Ample Source International Limited v Bonython Metals Group Pty Limited; In the Matter of Bonython Metals Group Pty Limited [2010] FCA 1479 (22 December 2010)

Last Updated: 7 January 2011

FEDERAL COURT OF AUSTRALIA

Ample Source International Limited v Bonython Metals Group Pty Limited; In the Matter of Bonython Metals Group Pty Limited [2010] FCA 1479

Citation:		Ample Source International Limited v Bonython Metals Group Pty Limited; In the Matter of Bonython Metals Group Pty Limited [2010] FCA 1479
Parties:		AMPLE SOURCE INTERNATIONAL LIMITED (BVICN 1575638) v BONYTHON METALS GROUP PTY LIMITED (ACN 141 257 294), JOHN HILLAM and CFM MEDIA HOLDINGS PTY LIMITED (ACN 143 465 909)
File number:		NSD 1784 of 2010
Judge:		FOSTER J
Date of judgment:		22 December 2010
Catchwords:		CORPORATIONS – whether payments procured by the second defendant, a director of the first defendant, were made as a result of breaches of the director’s duties owed by the second defendant to the first defendant – prima facie case of breach of duty established – balance of convenience and balance of justice favour the protection of the first defendant’s funds – appropriate protective orders made on an interlocutory basis (including orders for the restoration of the first defendant’s funds to the first defendant)
Legislation:		Corporations Act 2001 (Cth), ss 180–182, 232–234
Cases cited:		Australian Competition and Consumer Commission v Allphones Retail Pty Ltd (No 2) [2009] FCA 17; (2009) 253 ALR 324 applied Hillam v Leduva Pty Limited [2010] NSWSC 1360 cited Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 applied
Date of hearing:	22 December 2010
Place:	Sydney
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	52
Counsel for the Plaintiff:	Mr JC Giles
Solicitor for the Plaintiff:	DibbsBarker
Counsel for the Defendants:	Mr DA Smallbone
Solicitor for the Defendants:	Holman Webb

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 1784 of 2010

IN THE MATTER OF BONYTHON METALS GROUP PTY LIMITED (ACN 141 257 294)

BETWEEN:	AMPLE SOURCE INTERNATIONAL LIMITED (BVICN 1575638) Plaintiff
AND:	BONYTHON METALS GROUP PTY LIMITED (ACN 141 257 294) First Defendant JOHN HILLAM Second Defendant CFM MEDIA HOLDINGS PTY LIMITED (ACN 143 465 909) Third Defendant

JUDGE:	FOSTER J
DATE OF ORDER:	22 DECEMBER 2010
WHERE MADE:	SYDNEY

UPON the plaintiff by its Counsel undertaking to the Court:

(a) to submit to such order (if any) as the Court may consider to be just for the payment of compensation, to be assessed by the Court or as it may direct, to any person, whether or not a party, adversely affected by the operation of the interlocutory orders made this day and recorded at pars 2 to 7 below or any continuation (with or without variation) thereof; and

(b) to pay the compensation referred to in (a) to the person there referred to,

THE COURT:

1. ORDERS that CFM Media Holdings Pty Limited (ACN 143 465 909) be added as a third defendant to this proceeding.
2. ORDERS that, up to and including the final hearing of this proceeding or until further order, the second and third defendants do all things necessary to ensure that the partners of Holman Webb do not pay the sum of $175,000, paid into Holman Webb’s trust account by the first defendant in about mid November 2010, and the additional sum of $175,000 paid into that trust account by the third defendant on 16 December 2010, to anyone other than the first defendant.
3. ORDERS that the plaintiff’s nominee, Mr Max Williamson, be forthwith permitted to inspect and copy all of the first defendant’s financial records.
4. ORDERS that the second and third defendants do all things necessary to cause the partners of Holman Webb to forthwith transfer the total sum of $350,000, held in Holman Webb’s trust account and paid into that account by the first defendant and the third defendant, to the first defendant’s National Australia Bank, Double Bay branch, bank account number 16-613-1625.
5. ORDERS that, up to and including the final hearing of this proceeding or further order, the first defendant be restrained from paying or transferring any money or asset of the first defendant to any related entity of the second or third defendants other than the payment of the monthly fee payable to the third defendant strictly in accordance with the terms of the Contractor Agreement between the first defendant and the third defendant and any monies due strictly in accordance with the terms of the three Binding Term Sheets dated 15 February 2010 between the first defendant and Wentworth Metal Group Pty Limited.
6. ORDERS that the defendants forthwith provide the plaintiff with copies of all of the first defendant’s bank statements, deposit slips, bank receipts and copies of cheques for National Australia Bank, Double Bay branch, bank account numbers 85-808-2187, 16-613-1625 and 17-847-4000 and any other bank accounts held in the name of the first defendant, for the period 1 April 2010 to 22 December 2010.
7. ORDERS that, up to and including the final hearing of this proceeding or until further order, the first defendant:

(a) Continue to maintain bank accounts exclusively at the National Australia Bank, Double Bay branch, and to make all payments from and receive all payments to and conduct the business of the first defendant through National Australia Bank, Double Bay branch, bank account numbers 85-808-2187, 16-613-1625 or 17-847-4000 or any other bank account currently held in the sole name of the first defendant at National Australia Bank, Double Bay Branch; and

(b) Deliver to the plaintiff a copy of all bank statements for those accounts not less often than one per calendar month.

