Law Society of New South Wales v. Milios and Another

(Judgment by: Austin J)

Law Society of New South Wales
v.Milios and Another

New South Wales Supreme Court

Austin J

Judgment date: 15 December 1999

Judgment by:
Austin J

[ 1 ] The proceedings of which the present application forms part are proceedings brought by the Law Society of New South Wales against a solicitor, Nicholaos Milios, and a company of which he was a shareholder called Vacentia Pty Ltd. Pursuant to Pt 8 of the Legal Profession Act 1987 the Court has appointed David Patrick Watson to be receiver of the property of Mr Milios. Mr Watson, by notice of motion filed on 8 December 1999, seeks directions as to whether in his capacity as receiver he is justified in entering into and completing the settlement of a claim which he has made against Vacentia for recovery of money which he alleges to be trust money belonging to Mr Milios' clients.

[ 2 ] The Court's authority to give a direction of the kind which Mr Watson seeks is conferred by s 113 of the Act, which relevantly says that the Supreme Court may give directions to a receiver for the exercise of an authority conferred on him by the Court when he was appointed. When Mr Watson was appointed he obtained by virtue of that appointment the authority to take proceedings of the kind which I have described for the recovery of property, by virtue of s 98 of the Act.

[ 3 ] The function of the Court, when an application for directions is made, was described by Young J in Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117 in the analogous circumstances, of directions to a provisional liquidator. As his Honour there said, it is appropriate for the Court to give directions in order to provide guidance to the applicant on matters of law. As I shall describe, the application in the present case raises primarily a question of law as to the proper construction of the Corporations Law .

[ 4 ] Vacentia appeared as respondent to Mr Watson's application in order to support submissions made on Mr Watson's behalf that he is justified in entering into and completing the settlement. The Court also received written submissions from the solicitor for a company called Speedy Gantry Hire Pty Ltd, which, as will appear, is a subsidiary of Vacentia. Speedy Gantry did not, however, make any application to appear at today's hearing.

[ 5 ] The issue which the Court has been asked to consider today was raised in correspondence on behalf of Mr Hassall, who together with his company is a minority shareholder in Speedy Gantry, of which he is also a director. Pursuant to directions which I gave on 8 December 1999 Mr Hassall was served with the application and given the opportunity to appear, but has indicated through his solicitors his election not to be represented at today's hearing.

[ 6 ] I need recount the underlying facts of this case only briefly. In 1987 Mr Milios acted in connection with the acquisition by Vacentia of a 51 per cent shareholding in Speedy Gantry Hire. Negotiations for the acquisition of the shares, which were eventually purchased by Vacentia from a Mr Nielsen, by an agreement dated 8 December 1997, completed on 5 January 1998 were initially conducted by Michael Foy on his own behalf and on behalf of Bradley Montgomery. The negotiated purchase price was $1,500,000. While Mr Milios became involved in the transaction as the lawyer for Messrs Foy and Montgomery, he evidently developed an interest in it as a co-purchaser. He agreed with Mr Foy and Mr Montgomery that Vacentia would be formed with the three of them as shareholders and directors, and that it would acquire the 51 per cent interest in Speedy Gantry through loans provided by all three shareholders.

[ 7 ] The evidence indicates that the sum of $958,233.69 was paid out of the trust account of Mr Milios' firm to another firm of solicitors called Chris Wlodarczyk& Co and that most of that amount was used as settlement money for completion of the acquisition of the shares in Speedy Gantry on 5 January 1998. After Mr Watson was appointed as receiver on 20 November 1998 he conducted investigations which led to his filing a notice of motion in the Common Law Division of this Court seeking orders for recovery of the moneys paid out of Mr Milios' trust account in a total amount of $963,245.39.

[ 8 ] The notice of motion seeks to recover that sum from Vacentia and in the alternative to obtain a declaration that the shares in Speedy Gantry held in the name of Vacentia are charged with the payment of that amount in favour of the receiver.

