Moage Limited (Acn 004 270 848); Independent Resources (Asia) Group Pty Limited (Acn 008 129 226); Enterprise Gold Mines NL (Acn 009 356 665); Jingellic Minerals NL (Acn 009 347 406) v Claremont Petroleum NL and Beach Petroleum NL [1991] FCA 529 (7 November 1991)

FEDERAL COURT OF AUSTRALIA

MOAGE LIMITED (ACN 004 270 848); INDEPENDENT RESOURCES (ASIA) GROUP PTY
LIMITED (ACN 008 129 226); ENTERPRISE GOLD MINES N.L. (ACN 009 356 665);
JINGELLIC MINERALS N.L. (ACN 009 347 406)
And: CLAREMONT PETROLEUM N.L. and BEACH PETROLEUM N.L.
No. 3124 of 1991
FED No. 669
Corporations Law - Practice and Procedure
6 ACSR 205

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Lockhart J.(1)

CATCHWORDS

Corporations Law - Oppression - interlocutory application - company advancing money to 65 percent owned subsidiary - application by minority shareholder of holding company.

Practice and Procedure - Security for costs - transfer to South Australian District Registry of this Court - principles involved.

Corporations Law: ss. 260, 1323, 1324

Federal Court of Australia Act 1976: s. 48

HEARING

SYDNEY
7:11:1991

Counsel for the Applicants : F. Lever

Solicitors for the Applicants: Abbott Tout Russell Kennedy

Counsel for the Respondents : P. Jacobsen, D.

Charles (31.10.91 only)

Solicitors for the Respondents: Blake Dawson Waldron

ORDER

1. The motion of the applicants for interlocutory relief be dismissed.

2. The motions of the respondents for security for costs and the transfer to the South Australian District Registry of this Court be dismissed.

3. There be no order as to costs. AND THE COURT DIRECTS THAT:
1. The applicants file and serve a brief and concise statement of the

constitutive facts, issues and contentions upon which they rely by 11 November 1991.

2. The applicants file and serve all affidavits upon which they propose to rely except the affidavits of experts by 14 November 1991.

3. The applicants file and serve affidavits from all experts by 21 November 1991.

4. The respondents file and serve a brief and concise statement of the constitutive facts, issues and contentions upon which they rely by 25 November 1991.

5. The respondents file and serve all affidavits upon which they propose to rely except the affidavits of experts by 2 December 1991.

6. The matter be adjourned for further directions to 6 December 1991 at 9.30 am.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

This is a proceeding for relief under s. 260 of the Corporations Law by the applicants as shareholders of the first respondent, Claremont Petroleum N.L. ("Claremont"), on the grounds that the affairs of Claremont have and are being conducted in a manner that is oppressive and unfairly prejudicial to or unfairly discriminatory against the shareholders of Claremont and in a manner that is contrary to the interests of the shareholders of Claremont as a whole. Extensive relief is sought by the applicants including declarations, injunctions and an order that Claremont be wound up pursuant to ss. 260 and 461 of the Corporations Law.

2. The applicants move the Court for interlocutory injunctions restraining Claremont from in any way disposing of its money or property in favour of the second respondent, Beach Petroleum N.L. ("Beach"), a subsidiary of Claremont, or any other subsidiary or associate of Claremont.

3. Claremont holds sixty-five percent of the total issued share capital of Beach. Claremont is incorporated in Queensland with its principal office in Sydney and the management of its affairs conducted from Sydney. Claremont has a issued capital of 262,664,915 ordinary shares of 25 cents each fully paid which are quoted on the Main Board of the Australian Stock Exchange Limited. Claremont's home exchange is Sydney. Beach is also a listed public company, the shares of which are quoted on the Main Board of the Australian Stock Exchange and its home exchange is Adelaide. As at 31 July 1991 Claremont had a total of 6,279 shareholders and at 30 July 1991 Beach had a total of 18,681 shareholders. The members of the Boards of Claremont and Beach are identical.