8. GRANTS liberty to apply to all parties on three days’ notice or on such shorter notice as a Judge shall deem appropriate.
9. ORDERS that the costs of and incidental to the Application made by the plaintiff before Foster J on 22 December 2010 be the plaintiff’s costs in the proceeding.
   

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 1784 of 2010

IN THE MATTER OF BONYTHON METALS GROUP PTY LIMITED (ACN 141 257 294)

BETWEEN:	AMPLE SOURCE INTERNATIONAL LIMITED (BVICN 1575638) Plaintiff
AND:	BONYTHON METALS GROUP PTY LIMITED (ACN 141 257 294) First Defendant JOHN HILLAM Second Defendant CFM MEDIA HOLDINGS PTY LIMITED (ACN 143 465 909) Third Defendant

JUDGE:	FOSTER J
DATE:	22 DECEMBER 2010
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. This proceeding was commenced by the plaintiff on Monday of this week (20 December 2010). The plaintiff urgently sought, in the interests of the first defendant, to protect a payment of $175,000 which had been made in mid-November 2010 by the first defendant into the Trust Account of Holman Webb Lawyers (Holman Webb’s Trust Account). That payment had been procured by the second defendant. The plaintiff’s application for interlocutory relief was made to the duty judge on Monday and his Honour granted an ex parte interlocutory injunction on that day in the following terms:

Upon the plaintiff by its counsel giving to the Court the usual undertaking as to damages:
THE COURT ORDERS THAT:
...

3. This interlocutory process be listed for hearing at 9:30 am on 21 December 2010.
4. Up to and including 5 pm on 21 December 2010, the first defendant by itself, its servants and agents do all things necessary to ensure that the partners of Holman Webb do not pay the sum of $175,000, paid into Holman Webb’s trust account by the First Defendant, to anyone other than the First Defendant.
   
