38 Neither Mr Au-Yeung who signed the three trust deeds on behalf of the first defendant, nor Mr Wong, the other director of the first defendant gave evidence before me. Nor did Ms Le give evidence.
39 Mr Zucker has deposed that there is no record of the first defendant declaring itself to be a trustee of its assets on terms of the three deeds. He says no units were issued under them.
40 There are strong pointers in the evidence that in June 2003 two of the directors of the first defendant proposed that the assets of the first defendant would be declared to be held on the trusts of the three deeds which they signed. The second plaintiff resigned as a director before such a declaration was made. There has been no evidence called by the other directors of the first defendant. The evidence before me does not show that declarations of trust were later made. There is however a serious question to be tried , in the sense of an issue to be investigated, as to whether or not such a declaration of trust was later made.
41 On 25 May 2004 Mr Zucker, writing as general counsel of the second defendant, said to the first plaintiff that although the Bellambi Land Trust, the Bellambi Coal Trust and the Bellambi Equipment Trust were certainly created, they held no assets, that no subscriptions for units were ever received and no units have been issued. He asserted that the Bellambi assets are beneficially owned by the first defendant but that all of the shares in the first defendant are owned by the trustee of the Balgownie Coal Investment Trust. This may well be the true position. On the other hand on 24 May 2004 he advised the solicitors for another unit holder both that the first defendant was the beneficial owner of the Bellambi Colliery and associated assets and also, that Great Pacific Capital Limited had never denied the entitlement of Billiva Pty Ltd to a "2.5% interest in the Bellambi assets (via any trust or beneficial structure) or his entitlement to a share of profits although there is some dispute as to the percentage of the share….". The two statements are not consistent.
42 Although there is a serious question to be tried as to whether the assets of the first defendant are held on the three trusts, the evidence does not show that the plaintiffs have a probability of success on this issue.
43 Mr M Cashion SC who appeared with Mr S White for the defendants, submitted that if the interlocutory injunction were continued, it was very likely that even if the defendants succeeded at a final hearing, the opportunity to sell the assets to Resource Pacific Ltd would be lost. This was because, if the option agreement were entered into, Resource Pacific Ltd proposed to exercise the option only if the Bellambi West Colliery could be added to other mining assets which it holds for the purpose of floating shares in Resource Pacific Ltd. The evidence of Mr Wookey, an adviser to Resource Pacific Ltd, was that the float would be unlikely to be successful unless there were at least two mines included in it. He said that if the float were delayed the proposed underwriter for the float would withdraw and the float could not take place this year. It is his opinion that if the float were to be delayed, the investors were unlikely to take up shares later and the float could be delayed indefinitely. This would cause substantial loss and damage to Resource Pacific Ltd and prevent it from obtaining access to the proposed equity and debt financing of $40,000,000 for use in its mining operations. Any delay would have a strong negative impact on the float proceeding in the future.
44 Hence Mr Cashion SC submitted that to justify the continuation of the interlocutory injunction the plaintiffs needed to show more than merely a serious question to be tried as to whether the trusts existed, and if so, whether entering into the agreement with Resource Pacific Ltd would be a breach of trust.
45 Where a decision to grant or refuse an interlocutory injunction will in a practical sense determine the substance of the matter in issue, it will usually be desirable for the Court to evaluate the strength of the plaintiff's case for final relief. (Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 536).
46 There is no inflexible rule as to when it is or is not appropriate at the interlocutory stage to examine the apparent strength of the plaintiffs' claim to final relief. (Australian Broadcasting Commission v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at 219, [18]). In the present case the balance of convenience and the apparent strength of the plaintiffs' case are not to be considered in isolation, in deciding where the lowest risk of injustice lies if the injunction is continued or dissolved. (Kolback Securities Ltd v Epoch Mining NL at 536).
47 There was evidence on information and belief from the defendants that the West Bellambi Colliery was operating at a loss and that the first defendant had suffered a loss for the twelve months to 30 June, 2004 of in the order of $17,000,000. There was evidence that the direct cost of production in July 2004 exceeded the gross revenue from the sale of coal in that month by almost $470,000. Mr Zucker gave evidence on information and belief that if the proposed float does not proceed successfully and the mine is not sold to Resource Pacific Ltd, it could at best operate at a break even level before taking into account holding costs including financing costs. He said that he was informed by the directors of the first defendant (who did not themselves give evidence), that they considered the agreement negotiated with Resource Pacific Ltd to be reasonable and that they wished to resolve to enter into the option agreement as soon as possible so as not to delay the proposed float of Resource Pacific Ltd. He gave evidence on information that the costs incurred by Resource Pacific Ltd in preparing for the float has exceeded $650,000 to date. I have already referred to the evidence from Mr Wookey as to the damage which Resource Pacific Ltd might sustain if the defendants are restrained from granting an option to Resource Pacific Ltd to acquire the mine.
