New South Wales Supreme Court CITATION : Hills Motorway Ltd v UBS AGHills Motorway Management Ltd v UBS AG [2005] NSWSC 1086 HEARING DATE(S) : 17/06/05 JUDGMENT DATE : 28 October 2005 Equity Division JURISDICTION : Corporations List JUDGMENT OF : White J DECISION : Plaintiffs' counsel to bring in short minutes in accordance with reasons. CATCHWORDS : CORPORATIONS - Application to set aside statutory demand - Where two demands for half the debt each were served on parties jointly liable for the debt - Whether a ground for setting aside the demands is that demands were in terms that debtors are severally liable as opposed to jointly - Where affidavit amending amount of claimed offset filed after 21 days - Corporations Act ss 459G, 459F, 459J - Held that claiming less than the actual debt is not a defect justifying the setting aside of a demand - Claimed offset is too small and does not affect demands - Affidavit filed after 21 days falls foul of principle in Graywinter - Payment of amount claimed in one demand will satisfy both. LEGISLATION CITED : Corporations Act 2001 (Cth) Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund (1996) 70 FCR 452 Energy Equity Corporation Ltd v Sinedie Pty Ltd (2001) 166 FLR 179 Process Machinery Australia Pty Ltd v ACN 057 260 590 Pty Ltd [2002] NSWSC 45 CASES CITED : Duck v Mayeu [1892] 2 QB 511 Barclays Australia (Finance) Ltd v Mike Gaffikin Marine Pty Ltd (1996) 21 ACSR 235 Elm Financial Services Pty Ltd v Macdougal [2004] NSWSC 560 The Hills Motorway Ltd v UBS AG PARTIES : Hills Motorway Management Ltd v UBS AG FILE NUMBER(S) : SC 3641/05; 3642/05 Plaintiffs: D P Robinson SC, W George COUNSEL : Defendant: C R C Newlinds SC, A Lo Surdo Plaintiff: Holding Redlich SOLICITORS : Defendant: Allens Arthur Robinson LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST WHITE J Friday, 28 October 2005 3641/05 The Hills Motorway Ltd v UBS AG 3642/05 Hills Motorway Management Ltd v UBS AG JUDGMENT 1 HIS HONOUR: These proceedings were heard together. Each plaintiff applies under s 459G of the Corporations Act 2001 (Cth) for an order setting aside a creditor's statutory demand. Hills Motorway Management Ltd ("Hills Management") is the responsible entity of the Hills Motorway trust. 2 In January 2005, shares in the Hills Motorway Ltd ("Hills") and units in the Hills Motorway trust were jointly quoted as stapled securities on the Australian Stock Exchange. On 31 January 2005, Transurban Investments Pty Ltd announced a takeover offer for all of the stapled securities in Hills Motorway Group. Transurban offered 1.47 Transurban stapled securities for each Hills stapled security. 3 The defendant, UBS AG was engaged to provide advice and assistance to Hills and Hills Motorway Trust. On 4 March 2005, it entered into an agreement with the plaintiffs which set out the terms on which it would act. The first paragraph of the letter provided: " The purpose of this letter is to set out the terms on which the Hills Motorway Ltd and Hills Motorway Trust (together the "Company") has engaged UBS AG … to act as its sole financial adviser … to provide advice on, and assist in, takeover response preparation and responding (including by approaching potential competing offerors) to any proposal by a third party to acquire or merge with all, or substantially all, of the Company or any of its businesses (including the approach by Transurban Group in January 2005) (the "Transaction"). " 4 The letter then set out the services which UBS agreed to provide to "the Company" and the "Company's" obligations to UBS. 5 Clause 3 provided that "the Company agrees to pay UBS the following fee(s)." There was then set out a formula for calculating UBS's fee. In the event of the Transaction terminating without proceeding to closing or no offeror acquiring more than 50% of the Company's ordinary securities on issue, UBS was to be paid a fee of $6,880,000. 6 Clause 3 provided that if the Transaction proceeded to completion, the Company would pay a fee to UBS comprising a base fee of $3,880,000 plus a Completion Fee calculated in accordance with certain formulae. If the Transaction was completed by a Transurban scrip exchange offer, UBS was to be paid an additional $380,000 for every 1% increase in the ratio of Transurban securities to Company securities above 1.47:1. In other words, if the Transaction were completed by a Transurban scrip offer of 1.55:1, being an increase of more than 5% but less than 6% above the ratio of 1.47, UBS would receive a fee of $5,780,000. Clause 3(b) provided that in the case of a Transaction that was a cash offer, the Completion Fee would be 1.25% of the Premium Consideration. Clause 3(d) provided that if the Transaction included cash and non-cash consideration, including scrip, the Completion Fee would be 1.25% of the Premium Consideration. Hence, a fee of 1.25% of the Premium Consideration was payable if any part of the Transaction included cash consideration. 