Federal Court of Australia

Chief Disruption Officer Pty Ltd as Trustee for the McDonald Family Trust v Michel, in the matter of Laava ID Pty Ltd (No 2) [2022] FCA 249

ORDERS

THE COURT ORDERS THAT:

1.    Leave is granted to the sixth, seventh and ninth defendants to file Amended Points of Defence in the form annexed to the affidavit of Carrie Peterson sworn 8 March 2022.

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

REASONS FOR JUDGMENT

GOODMAN J

1    On 9 March 2022, I granted leave to the sixth, seventh and ninth defendants to file Amended Points of Defence. Set out below are my reasons for doing so.

background

2    On 14 February 2022, I made a series of orders, including an order joining the sixth, seventh and ninth defendants to this proceeding and an order that those defendants file and serve their Points of Defence and affidavit evidence by 28 February 2022. The time for compliance with those orders was subsequently extended to 4:00pm on 2 March 2022.

3    On 2 March 2022, the sixth, seventh and ninth defendants filed their Points of Defence (at 3:25pm) and an affidavit of the sixth defendant affirmed that day (at 10:10 pm).

4    At the commencement of the hearing on 8 March 2022, the sixth, seventh and ninth defendants foreshadowed an application for leave to file Amended Points of Defence. That application was heard and determined on 9 March 2022.

THE PROPOSED AMENDMENT

5    In order to understand the amendment, it is necessary to set out paragraphs 84 and 85 of the plaintiff’s Amended Points of Claim. Those paragraphs are in the following form, insofar as is presently relevant:

84    Unbeknownst to CDO and McDonald, or about 27 October 2021, Michel and Surtees, in breach of the Foundational Understanding caused Laava to offer:

a.    24,333 further options to Michel;

b.    7,300 further options to Surtees;

c.    36,500 further options to Ger or Wyargine; and

d.    3,042 further options to Fitzpatrick,

which had an exercise price of $1 per option and which were able to be exercised immediately (Second Directors’ Options Issue).

85    In causing the Second Directors’ Options Issue, the dominant purpose of Michel and Surtees was to:

…

b.    insofar as it concerned the issuing of options to Ger or Wyargine, cause the appropriation of shares to Ger or Wyargine whose interests were aligned with the interests of Michel and Surtees and in circumstances where there was no commercial justification for the issuing of further shares or options to Ger or Wyargine, and where:

i.    they and Ger were aware of the Potential $100m Exit Event;

ii.    CPL, in which Ger had an interest, was entitled to substantial fees for work performed by Ger in accordance with the Contractor Agreement as set out in paragraphs 38 and 39 above;

iii.    Wyargine had already been issued 3,000 shares in Laava, which, assuming a pre-money valuation of $12m for Laava ($62.38 per share), had a value of approximately $187,140;

iv.    Ger or Wyargine had been offered 9,000 additional options, which, assuming a pre-money valuation of $12m for Laava ($62.38 per share), had a value of approximately $561,420;

v.    Ger or Wyargine did not propose to nor did he invest any new money into Laava;

vi.    there was otherwise no commercial justification for the additional 36,500 options;

vii.    Ger or Wyargine did not provide any services to Laava that would otherwise entitle him to options to acquire 36,500 shares, which,

(A)    assuming a pre-money valuation of $12m for Laava ($62.38 per share), had a value of approximately$2,276,870;

(B)    were the Potential $100m Exit Event to come to pass, would have a value of over $18,214,960 (an eight-fold increase assuming a $12m pre money valuation); and

(C)    assuming the value of $42.43 per share as per the Subscription Agreement, had a value of approximately$1,548,695.

viii.    the issuing of options to Ger or Wyargine increased the shareholding of persons that were aligned with the interests of Michel and Patrick and thereby increased their control of Laava;

…

6    Paragraph 85 of the Amended Points of Defence is in the following form (again insofar as is presently relevant):

85.    In response to paragraph 85:

…

(b)    with respect to sub. (b), the Sixth Defendant and the Seventh Defendant say, because it engages their interests, there was reasonable commercial justification for the issue on this basis:

(i)    the Sixth Defendant had become central to the success of Laava's 'go to market' offering;

(ii)    all potential investors wanted to meet the Sixth Defendant before making a decision to invest because of the importance of his contribution and exertions to Laava's success;

(iii)    the Sixth Defendant caused for the Seventh Defendant to offer his services to Laava for less than market rate because Laava, in its 'start up' or 'seed capital' phase did not have the resources to pay for his services at market rate;

(iv)    the issue of options to employees and managers of 'start-up' companies, such as those received by the Sixth Defendant, are intended t6 incentivise performance, in lieu of market rate remuneration;

(v)    the Sixth Defendant and / or the Seventh Defendant were offered additional options to acknowledge and recognise the key founder role Ger played in building Laava keep their joint and / or respective shareholding, or rights to shares, or options, or rights to options, equivalent to around 10 per cent of the total issued shareholding, and derivative rights thereto, in Laava.

Particulars

(a)    See email sent by Allan Aaron to the First Defendant at 9.06 pm on 9 November 2021 Board Meeting Minutes – 22 October 2021.

…

7    The marking up in the above paragraph reflects the changes from the Points of Defence.

8    The plaintiffs objected only to the deletion of the words deleted in sub-paragraph 85(b)(v).

evidence

9    The sixth, seventh and ninth defendants relied upon the affidavit of their solicitor, Ms Peterson sworn 8 March 2022. Ms Peterson deposed:

…

7.    On 7 March 2022, after cross referencing the Sixth Defendant's affidavit with the filed Points of Defence, it came to my attention that the due to an administrative error, the matters pleaded at paragraph 85(b)(v) of the Points of Defence were not reflective of my clients' instructions. My clients' instructions have never changed and are referred to at paragraph 138 of Mr Ger's affidavit (which referred to the minutes of the meeting dated 26 October 2021), and now also properly reflected in the proposed amended Points of Defence.

8.    As soon as I become aware of the error, at 12:29pm on 7 March 2022, I emailed the Plaintiffs' solicitors, seeking their consent to file a proposed Amended Points of Defence. Annexed and marked "A" is a copy of an email and letter attaching the proposed Amended Points of Defence sent to the Plaintiffs' solicitors.

…

10    Ms Peterson was not cross-examined and no objection was taken to her evidence.

11    Paragraph 138 of the affidavit of Mr Ger, the sixth defendant, is in the following form:

138.    On the same day [26 October 2021], the Board of Laava passed resolutions to proceed with Series A capital raising, to recognise me as a founder and to elevate my options in line with the other three founders. Exhibited at pages 383 is a true copy of an email from Patrick to John Fitzpatrick along with the minutes of the meeting.

CONSIDERATION

12    In so far as the amendment involved the deletion of words from paragraph 85(b)(v) of the Points of Defence, the sixth, seventh and ninth defendants required leave in circumstances where pleadings had closed and the plaintiff did not consent to that deletion: see r 16.53 of the Federal Court Rules 2011 (Cth). Further, to the extent that the proposed amendment involved the withdrawal of “an admission or any other plea that benefits another party”, leave was required: see r 26.11(2) of the Rules.

13    The Court’s discretion to allow an amendment, although broad, fell to be exercised in a manner which best promoted the overarching purpose of facilitating the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible: s 37M(1) of the Federal Court of Australia Act 1976 (Cth); Cement Australia Pty Ltd v Australian Competition and Consumer Commission [2010] FCAFC 101; (2010) 187 FCR 261 at [43]; Tamaya Resources Ltd (in liq) v Deloitte Touche Tohmatsu (A Firm) [2016] FCAFC 2; (2016) 332 ALR 199 at [122]-[124]. The exercise of the discretion was informed by the principles enunciated by the High Court of Australia in Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175: Tamaya Resources at [125]. The weight to be given to the considerations identified in Aon, individually and in combination, and the outcome of the balancing process, vary depending on the facts in the individual case: Cement Australia at [51].

