Republic Coal Pty Ltd v Baralaba Coal Pty Ltd

[2009] NSWSC 748

CITATION:	Republic Coal Pty Ltd v Baralaba Coal Pty Ltd [2009] NSWSC 748 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	6 July 2009
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	Brereton J
EX TEMPORE JUDGMENT DATE:	7 July 2009
DECISION:	Limited order for discovery made in relation to specific disputed allegation – leave to amend originating process granted subject to certain qualifications – motion otherwise dismissed
CATCHWORDS:	EVIDENCE – Expert evidence – Application for directions permitting plaintiff to obtain and produce expert evidence – examination of issues - where evidence on which expert would report is not relevant to true issue before the court – directions refused - DISCOVERY – Oppression suit - ordinarily appropriate to make order for discovery in oppression suit – where relationship between proposed categories and issues not apparent on face of categories – categories should ordinarily be expressed in terms of issues in proceedings - orders for discovery made only in respect of disputed allegations in pleadings
LEGISLATION CITED:	(CTH) Corporations Act 2001, s 232 (NSW) Uniform Civil Procedure Rules 2005 r 21.1, r 21.2, r 21.2(3)(b)
CATEGORY:	Procedural and other rulings
CASES CITED:	Re ABT Holdings Pty Limited (1979) 4 ACLR 40 Re Australian Marinas (Australasia) Pty Ltd [1975] VR 372 Syndicate Mortgage Solutions Pty Limited v El-Sayed [2008] NSWSC 1396
PARTIES:	Republic Coal Pty Limited (plaintiff) Baralaba Coal Pty Limited (first defendant) Cockatoo Coal Limited (second defendant) Cockatoo Coal Marketing company Pty Ltd (third defendant) Mark Lochtenberg (fourth defendant) Peter James Nightingale (fifth defendant) Norman Alfred Seckold (sixth defendant)
FILE NUMBER(S):	SC 2262/09
COUNSEL:	Ms M Painter w Mr P Maddigan (plaintiff) Mr R Dick (second - sixth defendants)
SOLICITORS:	Duncan Cotterill Lawyers (plaintiff) Minter Ellison (second - sixth defendants)

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

BRERETON J

Tuesday 7 July 2009

2262/09 Republic Coal Pty Limited v Baralaba Coal Pty Ltd & 5 Ors

JUDGMENT (ex tempore)

1 HIS HONOUR: The plaintiff Republic Coal Pty Limited is the minority 37.5 percent shareholder in the first defendant Baralaba Coal Pty Ltd, which owns a coal mine in Queensland. Republic alleges that the affairs of Baralaba are being conducted oppressively or not in the interests of the members as a whole, but in order to prefer the interests of second defendant Cockatoo Coal Ltd - through a subsidiary Cockatiel Coal Pty Limited - which is the majority 62.5 percent shareholder.

2 Relevant background matters include that, on 25 January 2005, Baralaba entered into a Marketing Agency Agreement with Peabody Coal Trade Australia Pty Ltd - which then had an interest in Baralaba - which interest has since been transferred to Cockatiel. That Marketing Agency Agreement has itself been novated, on 12 December 2008, to Cockatoo, contemporaneously with Cockatiel’s acquisition of its interest in Baralaba. As a result, the Marketing Agency Agreement gives Cockatoo the right to market coal produced by Baralaba, subject to certain restrictions and in return for a commission payable to Cockatoo for coal sold. It provides that the marketing rights under it cannot be assigned, nor a sub-agent appointed, without Baralaba’s consent.

