Cheng v Bullseye Mining Ltd
[2023] WADC 7
•24 JANUARY 2023
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CHAMBERS
LOCATION: PERTH
CITATION: CHENG -v- BULLSEYE MINING LTD [2023] WADC 7
CORAM: REGISTRAR KINGSLEY
HEARD: 27 APRIL, 20 & 27 AUGUST 2021
DELIVERED : 24 JANUARY 2023
FILE NO/S: CIV 1987 of 2020
BETWEEN: SAM CHENG
Plaintiff
AND
BULLSEYE MINING LTD
Defendant
AND
BULLSEYE MINING LTD
Plaintiff by counterclaim
AND
SAM CHENG
First defendant by counterclaim
WU QIYUAN
Second defendant by counterclaim
HONGKONG XINHE INTERNATIONAL INVESTMENT COMPANY LTD
Third defendant by counterclaim
YIYANG QIU
Fourth defendant by counterclaim
BRETT CLARK
Fifth defendant by counterclaim
DOONBEG CAPITAL PTY LTD
Sixth defendant by counterclaim
KEVIN DUNDO
Seventh defendant by counterclaim
RED 5 LTD
Eighth defendant by counterclaim
Catchwords:
Practice - Application for security for costs
Legislation:
Corporation Act 2001 (Cth)
Evidence Act 1906 (WA)
Mining Act 1978 (WA)
Rules of the Supreme Court 1971 (WA)
Result:
Application dismissed
Representation:
Counsel:
| Plaintiff | : | Mr A J Tharby |
| Defendant | : | Mr A P Hershowitz |
| Plaintiff by counterclaim | : | Mr A P Hershowitz |
| First defendant by counterclaim | : | Mr A J Tharby |
| Second defendant by counterclaim | : | Not applicable |
| Third defendant by counterclaim | : | Mr A J Tharby |
| Fourth defendant by counterclaim | : | Mr A J Tharby |
| Fifth defendant by counterclaim | : | Mr C S Williams |
| Sixth defendant by counterclaim | : | Mr C S Williams |
| Seventh defendant by counterclaim | : | Mr T J Porter |
| Eighth defendant by counterclaim | : | Mr A J Papamatheos |
Solicitors:
| Plaintiff | : | Bennett + Co |
| Defendant | : | Murcia Pestell Hillard |
| Plaintiff by counterclaim | : | Murcia Pestell Hillard |
| First defendant by counterclaim | : | Bennett + Co |
| Second defendant by counterclaim | : | Not applicable |
| Third defendant by counterclaim | : | Bennett + Co |
| Fourth defendant by counterclaim | : | Bennett + Co |
| Fifth defendant by counterclaim | : | Solomon Brothers |
| Sixth defendant by counterclaim | : | Solomon Brothers |
| Seventh defendant by counterclaim | : | Barry Nilsson Lawyers |
| Eighth defendant by counterclaim | : | Hopgoodganim Lawyers (Perth) |
Case(s) referred to in decision(s):
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69
Jensen v Nationwide News Pty Ltd [No 12] [2019] WASC 250
Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93
Osborne v Landpower Developments Pty Ltd (in liq) [2003] WASCA 117
Smith v New South Wales Bar Association (1992) 176 CLR 256
Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19
Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57
REGISTRAR KINGSLEY:
Preamble
These reasons were to be delivered on 27 August 2021. The plaintiff by counterclaim, Bullseye Mining Ltd (Bullseye), by letter dated 13 August 2021 sought to bring the matter on to hear an application for leave to adduce further evidence. The letter was supported by the affidavit of Bernard Arthur John Cummins sworn 17 August 2021 (Cummins' affidavit).
By some means, not readily apparent, the application came before me on 20 August 2021. All parties to the litigation were present and were heard. On 20 August 2021 I gave leave to Bullseye to bring an application for leave to adduce further evidence, such application to be filed and served on or before 25 August 2021. I was satisfied by Cummins' affidavit that the gold mining operations commenced at the Bungurra Gold Mine in December 2020 had advanced to a point where a gold pour was on track to take place in September 2021 (Cummins' affidavit, par 9).
