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[2024] NSWSC 663
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Flynn v PPK Mining Equipment Pty Ltd (No 3) [2024] NSWSC 663 (14 June 2024)
Last Updated: 14 June 2024
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Supreme Court
New South Wales
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Case Name:
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Flynn v PPK Mining Equipment Pty Ltd (No 3)
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Medium Neutral Citation:
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Hearing Date(s):
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On the papers (received 28 March 2024)
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Date of Orders:
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14 June 2024
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Decision Date:
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14 June 2024
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Jurisdiction:
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Equity - Commercial List
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Before:
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Rees J
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Decision:
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Orders made for specific performance.
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Catchwords:
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REMITTAL FOR ASSESSMENT OF DAMAGES – share purchase agreement –
plaintiffs to receive $500,000 worth of shares in publicly
listed company on
satisfaction of earnout – contract varied to change earnout to $1M revenue
in 2016 – industry recession
– prolonged share trading halt –
defendants breach contract by denying variation – parties disagree whether
revenue
more or less than $1M – in 2019 plaintiffs raise revenue item on
which they ultimately succeed – in 2023 Court of Appeal
determines revenue
threshold met – whether plaintiffs entitled to shares plus compensation
for increase in share price and
dividends over intervening 8
years.
DAMAGES – contract – principles at [87]-[90]
– considering counterfactual – loss of chance [102] – 50:50
chance plaintiffs would have established $1M revenue at the time – not
satisfied plaintiffs would have held the shares if issued
– more likely to
have sold in the short term.
FRUSTRATION – defendants to
issue number of shares “equal to $500,000 divided by VWAP Price”
calculated on share
trades “on the ASX over the 30 days on which trading
in PPK Shares took place immediately preceding” the share issue
date
– clause frustrated due to share trading halt – partial frustration
[105]-[106] – frustration did not discharge
accrued rights
[109].
SPECIFIC PERFORMANCE – whether damages an adequate
remedy in contract for share issue – principles at [83]-[86] –
not
just to confine to damages – whether specific performance can be
back-dated [114]-[115] – retrospective award of
specific performance is
anomalous – specific performance operates prospectively – specific
performance compels $500,000
of shares to be issued now.
EQUITABLE
DAMAGES – Lord Cairns’ Act – where damages sought in
substitution or addition to specific performance
– whether pleading
required [117] – principles at [117]-[126] – where damages sought in
aid of legal right, common
law damages generally awarded.
LACHES
– plaintiffs delay in claim for share issue in publicly listed company
– multiple share trades, buybacks and rights
issues since –
principles at [133]-[135].
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Legislation Cited:
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Cases Cited:
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Texts Cited:
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J W Carter, “Partial Termination of Contracts” (2008) 24
Journal of Contract Law 1J D Heydon, M J Leeming, P G Turner, Meagher,
Gummow & Lehane’s Equity: Doctrine & Remedies (5th ed, 2014,
LexisNexis) R E Megarry (1960) 76(302) The Law Quarterly Review P
Parkinson (ed), The Principles of Equity (2nd, 2003, Lawbook Co) P Young, C
Croft and M Smith, On Equity (1st ed, 2009, Thomson Reuters) N C Seddon and R
A Bigwood, Cheshire and Fifoot Law of Contract (11th ed, 2017, LexisNexis) P
Sparkes in “Back-dating Specific Performance” (1989) 10 The Journal
of Legal History 29ICF Spry, The Principles of Equitable Remedies: Specific
Performance, Injunctions, Rectification and Equitable Damages (9th ed, 2014,
Sweet & Maxwell) |
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Category:
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Consequential orders
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Parties:
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Daniel Flynn (First Plaintiff)
Flynfam Pty Ltd as trustee for Flynn
Family Trust (Second Plaintiff)
PPK Mining Equipment Pty Ltd (First
Defendant)
PPK Group Ltd (Second Defendant)
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Representation:
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Counsel:
Mr CD Wood SC / Mr AD Justice (Plaintiffs)
Mr TM Faulkner SC
/ Mr AJ Bulley (Defendants)
Solicitors:
MRM Lawyers
(Plaintiffs)
Moray & Agnew (Defendants)
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File Number(s):
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2019/11615
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JUDGMENT
- HER
HONOUR: This matter has been remitted for the assessment of damages:
Flynn v PPK Mining Equipment Pty Ltd [2023] NSWCA 201. In reprise, the
plaintiffs, Daniel Flynn and Flynfam Pty Ltd, entered into a Share Purchase
Agreement with the defendants, PPK Mining
Equipment Pty Ltd and PPK Group Ltd
(PPK), by which the plaintiffs sold their shares in Exlec Pty Ltd and
Exlec Holdings Pty Ltd in return for cash, shares in PPK, and, subject
to
satisfaction of “Second Performance Conditions”, further shares in
PPK. The cash was paid. The first tranche of shares
was transferred. It follows
from the Court of Appeal’s decision that the Second Performance Conditions
were also fulfilled.
The plaintiffs contend that they are entitled to a further
3,441,039 PPK shares, together with unpaid dividends on those shares,
said to
total between $4.4 million and $6.4 million.
- The
parties relied on their evidence and submissions at trial. The plaintiffs were
content for me to assess damages notwithstanding
an adverse credit finding
against Mr Flynn at first instance: Flynn v PPK Mining Equipment Pty Ltd
(No 2) [2022] NSWSC 1640 at [6].
Commercial
context
- The
claim for damages depends, in part, on the proper construction of cl 7.2 of the
Share Purchase Agreement and its embedded defined
term, “VWAP
Price”. It is thus timely to recall the circumstances surrounding the
contract. PPK is a publicly listed
company involved in the mining industry. In
2013 and 2014, PPK formed the view that the mining cycle was approaching its
bottom,
such that there were opportunities to acquire other companies and
thereby expand PPK’s mining services and mining equipment
businesses. The
plaintiffs’ business was identified as one such opportunity; Exlec had
recently emerged from administration
but continued to be in financial
extremis. Of particular interest to PPK was Exlec’s intellectual
property and Certificates of Conformity, permitting Exlec to manufacture
particular products.
- The
deal was done at $1.2 million, comprising cash on settlement of $200,000
followed by two share tranches of $500,000 each. The
initial cash payment was
formulated having regard to those creditors who needed to be paid out in order
to effect the sale, including
a secured creditor and payroll. Other creditors
were left to prove in the voluntary winding up of related company, Exlec Trading
Pty Ltd. Mr Flynn understood the price was $1.2 million and was clearly keen to
complete the sale. He responded promptly to all communications
by PPK.
Mr Flynn and his wife signed and returned all documents without delay. Mr
Flynn did not propose any drafting changes to the
transaction documents,
including the Share Purchase Agreement.
- On
13 October 2014, PPK’s chief executive officer, Peter Barker, briefed the
chairperson of PPK’s board of directors,
Robin Levison, on the proposed
transaction. Mr Barker advised that there was a desire to move promptly, driven
by PPK’s wishing
to lock in Mr Flynn and his designs, and given Mr
Flynn’s personal financial position. The total purchase price was $1.2
million,
comprising $200,000 in cash on settlement, $500,000 in PPK shares
subject to performance conditions and a further $500,000 in PPK
shares subject
to a further performance condition of “NPAT [net profit after tax] in year
two of $250K”. Mr Levison obtained
board approval.
- The
last trade of PPK shares before execution of the Share Purchase Agreement was on
8 October 2014, for $0.75 per share. Historical
share trading data indicates
that PPK shares were not traded every day; PPK shares traded on the ASX on three
days in the preceding
month.
The contract
- The
Share Purchase Agreement was executed on 15 October 2014. The Completion Date
was 16 October 2014, when all Exlec and Exlec Holdings
shares passed to PPK
Mining Equipment (cl 3.3) and $200,000 was paid to Mr Flynn (cl 4.1). On
Completion, Mr Flynn ceased to be a
director of Exlec and Exlec Holdings and
became an employee; his job title was Manager of Exlec.
- The
Share Purchase Agreement required PPK to issue two tranches of shares to Flynfam
– the First Performance Shares and the
Second Performance Shares –
if the First Performance Conditions and the Second Performance Conditions were
satisfied: cl 4.2.
Schedule 2 specified the First and Second Performance
Conditions:
“Part A (First Performance Conditions)
(a) The integration of the Business into the business carried
on by the Buyer to the satisfaction of the Buyer (acting reasonably)
not later
than 12 months after Completion, including:
(i) the transfer or re-issue of all the Certificates of
Conformity and the Manufacturing Licences to the Buyer (or its nominee);
(ii) the integration of all products manufactured and sold by
the Exlec Group as at Completion into the Buyer’s supply chain;
and
(iii) if requested by the Buyer, the relocation of the Business
from the Leased Premises to the premises located at 13B Old Punt
Road, Tomago,
New South Wales occupied by the Buyer or such other premises as may be nominated
by the Buyer; and
(b) Daniel does not cease to be an employee ...
Part B (Second Performance Conditions)
(a) The Business NPAT as specified in the NPAT Statement as
accepted by Flynfam or taken to be accepted under clause 9.3(b) or,
if
applicable, finally determined under clause 9.4 being greater than $250,000;
and
(b) Daniel does not cease to be an employee ...”
- As
to when each tranche of Performance Shares was to be issued, cl 7
provided:
“7.1 First Performance Shares
Subject to the satisfaction of the First Performance Conditions, PPK must issue
666,667 PPK Shares at an issue price of 75 cents
per PPK Share to Flynfam on the
first anniversary of the Completion Date.
7.2 Second Performance Shares
Subject to the satisfaction of the Second Performance Conditions, PPK must issue
the number of PPK Shares which is equal to $500,000
divided by the VWAP Price at
an issue price equal to the VWAP Price per PPK Share (rounded up to the nearest
whole number) to Flynfam
not later than 3 Business Days after the date on which
the NPAT Statement is accepted by Flynfam or taken to be accepted under clause
9.3(b) or, if applicable, finally determined under clause 9.4.”
- The
defined terms in cl 7.2 are relevantly defined in cl 1.1 as follows: (emphasis
added)
“Performance means, in respect
of the First Performance Shares and
Shares Issue the Second Performance
Shares, the date on which they
Date are issued in
accordance with this agreement.
PPK Shares means a fully paid ordinary
share in the capital of PPK.
VWAP Price means the volume weighted average price of
trading in PPK Shares on the ASX over the 30 days on which trading in PPK Shares
took place
immediately preceding (but not including) the Performance Shares
Issue Date in respect of the Second Performance Shares excluding
block trades,
large portfolio trades, permitted trades during the pre-trading hours period,
permitted trades during the post-trading
trading hours period, out of hours
trades and exchange traded option exercises (as each of those terms is defined
in the ASIC Market
Integrity Rules (Competition in Exchange Markets)
2011).”
- The
Performance Shares were required to be held in voluntary escrow for
12 months from the Performance Shares Issue Date, on the terms
set out in a
Voluntary Restriction Agreement: cl 7.4(a). Flynfam and Rebekah Flynn executed
the Voluntary Restriction Agreement,
agreeing not to deal in PPK shares received
for the escrow period. Nothing in that agreement restricted the right to vote,
receive
dividends or participate in a rights offer: cl 3.
- As
to when the Second Performance Shares were to be issued, the opening words of cl
7.2 provided that the first step was “satisfaction
of the Second
Performance Conditions”. The Second Performance Conditions were,
relevantly, “The Business NPAT as specified
in the NPAT Statement as
accepted by Flynfam or taken to be accepted under clause 9.3(b) or, if
applicable, finally determined under clause 9.4 being greater
than
$250,000”: Schedule 2, Part B(a). The Second Performance Shares were to be
issued three Business Days after NPAT was confirmed
to have been greater than
$250,000, via the process in cl 9.
