Precious Metals Australia Limited v Xstrata Windimurra Pty Limited

[2005] NSWSC 147

CITATION:	Precious Metals Australia Limited v Xstrata Windimurra Pty Limited & Anor [2005] NSWSC 147 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	01/03/05
JUDGMENT DATE :	9 March 2005
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	Einstein J
DECISION:	Orders made for provision of security for costs.

CATCHWORDS:	Security for costs
LEGISLATION CITED:	Trade Practices Act 1974 (Cth)
CASES CITED:	Ariss v Express Interiors Pty Ltd (in liq) (1995) 13 ACLC 1585 Baygol Pty Ltd v Huntsman Chemical Company Australia Pty Ltd [2004] FCA 1248 Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301 Equity Access Limited v Westpac Banking Corporation (1989) ATPR 40-972 Idoport Pty Ltd v National Australia Bank [2001] NSWSC 744 Oshlack v Richmond River Council (1998) 193 CLR 72 Pearson v Naydler [1977] 1 WLR 899 Rosenfield Nominees Pty Ltd v Bain Co (1988) 14 CLR 467 Townsend Controls Pty Ltd v Gilead (1989) 14 IPR 443 Visco v Minter [1969] 2 All ER 714
PARTIES:	Precious Metals Australia Limited (Plaintiff) Xstrata Windimurra Pty Limited (First Defendant) Xstrata (Schweiz) AG (Second Defendant)
FILE NUMBER(S):	SC 50113/04
COUNSEL:	Mr PR Garling SC, Mr R J L McCormack (Plaintiff) Mr JT Gleeson SC, Mr MR Elliott (Defendants)
SOLICITORS:	Piper Alderman (Plaintiff) Mallesons Stephen Jaques (Defendants)

LOWER COURT JURISDICTION:

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

Einstein J

Wednesday 9 March 2005

50113/04 Precious Metals Australia Limited v Xstrata Windimurra Pty Limited & Anor

JUDGMENT

The background

1 The procedural background explaining how the security for costs notice of motion presently before the court has come to be dealt with is generally set out in the judgement delivered today in the associated proceedings 50003 of 2005.

Security for costs

The principles

2 The principles which inform the exercise of the Court's discretion to order security for costs are reasonably well-established. A convenient statement of those principles was dealt with in Idoport Pty Ltd v National Australia BankLtd [2001] NSWSC 744.

3 An important consideration is that the application is predicated upon the assumption that the defendants will succeed in so much of the proceedings as do not involve any cross-claim raising matters outside the plaintiff’s claim.

4 Ormrod J in Visco v Minter [1969] 2 All ER 714 at 716 expressed the principles as follows:

‘So, if the defendant wishes to raise a counterclaim by way of defence, he is allowed to do so without incurring the liability of having to provide security for the costs of the counterclaim. But this rule is subject to certain limits, because otherwise it would enable a defendant, sued in this court, to bring a cross-action about something quite different . Where the counterclaim or cross-action raises matters quite outside the plaintiff’s claim , the defendant will be treated as a plaintiff so far as the cross action is concerned… The principle seems to be that where a defendant counter-attacks on the same front on which he is being attacked by the plaintiff, it will be regarded as a defensive manoeuvre. But if he opens a counter-attack on a different front, even to relieve pressure on the front attacked by the plaintiff, he is in danger of an order for security for costs depending on the court’s assessment of the position of each case’ (emphasis added).

5 The authorities are not at one in relation to what does and does not compromise a defensive manoeuvre: cf Townsend Controls Pty Ltd v Gilead (1989) 14 IPR 443 per von Doussa J; per contra Baygol Pty Ltd v Huntsman Chemical Company Australia Pty Ltd [2004] FCA 1248 per Tamberlin J.

6 It is inappropriate to repeat the record. The defence and cross-claim are self-explanatory.

7 PMA has claimed that the cross-claim is far more than purely defensive.

8 There are some open questions as to characterisation of certain of the claims in the cross-claim. As pointed above it is not always easy to identify with precision what precisely can be regarded as engaging "a different front". Rectification for unilateral mistake seems to me to be borderline in terms of opening up a different front. Likewise rectification for mutual mistake may arguably be characterised as a counter-attack on the same front although this analysis could be the subject of legitimate debate. The estoppel and Trade Practices Act claims although arguably borderline, are probably more appropriately described as comprising defensive manoeuvers.

