    The applicant is a digital music and entertainment company which was founded in 2008. The respondent, until his resignation on 11 May 2015, was at various times a director, general counsel, chief operating officer and vice-chairman of the applicant’s Board and otherwise a director of a related entity, Guvera UK Limited (Company No 06716336) (Guvera UK). The applicant is the holding company of Guvera UK. The respondent was required by the applicant to establish Guvera UK, which occurred in October 2008.

3    In its substantive application the applicant claims from the respondent compensation pursuant to s 1317H of the Corporations Act 2001 (Cth) (the Act), equitable compensation and costs. In its statement of claim, the applicant alleges that without lawful authority the respondent in his capacity as director of Guvera UK executed an agreement for the purchase of the entire issued share capital of Blinkbox Music Limited (Blinkbox). Further, the statement of claim also alleges that a UK based law firm, on or about 14 July 2015, wrote to the applicant stating that ex-employees of Blinkbox intended to commence legal proceedings in the UK against, amongst others, Blinkbox, the applicant and Guvera UK. The applicant otherwise contends that the respondent, in causing the acquisition of Blinkbox, breached his duty of care and diligence under s 180 of the Act and breached his duty as a director to act in good faith in the best interests of the applicant under s 181 of the Act. On this basis, the applicant seeks from the respondent damages and/or equitable compensation.

4    The most recent evidence, recognising that this matter currently is at the interlocutory stage, involves some press releases in UK newspapers to the effect that former employees of Blinkbox intend to or have commenced a class action against Guvera, with their claim being quantified as £10 million.

5    In its written submissions the applicant acknowledged that the making of freezing orders as sought is a drastic remedy which should not be lightly granted. The court must be persuaded of the existence of a prima facie cause of action, a danger the judgment will not be satisfied, and that in all of the circumstances the relevant discretion ought to be exercised.

6    The prima facie cause of action limb of the test was conveniently set out in the applicant’s written submissions, which I accept, as follows:

In relation to the first aspect – the Court must be persuaded of a reasonably arguable case on legal as well as factual matters: Cardile [v LED Builders Pty Ltd (1999) 198 CLR 380] [68]. The Court should not be drawn into a premature trial of the action. Rather it is a preliminary appraisal of the plaintiff’s case. Furthermore, the threshold represented by the “good arguable case” test is not a particularly exacting one and is satisfied if the case put forward is “more than barely capable of serious argument” – with “more than barely” indicating a degree of substance that is real rather than imagined and appreciable even though falling short (and perhaps markedly short) of a 50% probability of success: TZ Limited v ZMS Investments Pty Ltd [2010] NSWSC 196 at [22] – [23] citing Ninemia [Maritime Corporation v Trave Schiffahrtsgesellschaft GmbH & Co KG (The Niedersachsen) [1984] 1 All ER 398] and Pure Logistics v Scott [2007] NSWSC 595 per McDougall J.

7    In the present case, the respondent accepts that the threshold issue of the existence of a prima facie cause of action is satisfied; albeit noting that the evidence in support of this prima facie cause of action is primarily hearsay in circumstances where other potential witnesses, who would have been able to give first-hand evidence, are available but have not given evidence. According to the respondent this gives rise to a Jones v Dunkel ((1959) 101 CLR 298) inference against the applicant that their evidence would not have assisted.

8    The respondent also noted that paragraph 41 of the statement of claim and the particulars to that paragraph refer to the claims in the UK against Mr Herft, rather than the respondent, for dishonest inducement of or assistance in a breach of trust by Guvera UK. The respondent submitted that it cannot be the case that the respondent would be liable for someone else’s dishonesty. However, given that the respondent accepts that the prima facie cause of action threshold has been met it is difficult to understand the relevance of this submission.

9    I am satisfied, on the evidence which has been presented, that the applicant has a prima facie case. Although the quantum of the claim against the applicant is relatively at large at the present stage, there is no reason to doubt that proceedings such as the class action described in the statement of claim involve potentially a significant claim against the applicant in the order of the ₤10 million (as has been referred to in the newspaper articles). In this regard, I should note that the newspaper articles purport to record direct quotes from a solicitor at the law firm Bates Wells Braithwate, said to be representing the former employees, which is the same law firm referred to in paragraph 41 of the statement of claim. It seems to me that on an interlocutory basis, there is sufficient evidence for me to be reasonably satisfied that the applicant is facing a potential liability in the UK in the order of £10 million as suggested in the applicant’s written submissions.