- Clause
9 provided for an NPAT Statement to be prepared by the defendants and, if
disputed by the plaintiffs, to be the subject of
an expert determination. Clause
9 provided:
“9. NPAT Statement
9.1 Preparation of NPAT Statement
Not later than 10 Business Days after the second anniversary of the Completion
Date, the Buyer must prepare and give to Flynfam a
statement setting out the
Business NPAT for the 12 month period ending on the day immediately before the
second anniversary of the
Completion Date including details of each adjustment
(if any) made in accordance with the Agreed Adjustments (NPAT Statement).
9.2 Access
PPK must procure that all reasonable, non-disruptive access to the business and
accounting records, working papers and any other
relevant documents of the
Buyer, PPK and any other Related Body Corporate of PPK (including the Exlec
Group) is given to Flynfam
and its accountants and, if applicable, the
Independent Accountant for the purpose of reviewing the NPAT Statement
during normal business hours and on reasonable prior notice to the Buyer.
9.3 Review of NPAT Statement
(a) If Flynfam disputes the NPAT Statement it must
provide the Buyer with a written notice (Dispute Notice):
(i) within 20 Business Days after the date on which it is given
the NPAT Statement in accordance with clause 9.1 (Final Objection
Date);
(ii) setting out:
(A) reasonable details of each matter in dispute; and
(B) the reasons why each matter is disputed,
in which case the dispute will be determined in accordance with clause 9.4.
(b) If Flynfam does not dispute the NPAT Statement by
the Final Objection Date Flynfam will be taken to have accepted the NPAT
Statement as submitted by the Buyer and the amount of the Exlec Business
NPAT specified in it.
9.4 Dispute Resolution Procedure
(a) Within 10 Business Days after Flynfam gives the Buyer a
Dispute Notice, the Buyer must give Flynfam a response in writing on
the
disputed matters (Response).
(b) If the dispute has not been resolved within 10 Business
Days after the Buyer gives the Response to Flynfam, the dispute must
promptly be
submitted for determination to the Independent Accountant to determine the
matter or matters in dispute.
(c) The Independent Accountant must either be:
(i) agreed by the Buyer and Flynfam; or
(ii) if the Buyer and Flynfam cannot agree within 10 Business
Days of the expiry of the period in clause 9.4(b), then nominated,
at the
request of either the Buyer or Flynfam, by the President of the Institute of
Chartered Accountants, Sydney Branch;
(d) Regardless of whether the Independent Accountant is agreed
upon in accordance with clause 9.4(c)(i) or nominated in accordance
with clause
9.4(c)(ii):
(i) the disputed matters must be referred to the Independent
Accountant by written submission which must include the NPAT Statement,
the
Dispute Notice, the Response, an extract of the relevant provisions of this
agreement and instructions to finalise his determination
no later than 10
Business Days after his appointment (or another period agreed in writing by the
Buyer and Flynfam);
(ii) all correspondence between the Independent Accountant and
the Buyer or Flynfam must be copied to the other of them at the
same time;
and
(iii) subject to clause 9.4(d)(ii):
(A) each of the Buyer and Flynfam shall be entitled to make
such further written submissions to the Independent Account[ant] as
it deems
fit; and
(B) each of the Buyer and Flynfam must promptly supply the
Independent Accountant with any information, assistance and cooperation
requested in writing by the Independent Accountant in connection with its
determination.
(e) The Independent Accountant must act as an expert and not as
an arbitrator and his written determination will be final and binding
on the
parties in the absence of manifest error and the NPAT Statement will be
deemed to be amended accordingly and will be taken to comprise the final NPAT
Statement.
...”
- The
timeframes inherent in the cl 9 process were not fixed nor immaterial. In short,
PPK had two weeks to prepare the NPAT Statement:
cl 9.1. The process could be
completed at this point if the plaintiffs accepted the NPAT Statement. If not,
the plaintiffs had four
weeks to access PPK’s records and issue a Dispute
Notice, failing which the plaintiffs would be taken to have accepted the
NPAT
Statement: cl 9.3(b). PPK had two weeks to respond to a Dispute Notice:
cll 9.3(a), 9.4(a). The parties then had two weeks to
resolve any dispute,
failing which the parties had two weeks to agree on an Independent Accountant:
cll 9.4(b), (c)(ii). If the parties
could not so agree, then the President
of the Institute of Chartered Accountants would nominate an Independent
Accountant, with no
timeframe provided for this nomination. The parties were
then to provide written submissions to the Independent Accountant. The
Independent
Accountant was to finalise their determination within two weeks of
appointment or such other period as agreed in writing by the parties:
cl
9.4(d)(i). Whilst the Independent Accountant’s determination was
“final and binding”, the parties retained the
ability to challenge
the determination in the event of “manifest error”, such that
finalising the expert determination
was not necessarily the end of the matter:
cl 9.4(e).
- That
is, if the matter went to expert determination, then at a minimum, the process
would take 14 weeks. The process could take longer
if: the parties agreed in
writing that the Independent Accountant could take more time to finalise their
determination; the Independent
Accountant required further information; or
either party contended before the Court that the determination was affected by
“manifest
error”: cll 9.4(d)(i), 9.4(d)(iii)(B) and 9.4(e). The
Second Performance Shares were to be issued three Business Days after
the end of
the cl 9 process, whenever that might be.
- Beyond
the expert determination process, cl 19.5 provided that the agreement was
governed by the laws of New South Wales, with each
party submitting to the
non-exclusive jurisdiction of its courts “in respect of any proceedings
arising out of or in connection
with this agreement”.
- Finally,
the deal price of $1.2 million was reflected in the vendors’ indemnity for
any claim for breach of warranty, being
limited to a maximum aggregate liability
of $1.2 million: cl 12.3(a).
Construction of cl 7.2
- Turning
then to the proper construction of cl 7.2 of the Share Purchase Agreement and
“VWAP Price”, the relevant principles
are notorious, recently
repeated in Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd (2023)
407 ALR 613; [2023] HCA 6 at [27], quoting Ecosse Property Holdings Pty Ltd v
Gee Dee Nominees Pty Ltd [2017] HCA 12; (2017) 261 CLR 544 at [16]:
“It is well established that the terms of a commercial contract are to be
understood objectively, by what a reasonable businessperson
would have
understood them to mean, rather than by reference to the subjectively stated
intentions of the parties to the contract.
In a practical sense, this requires
that the reasonable businessperson be placed in the position of the parties. It
is from that
perspective that the court considers the circumstances surrounding
the contract and the commercial purpose and objects to be achieved
by it.”
- As
mentioned, the circumstances surrounding the contract were industry decline and
significant financial uncertainty. PPK was looking
for bargains. Mr Flynn
was desperate to sell. Certainty on price was, unremarkably, critical for both
vendor and purchaser.
- Both
tranches of PPK shares were to equate to $500,000 of PPK shares. This result was
achieved by different means in cl 7.1 and cl
7.2. The first tranche comprised
$500,000 of PPK shares by issuing a set number of shares (666,667) at a set
issue price ($0.75),
where the issue price was that at which PPK shares had last
traded before execution of the Share Purchase Agreement.
- Clause
7.2 went about the task of ensuring that the second tranche of PPK shares
equated $500,000 differently, ascertaining the number
of shares by dividing
$500,000 by the then share price for PPK shares. This no doubt reflected the
fact the date at which the Second
Performance Conditions may be fulfilled would
be at least two years after Completion, to which could be added further time,
ranging
from days to months, to complete the cl 9 process. The price of PPK
shares would likely go up or down in the meantime. The drafting
protected both
parties by ensuring that the vendors got their $500,000, regardless of how many
PPK shares it may take to achieve
that result, and the purchasers paid no more
than $500,000. Applying this formula, the total value of the Second Performance
Shares
that PPK was obliged to issue would be worth $500,000, whether
PPK’s share price rose or fell after Completion and regardless
of the time
taken to complete the cl 9 process.
- Turning
to the formula more precisely, cl 7.2 and the definition of VWAP Price
required PPK to issue the number of ordinary shares
equal to $500,000 divided by
the volume weighted average price (VWAP) of trading in PPK ordinary
shares on the ASX “over the 30 days on which trading in PPK Shares took
place immediately preceding (but not including) the Performance Shares Issue
Date”, excluding (largely) wholesale trades, and at an issue price equal
to
the VWAP of trading in such shares. The commercial purpose of the definition
is obvious: the plaintiffs were entitled to receive,
and PPK was obliged to
issue, $500,000 worth of PPK shares as at the Performance Shares Issue
Date. The number of shares required to achieve this result had to be based on
the current share price
for PPK shares, not a historical share price which
provided little indication of current value.
- Whilst
the plaintiffs contended that the 30 days meant 30 continuous days on
which PPK shares could be traded on the ASX, whether trading in PPK shares took
place on each of those 30 days or not, this
is not what the definition of VWAP
Price says. The definition is quite specific, “over the 30 days on which
trading in PPK
Shares took place”, that is, not days on which it
was possible to trade in PPK shares if you had wanted to, but days on which
trades in PPK shares actually
took place. As such, if no trades took place on
some days in the month preceding the issue of Second Performance Shares, earlier
trades would need to be included to arrive at the VWAP Price.
- Another
element in the definition of VWAP Price is the word “immediately”.
The VWAP was calculated on trades in PPK shares
on the ASX on the 30 days on
which trades took place “immediately preceding ... the Performance
Shares Issue Date”. The definition is directed to capturing recent trades,
and capturing enough of those
trades to calculate the average current share
price. The formula proceeds on the mutual assumption of the contracting parties
that
PPK shares could be traded on the ASX in the period immediately
preceding the Performance Shares Issue Date, even if PPK shares were not
traded every day. The formula could not run for want of relevant data
if there
were no trades in PPK shares on the ASX “immediately preceding” the
Performance Shares Issue Date, for example,
if the shares were suspended from
trade on the ASX for a protracted period.
A variation and trading
halt
- Events
unfolded in ways which the contracting parties likely did not contemplate. Mr
Flynn’s employment proved unworkable.
In May 2015, it was decided to move
Mr Flynn into a new role. In return, PPK agreed to vary the earn-out provisions
such that the
Second Performance Conditions were changed from NPAT of $250,000
to revenue of $1 million. This proved fortuitous for the plaintiffs
as Exlec
sustained a loss during the earn-out period; the Second Performance Conditions
were not satisfied in their original form.
The variation of the Share Purchase
Agreement was not, however, properly recorded and, given the substantial changes
in PPK’s
senior management in what appears to have been turbulent times,
was lost to corporate memory.
- PPK
also may not have picked the bottom of the mining cycle; financial conditions
did not improve. By May 2015, PPK’s shares
were trading at $0.55 to $0.57.
Mr Flynn became concerned about the drop in PPK’s share price. On
11 June 2015, PPK made an announcement to the ASX, reporting an underperformance
in the mining equipment business due to “extremely
difficult economic
conditions for our customers”. A number of customers had put their mines
into care and maintenance. For
customers whose mines were operating,
capital constraints prevented purchases of capital equipment.
- In
September 2015, PPK requested voluntary suspension of its shares on the ASX. PPK
company secretary, Andrew Cooke, advised the ASX
that PPK was not able to
complete its financial report for the 2015 financial year “whilst it
assesses issues that have arisen
in and the possible merger, joint venture or
divestment of its mining services division.” The suspension would last
until PPK
was in a position to resolve its 2015 financial report, but there was
“some uncertainty” as to when that might be. PPK’s
securities
were suspended from quotation on the ASX on 29 September 2015. The last trade
was at $0.20 per share. Mr Flynn was then
concerned about PPK’s trading
position.
