By a notice of motion filed on 17 June 2022, the first defendant, Whitehaven Coal Limited (Whitehaven), seeks security for its costs of these proceedings.
[2]
Background
In the proceedings, the plaintiff, Cayenne Coal Pty Ltd (Cayenne), seeks an order that 26,678,979 "Restricted Shares" in Whitehaven which are currently held in the name of the third defendant, Boardwalk Resources Investments Pty Ltd (In Liq) (BRI), as trustee of the Boardwalk Resources Trust (the BR Trust), be transferred to it on the basis that it has been appointed trustee of the trust in place of BRI.
The Restricted Shares were issued in connection with a transaction by which Whitehaven acquired the shares in Aston Resources Limited (Aston) and Boardwalk Resources Limited (Boardwalk) in exchange for ordinary and Restricted Shares in Whitehaven. The Restricted Shares are in the nature of deferred consideration. They are subject to the restrictions contained in a Restriction Deed dated 1 May 2012 (the Deed). The restrictions remain in place until milestones in relation to certain mining projects that were acquired by Whitehaven as part of its acquisition of Aston and Boardwalk (the Mining Projects) are achieved. BRI was and Cayenne is controlled by Mr Nathan Tinkler. Mr Tinkler and certain of his family members are beneficiaries of the BR Trust. Mr Tinkler is also an appointor under the BR Trust deed.
In related representative proceedings brought by Les & Zelda Investments Pty Ltd (LZI), a company associated with Mr Tinkler, LZI sues Whitehaven on its own behalf and on behalf of certain group members, including BRI, for damages for breach of its contractual obligations and for oppressive conduct in not developing the Mining Projects in a way that would have met the milestones and triggered release of the restrictions on the Restricted Shares. It appears that if Cayenne is successful in these proceedings, the Restricted Shares will be used to provide security to LCM Funding Pty Ltd, which has agreed to provide litigation funding to LZI on certain terms and conditions.
Clause 8.7 of Whitehaven's amended Constitution provides:
8.7 Transmission by operation of law
A person ('transmittee') who establishes to the satisfaction of the Board that the right to any securities has devolved on the transmittee by will or by operation of law may be registered as a shareholder in respect of the securities or may (subject to the provisions in these rules relating to transfers) transfer the securities provided that the Board has the same right to refuse to register the transmittee as if the transmittee was the transferee named in an ordinary transfer presented for registration.
Clause 2.2 of the Deed relevantly provides:
2.2 Restrictions
Each Vendor must not do any of the following during the Restriction Period for a Restricted Share:
(a) …
(b) do, or omit to do, any act if the act or omission would have the effect of transferring effective ownership or control of the Restricted Share or any legal, beneficial or economic interest in the Restricted Share; or
(c) …
"Vendor" includes BRI as trustee for the BR Trust, which holds the large majority of Restricted Shares.
Clause 7 of the Deed relevantly provides:
7 Consequences of breaching this deed
(a) If it appears to the Purchaser that a Vendor may breach this deed, the Purchaser may take the steps necessary to prevent the breach, or to enforce the deed as soon as it becomes aware of the potential breach.
(b) If a Vendor breaches this deed, each of the following applies:
(i) the Purchaser may take the steps necessary to enforce the deed, or to rectify the breach, as soon as practicable after becoming aware of the breach; and
(ii) the Purchaser may refuse to acknowledge, deal with, accept or register any sale, assignment, transfer or conversion of any of the Restricted Shares. This is in addition to other rights and remedies of the Purchaser.
When Whitehaven became aware of the proposed transfer it threatened to commence proceedings for an injunction to restrain the transfer. Ultimately, instead, it relied on instructions it gave Computershare, which provides share registration and transfer services in respect of Whitehaven shares, not to register the shares. It was in response to that instruction that Cayenne commenced these proceedings.
Standing back from the detail for the moment, it might be thought that Whitehaven has two principal interests in resisting the transfer of the shares. First, it would not want to be in a position where the transferee was not bound by the terms of the Deed in respect of the Restricted Shares. Second, to the extent that the Restricted Shares may be used to obtain funds to fund the representative proceedings against it, it has a tactical interest in preventing the shares from being used for that purpose.
