Supreme Court New South Wales Medium Neutral Citation: In the matter of Chapmans Ltd ACN 000 012 386 (No 3) [2015] NSWSC 2082 Hearing dates: 20 May 2015 Date of orders: 20 May 2015 Decision date: 20 May 2015 Jurisdiction: Equity - Corporations List Before: Brereton J Decision: Orders 1 and 2 made on 4 May 2015 continue permanently; claims for relief in paragraphs 8, 9, 9A, 10 and 11 of the further amended originating process filed 11 May 2015 dismissed. Catchwords: CORPORATIONS – management and administration – meetings – annual general meeting – recommendations by directors on voting – whether contractual obligation to recommend voting in favour of resolution – conditions precedent and subsequent in deed of release and compromise – whether positive obligation to ensure fulfilment of conditions – construction of deed – interaction with directors' fiduciary obligations. CORPORATIONS – management and administration – meetings – annual general meeting – orders requiring votes to be cast in favour of certain resolutions – absence of personal covenant in deed of release and compromise – effect of (CTH) Corporations Act 2001, s 611, on construction of deed. Legislation Cited: (CTH) Corporations Act 2001, s 12, s 611 Category: Principal judgment Parties: Peter Michael Kenneth Koadlow (plaintiff) Chapmans Ltd ACN 000 012 386 (first defendant) Peter James Dykes (second defendant) Anthony John Dunlop (third defendant) Representation: Counsel: A J Payne SC w G Huxley (plaintiff) W Muddle SC w J Little (defendant) Solicitors: Banki Haddock Fiora (plaintiff) ERA Legal (first defendant) File Number(s): 2015/129742 Judgment (ex tempore) 1. HIS HONOUR: On 25 February 2014 the plaintiff Peter Michael Koadlow, as executor of the estate of Elsie Koadlow (as lender), and the first defendant Chapmans Limited (as borrower), entered into a commercial loan facility agreement whereby the estate advanced to Chapmans a sum of $2.5 million. It seems that the loan was initially for a term of 180 days, but it appears to be uncontroversial that the loan ultimately fell due for repayment on 24 February 2015 (the reference to "24 February 2014" in recital D in the deed of release compromise apparently being a typographical error). As 24 February 2015 approached, the second and third defendants Mr Dykes and Mr Dunlop, being the directors of Chapmans, formed the view that the company would at the least struggle to make the repayment on 24 February, and thus entered into negotiations with the estate for an extension. 2. On 19 February 2015, Chapmans, its two directors, and Mr Koadlow (as executor and personally), entered into a deed of compromise and release of that date, which recited that Chapmans was at that date indebted to the estate for principal, interest and other amounts under the facility agreement in the sum of $2.5 million, which was due for payment and repayment on 24 February 2014 [sic], and that – including in consideration for a forbearance to use [sic – presumably "sue"] – the borrower and lender wished to conditionally compromise the debts in the manner contemplated by the deed with mutual releases. Clause 2 provided for a conditional compromise and release of the debts, in the following terms: 2.1 Conditional compromise and release Subject to the Borrower's compliance with this deed and in reliance upon the Warranties, the Lender conditionally agrees to compromise the Debts with the Borrower by releasing the Borrower from its obligations to pay and repay the Debts and to otherwise comply with the Facility Agreement. 1. The relevant conditions were specified in cl 2.2, which was as follows: 2.2 Conditions of compromise and release The compromise and release under clause 2.1 are subject to the fulfilment or waiver of the following conditions precedent and subsequent (which are for the benefit of the Lender and Mr Koadlow alone): the appointment of Mr Seymour as a director or the Borrower on the date of this deed; the transfer to the Lender of the Tempo Shares in accordance with clause 3, so that the Lender becomes the registered holder of the Tempo Shares within five Business Days after the date of this deed; the issue of the Placement Shares strictly in accordance with this deed and not in breach of the Warranties; the announcement the subject of clause 10.3 is made on the date of this deed; the recommendation of the Borrower's directors (other than Mr Seymour) of Mr Seymour's election as a director of the Borrower at the 2015 AGM; the unanimous recommendation by the Borrower's directors that shareholders at the 2015 AGM vote in favour of resolutions approving, including under ASX Listing Rule 7.1 and s 611 of the Corporations Act 2011, the issue of the Note and the issue of all Shares on any conversion of the Note; the Chapman Directors causing all votes attaching to all Shares that they or their associates control to be voted at the 2015 AGM in favour of resolutions referred to in clause 2.2(f); unless otherwise agreed by the Lender, the 2015 AGM is held by no later than 31 May 2015 and is not postponed; Mr Seymour is elected as director of the Borrower at the 2015 AGM; the Shareholder approval resolutions contemplated by this deed are passed by the requisite majorities at the 2015 AGM; and the issue of the Note to the Lender strictly in accordance with this deed and not in breach of the Warranties. 1. Clause 2.3 provided as follows: 2.3 Satisfaction The Borrower must take all steps and do such things as to satisfy the conditions precedent and subsequent by their stated dates, if any. Unless waived by the Lender, should any of them not be so satisfied the Lender may, amongst other things, terminate this deed by written notice to the Borrower with immediate effect. 