Noble Investments Pty Ltd v Southern Cross Exploration NL; In the matter of Southern Cross Exploration NL ACN 000 716 012

32 The defendant argued that none of the relief which is sought, except the declarations sought in paragraphs 1 and 2, would be granted. In particular, it contends that there is no possibility of the plaintiffs obtaining an order for the winding up of a publicly listed solvent company. The defendant's contention is, with respect, somewhat surprising. When analysed, it means that even if the plaintiffs prove that the defendant has by reason of its directors' conduct conducted its affairs unfairly to the interests of the members as a whole or in a way oppressive to or unfairly prejudicial to its members or some of its members, no relief could be given except by way of a declaration (paras 1 and 2) and the appointment of a receiver (para 5). In other words, even if the plaintiffs make out a case there is no reasonable prospect that under s 232 the Court could make an order which sought to stop or rectify the contravening conduct.

33 If the defendant is to succeed on this application the defendant must establish that there is no reasonable prospect of the plaintiffs successfully prosecuting those parts of the proceeding contained in the relief. In these reasons I need only deal with a defendant's or respondent's application for summary judgment under s 31A. 34 Section 31A is not an appropriate procedure for a defendant seeking to strike out the relief sought in an application or statement of claim. Section 31A is concerned with the substance of a proceeding and enables, relevantly, a defendant to apply for summary judgment in respect of the proceeding or part of the proceeding. The Court on such an application has to address the issue as to whether it is satisfied that the plaintiff has no reasonable prospect of successfully prosecuting the proceeding or part of the proceeding. An application under s 31A is not an appropriate procedure where a party is seeking to have part of an application or part of a pleading struck out. If the defendant's application were the appropriate procedure the Court would be called upon to give judgment in respect of the relief sought by the plaintiff. A court does not rule upon the relief sought and give judgment upon it. A court gives judgment in respect of the issues insofar as they amount to causes of action within the proceeding. The judgment that will be given in this proceeding in due course is upon the plaintiffs' claim of oppression under s 232. If the plaintiffs succeed the plaintiffs' judgment will be reflected in the relief which the Court fashions. If, on the other hand, the plaintiffs fail, the Court will not give judgment by dismissing the relief but will give judgment by dismissing the proceeding. 35 In Fortron Automotive Treatments Pty Ltd v Jones (No 2) [2006] FCA 1401, French J said (at [19], [20] and [21]): The question which has to be answered in an application for judgment under s 31A is whether the party against whom the application is made has any "reasonable prospect" of successfully prosecuting or defending "the proceeding" or the "part of the proceeding" in issue. That question is not to be answered by a finding that a party's statement of claim or defence fails to disclose a reasonable cause of action or defence. A pleading may be rectified by amendment so as to raise a reasonable cause of action or defence. It follows that a finding that a pleading should be struck out under O 20 does not mean there must be judgment against the party whose pleading it is. There may yet, by amendment, be a reasonable prospect of successfully prosecuting or defending that proceeding. In order to secure judgment under s 31A it must be shown that the party prosecuting or defending the proceeding has no reasonable prospect of success. This judgment can be made, by reference to pleadings, where there is a defect in the pleadings which cannot be cured. Alternatively, it may be a judgment made by reference to evidence put on in support of an application under s 31A which reasonably excludes the possibility that facts essential to the success of the claim or defence will be able to be established. ... Section 31A is not a vehicle for simply striking out parts of pleadings that are deficient. Section 31A allows for "judgment" or nothing. Alternative remedies with respect to deficient pleadings must be found in the rules of Court. ... 36 In my opinion, what the defendant here seeks to do is to strike out part of the pleading because as it is contended no court could give the relief which is sought, notwithstanding that s 233 of the Corporations Act allows for such relief. That is not an application under s 31A because it would not give rise to a judgment for the whole or part of the proceeding. 