Supreme Court Rejects Injunction to Halt Directors' Meeting

The Court denied an interlocutory injunction to stop a directors' meeting convened by interests associated with the first defendant, finding no serious question to be tried and that damages would be an adequate remedy.

Supreme Court New South Wales

Medium Neutral Citation: In the matter of [COMPANY] [2013] NSWSC 425 Hearing dates: 4 April 2013 Decision date: 04 April 2013 Jurisdiction: Equity Division - Corporations List Before: Black J Decision: Application for interlocutory injunction dismissed. Catchwords: CORPORATIONS LAW - Interlocutory injunction to restrain directors' meeting - lateness of application - Whether serious question to be tried established - Balance of convenience Legislation Cited: - Corporations Act 2011(Cth) ss 180-183, 232-233, 461, 1324, Cases Cited: - Australian Broadcasting Corporation v O'Neill (2000) 227 CLR 57 - Capgemini US v Case [2004] NSWSC 674 - [COMPANY] v OM Holdings [2000] FCA 414; 63 ACSR 64 Category: Interlocutory applications Parties: [NAME] (First Plaintiff) [NAME] (Second Plaintiff) [COMPANY] (Third Plaintiff) [COMPANY] (First Defendant) [NAME] (Second Defendant) [NAME] (Third Defendant) [NAME] (Fourth Defendant) [NAME] (Fifth Defendant) Representation: Counsel: [redacted] [NAME] (Second to Fifth Defendants) Solicitors: [redacted] [NAME] (Second to Fifth Defendants) File Number(s): 2013/102212