3 Subsequently, on 26 February 2009, Cockatoo has entered into an Exclusive Agency Agreement with the third defendant Cockatoo Coal Marketing Company Pty Limited (CCMC), a joint venture vehicle in which Cockatoo and S K Australia Pty Limited (SKA) are the joint venturers. SKA invested $25 million in the joint venture, the subject matter of which is the marketing and sale of Cockatoo’s coal production - including the coal produced by Baralaba. Cockatoo receives 50 percent of the profits made by CCMC. Cockatoo receives the benefit of SKA’s investment in the joint venture vehicle and Baralaba receives no compensation or consideration. Under the Exclusive Agency Agreement the agent - that is CCMC - is obliged to act in the best interests of Cockatoo. Cockatoo receives 50 percent of the profits made by CCMC. Cockatoo receives the benefit of SKA’s investment in the joint venture vehicle and Baralaba receives no compensation or consideration. Baralaba is not a party to the Exclusive Agency Agreement. There is no requirement for the approval by Baralaba of sales contracts in respect of coal produced by it, nor for the consent of Baralaba to the assignment of the agreement or the appointment of a sub-agent.

4 The Exclusive Agency Agreement gives more freedoms of action to the agent, and less control to the principal, than the Marketing Agency Agreement. Accordingly, it may be said, and I am content to accept for present purposes, that the rights of the principal under the Exclusive Agency Agreement are less valuable and the rights of the agent more valuable than their respective rights under the Marketing Agency Agreement, if one be compared to the other. Republic contends that by reason of that circumstance, it should have received some consideration or compensation in return for reduction in rights of the principal under the Exclusive Agency Agreement, and that in the absence of any such consideration, the effect of the transaction was to prefer the interests of Cockatoo to Baralaba. However, this presupposes that the Exclusive Agency Agreement replaced the Marketing Agency Agreement, and that Baralaba has given up rights it previously had under the Marketing Agency Agreement.

5 The Commercial List Statement, which now pleads Republic’s case, does not allege that the Exclusive Agency Agreement somehow replaced or superseded the Marketing Agency Agreement, though in the course of argument there was some suggestion that the affairs of Baralaba were being conducted conformably with the Exclusive Agency Agreement and not conformably with the Marketing Agency Agreement. Republic alleges, first, in the pleading that culminates in paragraph 29 of the Commercial List Statement, that the Exclusive Agency Agreement was not in the best interests of Baralaba but for the benefit of Cockatoo. Secondly, in paragraph 31, it is pleaded that entry by Cockatoo into the Exclusive Agency Agreement was a breach of its duty as agent. Although this is not elaborated, that is presumably said to be on the basis that Cockatoo failed to obtain the requisite consent under the Marketing Agency Agreement to assignment of the marketing rights under it or of the appointment of a sub-agent; such consent has subsequently been obtained, through a meeting of Baralaba’s directors on 1 June 2009. Thirdly, it is alleged that the Exclusive Agency Agreement was not duly authorised on the part of Baralaba, as it was a “related corporation transaction” within the meaning of clause 5.3(f) of the Shareholders Agreement relating to Baralaba’s affairs, which clause provides that Baralaba may enter into a transaction with a related corporation of a shareholder only with the approval of 75 percent of the shareholders. As Cockatoo and CCMC are related corporations of Cockatiel, it was suggested that the Exclusive Agency Agreement was a related corporation transaction. However, the provision pertains to transactions of Baralaba, not of Cockatoo; at this stage, Baralaba has not entered into the Exclusive Agency Agreement; and Cockatoo says there is no proposal or intention for Baralaba to enter into any such agreement. Objectively, from a commercial perspective, this is a surprising position, since it there would seem to be a significant commercial imperative for Cockatoo to obtain Baralaba’s consent to the Exclusive Agency Agreement, so that Cockatoo can market Baralaba’s coal through that Agreement. However, the defendants do not contend that Baralaba is presently bound by the Exclusive Agency Agreement, nor that Cockatoo is not bound by the Marketing Agency Agreement. Indeed, the defendants accept that Cockatoo remains bound by and subject to the Marketing Agency Agreement.

6 The first issue that arises under the Notice of Motion presently before the Court is Republic’s application for directions permitting it to obtain and adduce expert evidence from a coal industry expert as to the value of the “marketing rights” under the two agreements on a comparative basis.

