Totally Raw Pty Ltd v Pasado Pty Ltd
[2014] QDC 19
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- Unreported Judgment
- Appeal Determined (QCA)
- Totally Raw Pty Ltd v Pasado Pty Ltd[2014] QDC 19
- Add to List
Totally Raw Pty Ltd v Pasado Pty Ltd[2014] QDC 19
Totally Raw Pty Ltd v Pasado Pty Ltd[2014] QDC 19
DISTRICT COURT OF QUEENSLAND
CITATION: | Totally Raw Pty Ltd & Perfidelis Pty Ltd v Pasado Pty Ltd [2014] QDC 19 |
PARTIES: | TOTALLY RAW PTY LTD (ACN 059964886) and PERFIDELIS PTY LTD (ACN 110167872) v PASADO PTY LTD (ACN 192423834) |
FILE NO/S: | Maroochydore D61/2009 |
DIVISION: | Civil |
PROCEEDING: | Claim |
ORIGINATING COURT: | Maroochydore District Court |
DELIVERED ON: | 14th February 2014 |
DELIVERED AT: | Maroochydore District Court |
HEARING DATE: | 3rd to 5th February 2014 |
JUDGE: | Robertson DCJ |
ORDER: | The plaintiffs are entitled to the declaration set out in paragraph 1 of the claim. the parties to prepare orders and to make submissions on costs |
CATCHWORDS: | CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – INTENTION TO CREATE CONTRACT – UNCERTAINTY AND INCOMPLETENESS. OF CONTRACT – OTHER MATTERS – whether signed minutes of a director’s meeting signed by the parties constituted a binding share transfer agreement – where defendant agreed to exchange shares for shares in an associated company being transferred to him – where defendant claims the minute is void for uncertainty and that the parties did not intend on that date to enter into a binding legal agreement. Cases considered: Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 N.S.W.L.R. 540 Jelekainen v Frikton [2007] QSC 098 Mermaids Café Bar Pty Ltd v Elsafty Enterprises Pty Ltd [2010] QCA 271 Monarch Building Systems Pty Ltd v Quinn Villages [2006] QCA 2010 Pagnan SpA v Feed Products Limited [1987] 2 Lloyds’ Rep 601 Toyota Motor Corporation Australia Limited & Anor v Ken Morgan Motors Pty Ltd & Ors [1994] 2 VR 106 |
COUNSEL: | Mr C Jennings for the Plaintiff Mr C Wilson for the Defendant |
SOLICITORS: | Sajen Legal for the Plaintiff Rigby Lawyers for the Defendant |
- [1]These proceedings focus on the meaning and legal effect of a minute of meeting of the directors of Stratogen Holdings Pty Ltd (“SH”) dated 2 May 2008. The minute is signed by Hugh Ramsay (the sole director and shareholder of the first plaintiff) (“Ramsay”); Barry Elms (the sole director and shareholder of the defendant) (“Elms”); and Martin Rafter (the sole director and shareholder of the second plaintiff) (“Rafter”).
- [2]Ramsay and Rafter claim that the minute constitutes a binding share transfer agreement whereby Elms agreed to transfer his shares in SH in exchange for shares in an associated company. The plaintiffs seek declarations to that effect and specific performance of the share transfer agreement. Elms claims that the minute is void as it fails to comply with the terms of a Shareholders Agreement entered into by the parties in 2005. Alternatively he claims that the share transfer agreement is void for uncertainty and that the parties did not intend on that date to enter into a binding legal agreement.
- [3]The issues narrowed significantly at the start of the hearing on 3 February 2014 when Elms abandoned claims in his defence that he had signed the minute under duress from Ramsay and Rafter and/or that it would be harsh or unconscionable to enforce the share transfer agreement. A second amended defence was filed at the start of the hearing and Elms completely abandoned his counterclaim.
Background
- [4]In May 2005, pursuant to a Shareholders Agreement signed by all parties, they agreed to conduct an accountancy and financial planning business which in effect, represented an amalgamation of the three principals’ accountancy practices. The corporate structure of the business is accurately represented in Exhibit 4, a diagram prepared by Elms for the purposes of this litigation.