Judgment - EX tempore 1This matter has arisen in circumstances of significant urgency. An application was made returnable this morning to seek orders restraining the holding of a directors meeting which is due to take place at 2pm today, 4 April 2013. Counsel have each abbreviated their submissions to accommodate the urgency of the situation and I will equally need to abbreviate my reasons for judgment so that judgment can be delivered in sufficient time for any orders to be made by the Court to be effective. 2The first plaintiff, [COMPANY] ("[NAME]") and the first defendant, [COMPANY] ("[NAME]") are involved with the construction and development of an oil shipping terminal in Queensland. Their relationship is governed by a Shareholders Agreement between [COMPANY] (which holds seventy-five percent of the shares in [NAME]), [NAME] (which holds twenty-five percent of the shares in [NAME]) and [NAME] which appears to have been executed in February 2011. At about the same time, [NAME] and another entity, [COMPANY] ("Blue Diamond") entered an agreement by which Blue Diamond was to act as contractor in respect of the project. Disputes have subsequently arisen between the parties and [NAME] has purported to terminate the agreement with Blue Diamond. The validity of that termination is, I have been advised, contested by Blue Diamond. I was taken in the course of submissions to some of the documents which had passed between the parties prior to that termination but it will not be necessary to address those documents for the purposes of this judgment. 3The immediate occasion for the application before the Court is a proposed meeting of the board of directors of [NAME] which was convened by two directors appointed by [NAME] to the board of [NAME] by notice given on 18 March 2013. The notice of meeting of directors and agenda indicates that one of the matters to be considered at the meeting is a proposal that the Initial Funding Budget for the project be increased by the amount of $4,990,000, such amounts to be paid by the shareholders in their relevant shareholding percentages with payment to be due by 26 April 2013, in a little more than twenty-one days from today. The amount payable, if that resolution is passed, by [NAME] would be $3,742,500 and the amount payable by [NAME] would be $1,247,500. 4By Originating Process dated 4 April 2013 and filed by leave today, [NAME] and [NAME] seek substantive relief under ss 180-183, 232-233, 461 and 1324 of the Corporations Act 2001 (Cth), which relevantly raise issues as to directors' duties, oppression, the Court's power to wind up a company on the just and equitable grounds and the Court's power to grant an injunction in respect of a threatened breach of the Corporations Act. [NAME] and [NAME] are directors appointed to the board of [NAME] by interests associated with [NAME]. 5The [NAME] seek interlocutory relief, on their giving the usual undertaking as to damages, to retrain the second to fifth defendants, who are directors of [NAME] appointed by interests associated with [NAME], from, relevantly, taking any steps, including the passage of any resolution, to increase the Initial Funding Budget as foreshadowed in the notice of meeting of directors and agenda and taking any steps to issue any shares as foreshadowed in that notice or otherwise. 6In determining whether such an injunction should be granted, I should apply the principles outlined by the High Court of Australia in Australian Broadcasting Corporation v O'Neill (2000) 227 CLR 57 at [65], which in turn reflect earlier authorities requiring that there be established a prima facie case or a serious question to be tried in respect of the application. These principles were helpfully summarised in the judgment in [COMPANY] v OM Holdings [2000] FCA 414; 63 ACSR 64 at [7] ff. In order to obtain interlocutory relief, [NAME] must not only demonstrate a prima facie case or serious question to be tried as to the alleged breaches of the Corporations Act, but also that damages would not be an adequate remedy, so as to warrant the grant of injunctive relief, and that the balance of convenience favours the grant of an injunction on an interlocutory basis. 7I should note an immediate difficulty arises from the lateness of the application. The notice of the directors' meeting was given, as I have noted, on 18 March 2013. The plaintiff's solicitors wrote to the directors nominated by [NAME] to the board of [NAME] on 28 March 2013, some ten days later, and immediately prior to the Easter break. [NAME]' solicitors raised the possibility of an application for injunctive relief on 2 April 2013, and the originating process seeking, inter alia, such an injunction and affidavit in support were filed today, 4 April 2013. The lateness of that application has the consequence that the time that is available to [NAME] to seek to make good the basis of the application, the defendants to respond to it, and the Court to hear argument, is constrained. The second consequence of lateness is that, as Campbell J observed in Capgemini US v Case [2004] NSWSC 674 at [40], the Court may have regard to the delay in assertion of [NAME]' rights as relevant to the grant of injunctive relief, not only by reason of the principle that injunctive relief should be sought promptly, but also as a matter which goes to the balance of convenience. 8The [NAME] identify the basis on which injunctive relief is sought, so far as a serious question to be tried is concerned, in broader commercial terms rather than by reference to the particular breaches of sections of the Corporations Act to which they refer in the Originating Process. First, they contend that there is no utility in raising the relevant moneys, because no head contractor is presently appointed and all constructions works have ceased, and ask, rhetorically, why does [NAME] require a further $5 million in circumstances that it currently has moneys at its disposal and would, they contend, have had additional moneys at its disposal if the initial amounts raised had been properly applied. They contend that the Court should infer that the defendants have convened the meeting in order to bring financial pressure on [NAME], and potentially to seek to trigger clause 7.6 of the Shareholders Agreement, which would permit [NAME] to require [NAME] to transfer its shares in [NAME] to [NAME], and to pay [NAME] a specified amount of $2 million, if moneys due by [NAME] are not subscribed. It will be noted that there are at least several steps that are necessary before that outcome would arise. These include, at least, that the resolution is passed; that [NAME] chooses not to subscribe the additional capital, or at least that interests associated with it choose not to fund it to subscribe the additional capital, albeit that such a subscription could be made under protest; third, that [NAME] does not otherwise seek to intervene to protect its rights, by for example seeking declaratory relief as to the invalidity of a resolution or injunctive relief to restrain [NAME] acting on it, after it is passed; and, fourth, that [NAME] seeks to invoke the option provided to it under clause 7.6 of the Shareholders Agreement. I will return to those matters below. 9Blue Oil also contends, raising matters of construction, that the contractual mechanism to amend the Initial Funding Amount is not available, by reason of the purported termination of the Head Contract. This submission requires a degree of ingenuity on [NAME]'s part, because it could only be made good if the Court held that the Head Contract had been validly terminated at a final hearing, notwithstanding that [NAME]'s primary position is, as I understand it, that the termination of that contract was invalid. [NAME] also raises an argument based on the identity of the superintendent under the Head Contract, which is, it appears, [NAME]. [NAME] also contends that there is a degree of unreasonableness in the approach to be adopted, because there is an alternative mechanism under clause 10 of the Shareholders Agreement for raising additional funds which would be less damaging to [NAME] if invoked, because the consequences of non-payment would be a dilution of its interest rather than the loss of its interest which would occur if [NAME] chose to invoke the rights under clause 7.6 of the Shareholders Agreement. 