Carrington Cotton Co Ltd, Re [1999] QSC 114

State Reporting Bureau 3S-Ql.) ,. TRANSCRIPT OF PROCEEDINGS Copyright in this transcript is vested in the Crown. Copies thereof must not be made or sold without the written authority of the Director, State Reporting Bureau. SUPREME COURT OF QUEENSLAND CIVIL JURISDICTION HELMAN J No 11984 of 1998 IN THE MATTER OF THE CORPORATIONS LAW and IN THE MATTER OF CARRINGTON COTTON CORPORATION LIMITED (ACN 002 963 340) BRISBANE .. DATE 02/06/99 JUDGMENT 1 "'" , .. , ........... t· ...... ... co ••..•..• fl •. :. I. ..... " fll,," "'ot , -'\ . REVISED C0PfE5 ISSUED , • State Repqrting Bureau Date rI I ~ I q q. , 99,11';':' '''l -- 1 of 15 -- 020699 LH (Helman J) HIS HONOUR: This is the matter of Carrington Cotton. I have prepared reasons in the matter. I shall now publish them to you. HIS HONOUR: Upon the applicants giving the usual undertaking as to damages: I order that, until further order, the directors and shareholders of Carrington Cotton Corporation Limited and RMI Pty Ltd be restrained from causing those companies to be represented in application number 11984 of 1998 other than for the purpose of disclosure or production of documents, for making any necessary application, or for addressing the Court as to the nature of the relief sought; I order that, until further order, the directors and shareholders of Carrington Cotton Corporation Limited and RMI 10 20 ! 30 Pty Ltd be restrained from causing those companies to pay any 40 fees of McCullough Robertson incurred in application number 11984 of 1998 other than for the purpose of entering an appearance, or, so far as any fees have already been incurred, of disclosure or production of documents; and I order that, until further order, the directors and shareholders of Carrington Cotton Corporation Limited and RMI Pty Ltd be restrained from causing those companies to be represented in application number 11984 of 1998 by McCullough Robertson. JUDGMENT 2 50 60 -- 2 of 15 -- 020699 LH (Helman J) Liberty to apply. I order that the costs of this application be reserved. I make the order as to directions as in the initialled draft. 10 20 30 40 50 JUDGMENT 3 -- 3 of 15 -- ) IN THE SUPREME COURT OF QUEENSLAND No. 11984 of 1998 Brisbane IN THE MATTER of the Corporations Law -and- IN THE MATTER of CARRINGTON COTTON CORPORATION LIMITED (A.C.N. 002 963 340) REASONS FOR JUDGMENT - HELMAN J. Judgment delivered 2 June 1999 CATCHWORDS: CORPORATIONS - Miscellaneous cases - application for injunctions preventing company funds being used for legal expenses incurred in a dispute among shareholders. Solicitors: Hearing Date: Mr W. SofronoffQ.C. and Mr L.F. Kelly for the applicants Mr J. C. Bell Q.C. for the first and second respondents Mr R. R. Lindwall (solicitor) for the third, fourth, sixth and seventh respondents Allen Allen & Hemsley for the applicants McCullough Robertson for the first and second respondents Corrs Chambers Westgarth for the third, fourth, sixth and seventh respondents 7 May 1999 -- 4 of 15 -- ( ) C) ) IN THE SUPREME COURT OF QUEENSLAND No. 11984 of 1998 Brisbane IN THE MATTER of the Corporations Law -and- IN THE MATTER of CARRINGTON COTTON CORPORATION LIMITED (A.C.N. 002 963340) REASONS FOR JUDGMENT - HELMAN J. Judgment delivered 2 June 1999 1 The applicants, Alpine Pty Ltd, Giovanni Panizza, Mary Panizza, Helen Panizza, Albert Panizza, Benedict Panizza, Mark Panizza and Albern Pty Ltd Superannuation Fund, seek the following orders: 1. 2. An injunction until further order restraining the directors or shareholders of Carrington Cotton Corporation Limited or RMI Pty. Ltd from causing those companies to be represented in application No 11984 of 1998 other than for the purpose of disclosure or production of documents; An injunction until further order restraining the directors or shareholders of Carrington Cotton Corporation Limited or RMI Pty. Ltd from causing those companies to pay any fees of Messrs McCullough Robertson incurred in application No 11984 of 1998 other than for the purpose [of] entering an appearance, or, so far as any such fees have already been incurred, of disclosure or production of documents; 3. An injunction until further order restraining the directors or shareholders of Carrington Cotton Corporation Limited or RMI Pty. Ltd from causing those companies to be represented in application No 11984 of 1998 by Messrs McCullough Robertson; 4. An injunction until further order restraining the directors or shareholders of Carrington Cotton Corporation Limited or RMI Pty. -- 5 of 15 -- 2 Ltd from causing those companies to be represented in application No 11984 of 1998 by any firm of solicitors other than with the consent of the Applicants; 5. That there be liberty to apply; 6. Such further or other relief as the Court thinks fit; 7. Costs. In the course of the hearing before me, Mr SofronoffQ.C., for the applicants, conceded that the following could properly be added to the first order, if it were to be made: " for making any necessary application, or for addressing the Court as to the nature of the relief sought' . He added, as an alternative to the addition of those words, the imposition of a time limit on the operation of the order. 