Beach Petroleum Nl v Johnson, M.K.

[1993] FCA 421

NOT &A CA GU L M O ~ &a\ , \993

JUDGMENT No. ........ ........ ,, ..., ........

IN THE FEDERAL COURT OF AUSTRALIA )

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SOUTH AUSTRALIAN DISTRICT REGISTRY )

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GENERAL DIVISION ) No. G53 of 1991

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1. BETWEEN:

4 BEACH PETROLEUM NL and
Another

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I Applicants

2 5 JUM 1993 - and -

;	WLLCOLM KEITH JOHNSON and Others
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!	Respondents
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EXTEMPORE REASONS FOR JUDGMENT

Coram: von Doussa J.

Date : 18 June 1993

Place: Adelaide

There are three applications still to be decided between Beach and Enterprise. Enterprise seeks a stay of execution of the judgment that was handed down on 10 June 1993 for A$44 -45 million to enable it to take instructions, and if it appeals a stay pending the determination of the appeal. There are applications from Beach to appoint a receiver and manager and for injunctions. They all involve in one way or another, decisions that have to be made about the asset position of Enterprise and whether it is just in all the circumstances that Enterprise should be allowed to expend further of its funds on fighting the appeal.

the other applications, to weigh on the one hand prejudice

It is, as counsel have said, necessary in relation to the
stay application, and I think also indirectly in relation to

which the judgment creditor will suffer if the orders which it seeks are not made against the judgment debtor, and, on the other hand, the prejudice which the judgment debtor will suffer if a stay is not granted on terms that permit it to pursue its appeal.

I deal with the second of those situations first. It is quite clear on any view of the facts that Enterprise is in straightened financial circumstances, and it is not able from its own resources to meet a judgment in the order of A$44.45 million or anything like that sum. If a stay is not ordered steps will be taken by the judgment creditor to wind up Enterprise and bring its very existence to an end. It is clear in those circumstances, if a stay is not granted pending an appeal, and if an appeal is then pursued by the directors which succeeds, that the judgment creditor would not be in a position to restore Enterprise to its present position, that is as a listed company with the assets it presently holds.

For that reason it seems to me that prima facie where it is appropriate to consider making a stay on terms.	Enterprise has brought itself within that category of cases
If it is necessary under the Rules to establish "special circumstances" before the power to grant a stay can be exercised, in my view there are special circumstances arising in the sense that the lack of a stay would destroy the existence of Enterprise. However, the enlivenment of the power is a very different thing to the exercise of the power

in all the circumstances

I look then at the position of the judgment creditor. The judgment creditor contends that a stay should be granted on terms that are intended to preserve the assets of the judgment debtor, so far as possible, pending the appeal. As L said yesterday in the Spargos application, there will be cases where although the assets of the unsuccessful respondent at trial, who is the proposed appellant, will be insufficient to meet the judgment, yet nevertheless it will be appropriate to let the appellant pursue its rights of appeal, at least to a Full Court.