37 In White Industries Aust Ltd v Federal Commissioner of Taxation (2007) 160 FCR 298, Lindgren J said (at [50]): Section 31A of the FCA Act, like O 20 of the Rules, is concerned with the bringing and defending of proceedings, not just with pleadings; with substance, not just with form. Section 31A(1) is comparable to O 20, r 1 in that they are both concerned with summary judgment for the party who is prosecuting the proceeding. Section 31A(2) is comparable to O 20, r 2 in that they are both concerned with dismissals of proceedings. The word "judgment" in s 31A(2) is defined in s 4 of the FCA Act to mean "a judgment, decree or order, whether final or interlocutory, or a sentence". It is convenient in the context of the present case to think of the judgment to which s 31A(2) refers as an order of dismissal of a proceeding. 38 It is wrong to attempt to use s 31A for something for which it was not designed. It was not designed for the purpose of striking out an application or pleading or any part of a pleading for some defect in the application or pleading. It was designed to enable the Court to give judgment in respect of a proceeding or part of a proceeding when that proceeding or that part of the proceeding has no reasonable prospect of success. It is designed to deal with issues whether it be by way of a cause of action or an issue within a cause of action. It is not designed to attack the adequacy or the sufficiency of a pleading. 39 If any of the prayers for relief were struck out as sought, the Court would not thereby be giving judgment in favour of the defendant for the proceeding or part of the proceeding. The Court could not on the defendant's application give judgment on any part of the proceeding. 40 If the defendant were able to show that the plaintiffs could not hope to obtain any part of the relief sought, that part may be struck out but that is not to give judgment for the defendant on that part of the relief. Indeed, if at trial the plaintiffs showed that they were in fact entitled to the relief which had been struck out, relief could still be ordered. Of course, that is another reason why this application is, with the greatest respect, misconceived. 41 For those reasons, I would dismiss the application insofar as it is brought pursuant to s 31A of the Federal Court Act. 42 However, the defendant could have applied under O 11 r 16 to have part of the application struck out on the ground that the prayers for relief have a tendency to cause prejudice, embarrassment or delay in the proceeding or are otherwise an abuse of process. 43 It would be difficult to sustain an argument that where a pleading raises an arguable statutory cause of action and seeks the relief given by the statute that it offends O 11 r 16. I think, however, that is how the defendant put its case, albeit under the guise of a s 31A summary judgment application. 44 If a party seeks relief which on any understanding must be plainly and obviously not available to that party, the Court would strike out the relief. The Court would need to be satisfied, however, that it was unarguable that the relief sought would not be granted. 45 If, on the other hand, the defendant was relying upon an abuse of process, the defendant would have the onus of showing that the proceeding was an abuse and was brought or maintained for a collateral or ulterior motive. The defendant did not assert an abuse of that kind. 46 Therefore, it seems to me, the statutory relief sought would only be struck out if the Court was convinced that the relief, even assuming the plaintiffs succeeded on their case of oppression, would never be granted. It would be a rare circumstance where a court would say, not having heard a word of evidence, that an arguable case of oppression could not entitle the plaintiffs to any part of the relief given by the statute except a declaration and the appointment of a receiver. 47 However, I shall address the relief sought. 48 The first four paragraphs of the originating application are for declarations. The defendant does not challenge paragraphs 1 and 2 but claims that it is unarguable that the Court would not make the declarations sought in paragraphs 3 and 4. 49 It simply cannot be said that the plaintiffs could never be entitled to the relief sought in paragraphs 3 and 4. The relief sought in paragraphs 3 and 4 are a more precise statement of the declarations sought in paragraphs 1 and 2. The declarations sought reflect the plaintiffs' pleaded case, which the defendant accepts for the argument is arguable. If the plaintiffs made out their claims I think there is a real chance that the declarations which are sought in paragraphs 3 and 4 would be made. 50 No quarrel is taken with paragraph 5. 51 The relief sought in paragraph 6 may be ordered by the Court if the Court is of the opinion, as the plaintiffs claim, that the defendant ought to have required repayment of the mortgage prior to the institution of this proceeding. It cannot be said there is no prospect of an order of that kind. The order reflects the plaintiffs' pleaded case. 52 The plaintiffs have abandoned the relief sought in paragraph 7. 