2 The principal application, no. 11984 of 1998 filed on 24 December 1998, was made under s. 246AA of the Corporations Law. The applicants for the injunctions seek in the principal application orders for the refund of excessive moneys paid by Carrington Cotton to a company called Bromley Investments Pty Ltd under management service agreements o between Carrington Cotton and Bromley Investments entered into on 17 December 1993 and 0 20 May 1997 and interest, an order that certain shares acquired by Bromley Investments and, or alternatively, Mr Ross Marchant be cancelled as hi:lVing been acquired by insider trading C) and, or alternatively, a takeover bid made unconscionably and without full disclosure of all relevant information to shareholders, an order that a management service agreement between Carrington Cotton and Bromley Investments entered into on or about 17 June 1998 be declared void, save for a certain clause (2(a)(i», a declaration that an agreement entered into by Bromley Investments or R.M.!. Pty Ltd, a wholly owned subsidiary of Carrington Cotton, on behalf of Carrington Cotton or the Carrington Cotton group of companies with Wenaline Pty Ltd on or about 11 July 1996 be declared void, an order that the articles of association of -- 6 of 15 -- 3 Carrington Cotton be amended to provide that certain shareholders in Carrington Cotton be entitled to elect one director of Carrington Cotton, an order that Carrington Cotton take reasonable steps to satisfy the Australian Stock Exchange listing rules requirements for shareholders' spread and the re-listing of the company, and other relief. 3 Carrington Cotton is a public company. Until recently it was listed on the Australian Stock Exchange. It conducts a cotton-growing business. Until his death in February 1998, Mr Ross Marchant controlled the majority of shares in Carrington Cotton, in which there are ) 16,500,000 issued shares. They were held by him and by Bromley Investments, a company he controlled, and constitute 71.54 per cent. of the issued capital of Carrington Cotton. Mr Marchant's daughter Susan is the beneficiary of all those shares under Mr Marchant's will, although the shares are currently held by the executors ofMr Marchant's estate and Bromley Investments. The applicants are also shareholders in Carrington Cotton. They hold 27.35 per cent. of the issued capital. The balance, 1.11 per cent. of the issued capital, is held by approximafely 138 'other shareholders. ~J 4 The applicants have brought the principal application seeking relief against what they allege is the oppressive manner in which the affairs of Carrington Cotton have been, and are ) being, conducted. The essence of the applicants' allegations is that until his death Mr Marchant caused Carrington Cotton to conduct its affairs to favour him and members of his family, and that, since his death, his daughter and her husband, Mr Christopher McCosker, have continued to control Carrington Cotton to favour themselves. Mr McCosker is now a director of Carrington Cotton and Ms Marchant has been, but is no longer, a director. Wenaline is a company controlled by Mr McCosker and Ms Marchant. 5 There are two other directors of Carrington Cotton, Mr Russell Maughan and Mr Joseph Magill, the chairman, who, the applicants allege, were appointed at the instigation -- 7 of 15 -- 4 of Mr Marchant and hold office at the will of the Marchant interests. It is alleged that they breached their duties as directors and have acted improperly to assist the Marchant family. It is alleged that they have done so by: (a) Causing Ms Marchant to be appointed chief executive officer of Carrington Cotton after her father's death, although she is not qualified to fill that office and does so at an excessive remuneration; (b) Causing Carrington Cotton to enter into management contracts with companies owned and controlled by the Marchant family at rates of remuneration well in excess of amounts payable at arms length, with the effect (c) of siphoning off profits to them; Standing by while Mr Marchant purchased shares on the open market with the advantage of confidential information gained as a director; (d) Permitting Carrington Cotton to be de-listed by the Australian Stock Exchange in order to reduce independent scrutiny ofMr Marchant's conduct; (e) Aiding a takeover scheme of Mr Marchant's by failing to provide other shareholders with relevant information which they knew and which they were obliged by law to provide; and (f) Providing the Marchant int~rests with information concerning the affairs of the company while refusing such information to the applicants or any other shareholders. 