10The directors of [NAME], appointed by [NAME], who have appeared to resist the application, contend, first, that damages would be an adequate remedy and this is not a proper matter for injunctive relief; second, they rely on [NAME]' delay in seeking interlocutory relief to which I have referred; and, third, they contend that the application is hypothetical, since the subsequent outcome of the passage of a resolution, if passed, would depend on the additional events to which I have referred above. Finally, they contend that [NAME]' undertaking as to damages would not be sufficient to compensate [NAME] for loss which it would suffer if the passage of the resolution were restrained, although that submission rather depends upon the question of the purpose of raising the additional $4,990,000, a matter which has not been fully explored in evidence. 11It seems to me that it is ultimately possible to determine this matter on relatively narrow grounds, and it is preferable that I do so, given the possibility that there may be additional disputes between the parties depending on further events. In order to establish a prima facie case of the matters which they seek to establish, [NAME] would need to establish that there was a serious question to be tried, for example, that the calling of the relevant meeting - because that is all that has currently occurred - involved a contravention of ss 180-183 of the Corporations Act or amounted to oppression or conduct which would justify a winding up on the just and equitable ground for that purpose. I will assume for this purpose, without deciding, that the Court may have jurisdiction to grant an interlocutory injunction to restrain, for example, oppressive conduct, as distinct from power only to grant remedies after it has occurred. 12It does not seem to me that [NAME] have established a serious question to be tried that the mere calling of the meeting to consider the resolutions amounts to a breach of directors' duties or oppressive conduct. It may or may not be that the passage of the resolutions, when they are considered, would amount to a breach of directors' duties or oppression. However, I do not think that a serious question to be tried has been established that it is, for example, contrary to the duty of care that a director must exercise, or an act that would not be undertaken in good faith or for a proper corporate purpose, to consider whether those resolutions should be passed, and either vote for them or against them. I should not assume, and I do not assume, that the directors appointed by [NAME] to [NAME] will not act in accordance with their duties under the Corporations Act in respect of the consideration of such resolutions. For all one knows, one or more of them may vote against the resolutions in the relevant circumstances. 13I should note that complaint was also made by [NAME] that the meeting had been called on a date on which [NAME] would not be available to attend, because he would be flying from New York to Sydney. I note, however, that [NAME] advised of that matter after the meeting had been called, and there is no explanation as to why it has not been possible, in the period since 19 March when he so advised, for him to change his flight from New York to depart a day later or to depart earlier so as to be able to attend the meeting by telephone, from New York or elsewhere. The directors of [NAME] have also drawn to my attention that the Shareholders Agreement provides that [NAME] will be entitled to exercise the voting rights which would be available to [NAME] at such a meeting. I do not consider that this matter means that the calling of the meeting was otherwise in breach of directors' duties, or oppressive. 14Accordingly, it does not seem to me that a serious question has been established at this point, so as to warrant the grant of an interlocutory injunction at this point, notwithstanding that such a question may or may not arise after the relevant resolutions are passed. 15I should add that there is, in my view, a second reason why an interlocutory injunction should not be granted. It does not seem to me that the balance of convenience warrants the grant of interlocutory relief, so as to prevent the directors consulting as to the relevant question, where any prejudice to [NAME]' rights can readily be addressed by an application brought if the relevant resolutions are passed. In the course of submissions, I raised with [NAME], who appears for [NAME], what prejudice would be suffered by [NAME] by the holding of the meeting, which could not be avoided by an application brought after the resolution was passed to seek declarations as to its invalidity and injunctive relief to prevent it being acted upon, for example, so as to appropriate the [NAME]'s shares in the manner which is feared. I do not understand [NAME] to have indicated that there is any prejudice which would arise from the calling of the meeting itself, as distinct from the acts which might be taken to implement any resolution which is passed, and I understand [NAME]' primary position to be that the application was brought at this time because of the difficult environment between the two shareholders. While that environment may be difficult, it does not follow that the balance of convenience requires the grant of injunctive relief to restrain a directors' meeting, as distinct from the grant of injunctive relief to restrain implementation of any resolution which might be passed at it which might in turn be established to raise a serious question of a breach of directors' duties or oppression. 16For these reasons, I will not grant the interlocutory relief which is sought. I will hear counsel as to costs and as to any steps which should be taken to progress the proceedings and to provide an orderly mechanism for resolution of any further disputes which might arise, if the resolution which is considered at the meeting this afternoon is ultimately passed. 17Ms [NAME] submits that costs should be costs in the cause. [NAME] submits that there is no reason why an order for costs should not follow the event, so that [NAME] are ordered to pay the costs of the second to fifth defendants, the directors appointed by [NAME] to [NAME], in respect of the application. There is some force in [NAME]'s submission, so far as the application before me has raised substantive matters which are likely to be raised again in the substantive proceedings, or in any further application for injunctive relief brought by [NAME], if the resolution which [NAME] fear will be passed is in fact passed. It may be that, either in such an injunctive application when the grounds on which the resolution has been passed are clearer, or at a final hearing, [NAME] could make good the substantive submissions for which they contend, which were not established today prior to the passage of any such resolution. 18However, it seems to me that the reason the application has failed is not by reason of any determination of those substantive matters, since I have not determined them; it is, instead, because the application was premature, in that there was no serious question to be tried of a breach of directors duty or other legal wrong arising from the mere calling of the meeting, as distinct from a passage of the threatened resolution, and because the balance of convenience did not favour restraining directors from discussing the matters raised. In these circumstances, it seems to me that I should order that the costs of this application follow the event because the application is determined on a basis that is distinct from that which may be raised at the substantive hearing. To put that proposition another way, the application would be no less premature if [NAME] are ultimately shown to be successful at a final hearing. In these circumstances, I will order that [NAME] pay the costs of and incidental to the application before me today. 19I also heard counsel as to the orders which should be made to ensure the orderly management of the matter going forward. The only order that I need to make in that regard is an order that the matter be listed for directions in the Corporations List, on the basis that each party have liberty to restore. 20Accordingly, I make the following orders: 1. [NAME] pay the costs of and incidental to the application today.

2. The proceedings be listed in the motions list before the Corporations List Judge at 9.45am on 8 April 2013.

3. Each party have liberty to restore on four hour's notice.

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