Kaye v Strandbags Group [2006] NSWSC 1015

New South Wales Supreme Court

CITATION : Kaye v Strandbags Group [2006] NSWSC 1015

HEARING DATE(S) : 20 September 2006

JUDGMENT DATE : 20 September 2006

JURISDICTION : Equity

JUDGMENT OF : Campbell J

EX TEMPORE JUDGMENT DATE : 09/20/2006

DECISION : Mandatory orders for disclosure of information made.

CATCHWORDS : WORDS AND PHRASES – "undertakes" – whether contractual – INJUNCTIONS – covenant to provide information about operations of a proprietary company – whether damages an adequate remedy – INJUNCTIONS – discretionary basis for refusal of injunction that object of covenant not able to be obtained – EQUITY – equitable defences – laches – mere delay

LEGISLATION CITED : Uniform Civil Procedure Rules 2005

Cashman v 7 North Golden Gate Mining Company [1897] QLJ 152 Falconbridge Nickel Mines Limited v Minister for National Revenue [1965] CTC 82 CASES CITED : Jones v Dunkel (1959) 101 CLR 298 Knight v Simmonds [1896] 2 Ch 294 Lamshed v Lamshed (1963) 109 CLR 440 Savage v Lunn, NSWCA, 9 March 1998, unreported, BC9800548

Roger Kaye - First Plaintiff PARTIES : Hyman Shwiel - Second Plaintiff Strandbags Group Pty Ltd - Defendant

FILE NUMBER(S) : SC 1918/06

COUNSEL : TGR Parker SC; RE Steele - Plaintiffs MJ Dawson - Defendant

SOLICITORS : Sachs Gerace Lawyers - Plaintiffs TressCox - Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST

