Fayad v Bellpac Pty Ltd

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4335/04 VINCENT FAYAD & Anor v BELLPAC PTY LTD ACN 101 713 & Ors JUDGMENT 1 HIS HONOUR: In these proceedings the plaintiffs seek an order to continue an interim injunction restraining the first defendant from dealing with, disposing of or encumbering the land known as the West Bellambi Colliery, and associated leases, plant and equipment. 2 They also seek an interim injunction restraining the second defendant from dealing with or disposing of or encumbering the shares held by it in the first defendant. There was no evidence of a threat by the second defendant to so deal with the shares in the first defendant. The submissions of both parties addressed the first order sought. Background 3 The first defendant acquired the West Bellambi Colliery on 21 March 2003. On 29 July 2004 the secretary of the second defendant, which holds all of the shares in the first defendant, gave notice to the plaintiff that the first defendant intended to enter into an agreement, which it called a call-option agreement, with Resource Pacific Ltd for the sale of the Bellambi Colliery and associated equipment. 4 In these proceedings the plaintiffs claim that the first defendant holds the West Bellambi Colliery on trust for themselves and others. They contend that the sale of the colliery to Resource Pacific Ltd or the grant of an option to it to buy the colliery, would be a breach by the first defendant of its obligation as trustee. Although the final relief sought in the Summons is confined to declaratory and ancillary relief relating to alleged breaches of trust, at the hearing of the application for an interlocutory injunction the plaintiffs also contended that even if the colliery is not held by the first defendant on trust, nonetheless the entry into the call-option agreement with Resource Pacific Ltd would be a breach by the third and fourth defendants of their duties as directors of the first defendant. The plaintiffs are not shareholders of the first defendant. 5 The third and fourth defendants were appointed as directors of the first defendant on 23 April 2004. They had previously held that position between 15 August 2002 and 26 June 2003. The fifth defendant was a director of the first defendant between 16 June 2003 and 23 April 2004. A Mr Paul Jury, who is not a party to the proceeding, was a director of the first defendant between 16 June 2003 and 1 December 2003. The second plaintiff, Mr Werry, was a director between 15 August 2002 and 26 June 2003. 6 The third and fourth defendants, along with Mr Paul Jury, are also directors of the proposed purchaser, Resource Pacific Ltd. The shares in that company are held by Balgow Pty Ltd. The shares in Balgow Pty Ltd are held by the fifth defendant. 7 The second defendant is the trustee of a trust known as the Balgownie Coal Investment Trust. It holds all the shares in the first defendant. Those shares are held on the trusts declared by a Unit Trust Deed dated 16 October, 2002. The beneficial interest in the trust property is held by persons registered as the holders of units. No Unit Holder is entitled to any particular investment held in the Trust Fund. 100,000 units have been issued. The first plaintiff is registered as the holder of 20,625 "A" class units. He holds those Units on trust for Edessa Holdings Pty Ltd. That company is the trustee of the "family trust" of the second plaintiff. By deed dated 9 August 2004 the first plaintiff purportedly retired as trustee of the trust on which he holds the Units and the second plaintiff, Mr Werry, was appointed in his place. A form of transfer of the Units from the first plaintiff to the second plaintiff was submitted for registration by the second defendant. At the hearing before me on 11 August, that transfer had not been registered. 8 The third and fourth defendants are the only two directors of the second defendant. The second defendant has issued one share which is held by Great Pacific Capital Limited. 9 Although the trustee of the Balgownie Coal Investment Trust is the second defendant, at the hearing before me the plaintiffs claimed that the first defendant holds the West Bellambi Colliery on those trusts. No declaration to that effect is sought in the Summons. The summons claims declarations that the colliery and associated assets are held on the trusts created by three deeds called the Bellambi Land Trust, the Bellambi Coal Trust, and the Bellambi Equipment Trust. The plaintiffs claim that as a beneficiary of the trusts upon which the colliery is held, they are entitled to restrain the first defendant from an apprehended breach of trust. The alleged breach of trust is that there is a conflict or significant possibility of conflict between the fiduciary duty allegedly owed by the first defendant as trustee and the personal interests of those in control of the trustee who, it is said, are pursuing a corporate opportunity not for the benefit of the beneficiaries of the trust but for themselves or their associates. 10 The defendants deny that the first defendant holds the assets in question on trust. It is common ground that the second defendant holds the shares in the first defendant on the trusts of the Balgownie Coal Investment Trust. If the assets of the first defendant are held on the alleged trusts, the defendants deny that the proposed dealing would be a breach of trust. They also deny that the third and fourth defendants are in breach of their duties as directors in proposing that the first defendant grant an option to Resource Pacific Ltd to acquire the colliery, notwithstanding that they are also directors of that company, and that a former director and the largest Unit Holder in the Balgownie Coal Investment Trust owns the shares in the holding company of Resource Pacific Ltd. They say, in any event, that the plaintiffs do not have standing to challenge the proposed transaction of the first defendant as their only interest is as to a 26?% beneficial interest in the shares held by the second defendant in the first defendant. 11 The remaining units in the Balgownie Coal Investment Trust are held as follows:

Helen Ho (fifth defendant) 41,250 Galina Ross 19,625 Billiva Pty Ltd 2,500 Pioneer State Investment Ltd 7,500 Surich Investment Ltd 7,492 12 According to the register of unit holders, the remaining 8 units are held by Funwin No. 1 Pty Ltd to Funwin No. 8 Pty Ltd as a result of transfers effected on 27 May 2004 from Surich Investments Ltd. 13 On 4 May 2004 a meeting of unit holders of the Balgownie Coal Investment Trust was convened. The persons who attended were the fifth defendant and three persons as proxies for Surich Investments Ltd, (which was then the holder of 7,500 units), Pioneer State Investments Ltd, and Ms Ross. The persons attending in person or by proxy represented 75.875% of the issued units in the trust. The meeting purported to pass a number of resolutions. One of the resolutions was that Balgow Pty Ltd be appointed as trustee of the Balgownie Coal Investment Trust in place of the second defendant. 14 It seems that one of the unit holders, Billiva Pty Ltd, asserted that the resolutions passed at the meeting were void because there was not a quorum. On 31 May 2004 the second defendant advised the first plaintiff that after obtaining legal advice it agreed with that contention with the consequence that the resolutions passed on 4 May were accepted to be of no effect. 15 It may be that this explains the transfers apparently made on 27 May 2004 referred to in paragraph 12 above. Is There a Serious Question to be Tried that the First Defendant's Assets are held on Trust? 16 As I have noted, the second defendant is a wholly owned subsidiary of a listed company, Great Pacific Capital Ltd. In October 2002 and February 2003 the second plaintiff, Mr Werry, was a director of that company. 17 According to Mr Werry, in September 2002 the fourth defendant, Mr Au- Yeung said to him that "we" would use a trust to hold the Bellambi assets; that Mr Werry would get a quarter share; and that "we will hold our share in our BVI companies". Mr Werry took this to be a reference to British Virgin Islands companies. Mr Werry said that he wanted to hold his share through Mr Vincent Fayad. This conversation could not constitute a declaration by the first defendant that it would hold the assets which it proposed to acquire on trust. 18 The first defendant entered into the contract to purchase the Bellambi West Colliery on 18 October 2002. It was not suggested by the plaintiffs that at the time the contract of purchase was entered into the first defendant had declared itself to be a trustee of the assets which it agreed to acquire. The Balgownie Coal Investment Trust was established by a deed made on 16 October 2002 between the second defendant as trustee and the fifth defendant described as the initial unit holder. A meeting of the directors of the second defendant was held on 16 October 2002 attended by the fourth defendant, the second plaintiff, and Mr Edwin Yeung who signed the minutes as secretary. The minutes record a resolution that the second defendant accept appointment as trustee of the Balgownie Coal Investment Trust and that it hold all of the shares in GPC Bellambi Pty Ltd (the first defendant) on trust for the Balgownie Coal Investment Trust. 19 Mr Collins QC, who appeared with Mr Freeman for the plaintiffs, submitted that the directors of the second defendant breached their duties to the company, and that the second defendant breached its duties to the beneficiaries of the trust, by diverting the corporate opportunity to acquire the West Bellambi Colliery to the first defendant. He submitted that having regard to the conversation between Mr Wong and Mr Werry to which I have referred in paragraph 17, the directors of the second defendant should have ensured that the assets were acquired by the second defendant and held on the trusts of the Balgownie Coal Investment Trust, rather than by the first. 20 I do not think it lies in the mouth of the plaintiffs to make that submission. The second plaintiff was a director of the first and second defendants at the time the first defendant entered into the agreement to purchase the Bellambi West Colliery. He was also a director of Great Pacific Capital Ltd at that time. There is no evidence that at any time he complained of the fact that the purchaser under the asset sale agreement was the first defendant, not the second defendant. A minute of the board meeting of Great Pacific Capital Ltd of 4 February 2003 indicates the contrary. There was nothing to show that the opportunity to purchase the colliery rightly belonged to the second defendant rather than its subsidiary. 21 On 4 February 2003 a meeting was held of the directors of Great Pacific Capital Ltd. There were four directors of that company present, namely the third defendant, the fourth defendant, the second plaintiff and a Mr Ivan Wong. Mr Edwin Yeung, the secretary of Great Pacific Capital Ltd was also in attendance. All of the directors of Great Pacific Capital Ltd were in attendance. At that time the third and fourth defendants and the second plaintiff were also directors of the first defendant. Mr Ivan Wong was not a director of that company. According to the company searches which were in evidence there were no other directors of the first defendant at that time. 22 The minutes of meeting of the board of directors of Great Pacific Capital Ltd on 4 February 2003 record the following: "AW commented that the increase in expenses due to the Bellambi Project should be treated as loan rather than expenses as GPCL's role in this project is as the financier and therefore any expenses paid should be treated as loan to the Balgownie Coal Investment Trust which is the ultimate owner of the coal mine. ……… (c) Bellambi Project DAY reported that a valuation was done on the coal mine lease which would be used for arranging finance from LM Investment. The value reported is $28 million. DAY advised that the borrower will be GPC Bellambi Pty Ltd with GPCL as the guarantor."

