Supreme Court New South Wales Medium Neutral Citation: Strategic Communications Management Pty Ltd v Techfront Australia Pty Ltd [2020] NSWSC 847 Hearing dates: 15, 16, 17, 18 June 2020 Decision date: 01 July 2020 Jurisdiction: Equity - Commercial List Before: Hammerschlag J Decision: Judgment for the plaintiff against the second defendant, the third defendant, and the fourth defendant for: (1) $2,370,164. (2) $3,865,460. Catchwords: CONTRACT – EQUITY – ESTOPPEL – Claim against guarantors for moneys due under a Share Purchase Deed and for damages for failure to pay – Plaintiff alleges that it suffered damages significantly in excess of the amount due because it had a back-to-back liability to a third party for the amount and entered into a disadvantageous settlement with the third party – Guarantors allege that they and the principal debtor were discharged by agreement or that the plaintiff is estopped from asserting a claim against the principal debtor and the guarantors because the plaintiff represented that the principal debtor would be discharged upon certain conditions which were met and upon which the principal debtor and the guarantors relied – HELD – Agreement and representation not established – No detriment to found an estoppel established – HELD – Damages beyond amount of payment due not established – In addition, settlement not reasonable – Verdict for the plaintiff Legislation Cited: Personal Property Securities Act 2009 (Cth) Cases Cited: Briginshaw v Briginshaw (1938) 60 CLR 336 Helton v Allen (1940) 63 CLR 691 M.K. & J.A. Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWCA 39 Rejfek v McElroy (1965) 112 CLR 517 The Commonwealth v Verwayen (1990) 170 CLR 394 Troulis v Vamvoukakis [1998] NSWCA 237 Watson v Foxman (1995) 49 NSWLR 315 Category: Principal judgment Parties: Strategic Communications Management Pty Ltd - Plaintiff Techfront Australia Pty Ltd - First Defendant Global Sports Commerce Pte Ltd - Second Defendant Techfront International Fze - Third Defendant Technology Frontiers (India) Private Limited - Fourth Defendant Representation: Counsel: J. Burnett - Plaintiff M.S. Muralidharan (Director) - Second, Third, and Fourth Defendants Solicitors: Bird & Bird - Plaintiff File Number(s): 2019/110517 JUDGMENT WHAT THIS CASE IS ABOUT 1. HIS HONOUR: This dispute was heard remotely because of the current viral pandemic. 2. The plaintiff (Strategic or the Vendor) is an Australian company associated with Mr Gregory Roy Tracey (Tracey). At all material times, Mr Glendower (Glen) James Powys (Powys) was a consultant to Strategic. 3. The first defendant (Techfront or TFA) is an Australian company. It was not a participant in the hearing because it earlier went into voluntary administration, although it has subsequently come out. No relief is sought against it. 4. The second defendant is a Singaporean company, the third defendant is a United Arab Emirates company, and the fourth defendant is an Indian company (collectively, the defendants). 5. The defendants are all associated with Mr M.S. Muralidharan, an accountant (Muralidharan) who resides in Chennai, India. He is a director of each of the defendants. Techfront and the defendants were at all material times part of a group known as the Global Sports Commerce Group (sometimes referred to as GSC). 6. Mr Neil Maxwell (Maxwell) was at all material times an Australian resident director of Techfront. 7. Cellular Asset Management Pty Ltd (ACN 154 756 439) (CAM or the Company) is an Australian company which was, at one time, associated with Mr David Pearson (Pearson). It has operated in the Australian telecommunications market since 2012, delivering telecommunications connectivity, coverage, and capacity solutions. CAM had significant customers in the area. 8. On 29 May 2017, Strategic entered into a Share Sale and Purchase Agreement (SPA) under which it bought from Cellular Asset Management Ltd (the previous vendors), an English company, also associated with Pearson, all of the shares in CAM for $3 million (subject to adjustment) plus payment of what was defined as the First Earn Out and the Second Earn Out (together the Earn Outs), amounts which were to be paid respectively one year and two years after the Completion Date, calculated in accordance with a formula based on the revenue of CAM's business for the two periods, less certain fees and allowances for debt. The First Earn Out was capped at $3.5 million and the Second Earn Out at $4.5 million. The SPA provided for the calculation of these amounts and for the determination, by an expert, of any dispute. 9. Tracey guaranteed Strategic's obligations to the previous vendors under the SPA. 10. When the SPA was entered into, Tracey's plan was to on-sell CAM to Techfront which was already on the scene. 11. This came to pass when, on 29 June 2017, Strategic and Techfront entered into a Share Purchase Deed (the Deed) under which Strategic sold the shares in CAM to Techfront (for a price, it should be said, which was significantly higher than that for which Strategic had bought CAM). 12. The Deed was later amended by deeds made on 15 September 2017, 10 November 2017, and 17 April 2018. The last-mentioned deed is critical and features heavily below. 13. The SPA and the Deed were regularly referred to by those on the Strategic side and those on the Techfront side as being "back-to-back". 14. The purchase price under the Deed consisted of cash of $5.5 million on completion and a further $2 million on 30 March 2018, the issue to Strategic of Convertible Notes by CAM with a face value of $9 million, and an Option over unissued fully paid ordinary shares in a company referred to as Techfront Infrastructure, which was to be identified before completion. In addition, Techfront undertook payment to Strategic of the Earn Outs, which together were defined as the Back-to-Back Money. 15. Techfront intended to float on the stock exchange and Techfront Infrastructure was a reference to the yet-unidentified company that would be the float vehicle. 16. By clauses 11 and 12 of the Deed, read with clause 1.1, the defendants unconditionally and irrevocably agreed to make punctual payment of the Back-to-Back Money and guaranteed payment of all money owing or remaining unpaid by Techfront to Strategic under the Deed. By these provisions the defendants also agreed to indemnify Strategic in relation to its liability to pay the Earn Outs to the previous vendors. It is not necessary to set out these provisions in full. The defendants do not dispute having given these guarantees. 