Greenfields Coal Co Ltd v Mineral Resources Corp & Ors [1997] FCA 1323

FEDERAL COURT OF AUSTRALIA

CORPORATIONS LAW - security for costs - whether relevant credible testimony exists - whether discretion should be exercised. Corporations Law s 1335(1) Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 205 Applied Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1 Applied Sir Lindsay Parkinson & Co v Triplan Ltd [1973] QB 609 Considered Erolen Pty Ltd v Baulkham Hills Shire Council (1993) 10 ACSR 441 Considered Ariss v Express Interiors Pty Ltd (In Liq) [1996] 2 VR 507 Considered GREENFIELDS COAL COMPANY LIMITED v MINERAL RESOURCES CORPORATION & ORS VG 3215 of 1997 GOLDBERG J MELBOURNE 28 NOVEMBER 1997

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY VG 3215 of 1997

BETWEEN: GREENFIELDS COAL COMPANY LIMITED

(ACN 006 541 831)

Applicant

AND: MINERAL RESOURCES CORPORATION & OTHERS

Respondents

JUDGE: GOLDBERG J

DATE OF ORDER: 28 NOVEMBER 1997

WHERE MADE: MELBOURNE

THE COURT ORDERS THAT: 1. Within twenty‑one days the applicant provide security for the costs of the respondents up to the commencement of the final hearing of the proceeding in the sum of $42,000 to the satisfaction of the District Registrar of the Court. 2. The applicant pay the respondents their costs of and incidental to the respondents' motion filed 1 October 1997. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY VG 3215 of 1997

BETWEEN: GREENFIELDS COAL COMPANY LIMITED

(acn 006 541 831)