PMA's financial position

9 It seems clear that PMA is a one-operation entity, its single commercial purpose being to receive the Windimurra royalty. This is demonstrated from the following:

· In the financial years ended 30 June 2004, 30 June 2003 and 30 June 2002, the Windimurra royalty made up 52.20%, 67.64% and 88.22% of Precious Metals’ total revenue respectively. Most of the remaining income consisted of the sale of tenements and other investments.

· For the financial years ended 30 June 2004, 30 June 2003 and 30 June 2002, the right to receive the Windimurra royalty over the forthcoming four years made up 76.89%, 74.33% and 62.80% of Precious Metals total assets respectively. Most of the other assets consisted of either cash or non-trade receivables. The four-year period was chosen as this was the minimum time period in which the Windimurra project could be terminated and the associated royalties cease.

· In the years ended 30 June 2004 and 30 June 2003, amortisation on the Windimurra royalty is the largest expense item in the financial reports of Precious Metals.

· The 2004 annual report discloses at page 5 that Precious Metals principle activities were the receipt of royalty income and the maintenance and disposal of certain properties held through its wholly owned subsidiary “Kimberley Gold Pty Ltd”. Note 8, at page 18 of the 2004 annual report discloses that “Kimberley Gold Pty Ltd” was disposed of during the year. Accordingly, its sole activity is the receipt of the Windimurra royalty.

10 In what follows Xstrata's submissions summarising the evidence as to Xstrata’s financial position is adopted as correct.

The plaintiff’s position up to 1994

11 The evidence demonstrates that the plaintiff’s financial position declined significantly in the years leading up to 2004. Amongst other things:

· the operating assets of the plaintiff, a mining company, were systematically sold for the purpose of raising funds to meet liabilities. One can trace the disposal of these assets through the schedule of mining tenements in the accounts for the years ended 30 June 2002 [JSS 1, vol 3, tab 45, page 4] and 30 June 2003 [JSS 1, vol 3, tab 48, page 4], through the statement in the quarterly report for the period ended 31 December 2003 [JSS 1, vol 3, tab 50], and ultimately through to the fact that there is no schedule of mining tenements in the accounts for the year ended 30 June 2004 [JSS 1, vol 3, tab 56]. The present position is that the plaintiff has no operating assets;

· there was a suspension of trading in the plaintiff’s shares by the Stock Exchange on 28 October 2002 pending the lodgement of the company’s 2002 annual return. Trading in the plaintiff’s shares resumed on 27 February 2004 once the 2002 and 2003 annual returns had been lodged;

· those annual returns, once lodged, recorded that the plaintiff had made a loss of $21.5 million in the year ended 30 June 2002 [JSS 1, vol 3, tab 45, page 9], and a profit of only $347,481 in the year ended 30 June 2003 [JSS 1, vol 3, tab 48, page 11];

· further, the 2002 return disclosed that a capital raising was proposed to take place in order to retire certain debts due to directors and to obtain $500,000 in working capital. The proceeds of that capital raising were received in the year ended June 2004. The debts owed to the directors arose, in large part, upon the directors being required to meet guarantees they had given to a plaintiff’s creditor. The capital was raised by way of the issue of shares to the directors, and not by way of offer to shareholders generally (the $500,000 in working capital being raised by the issue of shares to the Earl of Warwick, a director). At the time the capital raising was put to the shareholders for approval, the plaintiff’s auditors noted that if the capital raising was not successful there was significant uncertainty as to whether the plaintiff could continue as a going concern [see JSS 1, vol 3, tab 45 at pages 6 and 12].

Financial position as at 30 June 2004

· The most recent audited annual accounts of the plaintiff are those for the financial year ended 30 June 2004 [JSS 1, vol 3, tab 56]. Those accounts reveal that as at 30 June 2004:

Assets and liabilities (page 10)

· the plaintiff’s total assets were $2.6 million, of which the ‘Windimurra royalty’ represented $2 million. The ‘Windimurra royalty’ is a reference to the plaintiff’s entitlement to receive royalty payments of $500,000 per annum from the defendant under the terms of the agreement the subject of these proceedings, and the carrying value of that asset was calculated on the basis that the plaintiff would receive that royalty for a further four years (see page 19);

· the plaintiff’s total liabilities were $222,611;

· the plaintiff’s net assets were $2.378 million;

· absent the carrying value of the ‘Windimurra royalty’, the plaintiff’s net assets were of the order of $378,500;

Financial performance (page 9)

· the net profit for the financial year was $265,896;

· this net profit figure was only made possible by the receipt of the annual Windimurra royalty of $500,000 and revenue of $457,913 in respect of ‘ordinary activities’. Note 2 to the accounts (page 15) makes it plain that the revenue of $457,913 comprised the proceeds of sale of the plaintiff’s investments and its controlled entity. The assets sold to facilitate the modest net profit for the year appear to have been the Palm Springs mining tenements, its only remaining operating asset [JSS 1, vol 3, tab 48, page 4. JSS 1, vol 3, tab 50];

Cash flows (page 11)

· the plaintiff’s ability to report a positive cash flow for the year had depended upon the receipt of three things – (1) the royalty payment, (2) the proceeds of the asset sale referred to above, and (3) $500,000 from one of its directors under the capital raising referred to above. The plaintiff’s cash flows from operating activities were ($600,281).