- [5]For present purposes it is sufficient to note that SH was owned in equal shares by Elms, Rafter and Ramsay. Stratogen Pty Ltd trading as Stratogen Chartered Accountants (which was the registered tax agent for the business, and which provided accountancy and taxation services) and Stratogen Financial Planning Services Pty Ltd (“SFP”) (which conducted financial planning services) were wholly owned subsidiaries of SH. SH also acquired at the time of the formation of the business a 30% stake in Stratogen Insurance (Mount Isa) Pty Ltd (“SI”), and a 70% stake in Stratogen Financial Planning (Mount Isa) Pty Ltd (“SFPMI”).
- [6]It is common ground that, at the time of the formation of SH and the associated corporate structure, it was expected and understood between all three men that their existing accountancy practices would bring into the new business in the order of $750,000 per annum in fees.
- [7]It is common ground that, at or about the time the new business was formed, SH entered into five equipment leases with CBFC Leasing, four of which were guaranteed by Elms’ then wife, and one by him. Initially, the CBA provided an overdraft facility but later in 2006, the SH group refinanced through Bankwest; and although no documents relating to these arrangements have been tendered, Mr Rafter gave evidence in cross-examination that the Bankwest facility was $500,000 and all three men had given personal guarantees and their respective companies had given charges as security for that facility.
- [8]It is common ground that in 2006 the business was facing significant cashflow problems, and that Elms was not bringing in the $750,000 as anticipated. As a consequence, it was agreed that Elms would take a reduced shareholding of 28.74% in SH with corresponding increases in the shareholdings of Ramsay and Rafter to 35.63%. The complete A.S.I.C. records are not in evidence, but this change in shareholding was certainly in place by 1 November 2006 (“the 2006 share transfer”).
- [9]I accept Mr Ramsay’s evidence that in April 2007, at a lunch at Noosa, he raised with Elms the prospect of Elms looking to retire. Mr Ramsay’s unchallenged evidence, which I accept, was to the effect that Elms reacted favourably, and one of the options raised was the prospect of Elms being bought out by one of the senior accountants in the business. Mr Elms, in his evidence, appeared to challenge this recollection, suggesting among other things that both men discussed their respective retirements.
- [10]Certainly by September 2007 as evidenced by the document behind tab 17 in Exhibit 1 Mr Elms made a formal announcement to staff of his intention to move towards retirement.
- [11]It is common ground that from around this time, there were discussions (probably mainly between Elms and Ramsay) about Elms moving towards retirement from the business and how this could be achieved.
- [12]In early 2008, Rafter and Ramsay were aware that Elms was going overseas for six weeks on 13 March 2008. Mr Elms had also told them that he had prostate cancer and that he was scheduled to have surgery at the end of May 2008.
- [13]I accept that Ramsay and Rafter were anxious to finalise arrangements for Elms to withdraw from the accountancy business.
- [14]On 7 February 2008 Ramsay or Rafter gave Elms the letter bearing that date behind tab 20 in Exhibit 1. Relevantly it is in these terms:
“Dear Barry,
Re: Equity Stratogen Holdings Pty Ltd
We have been trying to negotiate your transition from the accountancy business for sometime, with previously agreed deadlines/timeframes passing without any action or agreement. … As we have previously expressed to you your continual involvement in the accountancy business is, among other things, holding back interest for existing team members in acquiring equity. This buy-in you will agree is essential on many fronts including succession planning and key personnel retention.
The purpose of this letter is to formally outline a proposal for you to realise your equity in the accountancy business.
We have previously tabled valuations for the businesses operated by Stratogen Holdings Pty Ltd for your comment and in the absence of any comment from you we assume you are in agreement. The proposal is based on these valuations. You will appreciate and agree that due to the underperformance of our business neither the cashflow generated nor current business value are sufficient to contemplate any cash payment to you. Instead we are putting forward an equity swap as outlined below essentially swapping your equity in Stratogen Holdings Pty Ltd for additional 5% equity in Stratogen Financial Planning Pty Ltd.