7 It seems sometimes to be overlooked that value does not exist in the abstract; value must always be related to the person who holds the rights in question. “Marketing rights” do not exist in the abstract. What might be considered is either the rights of the principal under one of these agreements, or the rights of the agent under of one of these agreements. In theoretical terms, value is the price which that person would accept, and an arms length purchaser would pay, to sell and acquire the rights respectively. So far as was possible to ascertain - and I think it is fair to say that, without the anticipated expert advice, Republic has not yet been able precisely to formulate what it would seek to adduce - it seems, nonetheless, that it would be along the lines of the value of the principal’s rights under the Marketing Agency Agreement, the value of the principal’s rights on a comparative basis under the Exclusive Agency Agreement, and perhaps the value of the principal’s rights without any such agreement at all. Once that is appreciated, it is important to see whether, in fact, there is any valid basis for comparing the Exclusive Agency Agreement with the Marketing Agency Agreement.

8 The right to market Baralaba’s coal was granted to Cockatoo under the Marketing Agency Agreement. Baralaba reserved certain elements of control. I am prepared to assume, for present purposes, that those rights of control were of some value to Baralaba.

9 Baralaba has not granted any rights to anyone under the Exclusive Agency Agreement, to which it is not a party. Rather, under that Agreement, Cockatoo has granted rights to market the coal to which it has access to CCMC. The rights which Cockatoo grants under that Agreement to CCMC are not the same marketing rights that Baralaba granted and continues to grant to Cockatoo under the Marketing Agency Agreement. A comparison between the two is, therefore, irrelevant.

10 Baralaba would become a party to the Exclusive Agency Agreement, or at least become bound by it, only if it executed the consent contained in Annexure D to that Agreement which has not happened and is not proposed; even it did so, that would not supercede the Marketing Agency Agreement. Baralaba has not lost any of the rights that it has under the Marketing Agency Agreement. Whether there has been an infringement of those rights is another question, but even if there has, it does not follow that Baralaba has lost any such rights as it has under the Marketing Agency Agreement. In this respect, it is worth recording that, in their Commercial List Response, the defendants say (in paragraph 23, in answer to paragraph C27 of the Commercial List Statement), that the Exclusive Agency Agreement does not derogate or modify in any way the obligations imposed on Cockatoo under the Marketing Agency Agreement to provide marketing services or perform any other duties for the benefit of Baralaba.

11 It follows that the issue to which the proposed expert evidence is directed is not a relevant issue in the case, and I will not make directions for expert evidence in respect of it.

12 The second issue arising on the Notice of Motion is Republic’s application for an order that the defendants give discovery of six categories of documents, specified as follows:

1. All emails, correspondence, notes, minutes or other documents passing between the directors and officers of the First, Second or Third Defendants referring to or relating to the Plaintiff, Peter Doherty and/or Gordon Galt, during the period 1 October 2008 to 7 April 2009.

2. Any notes, minutes or other document recording any discussions between the Defendants or officers of the First, Second and Third Defendants concerning or relating to the Plaintiff, during the period 1 October 2008 and 29 May 2009.

3. All emails, correspondence, notes, minutes or other documents referring to or relating to the marketing rights of the First Defendant, from the period 1 October 2008 to 29 May 2009.

4. All emails, correspondence, notes, minutes or other documents sent to the directors, officers or staff of the First, Second and Third Defendants referring to or relating to the Plaintiff and/or Peter Doherty, during the period 1 October 2008 to 29 May 2009.

5. All emails, correspondence, notes, minutes or other documents referring to or relating to the funding of the First Defendant, from the period 11 October 2008 to 29 May 2009.

6. All emails, correspondence, notes, minutes or other documents referring to or relating to the formation of the Third Defendant from the period 11 October 2008 to 29 May 2009.