12 In short:

The plaintiff’s financial position as at 30 June 2004 was weak, in that:

· its only material assets were the right to receive the Windimurra royalty and cash of $428,500;

· it had no other assets which could be sold to raise working capital;

· it had only been able to survive as a going concern by selling its operating assets and issuing further shares to directors in return for cash or the retirement of debt;

· looking forward, the company’s only likely material cash receipt was $500,000 per annum for the Windimurra royalty.

13 It is also plain that following the commencement of the proceedings PMA determined to treat with its need to obtain additional funds in order to cover its own costs of pursuing these proceedings. This history is accurately summarised by Xstrata in the following terms:

· in October 2004 the plaintiff announced that it was in the process of finalising a prospectus for a pro-rata non-renounceable rights issue to shareholders to raise $770,000 to be applied to working capital, to further the company’s search for new mineral opportunities, to meet the costs of the issue and to meet the ongoing costs of the litigation against the defendants;

· during the course of November 2004 the shape of these proceedings changed. First, the plaintiff abandoned large parts of its claims. Second, the Court ordered the separate hearing and determination of a preliminary question on 9 and 10 February 2005 on the basis that if it was disposed of in a particular way the litigation would be at an end [Samaha, para 4+];

· in light of those developments, the plaintiff’s board of directors met on two occasions in late November 2004 and proposed that the capital raising be altered so that the amount to be raised would be the reduced sum of $462,000 (only 60% of what had previously been proposed). The board minutes record:

‘This was proposed as a result of the focused and greatly reduced legal action that the Company’s solicitors had submitted to the Supreme Court…Given that the proposed hearing had been set for 9 and 10 February for a two day period, the overall cost of litigation…was limited and therefore the Company could afford to reduce the proposed raising.’

· on 14 December 2004 the shape of the proceedings changed again, and the Court vacated the order made for the hearing of the preliminary question and instead made directions for the preparation of the entire case for a four week hearing commencing 4 July 2005. That same day the plaintiff’s Perth solicitor, Richard Payne, sent Mr Smith (a representative of the plaintiff) an email in which he stated that the plaintiff would need to think through the consequences of this change in the proceedings so far as the prospectus was concerned, as the costs of counsel and solicitors attending a four week hearing was likely to be $250,000 and the rule of thumb was that preparation would cost roughly the same. Payne suggested that more funds should be raised;

· on 20 December 2004 a prospectus was issued inviting shareholders to participate in the rights issue. The amount to be raised remained at $462,000 (being the reduced amount proposed by the directors in November 2004) notwithstanding that the preliminary hearing on one issue had been vacated and the matter was to proceed instead to a four week hearing on all issues in July 2005. It appears that Mr Payne’s suggestion of the previous week had not been acted upon;

· in Section 4.2 of the prospectus it was stated that the purpose of the issue was to raise funds to meet the following budgeted costs:

Administration and working capital $112,870

Ongoing costs of these proceedings $250,000

Expense of the issue $99,098

· section 4.2 of the prospectus carried on to provide that ‘in the event that the Company is required to either guarantee or lodge moneys with the Court as security of costs as referred to further in Section 5.3, such funds will be met from existing and new working capital’. This passage makes it plain that the $250,000 budgeted for in respect of the plaintiff’s ongoing costs of the proceedings related solely to its own legal costs;

· section 5.3 of the prospectus dealt in some detail with these proceedings, noting that:

(1) the plaintiff had been requested to provide security for costs, but that security for costs was a matter for the court’s discretion and the court may conclude that the defendants are responsible for raising various issues in the proceedings such that the plaintiff should not be required to provide security;

(2) the plaintiff believed that its own legal costs in conducting the proceedings through to the end of a 4 week trial were likely to be some hundreds of thousands of dollars. (As an aside, it is to be noted that the plaintiff has been served with a notice to produce calling for fee disclosures and estimates provided to it by its solicitors, but none have been produced);

(3) the directors believed that the funds to be raised pursuant to the offer, together with anticipated future Windimurra royalty payments, would be adequate to meet the costs of the proceedings even if the plaintiff is not successful.