10    The next issue, the danger the judgment will not be satisfied, raises another aspect of the matter, in particular the existing undertaking of the respondent that until final disposition of the matter he will not sell a property at 94 Holyrood Road, Maudsland Queensland (the property) nor 2 million shares which the respondent holds in the applicant.

11    There is in evidence a valuation from 2008 of the property and an apparent adjoining lot known as Lot 11. The valuation gives a value, per hectare, of the overall site area. As I understand it, the respondent contends that the property which he still holds is worth some $4.5 million based on a multiplication of the lower of the two values put forward in the valuation, namely the dollar per hectare of overall site area multiplied by the number of hectares which remain in his ownership which is in the order of some 26.86 hectares.

12    However, as Ms Callan has pointed out in submissions for the applicant, the property is encumbered and if it is worth some $4.5 million then the encumbrance would reduce the value to some $2.5 million. The other difficulty is that the valuation is very old and there is no basis on which I could infer that the value of the property remains what it was in 2008 or has been increased or is lower than that amount. I simply do not know one way or another. I am prepared to accept that the property has real value in the order of some millions rather than hundreds of thousands of dollars but beyond that I cannot say.

13    This is particularly so given that not only is the valuation very old but it seems to have been carried out on a joint basis for both Lot 100, which is the land the respondent continues to hold, and the adjoining Lot 11. It is not at all clear whether Lot 100 on its own would have the same value as the joint holding. This is another reason why I cannot infer that the property is worth anything like the $4.5 million which is alleged.

14    The other main asset that the respondent holds is his shares in the applicant. According to the applicant, the respondent holds 10 million shares and the current value is approximately $3 per share. The respondent has offered not to dispose of 2 million shares. The respondent has submitted that this would be worth $6 million on the applicant’s estimate of the current share value which, together with the property, should be sufficient. The difficulty with this submission is that as the applicant has pointed out, there is also evidence to infer that the respondent has attempted to sell the shares at considerably less than $3 per share and the value of his remaining shares no doubt would be affected by any such sale.

15    The other issue is that the respondent holds apparently some 10 million shares, only 2 million of which he is prepared to offer up as part of the undertaking, despite the respondent stating in his affidavit that he does not intend to sell any shares other than for the purpose of the payment of ordinary living expenses and reasonable legal expenses. If the shares in the applicant are worth $3 per share, or thereabouts, then it is not clear to me why the applicant would need to have access for sale purposes to some 8 million shares in order merely to pay ordinary living expenses and reasonable legal expenses.

16    The applicant has offered its own undertaking as to damages and has expressly excluded from the proposed freezing order the payment of ordinary living expenses and reasonable legal expenses in an amount which is not capped. In these circumstances and having regard to the existence of the prima facie cause of action, the very substantial potential liability to which the applicant is exposed and the evidence of the previous attempt by the respondent to dispose of shares at an undervalue, I consider that the discretion ought to be exercised in the applicant’s favour. The amendments to the proposed orders which the respondent has put forward do not seem to me to take the matter much further because they are limited to the 2 million shares the subject of the respondent’s undertaking.

17    I accept that the orders which I propose to make may cause some practical difficulty for the respondent in liquidating certain shares that he holds as may be necessary for the payment of ordinary living expenses and reasonable legal expenses. At this time, given that the respondent is unable to identify any particular bank account from which he would perform those transactions, it is not possible for me to formulate any exemption or exclusion from the order. However, I propose to give liberty to apply on 24 hours’ notice on the basis that if practical difficulties exist for the respondent in selling shares in the ordinary course for the payment of ordinary living expenses and reasonable legal expenses, the respondent should have an opportunity to, firstly, attempt to negotiate a suitable outcome with the applicant, but, secondly, to apply to the court. In terms of the opportunity to negotiate with the applicant, I consider that proposed order 2 in the applicant’s short minutes of order appropriately provides that opportunity. That sets out a regime by which the respondent is to provide to the applicant’s registry services provider and the applicant the share transfer request form and an accompanying letter setting out information, including that the shares are being sold at fair market value and are for the payment of ordinary living expenses and/or reasonable legal expenses, as well as the period of time for which those expenses will be met by reason of the proceeds of the sale. I would hope that any practical difficulties could be resolved between the parties without a further need for recourse to the court, but if that is not possible, liberty to apply will be available for that purpose.

18    Consequently, on the applicant giving the usual undertaking as to damages, I make orders accordingly.

Associate:

Dated:    3 November 2015