4. In aggregate, the applicants own 25,083,355 ordinary shares in the capital of Claremont which are registered in their names and that is about nine and a half percent of the issued capital of Claremont. In addition the first applicant, Moage Limited ("Moage"), claims to be beneficially entitled to a further parcel of 58,883,160 shares in the capital of Claremont. Those shares are presently registered in the name of Westpac Banking Corporation ("Westpac") which is Moage's banker.

5. The last sale price of shares in the capital of Claremont on Friday, 11 October 1991 (the last date selected in the evidence) was four cents per share, at which price the market value of the applicants' shareholdings in Claremont including the shares registered in the name of Westpac is approximately $3.3 million.

6. The Court also has before it a notice of motion of the respondents for an order that the applicants provide security for the costs of the respondents of this proceeding and an order that the proceeding be transfered to the South Australian District Registry of the Court pursuant to s. 48 of the Federal Court of Australia Act 1976. All motions were heard together by consent.

7. The relevant facts appear from affidavits and exhibits together with some oral evidence. Any statement of the facts which I make is, of course, on the basis of the evidence as it presently stands which of necessity has been collected rather quickly and may not reflect in all respects the evidence as it will be at the final hearing. Any findings I make are essentially of the kind that one makes when hearing motions for interlocutory injunctions so that they do not reflect any final view.

8. In addition to this proceeding there are two other proceedings on foot including similar parties; one in the South Australian District Registry of this Court and the other in the Supreme Court of South Australia.

9. On 28 March 1991 the fourth applicant, Jingellic Minerals N.L. ("Jingellic") commenced proceedings in the Supreme Court of South Australia (No. 766 of 1991) to wind up Beach ("the Supreme Court proceeding"). On 18 April 1991 Beach applied for an order that Jingellic's summons to wind up Beach be dismissed which was subsequently argued before Zelling A.J.. His Honour delivered judgment on 24 April in which he found that there was a genuine dispute on substantial grounds as to whether an agreement known as the SCAF agreement was entered into in breach of the articles of association and that a genuine dispute existed as to whether the debt, the foundation of the winding up summons, had been compounded. His Honour found that Beach was probably insolvent and he exercised his discretion by ordering a stay of the winding up summons until the defences of Beach are tried, following the course adopted by Gibbs J., then a justice of the Supreme Court of Queensland, in In re QBS. Pty Limited (1967) QdR 218 and of Needham J. of the Supreme Court of New South Wales in In re Horizon Pacific Limited (1977) ACLC 40-334.

10. On 26 April 1991 Jingellic applied for the appointment of a provisional liquidator to Beach and on the same day counsel for Beach applied before Zelling A.J. to reopen his case. Zelling A.J. on 1 May heard argument on Beach's application to reopen its case and on 2 May granted leave to Beach to reopen its case on the application to dismiss the winding up summons restricted to the issue of Beach's solvency. His Honour heard evidence in May and July and on 2 September gave judgment on the issue of Beach's solvency. His Honour found that Beach had not demonstrated that it was solvent, that in his opinion Jingellic had established that Beach was insolvent, but he could not see the need then for the appointment of a provisional liquidator as it had not been proven that the assets of Beach "are likely to be spirited away or unlawfully disposed of and I cannot see any work for a provisional liquidator to do at present". Accordingly his Honour declined to appoint a provisional liquidator to Beach and dismissed the application for such appointment.

11. On 2 October 1991 the Full Court of the Supreme Court of South Australia heard an appeal from the judgment of Zelling A.J. and reserved its decision which was given on Friday last, 1 November, 1991. The Full Court allowed the appeal and found that Zelling A.J. erred in not finding that there was a bona fide dispute on substantial grounds of Beach's allegations of fraud and breach of directors' duties. The Full Court found also that his Honour erred in holding that Beach was insolvent; and that his Honour should have found that Beach was solvent.