17. Strategic became liable to the previous vendors to pay the Earn Outs. It demanded payment of the Back-to-Back Money from Techfront and the defendants, but they did not pay. Strategic now sues the defendants on their guarantees and indemnities. HISTORY 1. Techfront and the defendants have an almost unblemished record of failing to meet their contractual obligations to Strategic. Muralidharan's attitude is that if a deadline for a contractual obligation passes and it is not met, the obligation has expired. Muralidharan made it clear that his approach is that transnational transactions are always re-negotiated. 2. Under the Deed, Techfront was obliged to pay $5.5 million to Strategic on 15 September 2017, termed Progress Payment 1, which was the date scheduled for completion. It was unable to pay. It apparently lacked necessary approval from the Reserve Bank of India to pay. On that day, the parties entered into an instrument entitled "Side Deed", which extended the date for Progress Payment 1 to 9 October 2017. 3. Techfront did not pay by 9 October 2017. It paid $1,750,000 on or about 13 November 2017. 4. At about that time, the parties entered into another deed extending the date for the balance of $3,750,000 of Progress Payment 1 to 22 December 2017. Progress Payment 2 of $2 million was payable on 30 March 2018. 5. As at 18 December 2017, it was apparent that Techfront would again default. The parties began discussing a "revamped deal structure". 6. On 18 December 2017, Maxwell emailed Ms Meera Krishnakumar (Krishnakumar), GSC's in-house counsel, and Tracey: Hi Meera, Details of the revamped deal structure as discussed; • $1.75m already paid • $4m second tranche paid before 31st January (increase of $250k in recognition of delayed settlement) • If not paid by this date, Greg & Glen have option to terminate the deal and retain the $1m Also, TFIS is to be established (80% TFA / 20% SCM) Greg to proposed working capital requirements for GSC contribution – 20% rent etc. TFA to assume already invested capex costs associated with NOC facility (Ingram lease arrangement) Kind regards, Neil Maxwell 1. On 26 March 2018, Krishnakumar responded: Dear Neil and MSM, Further to the discussions our team had with the Reserve Bank of India, we are bound by certain restrictions in the outbound investment from India to TFA in CAM due to the lack of availability of adequate due diligence reports and latest audited financials of both CAM and TFA. As such we are able to complete the following immediately: 1. Acquire 50% stake in CAM for purchase price of AUD 5,750,000 (This would essentially change Progress Payment 1 from 5.5 mn to 5.75mn) 2. There will be no Progress Payment 2 and additional 2mn payout 3. The convertible note deed would have to be terminated 4. Event of default clause would have to be reviewed and amended based on the above understanding. 5. Further, there would be no PPSR [1] on the acquisition of 50% stake. This would be clear of any encumbrance as we are unclear on the regulatory approval for further 50% acquisition. Please confirm the same at the earliest. Many thanks Meera 1. Later that day, Maxwell forwarded this communication to Tracey and Powys under cover of the following email: Greg / Glen Can we discuss? I am clarifying what this means. I have receipt for $4m transfer which was made today. Kind regards, Neil 1. On 31 March 2018, Maxwell wrote to Tracey and Powys: GT/Glen Further to our chat Friday, I outline the proposal from Murali given recent developments at GSC level; • Basic framework is the current SPA stands amended with TFA buying the 50% stake for revised upward consideration of A$ 5.75 Million of which $ 1.75 Million has been paid and a further A$ 4 Million will be paid. All other obligations such as Convertible Notes, Cash Guarantees etc. will cease to exist subject to the below. • TFA will be given 30-day window to have DD of the CAM financial books for the period ended June 30, 2017 and further from July 1, 2017 till March 2018. • On completion of 30-day review period, TFA and CAM will engage and arrive at a consensus on the balance 50% acquisition by TFA. The spirit to consider for the balance 50% values built around Convertible Note / Cash will largely depend on the finding from the DD for period July 1, 2017 till March 2018 and further next 18 months forecasted business plan. Protection of Values for balance 50% in terms of convertible notes as referred in SSA will be linked to June 18 and June 19 audited performance • Within this framework CAM to satisfy during DD that June 18 and June 19 financial performance – revenue, EBITDA and EBIT are aligned to the expectations TFA and CAM can agree, TFA will consider favourably the balance acquisition value realigning only the period of cash vs notes vesting on promoters. Can I propose that you and Glen meet with Murali whilst he is in Sydney on 17th or 18th April (morning) to discuss? Murali and I will also be in NZ on 19th. I am happy to assist where I can. Cheers Neil 1. On 6 April 2018, Tracey wrote to Maxwell and Powys: Neil, Thank you for your email. We acknowledge that there have been many developments for both TFA and GSC. While you refer to the SPA that we agreed and signed (on which by necessity we must reserve all of our rights) we note that your that your [sic] proposal below is significantly different. We look forward to the opportunity to meet with yourself and Murali on the 17th of April at 10am at TFA, to discuss a way forward. Yours faithfully, Greg 1. On 16 April 2018, Powys prepared a draft deed which he sent to Tracey under cover of an email which contained a table summarising the financial terms of the deed with a comparative table as to the changes that were acceptable to Strategic. The tables made no mention of the Earn Outs. 2. The draft deed contained an acknowledgment of the receipt of an additional $4 million and provided that upon that payment the parties agreed to amend the Deed to reflect that Techfront owned 50% of the shares and that Techfront was not obliged to pay Progress Payment 2 or provide the Convertible Notes or the Option. The draft also provided that the SPA would be amended for the benefit of Strategic by giving it an option valid until 30 June 2020 to buy back from Techfront the 50% of the company acquired under the proposed amended Deed for $4,657,000. 