· an amount of $393,759 (gross) was raised from the capital raising, and the shortfall of shares worth $68,208 were allotted in accordance with the underwriting agreement.

14 It is quite clear that the present financial position of PMA is such that it will not been a position to meet an order that it pay the defendants costs of the proceedings should the defendants be successful.

15 As the defendants had submitted this conclusion is not surprising in light of the fact that the capital raising had been reduced to reflect a reduction in the costs of the litigation consequent upon it being funnelled into a short preliminary hearing on one issue. That reduction had made a more modest capital raising affordable. By the time the prospectus was issued, however, the issues were not so confined, and there was to be no short hearing of a preliminary question. The capital raising did not, therefore, proceed on any assessment of the plaintiff’s own costs of the proceedings as presently configured, let alone upon a proper assessment of the plaintiff’s likely costs liability in the event it was unsuccessful in such proceedings.

16 However there is compelling evidence presently before the Court as to Xstrata's present financial position given by Mr Gower which in summary is to the following effect:

· even taking the proceeds of the recent capital raising into account, the plaintiff’s likely cash inflows and outflows from 31 December 2004 to 31 August 2005 and 31 December 2005 are such that it will only have between $500,000 and $550,000 available to fund this litigation;

· on this basis, even assuming the plaintiff’s own legal fees are limited to $350,000 (in itself a conservative estimate), it will not be able to meet its own costs plus an order for the payment of $1 million to the defendants in respect of their costs;

· the plaintiff’s cash position is likely to deteriorate after 31 December 2005. The estimated shortfall as at 31 August 2005 is about $793,500. By 31 December 2005 that shortfall is likely to have increased to about $812,250.

17 The evidence therefore clearly demonstrates that there is reason to believe that the plaintiff will not be able to satisfy any costs orders made against it in the proceedings. That evidence not only gives the Court a jurisdictional basis for ordering security, but is a factor in favour of such an order being made: Ariss v Express Interiors Pty Ltd (in liq) (1995) 13 ACLC 1585.

Discretionary considerations

18 The history of this litigation is somewhat awkward to say the least. The parties have moved from an anticipation of a need to ready themselves for a preliminary issue determination of the separate question of law, through sundry amendments to the pleadings and into the present path of the four week fixture in July of this year. It seems to me that the vast increase in the nature, extent and complexity of the legal and factual issues, raised essentially by reason of the cross-claim which has led to PMA being required to treat with the four-week hearing, rather than a two-day hearing, represents a legitimate discretionary considerations in terms of the appropriate order for security for costs to be made in these proceedings.

19 The Court has a very wide discretion in determining what in the interests of justice, should be the amount PMA should pay by way of security for costs. That discretion requires to take into account:

· The initial evidence given by Mr Samaha by affidavit dated 20 December 2004 was that the costs incurred and likely to be incurred by the defendants will be in excess of $1.8 million and that on an assessment, the defendants would be likely to recover at least $1 million [confirmed by Ms Higginbotham’s evidence]. , I note that a mathematical error exists in the calculation of projected total costs in the affidavit of Mr Samaha, dated 20 December 2004. This error being in paragraph 34 of the affidavit where the total costs should add to $1,334,285.93, not $1,829,299.363 as disclosed; and

· Mr Samaha’s later updated evidence that the costs incurred and likely to be incurred by the defendant will be about $1.6 million and that on assessment the defendants would be likely to recover about $1.2 million.

20 These estimated costs can only be described as astounding.

21 There is also to be taken into account the relatively unusual circumstance that PMA will be claiming that to the extent that it may succeed in establishing that all or part of the proceedings were legitimately commenced to enforce the Guarantee or Indemnity [cf the judgment in the Guarantee proceedings], the whole of its legal costs will be required to be paid by Xstrata in relation at least to those issues. Having said that, it is of course clear that the Court presently must, for the purpose of the security for costs application, assume that the defendants will succeed in the proceedings. Nevertheless, it can take into account every fact, matter and circumstance providing a background context against which the proper exercise of the discretion to order security for costs must take place.