2. The matter was again before the Duty Judge yesterday, at which time the injunction granted on Monday was extended up to and including 5.00 pm today. In the meantime, the plaintiff discovered that there had been a second payment made into Holman Webb’s Trust Account. This second payment was made on 16 December 2010 by a company called CFM Media Holdings Pty Limited (CFM). CFM is a corporation controlled by the second defendant. The amount of this second payment was $175,035. CFM’s payment into Holman Webb’s Trust Account was funded by a transfer of $175,000 from the first defendant’s bank account to CFM’s bank account. That transfer was made on 15 December 2010. Both the transfer of funds from the first defendant to CFM and the payment into Holman Webb’s Trust Account were procured by the second defendant. Yesterday, an undertaking was given up to and including 5.00 pm today that the second sum of money (viz the sum of $175,035) would not be disbursed from Holman Webb’s Trust Account. The issues before me today concern the future disposition of both of these payments.
3. The plaintiff owns 26.6% of the issued capital of the first defendant. It has an option to increase its shareholding in the first defendant up to 50% of the first defendant’s issued capital at a cost of $105 million. The second defendant is the chief executive officer, a director, and together with his wife, the owner of 68% of the issued capital of the first defendant. There is a third shareholder in the first defendant who owns slightly more than 5% of its issued capital. There are no other shareholders in the first defendant.
4. The plaintiff alleges that the second defendant has breached his duties as a director of the first defendant (both statutory and fiduciary) by procuring the payments to which I have referred, payments which are alleged to be for the benefit of the second defendant and CFM and not to be for the benefit or any proper purpose of the first defendant. The plaintiff relies upon ss 180–182 of the Corporations Act 2001 (Cth) (the Corporations Act), as well as the general law. As I have mentioned, the plaintiff is a shareholder in the first defendant and seeks to agitate these claims in its capacity as a shareholder of the first defendant for the benefit of the first defendant. It relies upon ss 232–234 of the Corporations Act (esp s 233(1)(c), (i) and (j)).
5. In considering whether the Court should grant interlocutory relief in respect of the payments to which I have referred, I will apply the principles which are ordinarily applied to the Court’s consideration of applications for interlocutory injunctions. In Australian Competition and Consumer Commission v Allphones Retail Pty Ltd (No 2) [2009] FCA 17; (2009) 253 ALR 324 at [13]–[31] (pp 326–329), I set out what I considered to be the relevant principles. In essence what is required is that the plaintiff establish that there is a serious question to be tried and that the balance of convenience and the balance of justice favour the grant of relief rather than the withholding of relief.
6. At [27]–[29] (p 329) in Allphones (No 2), I referred to and discussed the decision of McLelland J in Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 536A-D. In Kolback, his Honour observed that, in some cases, the grant or refusal of an interlocutory injunction might well determine the final outcome of the proceeding. In such a case, great care needs to be taken by the Court in looking at each of the integers of the test in order to ensure that no injustice is visited upon a defendant who is brought to court with little or no notice, often without a great deal of time within which to prepare his, her or its case. In such a case, it is desirable that the Court evaluate the strength of the plaintiff’s case for final relief.
7. Counsel who appears for the defendants in the present case has suggested that the present case is a case which engages the principle articulated in Kolback. I agree.
8. The serious question to be tried in the present case is whether or not the disbursement of the first defendant’s funds at the instigation of the second defendant for his own and CFM’s purposes was in breach of the director’s duties owed by the second defendant to the first defendant.
9. Counsel for the defendants conceded that there is a serious question to be tried in the present case and that was a proper concession.
10. It also seems to me that the conduct of the second defendant constitutes relatively serious infringements of his director’s duties. Some attempt was made to justify the making of the payments: It was said that the first payment was approved by the Board of Directors of the first defendant; that the payments were properly classified as loans to CFM and that they were secured by a fixed and floating charge over the whole of the assets and undertaking of CFM; that it was in the interests of the first defendant to keep the second defendant “on-side” and content so that he would do his best to secure an important deal for the benefit of the first defendant which was in the offing in November 2010; that the first defendant had no immediate or pressing need for the funds; and that CFM had an entitlement to be paid $25,000 monthly in advance under a Service Agreement between it and the first defendant and that these payments were merely an advance against that entitlement.
11. But the payments did not benefit the first defendant and will not do so in the future. The plaintiff did not consent to the payments being made nor, as far as the evidence goes, did the third shareholder in the first defendant. The funds belong to the first defendant. There is no guarantee that CFM will ever become entitled under its Service Agreement with the first defendant to payments equal to or greater than the total of the payments made into Holman Webb’s Trust Account. The loan and related security arrangements between the first defendant and CFM have probably not been authorised by the first defendant and, in any event, are tainted by the second defendant’s breaches of duty. The second defendant’s conduct in procuring the payments cannot be justified or excused.
12. The real question for present purposes is: Where does the balance of convenience and the balance of justice lie? In order to address that question it is necessary to flesh out the underlying facts of the matter a little more.
13. The plaintiff took up shares in the first defendant earlier this year pursuant to a Share Allotment and Shareholders Agreement dated 20 April 2010 (the Subscription Agreement). This was its first investment in the first defendant. Under that agreement the plaintiff was obliged to subscribe for shares in the first defendant to a value of $16 million. In addition, it had already subscribed for shares to a value of $500,000, making its total financial commitment to the first defendant $16.5 million. As part of the arrangements between the parties, the first defendant was bound to enter into a service agreement (the Service Agreement) with CFM and to confirm the adoption of what was called in the Subscription Agreement “the initial business plan and budget”. The first defendant is obliged to spend its working capital in accordance with the Initial Business Plan and Budget and subsequent Business Plans and Budgets and “... to maximise the business interests of the company” (cl 6.1 and cl 9.1). Under the Subscription Agreement, the first defendant is not entitled to do as it pleases with its working capital.
14. The proposed Service Agreement was attached to the Subscription Agreement as a schedule to that Agreement. The initial budget was also attached to the Subscription Agreement. I pause to note that the initial budget was described as a “Cashflows Projection 2010” in Schedule 6 to the Subscription Agreement and covered inflows and outflows for the period from April 2010 to the end of December 2010. In that document, the parties budgeted that all of the capital which the first defendant had raised would be expended by the end of December 2010. The agreement also contains detailed provisions governing the management of the first defendant, including requirements that business plans, a budget and management reports be prepared on a regular basis. Directors’ meetings are to be held monthly. Certain transactions (including the making of loans other than in the ordinary course of the first defendant’s business) require the unanimous approval of all of the directors of the first defendant (cl 10.6(b)(iv)).
15. The Service Agreement provides that CFM will make available the services of the second defendant for a payment of $25,000 per month payable monthly in advance exclusive of GST. The term of that Agreement is five years commencing on 1 May 2010. The first defendant may terminate the Service Agreement without cause by giving two months’ written notice of termination to CFM. The Service Agreement may also be peremptorily terminated by the first defendant if CFM defaults thereunder.
16. The parties have not been getting on lately. Several disputes are revealed in the evidence, some of which have been resolved and others of which are no longer relevant or at least not presently relevant.
17. The evidence before me establishes that, as at 20 December 2010, the total of the credit balances of the two bank accounts which are currently maintained by the first defendant at the Double Bay branch of the National Bank of Australia Limited was $377,620.40 and that there are payments planned to be made by the first defendant up to 20 January 2011 of $301,179.51 with a further $176,860 planned to be paid out in February 2011. Other payments are anticipated between March and June 2011. No significant cash inflows are expected in the period up to the end of February 2011.
18. There is other evidence of the parties’ expectations as to the cash inflows and outflows at various times during 2010, but I do not need to refer to that evidence for present purposes.
19. The first defendant, therefore, has an immediate need for $301,179.51. The total required by it for the period ending 28 February 2011 is $478,039.51. Without access to the funds presently held in Holman Webb’s Trust Account on behalf of the first defendant and/or CFM, the first defendant will not have sufficient funds available to it to meet the total anticipated expenditure of $478,039.51 to the end of February 2011. Plainly, the first defendant has an immediate need for the funds in Holman Webb’s Trust Account.
20. The second defendant submitted that he also had an immediate need for $175,000. He has contracted to purchase a home unit property in Henderson Road, Alexandria (the Alexandria home unit) and requires $175,000 in order to complete the purchase of that property. Settlement of the purchase is fixed for 11.30 am tomorrow (Thursday, 23 December 2010). CFM is now the purchaser, as the second defendant’s nominee. Without one of the parcels of $175,000 paid into Holman Webb’s Trust Account, CFM cannot complete the purchase.
21. The contract for the purchase of the Alexandria home unit was exchanged on 8 January 2008. The purchase price was $795,000.
22. The second defendant took up occupation of that home unit on 23 August 2007. The original contractual arrangements required that completion of the contract for sale be effected by 8 January 2009. Between August 2007 and November 2010 the second defendant was involved in a number of disputes with the vendor of the Alexandria home unit, a company called Leduva Pty Limited (Leduva). I do not need to refer to all of these disputes. They are catalogued in a judgment of Slattery J of the New South Wales Supreme Court in Hillam v Leduva Pty Limited [2010] NSWSC 1360, which was delivered on Monday of this week. However, one or two matters of importance are revealed by his Honour’s judgment. They are:

