Greymouth Petroleum Mining v Fletcher Challenge Limited

IN THE COURT OF APPEAL OF NEW ZEALAND

CA41/01

BETWEEN	CUE ENERGY RESOURCES LIMITED AND OTHERS
Appellants

AND	BROWSE PETROLEUM PTY LIMITED
Respondent

Hearing:	15 March 2001
Coram:	Gault J Blanchard J McGrath J
Appearances:	W M Wilson QC and D G C Baker for Appellants J M Mallon and J H Stevens for Respondent
Judgment:	15 March 2001

JUDGMENT OF THE COURT DELIVERED BY GAULT J

We have heard, as a matter of urgency, an appeal from a judgment of Wild J delivered in the High Court at Wellington on 1 March 2001.
The Judge granted an interlocutory injunction restraining the respondent, Cue Energy Resources Ltd (Cue), from proceeding with the rights issue notified to the New Zealand Stock Exchange on 14 February 2001, and restraining the other respondents, the directors of Cue, from taking any other action on behalf of the company other than action strictly necessary in the ordinary course of business.
The injunction was granted on the application of Browse Petroleum Pty Ltd (Browse) supported by Todd Petroleum Mining Co Ltd and Anzoil NZ. They are shareholders of Cue and together hold 11.53% of the capital.
The Judge required security to support the undertaking as to damages that was given by Browse. By way of compliance a sum equivalent to NZ$1m has been appropriately secured.
In the substantive proceeding Browse has alleged two causes of action arising out of the fact that Browse and its supporting shareholders requisitioned a shareholders meeting on 1 December 2000 proposing changes of directors. The appellants now accept, as the Judge found, there is a serious question to be tried as to whether by delaying calling the meeting in response to the requisition they were in breach of s121B of the Companies Act 1993 and/or were acting oppressively for the purposes of s174 of that Act.
Not only did the directors not call a meeting of shareholders, contending there was an issue of the validity of one of the proposed resolutions, but in mid-February 2001 they announced a rights issue entitling existing shareholders to subscribe for one additional share for every four held at A$0.04 a share.
This occurred against the background of the annual shareholders meeting on 27 November 2000 at which resolutions to approve placement of 100 million new shares and options and the re-election of one of the directors were defeated. Those opposing those resolutions did not support new investments outside the company’s core business which was the stated reason for raising the new capital.
The present appeal does not involve any question of the applicable principles adopted by the Judge. It is advanced on the ground that the Judge erred in his assessment of the balance of convenience. He dealt with that as follows:
Minimising the risk of ultimate injustice is more difficult. On the one hand the plaintiffs can argue powerfully that their position will be permanently prejudicially affected if the issue precedes the meeting they have requisitioned. On the other, the defendant can point to the urgent need for the issue to proceed, and the possibly serious financial consequences of it not doing so.
I see this as one of those difficult situations where upholding the status quo provides the answer, and I see that as requiring the rights issue not to proceed. The last “peaceable state”, as it has sometimes been called, between the parties was sometime before the issue was announced.
I am obviously concerned about the position of all the other shareholders of Cue – and some 60% of them are effectively unrepresented before me.
However, I believe, if the meeting is promptly convened, Cue’s financial position can be sufficiently maintained. I sense that the difficulties in that respect have been placed, in the unexamined evidence before me, at their very highest, if not somewhat overstated. In that respect I note that, whilst at the AGM last November the new share capital to be placed was for new technology investments, it is now said to be necessary to raise additional share capital to fund the day-to-day- running of the Company’s oil and gas operations.
I accept that damages would not provide an adequate remedy to either party, if only because damages would be very difficult for either party to calculate in this case.
Accordingly, I intend granting the interim relief sought, but subject to one important condition. That is that I accept Mr Wilson’s submission that Browse’s undertaking as to damages is not good. Accordingly, I intend granting relief in a form which adequately secures Cue against any damages it is likely to sustain as a consequence of the relief granted, should it not be sustained.
In support of the appeal it was submitted that on the facts the interests of both Browse and Cue can and should be recognised by permitting the rights issue to proceed and leaving the directors to act in the usual way pending the shareholders’ meeting which now is to be held on 30 March, counsel having advised us that notice calling the meeting is to be sent out today.
Mr Wilson for the appellant contended that the Judge had unjustifiably discounted evidence given on behalf of Cue. He referred to the following assertions that were made and, he said, were unchallenged.
Cue is “asset rich cash poor”.
…
As a consequence of a “blowout” of an oil well in which Cue has an interest the company has net cash requirements of A$1,045,000 by the end of March and A$228,000 by the end of April.