[ 9 ] Since the time of filing the application on 8 March 1999 the receiver has had negotiations with Mr Foy and Mr Montgomery which have led to a proposal, contained in a draft deed of settlement, for settlement of the receiver's claim. The proposal initially put forward in the draft was that the claim would be settled and appropriate releases given in consideration of the payment by Vacentia to the receiver of $435,000. Messrs Foy and Montgomery and Vacentia would provide warranties including a warranty and that the settlement sum paid by Vacentia would be obtained by way of additional shareholder's loans from Messrs Foy and Montgomery.

[ 10 ] It appears that after the initial draft was prepared Messrs Foy and Montgomery did not succeed in obtaining the funding which they had intended to obtain in order to perform their obligation under the settlement proposal and, therefore, the proposal was altered. In its altered form the proposal involves Speedy Gantry lending the $435,000 to Vacentia to enable the latter to pay that money over in terms of the deed of settlement. The receiver has required that the warranty by Messrs Foy and Montgomery be varied to become a covenant to effect that if the receiver is obliged to disgorge the settlement sum, then they will reimburse the receiver. Two alternative texts of that provision are in evidence and evidently the final version has not been settled, though it appears that all relevant parties agree that such a provision will be included in the deed of settlement.

[ 11 ] The shareholders of Speedy Gantry are a company called Gainguard, which I understand to be associated with Mr Hassall, Mr and Mrs Hassall, and Vacentia. Vacentia holds 73,001 A class shares and 1,460 B class shares. Gainguard holds 29,201 A class shares and Mr and Mrs Hassell hold 42,340 B class shares. Mr Hassell, Mr Foy and Mr Montgomery are the directors. The constitution of Speedy Gantry is not in evidence before me, but the case has proceeded on the basis that the shareholding of the Hassell interest is a minority shareholding as regards voting. Obviously however, it would be a controlling shareholding in a meeting at which Vacentia was precluded from voting.

[ 12 ] Through his solicitors Mr Hassall has objected to the proposed settlement on the ground that it is improper. When asked to particularise the objection, Mr Hassall's solicitor identified s 260A and s 260B of the Corporations Law , and also alleged that the loan from Speedy Gantry to Vacentia was not authorised by any resolution of the former's board of directors. The latter point appears to have evaporated. The solicitor for Speedy Gantry, Mr Conomos, wrote to Mr Hassall's solicitors on 2 December 1999 particularising the relevant resolution of the board of directors of Speedy Gantry and enclosing a draft set of minutes. Mr Hassall has been subsequently invited by the receiver's solicitors to indicate whether there remains any basis of objection as far as the authorisation point is concerned and he has not replied.

[ 13 ] The question with respect to s 260A and s 260B of the Corporations Law remains, however, as the only objection of a substantial kind for consideration by the Court today.

[ 14 ] Section 260A is relevantly in the following terms:

"A company may financially assist a person to acquire shares ... in the company ... only if:

giving the assistance does not materially prejudice:

the interests of the company or its shareholders; or
the company's ability to pay its creditors; or

the assistance is approved by shareholders under section 260B (that section also requires advance notice to ASIC); or
the assistance is exempted under section 260C."

[ 15 ] Section 260B sets out a procedure for shareholder approval which has not been embarked upon in the present case. For present purposes it is sufficient to note that if a special resolution of the shareholders of Speedy Gantry were to be sought, no votes could be cast in favour of the resolution by Vacentia because it is the person who acquired the 51 per cent shareholding in Speedy Gantry.

[ 16 ] The section is the successor to provisions which may be traced back to recommendations in the United Kingdom by the Greene Committee (Cmd 267). The Greene Committee was concerned with a practice whereby a syndicate would acquire a controlling shareholding of a target company by the use of a temporary loan, and upon obtaining control replace the directors with its nominees and cause the new board to lend the target's liquid funds to the syndicate in order to repay the temporary loan. In effect, the company's own funds were being used to finance the acquisition of a controlling interest in its shares. For present purposes it is significant that the acquisition of shares necessarily preceded the provision of financial assistance in the Greene Committee's example.