7 The agreement was signed by Mr Hopman as "managing director" and by Mr Collier as "chief financial officer", both of whom signed on behalf of the "Company". As the Hills Motorway trust was not a legal entity, the contracting party other than Hills must have been Hills Management. 8 On Friday 8 April 2005, a meeting was held of directors of Hills and Hills Management. Representatives of UBS and lawyers for Hills were also present. The minutes record that Mr Davis of UBS advised that there was a strong indication from the bulk of key institutional investors that they wanted the Hills board to negotiate a better offer from Transurban in value terms, and that a cash component would strengthen the offer. A document prepared by UBS was tabled outlining two proposed revised offer structures. Mr Davis recommended that both structures be put to Transurban. Each board member indicated that he would be prepared to recommend to Hills investors that they accept either of the revised offer structures. UBS was authorised to put the revised offer structures to Macquarie Bank, who were advising Transurban. The two revised offer structures were that Transurban should be asked to provide 1.55 Transurban securities for each Hills security, or 1.47 Transurban securities for each Hills security plus 50 cents in cash. At the closing price on 7 April 2005 for Transurban securities, the former proposal had a higher value. The values of both proposals would fluctuate, but not identically, according to movements in the price of Transurban securities. 9 The two revised offers which Hills sought to extract from Transurban were considered by Transurban. On the morning of 11 April 2005, the Hills board was advised that a holder of about 9% of the Hills securities had sold its stake to a hedge fund. It was expected that control of Hills would pass quickly. The board met on Monday 11 April 2005. Mr Murray, the chairman of Hills, advised the board that Macquarie, the adviser to Transurban, had indicated that the Transurban board was prepared to recommend an offer of 1.47 securities with a cash component of 25 cents. The minutes of the 11 April 2005 board meeting record that Macquarie had advised that Transurban was not prepared to adopt either of the proposed offer structures, but would be prepared to couple the offer of 1.47 Transurban securities for each Hills security with a cash component of 20 to 25 cents, and that if the board did not recommend the offer with a modest additional cash component to Hills' investors, Transurban would simply announce the increase without reference to the Hills directors. The meeting resolved that following the conclusion of the meeting, Mr Murrayshould put the revised proposal to the chairman of Transurban, Mr Cox, and otherwise engage in negotiations with Mr Cox with a view to extracting a revised offer comprising an offer exchange ratio of 1.47 and as high a cash component as possible, but at least 25 cents. 10 On 12 April 2005, Transurban made a revised offer of 1.47 shares in Transurban plus 25 cents in cash for each HMG security. The Hills and Hills Management boards formally recommended that investors accept Transurban's increased offer. 11 The effect of the inclusion of a 25 cent cash component for every one HMG security was to increase the fee which would otherwise have been payable to UBS by $5,580,000, or possibly $5,885,080. UBS claims that pursuant to the agreement of 5 March 2005, Hills and Hills Motorway owe it fees of $11,234,080. There was no dispute at the hearing before me that that was the fee payable under the agreement of 4 March, 2005. Hills and Hills Management say that had Transurban's offer been an all scrip offer rather than including a 25 cent cash component, the fee would have been $5,349,000. 12 The takeover was successful. The Hills Motorway Group is now controlled by Transurban. Hills and Hills Management have not paid UBS's fee. On 13 April 2005, UBS forwarded separate invoices to Hills and to the Hills Motorway trust. It claimed $5,617,040 from each of them. This was odd as it is clear from the letter of 5 March 2005 that Hills and Hills Management are jointly liable for the debt of $11,234,080, rather than each being severally liable for half of that debt. 13 On or after 3 June 2005, statutory demands were made on each of Hills and Hills Management. The demands were in accordance with the prescribed form. Each demand claimed that the debtor owed UBS $5,617,040, being the amount of the debt described in the Schedule. The description of the debt in the Schedule was: " Invoice No. … dated 13 April 2005, for fees for providing financial advice and other assistance to the debtor in accordance with the engagement letter