13 The Commercial List Statement asserts a number of matters to found a case of oppression, for the purposes of the (CTH) Corporations Act 2001, s 232: first, that sales contracts have been entered into without the approval of Baralaba’s board, as is said to be required by the Marketing Agency Agreement, and that this is not in the best interests of Baralaba; secondly, that by entering into the Exclusive Agency Agreement and the sales contracts without the approval of Baralaba’s Board, the directors who represent Cockatoo have preferred the interests of Cockatoo over those of Baralaba so as to amount to oppression of Republic as minority shareholder; thirdly, that the Cockatoo directors have threatened to dilute Republic’s shareholding in Baralaba; fourthly, that the Cockatoo directors have inhibited the provision of information to the Republic directors of Baralaba in accordance with the time frame specified in the Shareholders Agreement and, moreover, have proposed to reduce the reporting requirements; fifthly, that the Cockatoo directors have inhibited the provision of specific information in response to requests including, in particular, in relation to funding arrangements between Cockatoo and Baralaba; sixthly, that the Cockatoo directors did not disclose and refrained from disclosing that the Exclusive Agency Agreement had, in fact, been executed; seventhly, that the Cockatoo directors have belittled and abused the Republic directors of Baralaba; eighthly, that all of these matters have been productive of a breakdown in trust and confidence between the shareholders, so that it is just and equitable that Baralaba be wound up; and ninthly, that those matters, at least when taken together, amount to oppression for relevant purposes.

14 In an oppression suit, the rights of a plaintiff to discovery are approached on ordinary principles, and the Court’s discretion is not exercised adversely to a plaintiff in the absence of special ground. Ordinarily, it will be appropriate to make an order for discovery in an oppression suit [Re Australian Marinas (Australasia) Pty Ltd [1975] VR 372 (Adams J); Re ABT Holdings Pty Limited (1979) 4 ACLR 40 Master Cohen QC (as he then was)]. Those decisions, of course, were at a time when the more refined approach to discovery that is now taken by the Court had emerged, before discovery was restricted to classes, but to my mind they nonetheless support a general principle that inclines in favour of the making of an order for discovery in an oppression suit - especially where, as is common place, the records of the company in question will be in the control of the hands of the majority.

15 Nonetheless, even then, in ABT Holdings, where the allegations were wide and general, Master Cohen limited the discovery ordered to classes specified by reference to particular allegations in the Statement of Claim - namely, those allegations in the Statement of Claim which were disputed.

16 Nowadays, UCPR r 21.2 governs the situation. It provides for an order for discovery only of documents within a class or classes specified in the order (or samples thereof). In particular, sub-rule (2) provides that a class of documents must not be specified in more general terms than the Court considers to be justified in the circumstances; sub-rule (3) provides that a class may be specified by relevance to one or more facts in issue or by description of the nature of the documents and the period in which they were brought into existence or in such other manner that the Court considers appropriate; and sub-rule (4) provides that an order for discovery may not be made in respect of a document unless the document is relevant to a fact in issue. A document is taken to be relevant to a fact in issue if it contains material that could rationally affect the assessment of the probability of the existence of that fact other than by relating solely to credibility and regardless of whether it would be admissible.

17 In Syndicate Mortgage Solutions Pty Limited v El-Sayed [2008] NSWSC 1396, I said (at [3]):

It should be clearly understood that the purpose of providing for discovery limited to classes of documents was not to widen the scope of discovery to enable it to be used as a subpoena for all manner of documents which might in some way touch upon the case, but to narrow the obligation from that which would have been imposed by an order for general discovery. It still remains essential that any document in respect of which an order is to be made be relevant, in the sense to which I have referred, to a fact in issue. Generally speaking, categories of discovery should be framed so as to specify classes by relevance to facts in issue, rather than by description of classes of documents not on their face tied to any particular fact in issue in the proceedings, because the latter approach will often fail to demonstrate the requisite connection to a fact in issue in the proceedings.

18 The present case is a clear illustration of the problems that arise if the course that I then envisaged is not followed. Categories 1, 2 and 4 are not, on their face, tied to any particular issue in the proceedings. It therefore cannot be seen, on the face of those categories, why the documents that they would capture are relevant to any issue in the proceedings.