3. On the morning of 17 April 2018, Tracey and Powys met Muralidharan in Sydney at Techfront's office in Lane Cove (the Meeting). Muralidharan was on his way to New Zealand for a group meeting. It seems he was keen to have a revamped deal by the time he got to New Zealand. 4. At the Meeting, Tracey, on behalf of Strategic, and Muralidharan, on behalf of the defendants, signed a Variation Deed (the Variation Deed). The Variation Deed was later signed by Maxwell on behalf of Techfront. It is appropriate to set out the text of the Variation Deed in full: STRATEGIC COMMUNICATIONS MANAGEMENT PTY LTD ACN 61 8 224 637 25 WALKERS DRIVE, LANE COVE NORTH, NSW, AUSTRALIA. 2066 From 1. Strategic Communications Management Pty Ltd ACN 618 224 687 25 Walkers Drive, Lane Cove North, NSW, 2066 2. Gregory Roy Tracey Walkers Drive, Lane Cove North, NSW, 2066 To 1. Techfront Australia Pty Ltd ACN 157 983 303 Suite 303, Level 3, 71 Longueville Road, Lane Cove, NSW 2066 With a copy to: 1. Global Sports Commerce Pte Ltd 7 Temasek Boulevard, #12-04 Suntec Tower One, Singapore (038987) 2. Techfront International Fze WH No 3, PO Box 16111, Ras Al Khaimah, UAE 3. Technology Frontiers (India) Private Limited Plot No 38, Developed Plot Industrial Estate Perungudi, Chennai 600096 Tamil Nadu India Date: 17th April 2018 1. We refer to the Share Sale and Purchase Deed executed on 29 June 2017 ("SPA") and the Side Deed executed on 15 September 2017 ("Side Deed") between Strategic Communications Management Pty Ltd ACN 618 224 687 ("Vendor"), Techfront Australia Pty Ltd ACN 157 983 303 ("Purchaser"), Gregory Roy Tracey ("Beneficiary"), Global Sports Commerce Pte Ltd, Techfront International FZE and Technology Frontiers (India) Private Limited (each, a "Guarantor") (and, each a "Party" to this letter and collectively, the "Parties"). 2. Unless otherwise defined herein, all capitalised terms used in this deed (the "Letter") shall have the same meaning as ascribed to them in the SPA or Side Deed, as the context requires. 3. The Parties acknowledge and agree that: a) the Vendor has received an amount of A$ 1,750,000 (Australian Dollars One Million and Seven Hundred and Fifty Thousand) by way of wire transfer (in cleared funds) from the Purchaser on or about 12th of December 2017 towards part payment of Progress Payment 1 under clause 2.2(a) of the SPA; b) the Vendor will receive an amount of A$ 4,000,000 (Australian Dollars Four Million) by way of wire transfer (in cleared funds) from the Purchaser on or about 19th of April to finalise payment of Progress Payment 1 under clause 2.2(a) of the SPA; c) on payment of the amount referred to in paragraph 3(b) above, the Parties agree that the SPA will be amended to: i. Reflect that the Purchaser owns 50% of the Shares ii. Remove the obligation on the Purchaser to: 1. Pay Progress Payment 2; 2. Provide the Convertible Notes; and 3. Provide the Option. iii. Include, for the benefit of the Vendor, an option (valid until 30 Jun 20) to buy back from the Purchaser the 50% of Shares acquired under the amended SPA, for a total consideration of $4,500,000. iv. Include a provision, that Global Sports Commerce Pte Ltd may replace Techfront Australia Pty Ltd as the Purchaser (and owner of the Snares) if agreed by both Parties, with such action or transfer to be complete by 30 Jun 2018. 4. Except to the extent expressly varied, supplemented or amended by the provisions of this Letter, the terms and conditions of the SPA and Side Letter are hereby confirmed and shall remain in full force and effect. The Parties acknowledge and agree that to the extent of any inconsistency between the terms of this Letter and the terms of the SPA or the Side Deed, the terms of this Letter shall prevail to the extent of any such inconsistency. The Parties acknowledge and agree that the terms of this Letter vary the SPA in accordance with clause 21 of the SPA and also vary the Side Deed. 5. This Letter shall be binding on and shall inure to the benefit of the Parties hereto and their respective successors and assigns. 6. Each of the Parties will promptly do, execute or deliver, or cause to be done, made executed or delivered, all further acts, documents and things as the other Parties to this Letter may reasonably require for giving effect to this Letter and will use reasonable efforts and take any steps as may be reasonably required within its power to implement to their full extent the provisions of this Letter. 7. This Letter may be entered into in any number of counterparts, all of which taken together shall constitute one and the same instrument. Either Party may enter into this Letter by executing such counterpart. 8. Each Party represents and warrants that it has capacity to execute, deliver and comply with its obligations under this Letter. 9. This Letter is governed by the laws of New South Wales. 1. What was said at the Meeting is hotly in contest. 2. The nub is that Muralidharan says that Tracey said once the additional $4 million was paid, there would be no more financial obligation or responsibility on Techfront in the "CAM deal", meaning (I infer) that all financial obligations on Techfront, including the obligation to pay the Back-to-Back Money, would be released. 3. Tracey and Powys deny that this was said. 4. Muralidharan sent the following email to Tracey, Krishnakumar, and Maxwell at 11:33 am on 17 April 2018, apparently shortly after the Variation Deed was signed: Neil Meera Greg Glenn will forward amendment to SSA further to the discussion today morning with them. The 50% phase 1 will get consummated by tomorrow (April 18th) by TFA incl transfer of A$ 4 million. Over next few weeks we will work with CAM on migrating CAM to GSC subject to TFA board blessing. Rgds MSM 1. At 11:39 am, Tracey emailed the Variation Deed to Muralidharan, Krishnakumar, Maxwell, and Powys. 