So far as Cayenne is concerned, it submits that the transfer does not involve any breach of the Deed because no action is being taken by BRI or for that matter any other party to the Deed to transfer the Restricted Shares. Rather, Mr Tinkler, as appointor under the BR Trust deed has removed BRI as trustee and appointed Cayenne in its place and Cayenne is simply discharging its obligations to obtain control of the trust assets. In any event, Cayenne has agreed to sign a deed by which it becomes bound by the Deed.
Whitehaven has not yet filed a Commercial List Response. It will be filed shortly, after Cayenne files an Amended Commercial List Statement. However, Whitehaven has indicated that it proposes to raise a number of defences, including that Cayenne has not validly been appointed as a trustee of the BR Trust and that the transfer breaches cl 2.2 of the Deed.
[3]
The application for security
The application for security is made under s 1335(1) of the Corporations Act 2001 (Cth) and Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 42.21. It is not suggested that different principles apply depending upon the basis on which the application is made. Both provisions require Whitehaven to establish that there is reason to believe that Cayenne will be unable to pay Whitehaven's costs if ordered to do so. If that threshold requirement is satisfied, the Court has a discretion to order the provision of security.
It is accepted that the threshold requirement is satisfied in this case. Cayenne has paid up capital of $1. It has no bank accounts. It appears that it has not filed any tax returns. Nor has it prepared any financial statements. It is to be inferred from these facts that it is a dormant company with no substantial assets.
In its written submissions, Cayenne advances two reasons for why the Court should in the exercise of its discretion refuse to order security. The first was that it had a strong case. The second was that the proceedings were essentially defensive in nature.
The first of these grounds was largely and properly abandoned in oral submissions. It is apparent that Whitehaven is proposing to raise a number of defences. It is not possible on the material before the Court to form a view on the strength of those defences, even if that were otherwise an appropriate thing to do.
Cayenne claims that these proceedings are defensive in nature because in substance Whitehaven is seeking to assert its rights under the Deed and Cayenne is resisting that claim. In the circumstances, the only way it could do that was by commencing these proceedings.
I accept that if Cayenne's claim is properly classified as defensive, then that provides a strong discretionary reason for refusing security: see Interwest Ltd v Tricontinental Corporation Ltd & Anor (1991) 5 ACSR 621 at 627 per Ormiston J; Amalgamated Mining Services Pty Ltd v Warman International Ltd and Another (1988) 19 FCR 324. However, in my opinion, Cayenne's claim is not properly classified as defensive. It is not correct to say that the primary issue in the case is the exercise by Whitehaven of its rights under the Deed. Rather, the primary issue is whether Cayenne is entitled to the Restricted Shares. Whitehaven disputes that it is on a number of grounds and, accordingly, has refused to permit registration of the transfer. By these proceedings, Cayenne seeks to vindicate what it says are its rights as legal owner of the shares. In doing so, it is asserting a positive right, which Whitehaven disputes. The fact that Cayenne is required to bring these proceedings because there is an administrative process available to Whitehaven to prevent Cayenne from perfecting the entitlement it claims (which Whitehaven has exercised), does not make the proceedings defensive. It is still Cayenne that claims an interest in the shares and it is that claim which is resisted by Whitehaven.
It was not suggested that there was some other discretionary ground for refusing security. Moreover, if Whitehaven is successful, it was not suggested that it would not be entitled to recover its costs in the normal course of events. The fact that Cayenne has no ability to pay costs together with the fact that no-one standing to benefit from Cayenne's success has agreed to pay Whitehaven's costs if it is successful provides a strong reason for ordering security.