The application was filed on 25 August 2021, supported by the affidavit of Dariena Catherine Ann Mullan sworn 25 August 2021 (Mullan's affidavit). The application was heard on 27 August 2021. Joint submissions by the defendants by counterclaim were filed on 27 August 2021 and Bullseye filed submissions on 8 September 2021.
I reserved my decision and I advised the parties' solicitors that my determination would be incorporated into the reasons originally to be delivered on 27 August 2021.
Reasons
The plaintiff (Cheng) brought proceedings against Bullseye for unpaid monies pursuant to a contract for services. Bullseye has defended the claim and brought a counterclaim against Cheng and seven other defendants alleging a tort of conspiracy by those defendants against Bullseye.
The applications
Each defendant, other than the second defendant (who is yet to be served), have brought applications for security for costs. All applications are dated 20 November 2020 and for each defendant the costs sought are:
1.For the first defendant $100,000.
2.For the third and fourth defendants $120,000.
3.For the fifth and sixth defendants $116,209.
4.For the seventh defendant $120,000.
5.For the eighth defendant $100,000.
The seventh and eighth defendants were previously jointly represented but are now separately represented and hence seek their own security for costs.
The evidence
The first, third and fourth defendants rely on the evidence of Alexander James Tharby affirmed 20 November 2020.
The fifth and sixth defendants rely on the affidavit of Giuseppe Zagari affirmed 20 November 2020 and that of Brett Clark affirmed 19 November 2020.
The seventh defendant relies on the affidavit of Tobias Richard Barrie sworn 17 February 2021.
The eighth defendant relies on the affidavit of Nino Anthony Odorisio sworn 20 November 2020.
At the point when they were jointly represented the seventh and eighth defendants filed an affidavit of Sarah Rose O'Brien‑Smith sworn 24 December 2020.
The eighth defendant further relies on the affidavit of Robyn Anne Ferguson sworn 16 March 2021.
The plaintiff relies on affidavits of Timothy Iren Masson sworn 22 December 2020 and Peter Gerard Burns sworn 13 January 2021 (Burns' affidavit). The plaintiff also relies on Mullan's affidavit.
Objection to Burns' affidavit
The first, third and fourth defendants, by counterclaim for themselves and for the other defendants by counterclaim object to certain paragraphs of Burns' affidavit. Counsel for the first, third and fourth defendants by counterclaim, and counsel for the plaintiff by counterclaim briefly made submissions on the various paragraphs, and I gave my decision.
Paragraphs 30 and 124 of Burns' affidavit were objected to on the basis that the statement 'strong positive cash flows' was meaningless. The paragraphs were not struck but would be given little weight.
Paragraphs 55, 74 - 76, 78 - 84, 93, 94 and 98 - 104 are objected on the basis of being inadmissible hearsay. Mr Burns deposes to being informed by a person that something had occurred, or that Mr Burns was informed by a person that that person had been told something. In my opinion the paragraphs sought to admit into evidence inadmissible hearsay and were struck.
Objections to pars 52 - 54 were not pressed.
The pleaded action
Cheng's action against Bullseye pleads performance by Cheng under a consultancy agreement entered between Holy Investments Pty Ltd (Holy) and Bullseye in or around 9 October 2013. Cheng pleads he performed services and Holy rendered invoices which were paid by Bullseye. Between 2018 and May 2020 Holy sent invoices totalling $580,000 which have not been paid.
Bullseye's defence pleads that whilst payments were made to Holy up to June 2018, Bullseye then terminated Cheng's services in or around 8 December 2017. Bullseye pleads that whilst Cheng, through Holy, rendered invoices they were not paid by reason of the termination.
Bullseye then brings a counterclaim against Cheng and seven other defendants alleging the tort of conspiracy.
Bullseye pleads that it carries on business as a West Australian gold exploration and production development company and has a portfolio of tenements including North Laverton Gold Project (NLG Project), Red 5 Ltd (Red 5), Darlot Gold Mine, Southern Cross Gold, and Aurora Gold Project.
