GENERAL NICE RECURSOS COMMERCIAL OFFSHORE DE MACAU LIMITADA

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : WISE ENERGY GROUP COMPANY LTD -v- ROCKE [2014] WASC 505

Practice and procedure - Application for security for costs of appeal - Relevant principles - Turns on own facts

Corporations Act 2001 (Cth), s 1335(1)

First Respondent : Mr J A Thomson SC & Mr T J Porter

Second Respondent : Mr J A Thomson SC & Mr T J Porter

Third Respondent : Mr J A Thomson SC & Mr T J Porter

Third Respondent : Lavan Legal (as agents for Kemp Strang)

Acohs Pty Ltd v Ucorp Pty Ltd [2006] FCA 1279; (2006) 155 FCR 181

BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857

Brundza v Robbie & Co [No 2] [1952] HCA 49; (1952) 88 CLR 171

Murchie v The Big Kart Track Pty Ltd (No 2) [2002] QCA 339; [2003] 1 Qd R 528

Sent v Jet Corporation of Australia Pty Ltd [1984] FCA 178; (1984) 2 FCR 201

Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19

The Australian Compressed Fodder Co v Westwood (1903) IX Arg LR 113

Tricorp Pty Ltd (in liq) v Deputy Commissioner for Taxation (WA) (1992) 6 ACSR 706

1 NEWNES JA: This is an application by the respondents for security for their costs of the appeal. The respondents seek an amount of $85,000 by way of security. The provision of security is resisted by the appellant (Wise).

2 It is convenient before turning to the specific issues which arise on the application to summarise the relevant, not uncomplicated, background.

3 In August 2011, Pluton Resources Ltd (Pluton) acquired the tenements and infrastructure constituting the Cockatoo Project. The Cockatoo Project was an iron ore mining project located on Cockatoo Island off the Western Australian coast. No monetary consideration was paid by Pluton. The consideration for the acquisition was the assumption by Pluton of the vendors' liabilities in relation to the rehabilitation of the project area and its replacement of the amount of any environmental bonds lodged by the vendors. Pluton also agreed to pay the vendors any amount it saved if it did not have to remove a seawall in the course of the rehabilitation. The cost of rehabilitation if the seawall had to be removed was some $AUD42 million.

4 On 28 February 2013, Pluton entered into an iron ore sales contract (the Sale and Purchase Contract) with General Nice Resources (HK) Ltd (GNR(HK)) pursuant to which GNR(HK) agreed to pay the sum of $US24 million to Pluton and Pluton agreed to provide 10 shipments of ore to GNR(HK). An amount of $US2.4 million in respect of each shipment was to be deducted by GNR(HK) from the $US24 million advanced to Pluton. By an addendum of the same date, it was agreed that the sum of $US24 million would not be advanced until Pluton had provided security acceptable to GNR(HK) and that Pluton would provide a further 10 shipments of iron ore by a separate agreement. (In fact no separate agreement was ever entered into but the further shipments were dealt with in addenda to the Sale and Purchase Contract.)

5 On 26 April 2013, Pluton entered into a loan agreement (the Loan Agreement) with the third respondent (GNR Offshore), a company associated with GNR(HK). The Loan Agreement recorded the terms of a loan of $US24 million from GNR Offshore to Pluton and provided, in effect, that it was to be repaid by equal instalments of $US2.4 million by 10 shipments of iron ore to GNR(HK) under the Sale and Purchase Contract. The 'loan' was in fact a prepayment for the shipments.

6 Also on 26 April 2013, Wise acquired 50% of Pluton's interest in the Cockatoo Project. Wise is a foreign company registered in Hong Kong and its sole director is resident in China. Again, no monetary consideration was paid for the acquisition of the interest. Wise acquired its interest by assuming certain rehabilitation obligations and other liabilities. Pluton and Wise entered into a joint venture to operate the mine and Pluton became the manager of the joint venture. The effect of the purchase agreement (the Sale Reinstatement Deed) was in fact to reinstate an earlier agreement between Pluton and Wise that had been terminated in December 2012. Under the Sale Reinstatement Deed, Wise ratified the action of Pluton in entering into the Sale and Purchase Contract.