(a) The original contract for sale was varied in June 2010 as part of the resolution of a dispute between Leduva and the second defendant which had by then reached the Supreme Court. In essence, the settlement of that dispute required the second defendant to pay $750,000 to Leduva as the balance of the purchase price due for the Alexandria home unit. In addition, the second defendant agreed to pay other moneys to Leduva over time. These additional moneys were said to be compensation for unpaid occupation fees and other sums due to Leduva from the second defendant.

(b) The arrangements reached in June 2010 were not honoured. The second defendant’s failure to meet his commitments under those arrangements led to further litigation between the parties.

(c) On 27 August 2010 the second defendant commenced the proceedings which were determined by Slattery J on Monday of this week. In those proceedings, the second defendant sought relief against forfeiture and specific performance of the contract for sale in respect of the Alexandria home unit. The judgment of Slattery J reveals that, on the same day as the second defendant commenced the Supreme Court proceedings, he received a finance approval from Liberty Financial Pty Limited (Liberty) which was intended to finance the bulk of the payments due to Leduva, thereby enabling the purchase of the Alexandria home unit to be completed.

(d) An issue which arose in the Supreme Court proceeding was whether or not the second defendant was, in fact, ready, willing and able to complete the contract. The point of contention was whether he had the necessary funds immediately available for the completion of that contract. The finance being provided by Liberty was not sufficient to enable completion.

23. On 11 November 2010, the second defendant caused the first defendant to pay $175,000 into Holman Webb’s Trust Account. The second defendant instructed Holman Webb that that sum was to be held in trust for CFM. Once that payment was made the second defendant and CFM believed that they were then in a position to inform the Supreme Court that CFM and the second defendant had sufficient funds to complete the purchase and thus were ready, willing and able to do so. At [110]–[112] of his judgment, Slattery J said:
    110. The amendment [sic] paid under the June 2010 agreement was $750,000. On 29 June 2010 $40,000 was paid to Leduva on account of the purchase price leaving a balance of $710,000. This sum is to be funded by a net amount (after deduction of fees and interest) of $501,398.70 sourced from Liberty Financial to CFM the proposed nominees [sic] purchaser. The balance of $210,000 is presently held in the Holman & Webb’s [sic] trust account in the name of the proposed nominee purchaser CFM. Holman & Webb [sic] have given the following undertaking to the Court on behalf of CFM.

