Republic Coal v Baralaba Coal

[2010] NSWSC 485

CITATION:	Republic Coal v Baralaba Coal [2010] NSWSC 485
HEARING DATE(S):	18/5/10
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	McDougall J at 1
EX TEMPORE JUDGMENT DATE:	18 May 2010
DECISION:	The application for security for costs fails. Order that the amended notice of motion filed in court today be dismissed with costs.
CATCHWORDS:	PROCEDURE - application for security for costs - delay in application - whether order would stulify litigation - effect of cross-claim dealing with the issues of the proceedings that may be affected by a stay if order is made and security is not provided.
LEGISLATION CITED:	Corporations Act 2001 (Cth) Uniform Civil Procedure Rules
CATEGORY:	Procedural and other rulings
CASES CITED:	Green v CGU Insurance Ltd (2008) 67 ACSR 105
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 (Plaintiff / Respondent) RA Dick SC (Second to Sixth Defendants / Applicants)
SOLICITORS:	Duncan Cotterill Lawyers (Plaintiff / Respondent) Minter Ellison (Second to Sixth Defendants / Applicants)

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

McDOUGALL J

18 May 2010 (ex tempore – revised 18 May 2010)

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

JUDGMENT

1 HIS HONOUR: This application for security for costs is brought by the second to sixth defendants, to whom it is convenient although inaccurate to refer simply as the defendants. The plaintiff is a minority shareholder in the first defendant (Baralaba). The second defendant, through its wholly owned subsidiary, Cockatiel, is the majority shareholder in Baralaba. The plaintiff claims that the defendants have acted oppressively in their conduct of the affairs of Baralaba. It seeks either orders that Baralaba be wound up or orders that its shareholding in Baralaba be purchased at a value to be determined by the court.

2 The second defendant and Cockatiel have cross-claimed. They allege that the plaintiff has acted oppressively in relation to the affairs of Baralaba and seek an order that they buy out its minority shareholding.

3 The proceedings are fixed for hearing, to commence on 15 June 2010, with an estimate of three weeks (and a gap of one week in the middle of that block of hearing time).

4 The application for security for costs is brought pursuant to either or both of s 1335 of the Corporations Act 2001 (Cth) or UCPR r 42.21. It does not appear to be in dispute that the jurisdictional basis for making an order for security - namely, that there is reason to believe that the plaintiff, if unsuccessful, would be unable to pay the defendants' costs - has been made out. In case that should be in doubt, I will say that I am satisfied, on the evidence of the plaintiff's financial position and its commitments, that the jurisdictional test has been made out.

5 The parties (in particular, the defendants) regaled the Court with a substantial body of evidence detailing the procedural history of the matter. As I understand it, that was done, firstly, in an attempt to explain why the application is brought at this stage in the proceedings, and, secondly, in an attempt to show that one party rather than the other was responsible for what appears to have been a significant expansion in the scope of the issues and the evidence.

6 The unchallenged evidence of the defendants' solicitor, Mr Hughes, is that he considered (and indeed flagged to the plaintiff) making an application for security for costs when these proceedings were commenced, but was satisfied, on the basis of his then estimate of the likely duration of the hearing and the costs likely to be incurred, that the plaintiff would be able to pay costs if ordered to do so. He was assisted in achieving that state of satisfaction by evidence of the plaintiff's financial position and assets.

7 It would appear that a significant reason for the expansion of the issues and the evidence is that the question of value is to be determined along with all other issues in the proceedings. The plaintiff says that even if it had thought that that would be the case, it expected that the question of value would be resolved by reference to brokers' reports featured on Baralaba's website. That expectation (or hope) was disappointed. There is much evidence from mining engineers and experts and accountants dealing with the likely output of Baralaba's mine and the value of the cash flows that will be generated thereby.

8 It is in a sense correct to say that it is the defendants who insisted that the question of value should be dealt with in the way that I have just outlined rather than through reliance on the brokers' reports. However, particularly given what one cannot help but know as to the degree of credibility that brokers' reports sometimes have, it does not seem to me that the defendants were acting unreasonably in taking the view that value should be proved properly. Nor do I think it is unreasonable for the defendants to have taken that course even in circumstances where Baralaba appears to be relying on the brokers' reports in the way that I have indicated.

9 There are in my view three significant reasons why security for costs should not be ordered. The first is that it should have been apparent since at least mid December last year that the case would be substantially more complex, and cost substantially more to run, than had been thought hitherto. That is because it was on 9 December 2009, at the very latest, that what is now the full ambit of the issues, and thus of the evidence required to deal with them, was confirmed by directions then given. It was not, however, until early April this year - about four months later - that the question of security was re-agitated.

10 There is some evidence that, if the plaintiff had known that the case would be expanded and would cost more to run, or that it would have been required to provide substantial security for costs, it might have taken a different attitude both to a mediation which occurred on 3 December 2009 and to the conduct of the proceedings thereafter. That evidence does not entirely grapple with the chronology that I have outlined. But in any event, as Hodgson JA pointed out in Green v CGU Insurance Ltd (2008) 67 ACSR 105 at 121-122 [56]-[57], prejudice may be inferred even in the absence of precise demonstration of steps that would have been taken if the application had been flagged earlier. In my view, given the very tight funding constraints under which the plaintiff is and has been operating, it is easy to infer prejudice.