1. The mutual releases are to be found in cl 6, which provided as follows: Mutual Releases 6.1. Mutual Releases 6.1.1. Subject to clause 6.1.2 and to strict compliance by the Borrower with its obligations under this deed, each of the Lender and Mr Koadlow releases each of the Borrower and Chapmans Directors from any Claim, including in respect of any matter whatsoever occurring before the date of this deed. 6.1.2. The Borrower continues to be indebted to the Lender under the Facility Agreement for that part of the Debts that is not compromised by the issue of either the Tempo Shares (that part being in an amount of $1,200,000) or the Placement Shares (that part being in an amount of $100,000) until the Note issues in accordance with clause 5. 6.1.3. On and from entry into this deed, each of the Borrower and the Chapmans Directors releases each of the Lender and Mr Koadlow from any Claim. 6.2. Action bar Subject to compliance with its obligations under this deed, a party may plead the terms of this deed as an absolute bar to any Claim by another party. 1. Clause 12.7 was as follows: 12.7 Further assurance Each party must promptly sign all documents and do all things that the other party from time to time reasonably requests to effect, perfect or complete this deed and all transactions under and incidental to it. 1. The circumstances and negotiations which culminated in the execution of the deed of compromise and release are the subject of dispute. In essence, and over-simplified, the directors of Chapmans say they were pressured and even intimidated into executing it by one Mr Milne, who was representing the plaintiff in the negotiations. Those allegations are denied by Mr Milne. Although Mr Seymour was also involved in some of the negotiations in question and was not called, and although Mr Milne conceded to having a conviction for dishonesty, I found his evidence far more credible than that of the second and third defendants, and to the extent anything turns on the difference I would prefer Mr Milne's version to that of the second and third defendants. However, ultimately I think little if anything turns on those questions of fact, although more may turn on whether the directors genuinely hold the opinions which they now profess. 2. In April 2015, when the time arrived for the giving of notice of Chapmans' Annual General Meeting, at which the resolutions referred to in condition 2.2(f) were to be considered, the directors appear – so it emerged in cross-examination – to have at least begun to form the view that it might not be in the interests of the company to proceed with the issue of the convertible note. In circumstances referred to in the interlocutory judgment given in these proceedings on 4 May 2015 (see [2015] NSWSC 1313), a notice of meeting was issued which did not include provision for those resolutions. At that time, the omission of notice of that resolution was said to be justified by the failure of the plaintiff to provide necessary information. That triggered the original application to the Court, which resulted in the interlocutory mandatory injunctions pronounced in that earlier judgment. Those orders were duly complied with, and an amended notice of meeting was issued on 6 May 2015 which includes, as resolution 7, the resolutions required to satisfy condition 2.2(f). 3. In the accompanying explanatory memorandum appears the following: Recommendation of each Director as to whether Shareholders should approve these Resolutions Pursuant to the CR Deed, each of the Messrs Dykes and Dunlop are required to recommend that Shareholders approve this resolution. In compliance with this requirement, they recommend the Shareholders approve Resolution 7. The following statement and recommendation has been issued by Craig Seymour: Mr Seymour, the director appointed as nominee of the Estate of Elsie Koadlow, wishes to note that he is not bound by the Court Orders and is not a party to the CR Deed. Mr Seymour believes that he is unable to assess whether the convertible note issue is fair in the absence of any valuation of the Digital4ge shares, but otherwise believes that the issue is reasonable. Mr Seymour supports the issue of the convertible note on the basis that, if the convertible note is issued and converted and if a change in control of Chapmans Ltd occurs and if the forced sale provision of the Digital4ge shares are triggered, any sale will take place at market value as determined by an independent valuer. Alternatively, if the forced sale provisions are not triggered under the same scenario, then Chapmans Ltd will continue to hold the Digital4ge shares. Accordingly, Mr Seymour's view is that the forced sale provisions with respect to the Digital4ge shares are immaterial to his decision to support the issue of the convertible note. 1. That was followed by the following analysis of the fairness and reasonableness of the proposed issue of the convertible note: An analysis of whether the proposed issue of the Convertible Note and the Conversion Shares to the Lender, the subject of this Resolution, is fair and reasonable to the non-associated Shareholders The Directors consider that: (A) An offer is considered 'fair' if the value of the other price or consideration is equal to or greater than the value of the securities that are the subject of the offer. The comparison should be made assuming a knowledgeable and willing, but not anxious, buyer and a knowledgeable and willing, but not anxious, seller acting at arm's length; and (B) An offer is considered to be 'reasonable' if it is 'fair'. If the offer is 'not fair' it may still be 'reasonable', if the Directors believe that there are