19 In the course of argument, it emerged that they were said to be relevant to the issues of oppression, or the best interests of Baralaba, or preference of the interests of Cockatoo. The rationale appears to be that any communication between or by or to the Cockatoo directors or staff in respect of Republic or its directors might tend to evidence some animus or course of oppressive conduct towards Republic. However, that is not the oppression case pleaded. A close scrutiny of the Statement of Claim reveals no allegation that the majority directors are caucusing together, or are embarking together on a course of oppressive conduct. Rather, there are pleaded the several specific factual matters that I have summarised above, which together are said to constitute the oppression.

20 On closer analysis, it is possible to identify a few allegations in respect of which discovery of the type in question might be relevant, in the sense referred to in UCPR r 21.1. The first is paragraph 54, which alleges that the majority directors’ conduct complained of was engaged in with the knowledge and approval of Cockatoo. However, as the majority directors are admittedly directors of Cockatoo, it would seem impossible to deny, to the extent it is relevant, that Cockatoo had knowledge of what they were doing and, in my view, discovery on the scale envisaged, for assisting proof of the allegation in paragraph 54, is not necessary.

21 Paragraph 55 contains an allegation of fact, which is disputed, that Cockatoo indicated an intention to dilute Republic’s shareholders in Baralaba. It seems to me that that allegation is one in respect of which discovery could and should properly be ordered.

22 Paragraph 85 alleges that, at Board meetings, various of the majority directors treated the plaintiff - by its representative Mr Doherty - in a belittling and abusive manner. On the face of the Commercial List Response that is denied. It is said that there is not really a significant factual dispute about this, because the assertions of the factual allegations are not in issue, the defence being that the conduct has to be seen in the context of a number of other matters. Although this was asserted, no evidence was put before me, and the position remains that paragraph 85 is denied on the pleadings. Moreover, insofar as the defence to ti may involve reference to the context of the matters of fact asserted, that does not detract from the view that discovery in relation to paragraph 85 would be appropriate.

23 Paragraph 86 alleges that the relationship between the shareholders has deteriorated, such that there is little trust or confidence between them, so that it is just and equitable that the company be wound up. Again, the state of affairs as to trust and confidence is on the pleadings a matter of factual controversy in respect of which it would be appropriate to order discovery.

24 Category 3 in the Schedule to the Motion refers to documents relating to the “marketing rights”, the suggestion being that the reasoning or intent that lay behind the granting of marketing rights might inform the question of oppression. That does not appear to be the case pleaded. The case pleaded is that the act of entering into the Agreement, at least combined with the other conduct complained of, was oppressive.

25 Paragraph 5 in the Schedule refers to “funding arrangements”. I accept that the actual funding arrangements might be significant, because they might would go to the materiality of what was allegedly not disclosed when disclosure was sought. However, defendants’ counsel informed the Court, and plaintiff’s counsel did not dispute, that the funding arrangements have now been put into evidence, attached to one of the affidavits. As it seems that the funding arrangements are now in evidence in any event, I do not perceive that the discovery of those funding arrangements is now necessary. The circumstance that the plaintiff might be entitled to various documentation under the Shareholders Agreement is not a basis for discovery of that documentation.

26 Paragraph 6 in the Schedule seeks documents in relation to the formation of CCMC. Again, it is said that the formation of CCMC, and the rationale behind, it might illuminate the question of oppression. But the incorporation and formation of CCMC is not one of the acts of oppression relied on in the pleading. I therefore do not see that discovery in respect of it is necessary.

27 One must always sit back when considering classes of documents and ask, if an order for general discovery were made, would it catch all the documents in these classes. I do not suggest that it is never appropriate to describe documents by reference to the nature and period of the documents, as envisaged in UCPR, r 21.2(3)(b). In some cases, it will be possible to see that documents of a particular nature or character or description necessarily constitute be a subset of documents that relate to an issue in the proceedings. But, except where that can clearly be demonstrated, it is far more appropriate to define classes of documents by their relationship to the issues. If I made an order for discovery in respect of each of the allegations of fact in every paragraph of the Statement of Claim that was not admitted in the Defence, that order would not, at least necessarily, capture all of the documents described in the six classes in the Schedule.