…
The directors are actively considering all options to obtain additional working capital.
…
Cue was proceeding with a pro rata rights issue to raise A$2.97 million which was due to close on 30 March 2001 and the motivation for which was the raising of cash, not the dilution of the interest of some shareholders.
…
If the rights issue cannot proceed, or the directors cannot act other than in the ordinary course of business, “there is a real risk that Cue will not be able to survive the next two to three months without going in to ‘financial crisis’ and going into default in respect of various commitments (causing Cue to lose valuable assets and value)”.
It was submitted that if the injunction stands the security supporting the undertaking of the damages may be insufficient. It was further submitted that it is now clear the requisitioned meeting will be held before the issue closes, and that if the issue is allowed to proceed there will be no injustice to any party because, if the board of Cue as constituted following the meeting considers that the issue should not proceed to conclusion it can be cancelled.
Turning to the position of the directors, Mr Wilson argued that they should not be restricted to acting in a caretaker role and said the company plainly is in need of active management and that the changes at the requisitioned meeting are far from assured.
On the other hand the respondent argued that the proposal to allow the rights issue to proceed would place it and its supporting shareholders in a serious dilemma. In order to avoid dilution of their shareholdings and to preserve the presently real prospect of forcing a change in control they must subscribe for shares and thereby place substantial sums of money in the hands of directors in whom they have lost confidence. They point out that if the rights issue proceeds prior to the meeting there is nothing to prevent the directors from allotting shares as and when rights are subscribed for with the consequence that the voting rights attaching may be exercised at the meeting.
The respondent maintains that the Judge was right to express reservation about the factual assertions of serious financial need. Points of criticism were, that the evidence was not unchallenged but that the circumstances in which the matter came before the High Court were such that only limited opportunity for challenge was available and the financial position of Cue was not fully disclosed; that the directors have not sufficiently explained how the sum now said to be urgently needed is made up; that the directors have not explained what steps they have taken otherwise to meet the financial demands of the company; that the blowout of the Anguur-1 well was known before the annual meeting of the company in November and is, in any event, covered by insurance; that the financial position now claimed is inconsistent both with the prospectus issued in respect of the rights issue and the cash flow statement previously issued by the company.
So far as it was said for the respondent that the directors have not taken steps to address the liquidity position of Cue in other ways, Mr Wilson protested that that is foreclosed by the injunction against the directors.
There was also discussion during the course of the hearing of the possibility of allowing the rights issue to proceed so long as no allotment is made until after the meeting. We were told this was a course also discussed in the High Court. At that time it was not sought by the directors and the Judge rejected it because of the difficulties that could arise, as with any rights trading.
In this Court it was made clear by Mr Wilson that the directors want to be in a position to allot shares and to secure access to the funds generated before the meeting. He referred to the possible restriction on allotment as an unattractive fallback position. For our part we take the view that since it was canvassed before the Judge and was not sought by the directors, we should not now interfere with the Judge’s rejection of it.
This contest for control of the board of the company must be resolved by the shareholders. The position of the requisitioning shareholders will be prejudiced if the rights issue proceeds with the likelihood of allotment before the meeting so that voting rights attached can be exercised at the meeting.
We have not been persuaded that the Judge was wrong in weighing the claimed liquidity issues as not requiring the position of the requisitioning shareholders to be overridden. He was right to maintain the status quo.
We note that counsel accepted that the restraint upon the directors against action other than is strictly necessary in the ordinary course of the company’s business should not interfere with reasonable steps to address short term liquidity issues. The spirit of the restraint is to prevent the directors making significant commitments on behalf of the company pending the meeting. They, of course, will be entitled to apply to the High Court for directions and approvals if they find that is in the interests of the company.
The appeal is dismissed. The respondent is entitled to costs which we fix at $5,000 together with any disbursements approved, if necessary, by the Registrar. Costs in the High Court can be fixed, if necessary, in that Court.

Solicitors
Quigg Partners, Wellington, for Appellants
Bell Gully, Wellington, for Respondent.

[2001] NZCA 95

15 March 2001