BETWEEN : IRON ORE RESOURCES PTY LTD (ACN 121 046 197)

ROYALTY ADMINISTRATION COMPANY PTY LTD (ACN 108 786 778)

Practice and procedure - Injunction - Undertaking as to damages - Plaintiff a trustee - Plaintiff has no assets in its own right - Whether injunction should be conditional upon beneficiary giving undertaking as to damages - Turns on own facts

Continuation of injunction conditional upon beneficiary giving undertaking as to damages

1 NEWNES J: On 9 January 2009, an urgent interim injunction was granted on the application of the plaintiffs restraining the defendant from transferring certain tenements to Kimberley Metals Group Pty Ltd (Kimberley Metals) pursuant to an agreement dated 19 December 2008 made between the defendant and Kimberley Metals. The injunction was expressed to operate until 4.00 pm on 14 January 2009.

2 On 14 January 2009, the injunction was extended until further order. The trial of the action has since been set down for three days commencing on 3 March 2009.

3 When the injunction was first granted, the first plaintiff gave an undertaking as to damages in the usual form. On 14 January 2009, counsel for the defendant raised the adequacy of the value of the first plaintiff's undertaking but the matter was not pursued at that time on the basis that the parties would confer to see if it could be resolved between them. It has turned out that the parties have been unable to reach agreement and the defendant now seeks an order that the injunction be discharged unless such an undertaking is also given by Battle Mountain Pty Ltd (Battle Mountain), for whom the first plaintiff holds its shares in the defendant in trust.

4 It is necessary in order to explain the basis of the application to describe briefly the issues in the action. In that connection, I should say that I did not understand the second plaintiff to be playing an active part in the matter at this stage.

5 The first plaintiff holds 25% of the issued shares in the defendant. It holds those shares as trustee for Battle Mountain. The remaining 75% of the shares in the defendant are held by Resource Mining Corporation Ltd (Resource Mining), a company whose shares are listed on the Australian Stock Exchange. Under the defendant's constitution, any shareholder wishing to sell its shares in the defendant must first offer them to the other shareholders (right of pre-emption).

6 The defendant is currently the owner of what is described as the 'Argyle Iron Ore Project' (Argyle Project), which consists of an exploration licence, a miscellaneous licence, two mining lease applications and certain mining information and exploration data. The first plaintiff says that the defendant was formed for the sole purpose of developing the Argyle Project to commercial production of iron ore.

7 The first plaintiff says that by virtue of certain agreements (which it is unnecessary to canvass for present purposes) Resource Mining agreed that it would be solely liable for all costs associated with the development of the Argyle Project until commercial production is achieved. The plaintiffs say that the cost of developing the Argyle Project to commercial production is in the order of $70 million to $100 million.

8 In late 2007 or early 2008, Resource Mining decided to sell its shares in the defendant. There were then prolonged discussions between Resource Mining and the first plaintiff regarding the proposed sale, including as to whether the first plaintiff would waive its right of pre-emption. In August 2008, the first plaintiff said that it would not waive its right of pre-emption.

9 Subsequently, Resource Mining initiated a process for the sale of the Argyle Project by the defendant. It did not inform the first plaintiff that it was doing so.

10 On or about 19 December 2008, the board of the defendant, consisting of Messrs Warwick Davies and Alan Rule, both of whom were nominees of Resource Mining, resolved to enter into an agreement to sell the Argyle Project to Kimberley Metals and, on the same day, the defendant entered into such an agreement (the sale agreement). Under the sale agreement, Kimberley Metals agreed to pay to the defendant the sum of $2.4 million as the purchase price of the Argyle Project and (subject to certain conditions) a further $1.5 million after shipment of the first 2 million tonnes of hematite iron ore. In the sale agreement, Kimberley Metals acknowledged that it was aware of the possibility that the first plaintiff would dispute matters in connection with the sale agreement.