“5. CFM Media Holdings Pty Ltd undertakes to the Court that until judgment and, if the Court’s determination be that [sic] contract is on foot and ought be performed, then until completion of the sale CFM Media Holdings Pty Ltd will not direct Holman Webb to apply that money otherwise than to payment of the purchase money.”

111. I can infer from this that those funds will be available at settlement of the proposed purchase.
112. Mr Hillam is ready, willing and able to compete [sic] the 8 January 2008 contract as varied by the June 2010 agreement.
     
24. In his judgment, Slattery J also indicated that he would require that settlement of the purchase of the Alexandria home unit take place within 14 days of last Monday (ie by no later than 3 January 2011). The final orders made by his Honour have not been tendered in evidence before me. Therefore, I do not know the precise terms of those orders. For the moment, I will assume that his Honour ordered that settlement occur by no later than 3 January 2011.
25. The second defendant adopted a position from about 8 November 2010 that he was entitled to procure the first payment of $175,000 into Holman Webb’s Trust Account because the directors of the first defendant would, in due course, authorise that payment as being an advance against the payments due under the Service Agreement and that the Board’s authorisation, even if given over the objections of the plaintiff, would be an effective approval of his conduct in procuring the payments in question. The Board did, in fact, pass a resolution on 24 November 2010 by which it attempted to ratify the payment made on 11 November 2010.
26. On 9 November 2010, the second defendant raised with Mr Liebeskind the possibility that the first defendant might provide funds to him and to CFM in order to assist them to complete the purchase of the Alexandria home unit. Mr Liebeskind, who was at that time a director of the first defendant, then informed Mr Wilson Cheung of the second defendant’s proposal. At that time, Mr Cheung was the nominee of the plaintiff on the Board of the first defendant. On 11 November 2010 the suggestion that funds should be provided by the first defendant to the second defendant for the purpose which he had identified was rebuffed by Mr Cheung. On the same day Mr Liebeskind pressed the point with Mr Cheung but did not secure any agreement from him. The first payment into Holman Webb’s Trust Account was nonetheless made on that day (11 November 2010).
27. On 12 November 2010 the plaintiff’s lawyers wrote to the second defendant. In that letter they set out what they considered to be good reasons why any payment, along the lines of that suggested by the second defendant, would be a breach of the duties owed by him to the first defendant as one of its directors. Omitting formal parts, that letter was in the following terms:

Ample Source International Ltd (“ASI”)
Bonython Metals Group Pty Ltd (“BMG”)
Our Ref: WMA
We act for Ample Source International Ltd (ASI). We have been provided with emails between yourself and Steve Liebskind to Linda Lau and Wilson Cheung (on behalf of ASI) dated 10 and 11 November 2010.
We note that you, Mr Liebskind, and Mr Cheung are the directors of BMG. Mr Cheung (and Linda Lau as alternate director) represents the interests of the minority shareholder, ASI.
We have attached a copy of the email from Mr Liebskind to Mr Cheung dated 10 November 2010 (the Proposal). We note that the Proposal seeks a loan of $150,000 from BMG in order to fund the completion of the “settlement” of your own home today.
You have been notified via email by both Ms Lau and Mr Cheung that ASI does not agree and does not approve the Proposal.
You should note the grounds for opposing the Proposal include:

1. the Proposal is purely for your own personal benefit;
2. the Proposal would not therefore be for a proper purpose;
3. the Proposal would not be in the best interests of BMG;

4, the Proposal is an attempt to gain an advantage for yourself in your capacity as a director;

5. the Proposal would be contrary to the interests of the members of BMG as a whole; and
6. the Proposal would be oppressive to, unfairly prejudicial to, or unfairly discriminatory against, ASI in its capacity as a member of BMG.

We also note that Mr Liebskind has asserted that he has received legal advice from Messrs Holman Webb that he would not be in breach of the “Corporations Code (ie the Corporations Act) or any other responsibilities as a director”. With respect, we disagree completely with that view for the reasons given above.
In the event that you and Mr Liebskind purport to pass a resolution of directors of BMG that permits the Proposal to be undertaken by BMG, then we are instructed to advise you that:

1. the resolution shall be invalid, as the directors’ meeting has not been properly convened in accordance with the provisions of the Corporations Act nor the Constitution of BMG;
2. the resolution shall also be invalid, as you shall not have a quorum pursuant to clause 10.4(b)(i) of the Share Allotment and Shareholders Agreement dated 20 April 2010;

100. the resolution shall not be binding upon BMG;

4. you and Mr Liebskind shall be in breach of sections 181, 182 and 232 of the Corporations Act;
5. ASI shall be entitled to seek urgent injunctive relief against BMG, Mr Liebskind and you, for such orders as it may be advised, including costs;

We are therefore instructed to seek your written undertaking by no later than 5:00pm today that you, in your capacity as either a shareholder of BMG or a director of BMG shall not attempt to pass any resolution in favour of any transaction by BMG that provides funding to you to finance the settlement of your house. If that undertaking is not provided in that time, our client reserves all its rights against you.