After further discussion of the project the minute continued: "It was noted that the legal structure for this project is as follows: GPC No. 8 (Bulli) Pty Ltd is a wholly owned subsidiary of GPCL; GPC No. 8 (Bulli) Pty Ltd own all the shares in GPC Bellambi Pty Ltd ATF Balgownie Coal Investment Trust; GPC Bellambi Pty Ltd will be party to the contract to acquire the coal mine lease, the land all equipments; GPC Bellambi Pty Ltd will be the borrower for senior debt to acquire the above assets; GPC Bellambi Pty Ltd will also be the party to enter into mining contract with TSN/other miners and marketing contract with RAG/others." 23 The minute was signed by Mr Edwin Yeung as company secretary. 24 The plaintiffs contended that there was a serious question to be tried that by these minutes, the first defendant declared itself as a trustee of the Bellambi coalmine for the beneficiaries of the Balgownie Coal Investment Trust. Mr Collins QC seized on the description of the Balgownie Coal Investment Trust as being "the ultimate owner of the coalmine" as constituting such a declaration of trust. 25 Mr Werry did not give any evidence about the meeting of 4 February 2003 except to produce the minute of the meeting. There is no evidence that at the meeting on 4 February 2003 the three directors present who were also directors of the first defendant convened a meeting of that company. There is no evidence that at that meeting they were acting in their capacity as directors of the first defendant. For this reason alone I do not consider that the minute can be construed as a declaration of trust made by the first defendant of its assets. 26 Secondly, the statement that the "Balgownie Coal Investment Trust…. is the ultimate owner of the coalmine" was a description of an existing fact. Whether that description was accurate or inaccurate, the statement did not express an intention to create new interests in property. Although courts are now less reluctant than they once were to infer an intention to create a trust where that intention is not expressly stated, (see the cases collected by Campbell J in Commonwealth v Booker International Pty Ltd [2002] NSWSC 292 at [34]-[45]), I cannot infer from the document either an intention to create a trust nor an intention to create any new interest in property. 27 Thirdly, the minute describes the Balgownie Coal Investment Trust as the "ultimate" owner of the coalmine. That is not consistent with the Unit Holders being the immediate beneficial owners of the coalmine. When read with the description of the legal structure for the project which makes no reference to a trust of the coalmine, it is clear that the reference to the "ultimate owner" is to those persons who would ultimately enjoy the benefits of ownership of the mine. The beneficiaries of the Balgownie Coal Investment Trust should enjoy those benefits through their beneficial ownership of the shares in the first defendant. 28 The minute of the board meeting was not a document intended to create legal rights and obligations. It should not be construed as a declaration or agreement intended to have legal effect. Indeed the attendance is recorded as a comment by one of the directors, not even as a resolution of three or all of them. The minute does not give rise to a serious question to be tried that on 4 February 2003 the first defendant declared itself to be a trustee of the colliery on the terms of the Balgownie Coal Investment Trust. I have noted that the first defendant was not the trustee of that trust. That would not preclude it from declaring trusts on the same terms as the Balgownie Coal Investment Trust, or even declaring itself as a trustee for the second defendant. However that is not what the sentence in question describes. 29 An alternative basis upon which the plaintiffs put their case that the assets are held on trust was that the assets were held on three trusts described respectively as the Bellambi Land Trust, the Bellambi Coal Trust, and the Bellambi Equipment Trust. There was in evidence three Unit Trust Deeds all of which bore a date of 15 October 2002, although the evidence establishes that they were signed in June 1993 by the second plaintiff and the fourth defendant. 