11 On 23 December 2008, Resource Mining informed the Australian Stock Exchange that the defendant had entered into the sale agreement. It appears that it was then the plaintiffs first learned of the sale.

12 In the action, the first plaintiff alleges (among other things) that the defendant entered into the sale agreement for the benefit of Resource Mining rather than the defendant, and without regard to the interests of the first plaintiff and the defendant in the continuation of the development of the Argyle Project to commercial production. The first plaintiff says that the proposed sale is oppressive or unfairly prejudicial to the first plaintiff and the defendant. The first plaintiff also alleges that Kimberley Metals was aware of the relevant circumstances in which the defendant came to enter into the sale agreement.

13 The first plaintiff seeks, among other things, to restrain the defendant from completing the sale.

14 The defendant (relevantly) denies that the sale constitutes oppression or that it is unfairly prejudicial. It says the board of the defendant passed the resolution to enter into the sale agreement, and entered into the sale agreement, because it considered that it was unlikely the defendant would be able to develop the tenements economically and, moreover, that even if the tenements could be developed by the defendant, the return to the defendant would be likely to be less than the consideration received under the sale agreement.

15 The sale agreement contains a force majeure clause, the effect of which is that each of the parties to it is excused from its obligations under the sale agreement if, without default on their part, it cannot be completed by 31 May 2009. It is in light of that that the action has been set down for trial in March.

16 The defendant says that the undertaking as to damages provided by the first plaintiff has no or no real value and that an undertaking should be given by Battle Mountain, whose alter ego the first plaintiff is.

17 The first plaintiff, which was incorporated on 2 August 2006, has a paid-up capital of $1 and has no assets in its own right. As I have mentioned, the first plaintiff's shares in the defendant are held on trust for Battle Mountain. The trust is recorded in a declaration of trust contained in a letter written by Mr Dorsey, the sole director of the first plaintiff, to Battle Mountain on 30 August 2006.

18 In that letter, the first plaintiff declared (relevantly) that it 'has acquired and will hold [the shares in the defendant] and all rights pertaining to the [shares] and all income and proceeds of the [shares] upon trust for [Battle Mountain] absolutely'. The letter goes on to provide that the first plaintiff shall:

1. '... deal with the [shares] and all such rights, privileges, benefits, income and proceeds in such manner as [Battle Mountain] may from time to time direct and not otherwise';
2. '... furnish to [Battle Mountain] every notice or other written communication received by [the first plaintiff] in respect of the [shares] immediately it is received by [the first plaintiff]';
3. '... exercise all rights attaching to the [shares] in such manner as [Battle Mountain] may from time to time exist and not otherwise'; and
4. '... on request by [Battle Mountain] execute and deliver any transfer, proxy, direction or other instrument relating to the [shares] as [Battle Mountain] shall require.'

19 The only activity carried on by the first plaintiff is as trustee of the shares. And as counsel for the first plaintiff conceded, the directors of the first plaintiff and Battle Mountain are plainly not at arms length.

20 Since the question of the value of the first plaintiff's undertaking was raised, Battle Mountain has taken two steps to overcome the defendant's complaint. In the first place, Battle Mountain has agreed to lend the sum of $500,000 to the first plaintiff to provide security for, and (if required) to make payment pursuant to, the first plaintiff's undertaking as to damages.

21 In addition, on 28 January 2009, Battle Mountain gave a written direction to the first plaintiff, in its capacity as trustee, (relevantly) to use any funds paid to it as a distribution of profits (in the form of a dividend) or a return of capital as a consequence of the sale by the defendant of the Argyle Project, to make any payment under the undertaking as to damages as may be directed by this court.

22 The loan agreement is in evidence. It is a relatively lengthy document, running to some 26 pages, but the salient features of it for present purposes can be described quite shortly. The maximum amount of the loan is $500,000. It is interest free. Unless Battle Mountain otherwise agrees, any money advanced under the loan agreement may only be used by the first plaintiff to provide security for, and (if required) to make payment pursuant to, the first plaintiff's undertaking as to damages.

