Republic Coal v Baralaba Coal [2010] NSWSC 601

New South Wales Supreme Court

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

Republic Coal Pty Limited (Plaintiff) Baralaba Coal Pty Limited (First Defendant) Cockatoo Coal Limited (Second Defendant) PARTIES : 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."