- As
a publicly listed company, PPK had an obligation of continuous disclosure in
accordance with s 674(2) of the Corporations Act 2001 (Cth) and ASX
Listing Rules r 3.1. In short, PPK was obliged to notify the ASX of information
that a reasonable person would expect,
if it were generally available, to have a
material effect on the price of PPK shares. Shares may be suspended from
quotation on the
ASX inter alia to prevent an "uninformed” market:
ASX Listing Rules r 17.3.2. It would appear from PPK’s request for
voluntary suspension
that the company could not, or was not prepared to,
complete its financial accounts and disclose the contents to the market.
First Performance Shares
- On
28 October 2015, PPK issued 666,667 shares to the plaintiffs in accordance with
cl 7.1 of the Share Purchase Agreement. PPK announced
to the ASX that the
shares were subject to voluntary escrow for 12 months and would be released from
escrow on 28 October 2016. With
the issue of the First Performance Shares, PPK
had 73,341,570 ordinary shares on issue.
- In
July 2016, Mr Flynn was approached by PPK director, Dale McNamara, who said it
looked like Mr Flynn was not going to meet the earn-out
target and suggested a
cash bonus instead. Mr Flynn said he was not interested. Mr Flynn said he did
not trust Mr McNamara and avoided
any discussion with him on this subject.
- Mr
Flynn described a number of significant resignations and terminations of staff
at the time, which staff were not replaced. As
Mr Barker described it, PPK was
then trying to survive “the depths of the coal recession”. There was
a downturn in the
price of coal. Work was scarce. All executives, including Mr
Flynn, took a 10% pay cut while Mr Barker took a 20% pay cut. There
were
significant staff redundancies at PPK Group. Mr Flynn agreed that the mining
industry was in a downturn.
- The
second anniversary of Completion of the Share Purchase Agreement was 16 October
2016. The First Performance Shares were released
from escrow on 28 October 2016.
PPK’s shares remained suspended from trade.
NPAT
Statements
- As
earlier mentioned, PPK was obliged to give Flynfam an NPAT Statement not later
than ten Business Days after the second anniversary
of Completion of the Share
Purchase Agreement. The NPAT Statement was late, provided on 10 November
2016. Due to a loss of corporate
memory, the NPAT Statement was prepared on the
basis of the Share Purchase Agreement as executed, calculating whether the
Second
Performance Conditions were satisfied having regard to NPAT rather than
revenue. Revenue was calculated at $924,505 and NPAT at -$541.779.
- On
15 November 2016, Mr Flynn advised PPK, copied to Mr Flynn’s accountant
Wayne Masters, that he did not accept the NPAT Statement,
in particular:
“1. The second performance share was varied from $250K
NPAT to revenue of $1M.
2. Exlec stock booked out to internal jobs (Tomago & Port
Kembla) under alternate part numbers. The part sales figures are
incorrect.
3. ALL hours & materials for internal work must be
calculated at market rate for the purposes of revenue figures.
4. Exlec jobs seems to be missing a lot of revenue for example
NEX00020 shows $0 however the job was invoiced at $41.5K, NEX00020
shows $0 but
invoiced at $4.8K, NEX00110 also shows $0 but invoiced at $12.5K, NEX 00159
shows $73K but invoiced at $99K, NEX 00216
shows $179K but invoiced at $231K.
There are many more in this area.”
Flynfam’s notice did not comply with the Share Purchase Agreement
either, where the email was not sent to Mr Levison: cl 18.3(b).
- PPK
investigated the issues raised by Mr Flynn. On 29 November 2016, PPK provided a
revised NPAT Statement, with revenue now $762,056
and NPAT now -$577,339. In
respect of the first issue raised by Mr Flynn, PPK disputed that the Second
Performance Condition had
been varied. As to the second issue, PPK advised that
Exlec alternate part numbers had been manually identified by Exlec employees
and
were listed in the calculation. In respect of the third issue, PPK explained how
the NPAT Statement had been calculated in respect
of internal work:
“3. Accounting for internal work
The NPAT statement calculation has been prepared in accordance with PPK’s
accounting policy for internal work which is characterised
by the following:
a) In the first instance, all internal divisions receive a cost
recovery only for the goods and services they provide and retain
proportional
rights to the asset created (eg work in progress asset or stock item)
b) Revenue and profit on sale is recognised amongst the
internal divisions when the final sale to the external customer is made
c) Percentage share for the allocation of profit is made with
respect to share of costs.
Accordingly, the NPAT statement calculation reflects revenue and profit on sale
for those internal jobs which culminated in an external
customer sale.
It is also noted that PPK’s internal accounting policy is compliant with
accounting standards such as AASB 15 Revenue and AASB
102 inventories.”
- PPK
also noted that the adjustment for internal work added $103,227 in revenue and
$14,544 gross profit, representing a 14% gross
margin. The average gross margin
on Exlec jobs for external customers was 19%. Even if the NPAT calculation was
amended to add a
19% gross margin on internal sales, only a further $6,000 to
$7,000 would be added to revenue and profit.
- As
for item 4 – “missing” Exlec job revenue – PPK advised
that there was no ‘missing’ revenue
as only revenue recognised
during the NPAT period was taken into consideration. Finally, PPK introduced a
further issue, advising:
“5. New “Hydraulic” business
It was noted by PPK that the Exlec management accounts reflects the
establishment of a new ‘hydraulics’ business whilst
under PPK
ownership.
As part of establishing this new source of business, new equipment was procured
(e.g. Hydraulics test bench) and new employees hired
(e.g. Mark Cooper, Steven
Ross).
In accordance with the terms of the Share Purchase Agreement, the NPAT statement
is calculated with reference to the definition of
the business that was
“carried on by Exlec immediately before” acquisition by PPK.
Accordingly, any new businesses streams created under PPK would be excluded from
the NPAT Statement calculation. As a result a further
adjustment[s] has been
made (refer tab 8 of the calculation).”
- The
next day, Mr Flynn resigned. His letter of resignation stated: (emphasis added)
“This should come as no surprise considering my obvious exclusion from
senior management meetings/decisions surrounding the
PPK Mining business and the
recent events surrounding my earn out.
... I feel I will be unable to work with the current senior management due to
its questionable ethics, incompetence and exclusive management style.
...”
- On
8 December 2016, Mr Flynn requested data in respect of “revenue generated
by Exlec including details of internal revenue
not included in the calculation
by PPK”. On 9 December 2016, PPK obliged, providing Mr Flynn and his
accountant with spreadsheets
and general ledger data, together with an
explanation of how the spreadsheets previously supplied supported the revised
NPAT Statement.
PPK offered to generate the reports again from the accounting
system with Mr Flynn or his accountant present and to “walk your
accountant through the calculations”.
- On
5 January 2017, Mr Flynn’s solicitor wrote to PPK’s then solicitors,
HWL Ebsworth, asking whether they held instructions
in respect of the disputed
NPAT statement. On 19 January 2017, HWL Ebsworth replied that they were not
instructed in the matter and
suggested that Mr Flynn’s solicitor
correspond with PPK directly. The letter from Mr Flynn’s solicitor was
outside the
20 business days required by cl 9.3(a). Nor, for that matter,
was the solicitor’s letter addressed to Mr Levison, nor even
the
defendants’ then solicitors.
- On
23 January 2017, Mr Flynn served a letter of demand on PPK, apparently in
respect of unpaid long service leave and underpayment.
On 31 January 2017, Mr
Flynn’s solicitor advised PPK that the objections to the NPAT Statement
were maintained. As the Second
Performance Conditions had been varied to a
revenue target, the NPAT Statement should reflect gross revenue of the Exlec
business.
Mr Masters’ revenue calculation was provided. Mr Flynn’s
solicitor advised:
“● Internal costs recovery
Our client maintains that the “intra-group” provision of goods and
services from the Exlec business to other PPK Group
companies must be accounted
for in any financial statements. ...
● Hydraulic business
Exlec’s hydraulic business was transferred to PPK after completion of the
Share Purchase Agreement. The hydraulic business
was not new nor created by PPK.
... revenue of the hydraulic business must be included in the financial
statements.”
- Mr
Masters calculated revenue as $1,002,914 after making two adjustments to the
$762,056 revenue calculated by PPK. First, Mr Masters
allowed for additional
revenue of $79,064 to be added for internal jobs “because we contend that
for any internal jobs, a full
cost recovery is the minimum that would be charged
to an external customer. We believe this is very reasonable as we have not
included
any profit margin”.
- Second,
Mr Masters added revenue of $161,794 for the “New Hydraulics
Business” on the basis that “We contend that
the hydraulics business
is not a new business established under the PPK ownership period, due to the
fact that Exlec under Daniel
Flynn’s ownership, employed a hydraulics
engineer for some 18 months prior to the PPK acquisition and had various sales
in
this particular field prior to PPK ownership”. Mr Masters also
noted some other matters raised by Mr Flynn – contractor costs should be
added and some Exlec jobs and invoices
were missing – and suggested that
these would take the revenue figure higher.
- On
17 February 2017, PPK denied that the Share Purchase Agreement had been varied
as suggested. Further, the primary matter in dispute
was whether the earn-out
had been varied, but this was not an issue to which the dispute resolution
procedures in cl 9 applied. As
regarded the accounting matters raised by Mr
Masters, PPK advised that it would address these further “if a Court
decides that
the Share Purchase Agreement has been amended as your client
alleges”.
- There
the matter rested for six months. During this time, Mr Flynn sued PPK in the
Chief Industrial Magistrates Court of New South
Wales at Maitland for long
service leave and alleged underpayment. In May 2017, PPK filed a Cross Claim,
which Mr Flynn applied to
strike out. By 28 June 2017, the proceedings were
resolved by agreement and discontinued.
Further efforts to
resolve the matter
- On
31 July 2017, Mr Flynn’s solicitor re-stated his position in the same
terms as the earlier letter of 31 January 2017. On
16 August 2017, the trading
hold in PPK shares was lifted. The first trade, on 22 August 2017, was at
$0.125, being a 40% drop in
the share price on suspension. Obviously enough, the
share price corrected to reflect investors’ perceptions as to the value
of
the shares, based on PPK’s financial reports now provided and other
available information.
- On
27 September 2017, PPK sought to engage with the substance of
Mr Flynn’s complaint, taking no point that some six months
had
passed. Having spoken to the hydraulic engineer employed by Exlec, Con
Theodoridis, PPK was satisfied that Exlec did not have
a hydraulic business
before being acquired by PPK. Further:
“Using the “Calculation of Gross Turnover of Exlec PPK Pty
Ltd”, we advise of the following adjustments that need to be made
based on a quick analysis performed over the past few days:
|
Gross Turnover as calculated by [Mr Masters]
|
$1,002,914
|
|
Less adjustments per the spreadsheet of 29.11.16:
|
|
|
New (Hydraulic) business tab
|
(161,794)
|
|
Cost recovery internal jobs tab
● Int URC (Note 1)
● Internal (Note 2)
|
(9,844)
(4,461)
|
|
Amended Gross Turnover
|
$ 826,815
|
Note 1 – internal non-recovery costs of $9,844 are in relation to
updating technical documentation, training and associated work that
is not
chargeable. These costs are not revenue related.
Note 2 – of the $75,188 internal work, $4,461 related to the PPK
employees labour costs for the FLP1. It should be noted that these
were
employees hired subsequent to the acquisition of Exlec and which were allocated
to the Exlec team but did work across other
PPK products as noted earlier.