23 The loan agreement provides (relevantly) that on the expiry date (as defined) the first plaintiff must pay to Battle Mountain the whole of the principal sum and any other money outstanding, save for any sum already paid by the first plaintiff pursuant to the undertaking as to damages. The expiry date is defined to mean the earlier of 36 months from the date of entering into the loan agreement, the date upon which the court makes a determination in the proceedings under which the first plaintiff is not liable under the undertaking as to costs, and the date on which the first plaintiff's appointment as trustee is terminated.

24 The defendant put into evidence financial statements for the first plaintiff for the six months ended 31 December 2008, which had been provided to it by the solicitors for the first plaintiff. The financial statements had been prepared for the purposes of these proceedings. They show that the first plaintiff had no income or expenditure in that period and that it had cash assets of $1, representing its issued capital. According to the notes to the financial statements, the first plaintiff 'does not record on its balance sheet the liabilities of the trust that it is trustee for and/or a receivable for the right of indemnity as a result of acting as trustee'. The notes also record that the first plaintiff has entered into a loan agreement with Battle Mountain in the sum of $500,000 to enable the first plaintiff to meet any claim for damages and/or costs awarded against in this action.

25 In a note of events subsequent to balance date, it is recorded that, since 31 December 2008, the first plaintiff had drawn down an amount of $100,000 under the loan agreement.

26 The accounts were signed by Mr Holbrook, a director of the first plaintiff, in his capacity as a partner of the chartered accountancy firm PKF.

27 By an affidavit sworn on 29 January 2009, the plaintiffs' solicitor adduced further financial statements for the six month period ended 29 January 2009. Once again the accounts are signed by Mr Holbrook. The accounts are said to have been produced for the purposes of the proceedings. I think it is apparent that they were prepared specifically for the purposes of this application.

28 The profit and loss statement contained in these financial statements again shows no income or expenditure. The balance sheet, however, differs very markedly from the earlier balance sheet. It shows total current assets of $15,100,001. They are made up of cash assets of $100,001 and 'proceeds received from [Battle Mountain]' of $15 million. Total current liabilities are shown as $100,000, constituted by a loan from Battle Mountain of that amount.

29 In the notes to the financial statements, it is stated that the first plaintiff 'records the amount receivable for another company known as Battle Mountain Pty Limited ... as an asset on the basis that [Battle Mountain] has given the [first plaintiff] directions to use the asset that it holds as a trustee to meet any costs or claim in the proceedings.' The notes go on to explain that the benefits arising from the letter of direction dated 29 January 2009 are considered to be proceeds receivable from Battle Mountain. The sum of $15 million is based on the first plaintiff's right of a 'free carry' interest in the Argyle Project, with the capital expenditure required for the project being approximately $60 million, and the first plaintiff having a 25% interest in it.

30 It is unnecessary to comment on this set of accounts. Counsel for the first plaintiff did not seek to place any reliance on the asset figure of $15 million for the purposes of this application.

31 The first plaintiff contended that no basis had been shown for requiring Battle Mountain to provide an undertaking as to damages. The first plaintiff has an amount of up to $500,000 available to it under the loan agreement and immediately available funds of $100,000, being the amount it has already drawn down.

32 In addition, under the direction of 28 January 2009, Battle Mountain has directed the first plaintiff to use any funds it receives from the defendant as a consequence of the sale of the Argyle Project to pay, among other things, any amount which it may be ordered by this court to pay under the undertaking as to damages.

33 The first plaintiff says that, if the sale of the Argyle Project is completed, under the sale agreement it will become entitled to the sum of $575,000 as its share of the sale of proceeds. That is based upon a facsimile, dated 30 December 2008, it received from the defendant in which the defendant says that it intends to distribute the sale proceeds, after deduction of tax and expenses, to the shareholders in proportion to their shareholding. Based on assumptions as to the amount of the expenses and a 'minimal tax liability', the defendant says that the first plaintiff's share would be $575,000.

