Case: The Food Improvers Pty Limited and Anor v BGR Corporation Pty Limited and Ors (No 3) [2007] FCA 97
Outcome: considered
On 12 February 2007 the primary Judge delivered reasons for judgment in proceedings NSD1140/2005: see The Food Improvers Pty Limited and Anor v BGR Corporation Pty Limited and Ors (No 3) [2007] FCA 97 ('the first reasons'). 12 Mr Gulson testified that the right to consultancy fees had been cancelled and not merely suspended. In the first reasons the primary Judge rejected such contention and found that it would have been unfair to the shareholders to work for BGR with no prospect of remuneration even if BGR's fortunes improved. His Honour found at [63]: I am of opinion that the parties agreed in March 2001 that BGR's liability for payment of the consultancy fees which would otherwise become due under cl 4.1 would be made subject to a condition that BGR be able to pay before the consultant were entitled to issue tax invoices. 13 During 2005 negotiations had taken place between the joint shareholders of BGR in respect of the payment of consultancy fees exceeding $1,000,000 claimed by TFI through Mr Bax. Meetings had been held between the partners at which the two scenarios, Option A and Option B, were suggested for the distribution of the proceeds of sale of Main Camp Station among the shareholders. It is common ground that payment to the shareholders by way of fully franked dividends was beneficial to them for tax reasons. His Honour found that no agreement was reached between the parties despite the extensive negotiations to resolve their differences concerning TFI's claim for consultancy fees. 14 Before the primary Judge Mr Gulson claimed that he had not concerned himself with the details of the draft settlement deeds involving Options A and B and had never read their provisions relating to the payment of consultancy fees to TFI. The primary Judge did not accept such assertion. 15 Main Camp Station was sold on 12 December 2005 for $9,000,000. His Honour concluded at [195] that the negotiations to settle the partners' disputes culminated in Cordato's letter dated 11 January 2006 that proceeded upon the basis that the method of distribution 'would be in accordance with Option B' . However BGR, at the direction of Mr Gulson and without consultation, wrote to TFI on 23 February 2006 advising that an interim dividend of $3,500,000 had been declared. Such funds were derived from the proceeds of the sale. The primary Judge found at [252] that: For months the plaintiffs were told that a distribution would be made in accordance with Option B. Instead, they were confronted with a fait accompli when a different form of distribution was made without any further consultation in February 2006. His Honour found that the distribution on 23 February 2006 was unfairly prejudicial to TFI. 16 Having found that TFI had suffered oppression, the primary Judge considered the relief to be granted. At [269] his Honour said: An order for specific performance of an agreement to distribute in accordance with option B is not appropriate because no contact so to distribute was made. But it is not the end of the matter. Both Triad and Food Improvers are entitled to render invoices so as to be paid over $1 million each in consultancy fees which had not been invoiced. Food Improvers has established that it is entitled to receive interest from BGR on its loan of $111,000. The plaintiffs' position is that they wish Food Improvers to receive only $500,000 by way of a payment for the consultancy fees forgone. Likewise, Mr Gulson has indicated that he and Triad do not wish to receive any consultancy fees. As the difference between options A and B showed, Triad was fiscally better off by receiving only dividends which would be fully franked together with the corresponding imputation credits. And, Mr Lombardo gave advice that that was best for both Triad's and Food Improvers' positions. 17 His Honour then said [270]: The negotiations in September 2005 and all the correspondence up to the time of the distribution on 22 February 2006 demonstrated that all the shareholders were content to have a payment of $500,000 made in respect of Food Improvers' entitlement to consultancy fees and thereafter a distribution made in accordance with the balance of option B. Having regard to the oppression which I have found in respect of the way Food Improvers has been treated, I am of opinion that it would be appropriate to make an order requiring BGR, Triad and Cordato Partners Services to cause the payment of a tax invoice for $500,000 plus GST, when issued by Food Improvers, in respect of the compromise of its entitlement to consultancy fees payable by BGR. 18 His Honour continued at [271]: The dividend paid on 22 February 2006 should be set aside and BGR should be required to give effect to a distribution in accordance with the mechanism in option B. That is, the $500,000 consultancy fee plus GST should be paid to Food Improvers by BGR and then a dividend paid to its shareholders which would be used to repay their loan accounts. The amounts so received by BGR would then fund a second dividend to its shareholders. It may be possible for the parties to agree some payments between them of net amounts instead of this, in light of the fact that the earlier payments have been made. Food Improvers will also be entitled to have the dividends paid to it by BGR treated as fully franked. 