Applicant

AND: MINERAL RESOURCES CORPORATION & OTHERS

Respondents

JUDGE: GOLDBERG J

DATE: 28 novemBER 1997

PLACE: MELBOURNE

REASONS FOR JUDGMENT The application in this proceeding was filed on 30 July 1997 supported by a statement of claim. On 11 September 1997 orders and directions were made by consent for the delivery of pleadings and particulars and the giving of discovery. On 1 October 1997 the respondents filed a notice of motion seeking an order that the applicant provide security for the respondents' costs in the sum of $159,184. There are eleven respondents to the proceeding and there are a number of causes of action pleaded. The first cause of action relates to the alleged failure of the first and second respondents to lodge substantial shareholding notices in accordance with s 710 of the Corporations Law in respect of an option agreement entered into by the first respondent on 18 October 1996 which entitled it to acquire four million shares in the applicant and in respect of sales of shares in the applicant by the first and second respondents in March 1997 and between May and July 1997. The applicant seeks orders vesting those shares in the Australian Securities Commission and otherwise disentitling the first and second respondents from obtaining any benefit in respect of those shares. The second cause of action alleges that the first, second, third, fourth, fifth, sixth and eleventh respondents acquired and sold shares in the applicant which acquisitions and sales, in the circumstances in which they occurred, resulted in breaches of s 997, s 998 and s 1002G of the Corporations Law. The applicant seeks orders vesting the shares those respondents have acquired in the Australian Securities Commission and otherwise disentitling them from obtaining any benefit in respect of those shares. In relation to the shares which those respondents sold, the applicant seeks an order that they pay damages to the applicant. The third cause of action alleges that the eighth and ninth respondents breached the fiduciary duties they owed to the applicant as former directors of the applicant in that they disclosed information to other respondents which brought about the share transactions to which I have referred, as a result of which the applicant has suffered loss and damage. It is alleged that other respondents participated in those breaches and in the misuse of information confidential to the applicant. It is said that at the time of the acquisitions and sales the second, third, fourth, fifth, sixth and eleventh respondents possessed information about the applicant's business not generally available which, had it been generally available, a reasonable person would have expected to have a material effect on the price or value of the applicant's shares. On 23 September 1997 the respondents' solicitors wrote to the applicant's solicitors seeking security for the respondents' costs in the sum of $159,184 on the basis that the applicant's published preliminary accounts for the year ended 30 June 1997 disclosed an operating loss after tax of $11,152,000, accumulated losses of $13,156,000, total current liabilities of $10,391,000 and current assets of $1,456,000. The applicant's solicitors response was that the parties should await the finalisation of the applicant's audited accounts so that a more accurate view of the applicant's financial position could be obtained. In support of the application for security for costs the respondents rely upon the evidence of the eighth respondent, Peter Edward Maher, and the evidence of Elizabeth Mary Harris, a consultant who verifies the amount claimed on the basis that it includes all costs up to and including trial. The eighth respondent was a director of the applicant from 29 March 1995 to 20 May 1995. He says that on 3 July 1997 the first respondent announced an intention to make a takeover offer for all the issued ordinary shares in the applicant. On 21 July 1997 the first respondent requisitioned a meeting of members of the applicant to consider resolutions to remove the directors of the applicant and to appoint three new directors. On 11 September 1997 a general meeting of the applicant was held, the resolutions to remove the directors were lost and one new director was appointed. The first respondent's Part A statement was sent to all shareholders in the applicant on 22 September 1997. The eighth respondent disputes the causes of action relying on the acquisition and sale of shares in the applicant and challenges the proposition that any fall in the price of shares in the applicant came about as a result of the use of inside information. In relation to the applicant's financial position, the eighth respondent says that production from the Alpheus Project, its major asset involving the recovery of coal fines from coal settling plants, has not yet commenced and he notes the concerns the first respondent has as to whether that project will be successful. He also relies on the statement of Stephen Barber who became a director of the applicant on 10 June 1997 at its general meeting on 11 September 1997 when he said words to the effect: "when I became a director of Greenfields, it was on the brink of administration". The applicant has produced a transcript of that general meeting and complains that the eighth respondent has taken the statement out of context. The context was that Mr Barber was presenting a report and the statement occurred in the course of the following statement made by Mr Barber at the start of his presentation: "The new directors came onto your board in June this year. At that time the Company was in complete disarray. · Ü It owed A$10 million and needed another US$650,000 to finish the Alpheus plant before it could start operating. · Ü Hoogovens was needed to complete the plant yet had downed tools because was owed more than US$4 million. · Ü There was no cashflow; · Ü Therefore Greenfields was facing the prospect of either: - going into administration, receivership or liquidation; or - recommending acceptance of the takeover bid." The eighth respondent produces the applicant's preliminary final report lodged with the Australian Stock Exchange which shows an operating loss after tax of $11,152,000, accumulated losses of $13,156,000, total