7 The Sale Reinstatement Deed contemplated that Pluton and Wise would each grant security over their interest in the joint venture to GNR Offshore to secure the money advanced by GNR Offshore to Pluton under the Loan Agreement. It also contained, among other things, various provisions in connection with the loan. In particular, it provided that Pluton and Wise agreed that Pluton's liability to pay the loan was a liability held and incurred by each of them in their joint venture shares and that payment of the liability by Pluton would be joint venture expenditure. Wise also agreed that it would make available to Pluton its percentage of iron ore from the joint venture mine to enable Pluton to satisfy its obligation to repay the loan.

8 Subsequently, Pluton and GNR(HK) made a number of amendments, by way of addenda, to the Sale and Purchase Contract. The effect of the relevant amendments was that instead of 10 shipments of iron ore to reduce the Pluton debt there were to be 20 shipments. The price formula for some of the shipments was also changed. The effect of an addendum in April 2014 was that the reduction in Pluton's indebtedness to GNR Offshore in respect of shipments 1 to 3 was to be $US2.4 million for each shipment; for shipments 4 to 7, 11 to 14 and 18 to 19 it was to be $US1 million for each shipment; for shipments 15 to 17 it was to be $US2 million for each shipment; and for shipment 20 it was to be $US0.8 million. Relevantly, for shipments 8 to 10 there was to be no reduction in Pluton's indebtedness.

9 On 31 August 2013, Wise entered into a security deed with GNR Offshore (the Wise Security Deed) by which Wise granted to GNR Offshore security over Wise's interest in the joint venture to secure all money payable by Pluton to GNR Offshore, to a maximum of $US12 million. The deed stated that Wise's liability would reduce by $US1.2 million upon delivery of each shipment of iron ore made in accordance with the Loan Agreement.

10 On 20 August 2014, GNR Offshore, Pluton, Wise and GNR(HK) entered into a further deed (the Acknowledgment and Amendment Deed). The effect of that deed, among other things, was to amend the Wise Security Deed to provide that the debt reduced not only by $US1.2 million upon each shipment of iron ore in accordance with the Sale and Purchase Contract but also by reason of any conversion of any part of the debt owed by Pluton to GNR Offshore to equity in Pluton.

11 On about 17 October 2014, a significant part of the Pluton debt (approximately $AUD9.4 million) was converted into shares in Pluton.

12 Between August 2013 and October 2014, 10 shipments of ore were made to GNR(HK). There was no dispute that the first three shipments were made by Pluton and accepted by GNR Offshore as having reduced Pluton's indebtedness to GNR Offshore by $US2.4 million for each shipment. But there was a dispute as to whether shipments 4 to 10 had that effect. GNR Offshore contended that under the April 2014 amendments to the Sale and Purchase Contract, each of shipments 4 to 7 reduced Pluton's indebtedness by only $1 million and shipments 8 to 10 resulted in no reduction of the amount owing under the Loan Agreement. GNR Offshore claimed there was therefore a balance of $336,961.92 owing by Wise under the Loan Agreement (being 50% of the total amount said to be then remaining owing under the Loan Agreement). It alleged that Wise was in default in failing to repay that amount. (Subsequent claimed enforcement costs have increased Wise's alleged indebtedness to some $890,000.)

13 On 3 November 2014, the first and second respondents were appointed by GNR Offshore as receivers and managers of Pluton's interest in the joint venture. They retired as receivers and managers on 23 March 2015. On 4 November 2014, GNR Offshore, acting under the Wise Security Deed, appointed the first and second respondents as receivers and managers of Wise's interest in the joint venture. The first and second respondents have continued and remain as receivers and managers of Wise's interest.