28. It must have been very clear to the second defendant that the plaintiff and its directors did not consider that the first payment of $175,000 into Holman Webb’s Trust Account in order to facilitate completion of the purchase of the Alexandria home unit was an appropriate disposition of the first defendant’s funds.
29. On 16 November 2010, which was after the first payment of $175,000 had actually been made into Holman Webb’s Trust Account, Holman Webb responded to the letter from the plaintiff’s lawyers to the second defendant dated 12 November 2010. Omitting formal parts, that letter was in the following terms:

BONYTHON METALS GROUP PTY LIMITED
We refer to the letter addressed to Mr John Hillam dated 12 November 2010.
The Resolution approved by Messrs Hillam and Liebeskind on 11 November 2010 was a resolution of directors of Bonython Metals Group Pty Limited.
Mr Hillam denies the allegations in paragraphs numbered 1 to 6 inclusive in your letter.
He also denies the contentions in paragraphs (a) to (e) inclusive in your said letter.
The Resolution approved a payment to CFM Media Holdings Pty Limited of an amount equal to seven monthly payments to that company under the service agreement with Bonython Metals Group Pty Limited, excluding GST.
The effect of the payment is a pre-payment of moneys due to CFM Media Holdings Pty Limited under its service agreement.
There is no dispute that CFM Media Holdings Pty Limited has a service agreement with Bonython Metals Group Pty Limited and that Bonython Metals Group Pty Limited is liable to pay moneys to CFM Media Holdings Pty Limited pursuant to that agreement.
The only issue is whether the company should, at the request of CFM Media Holdings Pty Limited, make a payment which is effectively a payment in advance.
We are instructed that Mr Liebeskind sought legal advice independently of this firm.
In addition, he communicated directly with your clients prior to approving the resolution.
We are further instructed that Ms Lau has requested that a directors’ meeting be held in the week commencing 22 November 2010.
We understand that both Mr Hillam and Mr Liebeskind agree to a meeting on 22 November, 2010 and that Mr Liebeskind will communicate directly with your clients concerning this meeting of directors.
We assume that the issue of the resolution will be discussed at that meeting and that a resolution ratifying the actions of Messrs Hillam and Liebeskind will be put to that meeting.

30. As is apparent from the terms of the letter itself, what was being suggested was that the payment of the first $175,000 by the first defendant into Holman Webb’s Trust Account was a payment in advance of sums of money that would become due from the first defendant to CFM under the Service Agreement. As at 16 November 2010, CFM had no entitlement under the Service Agreement to be paid such a significant sum in advance of the provision by it of the services which it had contracted to provide to the first defendant.
31. On 22 November 2010 the lawyers for the plaintiff again took up the cudgels on behalf of the plaintiff. By then they had become aware that the directors of the first defendant were proposing to meet and to pass a resolution which, in terms, would have the effect of ratifying the actions of the second defendant in procuring the first payment. It also appears from that letter that they did not know that the payment had already been made, although I think that a sensible reading of the letter suggests that they may have had their suspicions.
32. By 7 December 2010 the lawyers for the plaintiff were aware that the first payment of $175,000 had in fact been paid into Holman Webb’s Trust Account. Nonetheless, they were still seeking detailed answers to a number of relevant questions. In particular they wanted to know upon what basis that payment had been made.
33. In their letter to Holman Webb dated 9 December 2010, the plaintiff’s lawyers said:

Ample Source International Ltd (“ASI”)
Bonython Metals Group Pty ltd (“BMG”)
Your Ref. RJA:BON103/4
We refer to our letter of 22 November 2010. We note that we have not been provided with any of the documents sought in that letter. Can you please respond to this request.
We are instructed that Mr Hillam has issued an email to our client saying “Your note about $175,000 in Holman Webb account in the name of BMG. These funds have since been transfer [sic] to CFM Media Holdings Trust account as per agreements signed and ratified by the 24 November BOD meeting.” We are instructed that no representative of ASI was present at any such board meeting of 24 November 2010.
We draw your attention, again, to clause 10.4(b)(i) of the Share Allotment and Shareholders Agreement dated 20 April 2010 between BMG, ASI, John Hillam and Sarobol Teeranukul, which states:

The quorum for a Board meeting is one Director appointed by each Shareholder and a quorum must be present for the whole of a meeting.