48 It may well be that irrespective of whether or not the interlocutory injunction is extended, the float will not proceed because of the pendency of the proceedings. Mr Wookey accepted that the fact that a third party claimed title to the assets which were proposed to be put into the float would itself be sufficient to deter investors. However that may be, if the only case which the plaintiffs could maintain was the case for the final relief sought in the Summons, I would not be persuaded that the case has sufficient strength to warrant the grant of the interlocutory injunction to preserve the status quo when the result would be to force the first defendant to retain an asset which is operating at a substantial loss. On the materials before me it is not likely that the evidence at a final hearing will show that the first defendant holds its assets on the three Bellambi trusts. That cannot be ruled out as a possibility given that the fourth defendant executed the deeds which suggests that it was his then intention, along with that of the second plaintiff, that the company should declare that it held the assets on those trusts. No evidence was led by the defendants to show what brought about a change of intention. As I have said, the third and fourth defendants did not give evidence and the plaintiffs had not had the opportunity to administer interrogatories. Nonetheless, although the plaintiffs might make out a case at a final hearing that something was done to declare the trusts, they do not have that evidence at the moment. On the evidence as it presently stands the case for the relief sought in the Summons would fail. That is not for lack of evidence of a breach of trust if a trust exists, but for lack of evidence that trusts have been declared.
49 Because of this conclusion I will not deal separately with the issue of whether there is a prima facie case or serious question to be tried that if the trust exists the first defendant has breached it (see generally, Ford & Lee, Principles of the Law of Trusts, para 9650, 9660).
Serious Question to be Tried: Breach of Directors' Duties?
50 Although the Summons made no claim for relief on the ground that the third and fourth defendants breached their duties as directors of either of the first or second defendants, that contention loomed large in the submissions which were advanced for the plaintiffs at the hearing. At the conclusion of the hearing on 11 August, 2004 I invited written submissions from the parties on the question of the plaintiffs' standing to maintain such a claim. In its submissions the plaintiffs sought an order that the second plaintiff be given leave under s 237 of the Corporations Act to bring proceedings on behalf of first defendant and on behalf of the second defendant, against the third and fourth defendants in respect of alleged breaches of the Corporations Act and breaches of directors' duties owed to the first and second defendants at general law. The second plaintiff has standing under s 236 of the Corporations ACT to make an application under s 237 as he is a former officer of the first and second defendants. No substantive application whether by Originating Process or otherwise had been made for that relief. I re-listed the proceedings yesterday to determine whether I should entertain the application for such orders nunc pro tunc. (See Cadwallader v Bajco Pty Ltd (2001) 189 ALR 370 at 421, [236]). The application was opposed. I refused to entertain it. The plaintiffs acknowledged the need to file additional evidence to support the claim and sought leave to do so. They acknowledged that the defendants would be entitled to time in order to deal with the application and to put on further evidence on it. They acknowledged that an application under s 237 is an application for final relief (Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313 at 318, [24]), and that such proceedings should be commenced by Originating Process (Supreme Court (Corporations) Rules 1999 Rule 2.2). It would clearly have been unfair to the defendants to have permitted the application to be made and heard forthwith. There would have been no point in allowing it to be made by an inappropriate process and adjourning it.
51 Mr Collins QC however offered an undertaking to the Court on behalf of the second plaintiff to commence and prosecute such proceedings expeditiously. He also outlined the amended final relief which the plaintiff would seek in the current proceedings, or in separate proceedings, if leave is given under s 237 of the Corporations Act. That relief includes declarations that the third and fourth defendants have breached their statutory and fiduciary obligations owed to the first defendant and orders that they be restrained from taking any steps on behalf of the first defendant to sell, charge or further encumber the relevant assets.
52 In R v Byrnes (1995) 183 CLR 501, Brennan, Deane, Toohey and Gaudron JJ described the position of directors who have conflicting interests or duties as follows (at 516-517):
"A company is entitled to the unbiased and independent judgment of each of its directors. A director of a company who is also a director of another company may owe conflicting fiduciary duties. Being a fiduciary, the director of the first company must not exercise his or her powers for the benefit or gain of the second company without clearly disclosing the second company's interest to the first company and obtaining the first company's consent. Nor, of course, can the director exercise those powers for the director's own benefit or gain without clearly disclosing his or her interest and obtaining the company's consent. A fiduciary must not exercise an authority or power for the personal benefit or gain of the fiduciary or a third party to whom a fiduciary duty is owed without the beneficiary's consent." (Citations omitted).
53 Their Honours added that "By 'third party' we mean a party whose interests are not coincident with the interests of the fiduciary's beneficiary."