14 Wise commenced proceedings, claiming that the receivers had not been validly appointed to its interest. It argued, in substance, that on the proper construction of the Wise Security Deed its liability to GNR Offshore had been satisfied by the 10 shipments of iron ore, either alone or together with the conversion of part of the debt to equity in Pluton, and there was therefore no basis for the appointment. The respondents accepted that if the 10 shipments discharged the debt, the appointment of the receivers was invalid. However, they contended that that was not the case. They argued that under the pricing formula for shipments 4 to 10 in the Sale and Purchase Contract (as amended in April 2014) the 10 shipments were insufficient to discharge Wise's debt under the Loan Agreement.

15 On 23 December 2014, after trial, the primary judge dismissed Wise's claim, concluding that Wise's liability had not been discharged by the 10 shipments and that the first and second respondents had been validly appointed. Her Honour found, in effect, that under the Loan Agreement the extent of the reduction in the amount owing by each shipment of iron ore was to be calculated by the application of the price formula in the Sale and Purchase Contract as amended in April 2014. Pluton's indebtedness was not reduced by $US2.4 million simply by each shipment of ore but was reduced by that amount only for shipments for which, under that price formula, GNR(HK) received the benefit of a reduction in the price paid for the shipment of $US2.4 million. Her Honour concluded that upon the application of the price formula, the 10 shipments were insufficient to extinguish the debt.

16 Wise has appealed from her Honour's finding. The appeal has been brought at the instigation of the sole director of Wise in the exercise of her residual powers to challenge the appointment of the receivers. The appeal notice was filed on 29 January 2015. An appellant's case was filed on 5 March 2015 and an amended appellant's case on 20 April 2015. The respondents' answer was filed on 14 May 2015.

17 The respondents' application for security for costs was filed on 20 May 2015, supported by two substantial affidavits, one extending to 152 pages and the other to 64 pages. Two further (rather briefer) affidavits were also subsequently relied upon. Wise relied upon one affidavit of somewhat more modest proportions. The application came on for hearing on 15 June 2015. Regrettably, subsequent illness has meant that it has taken me longer than would ordinarily be the case to determine the matter.

18 The application was made both pursuant to s 1335(1) of the Corporations Act 2001 (Cth) and r 44(1) of the Supreme Court (Court of Appeal) Rules 2005 (WA). It was submitted by the respondents, and I accept, that while the principles applicable to each may differ to some extent, those differences are not material for present purposes. It is sufficient to refer to s 1335(1) of the Corporations Act, which provides:

Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

19 Where the court is satisfied there is reason to believe that an appellant will be unable to pay the respondent's costs if it is unsuccessful, that in itself provides a substantial factor in the exercise of discretion in favour of the applicant: BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857, 860; Sent v Jet Corporation of Australia Pty Ltd [1984] FCA 178; (1984) 2 FCR 201, 215 - 217.

20 The other factors that are relevant on an application by a respondent for security for the costs of an appeal cannot be stated exhaustively but will ordinarily include:

(a) the appellant's prospects of success on the appeal;

(b) the fact that the respondent has a judgment on the merits at first instance in its favour, that being a circumstance which favours the exercise of the discretion in favour of an order for security for costs;

(c) whether the appellant would be shut out of the appeal if security for costs were ordered; and

(d) whether there has been any delay in the respondent filing the application for security for costs.

21 Where an order for security for costs is made, the amount of the security to be provided by an appellant must be related to the costs likely to be incurred by the respondent on the appeal, but the court does not endeavour to give a complete and certain indemnity to the respondent: Brundza v Robbie & Co [No 2] [1952] HCA 49; (1952) 88 CLR 171, 175.

22 The starting point is whether it appears by credible evidence that there is reason to believe Wise will be unable to pay the respondents' costs if the appeal is unsuccessful. That is, whether there is reason to believe that at the time judgment is delivered Wise will not have assets available to it that can be realised in sufficient time to comply with an adverse costs order in the usual terms: Acohs Pty Ltd v Ucorp Pty Ltd [2006] FCA 1279; (2006) 155 FCR 181 [10]; Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19 [35(c)].

