Geilston v Tricom Equities [2010] NSWSC 119 (22 February 2010)

Last Updated: 1 March 2010

NEW SOUTH WALES SUPREME COURT

CITATION:
Geilston v Tricom Equities [2010] NSWSC 119


JURISDICTION:
Equity Division
Commercial list

FILE NUMBER(S):
2007/266372

HEARING DATE(S):
22/02/2010


EX TEMPORE DATE:
22 February 2010

PARTIES:
Geilston Pty Limited (Plaintiff)
Tricom Equities (Limited)

JUDGMENT OF:
McDougall J

LOWER COURT JURISDICTION:
Not Applicable

LOWER COURT FILE NUMBER(S):
Not Applicable

LOWER COURT JUDICIAL OFFICER:
Not Applicable



COUNSEL:
T Koltai (Plaintiff) (In person)
A Fox (Defendant)

SOLICITORS:
Henry Davis York (Defendant)


CATCHWORDS:
CONTRACTS - construction of contract - agreement to lend shares - plaintiff sues to recover shares - what was lending agreement and terms of agreement - whether variation of agreement to delay replacement - what was plaintiff's entitlement to shares - where company restructured - where shares consolidated - whether specific performance should be granted.

LEGISLATION CITED:
Evidence Act 1995 (NSW)

CATEGORY:
Principal judgment

CASES CITED:


TEXTS CITED:


DECISION:
Tricom should deliver to Geilston the 460,000 shares in the capital of Synergy Metals Limited held by Tricom for Geilston.



JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST


McDOUGALL J

22 February 2010 (ex tempore – revised 22 February 2010)

2007/266372 GEILSTON PTY LIMITED v TRICOM EQUITIES LIMITED

JUDGMENT

1 HIS HONOUR: The plaintiff (Geilston) sues to recover shares in the company formerly known as ISP Limited (ISP) held by or at the direction of the defendant (Tricom). It is common ground that in February 2001, Geilston agreed to "lend" to Tricom some 4.6 million shares in ISP held by Geilston. It was a term of the agreement that the shares would be "replaced" within twenty working days. For reasons that it will be necessary to consider in somewhat more detail, that did not happen. In these proceedings, Geilston sues to recover the shares.

The issues

2 The essential issues appear to be the following:

(1) when was the lending agreement made and what were its terms?

(2) After the lending agreement was made and the shares in question were transferred to Tricom, and before expiry of the time for transfer back of the shares (or equivalent shares), was an agreement reached between Tricom and Geilston that the shares would not be transferred back whilst (as was then the case) trading in the shares had been suspended by Australian Stock Exchange Limited (ASX)?

(3) In circumstances where the capital of ISP was consolidated, on a ten-for-one basis, so that a shareholding of 4.6 million shares became, after the restructure, 460,000 shares, is Geilston's entitlement to recover the shares limited to the 460,000 post-consolidation shares?

Factual background

The proposed capital raising

3 The affairs of Geilston are controlled by Mr Thomas Koltai. In February and March 2001, Mr Koltai was a director and the Chief Executive Officer of ISP. ISP was, as I have indicated, listed on the ASX. ISP fell into financial difficulties. In late 2000, it was advised by its auditors to obtain an injection of capital. Mr Koltai had discussions with, among others, Mr Kris Knauer of Tricom. To cut a long story short, Mr Knauer was able to find investors who would subscribe a total of $230,000 for convertible notes in ISP. The notes were to be issued at five cents. On conversion of the notes, those investors would hold between them 4.6 million shares.

4 Mr Knauer's clients were apparently prepared to subscribe for notes only on the basis that they could convert the notes immediately and sell the shares. It was their desire, indeed haste, to do so that led to the lending agreement.

5 Mr Knauer apparently believed that the notes could be converted forthwith, and thus that it was in order to sell the equivalent shares on the basis that when the sales were due for settlement, the subscribers for the notes would have become registered as holders of the shares in question. However, Mr Knauer says, he was concerned that his client's position should be covered, and thus had discussions with Mr Koltai in early February 2001 to the effect that, if necessary, Mr Koltai's company Geilston could "lend" 4,600,000 shares. Mr Koltai denies, I think, that an oral agreement was made at that time, but it may be noted that the discussions that were held resulted in the production of what Geilston says is the written agreement on which it sues, and which Tricom says is a record, or confirmation, of what had been agreed earlier.

6 Given Mr Knauer's desire to protect his clients from the consequences of what might otherwise be regarded as short selling, I think the better view is that Mr Knauer did obtain comfort, in the form of an oral agreement or undertaking from Mr Koltai, that Geilston's shares would be available if required.