28 It follows that an order for discovery in the terms sought should not be made. For the reasons already given, I am prepared to make an order for discovery in respect of documents that relate to the allegations of fact in paragraphs and 55, 85 and 86 of the Commercial List Statement, but not otherwise.

29 The third issue raised by the Motion is an application to amend the Originating Process. Only one aspect of that application is in dispute, namely, the claim for relief in paragraph 4 of the Originating Process. It is clear that what the plaintiff seeks in substance is an order restraining the defendants from taking steps that would bind Baralaba to the Exclusive Agency Agreement, or from further implementing that Agreement. It seems to me that that can be addressed by a minor amendment to paragraph 4 of the Proposed Amended Originating Process, which I shall reflect in the order that I am about to make.

30 Before I do so, and without making any orders in this behalf, I will simply observe that the plaintiff might be well advised to reconsider the pleading in paragraphs 21 - 30 of the Commercial List Statement, and in 32 - 43 of that Statement, which, without expressing any concluded view, may be misconceived.

31 The defendants have adopted the impermissible course, in their Commercial List Response, of referring to documents for their full force and effect, without pleading their effect, contrary to the requirements of the rules. I will therefore order that paragraphs 14(c), 17(b), 18(b), 55(b) of the Commercial List Statement be struck out.

32 The defendants have also included, in many paragraphs of its Commercial List Response, “non-admissions” of matters of fact which one would expect to be within the knowledge of the defendants and, therefore, able to be admitted or denied. In this respect, I refer to paragraphs 7(d), 8(a), 17(c), 18(c), 19(b), 20, 21(c), 22(c), 29, 35(c), 36(c), 37(d), 39(f) and 47(b). I will not make an order in respect of them at this stage, but it would be appropriate for the defendants to reconsider whether they can plead more precisely to the matters “not admitted” in those paragraphs.

33 My orders are:

(1) Order that the defendants give the plaintiff discovery of documents in the following classes:


(a) Documents relevant to the allegations of fact in paragraph 55 of the Commercial List Statement;

(b) Documents relevant to the allegations of fact in paragraph 85 of the Commercial List Statement;

(c) Documents relevant to the allegations of fact in paragraph 86 of the Commercial List Statement.

(2) Grant leave to the plaintiff to amend the Originating Process by filing an Amended Originating Process in the form initialled by me, dated this day and placed with the papers, subject to:


(a) the insertion in the introductory sentences of paragraph (a) after the matter “461(1)” and before the matter “(k)” of the matter “(e), (f), (g)”;

(b) the insertion in paragraph 4 after the words “otherwise approving of” the words “or consenting to”;

(c) the deletion in paragraph 4 of the matter “where that agreement relates to” and the substitution of the matter “on behalf of”;

(d) the addition to paragraph 7 of the matter “on the ground of oppression or on the basis that it is just and equitable to do so”.


(3) Order that the Motion be otherwise dismissed.

(4) Order that paragraphs 14(c), 17(b), 18(b), 55(b) of the Commercial List Statement be struck out.

34 The plaintiff has failed on the application for directions concerning expert evidence. On the application for discovery, the orders ultimately made reflect a course that the defendants urged be adopted at an earlier stage. On the question of amendment, the result ultimately substantially reflected the defendants’ position. Thus, although the defendants were not totally successful - in that some order for discovery was made - it was an order that substantially accorded with the position that they had advocated in the earlier correspondence. In those circumstances, the plaintiff should pay the defendants’ costs of the Motion.

35 I order that the plaintiff pay the defendants’ costs of the Motion.

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28/10/2009 - Defendant changed to defendants at para 33 - Paragraph(s) 33