BETWEEN : PORT KENNEDY RESORTS PTY LTD (ACN 061 115 348)

PORT KENNEDY GOLF COUNTRY CLUB PTY LTD (ACN 060 885 252)

Procedure - Injunction - Interlocutory injunction - Triable issue - Test for balance of convenience - Threat of winding up - Potential insolvency of respondent - Third parties' interests - Undertaking as to damages - Third parties acquiring rights in knowledge of pending claim for injunction - Third party having no vested rights but wishing to enter into contract to be restrained

First Respondent : Mr J Gilmour QC & Mr S M Standing

Second Respondents : Mr J Gilmour QC & Mr S M Standing

Third Respondent : Mr J Gilmour QC & Mr S M Standing

Fourth Respondent : Mr J Gilmour QC & Mr S M Standing

1 The appeal is against a decision made by McKechnie J on 28 September 2000 whereby he varied certain interlocutory orders made by Anderson J on 21 July 2000. The principal effect of the orders granted by McKechnie J was that the first appellant ("PKR") was restrained from selling any of its land or interests in its land or other assets (other than residential lots sold in the ordinary course of business), and the fourth appellant ("Fleuris") was restrained from dealing with any of the shares held by it in the capital of PKR. Other relief was granted by McKechnie J ancillary to and supporting the orders to which we have referred.

2 Similar orders had earlier been sought from Anderson J. His Honour, however, had only granted what was described as an "information injunction". By his Honour's orders PKR was restrained from offering for sale any of its land or other assets without giving the respondents five business days' notice in writing of its intention to do so, and a similar order was made restraining Fleuris on the same basis from dealing with any of its shares in PKR.

3 The application made to McKechnie J was precipitated by a letter dated 28 July 2000 written to the respondents' solicitors by the solicitors for PKR and Fleuris in which they gave notice that PKR was in the process of negotiating what was described as "an investment of equity and/or a purchase of all assets". The proposed transaction would involve the disposal of all of the assets of PKR or an investment by third parties in the company. The orders granted by McKechnie J effectively restrained any of the contemplated agreements being entered into.

4 PKR has rights to develop an area at Port Kennedy, Western Australia under an agreement ("the State Agreement"), being Schedule 1 to the Port Kennedy Development Agreement Act 1992. The development contemplated by the State Agreement is an "integrated tourism resort", comprising two 18-hole golf courses, a 5-star resort, a marina and various residential and short stay accommodation areas.

5 Initially, the parties to the State Agreement were the State of Western Australia and Fleuris. Later, Fleuris assigned its rights thereunder to PKR. Fleuris holds 8 million of the 10 million issued shares in the share capital of PKR. The second appellants, Messrs Lukin and Sheehan, are the sole directors of Fleuris and are directors of PKR. The third respondent ("Pac-Asia") was PKR's "only substantial financier for the project" and entered into a number of agreements and deeds with PKR and Fleuris relating to it.

6 Pac-Asia alleges that in April 1995 a composite agreement, termed the "Investment Agreement" was entered into between PKR, Pac-Asia, Fleuris and the fourth respondent ("PKGCC"). The respondents plead in the statement of claim that the Investment Agreement was partly written and partly oral and, further or alternatively, implied. The written part is pleaded to comprise certain letters and facsimiles and further incorporates a series of agreements, deeds and mortgages entered into pursuant thereto. Included amongst the latter class of documents are a shareholders' agreement between PKR, Fleuris and PKGCC, a share mortgage between Fleuris and Pac-Asia and a call option deed between Fleuris, Pac-Asia and the second appellants, all stamped 1 June 1995. The oral part of the Investment Agreement is alleged to consist of certain telephone conversations, but these are said only to relate to the agreement by PKGCC "to the terms negotiated and agreed as between Fleuris, Pac-Asia and PKR" in the letters and facsimiles said to form part of the Investment Agreement.

