New South Wales Supreme Court CITATION : Tyndall v AGP [2001] NSWSC 224 CURRENT JURISDICTION: Equity Division Commercial List FILE NUMBER(S) : SC 50100/00 HEARING DATE(S) : 16.3.01 JUDGMENT DATE : 30 March 2001 PARTIES : Tyndall Australia Ltd v Australian Growth Properties Ltd JUDGMENT OF : Hunter J COUNSEL : Applicant/defendant: W G Muddle Respondent/plaintiff: D Hammerschlag SC SOLICITORS : Applicant/defendant: Hunt & Hunt Respondent/plaintiff: Freehills CATCHWORDS : Practice & Procedure - leave to amend defence - alleged futility of amendment - amendment to allege unenforceability of agreement arising out of breach of s1002G Corporations Law LEGISLATION CITED : Trade Practices Act 1974 (Cth) Corporations Law CASES CITED : Yango Pastoral Co Pty Ltd -v- First Chicago Australia Ltd (1978) 139 CLR 410 Australian Breeders Co-operative Society Ltd -v- Jones (1997) 26 ACSR 26 DECISION : Application granted. Plaintiff's costs of and incidental to the amendment be paid by the defendant. Costs of the application be defendant's costs in the cause. IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST HUNTER J FRIDAY 30 MARCH 2001 50100/00 TYNDALL AUSTRALIA LTD -v- AUSTRALIAN GROWTH PROPERTIES LTD REASONS FOR JUDGMENT 1 In these proceedings the plaintiff sues the defendant under an agreement made on 8 January 1998 by which the defendant agreed to purchase from the plaintiff listed units in a trust known as the Global Property Fund. The defendant is the parent company of the manager of that fund. The purchase price was described as $20,271,001.40 "as adjusted in accordance with Clause 2.3". That phrase referred to a provision that payments to the plaintiff under cl 6 of the agreement "shall be taken to be a pro rata increase in the Purchase Price of each unit". Cl 6 provided for payment to the plaintiff of 23.17% of the proceeds of certain litigation, if there had been no prior termination of the agreement in accordance with cl 6.4(b). 2 It is not in dispute that the subject litigation has been settled and the agreement has not been terminated under cl 6. 3 By its defence, the defendant relies on an equitable set off based on its cross claim. That cross claim, so far as is relevant, contends that the plaintiff represented to the defendant that particular assets of the fund had a total value in the order of $50,000,000 "which values were greater than those disclosed in the published accounts of the [fund]". That representation was relied upon to support allegations of misleading conduct and claims for relief, inter alia, under the Trade Practices Act 1974 (Cth). 4 In this application the defendant seeks leave to amend its defence on notice of motion filed 9 March 2001. That application is opposed on the grounds that it is futile to grant leave as the amendment discloses no arguable cause of action. 5 The form of the amendment is not precisely that referred to in the notice of motion. That proposed amendment has been altered in terms of the document entitled Amended Defence, which I have marked for identification 1, and in which, so far as is relevant, the defendant seeks to plead the following further matter: " 4. Further and in the alternative in answer to the whole of the Plaintiff's claim the Defendant says that the Agreement which the Plaintiff seeks to enforce was illegal and/or unenforceable and/or one which the Court will not assist the Plaintiff to enforce because it was intentionally induced by and resulted directly from an illegal act being a breach of Section 1002G(3) of the Corporations Law. Particulars (a) Michael Wilkins was the Managing Director of the Plaintiff and the person charged by the Plaintiff with the responsibility of effecting a sale of the Units. (b ) Donald Fletcher was a director of the Defendant and the person charged by the Defendant with responsibility for a possible purchase of the Units . (c) The Units were securities of a body corporate within the meaning of the Corporations Law . (d) Trading in the Units was permitted on the stock market of a securities exchange, being the Australian Stock Exchange . (e ) Michael Wilkins possessed information being the values of assets of the Trust, as pleaded in paragraph 1 of the Cross Claim, that was not generally available but, if it were generally available, a reasonable person would expect it to have a material effect on the price or value of the Units . (f ) Michael Wilkins in breach of Section 1002G(3) of the Corporations Law communicated or caused to be communicated the said information to Donald Fletcher in or about September and October 1997 as stated in paragraphs 4,5 and 9 of the Statement of Donald Fletcher dated 5 February 2001 . (g) At the time of the said communication Michael Wilkins knew and intended that Donald Fletcher would cause the Defendant to enter into the Agreement, which was an agreement for the purchase of the Units ." 6 Sec 1002G of the Corporations Law provides as follows: "1002G(1) Subject to this Division, where: (a) a person ( in this section called the "insider") possesses information that is not generally available but, if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of securities of a body corporate; and (b) the person knows, or ought reasonably to know, that: (i) the information is not generally available; and (ii) if it were generally available, it might have a material effect on the price or value of those securities; the following subsections apply. (2) The insider must not (whether as principal or agent) (a) subscribe for, purchase or sell, or enter into an agreement to subscribe for, purchase or sell, any such securities; or (b) procure another person to subscribe for, purchase or sell, or to enter into an agreement to subscribe for, purchase or sell, any such securities. (3) Where trading in the securities referred to in subsection (1) is permitted on the stock market of a securities exchange, the insider must not, directly or indirectly, communicate the information, or cause the information to be communicated, to another person if the insider knows, or ought reasonably to know, that the other person would or would be likely to: (a) subscribe for, purchase or sell, or enter into an agreement to subscribe for, purchase or sell, any such securities; or (b) procure a third person to subscribe for, purchase or sell, or to enter into an agreement to subscribe for, purchase or sell, any such securities." 