We believe the following steps will achieve the desired outcome:
- remove Stratogen Financial Planning Pty Ltd from the Stratogen Holdings Pty Ltd group using the demerger relief concessions to avoid any tax consequences, and
- your shares in Stratogen Holdings Pty Ltd are ‘swapped’ for shares in Stratogen Financial Planning Pty Ltd …
We require your in principle agreement to the above forthwith. Once received we can then begin the necessary processes and documentation.”
- [15]Both Rafter and Ramsay signed the letter.
- [16]I accept that a management meeting was held on 12 February 2008 between Elms, Rafter and Ramsay. Other staff, involved in other aspects of the business, attended initially then left. I am prepared to proceed on the basis that the handwritten points 1-8 on the copy of the 7 February letter behind tab 20 in Exhibit 1 were written by Mr Elms during the meeting. It is common ground that the issue about Mr O'Donnell (who was a financial planner who effectively ran SFP) was raised by Mr Elms, but that Mr Rafter shut down discussion as he believed the equity swap referred to in the letter needed to be agreed upon first.
- [17]At that meeting Elms agreed “in principle” to taking an increase in SFP in exchange for “Accounting” i.e. SH. As noted above, Ramsay and Rafter had proposed that SFP be removed from the group prior to the share swap, and Elms agreed “in principle” to what was effectively a demerger of the company from the group. The issues still to be resolved from Elm’s point of view related generally to the values to be ascribed to the relevant companies (or the parties’ interests in them), the approach to SFPMI, a new or amended shareholder agreement, and to retaining the services of Rob O'Donnell with SFP. Elms then went overseas and returned in late March.
- [18]On 16 April 2008 Elms forwarded the document behind tab 25 in Exhibit 1 by email to Rafter and Ramsay. Ramsay said that when he read this, he was very pessimistic about the parties resolving the issues between themselves. Sometime after this (probably still in April), Elms supplied to the others the document behind tab 24 in Exhibit 1. When Mr Elms was cross-examined about this document, he gave some surprising responses. He asserted that it was in response to a document the others had prepared a few days before. Certainly the letter of 7 February refers to the tabling of previous valuations but none of the parties have any recall about previous valuations. Mr Elms asserted that his production of that document was in response to a document the others had prepared a few days before. No such document has been produced nor was it suggested to Ramsay and Rafter that there was such a document or documents. Mr Elms emphatically denied that it was a valuation. When pressed, he conceded that it was a crude first step along the way to valuing the company. I accept the evidence of Rafter and Ramsay that it is a form of valuation using a method known as the future maintainable earnings method. Ramsay said he was surprised to receive the document from Elms, and that it gave him some optimism that they could indeed resolve the issue of the share swap.
- [19]It is common ground that Rafter then prepared the document behind tab 26. As explained in evidence, he reworked Elms’ figures in the tab 24 document to remove $80,000 work in progress pre-30 June 2007 in relation to which invoices had not been raised, and which he deemed unrecoverable; $30,000 in pre-30 June 2007 debtors deemed bad; and an adjustment was made for $21,000 in unpaid partners’ remuneration. Whereas in the tab 24 document Elms appears to have valued his 28.7% interest in the accountancy business i.e. SH at $360,000, based on a value of $1,250,540 using a multiplier of 5; Rafter, using a multiplied of 2.75 and allowing for the adjustments, valued SH at $130,465. Nothing turns on this, as Elms accepts that that was an accurate valuation for reasons I will later expose.
- [20]It is common ground that without formal notice to Elms, a meeting of all three was convened at 12.30 p.m. on 2 May 2008 and that a copy of the tab 26 document behind tab 27 was handed to Elms just before, or just after the meeting commenced.
- [21]There is very little evidence, apart from the critical minute itself and the contents of the letter dated 2 May 2008, as to what was discussed at the meeting. Mr Ramsay and Mr Rafter both fairly acknowledged little memory of oral discussions after almost six years. Mr Elms was a little more emphatic about recalling issues discussed but he too conceded fairly to problems in recall in what was discussed, apart from what is referred to in the documents.