34 The first plaintiff contends that the defendant will therefore readily be able to recover any amount payable by the first plaintiff under the undertaking as to damages.

35 The defendant submits that neither the loan agreement nor the direction provides adequate security for the first plaintiff's undertaking as to damages.

36 In respect of the loan agreement, it was submitted that Battle Mountain could at any time simply terminate the appointment of the first plaintiff as trustee and the loan would become immediately repayable. In any event, the loan agreement itself could be terminated or renegotiated between the first plaintiff and Battle Mountain, and that could occur at any stage. In addition, the loan period terminates as at 30 June 2009 so that if the proceedings were decided in favour of the first plaintiff at trial but that decision was overturned on appeal, the benefit of the loan would have been lost before the defendant was in a position to exercise its rights under the undertaking. A similar result would follow from the provision in the loan agreement that the loan agreement terminates upon a decision in favour of the first plaintiff at trial.

37 In respect of the direction of 28 January 2009, it was submitted that the direction could be revoked by Battle Mountain at any time and, in any event, it did no more than reiterate the first plaintiff's right of indemnity as trustee. It was further submitted that no real security would be provided by the receipt by the defendant of the proceeds of sale. The defendant would have no immediate entitlement to resort to those funds and may be unable to do so. The difficulties for the defendant in seeking to recover against trust assets had not been overcome.

38 The defendant submitted that there was no evidence Battle Mountain could not provide an undertaking as to damages nor had any reason been advanced as to why it should not do so.

39 Before turning to consider the specific issues which arise on this application, I should note that there was no evidence as to the amount of any loss that would be suffered by the defendant by reason of the injunction if the first plaintiff was unsuccessful at trial. Nor is the likely magnitude of any such loss apparent on the material before me. The effective period of the restraint is relatively short. As matters stand, the action is likely to be heard and determined before 31 May 2009, so it appears unlikely that the sale would be lost by reason of the injunction. However, if the first plaintiff is unsuccessful in the action, the defendant is likely to incur at least some loss in the nature of interest and holding costs by reason of the delay in the completion of the sale.

40 An undertaking as to damages is often described as the price a plaintiff must pay for an interlocutory injunction. Such an undertaking is a very important, if not essential, means of preventing injustice before the rights of the parties have been finally determined: Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd [1981] HCA 75; (1981) 146 CLR 249.

41 Where the financial position of a plaintiff is such that it is unable to give an undertaking as to damages which has real value, the fact that the undertaking as to damages has little or no value is not conclusive as to the result of an application for an interlocutory injunction: see Allen v Jambo Holdings Ltd [1980] 2 All ER 502, 506; Custom Credit Corporation Ltd v Whitehall Holdings Pty Ltd (Unreported, WASC, Library No 920231, 7 April 1992) [23]. Equally, nor can it be conclusive as to the continuation of an injunction. But it was not suggested that that was a relevant issue here. While the first plaintiff has no assets of any value in its own right, the party behind it and who stands to benefit from the litigation, Battle Mountain, is certainly in a financial position to provide security for the undertaking or (as the defendant seeks) to provide an undertaking of its own.

42 In Custom Credit, the plaintiff companies had not provided an undertaking as to damages as their financial position was such that their undertakings would be of no value. The persons standing behind them had, however, provided such undertakings. In that case, Ipp J observed that in such circumstances undertakings as to damages from those who stand behind the plaintiff are necessary before an injunction could be granted.

43 It seems to me that some guidance can also be gained from the position in relation to security for costs. It is well established in relation to security for costs that where a corporate plaintiff does not have adequate assets to meet an order for costs if such an order is made against it at trial, those who stand behind the company and who stand to benefit from the litigation may be required to come out from behind the corporate shield and make funds of their own available to provide security for costs if the action is not to be stayed: Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) [1984] FCA 34; (1984) 2 FCR 1; BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339.

