Federal Court of Australia

Jonsson, in the matter of Hooper Holdings Pty Ltd v Hooper Holdings Pty Ltd (No 2) [2022] FCA 664

ORDERS

THE COURT ORDERS THAT:

1.    The proceeding is dismissed.

2.    The applicant pay 80% of the costs of the defendants of and incidental to the proceeding.

3.    Pursuant to s 23 and s 37P of the Federal Court of Australia Act 1976 (Cth), rule 1.32 and rule 1.36 of the Federal Court Rules 2011, these orders and the reasons for judgment in support of these orders are made and published from Chambers.

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

REASONS FOR JUDGMENT

GREENWOOD J:

1    In these proceedings, the parties have entered into a transaction which has had the effect of bringing the controversy between the parties to an end. The issues that remain to be determined are the final form of an order to be made in disposition of the proceedings and the question of any order as to costs.

2    The proceeding can be brought to a conclusion either by granting leave to the applicant to discontinue the proceeding or by making an order that the proceeding be dismissed. Rule 26.12(2) of the Federal Court Rules 2011 provides that a party may file a notice of discontinuance with the leave of the Court at any time. Rule 26.12(7) provides that unless the terms of an order provide otherwise, a party who files a notice of discontinuance under subrule (2) (in this case, with leave) is liable to pay the costs of each other party to the proceeding in relation to the claim, or part of the claim, that is discontinued. Accordingly, the Rule will be self-executing as to costs unless the Court makes an order otherwise. The parties have filed submissions as to orders they each believe ought to be made as to costs. If the proceeding is dismissed, the parties contend that an order for costs ought to be made as they both respectively contend for.

3    Either way, any order for costs made as an aspect of the dismissal of the proceeding or the granting of leave to discontinue requires an assessment of whether an order for costs ought to be made in the exercise of the discretion arising under s 43 of the Federal Court of Australia Act 1976 (Cth).

4    The background to the proceeding is this.

5    On 29 November 2018, the applicant, Mr Jonsson, was appointed trustee in bankruptcy (the “trustee”) of the estate of Ms Eleanor Clare Hooper. Ms Hooper held 619 “A” class shares in the first respondent, Hooper Holdings Pty Ltd (“the company”) at the date of appointment of the trustee. Ms Hooper’s interest in those shares was a matter of “property” for the purposes of the Bankruptcy Act 1966 (Cth) (s 5(1)) and by operation of s 58(1) of that Act, the property of the bankrupt vested forthwith in the applicant and became, by operation of s 116(1) of that Act, property divisible among the creditors. It also became property the subject of realisation obligations cast by that Act upon the applicant: Part VI, Div 4 of the Act.

6    The company was incorporated on 28 June 1973 by the patriarch of the Hooper family, Mr David Gerald Hooper. When the company was incorporated, Mr D G Hooper was the “Life Director” and held one “Life Director’s Share” and his wife, Mrs Wendy Hooper, the second respondent, held one “Succeeding Director’s Share”. There are 10 different classes of shares issued in the company classed as “A” to “H” all of which are treated equally under the Articles of Association of the company. These shares are held by members of the Hooper family. Mr D G Hooper has died. His widow, Mrs Wendy Hooper, is a director of the company and her son, Mr Eric Hooper, the third respondent, was appointed a director in place of Mr D G Hooper on 17 April 2008. The company’s sole asset is all of the issued shares in a related company, David Hooper Investments Pty Ltd (“DHI”). That company was said to have owned two substantial unencumbered farming properties on which it carried on the business of cattle grazing and farming. It also held shares in publicly listed companies which were said to be valued at approximately $200,000 as at 30 June 2019.

7    By a letter dated 23 October 2019, the solicitors for the trustee informed the company that the trustee intended to realise the value of the shares and made reference to various assets relevant to that question.

8    By a letter dated 26 February 2020, the solicitors for the trustee advised the company that the trustee wanted to realise the “actual value of his shareholding in [the company]” and made reference to the contended “market value” of the shares.