6 The respondents to both applications are Carrington Cotton, R.M.I., the executors of the estate of Mr Marchant who are Ms Marchant and a Mr Maurice Maughan, Bromley Investments, Mr McCosker, Wenaline, Ms Marchant, Mr Russell Maughan, and Mr Magill. Cj o o o -- 8 of 15 -- 5 7 The applicants' statement of claim was delivered on 12 February 1999 and a defence of the executors of the estate of Mr Marchant, Bromley Investments, Wenaline, and Ms Marchant was delivered on 7 April 1999. 8 This application has arisen from statements of intention and conduct by Messrs Magill and Russell Maughan since the principal proceedings began. Even though the applicants have made serious allegations of misconduct against Messrs Magill and Russell Maughan the latter have, through their solicitors, McCullough Robertson - who also act for Carrington Cotton ) and R.M.I. and who briefly acted for Mr McCosker in the proceedings, notified the applicants' solicitors, in a letter dated 8 March 1999, that they will 'abide the order of the Court' and that it is not intended to deliver any defence on their behalf to the applicants' statement of claim. On the question of any order for costs sought against Messrs McCosker, Magill, and Russell Maughan it was said in the same letter said that when the time comes for submissions on costs at the end of the trial, the directors 'will make the appropriate submissions to the Court at that time'. In another letter, also dated 8 March 1999, from McCullough Robertson to the /\ (,~) applicants' solicitors the following appears: In relation to the role of the Company in the litigation, our instructions are that Mr McCosker will not participate in board decisions concerning the .... ) Application. Hence our instructions will be provided by the Company through Messrs Magill and Maughan. The Company will not "side with the majority shareholders" in the action. The situation here for the Company is distinguishable from the situation in the case before Byrne J in re Brims. In that case, the Company was not separately represented. Also, the Applicant, the Third Respondent, Fourth Respondent and Seventh Respondent in this action do not constitute all the shareholders in the Company. Further, the relief sought in your clients' Application will have an impact on the future operation of the Company in a number of respects. As such, the Company has resolved to playa limited role in this litigation, in order to present the facts and documents relevant to the issues affecting the -- 9 of 15 -- 6 Company's interests to the Court. We note that Byrne J accepted in re Brims that "expenditure to protect its discrete interests or for other proper purposes of the company may be made from company resources" (at page 592). The Company's Defence will be delivered in accordance with the directions. The case referred to is Re D.G. Brims and Sons Pty Ltd (1995) 16 A.C.S.R. 559. 9 Responding to a letter dated 12 March 1999 from the applicants' solicitors in which it was suggested that McCullough Robertson would have 'an inevitable conflict of duties' owed to their clients Carrington Cotton and R.M.I. on the one hand and their clients the directors on the other, McCullough Robertson wrote on 25 March 1999: We refer to your letter dated 12 March 1999. () We are instructed to clarify the position in relation to certain important matters. f\_ raised by you. '" .J Firstly, we act for the Company, and its wholly owned subsidiary, the Second Respondent. Secondly, we are not acting for Messrs Magill and Maughan in the action (except in relation to the question of costs, should that be necessary at the conclusion of the trial and after judgement). Thirdly, Messrs Magill and Maughan will not "use the company to defend their own actions". Fourthly, there is no "Chinese waIf' in place to quarantine Mr McCosker. We receive no instructions from him whatsoever (although we did at the outset receive limited instructions from all the directors to notify their D&O insurer of the claim, for which they will be billed separately). We understand that Mr McCosker now instructs other solicitors. In relation to the litigation, we are instructed that he plays no role in respect of the Company. Fifthly, our Counsel drew the Request for Particulars of the Statement of Claim as he reached the view that particulars were necessary for clarification so that the Company's Defence could be properly completed in an informed manner. Surely the costs associated with an application to obtain the particulars could be avoided by the provision of particulars to this limited request? If your clients have difficulties providing the particulars sought, please inform us so we may reconsider your difficulties with Counsel. o o -- 10 of 15 -- 7 In fact, the Defence of the Company in this matter may well assist your clients in obtaining a speedy resolution of the action on reduced issues. We think you should await the Defence before maintaining your assertion that the funds of the Company are being expended to defend the actions of Messrs Magill and Maughan. At present, sitting where we and our Counsel