The conspiracy to cause harm or injury to Bullseye is pleaded in par 26 of the counterclaim and runs to 84 subparagraphs. Cheng as first defendant and Wu as second defendant participated in Bullseye board meetings. Bullseye pleads that Cheng participated in Bullseye's internal communications involving the bidding process to acquire gold processing assets, whilst Wu, as a director of Bullseye, was privy to those financial details.
The bidding process was to acquire the gold processing assets of Darlot Gold Mine (Darlot bid). The ultimate successful bidder was Red 5, the eighth defendant. Red 5 then approached Bullseye with regard to a potential toll treatment agreement where Bullseye's gold bearing ore would be processed at the Red 5 Darlot Gold Mine plant.
Bullseye pleads that there was a group of shareholders (known as the Chinese Group) who held 39% of shares in Bullseye.
In December 2017 the eighth defendant Red 5 informed Bullseye it was making an off market takeover bid for Bullseye and that Red 5 had the support of the Chinese Group. In March 2018 Cheng informed Resource Development Group, a specialist group engaged by Bullseye to progress development and potential construction of mining operations that the Chinese Group intended to acquire 51% of shareholding in Bullseye and that Resource Development Group would have to work with the Chinese Group.
In May and June 2018 Wu, the second defendant advised Dariena Mullan, a director of Bullseye, that he controlled the entire 31% shareholding of the Chinese Group, they were acting as one unit, and the Chinese Group intended to acquire a further 12% of the shareholding. To achieve that end Cheng approached two shareholders with a view to persuade them to allow Cheng to acquire their Bullseye shareholding.
A Singaporean family (the Teo Family), were approached by an unidentified person from China offering to purchase the family's shareholding in Bullseye. The court is invited to infer that the person contacting the Teo Family was a member of the Chinese Group. Particulars are given to support the inference sought.
In July 2018 Wu and a company, Fountain Enterprise Int'l Co Ltd, requisitioned a general meeting of Bullseye pursuant to s 249D of the Corporations Act2001 (Cth) to remove the directors of Bullseye. By letter dated 3 September 2018 Xinhe the third defendant on his behalf and on behalf of Wu, Cheng, and Luke (the fourth defendant) purportedly made various false claims, attached false documentation, and provided a pro forma pre-filled proxy form.
In November 2018 Holy represented by Cheng entered into an agreement whereby Doonbeg (the sixth defendant), for a fee, was to purchase shares in Bullseye in such a manner there was no breach of s 606 of the Corporations Act or such that the requirements to make a takeover offer be triggered. The funds for the fees and costs were paid by Xinhe and Wu.
On 15 April 2019 the general meeting of Bullseye was held and the current board was re-elected.
In February 2020 Golden Soak Enterprises Pty Ltd (Golden Soak) lodged 11 applications for forfeiture of mining tenements against Bullseye Mining Tenements and key NLG Project mining leases. In March 2020 Golden Soak lodged a further seven applications for forfeiture. Bullseye invites the court, and particulars are given, to infer Cheng procured Golden Soak to make the applications as part of the conspiracy.
None of the defendants who have filed an appearance have filed a defence.
Security for costs - legal principles
The applications for security for costs are brought pursuant to s 1335 of the Corporations Act or alternatively O 25 of the Rules of the Supreme Court 1971 (WA) (RSC). It would appear that all defendants rely primarily on s 1335 of the Corporations Act which provides:
Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.
The precondition for the exercise of the court's jurisdiction, often described as the 'threshold jurisdictional question' is whether it appears by credible testimony that there is reason to believe the plaintiff corporation will be unable to pay the defendant's costs. If that condition is satisfied, the court has jurisdiction to make an order for costs, and the question then becomes whether it should exercise its discretion to make such an order: FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69 (FFE Minerals).
When determining whether a corporation will be unable to pay, it is necessary to identify the range of assets to which recourse might be had for the purpose of satisfying an adverse costs order. Those assets will generally be those that are immediately realised and those that could be realised in sufficient time to satisfy the costs order: Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19 [35] (Sugarloaf).
In Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd[2013] WASC 57, Edelman J listed the most commonly cited, non‑exclusive factors which guide the court's discretion in determining whether security for costs ought to be provided. Those factors were:
(i)the strength and bona fides of the plaintiff's case;
(ii)the likelihood of the plaintiff being unable to pay the defendant's costs;
(iii)whether the plaintiff's impecuniosity was caused by the defendant's conduct which is the subject of the claim;
(iv)whether the application for security is oppressive;
(v)whether the award of security would deny an impecunious applicant a right to litigate;
(vi)whether there are persons standing behind the plaintiff who were likely to benefit from the litigation;
(vii)whether the persons standing behind the plaintiff have offered any security or personal undertaking to be liable for the costs, …;
(viii)whether the applicant was in substance a plaintiff or the proceedings were defensive in the sense of directly resisting proceedings already brought …;
(ix)whether the application for security had been brought promptly;
(x)whether the applicant has any rights which it can exercise against assets of the plaintiff to satisfy an order for costs in its favour; and
(xi)any factors relating to the public interest.
The defendants bear the onus of satisfying the court that it should exercise its discretion and order security for costs: Sugarloaf.
The threshold question
The threshold question requires the defendants to produce credible evidence that there is reason to believe Bullseye would not be able to meet any costs order made against it. In order to determine that question, a court is required to do no more than judge the quality of the evidence to see if it objectively gives rise to a reason to believe that Bullseye will not meet a costs order. This requires an evaluation of the evidence led by the applicant: FFE Minerals.
A risk assessment, which is of necessity imprecise, is to be made of the corporation's finances. The examination of the corporation's financial affairs is approached in a practical commonsense manner: Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93.
The defendants rely on the financial reports for the years ended 30 June 2019 and 30 June 2020. For the year ended 30 June 2019 the defendants note that Bullseye made a loss of $3,884,257 for that year and a loss of $7,269,721 for the financial year ended 30 June 2018. Current assets were $428,915 and current liabilities were $1,120,107.
The non-current assets of Bullseye were $16,756,689 and non‑current liabilities were $4,221,037.
The defendants refer to note 12 of the notes to the Consolidated Financial Statements for the year ended 30 June 2019 which states that the recoverability of the carrying amount of exploration assets is dependent on the successful development and commercial exploration or sale of the respective mining permits.
The Directors Report noted opportunistic applications for forfeiture had been made by West Australian Prospectors Pty Ltd, Zygmund Wolski and Golden Soak against Bullseye's mining tenements.
Note 1 of the 2019 Consolidated Financial Statements states that the ability of the group to continue as a going concern is dependent on raising additional equity funding in the next 6 to 12 months. Note 1 goes on to say that these conditions indicate the existence of a material uncertainty that may cast a significant doubt about the group's ability to continue as a going concern. Note 26 of the 2019 Consolidated Financial Statement notes reports the raising of approximately $3,000,000 predominantly by way of equity.
For the financial year ended 30 June 2020 Bullseye recorded a loss of $2,758,889 with total current assets at $1,014,947 and current liabilities at $6,820,560.
The value of Bullseye's non-current assets was $17,016,121 and non‑current liabilities was $51,332.
The most significant component of Bullseye's non-current assets is its exploration assets. The defendants submit that the exploration assets are dependent on successful development and commercial exploitation or sale of mining permits. The defendants submit the value must be speculative.
Note 28 of the 2020 Consolidated Financial Statement notes reports Bullseye had borrowed in excess of $2.5 million by issue of convertible notes and drawn down $1 million pursuant to a loan agreement made October 2020.
The defendants make the point that tenements held by Bullseye are subject to forfeiture applications and objections to applications for exemption.
Section 102 of the Mining Act1978 (WA) provides that the holder of a mining tenement may be granted a certificate of exemption for compliance with expenditure conditions for any of four stated reasons. The mining regulations also include a provision for exemption where relevant expenditure requirements could not be met due to the consequences of the COVID-19 pandemic.