between the debtor and creditor dated 4 March 2005 " 14 Hills and Hills Management claim that they do not owe those debts. Leaving aside any offsetting claim, they jointly owe a debt of $11,234,080. They do not severally owe debts of $5,617,040. UBS says that it is not open to the plaintiffs to take this point as it is not identified as an issue in the affidavits filed within 21 days in support of the summons. UBS also says that the statutory demands described the debt as the fees owed under the engagement letter of 4 March 2005 and that it does not matter that each demand understates by half, the debt owed by Hills and Hills Management. Even if that is a defect, it is not one which causes substantial injustice. Nor is there any other reason why the demand should be set aside because of any such defect. (Corporations Act s 459J). 15 The affidavits filed for the plaintiffs within 21 days of the service of the statutory demand included a contention that Hills and Hills Motorway Management Ltd have an offsetting claim in the sum of $5,580,000. The basis of the claim was summarised in paragraph 16 of the affidavit of Mr Collier as follows: " Hills and Management allege that UBS breached the engagement letter, was negligent and engaged in misleading or deceptive conduct, or conduct likely to mislead or deceive under the Corporations Act 2001 and the Australian Securities Investments Commission Act 2001. Hills and Management allege they lost the chance to conclude their defence to the takeover on terms where they would be jointly liable to pay $5,580,080 less to UBS than they are contractually liable to do so upon the terms of the engagement letter. " 16 There then follows the description of the events to which I have referred above. The affidavits and supporting exhibit also disclosed that on the morning of 11 April 2005, Mr Collier, a director of Hills, was advised by UBS that he should advise the board about the impact a scrip and cash offer would have on UBS's fees if a scrip and cash bid was recommended by the directors. The minutes of 11 April 2005 record that Mr Collier noted that if the offer was revised to comprise a combination of scrip and cash, this would result in a substantial increase in the fees due to UBS. 17 It also appears from the affidavits filed within 21 days of the service of the statutory demand, that Transurban says that if the Hills board had requested that its scrip and cash offer be translated into a equivalent scrip offer, it would have accepted the proposal. Mr Burns, corporate counsel of Transurban, deposed that had Transurban been advised that by making a scrip and cash offer, Hills Motorway Group would incur an additional cost of approximately $5,000,000, Transurban would most likely have made a scrip only offer. 18 UBS says that these affidavits do not disclose any ground to establish that there is a genuine offsetting claim. Nowhere does it appear how UBS might have breached its contract, or been negligent, or been guilty of misleading and deceptive conduct. Rather, the evidence filed in support of the applications to set aside the statutory demands shows that on the morning of 11 April 2005, and whilst the Hills board was still in negotiations with the Transurban board, the board was told, if they needed telling, that if Transurban made a scrip and cash offer, this would result in a substantial increase in fees due to UBS. Hence, it was said by UBS that it was impossible to identify the ground upon which it would be contended that UBS engaged in misleading and deceptive conduct. 19 The affidavits did not raise any contention that there was anything improper in the fees which Hills and Hills Management agreed to pay UBS, including the structuring of the fee so that any cash component of an offer, however small, could result in a very substantial increase in UBS's fees, which might bear no relationship to the work UBS was to do, and no necessary relationship to additional value which might be provided to the holders of securities of Hills Motorway Group. 20 After the expiry of the period of 21 days following the service of the statutory demands, the plaintiffs filed further affidavits. Mr Bishop of Macquarie Bank deposed to having told Mr Davis and Mr Sweetman of UBS on Friday 8 April 2005, that Transurban was indifferent to whether the increase was in cash or scrip but would go for the lower offer. Hearsay evidence was also given of discussions with major investors in Hills Motorway Group for the purpose of seeking to establish that they were indifferent to whether a cash component was included in the offer, or would have preferred an all scrip offer. Mr Collier, in a later affidavit, swore that Mr Davis did not disclose to the directors of Hills and Hills Management that Macquarie had told him that the directors of Transurban were indifferent as to whether a scrip only, or a scrip plus cash offer, should be made. Nor, according to Mr Collier, did Mr Davis disclose that he had been told or believed that Transurban would select the recommendation that would enable it to acquire Hills's securities at the lowest total cost. 21 In an affidavit filed outside the 21-day period, the plaintiffs corrected the quantum of their off-setting claim. Mr Burns deposed that in calculating the off-setting claim of $5,580,080 referred to in his first affidavit, he had erroneously subtracted an amount of $275,000. The true amount of the off-setting claim was said to be $5,855,080. 