2. At 2:52 pm, Krishnakumar emailed Tracey, Muralidharan, Maxwell, and Powys: Hi Greg Thanks for the amendment. Could you also amend the Events of Default clause in the SPA to remove references to PPSR charge etc. so that the 50% stake holding is vested completely with TFA/GSC without any encumbrance? Regards Meera 1. At 3:41 pm, Tracey responded: Meera, To ensure that the transfer of funds is not delayed, on behalf of SCM, I confirm via this email that, in addition to the amendments outlined in the attached agreement that: "the Events of Default clause in the SPA" will be amended to remove references to PPSR charge etc. so that the 50% stake holding is vested completely with TFA/GSC without any encumbrance." Regards, Greg Tracy [sic] Director SCM Pty Ltd 1. On 18 April 2018, in a rare fulfilment of a contractual obligation, Techfront paid $4 million to Strategic. Over the next few months, efforts were devoted to negotiating a further deed of variation and shareholder's agreement. Powys and Krishnakumar were involved. 2. In an email to Powys on 10 May 2018, Krishnakumar raised the question of removing the guarantors from the agreement on the footing that the Purchase Price Obligations had been completed. Powys responded that this was a matter for further discussion. 3. The question of payment by Techfront of the Back-to-Back Money started becoming an issue when, on 22 May 2018, Powys wrote to Krishnakumar and others noting that the First Earn Out payment to the original vendor was due at the end of June. He said, relevantly, "given your request to remove guarantors…the Shareholders [sic] agreement will likely need to replace the guarantees in some form." 4. On 5 June 2018, Muralidharan wrote to Powys and others: Glen When I met you and Greg it was agreed clearly we pay balance 4 Million and 50% transfer will get effected to TFA… Once that process is complete TFA will engage internally with GSC for realignment of the ownership process … That will have documents created for reasiggment [sic] consequently the next 50% stake purchase will be assumed by GSC. I am completely unaware of these earn out clause [sic] seeking further funding by us ?? I don't think at any time last few months we discussed this matter. Can we all have concall anytime tomm day after or friday to untangle the situation before it gets messy … It wil [sic] be very challenging to keep the matter open ended on 50% share transfer when payment was fully effected for A$ 5.75 Million with a demanding board which seeks for confirmation of these investments Regards MSM 1. On 6 June 2018, Muralidharan wrote to Powys and others, relevantly: In relation to the Earn Out payments (Back-to Back Money), these have been a fundamental component of all agreements from Day 1. When TFA was unable to come up with the funds for the initial CAM acquisition, the only way that we would agree to continue with the purchase was by having the Earn out payments guaranteed by TFA/GSC. I have attached a summary of key elements from the CAM transaction documents and have been flagging throughout this email trail and others including the Completion checklist sent previously. 1. The First Earn Out was determined on 22 June 2018 to be $2,370,164, which Strategic paid the previous vendor (under the SPA) on 29 June 2018. 2. The Second Earn Out was determined on or about 1 July 2019 to be $3,865,460. 3. The previous vendors demanded payment of the Second Earn Out in mid-2019. 4. Strategic, in turn, demanded payment of the Back-to-Back Money from Techfront and the defendants. They did not pay, and have not paid. 5. In mid-2019, Strategic, which had net liabilities of over $900,000, had insufficient money to pay the Second Earn Out to the previous vendors. 6. It paid two instalments of $25,000 each on 15 July 2019 and 29 July 2019 respectively, and a further $280,000, under a deed of settlement entered into with the previous vendors on 23 September 2019. The terms of settlement included Strategic transferring its 50% of CAM (which Strategic contends was worth $5.75 million) to the previous vendors for $1 and assigning to the previous vendors a loan receivable of $1,243,234. Strategic says it spent $66,753 in legal and accounting costs with respect to the settlement. The previous vendors released Strategic from any further obligation to pay the Second Earn Out. 7. Strategic argues that the cost of settling with the previous vendors was thus $7,389,986, made up as to: 1. $330,000 paid in cash; 2. $5,749,999 loss on sale of its CAM shares; 3. $1,243,234 loan receivable; and 4. $66,753 in legal and accounting costs. 1. In other words, to settle a debt of $3,865,460, Strategic paid $7,389,986 by, amongst others divesting itself of its CAM shares at an undervalue of $5,749,999 and assigning a loan receivable exceeding $1.2 million. It argues that this was a reasonable settlement to have entered into. 2. Strategic sues for the amount of the First Earn Out of $2,370,164 plus $7,389,986 (rounded down to eliminate cents) as damages suffered by it as a result of the defendants' breach in failing to pay the Second Earn Out. The total sued for is $9,760,151. 3. For the reasons which follow, Strategic is entitled to judgment for the total amount of the Back-to-Back Money, but no more. THE HEARING 1. As mentioned earlier, the hearing was conducted remotely. Sitting hours were adjusted to make allowance for the time difference between Australia and India. The trial occupied four hearing days. 2. Mr J Burnett of Counsel appeared for Strategic. 3. The defendants were not legally represented. Not long before the hearing their solicitors, Colin W. Love & Co, withdrew. Muralidharan sought leave to appear for the defendants, which leave I granted. He is not a lawyer, but he did have the assistance of Krishnakumar who was in attendance at the hearing by video link from Singapore. 4. He is articulate, intelligent, and numerate. He is no stranger to business or to negotiations. He is assertive. 5. I gave Muralidharan significant latitude in the conduct of the hearing. He conducted an effective cross-examination of an expert forensic accountant called by Strategic. THE DEFENCE 1. Save for reading out a very short statement, apparently prepared by Krishnakumar, Muralidharan did not articulate the defence. Doing the best I can, it is that at the Meeting there was agreement, or Tracey represented that, upon payment of the $4 million under the Variation Deed, being the balance for 50% of CAM, Techfront (and consequently the defendants) would be released from all further financial obligations under the Deed and that a formal deed or shareholder's agreement reflecting this would be prepared and signed. It was upon this basis that Muralidharan signed the Variation Deed. Techfront paid the $4 million so that it and the defendants have been discharged. Strategic has refused to enter into the subsequent formal deed or shareholder's agreement. 