54 Their Honours went on to deal with the case where the Articles of a company permit a director who is interested in a proposed transaction to take the benefit of the transaction if he or she discloses his or her interest to the board. (See generally as to this Woolworths Ltd v Kelly (1991) 22 NSWLR 189 at 207, 231). In this case the constitution of the first defendant was not tendered and there was no evidence of who voted on the proposal to grant the option to Resource Pacific Ltd. However there are only two current directors of the first defendant and they are both directors of Resource Pacific Ltd. They both have a conflict at least between their duty to the first defendant and their duty to Resource Pacific Ltd.
55 Irrespective of whether the consideration which Resource Pacific Ltd will give for the purchase of the colliery if it exercises its option is reasonable, there is a prima facie case that the third and fourth defendants have acted or are proposing to act in breach of their fiduciary duty to the first defendant by granting an option for the purchase of the substantial asset of the first defendant to a company to which they owe conflicting fiduciary duties. Further, even if they have no beneficial interest in the shares in Resource Pacific Ltd or in its shareholder, Balgow Pty Ltd, the transaction is one in which a "third party" namely Ms Ho, stands to gain. As the High Court and many other cases have said, a fiduciary must not exercise a power for the personal benefit or gain either of the fiduciary or a third party, that is, a person whose interests are not coincident with the interests of the fiduciary's beneficiary, in this case the first defendant. It cannot be said that Ms Ho's interests are coincident with those of the first defendant.
56 I infer that there is an association between Ms Ho and the third and fourth defendants, which is evidenced by their directorships of Resource Pacific Ltd. It will be recalled that she holds 41¼% of the units in the Balgownie Coal Investment Trust. Although there is no direct evidence that she holds any of her shares in Balgow Pty Ltd on trust for the third or fourth defendants, the draft prospectus for the issue of shares in Resource Pacific Ltd, which is a confidential exhibit and from which I will not quote, implies that there is more than one person who have invested in that company. No evidence was given for the third and fourth defendants to show that they do not have a beneficial interest in the shares in Resource Pacific Ltd or in Balgow Pty Ltd, and I think it is a reasonable inference from their directorships at Resource Pacific Ltd that they or persons associated with them, do. Whether that is so or not, there is a serious question to be tried, to put it at the lowest, as to whether or not entry into the call option agreement would be a breach by them of their fiduciary duties to the first defendant.
57 The proposed transaction must excite the concern a Court of Equity unless the first defendant gives its informed consent to the transaction.
58 In such a case a fiduciary is not excused by showing that the contract entered into is fair and reasonable. The Court will not entertain such an enquiry. (Aberdeen Railway Co. v Blaikie Bros (1854) 1 Macq 461 at 471; [1843-60] All ER Rep. 249 at 252-253; Cummings v Claremont Petroleum NL (1992) 9 ACSR 583 at 595).
59 There is no evidence that such a consent has been or could be given. The Articles are not in evidence but in any event both directors have a conflict. I do not see how they, acting in the best interests of the proposed purchaser to achieve the lowest price for its benefit could at the same time act in the interests of the first defendant to achieve the highest price for it. There must be at least a serious question to be tried as to how they could avoid using confidential information in relation to the business and profits of the first defendant for the benefit of Resource Pacific Ltd.
60 Nor, prima facie, is this a case where the approval or ratification of the transaction could be obtained by the shareholders in general meeting. There is only one shareholder, the second defendant. It has the same directors as the first defendant. They would face essentially the same conflict of duty and duty, if not of interest and duty, if they were required to direct the second defendant's vote on a resolution to ratify or approve their conduct as directors of the first defendant.
61 It will also be recalled that in May of this year the second defendant proposed that Balgow Pty Ltd, the shareholder in Resource Pacific Ltd, be appointed as trustee of the Balgownie Coal Investment Trust. This is further evidence that those who control the second defendant are not independent of the proposed purchaser.
62 For the defendants it was submitted that the option will only be exercised if the float of Resource Pacific Ltd proceeds and that in that event only one of the current directors will be on the board. That is not an answer to the claim that the directors will breach their duty to the first defendant if the agreement is entered into.
63 I should add that it appears from the draft prospectus that if the acquisition of the property and the proposed float proceeds, the existing investors in Resource Pacific Ltd will obtain a substantial benefit.
Balance of Convenience
64 If the interlocutory injunction is continued but the second plaintiff fails to obtain the relief which he will seek on behalf of the first defendant to restrain the alleged breach of directors' duties, the first defendant may in the meantime have suffered substantial damage from continuing to operate a mine which is making losses. The first defendant may not be able to sell the mine later for as high a consideration as Resource Pacific Ltd may be prepared to pay. Resource Pacific Ltd and its shareholder may also suffer substantial losses, both in wasted costs on the proposed float and loss of future profit. On the other hand if the interlocutory injunction is not continued but the second plaintiff succeeds in his claim, it would be very difficult for the first defendant to establish what damage it has suffered from the directors' breach of duty, or for the second plaintiff on its behalf to establish for what profits the third and fourth defendants should account. Not only is it unclear whether they will derive any profits thorough Resource Pacific Ltd, but in any event the profits of the existing investors in that company will be attributable not only to the acquisition of the West Bellambi coalmine, but to the other assets of that company. If the profits are derived by a third party, and not by the third and fourth defendants, an application for an account of profits may face insuperable difficulties.