12. On 5 July 1991 Claremont and Beach commenced proceedings in this Court's South Australian District Registry (No. G53 of 1991) against Spargos Mining N.L. ("Spargos"), the third applicant Enterprise Gold Mines N.L. ("Enterprise"), Jingellic and others, in which Claremont and Beach asserted against certain of the defendants various courses of action including breaches of duty, both common law and statutory, conspiracy to defraud Claremont and Beach and misleading and deceptive conduct. The factual matrix (which occupies a statement of claim in the Federal Court proceeding in South Australia of some 51 pages) is complicated and needs no elaboration for present purposes. Von Doussa J. made certain ex parte orders on 22 July 1991 in that proceeding; later, on 1 August 1991, made further orders. The parties were next to appear before the Federal Court in South Australia on 1 November 1991. I have no evidence before me of what occured on that occasion.

13. The applicants claim that Beach has three principal assets, namely: (a) exploration interests in the Timor Sea; (b) a twenty-two percent interest in the Bodalla oil field in Queensland; (c) an interest in the Burbank oil fields in Oklahoma in the United States of America. They say that Beach's interest in the Timor Sea is non-income producing and rely upon Beach's 1991 annual report together with other matters to prove this. The applicants claim that Beach's interest in the Bodalla oil field is subject to forfeiture should a receiver, receiver and manager or liquidator be appointed to Beach. The applicants point to the 1991 annual report of Beach to establish that Beach's total earnings from its interests in the Burbank oil fields for the year ended 30 June 1991 was $328,000. They then point to financial statements in the same document showing that Beach recorded operating losses on a consolidated basis for the year ended 30 June 1990 of $13,058,000 and for the year ended 30 June 1991 of $11,375,000.

14. The applicants claim that Beach has insufficient operating revenue to service its ongoing exploration expenses and that it has insufficient revenue to repay substantial sums which it owes to Claremont in the order of $2.5 million. It also claims that the indebtedness of Beach to Claremont as at 30 April 1991 was $1.05 million; and that the difference between the two figures of $1.5 million represents the provision of moneys by Claremont to Beach in the meantime. The applicants also claim that, if Beach forfeits its interest in the Bodalla block, its ability to repay Claremont the moneys which are owed by it will be materially affected.

15. The applicants allege that the affairs of Claremont are being conducted in an oppressive manner to its shareholders in that: (a) Claremont's financial position is tight, which is reflected in its own financial statements by amongst other things a deficiency of current assets over current liabilities of approximately $42m and net assets of only about $967,000; (b) Claremont's operational activities are severely restricted by a heavy debt load which at 30 June 1991 amounted to $29.4 million; (c) Claremont will need to raise about $3 million for additional working capital at some stage within the next twelve months; (d) included in Claremont's current assets is approximately $14m receivable from subsidiaries, which includes the amount of about $2.5m owing by Beach to its parent, and in the annual report for 1991 of Claremont the directors have made no provision for non-recovery of this loan yet Beach has no obvious means of repaying any debt due to Claremont upon demand; (e) the directors of Claremont have an irreconcilable conflict of interest between their duties as directors of Claremont and their duties as directors of Beach and Claremont has made no demand upon Beach for repayment of the moneys due by Beach to Claremont; (f) Claremont is continuing to grant or provide financial accommodation to Beach.

16. The applicants claim that unless interlocutory injunctions are made to restrain the movement of further funds from Claremont to Beach the continuing provision of loan advances and other financial accommodations by Claremont to Beach will further erode Claremont's cash reserves and working capital which, in turn, will cause the financial position of Claremont to deteriorate further and with it the market price of Claremont's securities.

17. There are other facts which are referred to in the evidence and that bear on one or more of the motions before the Court. I need not refer to them at this stage, but shall mention certain of them when dealing with the submissions of counsel for the parties.

18. It is convenient to consider first the motion for interlocutory injunctions, then the motion for security for costs and finally the motion to transfer the proceeding to the South Australian registry of this Court.

19. Counsel for the parties have made full submissions in writing concerning all three motions and I do not propose to refer to them in detail but I have carefully considered them.

20. The applicants' claim for interlocutory relief is made pursuant to ss. 260(2), 1323(1) and 1324 of the Corporations Law.

