Republic Coal v Baralaba Coal

[2010] NSWSC 601

CITATION:	Republic Coal v Baralaba Coal [2010] NSWSC 601
HEARING DATE(S):	7 May 2010
JUDGMENT DATE :	7 June 2010
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	McDougall J at 1
EX TEMPORE JUDGMENT DATE:	7 May 2010
DECISION:	Application for injunctive relief is dismissed.
CATCHWORDS:	INTERLOCUTORY APPLICATION – application for injunction to restrain second defendant from entering into rail transportation agreement with railway operator – where plaintiff minority shareholder and second defendant majority shareholder – whether making of proposed contract would be oppressive or involve breach of fiduciary duties of common directors – balance of convenience – application dismissed – no question of principle.
CATEGORY:	Consequential orders
PARTIES:	Republic Coal Pty Limited (Plaintiff) Baralaba Coal Pty Limited (First Defendant) Cockatoo Coal Limited (Second Defendant) Cockatoo Coal Marketing Company Pty Limited (Third Defendant) Mark Lochtenberg (Fourth Defendant) Peter James Nightingale (Fifth Defendant) Norman Alfred Seckold (Sixth Defendant)
FILE NUMBER(S):	SC 2009/288343
COUNSEL:	CRC Newlinds SC / MAC Painter (Plaintiff) RA Dick SC / DJA Mackay (Second to Sixth Defendants)
SOLICITORS:	Duncan Cotterill (Plaintiff) Minter Ellison (Second to Sixth Defendants)

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

McDOUGALL J

7 May 2010 (ex tempore – revised 31 May 2010)

2009/288343 REPUBLIC COAL PTY LIMITED v BARALABA COAL PTY LIMITED

JUDGMENT

1 HIS HONOUR: This is an application for an injunction to restrain the second defendant (Cockatoo) from entering into a rail transportation agreement with QR Limited. The application arises in the following circumstances.

2 The plaintiff (Republic) holds 37.5 per cent of the shares in the first defendant (Baralaba). Cockatoo holds the remaining 62.5 per cent of the shares through its wholly owned subsidiary (Cockatiel).

3 The other defendants are directors of Cockatoo and of Baralaba.

4 Baralaba operates a coal mine near the township of the same name in the Bowen Basin in Queensland. Coal won from the mine is transported by truck to the rail head at Moura, and then by rail to port at Gladstone for export. The railway is operated by QR. The agreement by which QR carries Baralaba's coal was to expire late last year, but, by consecutive extensions, is now to expire on 21 May 2010.

5 It recently came to Republic's notice that Cockatoo has been negotiating with QR to enter into a ten year rail transportation agreement in effect to replace the agreement between Baralaba and QR, which is shortly due to expire. Republic wishes to say, as I understand it, that the opportunity to negotiate with QR arises out of the existing agreement between Baralaba and QR.

6 In these proceedings, Republic alleges that Cockatoo has controlled the affairs of Baralaba in a way that is oppressive to Republic. It seeks either an order for the winding up of Baralaba, or an order that Cockatoo buy out its shares in Baralaba at a price to be fixed by the Court.

7 If Cockatoo enters into a rail transportation agreement with QR then Republic will amend (of course, with leave) to allege that Cockatoo's actions in negotiating and contracting with QR, in replacement for the agreement between Baralaba and QR, is another instance of oppressive conduct. It will allege further, as I understand it, that the common directors who were involved in the negotiations and making of the contract were, to that extent, in breach of their fiduciary and statutory duties to Baralaba.

8 In those circumstances, as I have said, Republic sought an injunction to restrain the making of any rail transportation agreement between Cockatoo and QR. However, recognising the commercial problems that might flow from the grant of such injunctive relief, Mr Newlinds of Senior Counsel, who appeared with Ms Painter of counsel for Republic, modified the relief sought to take account of what was described as a proposed "back to back" agreement that Cockatoo proposed to make with Baralaba. A document purporting to be a terms sheet setting out the essential terms of such a back to back agreement suggests that if Cockatoo enters into the proposed agreement with QR, it will utilise the facilities available to it under that agreement to arrange for Baralaba's coal to be transported from the rail head at Moura to Gladstone, on the basis that Baralaba reimburses Cockatoo for the costs and expenses of that transport. Cockatoo accepts that as the contracting party with QR it would retain all primary liabilities under the proposed contract with QR.

9 No draft of any back to back agreement has been produced for Republic's consideration. That may be because, it seems, the idea that there would be such a back to back agreement is one of very recent origin.

10 The first question to be considered is whether there is a prima facie case that the making of the contract proposed between Cockatoo and QR would be oppressive in the requisite sense, or would involve, on the part of the common directors, some breach of their fiduciary duties. Mr Dick of Senior Counsel, who appeared with Mr Mackay of counsel for Cockatoo and the other "Cockatoo" defendants, including the directors, submitted that the case was at best very weak.