The defendants submit that there is no evidence from Bullseye that the forfeiture applications are unmeritorious, nor is there evidence that any application is being made on the basis of the reason specified in s 102 of the Mining Act.
Bullseye has issued $2.5 million worth of convertible notes with a 12‑month term from October 2020. The defendants submit that the evidence discloses Bullseye will need to repay $2.5 million plus interest in October 2021 unless the convertible note holders elect to convert to equity. The defendants make the point that the note holders have not entered into any variation of their notes and remain entitled to demand repayment in October 2021.
In response Bullseye submits that by 30 June 2020 Bullseye had significantly progressed the development of its gold project portfolio and had commenced gold mining at the Bungurra Project by the Blue Cap Bullseye Joint Venture (Blue Cap Joint Venture). Bullseye submits that it has entered into a joint venture with Blue Cap with a 70% to Bullseye profit split and has identified new priority gold targets and has completed soil sampling in preparation for drilling. On the Blue Cap Joint Venture the defendants submit the agreement is merely a conditional agreement to agree and does not constitute a contract that is binding on either Bullseye or Blue Cap. Ms Mullan, in her affidavit deposes that the Blue Cap Joint Venture entered into a Toll Milling Agreement on or about 4 December 2020 with Wiluna Operations Pty Ltd (Wiluna) for offsite toll treatment of gold ore extracted from Bungurra (par 15). I accept from what Ms Mullan deposes that the Blue Cap Joint Venture has a formal status other than a conditional agreement.
Bullseye submits that Xinhe, the third defendant by counterclaim, obviously considers Bullseye a viable entity in that by letter dated 15 December 2020 Xinhe offered Bullseye a working capital facility of $15 million for the purpose of Bullseye establishing mining operations on its Bungurra gold deposit. A condition of the funding, as well as Bullseye opening its books to Xinhe for due diligence, was that the facility be secured by way of a mining mortgage over mining lease M37/1167, a tenement the subject of an application for forfeiture.
Bullseye submits that this offer shows that Xinhe, a majority shareholder in Bullseye, considers the tenement a significant asset and that Bullseye as a mining exploration company with valuable mining tenements will result in significant financial gains for Bullseye and its shareholders.
In October 2020 the S Cygulis Family Trust entered into a convertible note deed with Bullseye in the sum of $200,000. By letter dated 27 November 2020 the trustees of the family trust write to the chair of Bullseye and say they '… are aware of Bullseye's financial position, and fully supports Bullseye and its directors'. The trustees go on to say they agree to take any reasonable steps to extend Bullseye's obligation to repay the loan by a further period of 12 months (Burns' affidavit, page 406).
In October 2020 Condor Developments Pty Ltd (Condor) entered into a convertible note deed with Bullseye in the sum of $200,000. By letter dated 27 November 2020 a director of Condor writes to the chair of Bullseye in the same terms as the letter referred to in [57].
In October 2020 Wild Horse Super Pty Ltd entered into a convertible note deed with Bullseye in the sum of $200,000. By letter dated 26 November 2020 Wild Horse Super advises Bullseye that it would be prepared to extend the convertible note from 12 months to 24 months on condition '… that the company demonstrated good cause that the loan repayment would not be possible upon the expiration of the 12‑month period' (Burns' affidavit, page 408).
There is no evidence whether the condition imposed by Wild Horse Super has been satisfied and that the company has extended the repayment date.
Mullan's affidavit
The thrust of Mullan's affidavit is that the plaintiff is now actively hauling gold bearing ore to the site operated by Wiluna for processing. Ms Mullan deposes to 31,854.6 wet metric tonnes of gold bearing ore being hauled to Wiluna's plant, between 5 July 2021 to 15 August 2021.
Blue Cap Mining Pty Ltd (BCM) is the contractor engaged by the plaintiff to provide mining services. Ms Mullan deposes that BCM has forecast that approximately 5,690 ounces of gold is expected to be processed from 53,802 dry tonnes of ore. At a gold price of $2,450 per ounce the gross revenue is $13,943,117 (Mullan's affidavit, par 31).