...”
- That
is, even if the Second Performance Conditions had been varied as suggested, PPK
considered that Exlec still did not satisfy the
conditions. PPK also suggested
that the dispute resolution procedures “may be the most practical method
to resolve this matter”,
at odds with PPK’s earlier stance. (This is
also the first mention of “FLP1”, in Note 2, which became the issue
on which the plaintiffs ultimately succeeded in Court of Appeal, such that the
Second Performance Conditions were found to have been
satisfied.)
- In
November 2017, PPK’s share capital was increased by some 4 million shares
issued to directors for services rendered, and
reduced by 15.5 million shares in
a buyback. The resulting issued share capital was 61,996,498 shares.
- On
1 December 2017, Mr Flynn emailed Mr Levison, advising that he was still waiting
for “the promised reply” regarding
the Second Performance Shares and
asked what was causing the delay. On 6 December 2017, PPK’s solicitor
replied to Mr Flynn
in firm terms, disputing that the Share Purchase Agreement
had been varied. There the matter lay for more than a year.
- In
November and December 2018, PPK undertook a capital raising, issuing
9.1 million shares. PPK’s share capital was then 71,096,498
ordinary
shares. By the end of the year, PPK’s share price had improved to $0.53
per share.
These proceedings
- In
January 2019, these proceedings were commenced. By Summons and Commercial List
Statement, the plaintiffs contended that the Share
Purchase Agreement had been
varied from NPAT to revenue, and that the revenue threshold of $1 million had
been met. Beyond referencing
pre-litigation correspondence on the subject, the
pleadings did not specify precisely how it was said that revenue exceeded $1
million.
- From
March to December 2019, PPK’s issued share capital increased to 85,101,035
ordinary shares. In March 2019, PPK declared
an interim dividend of $0.01. In
October 2019, a final dividend was declared of $0.01. By the end of the year,
PPK’s share price had improved to $5.10 per share.
- In
2020, some 3.7 million ordinary shares were issued. In March and October 2020,
an interim and final dividend were declared of $0.01
respectively. In December
2020, an in-specie dividend was declared of Li-S Energy Ltd shares, being
$0.025 payable by way of 0.3846 shares in Li-S Energy Ltd for every PPK share.
By the end of the year, PPK’s share price had improved to $5.78 per
share.
- In
2021, the issued share capital increased by some 500,000. The share price peaked
in September 2021, reaching $21.04 a share. By
the end of the year,
PPK’s share price had dropped back to $9.29 per share.
- By
May 2022, issued share capital stood at some 89.3 million ordinary shares. In
June 2022, an in-specie dividend was issued for shares in PPK Mining
Equipment Group Ltd (PPKMEG), being $0.0281 payable by way of
0.1569 shares in PPKMEG for every one share in PPK. An in-specie
distribution of PPKMEG shares was also issued, being $0.1511 payable by way of
distribution of 0.8431 shares in PPKMEG for every
PPK share. By July 2022,
PPK’s share price had fallen to $2.19 per share.
- The
trial took place in July and August 2022. In respect of damages, the plaintiffs
mainly relied on affidavits of Mr and Mrs Flynn
and expert stockmarket analyst,
Roy Shackley, to which I will return.
Primary judgment
- In
December 2022, I concluded that the Share Purchase Agreement had been varied.
PPK failed to provide an NPAT Statement which complied
with cl 9.1 as varied.
The defendants’ breach of cl 9.1 had the consequence that the Dispute
Resolution Procedure could not
be completed in accordance with cl 9. The expert
determination process could not begin where the defendants, in breach of
contract,
did not provide the starting point for that process, being an NPAT
Statement that complied with the Share Purchase Agreement. Nor
could the Dispute
Resolution Procedure be deployed to resolve the issue as to whether the Share
Purchase Agreement had been varied.
An Independent Accountant could not
determine this issue, which did not fall within cl 9.4. Nor should the
plaintiffs be thereby
precluded from any entitlement to further shares if, in
fact, the Second Performance Conditions were satisfied.
- I
further concluded that the expert determination clause did not oust the
jurisdiction of the Court to determine the matter: cl 19.5.
In Flynn (No
2) at [123]:
“Nor do I accept the defendants’ submission that, in determining
whether revenue exceeded $1 million, the Court is confined
to resolve the issues
identified by the NPAT Statement and Dispute Notices that were served.
The Court is not standing in shoes of the Independent Accountant. The Court is
determining whether the plaintiffs satisfied
the Second Performance Conditions
on the basis of the evidence before the Court, where the expert determination
process could not,
and now cannot, be undertaken due to the defendants’
breach of contract.”
- PPK
had made this submission where the issues raised by the plaintiffs at trial as
to why the revenue threshold was met differed greatly
from those canvassed in
pre-litigation correspondence. At trial, the plaintiffs relied on four items as
resulting in revenue exceeding
$1 million:
(a) The plaintiffs claimed revenue generated by the hydraulics business
($161,794) said to form part of Exlec’s business on
sale to PPK. I made no
adjustment to revenue on this account, where I was not satisfied that Exlec had
a hydraulics business.
(b) The plaintiffs sought to have a customer deposit ($51,579) recognised as
revenue on the basis that the contract had been cancelled.
I made no adjustment
on this account, where I was not satisfied that the job had been cancelled.
(c) Internal jobs ($12,709), in particular, “FLP-1” components made
by Exlec for other divisions of PPK to remedy a product
defect in a
“Coaltram” underground transport utility vehicle ($304,610), of
which six were sold during the NPAT period
(at a loss). I did not accept that
any adjustment to revenue should be made on account of this item.
(d) The plaintiffs claimed revenue generated by use of Exlec’s
Certificates of Recognition in other parts of PPK’s business
($258,846). I
concluded that revenue earned by another division of PPK was not revenue
“of” the Business.
- In
the result, I concluded that the Second Performance Conditions were not
satisfied. Of the revenue items advanced by the plaintiffs
at trial, the
“hydraulics business” item was clearly recognisable in
pre-litigation correspondence. The “internal
jobs” item was also
referred to in pre-litigation correspondence, but not to the extent that it was
pursued at trial given
the claim then made in respect of “FLP-1”
components.
Appeal
- In
August 2023, the Court of Appeal concluded that the Second Performance
Conditions were satisfied. In short, properly construed
in the circumstances
surrounding the Share Purchase Agreement, revenue from “internal
jobs” was to be included in Business
Revenue, not by the internal
allocation of revenue within the PPK group of companies but on the artificial
assumption that the Business
and the PPK group were standalone entities and on
the basis of a transfer price. The parties agreed that, if a transfer price was
to be recognised for “internal jobs”, then that price was cost plus
a 16.4% margin.
- Of
the four items of revenue relied upon at trial:
(a) The plaintiffs did not appeal in respect of the revenue said to be generated
by the hydraulics business.
(b) The appeal was dismissed in respect of the claim for the deposit.
(c) The plaintiffs succeeded in respect of internal jobs ($12,709) and
“FLP-1” components ($304,610), which was sufficient
to get the
revenue ‘across the line’.
(d) Stern JA also allowed the appeal in respect of the Certificate of
Recognition claims ($258,846), whilst Leeming and Mitchelmore
JJA did not
express a view on this item, on which nothing turned in light of the success of
the FLP-1 claim.
- The
matter was remitted to me for the assessment of damages. I assume the remittal
includes consideration of the plaintiffs’
prayers for equitable relief.
Remedies sought
- By
Amended Summons, the plaintiffs seek relevantly:
“8 A declaration that the first or second plaintiff is
entitled to 3,441,039 shares in the second defendant being the present
value of
$500,000 shares in PPK Ltd based on the volume weighed average price of shares
for the 30 days prior to the acceptance of
the Revenue Variation on or about 16
October 2016.
9 An order that the second defendant issue the first or second
plaintiff with 3,441,039 shares and pay the first or second plaintiff
any
dividends payable on those shares as if they had been issued on 16 October
2015.
10 In the alternative to prayers 8 and 9, damages.
10A In the alternative to prayers 8, 9 and 10 equitable
compensation.”
In closing submissions, the plaintiffs reduced the number of PPK shares to
2,314,568 or, alternatively, 1,605,162.
- But
for PPK’s breaches of the Share Purchase Agreement, it was said that PPK
was required to issue the shares on 16 October
2016 (two years after Completion;
the plaintiffs later revised this date in submissions to 29 November 2016, being
the date of the
revised NPAT statement) or, alternatively, 17 February 2017
(the date of PPK’s response to Mr Masters’ revenue calculation).
In
the premises, the plaintiffs had suffered (unparticularised) loss and damage.
- The
plaintiffs submitted that the Second Performance Shares, together with
dividends, totalled between $4.4 million and $6.4 million.
The disconformity
between these figures and $500,000 is immediately apparent.
Lay
evidence
- In
affidavits sworn shortly before the commencement of the trial, Mr and Mrs Flynn
said that, if Flynfam had received PPK shares in
November 2016, then it was the
couple’s intention to transfer a portion of the shares to their
self-managed superannuation
fund (what portion is not specified) and to hold on
to “all of the shares” for the long term. Whilst the affidavits are
not entirely clear, I assume that the shares which the couple intended to hold
were the portion of the Second Performance Shares
transferred to their
self-managed superannuation fund. Mrs Flynn said that she deferred to her
husband on such matters. It would
thus appear that any decision to hold or sell
PPK shares would have been made by Mr Flynn.
- I
attach little weight to Mr and Mrs Flynn’s evidence as to what they would
have done with the Second Performance Shares, for
three reasons. First, this is
hindsight evidence. The inherent unreliability of hindsight evidence was
described by Gleeson CJ in
Rosenberg v Percival [2001] HCA 18; (2001) 205 CLR 434 at
[16] and McHugh J in Chappel v Hart (1998) 195 CLR 232 at 246. Where the
share price rose from $0.125, when the trading hold was lifted in August 2017,
to $21.04 in September 2021, one
might readily think that one might have
retained such a share, but such evidence is infused with hindsight.
- Second,
the evidence points in the other direction. Mr Flynn was understandably worried
about the performance of PPK’s shares.
By May 2015, Mr Flynn was concerned
about the drop in PPK’s share price. In September 2015, he was concerned
about the suspension
of PPK’s shares on the ASX. As at November 2016 (and
the months which followed), PPK shares had an unhappy share trading history
of
prolonged suspension. At the point at which it was said that Mr Flynn would have
decided to hold the shares, he more likely viewed
such a prospect with concern
and circumspection.
- Relevant
to any decision as to whether to sell or hold PPK shares would have been Mr
Flynn’s assessment of the ability of PPK’s
senior management to turn
the situation around. But Mr Flynn was critical and mistrustful of PPK’s
senior management, suggesting
they had “questionable ethics” and
were incompetent: see [38]. Nor would Mr Flynn had continued to hold PPK shares
for a non-commercial reason, such as a sense of loyalty. Mr Flynn resigned
at
the earliest opportunity after completing the requirement of his continued
employment in the Second Performance Conditions. He
was suing PPK in the
Industrial Magistrates Court. I expect that Mr Flynn wanted nothing more to do
with PPK.
- As
far as can be told, Mr Flynn was also without a job. Whether (and when)
Mr Flynn gained further employment, after resigning from
PPK, is not known.
Whether Mr and Mrs Flynn had the financial wherewithal to resist liquidating the
Second Performance Shares is
not known. Such evidence was within the power of
the plaintiffs to adduce. I infer from the troubled financial history of Exlec,
before it was acquired by PPK, that Mr Flynn was not wealthy: see [3]. What is known is that
this was a time of widespread redundancies, scarce work and an industry
downturn. The fact that the couple
only intended to retain a portion of the
Second Performance Shares indicates that they proposed to sell at least some of
the shares.