Since there was no representative of ASI at any Board meeting on 24 November 2010, no valid resolution to authorise the payment could have been passed.
Please confirm the following matters:

1. Did BMG transfer to your firm $175,000 (or any other amount) in November or December 2010?

If so

2. What was the purpose of the transfer to your firm?
3. Was any such amount held by your firm in its trust account?
4. Please provide us with a copy of the receipt for the transfer of funds.
5. For what purpose did your firm receive the money?
6. Did your firm remit $175,000 (or any other sum, and if so how much) to CFM Media Holdings Pty Ltd (“CFM”) or any other party?
7. If 6 occurred, then what instruction did your firm receive, from whom to make that payment? Please supply a copy of that instruction.
8. If a payment was made by your firm to CFM what were the terms of the arrangement between BMG and CFM?

Please urgently provide us with copies of the following documents:
(a) the minutes of any purported meeting or meetings of directors of BMG in November 2010 purporting to be a resolution of the director or directors of BMG in November 2010;
(b) any document(s) signed by any director of BMG in November 2010 purporting to be a resolution of those directors;
(c) a copy of the bank account statement of BMG from which any withdrawal was made (before or after) in November 2010, or a transfer of money to Holman Webb;
(d) a copy of any financial records of BMG that identify the amount and identity of the recipient of any funds paid by BMG pursuant to any purported resolution(s);
(e) a copy of any other document(s) that evidences the terms upon which any payment to CFM was wade on or after 1st November 2010, either directly or from any BMG money held by Holman Webb.
We request your reply to these matters by 5:00pm on Friday 10 December 2010. Our client reserves all its rights.

34. In their letter dated 14 December 2010, the plaintiff’s lawyers wrote:

Ample Source International Ltd (“ASI”)
Bonython Metals Group Pty ltd (“BMG”)
Your Ref. RJA:BON103/4
We are writing to you following a series of events which has caused our client serious concern in relation to the use of BMG funds. The series of events to which we refer include:
(a) Mr Hillam’s failure to repay the sum of $209,000 which he owes to BMG as outlined in Clayton Utz’s letter to Mr Hillam and copied to you dated 8 July 2010 (attached copy “A”). This money is owed to BMG by Mr Hillam but to date the money remains outstanding and no arrangements have been made by Mr Hillam to repay it;
(b) The proposed payment of $150,000 from BMG’s account to CFM Media Holdings (CFM) to enable Mr Hillam to settle a personal transaction wholly unrelated to the business of BMG. The proposed payment was purportedly authorised by a Board meeting which lacked a quorum as required by the Share Allotment and Shareholders Agreement dated 20 April 2010.
(c) The payment of $175,000 from BMG’s account, initially to Holman Webb and with the intention by Mr Hillam that the moneys then transfer to CFM’s Trust Account for the purpose of benefiting Mr Hillam as a shareholder of CFM and wholly unrelated to the business of BMG. The transfer of these funds was either unauthorised or purportedly authorised by a Board meeting which lacked a quorum as required by the Share Allotment and Shareholders Agreement dated 20 April 2010; and
(d) The payment of legal fees to Holman Webb from BMG’s account for legal advice provided to Mr Hillam in his personal capacity.
Mr Hillam’s conduct as outlined above is clearly not in the interests of BMG and on each occasion was purely for Mr Hillam’s personal benefit. As a result, none of the conduct was for a proper purpose but was an attempt by Mr Hillam to gain advantage for himself in his capacity as a director. The conduct is contrary to the interests of the members of BMG as a whole and is oppressive to, unfairly prejudicial to or unfairly discriminatory against ASI in its capacity as a member of BMG.
ASI requires Mr Hillam to repay or procure the repayment of the sums referred to in paragraphs (a) to (d) above and to provide ASI with the following written undertakings by 5.00pm on Wednesday 15 December 2010:

1. BMG will not expend any money or assets of BMG except in the ordinary course of business (being the business of iron ore exploration) and except as approved in a budget plan by ASI; and
2. BMG will not pay any monies to any entity related to John Hillam other than the monthly fee payable to CFM Media Holdings at monthly intervals under its Service Agreement with BMG; and
3. Mr Hillam will not destroy any books, records, documents or other property of BMG.

If ASI has not received these written undertakings in the required time frame then ASI reserves its rights to commence such proceedings as may be advised to it including proceedings on behalf of BMG to recover the monies owed by Mr Hillam to BMG.
All rights are reserved against Mr Hillam.