9    The solicitors for the trustee sent a letter dated 1 April 2020 to the solicitors for the company and the second respondent, which contained what the respondents describe as a purported notice pursuant to Article 33 of the Articles of Association. The notice recites that Article 33 granted to Mrs Wendy Hooper the option to purchase the shares held by the trustee at a mutually agreed price “between our client and your client” and that “failing an agreement as to the price payable for the shares the parties are to implement the procedure established by Article 39 of the Articles”. The respondents observe that the letter also recited that should the trustee be unable to realise his shareholding in the company (in this way), he would make an application for the company to be wound up.

10    On 7 April 2020, the solicitors for the respondents replied to the letter of 1 April 2020 stating that Mrs Wendy Hooper and Mr Eric Hooper had no interest in purchasing the shares (vested in the trustee). The letter refers to the proposition that the last sale of shares in the company was at a nominal value of $1.00 per share. The letter contended that the second and third respondents did not consider that there was any basis to wind up the company on the just and equitable ground or otherwise.

11    On 9 April 2020, the solicitors for the trustee wrote to the solicitors for the respondents denying that the shares had a value of $619.00 and asserted the need to determine the market value of the shares stating that, in the absence of an agreement between the parties as to the acquisition of the shares at a relevant market value, the trustee would apply to the Court for the company to be wound up.

12    On 28 April 2020, the trustee’s solicitors again wrote to the solicitors for the respondents advising that based on their enquiries, the other shareholders in the company seemed willing to support an order for the winding up of the company, and that if a “buy-out” of the trustee’s shares could not be agreed upon, a winding up application would be filed.

13    On 6 May 2020, the trustee’s solicitors wrote to the solicitors for the respondents stating that unless the respondents were minded to purchase the trustee’s shares, it would be appropriate for the company to be wound up, and a suggestion was made in the letter that in those circumstances there ought to be a voluntary winding up but, in the absence of such an outcome, it would be necessary to make an application under s 461 of the Corporations Act 2001 (Cth) for a winding up order.

14    On 3 June 2020, the trustee was registered as a member in respect of the shares vested in the trustee, earlier held by Ms Eleanor Clare Hooper.

15    On 5 June 2020, the trustee filed an originating application under ss 233 and 461 of the Corporations Act seeking an order for the winding up of the company on “just and equitable grounds or alternatively, the grounds of oppression of the applicant member of the company”.

16    On 23 June 2020, the solicitors for the respondents sent a letter to the solicitors for the trustee advising that the shares had been registered in the name of the trustee, and observed that if a notice pursuant to Article 33 of the Articles of Association were to be put by the trustee, it was likely that, in response, a proposal would be put to the trustee for his consideration for the acquisition of the shares (by Mrs Hooper).

17    On 8 July 2020, the solicitors for the respondents sent an email to the solicitors for the trustee again inviting the trustee to invoke the process provided for by Article 33 (the pre-emptive right provision).

18    On 22 July 2020, the solicitors for the trustee responded saying that the process provided for in Article 33 had already been invoked by way of the letter of 1 April 2020.

19    By letter dated 21 October 2020, the solicitors for the respondents replied observing that the proposition contained in the letter of 1 April 2020 was an invalid exercise of the process contemplated by Article 33 because it was issued before the shares had been transmitted to the trustee, did not conform to the evident commercial purpose of Article 33 and, moreover, was misleading because it did not call for the exercise of the option in Article 33 in accordance with the pricing formula set out in Article 33 and thus misrepresented the true operation of the pricing formula. The letter also observed that should the trustee issue a new “valid” notice under Article 33, Mrs Wendy Hooper would acquire the shares in accordance with the pricing formula in Article 33. The letter also observed that the proceedings seeking a winding up order on the nominated grounds had no prospect of success and further observed that the respondents would rely upon the letter of 21 October 2020 in seeking an order that their costs of the proceeding be paid on an indemnity basis.