[ 17 ] The statutory prohibition on financial assistance became s 67 of the Uniform Companies Act 1961 (Qld) which prohibited a company "whether directly or indirectly" from giving financial assistance "for the purpose of or in connection with" an acquisition "made or to be made" of its shares. That section was considered in a line of cases which included Juniper Pty Ltd v Grausom (1983) 1 ACLC 1342, which made it clear that the section was capable of applying where the financial assistance took place after the acquisition provided that the two were sufficiently linked.

[ 18 ] The statutory provision was reformed in the 1980's and became s 205 of the Corporations Law , prior to the amendments to the Corporations Law by the Company Law Review Act 1988 (Cth). The 1980's amendments expanded the wording of the section, no doubt with the intention of clarifying the section's scope and meaning. However, it is far from clear that this intention was achieved. Importantly, however, s 205 retained the linking words "for the purpose of or in connection with" and it expanded on the meaning of the links in two separate subsections (s 205(3) and s 205(4)). Even having regard to their expanded meaning, it is hard to see how the words "for the purpose of" can be satisfied in a case where the acquisition occurs before the financial assistance is provided. That at any rate was the conclusion reached by Young J in Tallglen Pty Ltd v Optus Communications Pty Ltd (1998) 16 ACLC 1526 at 1532. However, his Honour pointed out that the words "in connection with" in their expanded definition were capable of applying to a case where the acquisition precedes the financial assistance.

[ 19 ] That was the state of the law when s 205 was repealed and replaced by provisions which include s 260A. The reforms achieved by the Company Law Review Act 1998 (Cth) were part of a project of simplification of the Corporations Law . It is essential that this overall object be borne in mind when the new section is interpreted. The simplification to the financial assistance prohibition was dramatic and severe. The words "for the purpose of or in connection with" and their expansion in separate subsections all disappeared, being replaced by the single word "to". But s 260A(2) made it clear, nonetheless, that the financial assistance could occur after the acquisition of shares had taken place. The Explanatory Memorandum for the Company Law Review Bill 1997 (Cth) contains the following provision:

"Paragraph 12.76. The Bill therefore prevents a company giving financial assistance to a person to acquire shares, or units of shares, in the company or a holding company if the transaction would materially prejudice the interests of the company or its shareholders, or materially prejudice the company's ability to pay its creditors (Bill, s 260A(1)(a)). This is subject to the exception that a company will be able to give financial assistance if the transaction has been approved by the company's shareholders in the manner set out in section 260B (Bill, s 260A(1)(b)). This approach is intended to minimise the difficulties the rule currently causes for ordinary commercial transactions. In particular, for transactions which do not involve material prejudice, the new rules will make it unnecessary to decide whether the transaction involves the giving of financial assistance. The new rules will bring the requirements for financial assistance more closely into line with those proposed for capital reductions."

[ 20 ] While this paragraph does not bear directly on the issue for determination today, it is, nevertheless, illuminating in a more general sense. It indicates that part of the intention of the legislative drafter was that those considering the application of the prohibition (including those planning transactions as well as judges) should focus their attention on whether the transaction would materially prejudice the interests of the company or its shareholders or the company's ability to pay creditors. If material prejudice is thought to be involved, then the transaction should be put to the shareholders for advance approval. If not, then the section does not stand in the way of implementing the transaction. Specifically, by focusing on material prejudice the drafter intended to minimise the scope for debate about the inclusive language of the section. The implication is that courts should be careful not to set in train a new jurisprudence of the technical and limiting construction.

[ 21 ] In the present case it is striking that the proposed settlement has arisen some years after the acquisition, and has arisen out of the happening of events which could not have been in the contemplation of any party to the acquisition at the time when it occurred. I should note in passing that the acquisition occurred, in my view, no later than 5 January 1998 when completion of the share transaction took place, notwithstanding that the share transaction was funded by loans to Vacentia from its shareholders. As Mason J and Brennan J said, in circumstances only approximately analogous, in Calverley v Green (1984) 155 CLR 242 at 257, the acquisition of property takes place when title is transferred in exchange for payment of the balance of the purchase money notwithstanding that part of the purchase money is provided out of secured loans which are subsequently repaid.