11 One of the problems that has arisen in assessing the matter is that the way in which Cockatoo has described the process of negotiating with QR, and the reason why that negotiation was in the name of Cockatoo rather than Baralaba, has evolved somewhat over the last three weeks. When Republic became aware of the negotiations its solicitors wrote to Cockatoo's solicitors. Cockatoo's solicitors replied stating that Cockatoo was indeed in the process of negotiating a new contract with QR. That was said to be "on behalf of Baralaba." It was not explained how the negotiations were being conducted "on behalf of Baralaba." Nonetheless, the letter said:

“Despite Cockatoo negotiating on behalf of Baralaba, at the fervent insistence of QR National, Cockatoo has been named as the "customer" in...the draft agreement."

12 That was so, the solicitor said, because QR was:

“[n]ot prepared to enter into a contract with Baralaba in circumstances where current proceedings, commenced by your client, seek orders that Baralaba be wound up.”

13 To move away from the correspondence for a moment: there is evidence that QR was concerned at the prospect that some application was being made to wind up Baralaba. However, as the relevant material shows, QR's understanding was that Baralaba was the subject of "a creditor's petition to wind the company up." That knowledge came to QR over a year ago, in April 2009. Undoubtedly, it refers to these proceedings. It is however to be noted that when QR raised the matter with the representatives of Cockatoo with whom it was corresponding, those representatives did not inform QR that the petition was not a creditor’s petition. It may be that the information would not have had any impact on QR; it may indeed be that QR would not have understood the difference. But, nonetheless, it is the fact that Cockatoo did not seek to dispel what appears to have been a misapprehension.

14 I return to the correspondence. Republic's solicitors wrote back to Cockatoo's solicitors stating that, having studied the documents provided, they were unable to identify any document "which records or refers to what you have characterised as the fervent insistence of QR."

15 The reply to that was that the fervent insistence was something that had arisen in meetings rather than in correspondence.

16 Republic's solicitors then turned their attention to the proposition that the negotiations were being undertaken in effect in Baralaba's best interests. The reply to that request for information was that, "QR National are only prepared to enter into a contract in Baralaba's name if additional security is provided by Baralaba (which will come at an additional cost to Baralaba) and backed by our client." They provided an email from a Mr Seth Rodgers of QR, which was apparently supposed to give credence to Cockatoo's case. The remarkable thing about that email is that it supports neither the proposition that QR would not contract with Baralaba, nor the proposition that QR would only contract with Baralaba if Baralaba provided additional security. It said, instead, that QR "will consider having either company as party to the agreement". However, it said, if the counterparty were Baralaba, QR "may seek additional security from Baralaba."

17 In a further letter, dated 4 May 2010, what had been fervent insistence calmed down, or cooled down, to a "preference." The focus of concern in a letter of that date from Cockatoo's solicitors to Republic's solicitors was the ability of Baralaba to provide what was said to be the additional security that QR would require if Baralaba were the counter party to the new contract. As I have indicated, Mr Rodgers' email of a few days earlier did not refer to the certainty that QR would require additional security.

18 It was also the letter of 4 May 2010 that raised the prospect of back to back agreements so that Baralaba would have the benefit of being able to get its coal from the mine to the port.

19 If what was being discussed was all fair and aboveboard, one wonders why Cockatoo's solicitors saw the need to describe the problems in the heightened and colourful terms employed, and to overstate, perhaps substantially, the depth of opposition on the part of QR to contracting anew with Baralaba.

20 One of the problems may well be that the negotiations that were undertaken did not explore in sufficient detail (if they explored at all) the terms on which QR would contract with Baralaba. It may be, if that is the case, that it provides some support for the proposition that the negotiations involve some breach of fiduciary duty. In circumstances where there is some evidence either way, where the evidence on any view is incomplete, where the relevant allegations have not been tested by cross-examination and where the matters have not been addressed in submissions, I express no view. It is sufficient to say in my view that the circumstances are capable of supporting the proposition that the negotiations could be characterised either as examples of further oppressive conduct (and I intend no prejudgment by the use of the word "further") or as instances of breach of fiduciary duty. In that sense, I think, there is either a serious question to be tried or a prima facie case.

21 However, and moving to the next stage of analysis, there are very serious discretionary issues involved. One of those issues relates to the terms of the contract propounded by QR. The latest version of the contract suggests that QR will impose a "capacity charge" which is payable monthly, regardless of the actual utilisation of the service. That is particularly important in circumstances where there is some evidence that the life of the Baralaba Mine may be no more than five years, but the life of the contract is ten years. On an estimated transportation usage of 500,000 tons per year, if the service were totally unused the capacity charge would be in the order of $3.25 million per annum. If Baralaba were a party to the contract and were unable to utilise the service, that would be a very significant impost.