23 The respondents noted that Wise had identified only three alleged assets. Those assets were: Wise's interest in the joint venture; a (disputed) claim against Pluton for about $US16.5 million; and another (disputed) claim against Pluton for some $500,000. It was submitted that the merits of the claims for $US16.6 million and $500,000 could not be assessed by the court on this application. The claim for $US16.5 million was denied by Pluton which claimed that in fact Wise is indebted to it in an amount of several million dollars. The claim for some $500,000 was also denied by Pluton and depended upon the provisions of a Sales and Marketing Agreement made between Pluton and Wise which was not in evidence. It was submitted that the debts allegedly owing to Wise must be disregarded for the purposes of this application.

24 That left Wise's interest in the joint venture. The respondents submitted that if that interest had any realisable monetary value (and the respondents argued that it did not), it was unlikely to be capable of being realised within a reasonable period of time. The respondents made a number of submissions in support of that contention. They were, in substance, as follows:

1. Any purchaser of Wise's interest would be required by cl 10.5 of the Joint Venture Agreement to assume its rehabilitation liabilities and any liabilities Wise may have to Pluton under the Joint Venture Agreement and other agreements. The total cost to the joint venture of the rehabilitation liabilities was estimated to be up to $AUD42 million. The other liabilities of Wise would include the several million dollars that Pluton claims is owed to it by Wise, if it turns out that Wise is indebted to Pluton in that sum.
2. When Pluton and Wise acquired their respective joint venture interests, no cash consideration was paid. The consideration was simply the assumption of certain liabilities of the vendor, including the rehabilitation liabilities. The terms of those acquisitions indicated that the joint venture has no positive value.
3. Moreover, there was unchallenged evidence that:

(a) since the acquisitions by Pluton and Wise, the iron ore price has fallen considerably and that there is currently 'negative market sentiment in respect of the purchase of iron ore mines';

(b) the value of Wise's interest is adversely affected because it does not have control of the joint venture; and

(c) there are a number of practical difficulties in the sale of Wise's interest even if it does have some positive value. First, in order to sell the interest it would be necessary to complete the current audit and then to obtain an independent valuation of the interest at a cost estimated at $102,655 (plus GST). Secondly, it would be necessary to obtain funds to prepare an information memorandum, to conduct a marketing campaign and to meet transaction costs involved in a sale. Thirdly, it would be necessary to obtain, among other things, the necessary approvals and consents of Pluton, secured creditors and governmental agencies. Fourthly, the sale of Wise's interest would take six to seven months to complete, assuming it has some value, that funding is available to meet the costs associated with the sale, and that a purchaser can be found.

1. The determination of Wise's liabilities in respect of the joint venture, including any liabilities to Pluton, and therefore the value of Wise's interest, depends upon an audit of the joint venture being carried out by KPMG on behalf of Pluton that was still incomplete.
2. Whilst a subsidiary of Pluton, Irvine Island Finance Corporation Ltd, had recently conducted a capital raising that raised some €25 million, the success of the capital raising says nothing about the value of the Cockatoo Project. It is evident from the offer document that the money was raised for the purposes of Pluton's mining operation on Irvine Island, located some 6 km from Cockatoo Island. In the offer document, the capital raising was said to be 'to raise sufficient funds to enable our parent Pluton ... and its subsidiaries to carry out the necessary work at Irvine Island to realise its full asset value and maximise profitability'. It went on to say that the 'major strength behind the bonds' on offer was the 'Irvine Island iron ore rich project asset', which was estimated to have a project value, as at 29 April 2015, of over $AUD76 million.

25 Wise advanced two substantive propositions in opposition to the application. It contended first, that the respondents had failed to adduce any credible evidence that Wise was likely to be unable to meet an adverse costs order, and secondly, the application should be refused on discretionary grounds, namely, that there had been unreasonable delay by the respondents in bringing the application, and that Wise's lack of means had been caused by the wrong-doing of the respondents.