22 These later affidavits were objected to on a number of grounds, including the ground that on the principle established in Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund (1996) 70 FCR 452 and cases which have followed it, the grounds to be relied upon to set aside the statutory demand must be identified in the affidavits filed within the 21-day period. Although it is open to a plaintiff to supplement its initial affidavits by supplementary evidence relevant to an area of controversy which has been identified in the initial affidavits, later affidavits, unless filed and served within the 21-day period, cannot be relied upon to identify a new ground for contending that the debt is genuinely disputed or raises a genuine offsetting claim. (Energy Equity Corporation Ltd v Sinedie Pty Ltd (2001) 166 FLR 179 at 185; Process Machinery Australia Pty Ltd v ACN 057 260 590 Pty Ltd [2002] NSWSC 45 at [21]-[22]). 23 It appeared to me that the objection to the admissibility of the affidavits based on this principle, could only properly be assessed in final submissions. 24 It was submitted for the plaintiffs that it was an implied term of UBS's retainer that it use reasonable care and skill and that it report back to the board the substance of its discussions with Macquarie. The plaintiffs contended that: (a) UBS was in breach of its retainer by recommending that Transurban be invited to make alternative offers, one of which was lower than the other, when it was likely that that would result in Transurban proceeding to negotiate on the basis of the proposal of scrip plus cash which had the lower value, even though this would result in Hills and Hills Management incurring a substantially higher fee. (b) UBS engaged in misleading or deceptive conduct by not pointing out to the board on 7 April 2005 what the consequences would be in terms of the quantum of fees payable to UBS if the negotiations with Transurban or its advisers resulted in Transurban making an offer which included a cash component. This was also propounded as a breach of retainer. (c) A representation was made by Mr Davis, recorded in the minutes of the meeting of 8 April 2005, that a cash component would strengthen the offer. They said that the evidence of the enquiries made of the institutional investors in the Hills Motorway Group indicated that the basis for that statement was questionable. The statement was both a breach of the implied contractual term that UBS exercise reasonable care and skill, and a statement made in trade or commerce which was misleading or deceptive. (d) UBS was guilty of misleading or deceptive conduct by not conveying to the board on 11 April 2005 the advice from Macquarie that Transurban was indifferent to whether it made an all scrip offer or a scrip and cash offer. If that information had been provided, it was reasonably arguable that such information would have affected the consideration the board gave to the reminder that a revised offer structure, which included a cash component, would result in a substantial increase in the fees due to UBS. 25 UBS denied that these contentions were open to the plaintiffs, having regard to the contents of the affidavits filed within the 21-day period, which materials, it was said, did not establish a genuine offsetting claim. 26 I will deal first with the contention that neither of the plaintiffs owed the debt claimed in the statutory demand. Joint Liability 27 The affidavits filed within 21 days adequately flagged the contention that the demands claimed half of the debt owing under the agreement of 4 March, 2005 as a several debt owed by each plaintiff and did not demand the debt owed by them jointly. In his affidavit of 24 June, 2005, Mr Collier exhibited the tax invoices and the statutory demands and said that each demand apparently claimed half of the joint debt. Each tax invoice specified 50% of the Base Fee of $3,880,000, 50% of the Completion Fee of $6,082,800 and 50% of a Restructure Termination Fee of $275,000, plus GST. Each statutory demand referred to the relevant tax invoice. The first affidavit clearly identified the issue that although the debt was a joint debt, UBS was claiming half of the debt from each plaintiff severally. 