7 Pac-Asia alleges that the parties intended that it would provide substantial funds to PKR and Fleuris to facilitate the development of the project, and it would become a holder of equity in PKR. There would inevitably be a delay in this occurring as any such participation by Pac-Asia in the project would require Ministerial approval and approval by the Foreign Investment Review Board. These approvals would not be forthcoming immediately. These difficulties led to PKR issuing 6,000,000 of its shares to Fleuris and Fleuris entering into a call option deed conferring an option on Pac-Asia to acquire those shares from Fleuris.

8 According to Pac-Asia, the call option deed formed part of the Investment Agreement, the fundamental purpose of which was to govern the interim situation. Pending Ministerial approval, Foreign Investment Review Board approval and the making of a final agreement, the Investment Agreement, in the meantime, was to provide Pac-Asia with sufficient security to enable it to advance funds to PKR and Fleuris and to confer power upon it to control the board of PKR. That is, before it became a shareholder. In this respect, Pac-Asia alleges (in par 11(h)(ii) of the statement of claim) that it was agreed by the Investment Agreement that:

"[T]he board of directors of PKR would consist of no more than six persons and ... pending necessary approvals being given to Pac-Asia, Fleuris would appoint or replace or substitute only two of the six directors of PKR, the balance would be nominated by Pac-Asia, Fleuris would appoint (and not remove) such nominees as directors of PKR, and such arrangements would be reflected in a shareholders' agreement to be executed by PKGCC and Fleuris and PKR, and in such other formal documentation as may be required."

9 PKR and Fleuris deny the Investment Agreement, and this gives rise to what both Anderson J and McKechnie J found to be a serious issue to be tried.

10 The moneys advanced by Pac-Asia were provided from 1995 to 1997. PKR ran short of funds thereafter. Early in 1999, dissension arose between Pac-Asia and Fleuris as to the management of PKR. Prior to 5 February 1999 there were six directors of PKR, two having been appointed by Fleuris (that is, Messrs Lukin and Sheehan) and four having been nominated by Pac-Asia. Thereafter, in February 1999, as a result of a series of actions taken by Fleuris, two directors nominated by Pac-Asia were removed and four new directors were appointed (two other Pac-Asia nominees had resigned). The result was that six directors were again appointed to the board of PKR, but all six were nominees of Fleuris and none was a nominee of Pac-Asia. The respondents contend that the steps taken by Fleuris to effect the foregoing and by PKR to accede thereto, was in breach of the term of the Investment Agreement pleaded in par 11(h)(ii) of the statement of claim, alternatively in breach of the share mortgage that is alleged to be part of the Investment Agreement.

11 The actions taken in connection with the new composition of the board of PKR led to the commencement of litigation. A number of different actions were commenced and were consolidated. Pac-Asia's application for expedition of the consolidated proceedings was opposed and refused.

12 The application heard by Anderson J whereby the respondents claimed an injunction restraining the appellants from dealing with the assets of PKR (but were granted only an "information injunction") was argued on 19 November 1999. Between that hearing and the delivery of his Honour's decision, PKR entered into a sub-lease of one of the two golf courses, which are part of the Port Kennedy project. The sub-lease is with The Golf Club (WA) Ltd ("The Golf Club") and is for a term of 50 years with an option to renew for a further term of 25 years. The sub-lease has received the requisite ministerial approval and has been registered. The third appellants acted as directors of PKR and participated in the board decision pursuant to which PKR entered into the sub-lease.

13 PKR (represented by the board comprised solely of Fleuris appointees), including the third appellants) now wishes to enter into an agreement of sale with Port Kennedy Development Group Pty Ltd ("PKDG"). In effect, the contemplated sale will involve the disposal of the entire undertaking of PKR. This is the transaction enjoined by the order of McKechnie J.