current liabilities of $10,391,000 and total current assets of $1,463,000.00 of which $152,000 is described as cash, $8,000 is described as receivables, and $1,303,000 is described as "other" with no other details. Further evidence shows that the amount of $1,303,000 represents escrow deposits. The material upon which the applicant relies in opposition to the motion for security for costs is found in the affidavit of Peter John Matthews, the applicant's secretary. He notes that the applicant is a listed public company with 101,650,000 issued ordinary shares as at 30 September 1997 issued to 2,522 members. As at 8 and 9 October 1997 the applicant's shares closed on the Stock Exchange at $0.22 and $0.23 respectively. He says that at the general meeting of the applicant on 11 September 1997 resolutions were passed resolving a share placement and rights issue which will have the effect of raising of the order of $2.6 million and $5.2 million. He says that it is expected that the placement of shares with Vilo Resources Pty Ltd will occur in October 1997 and that the prospectus for the rights issue is presently underway. He also notes that the applicant intends to proceed with a capital reconstruction and scheme of arrangement which it is expected will increase the value of shares in the applicant to $0.40 per share. Mr Matthews challenges evidence of the low percentage of what are said to be material sales of shares in the applicant during March 1997 but it is not necessary for me to make any determination of this issue. The respondents in support of their submissions submit that the allegations in the statement of claim are broad, unsupported by particulars, contradictory and, in the light of Mr Barber's affidavit, unsustainable. It is said that the application has been issued as a tactic in relation to the first respondent's takeover bid for the applicant. However, I am in no position on the material presently before the Court to form any view on either the viability, credibility or strength of the applicant's case. Suffice it to say that for present purposes I proceed on the assumption that the applicant's claim is bona fide and although it is said by the respondents that the proceeding has been issued as part of an overall takeover battle or strategy I am not prepared on this application to draw any inferences adverse to any party or in its favour from the nature of the proceedings other than to assume that the proceeding is brought bona fide and is contested bona fide. Mr Matthews produces the applicant's audited financial statements for the year ended 30 June 1997 which were filed with the Australian Securities Commission and the Australian Stock Exchange on 8 October 1997. He draws attention to the fact that the statements include a statement of opinion by the directors that: "At the date of this statement [7 October 1997] there are reasonable grounds to believe that the company will be able to pay its debts as and when they fall due." The respondents challenge the probative value of this statement on the basis that it is a statement required by s 301(5) of the Corporations Law. However, the fact that that section requires the statement to be made does not diminish, in my view, the necessity for it to be a true statement. The audited financial statements show the following figures as at 30 June 1997: · operating revenue for the year $1,644,250 · operating loss after income tax $402,225 · accumulated losses at end of year $1,582,475 · total current assets $88,788 · total non‑current assets $22,159,675 · total current liabilities $699,906 · net assets $21,548,557 The non‑current assets comprise a secured loan to Mineral Development Corporation ("MDC"), a controlled entity of the applicant and the note to the financial statements in respect of this item is in the following terms: "MDC will become operational in 1998 and is expected to generate positive cashflow. The Directors believe that this loan is fully recoverable and there is no need to make provision for the ability of MDC to repay the loan." In the financial statements the auditors have qualified the accounts, noting the directors' statement that proper books and records were not maintained by the management of the United States controlled entities. The auditors say that as at the date of their report they are unable to determine the effect if any of this fact on the value of this loan. The financial statements also include consolidated accounts incorporating the controlled entities of the applicant and these accounts show total current assets of $1,462,198 of which $1,301,442 are escrow deposits "which the controlled entity MDC is required to deposit and which are refunded on satisfactory completion of a project". The total net assets in the consolidated balance sheet are $9,239,309 but this amount takes into account $14,547,431 for property, plant and equipment. The financial statements also show that there are unsecured loans due to the applicant of the order of $1.5 million in respect of which it is seeking recovery. Approximately $540,000 of this amount is said to be owed by the first respondent which challenges the debt. Mr Matthews says that the applicant's business is the recovery of coal fines from coal settling plants, that its coal recovery plant is located at Alpheus in Gary, West Virginia in the United States and that the plant is expected to come into production in October or November 1997. He says there is a net present day value of the coal resource in the Alpheus coal impoundment in excess of $30 million and that the applicant has entered into a written contract for the sale of up to 240,000 tonnes per year of clean coal to a major US corporation which the directors believe will generate in excess US$5 million cashflow in its first year of operation with a net profit of the order of US $2.4 million per annum. The eighth respondent has sworn an affidavit in response to Mr Matthews affidavit. He refers to proceedings which were taken by the Australian Securities Commission in relation to the applicant's Part B statement which contained incorrect statements in relation to this proceeding but that issue is of little assistance to me in determining whether or not security for costs should be ordered. He notes, as Mr