28 It is clear from the terms of the letter of 5 March 2005 that the debt owed to UBS is owed by the Hills and Hills Management jointly, and not jointly and severally. It was faintly contended that the debt was owed jointly and severally. However all of the obligations on the side of the Hills Motorway were owed by "the Company", which was a defined expression. For the reasons previously given it meant Hills and Hills Management. 29 It is also clear that the invoices and the statutory demands claim half of the debt from each plaintiff. The plaintiffs' claim is deceptively simple. They say they do not severally owe to UBS a debt of $5,617,040 pursuant to the engagement letter of 4 March 2005. Subject to their offsetting claim, they jointly owe a debt which is twice that amount. A joint debt gives rise to one indivisible cause of action. (Duck v Mayeu [1892] 2 QB 511 at 513). 30 Whilst I accept that the statutory demands were for only half the amount which could have been claimed against each of the plaintiffs, it does not follow that the claim made was not for a debt each plaintiff owed. In Barclays Australia (Finance) Ltd v Mike Gaffikin Marine Pty Ltd (1996) 21 ACSR 235, McClelland CJ in Eq said that it was: "… incontestable that (subject to the rule against double satisfaction) a judgment or order for the payment of money against two persons jointly can be enforced against either or each of them individually: … even in a contractual context, a joint (and not several) liability of two persons under a contract may be enforced against only one of them by action (subject to a discretionary power in the court, to require the party jointly liable to be added as a defendant to the action or to stay the proceedings until that party is added)." (See Civil Procedure Act , 2005, s.95). 31 Moreover, a statutory demand must be in the prescribed form. (Section 459E(2)(e)). The prescribed form, form 509H does not make provision for naming two or more persons as the debtors liable to pay a joint debt. 32 I do not accept that the statutory demands are invalid because the debts demanded do not exist. In my view, each statutory demand claimed a sum that is owed by both plaintiffs. Each demand misstates the amount of the debt. That is a defect in relation to the demand. (Corporations Act s 9, definition of "defect" in relation to a statutory demand). Section 459J(2) provides that except as provided in subs (1) the Court must not set aside a statutory demand merely because of a defect. The plaintiffs did not rely upon s 459J(1) as a ground for setting aside the statutory demands. They were right not to do so. No substantial injustice was caused by the defect and there is no "other reason" within the meaning of s 459J(1)(b) why the demands should be set aside. 33 Because the debt owed by the plaintiffs, pursuant to the agreement of 4 March 2005, is owed by the plaintiffs jointly, payment by either or both of the plaintiffs of the sum of $5,617,040 will discharge so much of the debt as is the subject of the statutory demands. UBS cannot change the nature of the debt by demanding of each plaintiff that it pay half of it. Both demands are for the same debt. It was submitted for UBS that if the plaintiffs established an off-setting claim, half of the off-setting claim should be set off against each demand. That is misconceived. Any off-setting claim should be set off against the debt owing under the agreement of 5 March, 2005. Only if the off-setting claim exceeds $5,617,040 will there be a set-off against the statutory demands. But any such set-off would apply equally to both demands, as they claim the same debt. Off Setting Claim 34 The next question is whether the plaintiffs have established that on the applications made by them under s 459G, the Court is satisfied that they have an "offsetting claim" within the definition in s 459H(5). Senior counsel for the plaintiffs accepted that the counterclaim, set-off or cross-demand which the plaintiffs propound did not reduce the debt payable by the plaintiffs. 35 Given that the debt owed by the plaintiffs under the letter of 6 March 2005, is $11,234,080, and that the amount claimed under the statutory demands is $5,617,040, the remaining question is whether the plaintiffs have established that they have a genuine claim against the defendant in an amount of at least $5,617,040. It is also necessary for the plaintiffs to satisfy the court that they have such a genuine claim "on an application under s 459G", being an application made within 21 days after service of the demand made in accordance with the requirements of s 459G(2) and (3). The affidavits filed by the plaintiffs in support of their application within the period of 21 days asserted an offsetting claim in the sum of $5,580,080. It was only in an affidavit