26 Turning to the first contention, Wise submitted that:

1. Between 4 November 2014 and 23 March 2015, seven shipments of ore with a total value of $US16,497,982 were sold and delivered. Under the Sales and Marketing Agreement between Pluton and Wise, Wise was entitled to a marketing fee totalling $US494,939.46. The first and second respondents, as receivers and managers of Wise, have not collected the fee but the fee remains an asset of Wise.
2. The fact that the Cockatoo Project is a valuable asset was reflected in various announcements, as follows:

(a) upon their retirement as receivers and managers of Pluton's interest on 23 March 2015, the first and second respondents made an announcement to the Australian Stock Exchange (ASX) in which they described the mine as a 'high grade low cost mining operation that is capable of operating profitably even in this market';

(b) on 20 May 2015, Pluton had made an ASX announcement to the effect that through a wholly owned subsidiary it was undertaking a bond offering for £25 million, the proceeds of which would be used to 'repay existing creditors and fund the advancement of both [Pluton's] Irvine Island and Cockatoo projects'. (It is not clear how that is reconciled with the statements in the offer document which refer to the funds being used for the Irvine Island project);

(c) in a further ASX announcement, on 10 June 2015, Pluton had said that due to overwhelming interest the offer was being increased to €50 million; and

(d) in the bond offer document, reference was made to the fact that the Cockatoo Island mine had shipped over 50 million tonnes of ultra high-grade and low impurity ore since 1951 and that Pluton had recognised that its main focus should be 'to continue to develop and generate cash from Cockatoo Island and expedite progress in development at Irvine Island'.

1. The valuation of Wise's joint venture interest is not dependent upon the completion of the independent audit and in any event the responsibility for the very substantial delay in the completion of the audit, and therefore of the valuation, lies with the first and second respondents as receivers and managers appointed by GNR Offshore.

27 Wise argued that if the appeal fails the receivers will remain in possession of Wise's interest and there is therefore no reason to think the respondents will be unable to recover the costs of the appeal.

28 On the discretionary issues, Wise argued that there had been unreasonable delay by the respondents in making the application. The issue of security for costs had first been raised by the respondents on 29 April 2015, some three months after the appeal notice was served and after the respondents had consented to Wise filing a fresh appellant's case. It also submitted that there were two further factors which militated against an order for security. First, the alleged wrongdoing that is the subject of the appeal is the cause of Wise's lack of means, and secondly, where (as here) the only property of an appellant is the subject matter of the appeal, the court will be disinclined to order security.

29 I am satisfied that on the evidence there is reason to believe that Wise will be unable to pay the respondents' costs if the appeal is unsuccessful. In the circumstances, there is no reason to believe that within a reasonable time of the disposition of the appeal Wise's interest in the joint venture would be saleable upon a more advantageous basis than the assumption by a purchaser of the rehabilitation and other liabilities of Wise. (I should note that there is no evidence the relevant liabilities have diminished since Pluton and Wise acquired their interests.) Even a sale on those terms may be difficult in light of the evidence that since the acquisitions by Pluton and Wise, iron ore prices have declined considerably and iron ore mining operations have become less attractive to prospective purchasers.

30 In addition, there was unchallenged evidence that the value of Wise's interest is adversely affected because it does not have control of the joint venture; that there are practical difficulties in selling Wise's interest; and it would take an estimated six to seven months to sell the interest assuming those difficulties could be overcome and a buyer found.

31 In the absence of information about the operating costs of the joint venture, the mere fact that between 4 November 2014 and 23 March 2015 seven shipments of ore with a total value of $US16,497,982 were sold and delivered does not of itself indicate that Wise's interest is saleable on better terms than it acquired it. Nor does the fact that the mine has been described as a 'high grade low cost mining operation that is capable of operating profitably even in this market'. That is not to say that it is currently trading profitably or that, having regard to existing liabilities of the joint venture with regard to rehabilitation and otherwise, Wise's interest can presently be sold on better terms than the terms on which Wise acquired it.