- [22]It is common ground that Ramsay said at the start of the meeting words to the effect that he wanted the issues raised in the letter settled today and that he would not leave until it was resolved. All parties agree that they went through the 2 May letter line by line; and agreed on the valuation of SH after the adjustment. The copy of the 2 May letter behind tab 27 which is Elms’ document has notes on it in his handwriting which indicates ticks and some queries that were raised, none of which were pressed by him.
- [23]Rafter then left the room, obtained a laptop, and typed up the minute, and each of them signed it. All agreed that the meeting lasted about an hour. Issues raised by Elms, on the evidence, on the last occasion before 2 May, in particular the Rob O'Donnell share equity issue and a new SFP Shareholders Agreement were not raised by Elms and not discussed.
- [24]The minute (the share transfer agreement) signed on 2 May 2008 by all parties is in the following terms:
“
Minutes of meeting
of the Directors of Stratogen Holdings Pty Ltd
Held at 1/59 Mary Street, Noosaville
on 2 May 2008 at 12.30 p.m.
Present: H D Ramsay (Chairman)
B A Elms
M P Rafter
Company Valuation
A valuation of the company’s businesses, excluding Stratogen Financial Planning (Mount Isa) and Stratogen Insurances (Mount Isa), was tabled for consideration.
The methodology of the valuation and the adjustments and assumptions therein were agreed to.
All agreed to the valuation of Stratogen Holdings of $130,464 as tabled.
Stratogen Financial Planning (Mount Isa) and Stratogen Insurances (Mount Isa)
Agreed to spinoff these two entities and that the shares be acquired by Stratogen Financial Planning Pty Ltd via a script (sic) for script exchange.
It was agreed to instruct Peter Cook to arrange the share transfers as of 1 May 2008.
Pasado Pty Ltd (as trustee) Equity in Stratogen Holdings Pty Ltd
It was agreed that the equity held by Pasado as trustee in Stratogen Holdings Pty Ltd be exchanged with Totally Raw as trustee and Perfidelis as trustee for shares in Stratogen Financial Planning Pty Ltd to equalise the shareholding therein to 1/3rd to each of the existing shareholders.
Closure
There being no further business the meeting was closed at 1.30 p.m.”
The minute is signed by all parties.
The issues narrowed
- [25]In his final submission, Mr Wilson for the defendant concentrated on the Rob O'Donnell issue and the SFP Shareholders Agreement issue in support of his submission that the share transfer agreement was uncertain and incomplete. The relevant pleading is 6A of the second amended defence and counterclaim filed 3 February 2014 by leave of the court at the commencement of the trial. 6A sets out 13 reasons why Elms says the share transfer agreement is uncertain and incomplete. The O'Donnell issue and the SFP Shareholders Agreement issue are pleaded at 6A(l) and (j) respectively, and were only added in the pleading filed on the first day of the hearing. A new 6B alleges that the parties did not intend to enter into a concluded agreement for the sale of Elms’ interest in SH.
- [26]Mr Wilson did not press any of the other matters pleaded in 6A(a)-(i) and (m), as being of such importance as to render the share transfer agreement uncertain or incomplete, apart from a passing reference to the lease guarantees and the Bankwest debt guarantee which he conceded were not raised by his client in the negotiations leading up to 2 May 2008.
- [27]So the real issue is whether in signing the minute dated 2 May 2008 the parties intended to make a concluded bargain on terms that were capable of forming a binding contract.
- [28]The intention of the parties is to be tested objectively, by reference to what a reasonable observer would have concluded in all the surrounding circumstances and in particular the actions and words of the parties. The observations of Gleeson CJ (as his Honour then was) in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 N.S.W.L.R. 540 at 548 are often referred to in cases such as this involving disputes about intention to contract and uncertainty of terms. In Toyota Motor Corporation Australia Limited & Anor v Ken Morgan Motors Pty Ltd & Ors, Brooking J, in the Appeal Division of the Victorian Supreme Court, (at 131) cited the following passage from the judgment of Gleeson CJ:
“… Gleeson CJ observed that the question of intention to make a concluded bargain:
‘... is not the same as, although in a given case it may be closely related to, the question whether the parties have reached agreement upon such terms as are, in the circumstances, legally necessary to constitute a contract.