21. I have been referred to the relevant authorities concerning oppression and the conduct of directors in what are said to be circumstances relevant to those established in the present case including Scottish Co-Operative Wholesale Society v Meyer (1959) AC 324; Re Cumberland Holdings Limited (1976) 1 ACLR 361; and Walker v Winborne [1976] HCA 7; (1976) 137 CLR 1.

22. Reliance is placed by the applicants amongst other things on the report of the Chairman of Claremont to its shareholders at the annual general meeting held on 4 October 1991 and a statement attributed to the directors and recorded on page 2 of the annual report "the major challenge facing (Claremont) is to reduce its level of debt, and to maximise the value of its investment in the 65 percent subsidiary, Beach Petroleum and its investment in the Burbank Oilfields". On page 3 of the report, amongst other statements, the following appears: "Claremont's financial position remains tight ..." The applicants say that the balance sheet and other documents of Claremont reveal that there is a deficiency of about $42m between total current assets and total current liabilities; of the total current assets of $19,442,000, $16,292,000 is described as "receivables" and note 8 to the report under the heading "Current Receivables" shows that of the $16,292,000, $14,047,000 is made up of amounts receivable from subsidiaries included in which is $2.5m due from Beach. It shows that the total equity of shareholders after taking into account current and non-current assets and liabilities is only $960,000. They also point to the fact that the auditor's report is qualified; indeed, it is asserted to be heavily qualified, and based on the prediction of the outcome of the proceedings in South Australia.

23. The applicants also point to various statements in the 1991 annual report of Beach which show what they assert to be a very disquieting situation. They further point to the considerable increase in the debt due from Beach to Claremont since 30 June 1990 and they claim that there is a very real fear that the indebtedness will increase further unless Claremont is restrained from making further financial accommodation available to Beach; and that if this happens Beach will be required to realise its assets and extinguish its liabilities other than in the normal course of business which will almost certainly result in Beach losing the main source of its income. Liquidation of Beach would mean that none of the $2.5m debt due to Claremont would be repaid.

24. The applicants also claim that the four directors of Claremont and Beach have caused Claremont to enter into transactions which favour Beach to the serious detriment of the interests of the other shareholders in Claremont. They say that the interests of Claremont and Beach should be separately represented and that the directors should not be making decisions for Claremont which are unjustifiably aimed at preserving Beach, and that these decisions of the directors would not be made by reasonable and independent directors.

25. The applicants also point to other matters for the purpose of establishing, not only a prima facie case or a serious question to be tried, but on the balance of convenience; but in the main these additional matters are in amplification of what I have already mentioned, namely, the financial position of Claremont and Beach and the alleged conflicts of duty of the directors together with the significant increase in the advances made by Claremont to Beach.

26. The respondents join issue with most of the assertions made on behalf of the applicant. They point, amongst other things, to the following matters:-

. Claremont has a significant investment in its sixty-five percent
owned subsidiary, Beach, the book value of which in 1991 was
$10.2m;
. Claremont's financial position is, to a large extent,
interdependent with Beach;
. whilst the directors of the two companies are identical, they have
no personal interest to advance since their shareholdings in the
companies are minuscule and the directors are all men of
experience in the resources industry;
. the present Board replaced the Board comprised of people who had
committed Claremont/Beach to certain of their business activities
impugned by the applicants.

27. The respondents say that, although Zelling A.J. found on an interlocutory basis (which was then subject to appeal) that Beach was insolvent, the question of Beach's ability to pay its debts is inextricably bound up with the litigation in South Australia, in particular before this Court in that State. The respondents are now able to rely upon the findings of the Full Court to which reference was made earlier.