- Third,
I note my adverse credit finding in respect of Mr Flynn, specifically, that I
could not rely on Mr Flynn’s evidence in
the absence of corroboration from
a contemporaneous document, a reliable witness, or where his evidence was
against interest. As
such, I am reluctant to attach much weight to what he has
said, absent corroboration. Where the fate of the First Performance Shares
is
not known, and it would have been simple for the couple to put on evidence that
they continued to hold those shares, there is
no corroboration to hand. That is,
I would have been more inclined to accept Mr Flynn’s evidence that he
would have held the
Second Performance Shares for the long term if there was
evidence that he had made the same investment choice with the First Performance
Shares.
- In
the result, Mr Flynn’s decision to sell or hold the Second Performance
Shares – had he been issued with the shares
in November 2016 or
thereabouts – would have been based on whether it made commercial sense to
sell or hold the shares at the
time, rather than any ‘blanket’
decision to hold the shares for the long term. The performance of PPK
shares to that point could hardly be described as ‘blue chip’ stock.
Mr Flynn lacked confidence
in PPK management to turn the situation around. Mr
Flynn’s financial position was also, likely, modest or difficult. It is
more likely that Mr Flynn would have sold the Second Performance Shares and used
some of the funds to live on (implicit in the couple’s
evidence that they
would only have continued to hold a portion of the shares) and
re-invested the balance (if any) in other assets thought more likely to increase
in value.
Expert evidence
- The
plaintiffs relied on the expert evidence of Mr Shackley, who was asked to
provide the VWAP Price for PKK shares on the assumption
that the Performance
Share Issue Date was either 29 November 2016 or 17 February 2017. Mr Shackley
was asked to exclude any days
on which PPK was in a trading hold during the
required 30-day period. Mr Shackley further assumed that the phrase “over
the
30 days on which trading in PPK Shares took place immediately preceding (but
not including) the Performance Shares Issue Date”
included only the
continuous 30 days in which the ASX market was open to trade and PPK
shares were open to official quotation. As PPK shares were suspended from
trade
from 29 September 2015 to 16 August 2017, Mr Shackley included the
continuous 30 days that PPK shares were open to quotation
prior to suspension on
29 September 2015. As a consequence, Mr Shackley’s calculation was the
same, using either of the two
dates he was asked to assume was the Performance
Shares Issue Date. Based on these assumptions, Mr Shackley calculated a VWAP
Price
of $0.216023.
- Mr
Shackley was asked to re-calculate VWAP having regard to 30 days in which a
trade in PPK shares actually took place (which I have
concluded was what the
definition of VWAP Price called for). This date range was from 11 May 2015 to 27
August 2015. The VWAP based
on these 30 days of trading was $0.311495. The
calculation, however, still used trading days before the trading hiatus, which
the
definition of VWAP Price did not envisage, as such trades lacked the
“immediacy” required by the definition and the contractual
purpose.
Submissions
- The
plaintiffs submitted that the appropriate remedy was an order for specific
performance of the defendants’ obligation to
issue the shares but as if
the shares had been issued at the time of the breach, in November 2016 or
February 2017, including the distribution of all dividends attached to the
shares. The particular nature of
the shares which the plaintiffs should have
obtained, and the rights that subsequently attached to them, including the issue
of dividends
in the form of cash and shares in other companies, was said to be a
matter that should incline the Court to grant specific performance:
Dougan v
Ley [1946] HCA 3; (1946) 71 CLR 142 at 151 (per Dixon J). While PPK and Li-S Energy Ltd
shares were available on the ASX, PPKMEG's shares were unlisted and not readily
available for purchase in the market: Lionsgate Australia Pty Ltd v Macquarie
Private Portfolio Management Ltd [2007] NSWSC 371 at [64]- [65]. (There is no
evidence of this beyond the plaintiffs' submissions. The name of the company as
recorded in Mr Shackley’s document
suggests it was listed on the
ASX. Perhaps he intended to refer to PPK Mining Equipment Group Pty Ltd.
I do not know.)
- Whilst
Mr Shackley’s calculations did not accord with the requirements of
cl 7.2, I will set out the plaintiffs’ submissions as
to what followed
from Mr Shackley’s research, based on his re-calculations, that is, a VWAP
of $0.311495. The plaintiffs submitted
that Flynfam would have been issued with
1,605,162 PPK shares and would have held the shares. Flynfam would subsequently
have received
cash dividends and dividends payable in shares, being
617,345 shares in Li-S Energy Ltd and 1,605,162 shares in PPKMEG. These
shares
and dividends were said to be worth $4,456,720. Where PPKMEG are said to
be unlisted, the plaintiffs used the ‘payment rate’
for the share /
dividend distribution as a measure of damages (being a calculation which was not
explained, nor was I able to reconcile
it with Mr Shackley’s
figures).
- The
plaintiffs submitted that it made no difference whether contractual damages were
awarded or specific performance ordered, as contractual
damages should be
assessed at the date of trial, not at the date of breach. This result was
said to follow PNC Lifestyle Investments Pty Ltd v REW08 Projects Pty Ltd (No
2) [2017] NSWSC 993 at [32]- [42] (per Darke J). Flynfam missed the
opportunity to sell the shares at the peak price of $21.80 (although I
understood the plaintiffs’
evidence was that they would have held the
shares for the long term). The plaintiffs submitted that by taking the share
price at
the start of the hearing, the Court was already discounting for
vicissitudes as such an approach steeply discounted the best possible
outcome of
obtaining the shares in 2016 or 2017 and selling them at the top of the market:
Malec v JC Hutton Pty Ltd (No 2) (1990) 169 CLR 638. As for equitable
compensation, the plaintiffs submitted that if they could not get the shares
they should have got in October 2016,
then they should obtain a money order that
was appropriate given the value of the shares as at trial. That was what was
necessary
to put the plaintiffs in the position they would have been if the
contract had been complied with.
- The
defendants submitted that contractual damages were adequate and there was no
basis to grant equitable relief: Bankstown City Council v Alamdo Holdings Pty
Ltd [2005] HCA 46; (2005) 223 CLR 660 at [11] (per Gleeson CJ, Gummow, Hayne & Callinan
JJ); Inlon Pty Ltd v Celli SpA [2017] NSWSC 569 at [151] (per Parker
J); Redland Bricks Ltd v Morris [1970] AC 652 at 665 (per Lord Upjohn).
Further, if no injunction was ordered, there was no basis for any further relief
under s 68 of the Supreme Court Act 1970 (NSW) (even if it was pleaded).
Where damages are an adequate remedy, s 68 “is simply not
available”: PNC Lifestyle Investments v REW08 at [40] (per Darke
J). The fact that the market price of the shares subsequently increased and then
fell back was not a principled
reason to assess damages other than at the date
of breach. For all the Court knew, in the future, the market price may be lower
than
it was in 2015, 2016 or 2017. Contractual damages was the value of the
shares as at the date on which they would have been issued
had the defendant
performed its contractual obligation: Brimaud v Boston Securities
Entertainment Investments Pty Ltd (Federal Court of Australia, 9 September
1998, unrep) (per Emmett J); as explained in Ailakis v Olivero
(No 2) [2014] WASCA 127; (2014) 100 ACSR 524 at [138]- [141].
- In
the event that the Court was minded to grant an equitable remedy, the defendants
contended that the plaintiffs were guilty of laches, where the
proceedings were not commenced until 12 January 2019. Since 21 August 2017, PPK
shares have regularly traded on the ASX
and the VWAP has varied from day-to-day.
A Court will decline to set aside an invalid allotment of shares if delay on the
part of
a plaintiff has led innocent third parties to act to their detriment on
the state of the share register: Haas Timber & Trading Co Pty Ltd v Wade
[1954] HCA 39; (1954) 94 CLR 593; J D Heydon, M J Leeming, P G Turner, Meagher, Gummow
& Lehane’s Equity: Doctrine & Remedies (5th ed, 2014,
LexisNexis) at [38-030]; see generally, Nassif v Sun [2021] NSWSC 990 at
[169]. The defendants submitted that the same should apply where a plaintiff has
delayed in approaching the Court for an order for the
issuance of shares in a
publicly listed company. The impact of the equitable relief on third parties,
who purchased shares without
notice of the plaintiffs’ claims, was said to
be a compelling reason why relief ought to be refused.
Specific
performance or contractual damages?
- The
plaintiffs seek not only the Second Performance Shares but to capture the uplift
in the PPK share price since the second anniversary
of Completion, by calling in
aid various equitable and common law doctrines or a blend of same.
- The
plaintiffs put their primary claim as one for equitable relief – being
declaratory relief and specific performance –
with contractual damages
relied on “in the alternative”. The plaintiffs did not seek specific
performance in the strict
sense, being to compel the execution of a contract so
that the transaction could complete. Rather, the plaintiffs sought the aid
of
the Court to compel the defendants to perform their obligations according to the
terms of the contract: Waterways Authority of New South Wales v Coal &
Allied (Operations) Pty Ltd [2007] NSWCA 276 at [62] (per Beazley JA);
Paolucci v Makedyn Pty Ltd (2021) 20 BPR 41,749 at [10]-[11] (per Leeming
JA, White and McCallum JJA agreeing).
- As
Leeming JA explained in Paolucci v Makedyn, in requiring the performance
of a contractual term, equity is acting in aid of the plaintiff’s legal
rights: at [16]. However,
“... equity will not intervene to grant the
remedy unless there is some good ground for doing so .... It is thus necessary
for the plaintiff to prove that damages are not an adequate remedy. ... This is
the major hurdle that a claimant seeking specific
performance must
overcome”: at [17], quoting R E Megarry (1960) 76(302) The Law
Quarterly Review. In Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd
(2012) 28 BCL 226; [2010] NSWCA 283, Campbell JA observed, “The only
justification for equity ever involving itself in providing a remedy for breach
of a common
law obligation is if the remedy provided by the common law is
inadequate”: at [5]; see likewise Bankstown City Council v Alamdo
Holdings Pty Ltd [2005] HCA 46; (2005) 223 CLR 660 at [11] (per Gleeson CJ, Gummow, Hayne
& Callinan JJ).
- As
to whether damages are an adequate remedy, the test is whether it is just in all
the circumstances that the plaintiff should be
confined to damages: Coulls v
Bagot’s Executor & Trustee Co Ltd [1967] HCA 3; (1967) 119 CLR 460 at 503 (per
Windeyer J) (“the remedy, damages, cannot satisfy the demands of
justice”); Tullett Prebon (Australia) Pty Ltd v Purcell (2008) 175
IR 424; [2008] NSWSC 852 at [97] (per Brereton J), quoting Evans Marshall
& Co v Bertola SA [1973] 1 WLR 349 at 379 (per Sachs LJ), followed in
Paolucci v Makedyn at [17].
- Damages
may not be an adequate remedy in contracts for the sale of shares, in the
circumstances examined in ICF Spry, The Principles of Equitable Remedies:
Specific Performance, Injunctions, Rectification and Equitable Damages (9th
ed, 2014, Sweet & Maxwell) at 66-67:
“If ... there is no adequate market for the shares ... to confine a
purchaser to an award of damages would not be to leave
him in the same position
as if the contract had been carried out. So if shares are not listed for
quotation, or the parcel in question
is a controlling interest or is of such a
size or nature that to acquire it elsewhere would involve undue difficulty or
uncertain
expenditure, damages may be regarded as inappropriate. If however the
shares ... are readily obtainable ... damages may provide an
appropriate remedy.