filed on 3 August 2005, well outside the 21-day period, that the plaintiffs through Mr Burns, asserted that the offsetting claim was for $5,855,080. Mr Burns swore in an affidavit made on 2 August 2005 that in arriving at the sum of $5,580,080 referred to in his previous affidavit of 24 June 2005, he had erroneously subtracted an amount of $275,000, being a restructured termination fee of $250,000 plus GST. 36 An applicant under s 459G of the Corporations Act may not rely on grounds for disputing the debt to which the statutory demand relates if those grounds are not raised in the supporting affidavits filed within the 21 day limit. (Energy Equity Corporation Ltd v Sinedie Pty Ltd (2001) 166 FLR 179 at 185; (2002) 20 ACLC 1248 at 1252). The affidavits filed within the 21-day period must either expressly or by necessary inference clearly delineate the grounds upon which the debt claimed in the statutory demand is disputed, so that, within that period, the area of controversy is clearly delineated, either expressly or by necessary inference. (Process Machinery Australia Pty Ltd v ACN 057 260 590 Pty Ltd [2002] NSWSC 45 per Barrett J at [21]-[22]). 37 Whether or not the affidavits filed within the 21-day period sufficiently identified an offsetting claim in the amount of $5,580,080, they did not identify an offsetting claim of $5,855,080. It was not apparent from those affidavits that there was any greater offsetting claim. One of the difficulties with the affidavits was that it was impossible to ascertain from them how the offsetting claim of $5,580,080 was calculated. It was simply a sum asserted by Mr Burns. A plaintiff who relies upon an offsetting claim to set aside a statutory demand in its entirety must adduce evidence showing a plausible and coherent basis for asserting a claim to a sum which, despite elements of uncertainty, can be seen to be greater than the amount of the debt which is the subject of the statutory demand. (Elm Financial Services Pty Ltd v Macdougal [2004] NSWSC 560 at [19]). Where the offset is less than the debt owed, the amount required to be paid by the recipient of the demand can be reduced by the Court to reflect the offset. On no view did the affidavits filed within the 21-day period show that the plaintiffs had a genuine claim against the defendant in an amount of more than $5,580,080. 38 I infer from the affidavit of Mr Burns of 2 August, 2005 that the plaintiffs dispute that part of the tax invoices from UBS upon which the claim for a "restructure termination fee" of $250,000 plus GST of $25,000 is based. It is not clear to me how UBS is entitled to that fee under its engagement letter of 4 March, 2005. That was not the subject of submissions. More relevantly, the plaintiffs did not identify the grounds on which that part of the claimed debt was disputed. The plaintiffs' claims identified in paragraph [24] above, were all concerned with whether, as a result of UBS' conduct, they incurred a liability to pay a Completion Fee which was higher than that which would otherwise have been payable. No ground was identified for disputing the restructure termination fee. 39 It follows that it is unnecessary to decide whether the plaintiffs have a genuine claim for breach of contract, negligence, or misleading and deceptive conduct which can be offset against the debt of $11,234,080, on grounds which were sufficiently identified within the 21-day period. Even if they do have such a claim, they have not shown that it is in an amount which could reduce the debt below the amount claimed in the statutory demands. 40 It follows that the summons in each proceedings should be dismissed. However, because the debt, which is the subject of the statutory demands, is owed by the plaintiffs jointly, and not jointly and severally, the defendant will not establish a presumption that either plaintiff is insolvent if it receives payment from either or both of the plaintiffs of amounts totalling $5,617,040. 41 No submission was made that the period for compliance of the statutory demand should be extended beyond the period of 7 days after the determination of these proceedings provided for in s 459F(2). 42 To resolve any doubt, it is appropriate to declare that the plaintiffs will not fail to comply with the defendant's statutory demands dated 3 June 2005 if, within the time prescribed by s 459F(2) of the Corporations Act, they, or either of them, or some person on their behalf, pays to the defendant the amount of $5,617,040, or secures or compounds for that amount to the defendant's reasonable satisfaction. Otherwise, each summons should be dismissed. I direct the plaintiffs' counsel to bring in short minutes of order in each proceeding in accordance with these reasons. I will hear the parties on costs. ****** 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.