22 It is not a simple task to inject the above-described exercises in capital raising into the discretionary factors to be taken into account. They likely constitute a background matter. At least they suggest the existence of outside persons prepared to support PMA. Most particularly the PMA prospectus of 20 December 2004 at [6.7] travelled into considerable detail recording shareholders with particular relevant interests. It appears from the accompanying chart and in particular the notes to that chart that:

· the Earl of Warwick, by an indirect holding registered in the name Tagora Pty Ltd, as at the date of the prospectus held 27.65% of the issued shares but that immediately after the issue that shareholding was decreased to 26.65% of the issued shares;

· Mr Roderick Smith as at the date of the prospectus held a shareholding directly as well as indirectly. The indirect holdings were through Horseshoe Exploration Pty Ltd and Pacific Quest Investments Pty Ltd. As at the date of the prospectus the direct and indirect holdings were 36.31% of the issued shares. Immediately after the share issue that shareholding remained at 36.31%.

23 In the result it seems clear that at least these interests would gain by PMA’s success in the proceedings. There is no evidence of these or any other persons standing behind the company being prepared to provide the necessary security for costs.

24 Clearly the Court may take into account uncertainties in the cost estimates. The proceedings may conclude earlier than on in the time estimated. The parties may change their approaches to issues in the pleadings. What is allowed on a taxation as fair and reasonable may be considerably less than that suggested in the evidence of the defendants.

25 In the end, it is convenient to return to the principles which inform the proper approach to costs orders in curial proceedings.

26 The ordinary rule is of course that costs follow the event in proceedings before the Court. The rule has its rationale by way of a principle of compensation in respect of the successful party to the proceedings recovering the costs incurred in the proceedings.

27 The rationale for the general rule which has a public as well as a private dimension, was identified by McHugh J in Oshlack v Richmond River Council (1998) 193 CLR 72 at 97:

“The principle is grounded in reasons of fairness and policy and operates whether the successful party is the plaintiff or the defendant. Costs are not awarded to punish an unsuccessful party. The primary purpose of an award of costs is to indemnify the successful party. If the litigation had not been brought, or defended, by the unsuccessful party the successful party would not have incurred the expense which it did. As between the parties, fairness dictates that the unsuccessful party typically bears the liability for the costs of the unsuccessful litigation.

As a matter of policy, one beneficial by-product of this compensatory purpose may well be to instil in a party contemplating commencing, or defending, litigation a sober realisation of the potential financial expense involved . Large scale disregard of the principle of the usual order as to costs would inevitably lead to an increase in litigation with an increased, and often unnecessary, burden on the scarce resources of the publicly funded system of justice.” [emphasis added]

28 As Giles J (as His Honour then was) made plain in Rosenfield Nominees Pty Ltd v Bain and Co (1988) 14 ACLR 467 at 470, in exercising the discretion as to whether or not to make an order for costs, the Court must have a concern to achieve a balance between ensuring that adequate and fair protection is provided to the defendant, and avoiding injustice to an impecunious plaintiff by unnecessarily shutting it out or prejudicing it in the conduct of the proceedings [cf Street CJ in Buckley v BennellDesign & Construction Pty Ltd (1974) 1 ACLR 301 at 304].

29 With specific regard to security for costs against corporations, the Court in Pearson v Naydler [1977] 1 WLR 899 at 906-907 recognised that the basic notion of security for costs empowers the Court to order the plaintiff to do something that it will likely find difficult to do, ie. to provide security for the costs which ex hypothesi it is likely to be unable to pay. Despite this, the Court noted that this discretionary power should not be used as an instrument of oppression “by shutting out a small company from making a genuine claim against a large company” (see also Equity Access Limited v Westpac Banking Corporation (1989) ATPR 40-972 at 50,635). The Court must thereby strike a balance between this consideration and the notion that:

“…the court must not show such a reluctance to order security for costs that this becomes a weapon whereby the impecunious company can use its inability to pay costs as a means of putting unfair pressure on a more prosperous company. Litigation in which the defendant will be seriously out-of-pocket even if the action fails is not to be encouraged . While I accept that there is no burden of proof one way or the other, I think that the court ought not to be unduly reluctant to exercise its power to order security for costs in cases that fall squarely within the section.” [emphasis added]

Finding

30 At the end of the day I have come to the conclusion that the appropriate amount to order of security for costs is $500,000 to be paid:

· As to $250,000.00 on or before 15 May 2005;

· As to $250,000.00 on or before 15 June 2005.

I certify that paragraphs 1 - 30
are a true copy of the reasons
for judgment herein of
the Hon. Justice Einstein
given on 9 March 2005

___________________
Susan Piggott
Associate

9 March 2005

18/03/2005 - Counsel for the plaintiff, Mr McCormack's initials were incorrectly typed as RJC instead of RJL - Paragraph(s) Counsel box