Matthews confirmed in a further affidavit, that the proceeds of the placement of shares raising $2,691,000 (less costs) would be used to repay a loan provided to the applicant. He disputes, in substance, the debts said to be owed by the first respondent to the applicant. He also challenges the recoverability of the other loans said to make up the $1.5 million due to the applicant but whether or not these debts are due is not a matter in respect of which I can make a finding or take into account in any realistic sense on this application. The eighth respondent also challenges Mr Matthews' statement that "the business of Greenfields is the recovery of coal fines from coal settling ponds" as he says the business is that of a holding company. He also challenges Mr Matthews' statement that the plant in West Virginia is expected to come into production in October or November 1997 and he notes various statements by the applicant in and subsequent to February 1997 as to the scheduled start of production on various dates which have proved not to be correct. In a supplementary affidavit Mr Matthews said that the proceeding brought by the Australian Stock Exchange in respect of the Part B statement had been resolved and that the placement of shares to Vilo Resources Pty Ltd was completed on 15 October 1997 and that the funds obtained were used to repay a secured debt to VBS Investments Pty Ltd. He says that this has had the effect of reducing the current liabilities of the applicant by $2,600,000. However, this statement throws some doubt on what is in fact the current financial position of the company as distinct from the consolidated group. It does not appear that the loan to VBS Investments Pty Ltd was disclosed in the accounts as at 30 June 1997 so that the applicant may have incurred further substantial current liabilities in addition to those disclosed in the financial statements as at 30 June 1997. Alternatively if this is not correct then it would appear that the loan which was repaid was a non‑current liability. The reason for reaching that conclusion is that if the funds obtained from the placement reduced the current liabilities by $2,600,000, as at 30 June 1997 the applicant's total current liabilities were only $699,906. Even if one adds to that figure the loan of $1.3 million from VBS Investments Pty Ltd, one does not reach $2,600,000. Mr Matthews also says that on 16 and 17 October 1997 the applicant placed shares with six independent investors raising a total of $2,033,000. However, he does not say what has happened to the funds so obtained other than to note that they have increased the company's paid up capital. It would appear that something has happened to these funds as later in the affidavit he says that the balance of the applicant's account with the Australian New Zealand and Banking Group Ltd on the evening of 22 October 1997 was $795,918.23. If the proceeds of these placements raised cash it would appear that either a substantial part of the amount raised did not go into the applicant's bank account or if it did, it has already been used to discharge some liability or liabilities of the applicant. Mr Matthews says that the underwriting agreement was signed on 22 October 1997 but it is not produced. He says its terms are confidential and he notes that the prospectus will be lodged with the Australian Stock Exchange on 27 October 1997. He says that the effect of the underwriting agreement will ensure that the applicant will raise $5,285,000. However, he does not say for what purpose these funds are to be applied and until the prospectus becomes public it is not possible to know what the prospectus proposes in this respect. In the absence of any further evidence as to the extent to which these funds are available to pay the debts and liabilities of the applicant I am unable to take this amount into account as being available to pay any costs of this proceeding which might be awarded against the applicant. He also says that the applicant has reached a further agreement with Vilo Resources Pty Ltd to provide an advance against the underwriting agreement of up to $5 million "to be applied towards the business of Greenfields" which sum was to be paid to the applicant by 4.00 pm on 24 October 1997. However, it is not clear how this money is to be used or whether it has in fact been earmarked for specific purposes such as future developments. In the absence of any further evidence as to the extent to which this money is available to pay the debts and liabilities of the applicant, I am unable to take this amount into account as being available to pay any costs of this proceeding which might be awarded against the applicant. I make a similar observation in relation to Mr Matthews' statement that: "Greenfields also has in place a further undrawn secured facility of $2.5 million available for the development of its business interest in the United States". In the absence of details as to how and in what circumstances this amount is to be made available to the applicant I am unable to take it into account in determining what might be available to pay any costs awarded against the applicant in this proceeding. Mr Matthews gives an explanation as to why the various statements made by the company as to when the plant was going to come into operation have not come to pass and says that production is expected to commence in November 1997. However, on the material presently available to me I cannot predict what net funds might become available to the applicant as a result of the commencement of production. On one view it can be said that the fact of this anticipated production demonstrates that the applicant would be able to pay any costs awarded against it but as against that it can also be said from other evidence before the Court namely the delays in the production commencing there is reason to believe that the applicant will not be able to pay such costs out of the proceeds of such production. The observations of von Doussa J in Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 205 are relevant in this respect: "In my opinion the power of the court under s 1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would be then taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security."