2. The defence is thus an oral agreement outside the terms of the Variation Deed as signed, removing the entitlement of Strategic to claim the Back-to-Back Money, or an estoppel by representation or equitable estoppel precluding Strategic from enforcing the right to claim it. 3. There is no claim for rectification of the Variation Deed or to set it aside. 50% of CAM was transferred to Techfront under it. THE MEETING 1. In his affidavit sworn 3 July 2019, Muralidharan says the following of the Meeting. 33 The April Meeting was attended only by Tracey and me. 34 The April Meeting was arranged at the request of Tracey, for the purpose of him and me negotiating and agreeing to further amendments to the Share Sale Deed (as amended by the Side Deed and the Amending Deed). 35 At the time of the April Meeting TFA had not received anything from SCM in consideration for TFA paying the First Payment to SCM. I refer to my evidence in this affidavit; the First Payment was paid by TFA to SCM on 15 November 2017. 36 I have a general recollection that, during the April Meeting, Tracey said: Tracey: In June 2018 we are going to have to make an "earn out" payment under the Pearson agreement. That amount won't be more than $3,500,000. I then said: MSM: TFA must look at significantly changing the structure of the deal in relation to the acquisition of the CAM shares, in order to restrict the ownership by TFA of CAM shares to 50 percent of the total shares, as against the earlier 100 percent ownership. We need to focus on TFA acquiring 50 percent of CAM. Anything in excess of TFA owning 50 percent of the CAM shares will require us gaining insight into the business and performance of CAM. What is your immediate priority in CAM? Tracey then said: Tracey: The Pearson earn out payment of a maximum $3 million. 37 I understand that the "Pearson" which Tracey was referring to is a "Share Sale and Purchase Agreement" dated 29 May 2017, between CAM, Michael Hall, David Pearson, SCM and Tracey. 38 I have a general recollection that next, Tracey and I had a conversation as follows: MSM: What have you done with the $1.75 million that we paid you in December. Techfront has paid that amount, and we have received nothing for it. Tracey: That money was used for financing of the purchase of the CAM shares under the Pearson agreement. 39 Tracey and I then moved on to discussing the issue of the balance of the monies, which TFA was due to pay to SCM under the Share Sale Deed (as amended by the later documents that I have already referred to in this affidavit). 40 I have a general recollection that, during the April Meeting, Tracey then said: Tracey: Under the terms of the share sale agreement, Techfront still has to pay to Strategic another $4 million. That's the outstanding balance for progress payment 1, which hasn't been paid yet. Strategic really needs access to the balance of progress payment 1, and it needs those monies urgently. We need to use those funds to pay Pearson the earn-out, and we can't afford to pay the earn-out otherwise. If you can arrange for TFA to pay the $4 million to Strategic today, then Strategic will use that money to pay the earn-out to Pearson once the exact earn-out amount is calculated. To which I responded: MSM: Now, TFA is looking at acquiring only 50 percent of CAM – how do we go about making the changes to the acquisition documents? Tracey then said: Tracey: I will get my lawyers to draft the documents to limit the ownership to 50 percent and TFA needs to pay only $4 million so that I can fund the Pearson earn out. 41 I have a specific recollection that Tracey seemed desperate to receive the payment of the $4 million, because he kept asking me again and again during the April Meeting whether the amount could be paid to SCM that day. Tracey kept on saying, over and over again, what he was promising me would happen if TFA paid the $4 million, in terms of that money being used to meet obligations under the "Pearson" agreement. 42 I have a specific recollection that, later during the April Meeting, Tracey said: Tracey: I know Techfront has already paid part of progress payment 1. If Techfront can arrange for the $4 million balance to be paid, then once the payment is received, I will arrange for 50 percent of the shares in Cellular to be transferred immediately to TFA. 43 I specifically recall that Tracey repeated on a number of occasions during the April Meeting, and placed special emphasis on each occasion of repeating the words, that the shares in CAM would be transferred from SCM to TFA "immediately" upon TFA making the payment. 44 I understood this representation to mean, for example, that if TFA paid the $4 million on 18 April 2018, then what would happen is that on 18 April 2018 SCM would do all things necessary so that the CAM shares were transferred by SCM to TFA on the same day; that is, "immediately". 45 I refer to the Share Sale Deed, as amended by the Side Deed and the Amending Deed. The terms of the transactions recorded in those documents are based on the central premise that TFA would purchase from and acquire from SCM, the whole of the issued share capital of CAM. 46 I have a specific recollection that, during the course of the April Meeting, the negotiations entered into between Tracey and I instead focused on amending the Share Sale Deed (as amended) so that, instead of TFA acquiring the whole of the issued share capital of CAM, TFA would purchase 50 percent (%) of that issued share capital in CAM. Those negotiations also were conducted on the basis that SCM would retain the remaining CAM shares. 47 During the April Meeting I specifically recall Tracey saying: Tracey: The new deal should be, that TFA acquires 50 percent of the CAM shares, and not the 100 percent of theCAM shares as per the original agreement. 48 During the course of the April Meeting, I was concerned to make certain that the terms of the TFA / SCM transaction, originally recorded in the Share Sale Deed, were amended to reflect the changed circumstances. Specifically, where initially TFA was to acquire the whole of the CAM shares, now it was proposed that TFA instead acquire only 50 percent of the CAM shares, with SCM retaining the remaining shares in CAM. 49 I was concerned to ensure that the terms were definitely agreed because TFA had already paid $1.75 million to SCM on 15 November 2017 and received nothing in consideration for making that payment. I understood based on what was discussed at the April Meeting, that SCM was asking TFA to pay to it another $4 million. 