CAMPBELL J

WEDNESDAY 20 SEPTEMBER 2006

1918/06 ROGER KAYE AND ANOR v STRANDBAGS GROUP PTY LIMITED JUDGMENT – Ex Tempore 1 HIS HONOUR: This is an application for some final mandatory orders concerning the affairs of the defendant company, which I will refer to as Strandbags. It is a retailer of handbags, wallets, travel and business luggage. 2 There are two plaintiffs, Mr Kaye and Mr Shwiel. Mr Kaye, Mr Shwiel and another man established Strandbags in 1983. Mr Kaye was the managing director from 1983 and Mr Shwiel was also involved in its operations. They were both directors of the company. During that period Jalam Pty Limited held 40.25% of the issued capital of Strandbags. The issued capital of Jalam was in turn held as to 27.6% by Oceana Investment Corporation PLC and as to the remainder, by Mr Kaye and Mr Shwiel. The Settlement Deed 3 Prior to 7 October 1994, Mr Kaye, Mr Shwiel and Jalam had begun proceedings in the Federal Court against Strandbags, Oceana Investment Corporation PLC, and Messrs Lewis, Davies, and Desmarais, who were associated with Strandbags. At that time Strandbags had a different name to its present one. By 7 October 2004 some interlocutory orders had been obtained in those proceedings. On 7 October 2004, the parties to the proceedings entered into a Deed which aimed to settle the dispute from which the proceedings had arisen. That Deed needs to be considered in some detail. 4 By Clause 1 of the Deed, Oceana agreed to provide some additional security which a financier of Strandbags then required to keep a particular finance facility on foot. 5 Clause 2 of the Deed made provision for Mr Kaye to cease to be the managing director, and provided for the terms on which his severance from the company was to occur so far as salary and various other conditions of employment were concerned. 6 Clause 3 provided for the payments which were to be made and court orders which were to be made to settle the Federal Court proceedings. 7 Clause 4 made provision for Mr Shwiel and Mr Kaye to resign as directors of Strandbags. 8 Clauses 5 and 6 gave mutual releases concerning the disputes, and also concerning other matters arising from the prior relationship of the parties. 9 Clause 7 involved Mr Kaye and Mr Shwiel granting to Oceana an option, which was to be exercisable at any time within three years of the date of the Deed, to acquire for $450,000 that number of shares held by Mr Kaye and Mr Shwiel in Jalam that would leave Mr Kaye and Mr Shwiel with the number of shares that they, "need to hold in Jalam in order to retain an indirect shareholding in [Strandbags] equivalent to five per cent of the issued capital of [Strandbags] as at the date of this deed." 10 Clause 10 of the Deed provided that Strandbags, Messrs Lewis, Davies and Desmarais and Oceana agreed, "that they will not, other than as may otherwise be provided under this deed, do or cause or procure anything to be done whereby the shareholding of Jalam, Kaye or Shwiel in [Strandbags] is directly or indirectly diminished or diluted by any means, whether by the issue or allotment of further shares in [Strandbags] pursuant to any options to acquire shares granted by [Strandbags] on or before the date of this deed or otherwise, or by the granting of any options to acquire shares in [Strandbags] in the future." 11 Clause 10.2 went on to acknowledge that the covenant in Clause 10.1, "will not prevent [Strandbags] from raising additional funds by issuing additional shares in [Strandbags] where this is absolutely necessary for the preservation of the solvency of [Strandbags]." 12 Clause 13 involved an agreement for the cancellation of any options which Mr Kaye held to acquire shares in Strandbags, and also any options which Messrs Lewis, Davies or Desmarais or Oceana had to have issued to them shares or options in Strandbags. 13 Clause 14 then provided: "14.1 Each of the Respondents undertakes to Kaye and Shwiel to provide to each of them from time to time, and also on reasonable request, management financial and business information in relation to [Strandbags] to enable Kaye and Shwiel to be reasonably informed of the nature, conduct and financial state of the operations of [Strandbags] including in particular but without limitation: (a) weekly sales report; (b) the monthly financial pack provided to directors including but not limited to the profit and loss statement, balance sheet, cash flow and bank covenant schedule; (c) information, including correspondence, relating to any actual or potential or threatened default, breach or failure to comply with any condition of any lease in respect of which Kaye has given a personal guarantee in respect of the obligations of [Strandbags]." Post-Deed Events Related to Shareholdings in Strandbags 14 In December of 1997 Mr Kaye transferred to Oceana Investment Corporation PLC 40,181 shares which he held in Jalam, and Mr Shwiel transferred to Oceana Investment Corporation PLC 19,827 shares which he held in Jalam. Those transfers left each of Mr Kaye and Mr Shwiel with 6,210 ordinary shares in Jalam. 15 In October 1995 Strandbags had issued some convertible redeemable notes, which were convertible into ordinary shares on dates in 1996, 1997 and 1998. Attached to each convertible note was an option to acquire one new ordinary share per note. That option was to be exercisable at any time during the two years from 1 October 1998 to 30 September 2000. Strandbags' Accounts 16 The company has a financial year which ends on 28 February in any year. 17 The accounts of the company for the period ended 28 February 2005 show that some $686,000 was received in that year from a share issue. A note to the accounts shows that about 15.8 million B ordinary shares partly paid were issued on 24 February 2005. This issue was, apparently, part of an executive share plan. The note also stated that on 30 September 1996 approximately 34.076 million convertible redeemable notes were converted into share capital. It also says that the holders of the 34.076 million new ordinary shares "have an option to subscribe for 34.076 million ordinary shares at 20 cents per share payable in cash. This option is exercisable at any time up to 30 September 2006." The note also discloses that: "The company has a commitment to purchase, on call, up to 50 per cent of its class B ordinary shares. This obligation will increase over the next three years to cover one hundred per cent of the class B ordinary shares. The purchase price is based on a multiple of the last annual audited after tax net profits of the company." 