sufficient reasons for security holders to accept the offer in the absence of any higher offer. Given the extent of the voting power the Lender will obtain if it exercises its right to convert the Convertible Note, and if the Share issues contemplated by Resolutions 4, 5 and 6 do not occur, the absence of any premium reflected in the conversion price (given that the conversion price will be at a discount to the VWAP at the time of conversion) leads the Directors [to] consider that the issue of the Convertible Note and the Conversion Shares the subject of this resolution is not fair. In the event that the Convertible Note is converted by the Lender, the debt will be extinguished which will improve significantly, the Company's position in relation to solvency. It is for this reason, the Directors, notwithstanding the determination that the proposed issue of the Convertible Note and Convertible Shares is not fair, consider that the issue and the terms of the issue are reasonable. However, it is important to note that if the Convertible Note is not converted by the Lender, and the Lender seeks full payment of the face value and interest accrued on 31 May 2015, the solvency of the company will need to be addressed. It is for this reason, the directors have sought approval under Resolutions 4, 5 and 6 to give the Company the flexibility to raise equity security funding to repay the debt. Further to this, notwithstanding approval under Resolution 4, there are no guarantees that the placement contemplated by that Resolution will proceed. Nevertheless, the Directors will continue, between the date of this Notice and the date of the Meeting, to obtain commitments from parties to provide equity finance to the Company and if appropriate, will notify Shareholders as and when this occurs. 1. The proceedings were set down for final hearing today of a further amended originating process, whereby the plaintiff sought the confirmation on a final basis of the interlocutory injunctions already given and additional relief, of which claims 9A, 10, 11 and 12 were not pressed. That left – in addition to the orders already made on an interlocutory basis – claims 8 and 9, which were as follows: An order that each of the Second and Third Defendants recommends that the members of the First Defendant vote in favour of the Resolution at the Annual General Meeting of the members of the First Defendant convened to be held on 29 May 2015. An order that each of the Second and Third Defendants causes all votes attaching to shares in the capital of the First Defendant that they or their associates (within the meaning of section 9 of the Corporations Act 2001) control to be voted at the Annual General Meeting of the members of the First Defendant convened to be held on 29 May 2015 in favour of the Resolution. 1. Although the case raises some interesting and not straightforward issues about the intersection of contractual and fiduciary duties, I have come to the conclusion that it is unnecessary to resolve all of those issues and that, given the imperative of a speedy decision, it is possible to dispose of the application on a relatively narrow basis. 2. As for the claim in paragraph 8 of the originating process, it rests on contract and seeks to enforce what is said to be a contractual obligation of the second and third defendants to make a recommendation to shareholders that they vote in favour of the proposed resolution. The only specific reference to such a recommendation in the compromise and release deed is to be found in cl 2.2(f), where it appears in the list of conditions precedent and subsequent to the conditional compromise and release. At least at that point, it is merely a condition, non-satisfaction of which may entitle the lender estate to rescind the deed. 3. In cl 2.3, however, the borrower – that is to say, Chapmans – assumes an obligation to take all steps and do all such things to satisfy the conditions precedent and subsequent by their stated dates, if any. That may well impose a contractual obligation on the borrower to take positive steps to have the condition satisfied, although even then it is to be noted that the clause continues: Unless waived by the lender, should any of them not be so satisfied the lender may, amongst other things, terminate this deed by written notice to the borrower with immediate effect. 1. Ultimately, however, the reference to "amongst other things" probably means that there is both a contractual obligation on Chapmans to satisfy – or at least endeavour to satisfy – the condition, and a right to terminate if they are not satisfied. 2. However, the borrower referred to in cl 2.3 is Chapmans. Clause 2.3 does not itself impose any obligation on the directors, who are separately parties to the deed and who are separately dealt with in the deed where it is sought to impose obligations or confer benefits on them (see, for example, cl 6.1.1, cl 6.1.3, recital D, cl 2.2(g), cl 7.6). It was submitted for the plaintiff that cl 12.7 had the practical effect of obliging the directors also to satisfy or take steps to satisfy the requisite conditions, but in the absence of specific reference to the directors in cl 2.1, I do not accept that that is so. 3. Moreover, there is very good reason why the parties would not have incorporated an obligation on the directors to make the recommendation referred to in cl 2.2(f). It is notable that, while reference is made to them, using the defined term "Chapman directors", in cl 2.2(g), a similar reference does not appear in cl 2.2(f). A significant reason for that is that in making a direction to shareholders, directors are obliged to act in conformity with their fiduciary obligations and in the interests – and genuinely and honestly in the interests – of the shareholders as a whole. That is not an obligation which could permissibly be constrained by some personal contractual undertaking by the directors. If there were any such contractual constraint on the directors, it would have to be subject to a "fiduciary carve-out" if it were not to offend public policy. 