11 The second issue relates to stultification. The evidence of the plaintiff is in effect that all the cash assets it has will be consumed in paying for the litigation from here to judgment. Mr Dick of Senior Counsel, who appeared for the defendants, criticised that evidence on a number of grounds. He submitted that a cash payment that the plaintiff has recently received was not reflected in a balance sheet prepared from its accounting records as at yesterday's date. Further, he submitted, it was clear that when one considered the balance sheet, the plaintiff appeared to have more assets than was demonstrated thereby.

12 The reality is that, putting the plaintiff's evidence at its highest, it may have a sum of about $850,000 together with another $105,000 in cash assets. Its other assets, current and non-current, appear to consist of loans. In those circumstances, given that the estimate of costs to be expended until completion are a total of $787,000, and given that the plaintiff will need to meet other liabilities from time to time, it is in my view clear that the plaintiff's cash assets are, and for the foreseeable future will be, completely committed to the litigation and to those other liabilities of which I spoke.

13 Mr Dick also submitted that it was not clear from the balance sheet whether it reflected a term deposit, for $500,000, that had recently matured and might or might not have been rolled over. Again, that may be so; but in circumstances where there was no cross-examination on the documents, I think that I am obliged to act on what can be gleaned from them in the state that they bear.

14 In short, so far as the documents enable it to be assessed, the plaintiff's evidence is that its cash assets are such that if it has to provide anything substantial by way of security, it will not be able to fund the litigation and to pay its other liabilities.

15 That then turns attention to those who stand behind the plaintiff and who might benefit from the litigation. The evidence is that the shares in the plaintiff are held by a trustee company known as Three Cheeky Monkeys Holding Pty Ltd. That company's assets, in its own right, are only its two dollar share capital. Its substantial assets are held as the trustee of a family trust of which the beneficiaries are the principal of the plaintiff, Mr Peter Doherty, his wife Ms Jan Swinhoe, and their three children.

16 Mr Doherty has said in essence that he has used all the funds available to him to inject cash into the plaintiff to fund the litigation, and that he has no further available cash or assets that can be used.

17 Ms Swinhoe's position is quite clear. She holds a senior position with a major bank. She is an owner, together with Mr Doherty, of the family home. There is substantial equity in that home. Ms Swinhoe says, however, that she is not prepared to allow her interest in the family home to be encumbered for the purpose of the litigation, nor will she consent to Mr Doherty’s encumbering his interest. She gives reasons for that which I can completely understand, and which I accept.

18 I suppose it would be possible for Mr Doherty to encumber his interests in the family home without Ms Swinhoe's consent. However, I do not think that it is necessary for a man standing behind a company to go to the extent of promoting serious matrimonial discord to counter a suggestion that stultification has not been shown.

19 When one combines such accounting evidence as there is with the realities of family life, I am satisfied that if an order for security for costs were made as sought, it would have the effect of stultifying the litigation. Mr Dick submitted that some lesser order could be made which might avoid this consequence. But on the evidence, any order that might be made would be of such minor amount as to be, in reality, very little satisfaction whatsoever for the defendants.

20 Stultification is not an automatic ground for refusing to order security. It is, however, a discretionary factor. In my view, taken into account in conjunction with the delay to which I have referred, it provides a very powerful reason for declining to order security.

21 The third reason relates to the cross-claim which I have mentioned. The cross-claimants have not said that their cross-claim will not proceed if the proceedings by the plaintiff are stayed on the basis that security has been ordered and not given. Since it would have been open to the cross-claimants to say that, I infer that it is their intention to proceed with their cross-claim regardless. As Mr Newlinds of Senior Counsel for the plaintiff submitted, the issues of valuation that are relevant to the plaintiff's claim will be raised, in any event, on the cross-claim. Much of the evidence, and much of the hearing time, will be devoted to those issues. In other words, the cross-claimants (who are the second defendant and its wholly owned subsidiary, Cockatiel) will be put to the trouble and expense of running that part of the case in any event, and will not be able to shut out the plaintiff from running its case on valuation.

22 In those circumstances, the only effect of an order for security, and for a stay if security is not provided, would be (on the assumption that the stay comes into operation) that the plaintiff's case on oppression would not be run. That does not seem to me to be particularly relevant where the cross-claimants' case on oppression would be run and, again, the plaintiff (as cross-defendant) would be entitled to meet it. It might be assumed that the way in which the plaintiff would meet it would be, in effect, to run defensively its own case on oppression.

23 In other words, even if security is ordered and the proceedings are stayed, the cross-claimants at least are likely to be engaged in almost the same expense, in respect of their cross-claim, as they would have incurred in respect of their defence of the action.

24 Taking all those factors into account, I conclude that the application for security for costs fails. I order that the amended notice of motion filed in court today be dismissed. My tentative view as to costs is that the application for security was a sufficiently separate "event" so that costs should follow it; but that, given the late provision of financial information (and I do not say that in a critical sense), those costs should be assessed on the ordinary basis.

(Counsel addressed on costs)

25 I do not regard the matters to which Mr Newlinds has referred in his submissions as constituting a basis for ordering costs on the indemnity basis. I order the defendants to pay the plaintiff's costs of the notice of motion. I order that the exhibits on the application be handed out.

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