14 Anderson J described the respondents' case in the following terms:

"Speaking very broadly, it would appear from the material before me, including the voluminous affidavits, that [the respondents'] case is that an arrangement was made whereby Pac-Asia would actually participate in the project by investment of equity capital and would also procure loan finance for completion of the project. The investment or equity participation would be in the form of a subscription to the capital of [PKR]. As Pac-Asia was a foreign (Singaporean) company, Australian governmental approvals would be necessary to allow Pac-Asia to receive the proposed allotment of shares in [PKR]. There were also restrictions in the State agreement on changes in the beneficial ownership of [PKR], so approval was required at State level before Pac-Asia could obtain any substantial allotment of shares in [PKR]. It was anticipated that these approvals would take time to obtain, but the need for funds was immediate. So the arrangement was that [Fleuris] would, as a first step, take up the shares in [PKR] and grant to Pac-Asia a call option over the shares. (I gather that no difficulties were expected or encountered in obtaining approval from the State authorities for the allotment of shares in [PKR] to [Fleuris].) Pac-Asia would provide the funds to enable [Fleuris] to take up the shares. These funds ($6 million) would flow through to [PKR] immediately on the allotment of shares to [Fleuris]. When approval was obtained for Pac-Asia to assume ownership of the shares, Pac-Asia would exercise the call option and the shares (6 million in number) would be transferred to it. Meanwhile, Pac-Asia would be represented on the board of [PKR] and would go ahead with the procuring of loan funds."

15 As noted by Anderson J, the $6 million provided by Pac-Asia to Fleuris was then advanced by Fleuris to PKR to enable it to develop the project. The share mortgage relates to the 6 million shares in PKR taken up by Fleuris with the $6 million so provided by Pac-Asia. Counsel for the appellants submitted that not all of the $6 million had been received by Fleuris. There is, however, no evidence to support this submission. No reference was made to it in the judgments of either Anderson J or McKechnie J and it seems that no submissions of this nature were made to them. In the circumstances, we do not regard these submissions as having any weight for the purpose of this appeal.

16 In addition to the $6 million advance to enable Fleuris to acquire the 6 million shares, Pac-Asia, thereafter, from time to time, advanced to PKR a further sum of about $6.9 million. Again, counsel for the appellants submitted that not all these moneys were in fact received by PKR but there is no evidence before us to substantiate this submission and no regard can be had thereto.

17 Overall, taking into account interest on the advances made by Pac-Asia to Fleuris and PKR, there is, according to Pac-Asia, a sum of about $17 million owing to it by these two companies.

18 With regard to Pac-Asia's allegation that the Investment Agreement as pleaded had been entered into and gave Pac-Asia control over the PKR board, Anderson J held:

"On the evidence as a whole, I am satisfied that there is an arguable case that an informal investment agreement was entered into by and between Pac-Asia and [PKR, Fleuris and PKGCC] governing the terms on which Pac-Asia would provide funds to, or to the use of, [PKR] with respect to the Port Kennedy Resort project. I am satisfied that there is a triable issue on the question whether the parties severally agreed with each other that, pending the acquisition by Pac-Asia of the 6 million shares in [PKR] through exercise of the call option, the board of [PKR] would be made up only of four directors approved by Pac-Asia and two directors nominated by [Fleuris]. That is the substance of par 12 of the affidavit of the second plaintiff, Mr Ho, of 20 August 1999. Consistently with the existence of such an agreement, there is evidence that, from 1995 at least until February 1999, the board of [PKR] was, in fact, comprised of four nominees of Pac-Asia and two nominees of [Fleuris]. It is the kind of holding arrangement one would naturally expect to be put in place as an interim measure, in the circumstances. In any event, I consider that there is a triable issue on the question whether, pursuant to cl 8.7 of the share mortgage, [Fleuris] was bound not to appoint more than two persons as directors of [PKR] without the prior approval of Pac-Asia. The result is that there is a triable issue as to the proper composition of the board of [PKR] and, in particular, as to whether Pac-Asia is entitled to be represented on the board by four of the six directors approved by it."

19 Anderson J held that there was a triable issue as to whether the clause pleaded in par 11(h)(ii) of the statement of claim had been agreed by the parties and as to whether Pac-Asia was entitled to rely thereon. There was no appeal from the decision of Anderson J and nothing has been put before us that persuades us that his Honour was wrong in this respect.