20    Apart from the letter of 21 October 2020, the respondents emphasised that Mrs Wendy Hooper, in her affidavit of 25 September 2020, gave evidence that if a valid notice were to be served upon her pursuant to Article 33, she would exercise her option in Article 33 in respect of the shares so offered to her.

21    By a letter dated 12 March 2021, but sent on 23 March 2021, the trustee made an open offer to sell the shares vested in him, for $619.00. The letter further observed that if the offer were to be accepted, the trustee would not seek to press the winding up application and would seek to have the matter listed for a costs hearing only, having regard to the circumstance that the substantive issues between the parties would then no longer be in issue.

22    The respondents emphasised that the following day they responded observing that they regarded the trustee’s letter as, in substance, an offer by the trustee for the purposes of Article 33 to sell the shares for $619.00 and that on that footing, Mrs Wendy Hooper accepted the offer. The respondents sought bank details so that the purchase price could be promptly paid. The purchase price was paid. A share transfer form was executed. The shares were recorded as transferred to Mrs Wendy Hooper in the company’s Register and ASIC was notified.

23    As particular emphasis is placed upon Article 33 on the footing that a material matter in the exercise of the discretion as to costs is that the trustee’s application was doomed to fail, having regard to Article 33, it is necessary to briefly examine that Article and other Articles which bear upon it. In doing so, the Court is not seeking to exercise a judgment about whether the trustee or the respondents would have been successful on the application. The point of examining these Articles is simply to understand something about how they operate and the strength of the position contended for in relation to the argument.

24    Relevantly, for present purposes, Article 33 contains a pricing mechanism for determining the price at which shares might be transferred pursuant to a transfer notice. Article 33 grants an option to purchase the relevant shares “at par”. Alternatively, the price might be such price as the relevant parties to the transaction “may mutually agree as a fair value of the said share”. In the alternative to a mutually agreed fair value of the relevant share, the price would be “fixed in the manner provided in Article 39”. Whether the price of the relevant share was to be determined by mutual agreement or fixed in the manner provided for in Article 39, either of those outcomes would operate as the purchase price for the relevant shares in the alternative to purchase of the shares “at par”. The critical words, however, governing those alternatives are the words following the alternatives set out in Article 33, namely, “whichever is the lesser”. Accordingly, it would be highly unlikely, whatever arguments might be made about the question, that the price at which the share purchase option might be exercised would be a price that would reflect a market value of the shares held by the trustee based upon a valuation which reflected the aliquot interest the trustee held, through those shares, in the underlying assets held by DHI, because the lesser price would almost inevitably be the par value of $619.00.

25    The second matter emphasised by the respondents is that, in any event, the proposal put by the trustee on 1 April 2020 was invalid because the trustee was not registered as a member in respect of the relevant shares until 3 June 2020. Article 30 provides that any person “becoming entitled” as the trustee under any part of the Bankruptcy Act of the estate of a member may become registered as a member in respect of such share. A person “becoming entitled to be registered” [emphasis added] under the provisions of Article 30 “shall be entitled to the same … advantages to which the shareholder who he represents would have been entitled if he had remained the registered holder of the said share” but in such a case, the trustee “shall not before the said share has been transmitted to him be entitled in respect of it to exercise any right conferred by membership in relation to the meetings of the Company” [emphasis added].

26    Article 32 provides that the person to whom a share “is transmitted” pursuant to Article 30 shall not be entitled to transfer such share to any person except in accordance with the provisions of, relevantly, Article 33.

27    There is a reasonable argument that upon the trustee being appointed and upon the property of the bankrupt vesting in the trustee, the trustee became entitled to the estate of the relevant member and thus the relevant shares and, under Article 30, the trustee was entitled to become registered as a member in respect of such shares.

28    Moreover, by Article 30, the trustee upon “becoming entitled to be registered under the provisions of this Article” (Article 30) was entitled to the same advantages to which the shareholder was entitled had she remained the registered holder of the shares. On that footing, the trustee was entitled to invoke the mechanism under Article 33 but he would not have been able to transfer the shares to Mrs Hooper until he had first been registered in respect of the shares.