Credibility

7 In this context, both Mr Koltai and Mr Knauer swore affidavits, and both were cross-examined. Mr Koltai laboured under the very considerable difficulty of presenting Geilston's case himself. Thus, he was both witness and advocate as well as being, of course, a person with a direct interest in the outcome of this litigation. By contrast, Mr Knauer has left the employ of Tricom and, so far as the evidence reveals, has no interest whatever in the outcome of the litigation.

8 In general, to the extent that there was a conflict between the evidence of Mr Koltai and that of Mr Knauer, I prefer the evidence of Mr Knauer. In reaching that conclusion I take into account, among other things, the demeanour and performance of Mr Koltai in the witness box, although in doing so I remind myself, as I have said, that he was labouring under the very significant disability of being both advocate and witness. Nonetheless, there were occasions on which Mr Koltai gave evasive and non-responsive answers to questions that, clearly enough, he perceived to be dealing with weak points in his company's case. There were also occasions when, having made an admission or agreed with a particular state of affairs, Mr Koltai later sought to resile from that when it was apparent that what he had earlier said might be disadvantageous to his company's case.

9 I should also mention that Mr Koltai sought to attack the credibility of Mr Knauer on a number of bases. One was that there had been some market manipulation in relation to the shares in ISP at the time in question. Another was that an ASIC inquiry, conducted recently, into the affairs of Tricom would reveal that similar behaviour had been noticed in other transactions. I exercised the Court's discretion pursuant to s 135 of the Evidence Act 1995 (NSW) to stop that cross-examination. I did so because it was of no relevance to any issue in the case, and could go only to credit. In circumstances where a negative answer to Mr Koltai's questions would not have shed any light on credibility, and inevitably a positive answer would not have been given (at least in the absence of a certificate under s 128 of the Evidence Act) it seemed to me that the lines of questioning that had been foreshadowed, based as they were on documents prepared by Mr Koltai for the purposes of this litigation and on propositions with which Mr Knauer did not agree, would have resulted in undue waste of time for little real benefit.

The agreement

10 To return to the factual narrative: I conclude, as I have said, that it is likely that there was an oral agreement made between Mr Koltai on behalf of Geilston and Mr Knauer on behalf of Tricom prior to 14 February 2001 for Geilston to lend some 4.6 million shares in ISP to Tricom should they be needed.

11 The written agreement (or confirmation of agreement) reads, omitting formal parts, as follows:

“As discussed this morning Tricom Equities Limited would like to borrow 4.6 million ISP shares from one of the companies associated with you. The stock borrowed will be replaced on the holding by Tricom Equities Limited within twenty working days.

If you agree to lend the stock to Tricom Equities Limited could you please fill in the details and sign below."

12 The document is a fax of 14 February 2001 addressed to Mr Koltai. In the form in which I have set it out, it represented some negotiation and amendment. Mr Koltai completed the document with the name of Geilston, signed it on Geilston's behalf, and sent it back to Mr Knauer.

13 Mr Knauer then obtained from Mr Koltai Geilston's "HIN" - a unique identifying number in the CHESS register identifying all those who hold shares in listed public companies. That number enabled Mr Knauer, or the back office of Tricom, to transfer the shares into Tricom's name and then to use them to settle the sales which, by then, were overdue for settlement.

The agreement is varied

14 Although there was some initial dispute, it now appears to be common ground that twenty working days from 14 February 2001 would expire on 14 March 2001. Before that date was reached, Mr Knauer says that he had a conversation with Mr Koltai in which, in effect, they agreed that the shares need not “be replaced on the holding” at that time. That conversation was prompted because ASX placed ISP's shares in a trading halt on 26 or 28 February 2001 (the date is uncertain but it does not matter which date the trading halt occurred) and shortly thereafter suspended the shares from official quotation. It may be, as Mr Knauer says, that the dates can be reconciled because 26 February was the trading halt and 28 February was the suspension; but nothing turns on this detail.

15 Mr Knauer was under the belief (which Mr Koltai says in fact was a misapprehension) that the shares in question could not be transferred back to Geilston whilst there was in place a trading halt or suspension. Mr Knauer gave evidence, which I accept, that he had found this out on previous occasions when he had attempted to do an off-market transfer in shares of another listed public company trading in which had been halted or suspended. Whether that was right or wrong, it was, I find, Mr Knauer's state of mind.

16 Mr Knauer said that he had a conversation with Mr Koltai on 6 March 2001. That conversation, according to Mr Knauer, was to the effect that, among other things, Tricom as an ASX member could not be involved with or facilitate the transfer of shares in a company suspended from the ASX list. Accordingly, Mr Knauer said he told Mr Koltai, the shares could not be returned until ISP was relisted. According to Mr Knauer, Mr Koltai said in substance that he was not concerned about this but that he would like the shares back once ISP was relisted. According to Mr Knauer, Mr Koltai agreed that no retransfer should occur until relisting. Mr Koltai said, according to Mr Knauer, that as a director of ISP he was not in any event planning to sell the shares.