sit, your clients are presently only litigants making allegations, which require consideration by those representing the Company in an informed manner. We respectfully suggest that you (as solicitor for some of the shareholders) cannot judge the correct approach in the litigation for the Company in lieu of Queens Counsel retained . by the Company to consider its role. In any event, your views are a matter of record, and we do not wish to keep debating the issue in correspondence. We hope this corrects your "understandingfrom what (we) have said". We ask you to reconsider your position on the Request for Particulars. You may do so bearing in mind that we have already heard what you have said as to the Company having a limited role in oppression litigation (refer to our letter dated 8 March 1999). We await your earliest response in relation to the particulars sought. The reference to the request for particulars is to a request delivered on 26 February 1999 on behalf of Carrington Cotton and R.M.1. for further and better particulars of the statement of claim. The applicants' solicitors declined to supply those particulars on the ground that there could be 'no proper basis for such a request' since a defence from those companies was not required by the applicants. 10 In a further letter dated 14 April 1999, McCullough Robertson advised the applicants' solicitors that they expected 'the directors' would provide statements presenting Carrington Cotton's 'position in relation to the issues raised in the pleadings', but would not propose that they give evidence unless required by any party for cross-examination. 11 In an affidavit sworn on 6 May 1999 and filed by leave at the hearing, Mr Magill swore that, although no relief was claimed against him in the principal application, as he was named as a respondent he instructed McCullough Robertson to notify his director's and officer's liability insurer of the claim and to provide to the insurer such information as it -- 11 of 15 -- 8 required 'and to passively protect [his] interests in the Application until such time as the insurer arranged legal representation on [his] behalf. Mr Russell Maughan swore to the same effect in an affidavit also sworn on 6 May 1999 and filed by leave at the hearing. Messrs Magill and Russell Maughan also swore that they were aware that Carrington Cotton's -funds should be used only for, and its participation should be limited to, matters raised by the principal application which relate to that company 'as a whole'. 12 Paragraphs 10, 12, 13, and 14 ofMr Magill's affidavit set out his and the Carrington Cotton board's response to the principal application: 10. 12. Apart from the Applicants (and one letter I received about a year ago from a supporter of the Applicants), I am unaware of any other complaint from shareholders about the manner in which the Company operates its business. Other minor shareholders have a different view; by way of example, now produced and shown to me and marked exhibit 'JRM1' is a true copy of a letter dated 8 August 1998 from a shareholder, the Honourable Tom McVeigh, expressing support. Following receipt of the Application, the Board decided that myself and one of the other two directors, Russell Maughan, would provide instructions on the Company's behalf to the Company's solicitors, Messrs McCullough Robertson Lawyers, in relation to the Application, - and that Chris McCosker (the Company's third director, who is also a director of Wenaline Pty Ltd and is married to Susan Marchant, a director of Bromley Investments Pty Ltd) would exclude himself from any involvement in the conduct of the litigation insofar as the company's role is concerned. 13. In my judgment, if certain of the orders sought in the Application were made, those orders would adversely impact directly or indirectly upon the Company, both financially and in relation to the existing operational and management structures of the Company. Whilst there are a number of orders sought which would adversely affect the interests of the Company as a whole (and, in my judgment, the Company needs to be separately represented to make submissions upon), of particular concern are the following claims for relief (by reference to paragraph 108 of the Statement of Claim): (d) a declaration that the 98 MSA (as thatterm is defined in the Statement of Claim) is void (save for clause 2(a)(i)); (J o o u -- 12 of 15 -- 14. 