To say that parties to negotiations have agreed upon sufficient matters to produce the consequence that, perhaps by reference to implied terms or by resort to considerations of reasonableness, a court will treat their consensus as sufficiently comprehensive to be legally binding, is not the same thing as to say that a court will decide that they intended to make a concluded bargain. Nevertheless, in the ordinary case, as a matter of fact and commonsense, other things being equal, the more numerous and significant the areas in respect of which the parties have failed to reach agreement, the slower a court will be to conclude that they had the requisite contractual intention.’
His Honour had a little earlier said this:
‘… it will normally be of importance that the court have an understanding of the commercial context in which the dispute arises, and a most significant feature of that context will relate to the subject of which the parties regard, and ordinarily be expected to regard, as matters to be covered by their contract. … In many cases however, of which the present is a good example, there is a need for evidence in one form or another as to what subjects would be regarded as requiring agreement between the parties.’”
- [29]In Monarch Building Systems Pty Ltd v Quinn Villages [2006] QCA 2010 Williams JA wrote (at [47]):
“[47] The law applicable when the court is required to determine whether or not there was a contract between the parties is clear:
In my view the law was succinctly stated by Bingham J at first instance in Pagnan SpA v Feed Products Limited [1987] 2 Lloyds’ Rep 601 at 611 where he said:
‘Where the parties have not reached agreement on terms which they regard as essential to a binding agreement, it naturally flows that there can be no binding agreement until they do agree on those terms ….But just as it is open to parties by their words and conduct to make clear that they do not intend to be bound until certain terms are agreed, even if those terms (objectively viewed) are of relatively minor significance, the converse is also true. The parties may by their words and conduct make it clear that they do intend to be bound, even though there are other terms yet to be agreed, even terms which may often or usually be agreed before a binding contract is made … .’” (citations not included)
- [30]In essence Mr Wilson argues that the Rob O'Donnell issue and the SFP share holder issue were, viewed objectively, essential terms of any agreement whereby Elms was to move out of the accountancy business, such that the failure to deal with them renders any agreement falling into uncertainty and would lead to the conclusion that the parties did not have the intention to reach a binding agreement on 2 May 2008. He submits that it defies common sense and reasonableness to draw the inference that his client had simply abandoned these two issues.
- [31]In my opinion, this is a clear case in which the parties intended to be bound immediately by the terms of the agreement contained in the Share Transfer Agreement.
- [32]There is no suggestion (now) that Mr Elms was a party to the negotiations on 2 May who was at some commercial disadvantage, or that he lacked commercial experience and acumen. His note to staff dated 20 September 2007 sets out his qualifications and extensive business and accounting experience over many decades. He impressed me as a feisty man with strong views and a healthy respect for his own ability.
- [33]The terms of the agreement itself bespeak the language of contract. Mr Wilson referred frequently to the three lines in the minute relating to the transfer of equity from SH to SF. That submission ignores the whole document which should be read as a whole.
- [34]Although perhaps trite, as Chesterman JA observed in Mermaids Café Bar Pty Ltd v Elsafty Enterprises Pty Ltd [2010] QCA 271 [15]:
“The act of signing is significant. The execution of a document normally connotes that the party signing gives approval and assents to it.”
- [35]It is true, as Mr Wilson observed, that the two issues said by him to be essential for the formation of a binding agreement were raised by Mr Elms at the 12 February 08 meeting and again in the 16 April document. As I have noted the Rob O'Donnell issue was not pursued on 12 February as Mr Rafter wanted the equity swap issue resolved first. Mr Elms did not demur, but raised the issue again in the April document. Mr Rafter made notes of the 12 February meeting. The Shareholder Agreement is not mentioned. Both issues were raised again in the April document and are dealt with under specific headings, that is, the O'Donnell issue and the Shareholder’s Agreement.