7 It is the defendant's contention that insider information falling within the ambit of that section embraces information that may be accurate or inaccurate. It follows that under the 'Corporations Law defence' of illegality, the defendant would seek to rely, in the alternative, upon the alleged misleading representations as being accurate. 8 There is no dispute that the defendant has taken the benefit of the purchase of the units and of the benefit to the fund of the settlement. It does not seek to avoid or to have the agreement declared void ab initio. In substance it contends under the proposed amendment that the agreement is unenforceable for illegality. 9 The plaintiff resists the granting of leave on the following bases: (a) The allegation of insider trading cannot be sustained. It is submitted that, on the facts as pleaded in the proposed amendment, the relevant statutory prohibition under the Corporations Law is to be found in s 1002G(2), as to which the Law provides a defence in s 1002T(2)(b) in the following terms: "(2) In a prosecution brought against a person for an offence against subsection 1002G(2) because the person entered into, or procured another person to enter into, a transaction or agreement at a time when certain information was in the first-mentioned person's possession: (a) …. (b) it is a defence if the Court is satisfied that the other party to the transaction or agreement knew, or ought reasonably to have known, of the information before entering into the transaction or agreement." (b) It was further submitted that the "proposed pleading [does] not allege voidness nor voidability and avoidance" and "assertion of voidness is bound to fail…. because at best for the Defendant, if insider trading is established, voidability and not voidness is the consequence." (c) Further, that the defendant could not seek to avoid the contract because it has taken the benefit of the contract: it seeks to approbate and reprobate. 10 As to (a): it is apparent that the defendant seeks to avoid the operation of s 1002G(2) by relying, for its allegation of illegality, upon s 1002G(3). To do that, it interposes a third person between the plaintiff and the defendant, namely a director of the defendant : hence particular (g) of the proposed amendment. 11 By relying upon s 1002G(3), the defendant seeks to remove the implications of the availability of the defence to prosecution under s 1002G(2). In respect of a prosecution under s 1002G(3), s 1002T(3) provides for a defence where the court is 'satisfied that the other person knew, or ought reasonably to have known, of the information before the information was communicated". On the facts as pleaded in the proposed amendment that defence would not be available to the "insider". 12 Counsel for the plaintiff submits that recourse by the defendant to s 1002G (3) is illusory: that the defendant's director, for the purposes of the transaction, was the "human emanation" of the defendant. On that analysis s 1002G(3) would have nothing to say about the alleged illegality involved in the dealing between the plaintiff and the defendant. 13 However, whether approached as a question of construction of the section, or as a question of fact as to the relationship between the defendant and its director, I am not satisfied that the defence is unarguable. 14 Further, as a matter of construction of s1002G, I think it is undesirable to embark upon such a determination on this application for leave to amend, given: (i) the coincidence of allegations upon which the proposed amendment is based with those which will require to be dealt with under the defendant's present cross claim; and (ii) the absence of direct authority on this construction of the relevant "insider" provisions of the Corporations Law, which, I think, calls for closer examination of the operation of those provisions than has been given to them on his application. 15 As to (b) and (c): I think that argument mis-states the case that the defendant wishes to raise, namely, that the agreement, by reason of s1002G(3) of the Corporations Law is unenforceable. It was submitted on behalf of the defendant that the fact that it accepted the benefit under the agreement is no bar to the enforcement of the public interest policy against assisting a party to an illegal contract, relying upon obiter in Yango Pastoral Co Pty Ltd -v- First Chicago Australia Ltd (1978) 139 CLR 410 at 427-428. 16 I have not been referred to any direct authority, in point, as to the construction of s 1002G advanced on behalf of the defendant, counsel for the defendant having recourse to analogous decisions, principally that of Australian Breeders Co-operative Society Ltd -v- Jones (1997) 26 ACSR 26 at 72-73 and the authorities examined in that case. 17 As earlier stated, I think that determination of the issues sought to be raised under the proposed defence will involve factual issues concerning the relationship between the defendant and its director Donald Fletcher, in addition to significant questions of construction of the relevant provisions of the Corporations Law, their application to the facts of this case and their effect on the enforceability of the agreement. In relation to those latter aspects, I think it is inappropriate to attempt a determination of those questions on an application of this kind for the reasons stated. 18 I am not persuaded that the proposed defence must fail, notwithstanding what I perceive to be glaring difficulties confronting the defendant in making good such a defence. 19 For those reasons I grant leave to the defendant to amend its defence in terms of the document marked for identification 1. I order the defence to be filed and served by 4pm 3 April 2001 and any reply thereto to be filed and served by 10 April 2001. I order the defendant to pay the plaintiff's costs of and incidental to the amendment and I order that costs of the application be the defendant's costs in the cause. *********** Last Modified: 04/12/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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