53 The relief sought in paragraph 8 is a precursor to the relief which is sought in paragraphs 9 and 10. Ordinarily, one would have thought the value of the plaintiffs' interest in the defendant would be assessed by reference to the number of shares held by the plaintiffs and the market value of those shares at any particular time, especially when the defendant is a publicly listed company. The plaintiffs' holdings and the market value of their holding is, whilst the defendant remains listed, easily identified and calculated. One would have thought that this kind of order is more appropriate to a company with few shareholders and with shares of unknown value. However, it would not be appropriate to strike out paragraph 8 because it may be that the plaintiffs can successfully contend that the plaintiffs' interest in the defendant is to be valued by some other assessment other than the market value on the ASX. In any event, it could not be said that this prayer for relief had a tendency to cause prejudice, embarrassment or delay. 54 The relief sought in paragraph 10 is, as I say, consequential apparently upon an order made in paragraph 8. Paragraph 10 is an order that could be made. It may be the Court would decide that it is in the plaintiffs', the defendant's and the other members' of the defendant's interests that the plaintiffs' shareholding should be acquired by the defendant so that the plaintiffs could exit the defendant. Such an order would amount to a reduction in the defendant's capital. 55 In paragraph 9 the plaintiffs claim an order that Mr Ganke or his nominee purchased the plaintiffs' shares in capital of the defendant at the valuation determined pursuant to order 8. Mr Ganke is not a party to the proceeding. I raised with counsel for the plaintiffs, Mr S J Doyle, how the Court would order a non-party to purchase the plaintiffs' shares when the non-party had not been heard in relation to the claim of oppression by the defendant. He accepted that such an order would be unlikely unless Mr Ganke were joined as a party to the proceeding. Subsequent to the hearing of this matter, the plaintiffs' solicitors have advised that they do not intend to join Mr Ganke. 56 In those circumstances, I think the order sought in paragraph 9 ought to be dismissed because there is no prospect, in the absence of Mr Ganke being joined as a party, that he would be ordered to purchase the plaintiffs' shares. I would strike out paragraph 9, not pursuant to s 31A but pursuant to O 11 r 16, on the basis that the pleading has a tendency to embarrass or delay the proceeding. 57 That leaves for consideration the order sought in paragraph 11 which I think troubles the defendant most. The defendant claims that there is no prospect that a court could make an order for the winding up of the defendant in circumstances where the defendant is solvent and a publicly listed company. 58 The defendant submitted that the winding up of a publicly listed company in the absence of insolvency even for oppression is virtually unheard of, citing, so it was contended, the last reported case Re William Brooks & Co Ltd [1962] NSWLR 142 where a winding up order was set aside by consent in the High Court. 59 I think that contention is incorrect. In Re Weedmans Ltd (1974) Qd R 377 the company was listed on the Brisbane Stock Exchange: p 382. The trial judge (Lucas J) found that the directors of the company had acted in the affairs of the company in their own interests rather than in the interests of the members as a whole. He found that they had failed "to observe the requisite standard of commercial morality" and their conduct "reacted unfairly and unjustly against other members": p 398. He ordered the company to be wound up as "it seems to me that no other remedy is available to them": p 399. 60 The defendant relied upon a decision of the Court of Appeal in New Zealand in Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005] 2 NZLR 328 in which the Court of Appeal upheld a decision of a trial judge to enter summary judgment against plaintiffs in an application for oppression. 61 However, I do not think that that case supports the defendant's contention. It was argued in that case that the equivalent to s 232 and s 233 of the Corporations Act, s 174 of the Companies Act (NZ), did not apply to a publicly listed company. However, the Court said (at [113]): The operative words of the provision express a general principle which is directed to "an unjust detriment to the interests of a member of the company" (Thomas at p693). That test is an objective one. The provision may be prayed in aid even if the conduct accords with the company's constitution, because even then inappropriate prejudice may still arise. Relief can be given even if the conduct complained of does not involve a want of good faith or a lack of probity. The fact that all members are treated uniformly as members will not necessarily make conduct fair. The reasonable expectations of members are distinctly relevant - though this factor is not in and of itself necessarily determinative - and those expectations are not necessarily restricted to purely "internal", or "formal" expectations. There are no fixed categories of cases to which s 174 apply. The provision is one of general application. Relief may be sought even with respect to a listed company. 