28. The respondents assert that the applicants are in reality seeking to interfere with the internal management of Claremont and that they have failed to illustrate that there is a serious question to be tried. They say that there are very serious questions of law to be argued as to the extent of any rule against conflicts of duties or duties and interest and they assert that the balance of convenience is strongly in favour of the respondents. They say Claremont is a typical resources company operating through its subsidiaries, each of them is listed on the Australian Stock Exchange and has obligations under the Stock Exchange Listing Rules. It would be contrary to the balance of convenience to give a veto power to minority shareholders such as the applicants to prevent Claremont from funding its subsidiaries. They say that interlocutory injunctions could have the effect of stultifying the South Australian proceedings, for example, by preventing Claremont from funding Beach's legal costs. They assert that this is not a typical case of a subsidiary acting in the interests of a parent to the detriment of the subsidiary but rather it is a case where the parent is supporting its sixty-five percent owned subsidiary which is conduct that would normally be expected of a parent.

29. Having carefully considered the evidence and the written submissions, I have come to the conclusion that it would be inappropriate in this case to grant interlocutory relief. There are many complex issues of fact and law to be determined in this case which can only be effectively and justly determined upon a final hearing. I think however that a final hearing should be given to the parties as soon as they are ready for trial and the Court is able to allocate hearing dates to them. To disturb the status quo, in particular the movement of funds from Claremont to Beach, could have serious repercussions to both Claremont and Beach; repercussions which may be irreparable notwithstanding the giving of an undertaking as to damages by the applicants. To enter into this arena at the present stage by granting the interlocutory relief sought would be to walk partially blindfolded into a sea of complex facts with repercussions that could be most severe to the respondents and to their shareholders.

30. It is not a case where the Court can say that the case presented by the applicants is strong or weak or somewhere in between. The facts are so complicated and so much will depend upon the evidence of directors of the parties (including, in particular, evidence of the respondents as to why certain transactions have been entered into), that it would be inappropriate to determine these matters in any fashion on an interlocutory hearing of this kind. Taking these matters into account, together with the other matters to which I have referred and which are referred to in the submissions of counsel, I am firmly of the view that interlocutory relief should not be granted; but this says nothing as to the ultimate strength or weakness of the case of any party.

31. I turn to the motion for security for costs.

32. The respondents contend that the first applicant, Moage, is insolvent. They assert that the second applicant, Independent Resources (Asia) Group Pty Limited ("Independent") is also insolvent and it is in an even worse financial position than Moage. They claim that on the evidence from the balance sheet and accounts of Enterprise, it is unlikely that it would be able to pay any costs that may be awarded against the applicants in this case. They also assert that the 1991 balance sheet of Jingellic shows that it too is in a risky financial position.

33. The applicants claim that Enterprise has a surplus of more than $800,000 from which to pay any costs and that Jingellic still has a surplus of at least $600,000 which would be available to pay the costs of the respondents. They also say that it must be taken into account that both Enterprise and Jingellic have been forced into the situation of being engaged to a very large extent in litigation because of the actions of Beach including the claim for fraud in South Australia which was asserted before Zelling A.J. unsuccessfully (but I now have the finding of the Full Court reversing Zelling J.'s judgment). They also point to the fact that reliance is placed by the respondents upon the two annual reports of Enterprise and Jingellic and that by any analysis they show a substantial surplus of assets over liabilities from which to pay costs. The applicants also say that substantial sums are held in two accounts in South Australia, the interest on which affords more than enough money to cover costs of the proceeding.

34. Although it certainly appears that Moage and Independent Resources are in a most unhealthy financial position, I am not satisfied on the evidence that Enterprise and Jingellic would be unable to pay the costs of this proceeding.

35. Accordingly, I propose to dismiss the motion for security for costs. If it should transpire at some future stage in this case that further evidence comes to light casting doubt upon the capacity of Enterprise or Jingellic to pay costs, it is always open to the respondents to move afresh for an order for security for costs; but this is not intended to be an invitation to the respondents to take this course.