32 Whether or not the marketing fee of $US494,939.46 claimed by Wise is a realisable asset remains unclear. As I understand it, the receivers and managers have not attempted to collect it pending the resolution, by the audit, of Pluton's claim that Wise owes it several million dollars. Whether Wise will be able to recover the marketing fee depends upon the outcome of that claim following completion of the audit of the joint venture accounts.

33 I do not consider that the capital raising referred to by Wise assists its argument. It appears to be clear from the offer document (including the Bond Purchase and Membership Agreement) that the money raised is intended to be used for the Irvine Island project. The fact that it has been possible to raise substantial funds to develop the Irvine Island project does not assist in demonstrating the value or saleability of Wise's interest in the Cockatoo Project.

34 On the discretionary issues raised by Wise, I do not consider there has been unreasonable delay by the respondents in making the application. As mentioned earlier, the appeal notice was filed on 29 January 2015 and an appellant's case on 5 March 2015. That appellant's case contained three grounds of appeal. On 19 March 2015, Wise's solicitors informed the respondents' solicitors that two of those grounds would not be pursued and an amendment would be made to the remaining ground and to the written submissions. They sought the respondents' consent to the filing of an amended appellant's case. That consent was given on 9 April 2015 and, following discussions on costs and the execution of the necessary consent, an amended appellant's case was filed on 20 April 2015. The respondents' solicitors wrote on 29 April 2015 seeking security for the respondents' costs of the appeal. I would reject the complaint of unreasonable delay. It was not unreasonable for the respondents to wait for the amended appellant's case to see the nature and ambit of the appeal, and to be in a position to estimate the likely costs of it.

35 The contention that the respondents have caused Wise's lack of means is a factor to be weighed in the balance, but on an appeal it is a factor of diminished significance by contrast with its arguable significance at first instance: Murchie v The Big Kart Track Pty Ltd (No 2) [2002] QCA 339; [2003] 1 Qd R 528 [7].

36 Wise also sought to rely upon an argument that where the only property of an appellant is the subject matter of the appeal, the court will be disinclined to order security, relying on The Australian Compressed Fodder Co v Westwood (1903) IX Arg LR 113. I am not persuaded that that case is authority for such a principle and I do not accept that there is any such general principle: see, for instance, Tricorp Pty Ltd (in liq) v Deputy Commissioner for Taxation (WA) (1992) 6 ACSR 706, 708. Every case must turn upon its particular facts. The fact that the only property of Wise is the subject matter of the appeal is not, in my view, a matter of great weight in the circumstances of this case.

37 There is no evidence that Wise would be shut out of the appeal if security for costs were ordered and no submission to that effect was advanced by Wise. There was no suggestion that those who stand behind Wise lack the means to provide any security that might be ordered.

38 Perhaps not surprisingly, neither party contended that Wise's prospects of success were a significant factor, one way or the other, on this application. For present purposes, it is sufficient merely to observe that I accept the appeal is reasonably arguable.

39 On balance I am satisfied that this is an appropriate case for an order that Wise provide security for the respondents' costs of the appeal.

40 It is necessary then to turn to the amount of security to be provided.

41 The parties estimated (and I accept) that the appeal is likely to take one day. I also accept that the appeal involves commercial documents and dealings of some complexity. I understand that both sides intend to be represented by senior counsel on the appeal, and in light of the nature of the matter and its significance to the parties that would not appear unreasonable. I consider, however, that the amount of some $85,000 sought by the respondents by way of security is excessive. In my view, having regard to the material before me, an appropriate amount by way of security would be $40,000.

1. on or before a date to be fixed, Wise is to provide security for the respondents' costs of the appeal in the sum of $40,000 by payment of that sum into court, unless security in some other manner is agreed between the parties;
2. if Wise fails to provide security in the sum of $40,000 within the time specified, the appeal do stand dismissed and Wise is to pay the respondents' costs of the appeal, including any reserved costs, to be taxed;
3. the appeal be stayed until the security for costs is provided; and
4. the costs of this application be costs in the appeal.