18 Mr Dawson, counsel for Strandbags, tells me, from the Bar table, that the option to subscribe for shares was the same option as was attached to the convertible redeemable notes. While I do not doubt that those are his instructions, it is not apparent from the evidence before me how that could be so, given that the date for exercise of the options attached to the convertible redeemable notes was to expire on 30 September 2000. It is also not apparent from the accounts how the obligation of the company to purchase the class B ordinary shares arose. 19 Recent searches show that the plaintiffs each own 6.2% of the total shareholding in Jalam, and that Jalam in turn holds 9.97% of the shareholding in Strandbags. 20 A comparison of sets of the accounts of the company shows some changes in its operations. In the 1995 financial year it had operating revenue of $59.5 million, and made a loss after income tax of $7.8 million. Its net assets according to the balance sheet were $1.2 million. It had four subsidiaries. The principal activity of it and its subsidiaries was stated in the accounts to be "retailer of handbags, accessories and travel goods in predominantly one industry and one geographical area, namely Australia". 21 The accounts for the 2006 financial year show that its principal activities were "the speciality retail of handbags, accessories, wallets, business bags and travel goods". It had an operating revenue of around $156 million, and made a profit of nearly $15 million after income tax. Its net assets according to the balance sheet were around $15.6 million. The Plaintiffs' Claims in these Proceedings 22 In these proceedings, the plaintiffs seek mandatory orders to enforce what they say are their rights under Clause 14 of the Settlement Deed. 23 The particular circumstances that led to the case are that, on 13 March 2006 the solicitors for the plaintiffs wrote to Strandbags, setting out the terms of Clause 14.1 of the settlement Deed. The letter continued: "We are instructed that: 1. The Company ceased some years ago to provide to Kaye and Shwiel the information set out in paragraphs 14.1(a) and (b). 2. The Company has never provided any financial reports or other information to Kaye or Shwiel, despite being requested to do so. 3. According to the financial report for the Company for the year ended 28 February 2005 (a copy of which was obtained by our clients from a shareholder of the Company): (a) on 28 February 2005, 15,814,800 new partly paid shares were issued to executives of the Company apparently pursuant to an "Executive Share Plan"; and (b) The Company has outstanding 34,076,689 options exercisable at any time up to 30 September 2006. On behalf of our clients, we request the Company's undertaking that it will comply with its obligations clause 14.1 of the Deed by immediately providing the information specified in that clause to enable our clients to be reasonably informed of the current nature content and financial state of the operations of the Company, and by providing such information as relates to the ongoing nature content and financial state of the operations of the Company as that information becomes available in future. In particular, we request that the Company immediately provide the most recent version of the documents specified in clauses 14.1(a) and (b) and provide future versions of those documents on an ongoing basis. Further, our clients contend that the Company's obligations under clause 14.1 extend to the provision of information concerning the issue of shares by the Company and the grant of options by the Company. Accordingly, we request that the Company immediately provide the following information: (a) please provide full details of all shares issued under the Plan, including the recipient, the date of issue, the number of shares, the amount paid and the terms upon which the balance of any partly paid shares is due; (b) please advise when the Company proposes next to consider whether to issue further shares under the Plan; (c) please provide full details of any current options issued by the Company, including the name and address of the holder and the terms upon which the options have been granted, varied or extended. The request for this specific information should not be seen as derogating from the Company's obligation under clause 14.1 to provide relevant information without prior request. We are instructed that, unless by 4.00 pm on Thursday, 16 March 2006, the information sought in this letter is received or suitable undertakings are given that the information will be provided, we are to commence proceedings without further notice to enforce the Company's obligations under clause 14.1 the Deed." 24 The proceedings were begun by a Summons which was filed around 17 March 2006. That Summons sought the following relief: "1. A declaration that the Deed of Settlement made on 7 October 1994 ["the Deed"] is valid. 2. A declaration that the Defendant's obligations under the Deed are continuing and binding. 3. An order that the Defendant provide the Plaintiffs with full details of all shares issued under the Executive Share Plan (dated on or about 28 February 2005), including name of the recipient of any shares, the date of their issue, the number of shares issued, the amount paid for those shares and the terms upon which the balance of any partly paid shares is due. 4. An order that the Defendant provide the Plaintiffs with full details of any current options issued by it, including the name and address of the holder of such options and the terms upon which the options have been granted, varied or extended. 5. An order that the Defendant provide to the Plaintiffs, and continue to provide to them, all of the information described in clause 14.1 of the Deed. 6. Such further or other order as the Court considers fit. 7. Costs." 25 On 17 March 2006 the solicitors for the plaintiffs wrote to the solicitors for the defendant, saying "I note that you act for Strandbags. I enclose, as a matter of courtesy, Summons and Notice of Motion filed in the Supreme Court this morning, which have been sent directly to your client." 