19 In summary, the primary Judge made orders which had the same effect as Option B. The effect of the order necessarily subsumed the claim by Triad against BGR for consultancy fees by the payment of fully franked dividends. The combined effect of the orders was to remedy the proved oppression by resolving the claims of TFI and Triad upon BGR for consultancy fees and to achieve an equitable winding up of BGR for its shareholders. 20 The alternative proposal, namely Option A, was one in which both TFI and Triad would be paid the whole of their entitlement to consultancy fees. His Honour found that such payment, followed by the residue distribution from the sale of Main Camp Station, would be less advantageous to all parties. 21 Pursuant to the first reasons, his Honour also found that Triad was to refund consultancy fees paid to it in the period between 20 July 2005 to 28 February 2006 and after 28 February 2006, later calculated in the amount of $311,550.86. 22 On 12 February 2007 the primary Judge made orders in relation to certain aspects of the relief and stood the proceedings over to 14 February 2007 for the making of further orders. 23 On 14 February 2007 the primary Judge made orders that are not relevant to the present applications. His Honour stood over the proceedings to 19 February 2007 for the making of additional orders. 24 On 19 February 2007 after a further hearing before the primary Judge, his Honour made additional orders. Those orders, inter alia, effectively adopted the provisions of Option B. Order 6 of such orders ('Order 6') provided: Declares that other than as provided in these orders the first plaintiff and the second defendant have no subsisting entitlement to consultancy fees from any of the first, fourth, fifth, sixth, seventh and eighth defendants. 25 On 19 February 2007 the primary Judge also found that Triad and Cordato had been overpaid in respect of the interim dividend declared by BGR on 22 February 2006. Triad and Cordato were ordered to repay those monies, being $340,000 and $40,000 respectively. 27 His Honour also said at [12]: I also considered that it was appropriate to make an order that BGR actually pay to Food Improvers the consultancy fee of $500,000 plus GST. For the reasons that I gave in my principal judgment ([2007] FCA 97 at [269] - [271] ) Triad should receive only a distribution of the proceeds of sale of Main Camp Plantation by way of a fully franked dividend, and should not be able to claim consultancy fees in the liquidation. Likewise, because Mr Bax said that, for its own reasons, Food Improvers wished to have its distribution made by payment of the consultancy fee (limited to $500,000 plus GST) together with the balance as a fully franked dividend, Food Improvers should not be able to make any claim further for consultancy fees in liquidation. For those reasons I made declarations that neither Food Improvers nor Triad had any subsisting entitlement to consultancy fees having regard to the adoption of option B in the resolution. 28 On 28 February 2007 the primary Judge also ordered Triad and Cordato to repay BGR 90% of all amounts paid by way of legal costs and disbursements in respect of the proceedings. 29 On or about 13 March 2007, Triad received a letter from Gadens Lawyers ('Gadens'). Such letter informed Triad that Gadens were acting for the liquidator, David John Kerr of BGR. The letter demanded payment of $651,550.86 said to be owing to BGR by Triad pursuant to the Court's orders. Triad then engaged new lawyers, namely Shaw Reynolds Bowen &amp; Gerathy Lawyers, and Andrew Peter Quigley of that firm had carriage of the matter. 37 On 22 November 2007 the primary Judge delivered his written reasons in respect of the slip rule application: see The Food Improvers Pty Limited and Anor v BGR Corporation Pty Ltd and Ors (No 6) [2007] FCA 1812 ('the slip rule reasons'). In such reasons his Honour considered Options A and B and observed at [20]: By informally agreeing to distribution in accordance with Option B the parties were adopting a position that neither wished to assert their full legal rights to be paid under Option A... Since Mr Gulson was positively asserting there was no such entitlement, I found that he had indicated that he and Triad did not wish to receive those consultancy fees ( Food Improvers (No 3) [2007] FCA 97 at [269] ). That finding was inevitable given the joint rejection of distributing in accordance with Option A.