17 In his affidavit in reply, Mr Koltai did not accept that the conversation had taken place. However, in cross-examination, Mr Koltai accepted in substance that it did. He accepted that, at some stage after the shares in ISP had been suspended, he had a conversation with Mr Knauer in which Mr Knauer said that the shares could not be transferred back while they were suspended. He accepted that the conversation could have been within the twenty working day period ending on 14 March 2001, and said in any event that if Mr Knauer said the conversation occurred on 6 March he would not argue with it.

18 I find that a conversation took place substantially to the effect given by Mr Knauer. There are a number of reasons for making that finding. One is my general preference for the evidence of Mr Knauer over that of Mr Koltai where the two conflict. Another is that Mr Koltai accepted that he had then no intention of selling the shares (and, according to Mr Knauer, said this in the conversation). Another is Mr Knauer's evidence, given in cross-examination and re-examination, of his belief at the time as to the inability to do off-market transfers of shares whilst they were suspended, and of his basis for that belief. In short, I think, when one looks at the matter objectively the probabilities favour Mr Knauer's account.

Administration and reconstruction

19 ISP's shares continued in suspension until the company went into voluntary administration in May 2001. It was as a result of the voluntary administration that, on 29 October 2001, a restructure was agreed by which, among other things, the company's capital was consolidated on the ten for one basis (ten old shares for one post-consolidation share) to which I have referred. As part of the restructure, ISP was renamed Synergy Metals Limited, but nothing seems to turn on that.

20 As I have said, Mr Knauer's evidence was that Tricom required the loan of Geilston's shares to enable it to cover the sale contracts entered into by his clients who had subscribed to the convertible notes. It follows, of course, that once the shares were utilised for that purpose they were no longer available in specie to be redelivered to Geilston. However, what happened was that when the conversions of the notes were processed, 4.6 million shares were delivered in effect to Tricom's clients, and Tricom held those shares ready to transfer to Geilston. After the consolidation, those 4.6 million shares became 460,000 shares.

The offer to retransfer

21 Mr Knauer says that on about 22 November 2001, he had a conversation with Mr Koltai concerning those 460,000 shares. According to Mr Knauer, the conversation was to the effect that since ISP had relisted (under its new name) the 460,000 shares could be transferred back to Geilston. According to Mr Knauer, Mr Koltai said he wanted 4.6 million shares not 460,000. Mr Koltai denied this conversation and said that it could not have happened because during November 2001 he was totally out of contact (except by satellite phone) in a desert in Nevada. Mr Koltai went to the extent of seeking an adjournment of the hearing to enable him to produce records that would support this. That reason had not been referred to in Mr Koltai's affidavit in reply, which simply asserted that the conversation in question did not take place. Whatever were the documents that were supposed to prove Mr Koltai's incommunicado state were not discovered.

22 Mr Koltai sought to justify both the failure to give details in the affidavit and the failure to discover the documents by saying that he wanted to keep things up his sleeve. Without expressing a view on whether he was justified in doing that for the reason he gave (which was that to disclose them would have led to some change of position on the part of Mr Knauer), it is necessary to note that this was a deliberate forensic decision taken by Geilston at a time when it had legal advice. In those circumstances, I did not think it was appropriate to grant the adjournment and I did not do so. It follows that the matter proceeds on the basis of the evidence that there is not such other evidence as Mr Koltai may have been able to produce had he been given the adjournment he sought. Although it is not necessary to express a concluded view on the alleged conversation of 22 November 2001, if I were required to do so then, following my general preference for the evidence of Mr Knauer over that of Mr Koltai where they conflict, I would find that a conversation of the sort alleged did take place.

23 I should say that, according to Mr Koltai, he did have a discussion with Mr Knauer in June 2001, in which he asked Mr Knauer what had happened to the shares. On Mr Koltai's evidence, that was the only conversation between March and June of 2001 in relation to the shares. Whilst Mr Koltai sought to suggest, through cross-examination of Mr Knauer, that there had been other conversations between those dates, if one is to take Mr Koltai's evidence at face value on this point, it provides support for the proposition, to which I have referred already, that the intention of Geilston at all material times was to hold on to the shares and not to sell them. It also follows, as Mr Fox of counsel for Tricom submitted, that if the shares had been transferred back to Geilston prior to 14 March 2001, and if they had been held by Geilston thereafter (as appears to have been its intention) they would have been consolidated down to 460,000 shares from 4.6 million shares.