22 Republic appeared to suggest that the contract was itself a valuable asset and that if Baralaba had no further use for it, it could assign its rights. However, if Baralaba ceased operations at the mine, that would give rise to an entitlement in QR to terminate the agreement. Even if QR terminated the agreement, it would be entitled to recover its capacity charge for the unexpired term, unless in the meantime it were able to reutilise the capacity. That is another potential significant impost on Baralaba.

23 Further, in this context, the latest version of the draft agreement suggests that the customer "cannot assign or transfer its rights or obligations without the consent of QR", and that QR has an absolute discretion whether to give or withhold consent.

24 Of course, that causes one to ask (as Mr Newlinds did ask) why Cockatoo would wish to enter into such a contract. The answer is obvious. Cockatoo has other substantial coal mining interests in the Bowen Basin, and wishes to have an assured means of transport of at least part of its output to port at Bowen. There is no doubt that it can be argued strongly that Cockatoo has had an eye to its own advantage in pursuing the negotiations with QR as it has. But, even if that is so, the question arises as to whether the contract that has been negotiated would be, as Republic appears to suggest, a complete and unfettered benefit to Baralaba or whether, as Mr Dick submitted, it would in fact impose very significant potential liabilities on Baralaba.

25 It is also to be noted that, although QR is still prepared to contemplate Baralaba as a counterparty, it would require Baralaba to enter into a deed warranting, among other things, that it was not subject to any actions, suits, proceedings et cetera which might affect its ability to perform its obligations under the agreement. Baralaba simply could not give such a warranty whilst these proceedings remained a foot.

26 It would clearly be a very significant detriment to Baralaba if it does not have the assurance of getting its coal to port for the remaining life of the mine. If the negotiations between Cockatoo and QR do not proceed to consummation, there is, I think, a very real risk that Baralaba might be left without the assurance of transport. That would be, in commercial terms, a disaster not only for Baralaba and its shareholders, but also for those who live in the township of Baralaba, which, as I understand it, is in effect a "company town."

27 Those discretionary considerations seem to me to tell strongly against the grant of interlocutory relief. That is so, in particular, when one has regard to the circumstance that, if relief is withheld and Cockatoo proceeds to enter into the agreement with QR, Republic's ability to maintain its case of oppression and breach of fiduciary duty (and indeed, its ability to augment that case by referring to the relevant dealings) will not be at all prejudiced. If matters get to the stage where a buy-out is ordered, it would be open to the Court, if it found that the matters that are the subject of today's application were an aspect of oppressive conduct, to order that the shares be valued on the basis that Baralaba had available to it the benefit of a contract that, on this hypothesis but not otherwise, Cockatoo could be said to have usurped.

28 In this context also, I take into account the ability of Republic to meet the undertaking as to damages if called upon to do so. It is plain that the potential exposure could be very substantial indeed if an injunction were granted and later found to have been unjustified. To an extent, of course, that consideration is ameliorated if the injunction is limited in the way for which Mr Newlinds contends. But in any event, I think there is a real question as to the ability of Republic to meet any exposure under the undertaking, and the argument as to the value of its shareholding in Baralaba goes nowhere near satisfying me that it is "good" for the amounts that might be at stake.

29 Thus, by that circuitous process, I return to the more limited injunctive relief for which Mr Newlinds pressed. The intent of that seemed to be that if and when Cockatoo produced a draft of the proposed back to back agreement, either Cockatoo could move to have the injunction dissolved, or, if the injunction then dissolved of its own accord, Republic would bear the burden of justifying further or continued injunctive relief.

30 The difficulty with that proposal seems to me to be that the timeframe is relatively short. The current expiry date of the current agreement is 21 May 2010. It may well be that QR is prepared to negotiate a further short extension. There is some evidence that it is in QR's interest to have an assured utilisation capacity of 500,000 tons per annum for ten years on the rail line in question. But regardless of that, when a draft back to back agreement is produced, it is foreseeable that there will be another argument in this Court as to whether it is a true back to back agreement, or as to whether what is proposed is in itself yet a further example of oppressive conduct on the part of Cockatoo. The Court would be asked to decide that question without a full appreciation of the facts and circumstances that will come on a final hearing of this matter.

31 In those circumstances it seems to me that, if a back to back agreement is proffered, the terms and efficacy of that are best considered on a final hearing as part of the overall case of oppression. If no back to back agreement is proffered, it seems to me, that is simply something to weigh in the balance in considering whether the dealings between Cockatoo and QR are, as Republic submits is the case, yet a further example of oppression.

32 For those reasons, I conclude that the application for injunctive relief should be dismissed.

33 I order that the costs of the application for interlocutory relief be costs in the proceedings.

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