62 In the circumstances of that case, however, the Court agreed with the trial judge that it was appropriate for him to have entered summary judgment. 63 I do not think that s 233(1)(a) is not available as a remedy because the defendant is a publicly listed company. I agree, with respect, that there is nothing in s 233 or the Corporations Act which suggests that s 233(1)(a) has no application to a publicly listed company. 64 I would accept, however, that it would be a rare circumstance where an order of that kind would be made and even rarer where the company is shown to be solvent. In the absence of a strong case and a clear need for the relief, the Court would not take the extreme step of winding up a solvent company: Cumberland Holdings Ltd v Washington H Soul Pattinson & Company Ltd (1977) 2 ACLR 307. 65 Now is not the time to enquire into the financial health of the defendant or to determine whether it is solvent. It is not alleged by the plaintiffs that the defendant is insolvent. It is not in the plaintiffs' interests to make such a case. 66 The following matters can be noted. First, the defendant's financial statements have been prepared upon the basis that the defendant is a going concern. Secondly, the defendant's auditor's opinion is unqualified. Thirdly, the defendant, being a publicly listed company on the ASX, has reporting requirements which would include an obligation to advise the ASX of any changes in its financial circumstances. 67 However, that having been said, there are a number of matters that emerge from the defendant's financial statements which have been exhibited to witnesses' affidavits. As at 31 December 2007 there were 56,000,000 fully paid shares and 60,000,000 partly paid shares issued. As at 31 March 2008 there were two substantial shareholders; Mr Ganke with 26,450,372 shares and the plaintiffs and associates with 21,429,716 shares. The plaintiffs and Mr Ganke hold a significant part of the capital of the defendant. The plaintiffs and Mr Ganke are the dominant shareholders in the defendant and between them hold nearly 40% of the defendant's shares. 68 Up to and including the financial year ended 31 December 2004, the defendant's financial statements were qualified by the auditor because the auditor was unable to obtain sufficient audit evidence relating to the NBBC mortgage to form an opinion on whether other information should be included in the financial report. The accounts have not been subject to a qualified audit report since that date. 69 Revenue, which mainly comprised interest payments, more than halved in the financial year ended 31 December 2007. Revenue from interest reduced from $715,559 to $339,593. In the financial year 2007, the defendant made a loss of $83,750. Current assets decreased from $2,258,373 to $700,867 because the directors reclassified $1,734,266 of the mortgage investment as a non-current asset. Non-current assets increased from $3,764,883 to $5,805,192 by reason of that reclassification. 70 Included in assets designated "Available for Sale Financial Assets (Non-current)" were shares in unlisted corporations at cost - $612,627 which apparently includes the defendant's investment in NBBC. 71 The defendant's current liabilities amounted to $1,120,572 up from $568,940. 72 Whereas in the financial year ended 2006 the defendant's current assets exceeded its current liabilities of in the order of $1,700,000, by the end of the financial year in 2007 the defendant's current liabilities exceeded its current assets by around $420,000. The auditor makes no comment on this reversal in his audit opinion. However, as I have said, the accounts have been prepared on the basis that the company is a going concern and there is no qualification in the audit opinion. The auditor must have concluded, notwithstanding the excess of current liabilities over current assets, that the company can pay its debts as and when they fall due and payable: s 95A(1). 73 The mortgage given by NBBC was shown as a non-current asset. A note (8) in the accounts showed: Mortgage Investment is secured over freehold property in Fiji owned by Nadi Bay Beach Corporation Limited. The mortgage investment shown under current receivables in 2006 was reclassified as non current. 74 The company's non-current assets included exploration and evaluation expenditure. Those expenses were included at cost $1,420,312 together with the director's valuation of $7,086,235. The directors revalued the company's 5% interest in a uranium exploration in 2006 from $413,765 to $7,500,000. The 2006 financial statements contain the following note: The Directors have revalued the company's five percent (5%) interest in the Bigrlyi Uranium Joint Venture from a cost of $413,765 to $7,500,000. Energy Metals Ltd, the Operator, has released a JORC compliant resource report to the ASX which estimated resources of 14,000,000 pounds of uranium and 16,000,000 lbs of vanadium. The Directors revalued the company's interest based on the resources estimates and using a price per pound of $75 for uranium and $6 for vanadium, reducing these values to long term contract prices, and allowing for mining costs and further discounting for risks and future timing of cash flows. The ultimate recoupment of costs carried forward in respect of areas of interest still in the exploration or evaluation phases is dependent upon successful development and commercial exploitation, or alternatively, sale of the relevant assets. 