Nonetheless even if there is an available market, the size of the relevant
parcel, for example, or uncertainty
in the amount that the plaintiff would be
required to pay, or the risk that to seek to purchase it might prejudice or
inconvenience
unduly the plaintiff or third parties, may bring about a different
position. Further, where the plaintiff ... seeks specific performance
of a
contract to subscribe for shares different considerations arise, and hence each
case must be examined separately to determine
whether damages are
appropriate.”
Contractual damages
- The
first matter to consider is contractual damages, before turning to whether it is
just in all the circumstances that the plaintiffs
should be confined to this
remedy or whether the court should exercise its discretion to grant specific
performance. The general
measure of damages is the amount, so far as money can
provide, necessary to put the plaintiff in the position they would have been
if
the contract had been performed: Koufos v C Czarnikow Ltd (The Heron II)
[1969] 1 AC 350; Wenham v Ella [1972] HCA 43; (1972) 127 CLR 454 at 460 (per Barwick
CJ); Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653; [1986] HCA
81. This requires the Court to compare the actual position of the party who
sustains a loss by reason of the breach to what that party’s
position
would have likely been in a counterfactual scenario in which the contract was
performed: Brighton Automotive Holdings Pty Ltd v Honda Australia Pty Ltd (No
2) [2024] VSC 262 at [74] (per Matthews J).
- The
“ruling principle” is that contractual damages are assessed at the
date of the breach, “not as a matter of discretion,
but as an integral
aspect of the principle, which is concerned to [provide] the economic value of
the performance of the contract
at the time that performance was promised. In
this way, the measure of damages captures ... the benefit of the bargain and so
compensates
... for the loss of that benefit”: Clark v Macourt
[2013] HCA 56; (2013) 253 CLR 1 at [109] (per Keane J). Further, at [110]:
“The application of the ruling principle to measure value lost at the date
of breach of contract serves the important end of
bringing finality and
certainty to commercial dealings. It ensures that whatever might befall the
[promisee] after the date of breach,
for good or ill ... and whatever movements
may occur in the market, these developments have no bearing on the entitlement
of the
[promisee] and the liability of the [promisor].”
- This
rule, however, is not universal and “must give way in particular cases to
solutions best adapted to give an injured plaintiff
that amount in damages which
will most fairly compensate him for the wrong he has suffered: Johnson v
Perez [1988] HCA 64; (1988) 166 CLR 351 at 355-356 (per Mason CJ), following Johnson v
Agnew [1979] 1 All ER 883 at 896 (per Lord Wilberforce) (“But this is
not an absolute rule; if to follow it would give rise to injustice, the court
has
power to fix such other date as may be appropriate in the
circumstances”). For example, for contracts for sale of goods where
there
is no market in which the injured party can buy replacement goods, the date of
non-delivery may not be appropriate and a later
date may be used: Johnson v
Perez at 357.
- If
damages are assessed at the date of breach, subsequent events may be taken into
account so that the damages awarded are as accurate
as possible: Wenham v
Ella; Smith New Court Securities Ltd v Citibank NA [1996] UKHL 3; [1997] AC 254; Golden
Strait Corp v Nippon Yusen Kubishika Kaisha [2007] 2 AC 353;
[2007] UKHL 12. The Court must do the best it can in assessing damages
notwithstanding the difficulties in doing so, where estimation, if not
guesswork,
may be necessary in assessing the damages to be allowed: Fink v
Fink [1946] HCA 54; (1946) 74 CLR 127 at 143 (per Dixon and McTiernan JJ); McRae v
Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377 at 411-412 (per Dixon
and Fullagar JJ); The Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174
CLR 64 at 83 (per Mason CJ and Dawson J).
The breach
- The
breach of contract established at trial, and upheld on appeal, was PPK’s
failure to provide an NPAT Statement meeting the
description in the Share
Purchase Agreement as varied, which derailed the cl 9 process. This arose from
PPK’s refusal to accept
that the Share Purchase Agreement had been varied
from NPAT to revenue.
- The
plaintiffs also alleged that the revised NPAT Statement did not include
all revenue and the defendants thereby breached the Share Purchase Agreement.
But
for these breaches, it was said that PPK was required to issue Flynfam with
PPK shares. These breaches of contract were not, however,
established at trial.
Rather, I concluded that PPK’s calculation of revenue was correct. This
alleged breach of the Share Purchase
Agreement was not the subject of the
appeal.
- For
completeness, it was no breach by PPK to issue an NPAT Statement which put
forward a revenue figure which proved to be wrong.
Nor was it a breach of the
Share Purchase Agreement for PPK to provide a revenue calculation which differed
from that suggested by
Mr Masters ($1,002,914) or the revenue established at
trial ($743,689) or that found by the Court of Appeal ($1,048,299). The cl
9
process simply envisaged that PPK would put forward its calculation, which the
plaintiffs would check against PPK’s records
and to which they would
respond by accepting PPK’s figure or putting forward a different figure.
To this, PPK could respond.
If the parties could not reach a consensus, then the
expert determination process would ensue to ascertain revenue. The Share
Purchase
Agreement did not even require the parties to act reasonably: cl 19.11.
The counterfactual
- What
would have happened if PPK had provided an NPAT Statement prepared on the basis
of the Share Purchase Agreement as varied, calculating
whether the Second
Performance Conditions were satisfied having regard to revenue? This is easy to
envisage, where the NPAT Statements
which were provided included revenue,
albeit as a line item rather than as the ‘bottom line’. The figure
was $924,505 in the initial
NPAT Statement and $762,056 in the revised NPAT
Statement.
- As
to what would have happened next in the counterfactual, it can be said with some
confidence that Mr Flynn would not have accepted
PPK’s initial or revised
revenue calculation. Mr Flynn would have proffered an alternate figure. There is
no reason to think
that Mr Flynn’s calculation would have been different
from that proffered by Mr Masters, being $1,002,914. That figure was
provided
two months after the revised NPAT Statement and after Mr Masters had had an
opportunity to examine PPK’s calculation,
supporting spreadsheets and
general ledger. Nor is there any reason to think that PPK would have accepted
this calculation.
- In
the counterfactual, PPK accepted that the Share Purchase Agreement had been
varied and, thus, that the cl 9 process could be followed.
Where the plaintiffs
did not accept the NPAT Statement, and PPK did not accept the plaintiffs’
Dispute Notice, it is likely
that the cl 9 process would have proceeded to an
expert determination. Where the parties did not adhere to the timeframes
specified
in cl 9 in reality, it is reasonable to think that they would not have
been more punctual in the counterfactual. It is likely that
the process would
have taken at least four months, and probably longer. Given the intervening
Christmas period, I consider that the
cl 9 process would likely have taken five
months, ending in April 2017.
- In
the counterfactual, it cannot be assumed that the outcome of the expert
determination process would have been that the Independent
Accountant concluded
that revenue exceeded $1 million. I say this for, essentially, three reasons.
- First,
the expert determination process was to be conducted within relatively short
timeframes and determined by an accountant, not
by a lawyer. It cannot be
assumed that the Independent Accountant would have reached the view which I did
after a three-week trial
and with the benefit of extensive written submissions
from senior and junior counsel, nor the views reached by the Court of Appeal
on
conclusion of a two-day appeal.
- Second,
by and large, the revenue adjustments for which the plaintiffs contended in
these proceedings were not articulated until long
after the correspondence
exchanged between Mr Flynn and PPK in respect of the NPAT Statement and revised
NPAT statement. The first
mention of the FLP-1 enclosures was made by PPK
ten months after the revised NPAT Statement: see [47]. The FLP-1 enclosures
were not referred to in the pleadings. It was not until Mr Flynn’s first
affidavit of 9 October 2019
that reference was made to FLP-1 enclosures. The
best indication of the revenue items which Mr Flynn would have raised during the
‘counterfactual’ expert determination process are the matters raised
by Mr Masters on 31 January 2017: see [41]-[42]. Mr Masters allowed for additional revenue of
$79,064 for goods and services provided by Exlec to other PPK companies and a
further
$161,794 for revenue said to be generated by a hydraulic business
operated by Exlec before being purchased by PPK. Both of Mr
Masters’ adjustments to revenue had to be accepted by the Independent
Accountant before the revenue threshold was exceeded.
- Third,
the conclusions reached by the Independent Accountant may have varied depending
on the opinions or approach of the particular
accountant who undertook the task.
Accepting that accounting principles are well-settled, the range of possible
outcomes may be seen
from the widely differing and firmly held views of expert
accountants on the revenue items at trial, being the plaintiffs’
forensic
accountant, Suzanne Delbridge of Delbridge Forensic Accounting of Hamilton East,
and PPK’s forensic accountant, Campbell
Jackson, senior partner of Ernst
& Young in Melbourne. Some of the experts’ divergent views were
explicable by their differing
instructions, but far from all.
- If
the Independent Accountant had dealt with the revenue items which Mr Flynn would
likely have proffered in the counterfactual expert
determination process, being
internal jobs and hydraulics business, in accordance with the conclusions
reached in these proceedings,
including on appeal, then he or she would have
allowed $79,064 for “internal jobs” and disallowed $161,794 for the
“hydraulics
business”, such that revenue would have been less
than $1 million. Whether the Independent Accountant would have been a Ms
Delbridge, a Mr Jackson or someone with a different view
altogether, there is a
chance that the Independent Accountant would have accepted the revenue items
proffered by Mr Flynn and Mr
Masters, and concluded that the revenue target was
met, but this cannot be regarded as a foregone conclusion.
- Of
course, damages may be awarded for loss of a chance or opportunity that can be
“causally linked to a breach of contract”:
N C Seddon and R A
Bigwood, Cheshire and Fifoot Law of Contract (11th ed, 2017, LexisNexis)
at [23.14]. Drawing on my judgment in About Life Pty Ltd v Maddocks Lawyers
[2021] NSWSC 1370 at [505]- [511], the plaintiffs must establish that there
was some prospect of success of a commercial gain, of which the
plaintiffs would have availed themselves. (These elements are satisfied.)
The
Court must then value the lost opportunity by reference to the degree of
probability that the events posited by the plaintiff
would have occurred, taking
a “broad brush” but nonetheless evidence-based approach; see more
recently Lindsay-Owen v HWL Ebsworth Lawyers (No 2) [2024] NSWSC 541 at
[203] (per Harrison CJ at CL).
- Doing
the best I can, I consider that there was a 50:50 chance that the Independent
Accountant would have accepted Mr Flynn’s
arguments in the cl 9
process. That is, there was a 50% chance that the Independent Accountant would
have determined that the Second
Performance Conditions had been satisfied, such
that the plaintiffs became entitled to the issue of $500,000 worth of PPK shares
three business days after final determination under cl 9.4. At this point in the
analysis, therefore, contractual damages are $250,000,
reflecting a loss of the
chance to become entitled to $500,000 worth of shares. To this would be added
pre-judgment interest from
1 May 2017 to date. By my calculations, this is a
total of some $350,000.
Inability to give effect to cl
7.2
- Assuming
that the expert determination process took five months, then the expert
determination would have been issued in April 2017
in the counterfactual.
However, PPK’s shares remained suspended from trade and had then been
suspended for 19 months. As earlier
construed, the formula to calculate the
required number of PPK shares proceeded on the mutual assumption of the
contracting parties
that PPK shares could be traded on the ASX in the
period immediately preceding the Performance Shares Issue Date. This
formula could not be applied for want of relevant data, where there are no
trades in PPK
shares on the ASX “immediately preceding” the
Performance Shares Issue Date. The number of PPK shares to be issued could
not
be ascertained.