14    In Selvaratnam v St George – A Division of Westpac Banking Corporation (No 2) [2021] FCA 486, Stewart J said at [27]:

The applicable principles with regard to whether leave to withdraw an admission or other pleading that benefits another party are, relevantly, the following, noting that for simplicity I will refer only to the withdrawal of an admission:

(1)    The court has a broad discretion to weigh up all matters with the overall question being to ensure that there is a fair trial: Jeans v Commonwealth Bank of Australia Ltd [2003] FCAFC 309; 204 ALR 327 at [18] and [23] per Hill, Madgwick and Conti JJ.

(2)    The court will require an explanation for the making of the admission which is now sought to be withdrawn; the explanation must be a sensible one based on evidence of a solid and substantial character: Celestino v Celestino [1990] FCA 449 at 8 [12] per Spender, Miles and von Doussa JJ (noting that the AustLII MNC for this case is [1990] FCA 299).

(3)    The object of the courts is to decide the rights of the parties, and not to punish them for mistakes they make in the conduct of their cases; if the mistake is not fraudulent or intended to overreach, can be corrected without injustice to the other party, and if not corrected will not lead to a decision on the real matters in controversy, it should generally be corrected: Celestino at 7 [10].

(4)    The overriding consideration is the interests of justice: Australian Competition and Consumer Commission v Construction, Forestry, Mining and Energy Union [2007] FCA 1390 at [4] per Finn J.

(5)    The court will not lightly permit a party to withdraw an admission where the other party has acted to its detriment on the admission or is otherwise prejudiced by the withdrawal; if the other party has in good faith relied on the admission to its detriment so as to give rise to an estoppel the court will not permit the admission to be withdrawn: Celestino at 10 [14].

15    I granted leave to the sixth, seventh and ninth defendants to file their Amended Points of Defence for the following reasons.

16    First, the unchallenged evidence of Ms Peterson was that paragraph 85(b)(v) of the Points of Defence did not reflect her clients’ instructions and those instructions were reflected in paragraph 85(b)(v) of the Amended Points of Defence. It was also her unchallenged evidence that this was the product of error on her part. Whilst Ms Peterson may have been able to provide further detail, I took into account the fact that the error was discovered on 7 March 2022, the day before the hearing started and her affidavit was made on 8 March 2022, the first day of the hearing.

17    Secondly, that evidence (and the lack of a more detailed explanation) was explicable in the context of the regime within which the sixth, seventh and ninth defendants had been operating. As noted above, they were subject to a truncated timetable following their joinder to the proceeding on 14 February 2022 ahead of the hearing scheduled to commence on 8 March 2022. Within that timeframe they had been required to consider the voluminous documents already filed and to prepare their Points of Defence and affidavit evidence. There had also been an interlocutory hearing concerning security for costs and other issues: see Chief Disruption Officer Pty Ltd as Trustee for the McDonald Family Trust v Michel, in the matter of Laava ID Pty Ltd [2022] FCA 148.

18    Thirdly, the relative prejudice that would have been suffered by the plaintiffs on the one hand and by the sixth and seventh defendants on the other (noting that the disputed text did not involve the ninth defendant). If the amendment had not been allowed, then the sixth and seventh defendants would have been left with a pleading inconsistent with their instructions. Against this, there was no suggestion by the plaintiffs that they had acted to their detriment in reliance upon paragraph 85(b)(v) in its unamended form. Whilst I accepted that the plaintiffs would not have the benefit of a pleading by the sixth and seventh defendants that there was a commercial justification for the issue of additional options to them “to keep their joint and/or respective shareholding, or rights to shares, or options, or rights to options, equivalent to around 10 per cent of the total issued shareholding, and derivative rights thereto, in Laava”, I considered such prejudice to be outweighed by the prejudice that the sixth and seventh defendants would suffer in proceeding on a pleading inconsistent with their instructions and which contained an error. I also considered that it remained open to the plaintiffs to seek to explore this topic in cross-examination of Mr Ger.

Associate:

Dated:    18 March 2022

SCHEDULE OF PARTIES