75 The company's borrowings increased by $303,000 in 2007 which was used to meet its liabilities as and when they fell due. 76 The accounts show that the company's assets exceeded its liabilities by $15,174,657. 77 The defendant's most recent audited half yearly accounts to 30 June 2008 have been exhibited to one of Mr Ganke's affidavits. Again, the accounts have been prepared on the basis that the defendant is a going concern and, again, the audit opinion is unqualified. 78 The mortgage investment in Fiji is addressed: As shareholders are aware, the company has had, for many years, a substantial investment in a mortgage over freehold properties in Fiji, as well as a shareholding in the Fijian company, for many years. This project has been maturing slowly but surely. Political issues and bureaucratic procedures have been the major cause of delays. Southern Cross expects to receive full value for its investment and should in due course obtain extra benefits from its shareholding in the Fijian company. An independent valuation of the land holdings of about F$20,000,000 was obtained in 2006. This beachfront, freehold property has great potential for the development of holiday apartments and other tourist-oriented facilities, including an international hotel, all in close proximity to the Nadi International Airport. 79 The defendant's current assets are $678,705 (31 December 2007; $700,867). Its current liabilities are $1,719,072 (31 December 2007; $1,120,572). The defendant's current liabilities now exceed the defendant's current assets by $1,040,367. The defendant's liquidity has worsened by nearly $600,000. 80 The defendant's bank overdraft at 30 June 2008 was $998,202. It did not have an overdraft at the previous balance date, 31 December 2007. It would appear that the defendant's banker has supported the defendant over the last six months. The defendant's current liability for "Trade and other payables" was, at 31 December 2007, $484,012. That liability has decreased (i.e. improved) to $350,013. Of the $484,012, $165,278 was a liability to related parties. There are no notes to the 30 June 2008 half yearly accounts which would show whether the related parties' liability has been repaid or reduced. The defendant's liabilities in loans reduced from $636,560 to $370,857. 81 The defendant's consolidated cash flow shows that it made payments of $255,850 for exploration and paid $303,333 for investments during the half year. It incurred $314,703 in operating activities. It repaid $501,721 in borrowings. However, it borrowed $998,202 in an overdraft and borrowed a further $300,000. It made a loss of $46,142 for the six months. 82 The increase in the excess of current liabilities over current assets may indicate the defendant's need for support which may have been given by its bankers. 83 The defendant's fortunes will no doubt be examined at trial. Its directors will have the opportunity of explaining how the defendant is able to pay its debts as and when they fall due. It may be that the defendant has the support of its bankers. I have observed that the defendant's borrowings increased in 2007 by $303,000 and an overdraft liability of $998,202 was incurred. It may be that the defendant has the support of the shareholders associated with Mr Ganke, although this is less likely because there does not appear to be any increase in related party liabilities. 84 However, there is no need to speculate. If the defendant's solvency becomes an issue at trial, those matters can be addressed at that time. 85 It should not be understood that I am suggesting that the defendant is insolvent. I am merely explaining why it would not be appropriate to take away from, as it must be assumed, successful plaintiffs, one aspect of the discretionary relief given under s 233. 86 In the end, it will be a question at trial whether this defendant, if the plaintiffs make out their primary case, should be wound up. 87 I am not persuaded that paragraph 11 of the application should be struck out. I make the following orders: 1. Paragraphs 7 and 9 of the plaintiffs' originating application be struck out. 2. The defendant's application for summary judgment be dismissed. I certify that the preceding eighty-seven (87) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lander.

Associate: Dated: 22 December 2008 Counsel for the First, Second and Third Plaintiffs: Mr S J Doyle

Solicitor for the First, Second and Third Plaintiffs: Cowell Clarke

Counsel for the Defendant: Mr F Kunc SC

Solicitor for the Defendant: Marque Lawyers