26 The solicitors for the defendant wrote back to the solicitors for the plaintiffs, saying: "We refer to your fax letter dated 17 March 2006 which enclosed a Supreme Court Summons under which your clients, Roger Kaye and Hyman Shweil, are named as Plaintiffs and our client, Strandbags Group Pty Limited, is named as Defendant. We confirm that we have been instructed to file a Notice of Appearance, a copy of which will be served on you shortly. We note in Item 3 of the relief claimed under the Summons that there is an order sought for our client to provide you with:- "… full details of all shares issued under the Executive Share Plan (dated on or about 28 February 2005), including name of the recipient of any shares, the date of their issue, the number of shares issued, the amount paid for those shares and the terms upon which the balance of any partly paid shares is due." In this regard, we provide copies of the following:- (a) Form 484 (Charge to Company Details) lodged with ASIC on 16 March 2005 in relation to the issue of shares; (b) Form 281 (Notice that Company intends to Carry Out Buy-Back) lodged with ASIC on 11 November 2005; and (c) Form 484 (Change to Company Details) lodged with ASIC on 14 December 2005 in relation to share cancellation and company buy-back. The above forms have been filed with ASIC and, therefore, this information is publicly available to you. So far as item 4 of the relief claimed under the Summons is concerned, we are instructed that the only current options granted by Strandbags Group Pty Ltd are the options referred to in its financial accounts for the financial year ending 28 February 2005, a copy of which your client already possesses. For your information, the note in the accounts in relation to the options reads as follows:- "On 30th September, 1996 34,076,689 Convertible Redeemable Notes $6,815,338 were converted into share capital at 20c per share, resulting in the issue of 34,076,689 additional shares at 20c fully paid at that date. The holders of the 34,076,689 new ordinary shares have an option to subscribe for 34,076,689 ordinary shares at 20c per share payable in cash. This option is exercisable at any time up to 30 September, 2006." We have been instructed by our client that those options are currently held by the Oceana Group. We further note that, at this stage, you have not filed any evidence in support of your Notice of Motion for Expedition or the Summons for Relief." 27 On 21 April 2006 the solicitors for the plaintiffs sent the solicitors for the defendant a draft Statement of Claim which articulated a case which complained about the fact that, in some fashion, options had come to be exercisable up to 30 September 2006, and about the issuing of the B class ordinary shares. It also complained that the obligations under Clause 14 had not been complied with. It sought a mandatory order enforcing Clause 14, and orders for the defendant to take any steps necessary to cancel or rescind the shares and options that the Statement of Claim referred to, or alternatively an enquiry as to damages. 28 The Statement of Claim which was actually filed in the court on 24 April 2006 sought simpler orders than had the draft. It referred to the Deed of Settlement and referred to Clause 14. It then continued: "5. The Defendant has failed or refused to acknowledge that the Deed is valid and binding upon it. Particulars (a) Letter from Sachs Gerace Lawyers to TressCox Lawyers, dated 17 March 2006; (b) Letter from TressCox Lawyers to Sachs Gerace Lawyers, dated 21 March 2006. 6. The Defendant has failed or refused to comply fully with its obligations under the Deed as set out in paragraph 4 above. Particulars (a) Letter from Sachs Gerace Lawyers to TressCox Lawyers, dated 17 March 2006; (b) Letter from TressCox Lawyers to Sachs Gerace Lawyers, dated 21 March 2006. 7. The First Plaintiff and Second Plaintiff claim: (a) a declaration that the Deed is valid and binding upon the Defendant; (b) an order that the Defendant provide each of the First Plaintiff and the Second Plaintiff from time to time, and also on reasonable request, management financial and business information in relation to the Defendant to enable each of the First Plaintiff and the Second Plaintiff to be reasonably informed of the nature, conduct and financial state of the operations of the Defendant in accordance with clause 14.1 of the Deed. (c) Costs." 29 The defence asserted, and the defendant's counsel today also asserted, that the particulars were inadequate in that the letter from the plaintiffs' solicitors to the defendant's solicitors of 17 March 2006, and the reply of 21 March 2006, did not amount to a failure or refusal to acknowledge that the Deed was valid and binding, or a failure or refusal to comply with obligations under the Deed. 30 Of course, that is right. When the point was taken in court today, Mr Parker, Senior Counsel for the plaintiffs, immediately said that the reference to the letter of 17 March 2006 was erroneous, and that it was a reference to the letter of 13 March 2006 which was intended. When I enquired of Mr Dawson whether there had ever really been any bona fide doubt that it was the matters referred to in the letter of 13 March 2006 which were being complained about, he was unable to inform me that there was any such bona fide doubt. Under those circumstances, I intend to treat the particulars as referring to the letter of 13 March 2006. No sensible person could ever have thought that the letter of 17 March 2006 was what was really intended by the plaintiffs, given its very rudimentary content. 31 The relief which the plaintiffs seek today is not the relief which was articulated in the Statement of Claim which was filed. Wisely, the plaintiffs have chosen a more focused form of relief, rather than the imprecise relief which the Statement of Claim sought. The particular relief which the plaintiffs seek, in their submissions today, is "order the Defendant, within fourteen (14) days, to: (i) advise each of the Plaintiffs when the Defendant proposes next to consider whether to issue further shares under its executive share plan; (ii) provide to each of the Plaintiffs the details of any current options issued by the Defendant, including the name and address of the holder of such options and the terms upon which such options have been granted, varied or extended; and (iii) provide to each of the Plaintiffs the most recent version of the documents specified in clauses 14.1(a) and (b) of the Deed."