36. There remains the motion for transfer of this matter to the South Australian registry of this Court. The principles governing these matters are well established. It is sufficient to refer to the judgment of a Full Court of this Court in National Mutual Holdings Pty Ltd and Ors v Sentry Corporation and Anor (1988) 83 ALR 434 where the Full Court (Bowen C.J., Woodward and Lockhart JJ.) held that the appropriate test to be applied in considering motions for "change of venue" in this Court is: Where can the case be conducted or continued most suitably bearing in mind the interests of all the parties, the ends of justice in the determination of the issues between them, and the most efficient administration of the court? The respondents say that Claremont and Beach have authorised two of their directors to conduct the litigation presently being conducted in South Australia, one of whom lives in Perth and the other in Sydney. They make the somewhat curious submission that in those circumstances South Australia is a convenient mid point. They say that all the directors of both Claremont and Beach are now to be joined as personal respondents in the Federal Court proceedings in South Australia and that the directors should not be required to litigate in two states on matters which are inter-related. Also the respondents say that two of the directors of all the applicant companies live in South Australia. They assert that the issue which the applicants wish to agitate in the present proceeding is whether the actions of the directors of Claremont are in the interest of the members of Claremont as a whole, a question inextricably linked to the financial position of Claremont and Beach which is directly bound up with the assertions of fraud in the proceedings in the South Australian registry of this Court.

37. The applicants claim that:

. the principal offices of both Claremont and Beach are in Sydney;
. Claremont conducts its business from Sydney irrespective of where
the directors live;
. the annual general meeting of Claremont was held in Sydney;
. the relevant documents of both Claremont and Beach are in Sydney;
. the employees of both Claremont and Beach who may have to produce
documents in future or comply with other Court orders are in
Sydney;
. Sydney has the closest proximity to the control centres of both
companies;
. by comparison it would be extremely difficult for a court in South
Australia or elsewhere to regulate the affairs of companies based
in Sydney;
. if the applicants are successful in this proceeding, such orders
as may be made will be enforced in Sydney where the affairs of
Claremont and Beach are conducted;
. in these proceedings four shareholders with a significant interest
in Claremont challenge the management and administration of
Claremont in the public interest. The issue in this proceeding is
said to be narrow, namely, whether the business of Claremont is
being conducted in the interest of its members as a whole or in
the interest of Beach;
. there is no relationship between the three sets of proceedings
presently on foot.

38. The question is whether the interests of justice with all its ramifications is best served by letting the proceedings remain in Sydney or transfering them to the South Australian Registry of the Court.

39. The directors of Claremont appear to conduct the businesses of Claremont and of Beach in New South Wales. Although there is some degree of relationship between the three sets of proceedings and there are some matters which would favour the proceeding being transfered to South Australia I am not persuaded at present that this course should be taken. That is not to say that at some future date before the commencement of the trial it would not be appropriate to direct that this proceeding be transfered to the South Australian registry of this Court. However, this is a national court. Its Judges move from State to State and Territory to Territory for any purpose connected with the conduct of a case at any stage be it interlocutory or the final hearing. It may be that once the issues have clearly emerged and interlocutory steps are further advanced that it would be appropriate to hear the case in Adelaide. I do not suggest that this would necessarily be the appropriate course; but this Court can do this and without formally changing the venue. The Judge hearing the South Australian proceeding in this Court may be able to hear this proceeding. These are but possibilities; but this is not the appropriate time to canvass them. I am not persuaded that the stage has yet been reached, if indeed it ever will be, when the venue should be changed. Accordingly, the Court declines to order the transfer of this proceeding to South Australia.

40. As to the costs of the motions, the applicants have failed in their motion for interlocutory injunctions but have succeeded in resisting the motions of the respondent. The proper order for costs is that there be no order as to the costs of any party of any of the motions.

41. The Court gives the following directions for the further conduct of this proceeding:-
1. The applicants shall file and serve a brief and concise statement of the constitutive facts, issues and contentions upon which they rely by 11 November 1991.
2. The applicants shall file and serve all affidavits upon which they propose to rely except the affidavits of experts by 14 November 1991.
3. The applicants shall file and serve affidavits from all experts by 21 November 1991. 4. The respondents shall file and serve a brief and concise statement of the constitutive facts, issues and contentions upon which they rely by 25 November 1991. 5. The respondents shall file and serve all affidavits upon which they propose to rely except the affidavits of experts by 2 December 1991. 6. The matter is adjourned for further directions to 6 December 1991 at 9.30 am.