The first issue: the agreement and its terms

24 Essentially, for the reasons I have given, I think that there were discussions between Mr Knauer and Mr Koltai prior to 14 February 2001 in which Mr Koltai agreed, if required, to "lend" 4.6 million shares from a company controlled by him to Tricom. Accepting, as I do, Mr Knauer's evidence on this point, I find (as Mr Knauer said) that the loan was required to enable him to cover the sales entered into by Tricom's clients. I find further that Mr Knauer explained that purpose to Mr Koltai. It follows that the parties contemplated that the shares might be disposed of in settlement of those sales, and that they were not to be returned in specie but, rather, that an equivalent number was to be returned.

25 Against that background, I return to the terms of the written agreement of 14 February 2001. It refers to a desire to "borrow" and an agreement to "lend". Against the background to which I have referred, it is in my view clear that the borrowing and lending were for the purpose of enabling Tricom to settle sales made on behalf of its clients who were entitled, between them, to 4.6 million shares on conversion of their notes but to whom those shares had not been issued. That is important, because the agreement provides the stock borrowed "will be replaced". The use of the word "replaced" indicates, quite apart from the context to which I have referred, that the shares not need be returned in specie but that an equivalent number of shares could be delivered. That meaning is confirmed when one has regard to the evident purpose of the transaction as, objectively, it was known to both parties.

26 The replacement is to be "on the holding". Mr Knauer said that this meant to the entity whose HIN was given to support the delivery. Mr Koltai, I think, relied on those words to suggest that the actual holding lent was to be returned in specie. I do not accept Mr Koltai's suggested construction. As I have said, it is inconsistent with the clear purpose as that was known to the parties and is inconsistent with the ordinary English meaning of "replaced". In my view, the words "will be replaced on the holding" meant that the HIN of the lending company would be in effect credited with 4.6 million shares within twenty working days from 14 February 2001. In other words, the holding statement would show that the shares went off and, within twenty working days, an equivalent number came on. That is what would have happened but for the suspension from trading and the agreement that, I have found, was reached.

27 Thus regarded, the obligation on Tricom was not to return the shares in specie but to cause an equivalent number to be transferred to the lending company. There was no question of the shares lent being held on trust: they were to be used to settle what otherwise would have been short sales.

28 In short, in my view, the agreement reached was for shares to be borrowed and utilised to cover the open positions of Tricom's clients, and for equivalent shares to be returned within twenty working days thereafter.

Second issue: agreement to delay replacement

29 For reasons that I have given, I find that there was an agreement substantially to the effect indicated by Mr Knauer in his evidence. It follows that on or about 6 March 2001, the parties agreed that Tricom's obligation to return the shares, or more accurately to replace them on the holding, would be suspended while ever the shares remained suspended from quotation on the ASX.

Third issue: the effect of consolidation; specific performance

30 It is unclear whether Geilston seeks the delivery to it of 4.6 million shares in Synergy Metals Limited, or 460,000 shares. The case that was “pleaded” appeared to contemplate that some 4.6 million shares should be returned. However, I think, Mr Koltai accepted in the course of the hearing that only the consolidated shares should be returned. If such a concession were made, I would not act on it alone in circumstances where Mr Koltai was representing the interests of Geilston without the benefit of legal assistance.

31 If the case being put is that 4.6 million shares should be redelivered by way of specific performance of the agreement, that would give an enormous and unwarranted benefit to Geilston and wreak substantial injustice on Tricom. As I have pointed out, if shares had been delivered to Geilston after 14 February 2001 and before the consolidation, it would now (subject to any sale) be the holder of 460,000 shares. For it to get 4.6 million shares instead would over-compensate it by a factor of ten. Likewise, it would impose on Tricom a burden that the parties could not reasonably have expected it to bear. In those circumstances, any relief to which Geilston is entitled could be no more than delivery up of the 460,000 shares that Tricom holds.

32 Tricom has indicated that it is (and, it says, has always been) ready and willing to transfer those shares to Geilston. Appropriate relief could be to the effect that Tricom should deliver to Geilston the 460,000 shares in the capital of Synergy Metals Limited held by Tricom for Geilston. However, Tricom's evidence is that those shares are held in an account which enables the account holder, Geilston, to deal with the shares in any manner that is lawful, including, presumably by sale or transfer (including to another HIN). The parties did not address in any detail (or indeed at all) as to the relief that should be granted in the event that the Court were to conclude, as I have done, that Geilston is entitled to the 460,000 shares but no more. In those circumstances, I think, the appropriate course, having said what I have, is to stand the matter over for a period of time to enable the parties to agree on the appropriate way to ensure that Geilston has the benefit of the shares in question. I will also need to hear from the parties on the question of costs.

33 I stand the proceedings over to 9.30am on 1 March 2010 for final orders. On that occasion, if the parties are not agreed on costs, I will hear argument on costs.

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LAST UPDATED:
26 February 2010