50 During the April Meeting I specifically recall Tracey saying: Tracey: I will get all changes made, to ensure that Techfront carries no further liability for any future obligations that may arise in CAM or in relation to the purchase of the CAM shares. I am comfortable with, and agreeable to Techfront having a 50 percent stake in CAM, for which it has to pay the balance of $4 million. There will be no more financial obligation or responsibility on Techfront in the CAM deal after the payment of the $4 million. I will arrange for all future liabilities towards Techfront's acquisition to be deleted, and the terms regarding the convertible note and the options will also be deleted. 51 I have a general recollection that Tracey said to me, on a number of occasions during the April Meeting, words to the effect that once TFA paid the $4 million, TFA "would have no further liability" to pay any amount for the 50 percent stake in the shareholding of CAM. 52 Towards the end of the April Meeting, Tracey presented me with a draft deed. I understood that this draft deed had been prepared by SCM's lawyers based on Tracey's instructions that were provided during the course of the day on 17 April 2018. 53 During the April Meeting I recall that Tracey and I had a conversation, in the following words: MSM: Techfront and GSC are not in a position to commit any further money to CAM at the moment; we are not in a position to participate in any further financial obligations that will come into play in relation to CAM. If we pay the $4 million, how will we know that this is the final amount, and that you will not chase us for more? Tracey: We are agreeable to include a buyback option in the documents that we will have prepared, If at any time Techfront and GSC are not in a position to make any further financial capital investment in CAM, then SCM can have an option to buy back the shares for $4.5 million. 54 On 17 April 2018 I, on behalf of GSC, TIF and TFI signed a document which was presented to me at the April Meeting by Tracey (the "Variation Deed"). 55 Tracey insisted that I sign the Variation Deed urgently so that the $4 million could be paid. I did not witness Tracey sign the Variation Deed, and I do not know whether he did so physically or whether he affixed an electronic signature. 56 I was during the April Meeting in regular contact with Meera Krishnakumar, who is employed by GSC as its In-House Legal Counsel. Tracey was desperate for the payment of the $4 million to be made and he did not allow me any opportunity to have the draft of the Variation Deed reviewed by the Defendants' lawyers. I specifically recall that Tracey said to me, when he presented me with the unsigned Variation Deed: Tracey: if there are any gaps in the drafting or anything which has been missed, then we can attend to filling any gaps when we properly document what we have discussed here today. There will be a formal deed of variation that I will have drawn up after this meeting, to reflect our detailed understanding that there will be no further financial burden on Techfront once the $4 million is paid. We will remove the PPSR obligations that are contained in the original share sale agreement that was signed in June 2017. 57 In response, I said to Tracey: MSM: Material clauses need to be duly incorporated in the deed of variation to ensure there is no chaos and confusion. 58 I signed the Variation Deed on the basis that SCM, Tracey and the Defendants would, after the signing of the Variation Deed, work towards the finalisation of the "formal deed of variation" that Tracey was referring to. 1. Contrary to Muralidharan, both Tracey and Powys say that they were both at the Meeting. I believe them. When taxed on this question, Muralidharan gave a dissembling answer that he regarded Powys as not being at the Meeting because he did not speak and Muralidharan was dealing with Tracey. 2. There are aspects of Muralidharan's version of the Meeting with which Tracey agrees. However, he denies: * having said, "If you can arrange for TFA to pay the $4 million to Strategic today, then Strategic will use that money to pay the earn-out to Pearson once the exact earn-out amount is calculated"; * what is attributed to him in paragraph 41 of Muralidharan's affidavit; * having said, "If Techfront can arrange for the $4 million balance to be paid, then once the payment is received, I will arrange for 50 percent of the shares in [CAM] to be transferred immediately to TFA"; * what is attributed to him in paragraphs 43, 47, 50, 52, and 53; * that there was any urgency as suggested by Muralidharan in paragraph 55. He says the Deed was signed by both of them at the Meeting and was witnessed by Powys; * that he was desperate for the payment of $4 million and that he did not allow Muralidharan the opportunity to have the draft Variation Deed reviewed; * what is attributed to him in paragraph 56; and * that Muralidharan said the words recounted in paragraph 57. 1. Powys also accepts parts of Muralidharan's version. However, he denies: * that Muralidharan said the words he attributes to himself in paragraph 36; * the conversation recounted in paragraph 38; * that Tracey said the words, "Strategic really needs access to the balance of progress payment 1, and it needs those monies urgently. We need to use those funds to pay Pearson the earn-out, and we can't afford to pay the earn-out otherwise. If you can arrange for TFA to pay the $4 million to Strategic today, then Strategic will use that money to pay the earn-out to Pearson once the exact earn-out amount is calculated," referred to in paragraph 40; * the matters deposed to in paragraphs 42 to 44; * that Muralidharan wanted an immediate transfer. He says that he said, "We need to include a provision that the SPA [meaning the Deed] be amended to include the provision that GSC [meaning Global Sports Commerce] may replace TFA as the purchaser." Powys observes that a provision to this effect was included in the variation; * that Tracey said the words, "The new deal should be, that TFA acquires 