29    Thus, it seems that there was a reasonable argument in relation to the validity point. It seems that there was a poor argument in favour of the trustee in relation to the Article 33 point on the price of transfer.

30    In the result, an intervening event occurred which brought about a transfer of the shares at the nominal par value of $619.00.

31    Ultimately, the Court would have had to determine each of these two questions in resolving the proceeding and quelling the controversy between the parties as a result of hearing evidence and argument. The merits had not been determined and, in the absence of a determination on the merits, the critical event which traditionally would determine how the discretion as to costs ought to be exercised is simply not available. Generally, costs would follow the event. Notwithstanding that the material event so influential in the exercise of a discretion is not present, it may nevertheless be appropriate to make an order for costs having regard to the parties’ conduct including whether the parties acted reasonably and taking into account the basis on which it is no longer necessary to quell the controversy by an exercise of judicial power.

32    The authorities suggest that it is important for the Court to distinguish between two particular circumstances.

33    One circumstance is where a party, after litigating the proceeding for some time, has effectively surrendered and capitulated providing what is sometimes described as a “strong ground” to award costs against that party. One example of that circumstance is a case where proceedings are dismissed or discontinued because the moving party has simply chosen not to proceed with the litigation. That is not this case.

34    Another circumstance is one where supervening events or settlement so removes or modifies the subject matter of the dispute that although it could not be said that one party has simply won, no issues remain between them except as to costs.

35    In Re The Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622, McHugh J made the following observations at 624-625 after expressing views about the nature of the discretionary power as to costs:

In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties … In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. …

Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. …

If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases [footnote 7 sets out a range of authorities].

36    See also the observations of the Full Court in Chapman v Luminis Pty Ltd [2003] FCAFC 162, Beaumont, Sundberg and Hely JJ at [7]; Travaglini v Raccuia [2012] FCA 620, McKerracher J at [15]-[22]; Fairfield Services Pty Ltd (in liq) v Leggett [2020] QSC 183, Bond J at [19]-[24].

37    In the circumstances of this case, it is true that the respondents, earlier on, made it plain that they were not interested in acquiring the shares held by the trustee. Proceedings were ultimately instituted on 5 June 2020 after the exchanges described above. The proceedings progressed to the point where there was an interlocutory application in relation to discovery which was the subject of a judgment: Jonsson, in the matter of Hooper Holdings Pty Ltd v Hooper Holdings Pty Ltd [2020] FCA 1870.

38    Based simply on a textual examination of the relevant Articles and the orthodoxy of the provisions of the Bankruptcy Act earlier mentioned, I am satisfied that the trustee was “entitled” to invoke a mechanism under Article 33 of the Articles of Association at the moment in time when he did so and that registration of the shares to which he was entitled, although a precondition to a subsequent transfer to a buyer, was not a precondition to exercising the power under Article 33.

39    Not having had the benefit of submissions about these matters and seeking to avoid anything in the nature of a hypothetical hearing which would involve making findings on questions of evidence, I am also satisfied, however, that based on an examination of the text of Article 33 it is difficult to accept the proposition that it was a reasonable position for the trustee to take when acting in reliance upon Article 33, to call upon Mrs Wendy Hooper to either pay a price for the trustee’s shares based on a market value of the asset backing value of the shares having regard to the assets of the wholly owned subsidiary (the “market value” approach) or face the prospect of a winding up of the company on the ground of oppression or on the ground that it would be just and equitable to wind up the company on the footing that Mrs Hooper had not embraced the market value approach. The price of the shares was almost certainly going to be a price no higher than the par value of $619.00 which was ultimately the price agreed between the parties which brought about the transaction which in turn had the effect of resolving the proceedings. That being so, I am satisfied that the position adopted by the trustee was not reasonable.

40    I propose to order that the trustee pay 80% of the costs of the respondents of and incidental to the proceedings.

Associate:

Dated:    8 June 2022

SCHEDULE OF PARTIES