4. Those considerations, in my mind, demonstrate why the parties would not have included in this deed a contractual obligation on the directors to make such a recommendation, as distinct from a condition which would provide a right of rescission in the event that they do not do so. There may be alternative bases on which, were the directors not to make such a recommendation, they could be said to have, for example, endeavoured to frustrate the deed or interfered with contractual relations under it. I need not consider them because, at least at this stage, there has been a unanimous recommendation by the directors that shareholders at the AGM vote in favour of that resolution. That unanimous recommendation is to be found in cl (j) of the explanatory memorandum, set out above. 5. In their affidavit evidence, the directors have deposed to the effect that they no longer consider the issue of the convertible note or a resolution approving it to be in the interests of shareholders, and that they do not believe that they can recommend the resolution for the issue of the convertible notes to the shareholders "as being a fair deal". However, they have already made that recommendation. The relief sought, at least until the very last minute, was a mandatory injunction requiring them to make a recommendation which they had already made. 6. My decision on this issue should in no way be taken as sanctioning the proposition that the directors may properly now seek to undermine or recant from that recommendation; I decide that neither way for present purposes. But it seems to me that in circumstances where they are not contractually bound to make such a recommendation, and where they have in any event already made it, there is no basis to grant the injunction sought in paragraph 8, or an injunction to like effect. 7. The same analysis applies in respect of claim 9, in that the directors have not personally covenanted to vote their shares in the manner contemplated. The plaintiff's argument might be slightly stronger in this case than in respect of the recommendation, because of the reference to "the Chapman directors" in cl 2.2(g); but ultimately the overall analysis is the same. There is no covenant by the Chapman directors to cause all votes attached to their shares to be voted in any particular way. 8. It was argued in this respect, and perhaps more so in respect of the recommendation condition, that the directors represented and were an emanation of the company, but that is not correct. As was submitted for the defendants, the company could not require or compel the directors to make any particular recommendation. The law confers on the director qua director responsibilities towards the company in that respect, and an order that the company perform the deed would not involve the directors necessarily being bound to make a positive recommendation. 9. Further as to the claim in cl 9, the provisions of (CTH) Corporations Act 2001, s 611, item 7(a), have the effect that votes on the relevant resolution cannot be cast by the person making the acquisition, which in this case is the plaintiff estate, or by that person's associates. The notion of an associate is defined in s 12 and, relevantly for present purposes, s 12(2)(b). Conditions 2.2(e) and (i) pertain to the composition of the board of the company by seeking to influence the composition of that board in requiring the installation of Mr Seymour as a director. Ultimately, counsel for the plaintiff accepted, in the course of submissions, that that made the Chapman directors and the estate, relevantly, associates, and that the Chapman directors would not be entitled to vote under the provision to which I have referred, and that that was fatal to the claim for relief in prayer 9. 10. Accordingly, it seems to me the claims for both prayers 8 and 9 fail. The Court orders that: 1. Orders 1 and 2 made on 4 May 2015 continue permanently; and 2. The claims for relief in paragraphs 8, 9, 9A, 10 and 11 of the further amended originating process filed 11 May 2015 be dismissed; Costs 1. In principle, the defendants should pay the plaintiff's costs of the claims for relief in paragraphs 6 and 7 of the originating process, including the application for interlocutory relief, and the plaintiff should pay the defendants' costs of the other claims for relief. The question is whether that must be left to an assessor to work out if the parties cannot agree, or whether the Court should avoid the additional costs and time that that would inflict on the parties by making a less precise and more broad-axe order, which will do broad if imprecise justice between the parties. 2. As it seems to me, the imbalance between the two countervailing costs entitlements, though there may be some, is not great. The plaintiff's costs will include those of the initiating process and filing fees, and a hearing fee, which will tilt the balance somewhat in its favour. The defendants' side of the equation, on the other hand, will be increased by the additional evidence that has been adduced on the final hearing. 3. In broad terms, I think rough justice will be done between the parties if there is no order as to costs, to the intent that each party bear its own 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. Decision last updated: 18 August 2016