44 Similarly, where the only tangible assets of a plaintiff are held in trust, so that its only asset is its right of indemnity against the trust property, it may be required to establish that recourse to that property will be available to meet an order for costs. In that connection, the court must bear in mind the difficulties which a successful defendant would face in attempting to execute in respect of an order for costs. Where the court is not satisfied that such recourse is available, the trustee will be treated as having no available assets and the beneficiaries may be required to make funds of their own available to provide security for costs if the action is not to be stayed: Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40-584; Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] VicRp 9; [1995] 1 VR 150.

45 The first plaintiff has declined to procure an undertaking as to damages by Battle Mountain and, as appears from a letter from the first plaintiff's solicitors to the defendant's solicitors of 28 January 2009, Battle Mountain itself resists giving such an undertaking. Indeed, the latter is evident from the measures which Battle Mountain has put in place in an endeavour to placate the defendant. (I would observe in passing that in the course of argument counsel for the first plaintiff was unable to explain why Battle Mountain had gone to those lengths when it would appear that much the simpler course would have been to provide an undertaking as to damages.)

46 It is contended that those measures (by way of the loan agreement and the direction of 28 January 2009) are sufficient to overcome any reasonable complaint by the defendant as to the value of the first plaintiff's undertaking and that no basis has been made out to require an undertaking from Battle Mountain.

47 I do not accept that contention. In my view, the loan agreement does not provide any real assurance that, if it is called upon by the defendant after trial, the current undertaking as to damages will have any greater value then than it has now. The loan agreement effectively exists at the will of Battle Mountain. Under the terms of the loan agreement, it expires if the first plaintiff's appointment as trustee is terminated. Upon the termination of the loan agreement, the first plaintiff must repay the balance of the loan funds outstanding (save any funds which have already been paid to the defendant under the undertaking as to damages). Battle Mountain has the power to terminate the first plaintiff's appointment as trustee at any time and the nature of the trust is such that there would appear to be no practical impediment to it doing so. In addition, the loan terminates on 30 June 2009, regardless of whether the defendant then has an unquantified entitlement to damages under the undertaking as to damages. It is also the case, as the defendant submitted, that the first plaintiff and Battle Mountain could by agreement terminate or amend the loan agreement at any time.

48 It is the case, too, as submitted by the defendant, that the direction of 28 January 2009 exists at the will of Battle Mountain. The direction could be revoked at any stage. Its practical effect is also dependant upon a dividend or return of capital being made to the first plaintiff. In practical terms, the direction appears to add nothing to the first plaintiff's equitable right to indemnity from the trust assets and the defendant's remedy by that means.

49 In the circumstances of this case, the position of the first plaintiff is also a relevant consideration in determining whether the continuation of the injunction should be conditional upon an undertaking as to damages being given by Battle Mountain. As I have said, the first plaintiff is a bare trustee for Battle Mountain. Its only activity is as that trustee and it apparently exists for no other purpose. The first plaintiff is utterly the creature of Battle Mountain, to whose direct, immediate and total control, as trustee, it is subject. As trustee, the first plaintiff has no power, authority or discretion of its own. It can and must act solely at the direction of Battle Mountain. The person which in truth benefits from the injunction and which is (legal form apart) for all intents and purposes the real litigant, is Battle Mountain. The first plaintiff acts merely as a garment.

50 And while Battle Mountain has declined to provide an undertaking as to damages, it has not been suggested that it would be unable to provide one if required to do so. Nor was it suggested that this court could not require it to do so as a condition of the continuation of the interlocutory injunction. Having regard to the relationship between the first plaintiff and Battle Mountain, I am satisfied the court has that power.

51 In the circumstances, I consider it is appropriate to require as a condition of the continuation of the interlocutory injunction that Battle Mountain provide an undertaking as to damages.

52 I would order that unless, within a time to be specified, Battle Mountain provides an undertaking as to damages in the usual form, the interlocutory injunction be discharged. I would hear the parties on the time within which the undertaking is to be provided.