In the matter of Chapmans Ltd ACN 000 012 386 (No 3)

1. [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. [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:

3. [3]

   The relevant conditions were specified in cl 2.2, which was as follows:

4. [4]

   Clause 2.3 provided as follows:

5. [5]

   The mutual releases are to be found in cl 6, which provided as follows:

6. [6]

   Clause 12.7 was as follows:

7. [7]

   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.

8. [8]

   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).

9. [9]

   In the accompanying explanatory memorandum appears the following:

10. [10]

    That was followed by the following analysis of the fairness and reasonableness of the proposed issue of the convertible note:

11. [11]

    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:

12. [12]

    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.

13. [13]

    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.

14. [14]

    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:

15. [15]

    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.

16. [16]

    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.

17. [17]

    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.

18. [18]

    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.

19. [19]

    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.

20. [20]

    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.

21. [21]

    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.

22. [22]

    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.

23. [23]

    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.

24. [24]

    Accordingly, it seems to me the claims for both prayers 8 and 9 fail. The Court orders that:

    1. (1)

       Orders 1 and 2 made on 4 May 2015 continue permanently; and

    2. (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. [25]

   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. [26]

   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. [27]

   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.