[4]
Quantum
Whitehaven claims $255,000 in security. In support of that amount it relies on two affidavits sworn by Mr Jonathan Light, the partner of Allens who has the conduct of this matter on behalf of Whitehaven. Mr Light gives an estimate of the number of hours that various lawyers at Allens and counsel will be required to spend on the case broken down by reference to the following tasks:
1. Preparation of the Commercial List Response;
2. Directions and interlocutory hearings;
3. Preparation of evidence;
4. Trial preparation;
5. Attendance at a 2 day trial.
Mr Light multiplies the estimated number of hours by the charge out rates of the solicitors and barristers (junior and senior counsel) who will do that work to arrive at a total figure of $364,483.83 (excluding GST) broken down as follows:
Phase Total Costs (ex GST)
Costs incurred to date $26,546.83
Commercial List Response $33,240
Directions and Interlocutory Hearings $15,820
Evidence $58,850
Trial Preparation $144,155
Trial $85,872
Total (ex GST) $364,483.83
[5]
Mr Light discounts that figure by 30 percent to arrive at an estimate of party/party costs of $255,000.
Cayenne does not take issue with the charge out rates used by Mr Light or the discount rate of 30 percent. However, it takes issue with the number of hours estimated by Mr Light for each task. It submits that Mr Light gives inadequate reasoning for the estimates he gives. It also submits by reference to an affidavit prepared by Mr Daniel O'Brien, the partner of Carroll & O'Dea acting for Cayenne, that Mr Light's estimates are excessive.
I do not accept the first of Cayenne's criticisms. Necessarily, Mr Light has taken a broad brush approach. He has broken down the tasks to be performed in connection with the proceedings in an orthodox way. He has made an assumption that there will be no discovery. Particularly having regard to the stage the proceeding has reached, it is not realistic to expect Mr Light to give a more detailed explanation of the estimates he gives. Moreover, the suggestion that a more detailed explanation is required does not sit easily with the broad brush approach that the Court is required to take: Broadway Plaza Investments Pty Ltd v Broadway Plaza Pty Ltd [2019] NSWSC 1082 at [206] per Ward CJ in Eq.
As to the second criticism, generally I prefer the evidence given by Mr Light. The evidence given by Mr O'Brien was given at a time when Mr O'Brien was unaware of the defences that would be raised by Whitehaven. Mr O'Brien assumed that the hearing would last one day, although with the parties' consent the matter has been set down for two. Having regard to the defences that Whitehaven proposes to raise, an estimate of two days appears to me to be more realistic. Moreover, Mr Light's evidence is that Whitehaven has so far incurred approximately $100,000 in legal costs. There is no suggestion that those costs have been improperly incurred. In that context, the estimate of approximately $350,000 for the total costs of the case does not appear to be excessive.
Cayenne suggests that Mr Light's estimates are exaggerated because Allens is also acting in the representative proceedings and there is considerable overlap in the two proceedings, which will result in substantial efficiencies. I do not accept that submission. The representative proceedings provide context for the current proceeding. However, the two proceedings raise different issues. It is difficult to see how any work done for the representative proceedings could be used in the current proceedings.
Taking these matters into account, in my opinion it is appropriate to order that Cayenne provide $250,000 in respect of Whitehaven's costs.
[6]
Other matters
Two other matters should be mentioned.
First, Whitehaven suggested that it may be necessary to make an application for further security, particularly if discovery is required. Whether further security should be ordered will have to be assessed at the time an application is made, if that happens. However, it is relevant to observe that the case was set down on an expedited basis for a hearing of two days commencing on 30 August 2022 because the outcome of the case will affect the funding of the representative proceedings. In that context, multiple interlocutory applications should be discouraged.
Second, given the closeness of the hearing date, Whitehaven submits that Cayenne should be given 14 rather than the usual 28 days to provide security before these proceedings are stayed. I accept that there should be some truncation of the time in which security should be provided. In my opinion, an appropriate time is 21 days.
[7]
Orders
Accordingly, the orders of the Court are:
1. Within 21 days of the date of this judgment, the plaintiff provide security for the first defendant's costs in the sum of $250,000 by way of payment into Court or bank guarantee;
2. The proceedings be stayed if security is not provided in accordance with order (1);
3. Subject to order (4), the plaintiff pay the first defendant's costs of the notice of motion filed on 17 June 2022;
4. Either party may make an application to vary order (3) within 14 days of the date of these orders.
[8]
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Decision last updated: 15 July 2022
Parties
Applicant/Plaintiff:
Cayenne Coal Pty Ltd as Trustee for Boardwalk Resources Trust