- On
one view of it, cl 7.2 was frustrated in the counterfactual. Part of a contract
may be frustrated if that part of the contract
is distinct from the remainder
such that it is, for practical purposes, a separate contract: J W Carter,
“Partial Termination
of Contracts” (2008) 24 Journal of Contract
Law 1 at 6; NSW Law Reform Commission, Frustrated Contracts (1976) at
[2.6]. Here, the contractual provisions concerning the Second Performance Shares
were clearly separable from the provisions
concerning the sale of Exlec and
Exlec Holdings on Completion and the First Performance Shares.
- A
contract, or part of a contract, is frustrated where, "without default of
either party a contractual obligation has become incapable of being
performed because the circumstances in which performance is called for would
render it a thing radically different from that which was undertaken by
the contract ... It was not this that I promised to do": Davis Contractors
Ltd v Fareham Urban District Council [1956] UKHL 3; [1956] AC 696 at 729 (per Lord
Radcliffe). As Mason J explained in Codelfa Construction Pty Ltd v State Rail
Authority (NSW) (1982) 149 CLR 337; [1982] HCA 24, "a contract will be
frustrated when the parties enter into it on the common assumption that some
particular thing or state of affairs
essential to its performance will continue
to exist or be available, neither party undertaking responsibility in that
regard, and
that common assumption proves to be mistaken": at 357; Woolworths
Group Ltd v Gazcorp Pty Ltd [2022] NSWCA 19 at [212]- [221] (per Bell P).
- Here,
the last PPK share trade was in September 2015. After suspension from trade, the
last price at which PPK shares traded was,
obviously enough, no longer a good
indication of the current market value of such shares, where the information in
PPK’s undisclosed
financial results would be likely to have an impact on
the share price: see [27]-[28]. Once that information was supplied to the market
and share trading resumed, a correction to the share price could be expected,
as
indeed happened when the trading hold in PPK shares was lifted: see [46]. As Beach J explained
in TPT Patrol Pty Ltd (as Trustee for Amies Superannuation Fund) v Myer
Holdings Ltd [2019] FCA 1747; (2019) 293 FCR 29 at [666]- [669], at any particular point in
time, the price of an actively traded security reflects all publicly available
information and represents
the present discounted value of the future cashflows
expected to be generated by the underlying asset. As new information becomes
available, investors’ perceptions as to the net present value of the
company’s future cashflows may change, resulting
in a correction to the
share price.
- If
PPK had said to Mr Flynn in April 2017 that it proposed to calculate the number
of shares under cl 7.2 based on share trades from
2015, before a 19-month
suspension in trade, Mr Flynn would have been within his rights to protest that
those share prices did not
reflect market value. If the number of PPK shares had
been calculated using that formula, then Mr Flynn would have been short-changed
and received too few shares, calculated on an out-of-date share price which
likely far exceeded the share price if, and when, trading
in PPK shares resumed.
Mr Flynn could rightly exclaim that issuing the Second Performance Shares in
such a manner would be radically
or fundamentally different from what he had
been promised.
- Of
course, the effect of frustration is not to avoid a contract from the beginning
but to excuse the parties from performing future
obligations. By close analogy
to what follows on termination of a contract for breach, “an event of
frustration will not remove,
or negate, the existence or efficacy of what are
already unconditionally accrued rights under the contract, from periods whilst
the
contract’s performance was operative: Jamac Construction Group Pty
Ltd v De Mol Investments Pty Ltd [2014] WASC 273 at [44] (per Martin J),
applying McDonald v Dennys Lascelles Ltd [1933] HCA 25; (1933) 48 CLR 457 at 476-477
(per Dixon J). In the counterfactual, the plaintiffs became entitled to the
Second Performance Shares but the number of
shares could not be calculated as
the operation of cl 7.2 was discharged by frustration. The plaintiffs
remained entitled to damages
for breach of the promise in cl 7.2. The amount of
damages is obvious: the plaintiffs were entitled to $500,000 worth of PPK shares
and, absent issue of the shares, to $500,000. Where the plaintiffs had a 50:50
chance of getting to this point, the damages relevantly
remain $250,000 plus
pre-judgment interest.
- If
I am wrong about this, and if by some means PPK had issued the Second
Performance Shares to Mr Flynn in the counterfactual, such
shares would have
been held in escrow for 12 months, that is, until April 2018. By then, the
trading halt of PPK shares would have
been lifted. PPK shares were then trading
around $0.27 per share. The share price was one-third of the share price at
Completion.
I have earlier considered Mr and Mrs Flynn’s evidence
that, in the counterfactual, they would have continued to hold an unspecified
portion of the Second Performance Shares for the long term. I concluded that it
was more likely that Mr Flynn would have sold the
Second Performance Shares in
the short term, using some of the proceeds to live on and re-invested the
balance in other assets thought
more likely to increase in value. That is,
Flynfam would not have continued to hold the Second Performance Shares until
almost three
years later, in December 2020, when the first in-specie
dividend was declared of Li-S Energy shares, nor five years later when the
in-specie dividend was declared of PPKMEG shares in June 2022.
- In
the result, I assess damages for breach of contract at $250,000 plus
pre-judgment interest from 1 May 2017 to date, together totalling
some $350,000.
It is not clear why assessment of contractual damages at the date of breach
should give way in this case to assessment
at the date of trial, in order to
most fairly compensate the plaintiffs for the wrong suffered: Johnson v
Perez at 355-356. Nor is it obvious whether there would be any relevant
different in the result, where I am not satisfied on the balance
of
probabilities that the plaintiffs would have held the Second Performances Shares
beyond the short term and thus enjoyed the uplift
in value of those shares nor
the Li-S Energy shares or PPKMEG shares acquired by in-specie dividends.
Specific performance
- Looking
then at the contractual obligation which equity may compel PPK to perform
according to the terms of the contract, it can hardly
be thought that the Court
will compel the parties to now embark upon the cl 9 process on the basis that
the Share Purchase Agreement
was varied as the plaintiffs had contended. Rather,
having satisfied the Court of Appeal that the Second Performance Conditions were
satisfied, PPK is obliged to issue the number of ordinary shares equal to
$500,000 divided by the (current) VWAP Price in accordance
with cl 7.2 of the
Share Purchase Agreement.
- This
is obviously worth more than contractual damages. The difference is explained by
the contractual obligations to which each remedy
is directed. Contractual
damages were assessed in respect of PPK’s breach of cl 9.1. Specific
performance is directed to compel
performance of the contractual obligation in
cl 7.2, where satisfaction of the Second Performance Conditions has been
determined
by the Court, rather than by the cl 9 process.
- Is
it just in all the circumstances that the plaintiffs should be confined to
contractual damages? I think not, where the plaintiffs
have ultimately
vindicated their position in the Court of Appeal such that they are entitled to
compel PPK to perform the contractual
obligation in cl 7.2 of the Share Purchase
Agreement. While there is nothing unique about the PPK shares which will be
issued, where
the shares can readily be purchased on the ASX, I consider that
the demands of justice require that the plaintiffs be issued the
Second
Performance Shares or receive the value of such shares, that is, $500,000.
- A
grant of specific performance does not, however, achieve the result for which
the plaintiffs contend, being an order to issue PPK
shares but as if the shares
had been issued in November 2016 or February 2017. An order for specific
performance generally obliges
the defendant to do something now, in this case,
to perform a contractual obligation. The rare instances in which decrees of
specific
performance have been “back-dated” involve leases before
the Judicature Acts, as detailed by P Sparkes in “Back-dating
Specific
Performance” (1989) 10 The Journal of Legal History 29. The learned
author concluded at 34:
“In Chancery, specific performance normally operated prospectively. There
is limited authority for back-dating specific performance
to determine the
validity of a forfeiture [of a lease]. ... But these few hints scarcely add up
to a general doctrine that specific
performance operated retrospectively. Quite
the reverse, ... when back-dating did occur, it was anomalous.”
- In
Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242, Mr Sparke’s analysis was
endorsed: at 255 (per Mason CJ, Brennan, Deane and McHugh JJ). Their Honours
observed that, before
the Judicature Acts, the jurisdiction to backdate specific
performance “was a jurisdiction to be exercised sparingly”:
at 255;
following Walters v Northern Coal Mining Co [1855] EngR 854; (1855) 5 De G M & G 629
at 638-639 (“the circumstances of the case must be very special
indeed”).
- The
relevant obligation is to issue the Second Performance Shares on the basis that
the Second Performance Conditions were satisfied,
as determined by the Court of
Appeal. An order for specific performance does not require or enable the
defendants to perform that
obligation retrospectively.
Lord
Cairns’ Act: equitable damages
- In
closing submissions, the plaintiffs sought damages either in substitution for,
or in addition to, specific performance under the
Lord Cairns’ Act
1858. This was not pleaded, although it is not strictly necessary to do so:
“damages under Lord Cairns’ Act, or its modern statutory
equivalent, need not be expressly claimed where specific performance is
sought”: Ailakis v Olivero at [173], [185]; Jaggard v Sawyer
[1995] 1 WLR 269 at 285. In order for such damages to be awarded, it must first
be established that the court has jurisdiction to
grant specific performance:
Ferguson v Wilson [1866] UKLawRpCh 89; (1866) 2 Ch App 77 at 91-92 (per Cairns LJ). The
plaintiffs have established this.
- Where
the Court has power to order specific performance of any contract, the Court may
award damages either in addition to or in substitution
for specific performance:
s 68(b), Supreme Court Act 1970 (NSW). In Wentworth v Woollahra
Municipal Council [1982] HCA 41; (1982) 149 CLR 672, the Court explained, “The main
object of the Act was to enable the Court of Chancery to do “complete
justice”
between parties by awarding damages in those cases in which it
had formerly refused equitable relief in respect of a legal right
and left the
plaintiff to sue for damages at common law”: at 676. Damages so awarded
are referred to as equitable damages.
- Equitable
damages are not the same as common law damages: Wentworth at 678. That
said, the common law rules relating to the assessment of damages generally apply
to the assessment of damages under the
Lord Cairns' Act where that
jurisdiction is employed in aid of legal, as opposed to equitable, rights: P
Parkinson (ed), The Principles of Equity (2nd edition, 2003, Lawbook Co)
at [2231]. In Colbeam Palmer Ltd v Stock Affiliates Pty Ltd [1968] HCA 50; (1968) 122
CLR 25, Windeyer J noted, “Not until Lord Cairns’s Act in
1858 had the Chancery Court power to award damages. In assessing damages equity
follows the law ... ”: at 33. In Wenham v Ella, the High Court was
considering a claim for specific performance of a contract for the sale of land
where, by the date of hearing,
specific performance could no longer be ordered.
As to the damages which could be awarded under the Lord Cairns’
Act, Barwick CJ observed at 460:
“... the measure of damages which could be awarded at common law for
breach of the contract between these parties is, in my
opinion, the same as a
court of equity would employ in this case in ordering damages in lieu of
specific performance. In some circumstances,
damages in the latter case may
exceed those which would be awarded at law: but circumstances which might
justify a larger amount
of damages in lieu of specific performance than would be
given at law are not present in this case.”