- [36]Viewed objectively, and particularly having regard to the actions of the parties, plus delivery of the letter dated 7 February to Elms, the critical issues were the mechanism of the equity swap and the demerger of SFP from SH and values to be agreed in relation to both companies.
- [37]Mr Elms says now the O'Donnell issue was particularly important to him because O'Donnell was the manager of SFP. None of the parties were licensed to give financial planning advice.
- [38]Rather than being compelled to draw the inference that Elms abandoned the two issues, the more compelling inference is that, given the attitude expressed by Mr Rafter at the February meeting about putting off the O'Donnell issue, and despite Elms raising it again in the April document, he was content as at 2 May 2008 to leave these issues to be decided later. That he regarded value as the most important issue (given that from 12 February 2008 he had expressed in principle agreement with a share swap proposal), is strongly suggested by his production of the set of figures behind tab 24 in Exhibit 1, and his delivery of those calculations to the others. He accepts that this was after the 16 April document was sent to Rafter and Ramsey.
- [39]In Jelekainen v Frikton [2007] QSC 98 Muir J (as his Honour then was) cited a passage from the Pagnan SpA case:
“It is for the parties to decide whether they wish to be bound and, if so, by what terms, whether important or unimportant. It is the parties who are, in the memorable phrase coined by the Judge, ‘the masters of their contractual fate’. Of course the more important the term is the less likely it is that the parties will have left it for future decision. But there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later. It happens every day when the parties enter into so called ‘heads of agreement’.”
- [40]Another telling factor is that Elms did not raise these issues (or indeed the leasing or Bankwest issue) at the 2 May meeting. Mr Wilson says that is because the meeting was all about value. It was, but there is no reason why Mr Elms could not have raised these issues as being essential terms that had to be agreed before an agreement could be finalised on the share swap if that was indeed his intention.
- [41]I think it is clear that by the May meeting Mr Elms did not in truth regard these issues as essential terms to be resolved prior to the formation of the Share Transfer Agreement.
- [42]The meeting was held on a Friday prior to the long weekend. Over the weekend Mr Elms reflected on the meeting and regretted signing the minute. He wanted to rescind the minute. At the first opportunity, he instructed his solicitor to write the letter dated 12 May 2008 which is behind tab 36 in Exhibit 1. This letter does not raise the O'Donnell or the Shareholders Agreement issue or to the guarantee issue. It does not allege that the Share Transfer Agreement was uncertain or incomplete. In essence it alleges that because of duress he signed and notice was given of rescission of the minute.
- [43]In my opinion an enforceable share transfer agreement was reached by the parties as evidenced by the signed minute dated 2 May 2008.
- [44]Mr Wilson rightly conceded that if I was against him on this issue, the argument concerning failure to comply with clause 8 (in particular) of the May 2005 Shareholders Agreement, could not succeed. That is for two reasons essentially. The prohibition contained in 8.1 is subject to the words “Unless otherwise agreed by the other Shareholders he collectively hold not less than 75% of the issued shares in SH) …”; and 8.5 is subject to the words “unless the Shareholders unanimously determine otherwise … .
- [45]Clearly by implication the relevant shareholders did agree by signing the valid Share Transfer Agreement on 7 May 2008.
- [46]Mr Elms frankly agreed in any event that when the 2006 share transfer took place, clause 8 was not complied with and he left all that to Rafter.
- [47]The plaintiffs are entitled to the declaration set out in paragraph 1 of the claim.
- [48]Mr Wilson made no submissions about the plaintiff’s entitlement to specific performance in the event that I found against his primary submission. For completeness, none of the issues pleaded in 6A(a) to (i), (k), or (m) militate against my primary conclusion. The guarantees were never raised by Elms prior to the agreement being reached: and I accept Rafter and Ramsay’s evidence that they accepted Elms’ estimate of the value of SFP contained behind tab 24, Exhibit 1 although this was not discussed. Issues like time for performance or Elms position as a director and SH can readily be implied, and were not necessary for certainty in the circumstances here for a price to be nominated for Elms’ shares in SH.
- [49]I invite the parties to prepare orders and to make submissions on costs.