[ 22 ] Given that striking separation in time between the events of acquisition and the current financial proposal, it would be surprising if what is now proposed fell within any mischief which s 260A is intended to address. Certainly the difference between the present facts and the transaction which concerned the Greene Committee is obvious, for in the Greene Committee's transaction the syndicate always contemplated using the company's liquid funds to provide finance, at least in the intermediate term, for the acquisition of its shares.

[ 23 ] The argument for the view of Mr Hassall that s 260A has an application to these facts was not placed before the Court today. However, it seems to be that the genesis of the proposed payment of $435,000 by way of settlement of the receiver's claim was the wrongdoing by Mr Milios, when he used trust funds to provide his loan as shareholder to Vacentia in order that Vacentia could acquire its 51 per cent shareholding in Speedy Gantry. The argument appears to be that Mr Milios' wrongdoing sowed the seeds for the receiver's appointment and claim, and ultimately the loan by Speedy Gantry which is now proposed. Therefore, it may be contended, there is a factual connection between the acquisition of the shares and the subsequent loan, even though the loan is not made for the purpose of the acquisition. That contention raises for consideration the degree of connection which the new law requires between the acquisition and the financial assistance.

[ 24 ] Counsel for the receiver contended that the new law has substantially narrowed the scope of the statutory prohibition, by confining the degree of connection between the acquisition and the assistance which is necessary before the section applies. In his submission the relevant link is that for the section to apply there must, at the time of the acquisition of the shares, be a contract or arrangement in existence which would deliver the financial assistance, even if the assistance is delivered after the acquisition has occurred.

[ 25 ] The alternative view is to say that because the new provisions were part of a project for simplification of the law and were not intended to create new limitations which would detract from the fundamental question of material prejudice, the new section should be interpreted in light of its predecessor. On this view the words "assist a person to acquire shares" contain within them much of the old case law with respect to the requisite linking between acquisition and assistance. Without seeking to articulate the requisite link conclusively, this view would imply that the section may be attracted in broader circumstances than the receiver's submission would contend -- that financial assistance may be held to have been made "to acquire shares" even if the assistance comes after the completion of the acquisition, possibly some time after its completion, provided there is a link between the two which draws the transaction within the policy concerns which the section addresses.

[ 26 ] In my view the broader approach is preferable, having regard to the legislative history of the section, the Explanatory Memorandum to which I have referred, and most importantly the public policy which the section seeks to implement, as articulated by the Greene Committee. The literal wording of the section is not particularly helpful, though the broader view sits more easily with s 260A(2) than the narrower view, the latter effectively requiring the Court to insert some qualifying words into that subsection.

[ 27 ] Fortunately, it is unnecessary for me finally to decide between these alternative approaches. As counsel for the receiver submitted, whether one takes the broader or the narrower approach it is clear that the section does not apply to the present transaction. This is because of the complete severance between the circumstances which obtained when the acquisition occurred and the circumstances which now exist when the loan is in contemplation.

[ 28 ] It is true that the acquisition was funded at the time by improper use of trust funds, but nothing currently proposed arises out of that fact. In the meantime, events have occurred which include the appointment of the receiver, the commencement of the receiver's proceedings against Vacentia for recovery, and negotiation for the settlement of those proceedings, in which at first it was contemplated that the settlement sum would be funded by Messrs Foy and Montgomery rather than Speedy Gantry. Each of those contingent events has taken the present circumstances further away from what was in contemplation when the acquisition occurred. Whatever the precise meaning of the statutory words, my view is that the loan by Speedy Gantry to Vacentia of the settlement sum which the latter will pay to the receiver cannot be said to constitute financial assistance to Vacentia "to acquire" the 51 per cent interest which it completely acquired as long ago as 5 January 1998. Therefore, on the facts the section does not apply.

[ 29 ] Since the application of s 260A is the only issue before the Court and I have resolved that issue in favour of the receiver entering into and completing the deed of settlement, it seems to me appropriate that I should grant the relief which the motion seeks.

Direction that receiver justified in entering into and completing transaction