9 (e) a declaration that the Wenaline Agreement (as that term is defined in the Statement of Claim) is void; (g) that the Company be required to take reasonable steps to satisfy the Australian Stock Exchange Listing Rules requirements for shareholders spread and the relisting of the Company. Insofar as the Company has a discrete interest as to whether such orders are in the interests of the Company as a whole, or even in the form of such orders should it be determined that they be made, the Company has instructed Messrs McCullough Robertson Lawyers to represent its interests (and the interests of its wholly owned subsidiary, RMI Pty Ltd) in this Application. The Company has instructed Messrs McCullough Robertson not to 'take sides' in the Application, but to ensure that all relevant facts and documents in the possession of the Company are presented to this Honourable Court and to make submissions in relation to the Company's position so that, prior to the determination of the Application, all matters relevant to the interests of the Company as a whole, including those of the unrepresented 138 or so shareholders who are not parties to this Application, are taken into account by this Honourable Court. 13 Paragraphs 15, 16, 17, 18, 19, and 20 ofMr Magill's affidavit relate to the merits of the applicants sought-after relief (d), (e), and (g), referred to in paragraph 13. Mr Russell Maughan, in his affidavit, affirmed paragraphs 10, 12, 13, 14, 15, 16, 18, 19, and 20 of ( " i~~ Mr Magill's affidavit. 14 The proceedings on the principal application will, if the applicants are successful, fall \~ into two distinct stages: first it must be determined whether the alleged oppression has been proved, and secondly, it must be decided whether, oppression having been established, the relief sought, or any of it, should be granted. The issues for determination in the first stage all arise from the dispute between groups of shareholders, and that stage will be confmed to a decision on those issues in the form of fmdings of fact. The second stage may not occur at all if the applicants are unsuccessful in the first stage; but if they are successful, wider issues will arise in the second stage than those for determination in the first. The dispute between the groups of shareholders will still be relevant no doubt, but the determination as to whether -- 13 of 15 -- I. 10 the relief sought, or any of it, should be granted must also depend on consideration of what may be in the best interests of the company and its shareholders as a whole. 15 It is a general principle of company law that a company's money should not be expended on disputes between shareholders: see Pickering v. Stevenson (1872) L.R. 14 Eq. 322; Re Crossmore Electrical and Civil Engineering Ltd [1989] B.C.L.C. 137; Re a company, ex parte Johnson [1992] B.C.L.C. 701; and Re D.O. Brims and Sons Ply Ltd at pp. 591-592. 16 Applying that principle to this case, I conclude that Carrington Cotton's money should not be expended in the first stageofthe proceedings except to disclose relevant documents: (J see Re a company, ex parte Johnson at p. 703. In that part of the proceedings Carrington Cotton is a nominal, but of course necessary, party. Carrington Cotton's money has, however, obeen committed in this first stage for more than disclosure. Further and better particulars of the statement of claim have been sought and instructions given to deliver a defence, ostensibly I I , withq~t taking sides, put clearly enough to 'present the facts' - to quote a letter from ~' \ McCullough Robertson dated 8 March 1999 - asserted by Messrs Magill and Russell Maughan ., . in resisting at least some of the applicants' claims. It is clear that Messrs Magill and Russell 0 Maughan intend to continue using Carrington Cotton's resources in that way in the first stage. Such expenditure is a misfeasance and must b~ stopped: ibid pp. 704-705. I shall therefore make the orders sought in paragraphs 1 (amended as suggested by Mr Sofronoff) and 2 of the application. The words Mr Sofronoff suggested could be "added to the order sought, in paragraph 1 apply of course to the second stage of the proceedings. In th~/age,-shoUld !t ever be reached, Carrington Cotton will have ample opportunity to be heard and to make such submissions to the Court as are proper for it to make. 17 There could, I think, have been no objection to McCullough Robertson's continuing to act for Carrington Cotton and its subsidiary had they not also been acting for Messrs Magill -- 14 of 15 -- 11 and Russell Maughan. The difficulty, however, about the continued representation of Carrington Cotton and R.M.I. by McCullough Robertspnis th~t while that firm has instructions that Carrington Cotton is not to take sides in the shareholders' dispute it must act throughout for Messrs Magill and Russell Maughan, against whom serious allegations of misconduct are made, 'in relation to the question of costs'. The notion that such nicety in balancing conflicting duties is possible is artificial in the extreme and cannot be accepted. I shall therefore make the order sought in paragraph 3 of the application. I am not persuaded, however, that the order sought in paragraph 4 is shown by the evidence before me to be necessary. It has not been demonstrated, in my view, that the directors are likely to abuse their / 'I position by making an improper choice of new solicitors to represent Carrington Cotton. / There will of course be liberty to apply, and I shall invite further submissions on costs. " ) -- 15 of 15 --