30 Mr Werry gave evidence of a meeting in late May 2003 or early June 2003 with the fourth defendant, Mr Au-Yeung, and a financial adviser to Great Pacific Capital Ltd, Mr McMillan. Mr Werry deposed to telling Mr Au-Yeung that the Bellambi assets were supposed to be owned by the trust and that it would be preferable if the Bellambi assets were held in three separate trusts: one for the land; one for the coal leases; and one for the equipment. Mr Au-Yeung said that this was a good idea and that Mr Werry should go ahead and prepare the documents. As a result the three trust deeds were prepared. Mr Werry asked a solicitor employed by Great Pacific Capital Ltd to prepare the deeds and arrange for them to be executed by Mr Au-Yeung and himself on behalf of the first defendant. The Bellambi Land Trust deed which is in evidence does not include an execution page. However in proceedings between another Unit Holder and the defendants in the Commercial List, No 1363 of 2004, the defendants, as I read their defence, have admitted that all three deeds were executed by Mr Werry and Mr Au-Yeung. The Bellambi Coal Trust deed and the Bellambi Equipment Trust deed have been stamped with duty of $200 only. The Bellambi Land Trust deed has been stamped as a duplicate with a duty of $2. Although I have not made a comparison line by line between these deeds and the Balgownie Coal Investment Trust deed, the deeds appear to be in substantially identical terms except that the trustee is the first defendant instead of the second defendant, and the names of the trusts are the Bellambi Land Trust, the Bellambi Coal Trust and the Bellambi Equipment Trust respectively, rather than the Balgownie Coal Investment Trust. Relevantly the trusts which are declared are declared in respect of the "Trust Fund". In the Bellambi Land Trust deed that is defined as "the said Sum, all moneys paid to and accepted by the Trustee upon the issue of Units pursuant to clause 8, the accumulations of income directed or empowered to be made below, all accretions to the Trust Fund and the investments and property from time to time representing the whole or any part of such money and accumulations." 31 "Sum" is not a defined term. In the other two Bellambi deeds the word "sum" has a small 's'. 32 These deeds are consistent with it being the then intention of Mr Werry and Mr Au-Yeung to declare a trust of the land, the coal leases, and the equipment in accordance with the terms of the deeds. However they are not declarations of trusts of those assets. Ad Valorem duty was not paid on the documents. 33 Mr Werry gave evidence that he instructed an employed lawyer for Great Pacific Capital Ltd, Ms Catherine Le, to prepare directors' minutes dated 17 October 2002 for the first defendant resolving that in its own capacity and as trustee for the Bellambi Coal Trust, the Bellambi Equipment Trust, and the Bellambi Land Trust, to purchase the relevant mining leases, equipment and land. He said that he did not know what action if any she took following receipt of those instructions. 34 The minutes, if prepared in those terms, would have stated a false position. However there is no evidence that they were prepared. Mr Zucker, a solicitor for Great Pacific Capital Ltd who provides his services as a consultant on retainer, has given evidence that the minute books of Great Pacific Capital Ltd, the first defendant and the second defendant do not contain any minute that records any resolution to alter the legal structure for the Bellambi West Colliery from that described in the minute of 4 February 2003 as set out in paragraph 24 above. He says that he has been unable to locate any draft or signed minute for the first defendant dated 17 October 2002. I take it from his evidence that his search does not disclose any minute of the kind which Mr Werry said he instructed Ms Le to prepare, whether with a date of 17 October 2002 or otherwise. 35 In June 2003 Mr Werry instructed Mr Zucker to prepare security documentation for a loan from a Hong Kong based company, Mastermax Far East Ltd or Ace Bond Limited. The company was to act as trustee for three of the subsidiaries of Great Pacific Capital Ltd. The proposal was to document advances which had already been made to the first defendant to permit it to complete the acquisition of the colliery. Mr Zucker's instructions were that the first defendant would be borrowing "in its own capacity and in its capacity as trustee for:

(a) The Bellambi Coal Trust; (b) The Bellambi Equipment Trust; and (c) The Bellambi Land Trust "

In the result the loan documentation was entered into between the first defendant as a borrower and Ace Bond Capital Ltd as lender. There was no mention of the trust. This may have been because of a desire to keep the existence of the trusts on which the borrower was acting and the trusts on which the lender was acting secret. On the other hand, at least so far as the borrower was concerned, the reason why no trusts were referred to in the agreement may have been because nothing had been done to declare a trust by the first defendant of its assets on the terms of the Bellambi Land Trust, the Bellambi Coal Trust and the Bellambi Equipment Trust. 36 The deed of loan is wrongly dated 21 March 2003. It could not have been signed before 18 June 2003. In the circumstances of the urgent hearing, no explanation was provided for its backdating. 37 Mr Werry ceased to be a director of the first defendant on 26 June 2003. He did not sign the deed of loan. It is not clear to me exactly when it was signed. I do not conclude from the terms of the deed of loan that no trusts had come into existence. On the other hand it does not support the plaintiffs' contention that they had.

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).

76 For the reasons I have given I do not think that the apprehended injury can properly be compensated for in damages or by an account of profits. No other potential remedy other than an injunction was advanced. 77 It is clear that an interlocutory injunction must be granted in aid of final relief. (Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at 218.) However the jurisdiction to grant interlocutory relief is not limited to the granting of relief in aid of the final relief sought in the same proceeding. 78 The question then is whether the interlocutory injunction should be continued before the plaintiff has sought and obtained leave under s 237. I can act on the plaintiff's undertaking to seek leave. There is clearly at least a serious question to be tried as to whether the second plaintiff should be granted that leave. There may however be additional considerations on the question of leave than those which I have hitherto considered. This was not a question which was explored in any depth before me. Nonetheless, in my view the status quo should be preserved to enable the second plaintiff's claim to be determined. 79 The first plaintiff cannot seek leave under s 237. He does not seek to do so. I have indicated that were the claim for an interlocutory injunction based solely upon the claim for relief in the Summons I would have declined to extend the existing injunction. The basis on which I am prepared to continued the existing injunction is the second plaintiff's claim for leave to bring proceedings on behalf of the first defendant to restrain the alleged breach of directors' duties owed by the third and fourth defendants to it. The second plaintiff and Edessa Holdings offer undertakings as to damages. In those circumstances I do not think the interlocutory injunction should be refused because the first plaintiff does not continue his undertaking. 80 On 11 August 2004 I continued the existing injunction until further order as I was uncertain as to the date on which I would be able to deliver judgment. Nonetheless the onus to continue the interlocutory relief has remained always upon the plaintiffs. 81 The argument at the hearing on 11 August was not confined to claims for relief for breach of trust. Although the defendants submitted that I should decide the claim for interlocutory relief only on the basis of the claims for breach of trust, in my view the application should be decided on the grounds which were fought, rather than on the grounds which were foreshadowed by the Summons only. There was no pleading. The defendants did not seek an adjournment to deal with the claims which were put on a wider basis. They did not suggest that additional evidence would have been adduced had the claims for the alleged breach of directors' duties been foreshadowed in the Summons. I do not know for how long the current proposal involving Resource Pacific Ltd has been under consideration. However the plaintiffs have had notice only since about 29 July, 2004. They filed their summons on 4 August, 2004. Their case must have been prepared under pressure of time. I do not think they should be precluded from advancing additional grounds for attacking the transaction, unless the defendants can point to actual prejudice. The defendants have not demonstrated a relevant prejudice which should preclude my considering the claim for interlocutory relief on the alternative basis outlined during the hearing on 11 August.

82 Upon the second plaintiff and Edessa Holdings Pty Ltd giving the usual undertaking as to damages, and also undertaking to the Court that they will not dispose of, encumber or otherwise deal with their shares in Great Pacific Capital Ltd until further order of the Court, and upon the second plaintiff undertaking to the Court to commence and prosecute expeditiously proceedings pursuant to s 237 of the Corporations Act for leave to bring proceedings on behalf of the first defendant against the third and fourth defendants in respect of alleged breaches of s 180 to 183 of the Corporations Act and of duties owed to the first defendant at general law, I decline to dissolve the existing orders made on 4 August 2004 and further extended on 11 August, 2004 until further order. I modify the order made on 11 August, 2004 to provide that the existing injunction continue until further order in these proceedings or in proceedings to be commenced by the second plaintiff pursuant to s 237 of the Corporations Act. 83 I will reserve the costs of the application.

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