35. Some further correspondence was exchanged between the protagonists and their lawyers during the course of the next week. No undertakings were provided by the second defendant.
36. During the period from mid-November to mid-December 2010 the plaintiff was also pressing the second defendant and his lawyers for the production of bank statements that would reveal the details of all recent movements of funds out of the first defendant’s bank accounts. Those bank statements were not provided in that period.
37. I have described the dealings between the parties in the period between mid-November 2010 and mid-December 2010 because Counsel for the defendants submitted that a matter which weighs heavily in favour of his clients in the present application is the fact that the plaintiff became aware of the proposal to make the first payment, and perhaps, even the making of that payment, some weeks ago and took no steps to prevent the further disbursement of the first $175,000 until Monday of this week at a time which is, on any view of it, the most inconvenient time as far as the second defendant and CFM are concerned. It was submitted that the plaintiff was engaged in some corporate manoeuvre designed to place the second defendant under pressure for illegitimate and improper purposes.
38. There is no evidence to support this assertion.
39. I do not think that the plaintiff has sat on its hands and then chosen to pounce at the most inopportune time as far as the interests of the second defendant and CFM are concerned. The plaintiff has been trying to find out what happened. The second defendant and his lawyers have hardly been forthcoming in their responses to the plaintiff’s questions and requests for information. The evidence which I have summarised at [20]–[36] above does not support the second defendant’s contentions and I reject them.

BALANCE OF CONVENIENCE AND BALANCE OF JUSTICE

40. The balance of convenience and the balance of justice involve the following questions:

(1) What is the strength of the plaintiff’s case? A strong prima facie case weighs in favour of relief whilst a weak one favours the party resisting interlocutory relief.

(2) What prejudice might flow to the plaintiff, on the one hand, and to the second defendant and CFM, on the other hand, from each of the options open to the Court?

41. As I have already mentioned, I consider the plaintiff has a strong prima facie case that the making of both payments was in breach of the duties owed by the second defendant to the first defendant as a director of the first defendant. The plaintiff sues as a shareholder of the first defendant in the interests of the first defendant.
42. It seems to me that, when it is understood that the need for the funds on the part of the second defendant and CFM flows from the contract for sale in respect of the Alexandria home unit entered into in January 2008 and from the judgment of Slattery J which was delivered this week, it is difficult to place much weight on the matters raised in support of the second defendant’s position.
43. In essence, what is put is that the second defendant and CFM are under great pressure to complete the purchase of the Alexandria home unit and have no real opportunity now of securing the balance of the funds required to complete the purchase of that home unit from any source other than the first defendant with the consequence that, if the payment out of Holman Webb’s Trust Account of at least $175,000 is not permitted, the second defendant and CFM will most likely lose the benefit of the transaction into which they have entered concerning the Alexandria home unit.
44. It seems to me that, while it is quite true that there is significant pressure on settlement, that pressure flows entirely from a number of decisions made by the second defendant in his own perceived interest at various times since about August 2007.
45. It was the second defendant who decided to purchase the Alexandria home unit without having secured the necessary finance beforehand. It was he who fell into difficulties with Leduva on a number of occasions over the years between 2007 and the present. It was he who decided upon a course of action which involved using the funds of the first defendant as if the first defendant were his banker, commencing around early November 2010, in the face of repeated objections from the plaintiff and its lawyers. Neither the first defendant nor the plaintiff has caused or contributed to the difficulties now confronting CFM and the second defendant as a result of the second defendant’s conduct.
46. Further, the second defendant has chosen not to prove the current financial position of either CFM or himself. In the absence of evidence directed to those matters, it is impossible for the Court to assess whether the loan arrangements purportedly entered into between the first defendant, CFM and the second defendant provide any real protection for the first defendant.
47. The validity of those arrangements is, in any event, under challenge. The fact that these loan arrangements were purportedly made in an endeavour to shore up the second defendant’s position does not assist the second defendant in his defence of the present application.
48. I am not now in a position to assess whether the second defendant and CFM would have been able to obtain finance from a source other than the first defendant had they attempted to do so much earlier than November 2010 but there is little doubt that their prospects of doing so were better earlier in the piece than they are now.
49. There is a dispute about the cash needs of the first defendant over the next two months. However, whatever view one takes of those needs, it is obvious that most, if not all, of the $350,035 presently held by Holman Webb will be required by the first defendant in the immediate future and should be returned to the first defendant at the earliest opportunity. The simple fact is that these moneys should not have been paid away in the manner that they were and they should now be returned. The balance of convenience and the balance of justice favour the grant of the relief sought by the plaintiff.
50. For these reasons I propose to make appropriate orders to protect the first defendant from the consequences of the second defendant’s prima facie breaches of duty.
51. I also think that CFM should be added as an additional defendant given its direct involvement in the second payment of $175,035 into Holman Webb’s Trust Account and its involvement in the transfer of funds from the first defendant’s bank account to its bank account and given the fact that CFM takes the view that at least the second payment made into Holman Webb’s Trust Account is held in trust for it. There will be orders accordingly.
52. I think that the plaintiff’s costs of the application before me should be the plaintiff’s costs in the proceeding.
    

I certify that the preceding fifty-two (52) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster.

Associate:

Dated: 6 January 2011