65 There was evidence that the consideration for the purchase is reasonable. I have also already referred to the evidence that the colliery is operating at a loss so that substantial damages may be incurred if the transaction is restrained.
66 The defendants contended that the undertakings as to damages which were proffered were inadequate.
67 When the current injunction was obtained the usual undertaking as to damages was given by the first plaintiff, Mr Fayad, and by Mr Werry who at that stage was not a plaintiff. Mr Werry was added as a plaintiff by consent during the hearing before me on 11 August 2004. Mr Fayad did not renew his undertaking as to damages on 11 August. Mr Werry offered his undertaking as to damages. The undertaking was also offered by Edessa Holdings Pty Ltd.
68 Mr Werry has net assets of $760,000 of which $750,000 is represented by shares in Great Pacific Capital Ltd. Edessa Holdings Pty Ltd has assets of $1,247,000 of which $987,000 is represented by shares in Great Pacific Capital Ltd. Those shares are held subject to Restriction Agreements. Under the Restriction Agreements Mr Werry and Edessa Holdings Pty Ltd are precluded from disposing of or agreeing or offering to dispose of the shares, or creating or agreeing to offer to create, any security interest in the shares until 18 March 2005. They offer a further undertaking to the Court not to dispose of, encumber or otherwise deal with those shares after 18 March 2005 until further order of the Court.
69 The defendants submit that as the value of the undertakings as to damages will depend primarily upon the value of the shares in Great Pacific Capital Ltd after March 2005, and as the potential liability of Mr Werry and Edessa Holdings Pty Ltd under the undertakings is many times greater than their financial worth, the undertakings are not adequate.
70 They also complain that Mr Fayad has not renewed his undertaking as to damages and say that relief should not be granted in the absence of an undertaking from Mr Fayad.
71 I am now considering whether the injunction granted should be continued on the alternative basis put forward by the plaintiffs. Notwithstanding the force of the submission as to the inadequacy of the undertaking as to damages, and the potential damages which the first defendant and others might suffer if the injunction is continued, the prima facie merits of the plaintiff's complaint of an apprehended breach of directors' duties are sufficiently strong as to warrant the Court's interference if the plaintiffs have standing to bring the proceeding.
Standing and Injunctive Relief to Preserve Subject Matter of Related Proceedings to be Commenced
72 The defendants' fiduciary duties as directors are owed to the companies of which they are directors. No submission was made that the plaintiffs, as the beneficial owners of shares in the first defendant had standing to complain of the alleged breach of directors' duties. I therefore do not need to consider the interaction of s 1324 and s 236(3) of the Corporations Act.
73 The question therefore is whether the Court has power to continue the interlocutory injunction in order to protect the position of the second plaintiff who will seek leave to commence proceedings in the name of the first defendant against the third and fourth defendants, where that is not the relief which is presently claimed in the proceeding and where such leave has not been granted. Mr Cashion SC submitted that the Court did not have that power as the jurisdiction to grant interlocutory injunctive relief was confined to granting relief which would support the claim for final relief in the proceedings in which the application was made.
74 It would be a triumph of form over substance if the Court lacked jurisdiction to continue the interlocutory injunction because the basis of its continuance was to preserve the subject matter of proceedings which the second plaintiff has undertaken to commence, rather than the existing proceedings. That is not equity's way. If proceedings for leave under s 237 of the Corporation Act were commenced today, then even before the question of leave to commence proceedings were decided, the Court would have jurisdiction in those proceedings to grant the interlocutory relief which is sought today in those proceedings. The questions would then include whether there was a serious question to be tried as to the second plaintiff's right to obtain leave to commence proceedings on behalf of the first defendant (see also Emlen Pty Ltd v St Barbara Mines Ltd (1997) 15 ACLC 1107).
75 The present case is analogous to those in which interlocutory relief was sought in equity's auxiliary jurisdiction to enable parties more effectively to assert their rights in actions at law. In Meagher, Gummow & Lehane's Equity, Doctrines & Remedies 4 ed, the authors state at para [21-345]:
" It is often said that where an interlocutory injunction is sought in the auxiliary jurisdiction of a court of equity the plaintiff must prove that if the remedy were not granted irreparable injury would result. This requirement does not apply if the injunction is sought in the exclusive jurisdiction. However, it does not really require a great deal even when it does apply: 'irreparable injury' apparently means no more than an injury which cannot properly be compensated in damages, or by an order for accounts or some other interim remedy. " (Citations omitted).