50 percent of the CAM shares, and not the 100 percent of the CAM shares as per the original agreement"; * that Tracey said the words attributed to him in paragraphs 50 and 51; * that Muralidharan said, "If we pay the $4 million, how will we know that this is the final amount, and that you will not chase us for more?", and that Tracey said, "We are agreeable to include a buyback option in the documents that we will have prepared," as recounted in paragraph 53; and * that Tracey insisted that Muralidharan sign the Variation Deed urgently so that the $4 million could be paid. 1. Powys says they (presumably him and Tracey) were concerned to make sure the terms of the transaction were definitely agreed and that they were amended to reflect the changed circumstances, hence their specificity in the draft deed and the executed Variation Deed. He says that he prepared the draft deed and that during the Meeting, Muralidharan requested several changes, which Powys made using his laptop and which were incorporated into the signed document. He says that he saw Muralidharan and Tracey execute the Variation Deed in two counterparts. Muralidharan took one, and Tracey and he took the other one with them. DISPOSITION 1. Where a party seeks to rely upon spoken words as a foundation for a cause of action, the conversation must be proved to the reasonable satisfaction of the Court. This means that the Court must feel an actual persuasion of its occurrence or its existence. In the absence of some reliable contemporaneous record or other satisfactory corroboration, a party may face serious difficulties of proof. Such reasonable satisfaction is not a state of mind that is obtained or established independently of the nature and consequences of the fact or facts to be proved. The seriousness of an allegation made, inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question of whether the issue has been proved to the reasonable satisfaction of the Court. Reasonable satisfaction should not be produced by inexact proofs, indefinite testimony, or indirect inferences: Briginshaw v Briginshaw (1938) 60 CLR 336 at 362; Helton v Allen (1940) 63 CLR 691 at 712; Rejfek v McElroy (1965) 112 CLR 517 at 521; Watson v Foxman (1995) 49 NSWLR 315 at 319. 2. The oral testimony from either side did not cause me to feel an actual persuasion that either's version of positive statements they say they made should be accepted as accurate. The consequence is that the defendants, which bear the onus of establishing the agreement of representations to its effect, have failed to discharge it and must lose. 3. Muralidharan showed a clear tendency to say whatever he thought would serve his commercial interests. I am unpersuaded that Tracey would have had the capability of getting him to sign the Deed if he did not want to do it. He was clearly wrong about who was at the Meeting and I do not accept that he did not witness Tracey signing the Variation Deed. I believe Powys as to the circumstances under which the draft Variation Deed was amended, signed, and taken away. 4. For his part, Tracey was vague. I am persuaded that Tracey was, contrary to what he and Powys now say, desperate to get his hands on the $4 million. Objectively, Strategic needed the money to pay the First Earn Out to Pearson, but this is a far cry from releasing Techfront from paying the Back-to-Back Money while remaining liable to pay the previous vendors. 5. An anomaly with Powys' evidence is that his table of 16 April 2018 omitted to mention the Earn Outs or Back-to-Back Money, which in his email of 6 June 2018 he described as a "fundamental component of all agreements from day one." Later, he said this was a mistake. 6. Muralidharan made the point, with some emphasis, that in his proposal on 31 March 2018, Maxwell said: Basic framework is the current SPA stands amended with TFA buying the 50% stake for revised upward consideration of A$ 5.75 Million of which $ 1.75 Million has been paid and a further A$ 4 Million will be paid. All other obligations such as Convertible Notes, Cash Guarantees etc. will cease to exist subject to the below. [emphasis added] 1. He argued that the Back-to-Back Money payments were covered by the reference to "etc.". This submission is not without some force, although it did have an air of ex post facto construction. Also, it reflected a proposal from Muralidharan which differed from the final terms that he executed and which made reference to the Convertible Notes but not to Cash Guarantees, and did specify other obligations which were to be removed. 2. The fundamental problem for the defendants is that the objective contemporaneous material does not favour them. 3. Krishnakumar's email of 26 March 2018 says nothing of the Back-to-Back Money but does provide for no Progress Payment 2 and termination of the Convertible Notes. 4. I am not persuaded that it is more than probable than not that Tracey would have given away Strategic's entitlement to be paid the Back-to-Back Money when its obligation to pay them to the previous vendors remained intact and was personally guaranteed by him. He was desperate for the $4 million, but not that desperate. 5. I am not persuaded that anything was said about the Back-to-Back Money at the Meeting. I am not convinced that Muralidharan actually turned his mind to the Back-to-Back Money at the time, although it is plausible that he could have thought that the $4 million was the last payment that Techfront was going to make, irrespective of its legal obligations. 6. Ultimately, the most important factor weighing against the defendants is the execution of the Variation Deed, which: 1. specifies in clause 3 c)(ii) the obligations to be removed but says nothing of the Back-to-Back Money; and 2. makes clear in clause 4 that, except as expressly varied, the Deed remains in full force and effect. 1. It is worthy of observation that clause 21 of the Deed provides that, "This agreement may only be amended or varied by a document in writing signed by each party." 2. I am not satisfied that Tracey said or did anything to induce Muralidharan to hold the view, if he had it, that all other obligations would be at an end. 3. By executing the Variation Deed, Techfront suffered no detriment because its position under the Variation Deed (and, for that matter, the position of the defendants) is on any view no worse than it was under the Deed. No estoppel could arise even if Tracey induced Muralidharan to have that view: The Commonwealth v Verwayen (1990) 170 CLR 394 at [44]; M.K. & J.A. Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWCA 39 at [72]. 4. The defendants have failed to establish that their rights and obligations are not regulated by the terms of formal contractual instruments to which they and the plaintiff are parties. THE DAMAGES CLAIM 1. Strategic's damages claim so far as it exceeds the Second Earn Out, is based on the notion that because it was liable to the previous vendors for the Second Earn Out, which the defendants failed to pay it, it suffered significant additional loss because it was forced to do a disadvantageous deal with the previous vendors. This claim is unsound for a number of reasons. 2. First, the additional loss was not caused by Techfront's breach but by Strategic's, and for that matter Tracey's, own impecuniosity. 3. Second, I do not think that a settlement involving payments or transfer of value, direct and indirect, amounting to over $7.3 million to settle a claim of $3.865 million is reasonable. 4. Third, Strategic fell far short of establishing its claimed loss. It made no attempt to show that the loan receivable which it assigned was worth its face value or to prove what it spent in legal and accounting costs was necessary or reasonable. 5. It failed to establish the claimed value of the CAM shares it transferred to the previous vendors. 6. Strategic called a forensic accountant, Mr Tony Samuel, who opined that, as at the valuation date of 23 September 2019 when Strategic settled the Second Earn Out with the previous vendors, Strategic's shares in CAM had a market value [2] of $5.7 million, and possibly higher than that. This valuation cannot be accepted. 7. The said market value is derived from the price at which Techfront bought 50% of CAM under the Variation Deed, that is, the very transaction which is the subject of this dispute. I do not consider this approach to be sound, not least of all because under that very transaction, Techfront gave Strategic a buyback option for the very same shares at a price which was $1.25 million less and, barely 18 months later, Strategic let an equivalent shareholding go for $1. 8. I also do not think it was safe to proceed on the footing that the parties were truly at arm's length and were not anxious. 9. The reliability of the valuation is undermined by the fact that Strategic did not provide Mr Samuel with the critical financial information that on 22 July 2019 (not long before the valuation date), CAM's financial position was so dire that the directors had reason to suspect that it may have been approaching insolvency and were considering voluntary administration. At that time, the directors resolved to appoint an expert to assess its solvency and financial position and advise on its options for restructuring. Mr Samuel fairly accepted that this information could have had a significant effect on his opinion and he would have had to have made further investigations to adhere to his opinion had he been told about it. 10. Mr Samuel was also not provided with an email which Tracey sent Pearson in 2018 saying about the First Earn Out: Whilst the below par revenues have had an earn out impact, they have also significantly impacted cashflow and profitability meaning that: • I am not in a position to make the full Earn Out 1 payment immediately without putting 2019 at risk; and • The Earn Out 2 payment looks to be unachievable Given this situation, and a desire to ensure that I am in a position to fulfil the longer term objectives of the original transaction, we need to discuss a re-negotiation of the Earn Out Payments. There is no easy way to address the fact that the business is not likely to perform to the level on which the Earn outs were forecast. As such, I propose the following: 1. I pay 50% of the Earn Out Payment 1 to you on 2nd of July and the balance within 90 days. 2. That Earn Out Payment 2 (which is currently based on 22.5% of revenue, capped at $4.5m) is adjusted to reflect 15% of revenue, capped at $3.5m. 1. Apart from anything else, this information calls significantly into question that it was appropriate to value the shares on the basis that the underlying enterprise was a going concern, which Mr Samuel did. 2. In both the 2018 and 2019 financial years, CAM had a deficit of current assets. Its position in that regard had deteriorated substantially since 2015. I do not think that Mr Samuel took sufficient account of the negative connotations of these matters in coming to his valuation. 3. So far as the undervalue component of the damages claim is concerned, the state of the evidence would not enable the Court to determine the value of the shares foregone on a rational basis. Although the Court is required to do its best, justice does not dictate that a figure be plucked out of the air: Troulis v Vamvoukakis [1998] NSWCA 237 at p. 14 per Gleeson CJ. CONCLUSION 1. There will be judgment for the plaintiff against the second defendant, the third defendant, and the fourth defendant for: 1. $2,370,164. 2. $3,865,460. 1. I provisionally order that the defendants are to pay the plaintiff's costs of the proceedings. This order will solidify on 10 July 2020 unless before then a party notifies the other parties and my Associate in writing that some other order is sought, specifies that order, and states briefly the grounds for it. In the event that such notice is received, arrangements will be made for such further submissions as are appropriate. I will stand the matter over to 17 July 2020 to allow for that possibility and to enable the plaintiff to bring in Short Minutes which may include any adjustment for pre-judgment interest. 2. The exhibits are to be returned. ************ Endnotes 1. Under the Deed, in particular clause 17.2, Strategic could, on an event of default, acquire a security interest in the CAM shares which would be registrable in the Personal Property Securities Register (PPSR) under the Personal Property Securities Act 2009 (Cth) 2. The definition of "market value" adopted by the witness was, the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing, but not anxious buyer, and a knowledgeable, willing, but not anxious seller, acting at arm's length. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 July 2020