BCM projects that by December 2021 some 163,125 dry tonnes will be processed resulting in 19,661 ounces of gold. This equates to $48,170,473 (at a gold price of $2,450 per ounce), generating a pre-tax profit (net of rebates) of $13,743,340 (Mullan's affidavit, par 37 and page 39). I note that the BCM projection at page 39 suggests the all in cash cost per ounce is $1,233.
Joint defendants' submissions on Mullan's affidavit
The defendants submit that the plaintiff made a deliberate decision not to call evidence at the initial hearing, and this will 'tell decisively against the application' (see Smith v New South Wales Bar Association (1992) 176 CLR 256, 266). The defendants go on to cite Jensen v Nationwide News Pty Ltd [No 12][2019] WASC 250 [6] ‑ [12] as to the relevant principles in relation to an application to reopen.
A less stringent test applies when the application for leave to reopen is made before reasons are delivered and orders made (Osborne v Landpower Developments Pty Ltd (in liq) [2003] WASCA 117). Relevant factors in the exercise of discretion to allow a reopening include the materiality of the evidence and whether the interests of justice would be served by its admission.
In my opinion this is not a case where the plaintiff's legal advisors have reflected on what has occurred and concluded the plaintiff's evidence could have been better presented. At the date of the Burns' affidavit the information surrounding the mining of gold at Bungurra was not available. The information concerning the wet tonnage of ore mined, the wet tonnage of ore transported, and the estimate of gold recovery from the dry tonnes of ore came after the hearing.
In my opinion it is in the interests of justice that the plaintiff have leave to reopen.
The defendants jointly submit that the Mullan's affidavit is inadmissible predominately because of hearsay. Even if admissible the defendants submit there is no evidence of any decrease of liabilities or increase in assets of the plaintiff, nor evidence of actual revenue generated by the plaintiff.
The plaintiff submits the documents attached to the Mullan's affidavit are business records pursuant to s 79C of the Evidence Act 1906 (WA). The plaintiff submits BCM is a party to the joint venture and contracted to provide services to the plaintiff. As Ms Mullan deposes part of those services are to maintain documents and updates and reports to the plaintiff (Mullan's affidavit, par 16).
For the purpose of s 79C of the Evidence Act, a business record is a document prepared or used in the ordinary course of business for the purpose of recording any matter relating to the business. BCM is in the business of mine management construction and haulage of ore. The documents prepared by BCM have been created for the purpose of its business and its obligations to the plaintiff. There is no reason to believe the documents are not a genuine business record.
In my opinion the documents produced by BCM are a business record.
In any event an application for security for costs is an interlocutory application. Order 37 r 6(2) of the RSC provides that an affidavit may contain statements of information and belief provided the source and grounds for the information and belief are set out. Ms Mullan in her affidavit has set out the source of her information and belief (Mullan's affidavit, par 36).
I will admit the Mullan's affidavit and attachments into evidence.
Discussion
The plaintiff is a mining exploration company. The company has gone from exploration to production. The plaintiff has now reached a point where predictions or estimates can be made of likely gold to be recovered and, based on the then prevailing gold price, an estimate of the net profit available to the plaintiff.
The evidence of Bullseye now discloses there is a revenue stream. The gold bearing ore is now a realisable asset.
The mining tenements which the plaintiff holds are an asset, albeit subject to forfeiture applications. The Xinhe offer shows that at least one tenement could act as security for a loan facility.
From past history the plaintiff has shown to be reliant on raising capital through convertible notes, and on funding from its directors and shareholders. There is no indication that those sources of funding will not continue.
Conclusion
The test on an application for security for costs is not that the plaintiff would be unable to pay the defendants' costs, but whether there is reason to believe the plaintiff would be unable to pay the costs.
On the evidence before me I am unable to conclude there is reason to believe the plaintiff would be unable to pay the defendants' costs.
The respective defendants' applications are dismissed. I will hear counsel on the issue of costs.
I certify that the preceding paragraph(s) comprise the reasons for decision of the District Court of Western Australia.
TS
Court Officer
24 JANUARY 2023
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