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I	This is a different situation from the Spargos case because the asset position of Enterprise is very much worse. It is the submission of Beach that if Enterprise were allowed to fund the appeal from its resources, the cash resources of the company would be entirely lost, and in a round about way the integrity of Enterprise would be destroyed, not because of the absence of a stay, but because of the use of its assets to
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position. Enterprise has got other assets besides its cash fund the appeal. I think that somewhat overstates the
reserves, but they are not very extensive.
It is a very serious step to deprive any company of a right of appeal, and a more serious step, it seems to me, to deprive a public listed company with a lot of small shareholders of a right of appeal, but I have come to the view that Enterprise should not be given an unlimited right of
access to its assets to go ahead with an appeal against the principal judgment.
I have come to that view not simply by looking at the present asset position of Enterprise, but by looking also at the events which have occurred in May and June of this year. We have heard a lot about the CGMA transaction. By the end of May, Mr Fuller was bankrupt, yet Mr Fuller was still having discussions with Mr Burch and others about the settlement of the CGMA proceedings. Mr Burch frankly says that the CGMA proceedings had to be settled because of a number of pressures that were being exerted on Enterprise at the time. In particular there was an inability to fund the trial of the action, and there was pressure from Messrs Fisher Jeffries to find $100,000 on account of costs. M r Burch says that sum could not be found. The company at that stage was not in a position to defend the Supreme Court proceedings. If the CGMA action had not been settled, it would have been necessary to place Enterprise in provisional liquidation. That, it seems to me, is evidence which gives a graphic picture of the plight
that was going cost $100,000. Quite clearly, this appeal is of Enterprise. It was not in a position to run litigation
going to cost a good deal more than that.
The directors of Enterprise negotiated to settle the CGMA proceedings. As a general comment, those proceedings were obviously proceedings that sooner or later had to be settled and I think no criticism should be levelled at the directors of Enterprise for exploring the possibility of some
settlement, and for pursuing discussions which had much earlier taken place with Mr Fuller. Those negotiations proceeded in an apparently regular way initially and led to the drafting of a deed of settlement subject to a condition precedent requiring another document to be executed by the receiver of Jingellic. Unfortunately in the hours before the delivery of judgment in the principal proceedings that transaction ran off the rails. Mr Mount was no longer prepared to sign the document that would have been the fulfilment of the condition precedent. He had been advised, quite properly in my view, that he should wait until the delivery of the judgment. When that information came to the knowledge of Mr Fuller representing a number of parties to the deed of settlement, and to the directors of Enterprise, a flurry of activity occurred to get the deed of settlement in place before judgment.
With the benefit of hindsight, it appears that the position of Enterprise might not have been much different under the document then executed in a hurry, provided of
course that certain assurances apparently given by Mr Mount that he would sign the deed for Jingellic at a later stage,
were fulfilled. But it is qulte clear that the document had the potential to greatly benefit the other parties to the settlement, being companies on whose behalf M r Fuller was conducting negotiations, that is, CGMA, IRL, Southern Goldfields, Rostight, and a company also that was not a party, Cortaus .
The deed of settlement was signed in great haste and there is reason to suspect that aspects of it involve contraventions of the law. It appears that money was transferred out of Rostight and used to purchase its own shares. There is reason to suspect that there may have been breaches of fiduciary duty on the part of some of the other parties, other than Enterprise. In the end result following the execution of the deed, Rostight, which had been a subsidiary of Cortaus, in turn a 78% subsidiary of IRL, which had $650,000 at the National Australia Bank, lost that money.
It was transferred as to $400,000 to Enterprise and as it now turns out $250,000 odd was transferred to Copper Producers, controlled in part by M r Josling. The documents that have been put in by the applicants give rise to a real suspicion that Copper Producers is not at arm's length, but is another company that is associated with 141 Fuller and has been in the past. A further consequence of the transaction is that Rostight has ceased to be a subsidiary of Cortaus, and is now said to be owned by Copper Producers. Mr Webb's evidence was that the $250,000 was going to be used to fund Southern
Mr Mount will be prepared to go on with the transaction that Goldfields. Given that information, one could wonder how far
he had hitherto indicated that he would go on with, he may or he may not proceed, that is not clear. But what I think is clear is that steps will inevitably be taken, if the order that I make today does not bring about that result, to prohibit the parties from giving further effect to the deed of settlement and to freeze assets where they now are in the

hands of Copper Producers, Enterprise, Rostight and the other parties, whilst steps are taken by interested parties - Beach and receivers - to have aspects of the transaction set aside.

When one then turns to para.6 of Burch's affidavit

which sets out the alleged assets of Enterprise, there is $475,000 approximately in cash, but $400,000 of that has just come from Rostight. It is that money which is now available in a practical sense to fund this appeal, which was not available before the settlement. I hark back to the fact that the company was not able to find $100,000 before the settlement to fight a case and was talking of provisional liquidation. If $400,000 of that money were frozen, as it seems to me inevitably it will be - if not by my orders, by some other order of the Court - Enterprise is not then in a position at least from that asset to fight the appeal.