- In
ASA Constructions Pty Ltd v Iwanov [1975] 1 NSWLR 512, Needham J
observed, “Where a court is exercising jurisdiction to award damages under
s. 68 of the Act, it should not adopt
a different standard, if the breach
of the contract which caused the institution of proceedings for specific
performance was a breach
which would have sounded in damages at common
law”: at 516-517. In Madden v Kevereski [1983] 1 NSWLR 305, Helsham
CJ in Eq explained at 306-307: (emphasis added)
“In my view the law in this area is in such a mess that it is time some
court gave an authoritative decision about s 68. I
take the view that the
damages which the Court has power to award under s 68 have nothing to do with
common law damages. ... The
damages which the Court may award under section 68
are sui generis; the power to award them is a power to enable the Court
to do complete justice so far as equity considers it ought to be done, by
supplementing with money the equitable remedy, or a attempting with money to
substitute a remedy. The section is simply not available when damages, in the
common law sense, are an adequate remedy, or when a plaintiff has to rely
on a
common law right to damages for breach of contract.
... there is no date which can be said to be the date at which damages under s
68 should be assessed. It will be assessed so as to
do what is just as between
the parties and the particular circumstances of each case ...”
- Likewise
in Rosser v Maritime Services Board (No 2) (1998) 14 BCL 375, Young J
stated the general rule is that if the defendant has committed a common law
breach of contract, damages
given by a court of equity should generally be the
same as at common law. Further, at 381:
“... whilst, generally, equity would apply the same principles of
assessment of damages as applied at common law, it would
not invariably do so.
In appropriate cases, the court may apply what is sometimes described as "the
user principle" to equitable
damages. Thus, where damages are given in
substitution for an injunction to protect a restrictive covenant, the damages
may well
be the sum which the plaintiff might reasonably have demanded for
relaxation of the covenant, not the detriment he has actually suffered
...”
- Rosser
v Maritime Services Board was followed in Mills v Ruthol Pty Ltd; Tricon
(Aust) Pty Ltd v Ruthol Pty Ltd (2004) 61 NSWLR 1; [2004] NSWSC 547, where
Palmer J observed, “this general rule is subject always to the broader
considerations of justice which underlie Equity’s
discretionary
remedies”: at [67].
- Equitable
damages may produce a different result in some contractual contexts, for
example, where there is a threatened or ongoing
breach of contract:
Barbagallo v J & F Catelan Pty Ltd (1986) 1 Qd R 245 at 252, 256 (per
McPherson J). As mentioned, the appropriate date for the assessment of equitable
damages depends on what is just
between the parties and may be assessed at the
date of judgment or the date of accrual of the cause of action: Madden v
Kevereski at 307; ASA Constructions Pty Ltd v Iwanov at 519. This may
have the result that equitable damages are assessed at the date of trial rather
than the date of breach, which may
produce a different result (albeit the common
law may also assess contractual damages at the later day: see [89]).
- In
sum, equitable damages to be awarded in a claim based on a contract will usually
be the same as common law damages. The learned
author of Spry, The Principles
of Equitable Remedies, summarised the position at 671:
“... if there is a right to damages at law and it appears to a court of
equitable jurisdiction that it is appropriate under
a Lord Cairns’ Act
provision to award damages either in lieu of or in addition to specific
performance or an injunction, the
application of general equitable principles
generally gives rise to the result that the measure of damages in equity is the
same
as the measure of damages at law; and again, generally the same tests of
remoteness of damage are applied in equity as at law. ...
[I]f the most just
course is to award damages on a different basis to that for legal damages, the
better view is that the court will
act accordingly, although it may be expected
that this position will not arise often.”
- In
the event that equitable damages should be assessed on a basis other than common
law damages, the approach to the assessment of
equitable compensation should be
followed: Hamann v Taleb at [67]-[68]. In that event, common law
considerations of remoteness and foreseeability are generally irrelevant; the
courts apply
common sense views as to what loss resulted from a breach and so
falls to be compensated: Canson Enterprises Ltd v Boughton & Co
(1991) 85 DLR (4th) 129 at 163, followed in Youyang Pty Ltd v Minter Ellison
Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 at [35]. Just as with the
assessment of common law damages, the Court may discount or adjust the amount of
compensation akin to a Sellars discount: P Young, C Croft and M Smith,
On Equity (1st ed, 2009, Thomson Reuters) at 1116, citing
Dempster v Mallina Holdings Ltd (1994) 13 WAR 124. The cardinal principle
is that the remedy must be fashioned to fit the nature of the case and the
particular facts: Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544;
128 ALR 201 at 210 (per Mason CJ, Brennan, Deane, Dawson and Gaudron JJ).
- Looking,
first, at what equitable damages might be awarded ‘in substitution
for’ specific performance of PPK’s obligation
to issue the Second
Performance Shares under cl 7.2, the approach was described in Fuller v
Albert (No 3) [2021] NSWCA 226 at [23]:
“Such damages are intended to put the plaintiff into a position equivalent
to that in which it would have been had the contract
been specifically
performed. In those circumstances, the correct approach is to compare the
plaintiff’s position with that
which would have obtained had specific
performance been decreed and the contract performed. ...”
- Here,
specific performance has had yet to ordered, where the plaintiffs have sought
competing remedies and the matter was remitted
for determination of the
appropriate remedy. A comparison of the plaintiffs’ position with that
which would be obtained if
specific performance is decreed and the contract
performed is simple: equitable damages ‘in substitution for’
specific
performance is $500,000.
- There
is no other contractual obligation which PPK may now be compelled to perform
which gives a better result for the plaintiffs.
As earlier mentioned, PPK did
not breach the Share Purchase Agreement when it proffered a revenue calculation
less than $1 million
in November 2016, or did not accept Mr Flynn’s
competing figure of $1,002,914 in January 2017, during the flawed cl 9 process:
see [93]. Mr Flynn did
not even put forward the “FLP-1” revenue item, which ultimately got
revenue ‘over the line’,
until three years later: see [99]. It would have been
open to PPK, at that point, to accept Mr Flynn’s evidence in respect of
“internal revenue”
arising from the FLP-1 components, but PPK did
not breach the contract by proceeding otherwise, where the cl 9 process had
failed
and the matter was now being determined by the Court under cl 19.5. It
was not until the Court of Appeal’s judgment in August
2023 that the issue
was resolved in the plaintiffs’ favour, giving rise to an obligation on
the part of PPK to issue the Second
Performance Shares, should that remedy be
identified as appropriate on the remittal, of the various remedies sought.
- It
is not obvious what equitable compensation would be awarded in these
circumstances either. The plaintiffs’ submissions are
based on the premise
that PPK was obliged to issue the Second Performance Shares in November 2016
(having calculated revenue above
$1 million) or January 2017 (having accepted Mr
Flynn’s calculation above $1 million). But there was no breach of
obligation
by PPK in either scenario. Applying commonsense views as to what loss
resulted from a breach and so falls to be compensated cannot
begin where there
was no breach of obligation, contractual or otherwise.
- Looking
next at what equitable damages might be awarded ‘in addition to’
orders for specific performance, damages can
be awarded, for example, for loss
arising from the delay in performance: Ailakis v Olivero at [166].
Damages cannot be awarded for “mere delay”, absent proof of damage:
Hamann v Taleb [2021] NSWSC 1632 at [50]- [53] (per Lindsay J). As Darke J
observed in PNC Lifestyle v REW08 Projects, “it is logical that
damages in addition, for loss caused by performance occurring at a time later
than that required by the
contract, be assessed at the date of hearing”:
at [40].
- There
is no relevant delay in PPK's performance of its contractual obligation to issue
the Second Performance Shares in accordance
with cl 7.2, where the obligation to
do so arises on the making of orders at the conclusion of this judgment. It is
not obvious why
the plaintiffs should be awarded damages ‘in addition
to’ specific performance, or what those damages would
be.
Equitable compensation
- The
plaintiffs separately sought equitable compensation. Equitable compensation
restores those who have suffered loss to the position
in which they would have
been if there had been no breach of an equitable obligation: Nocton v Lord
Ashburton [1914] UKLawRpAC 31; [1914] AC 932 at 952 (per Viscount Haldane LC); O'Halloran v RT
Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 272 (per Spigelman CJ).
- No
equitable obligation was pleaded. As I read the pleadings, the claim for
equitable compensation related to the plaintiffs’
estoppel claim: in the
event that the Court found that the Share Purchase Agreement had not been
varied, then the plaintiffs contended
that PPK was estopped from suggesting
otherwise. Such a reading is consistent with the plaintiffs’ reply
submissions (at [114]).
As the plaintiffs succeeded in establishing that the
Share Purchase Agreement was varied, it is not necessary to consider this
further.
Laches
- The
defence of laches comprises three components: knowledge of the wrong,
delay and unconscionable prejudice caused by the delay: Crawley v Short
(2009) 262 ALR 654; [2009] NSWCA 410 at [163] (per Young JA, Allsop P and
Macfarlan JA agreeing). In respect of the plaintiff’s knowledge of the
wrong, it is apparent from
Mr Flynn’s initial response to the NPAT
Statement in November 2016, supplemented by correspondence from his accountant
and
solicitors in December 2016 and January 2017, that Mr Flynn was aware of
facts giving rise to a cause of action against PPK at the
time.
- As
to delay, Parker J considered a claim for the issue of shares in Nassif v Sun
and observed, “the length of delay required to establish the defence
of laches depends on the nature of the claim, and where
the claim is to a
speculative asset the margin for permissible delay is short”: at [172].
There, a delay of four years was
enough to bar the claim by laches.
- In
respect of the element of unconscionable prejudice, there must be substantial
detriment, not merely a trivial inconvenience, caused
by the plaintiff’s
delay: Duke Group Ltd (In liq) v Alamain Investments Ltd (2003) 232 LSJS
58; [2003] SASC 415 at [153] (per Doyle CJ); Bell Group Ltd (in liq) v
Westpac Banking Corp (No 10) [2008] WASC 239; (2008) 39 WAR 1; (2008) 70 ACSR 1 at
[9314] (per Owen J).
- Here,
the proceedings were commenced two years after the NPAT Statement was issued.
The plaintiffs probably waited until PPK’s
share price rebounded before
doing anything. The plaintiffs’ hesitation is understandable; embarking on
legal proceedings in
the Commercial List to compel the issue of shares may not
be advisable unless the shares are of sufficient value. In the meanwhile,
PPK’s issued share capital had expanded by share issues, contracted by
buy-backs, and changed hands through numerous share
trades involving third
parties.
- Accepting
that the plaintiffs had knowledge of the wrong from an early stage, the question
is whether, in all the circumstances, “it
would be practically unjust to
give a remedy” Crawley at [164]. As Young JA further stated at
[175]:
“...all three elements must be taken together and the ultimate question
asked as to whether, in all the circumstances, the
plaintiff has impliedly, in
equity, released the defendant from his or her claim or has so acted as to make
it unfair that the claim
should now succeed.”
- I
do not think that two years is sufficient delay to bar the plaintiffs’
claim by laches in this case. Nor am I satisfied that there is
unconscionable prejudice in the form of a substantial detriment. True it is that
numerous
third parties have traded in PPK shares on the basis of the issued
share capital at the time of their trades. It was not suggested,
however, that
the issue of a further $500,000 in PPK shares to the plaintiffs would have a
material effect on other shareholders,
or PPK, presumably in light of the total
issued share capital. Having regard to these elements, I do not think it can be
said that
the plaintiffs impliedly released PPK from their claim or acted so as
to make it unfair that their claim should now succeed. The
defence of laches
is not established.
Orders
- For
these reasons, I make the following orders:
(1) Order the second defendant to issue to the second plaintiff the number of
PPK Shares (as defined in the Share Purchase Agreement
executed on 15 October
2014) which is equal to $500,000 divided by the VWAP Price (as defined in the
Share Purchase Agreement) at
an issue price equal to the VWAP Price per PPK
Share (rounded up to the nearest whole number) to the second plaintiff not later
than
three business days after the date of this judgment.
(2) Parties to notify any errors or omissions within 7 days.
**********
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