The next asset is some 44 million Claremont shares, but
they are subject to a Mareva injunction and have been for a

long time. That Mareva injunction is, itself, the product of

other disputes which have arisen about settlements and	transactions that have occurred in the course of the
proceedings about which Beach and Claremont had no advance warning and about which they assert that their position was detrimentally affected. Whether it was or not is a matter not yet resolved, but in the meantime a Mareva injunction has been made and it seems to me that those assets, having been frozen to the date of trial, should, a fortiori, be frozen following a successful verdict.

There is the Ejudina project said to be worth $300,000. Whether that can be sold or not, I do not know, but even that amount of money together with the $75,000 spare cash, is likely to be exhausted almost in its entirety if not in its entirety by the time the appeal has been funded and a number of months have gone by with the current administration expenses of the company. It seems to me that amount of money would be expended probably by the end of the year.

There is a 40% interest in the Lyndon joint venture, but that is tied up with the deed of settlement, and it is probable that that asset in some way or another must be frozen also pending the sorting out of the rights of the parties in respect of the deed of settlement. There is a small amount still apparently available from shares in Kingstream Resources NL but it is not a significant amount. The other asset of Enterprise said to be a significant one is an interest indirectly through Jingellic in the Nevoria joint venture. At the moment Jingellic has a 60% interest in Nevoria, and it is hoped that if M r Mount is prepared on behalf of Jlngellic to

precedent under the deed of settlement, that interest might	sign the deed that was to be the fulfilment of the condition
increase to 100% in Jingellic. However the road into that asset for Enterprise is through its shareholding in Jingellic and 34.5% of that shareholding comes again under the deed of settlement, so there is a large question mark standing over that as well.

One hesitates to be critical of the management of a company, and I am conscious of the fact that even in the time that has been put into this hearing only the briefest outlines of the conduct of the parties has been elucidated in the evidence, but I think I am justified in saying that the directors of Enterprise in going ahead with the deed of settlement in the circumstances in which they did were imprudent at the least. Unwittingly the directors allowed Enterprise to be duped, to be used as a vehicle to enable all the other parties to the deed of settlement to act in a way that was highly likely to prejudice Beach.

That is not a weighty matter in the totality of the factors that have to be taken into account in the exercise of the discretion which I must exercise today, but it does seem to me that the directors of Enterprise have in that transaction, in particular, shown a preparedness to act in the immediate self-interests of Enterprise without adequate regard to the wider interests of other people that may be affected by the decision and in particular to the possibility that Beach

may have been affected by that decision in the event of a	judgment going against Enterprise.
In all the circumstances, and conscious as I am that it is an extreme step to take, I do not think it is appropriate to allow Enterprise unbridled access to those of its assets that it might be able to realise, which is really only $75,000 and the Ejudina project, for the purposes of funding this appeal. The litigation has been long and expensive. I think

it is apparent from decisions that were made in interlocutory applications in the course of the proceedings that Enterprise was given every opportunity during the trial to have funds available to run the defence of the action as the directors saw fit, but the end result of that has been that Enterprise has finished up in a parlous position. It did not budget on the way through the trial for the risk that it might wish to fund an appeal. It seems to me that the applicants are now right in saying that if Enterprise is allowed to run an appeal as it wishes to do, the end result is going to be the destruction of the company. There simply will be very little left there except for a few assets which are the subject of disputes arising under the deed of settlement.

The question then is what I should do, having formed that view about the matter. If Enterprise were able to fund an appeal by some other means clearly it would be entitled to a stay. I propose to give Mr Quick the opportunity to seek instructions about that if he wishes, but M r Burch has already indicated what I would have thought was likely to be the

enough and are not likely to put up any more money. If that	position, namely, that the shareholders in Enterprise have had
view is repeated in a moment when I give Mr Quick the opportunity to take instructions, it seems to me that the end of the road for Enterprise has been reached and that I really ought to take the drastic step of appointing a receiver and manager before further funds are expended simply on the day-
to-day administration of the company. M r Quick, I will give

you the opportunity to take instructions.

I certify that this and the

/O preceding pages are a

true copy of the Reasons for Judament of Mr Justice von ~ougsa