20 It is necessary to say something about the strength of the respondents' case in this respect as this bears on the balance of convenience. In a facsimile dated 10 February 1995 sent on behalf of Pac-Asia to Mr Lukin, under the heading "Directors", the statement was made:

"Pac-Asia will be entitled to appoint four and Fleuris two directors. The shareholders' agreement will have to be suitably amended. Since Mr Hayward has advised that it would not be possible at this stage to amend the shareholders' agreement, the present investors will have to undertake that suitable amendments will be made to the shareholders' agreement to re[f]lect this change once FIRB has been obtained."

On 11 February 1995 a further facsimile was sent to Mr Lukin to the same effect. Mr Lukin replied by facsimile dated 13 February 1995 agreeing to the proposal. PKR was a party to the shareholders' agreement to which reference was made and there is other material from which it can be inferred that Mr Lukin was acting for both PKR and Fleuris. It is therefore strongly arguable that both were parties to the agreement that Pac-Asia would be entitled to nominate four out of the six directors of PKR, as alleged.

21 It is also relevant, as Anderson J pointed out, that the board of PKR, as from 1995, in fact comprised four nominees of Pac-Asia and two nominees of Fleuris. The conduct of the parties supports the respondents' contentions.

22 In all the circumstances, we regard the overall strength of the respondents' case on this issue as fairly strong, on the evidence as it stands.

23 There is a further matter to be noted in this context. Paragraph 10 of the statement of claim pleads that PKGCC, Pac-Asia, PKR and Fleuris were parties to the Investment Agreement. Paragraph 11 of the statement of claim provides, however, that it was an express term of the Investment Agreement that, "each of Fleuris and PKGCC separately promised to Pac-Asia that the board of directors of PKR ...". No allegation is made in par 11(h) that PKR made a promise in the terms alleged. This may be a pleading error. Whatever may be the position in that respect the point was not taken before Anderson J or McKechnie J and was not raised by counsel before us. The argument assured that PKR was a party to the promise referred to in par 11(h). In the circumstances, we approach the matter on the basis that the promise was made, as contemplated by the exchange of correspondence to which we have referred, by PKR as well as Fleuris.

24 The main thrust of the appellants' challenge to the respondents' case based on the term pleaded in par 11(h)(ii) of the statement of claim rests on the current rights of Pac-Asia under the call option whereby Pac-Asia was entitled to call for the transfer of the 6 million shares. In summary, the appellants contend that the option afforded Pac-Asia thereby has expired and, therefore, Pac-Asia is no longer entitled to control the board of PKR in accordance with the term of the Investment Agreement pleaded in par 11(h)(ii).

25 The option provided by the call option deed expired two years from the date of the deed. The deed is stamped 1 June 1995. There was evidence that the call option was extended by two years from a letter dated 1 December 1997 written by Pac-Asia to PKR. When the application for an injunction was argued before Anderson J, the extended option period had not expired. The respondents contend that, on 1 December 1999, prior to the hearing before McKechnie J, the option had in fact expired and Pac-Asia has at no time attempted to exercise it. In answer to this argument, senior counsel for the respondents relied on two facsimiles, which pre-dated the call option deed. The fact that these documents reflect prior negotiations, as it were, makes it difficult for the respondents to rely on them, as there is a strong inference that they were subsumed by the later deed. The issue as to the continued existence of the share option apparently took the respondents somewhat by surprise and, at the trial, different arguments and different evidence may be relied upon. On the material to which this Court was referred, however, the respondents' case as to the extension of the option period, while not entirely unarguable, has to be characterised as relatively weak.

26 Counsel for the appellants then submitted that if the option to acquire the 6 million shares was no longer open to be exercised, that meant that the underlying purpose of the promise by PKR and Fleuris that only two of the six directors of PKR would be appointed or replaced or substituted by Fleuris and the balance would be nominated by Pac-Asia, fell away and no reliance could be placed on that provision of the Investment Agreement, referred to in par 11(h)(ii) of the statement of claim. We do not accept this submission for two reasons.

27 Firstly, it is apparent that the board control afforded to Pac-Asia by the term referred to in par 11(h)(ii) protects it in two respects. Firstly, board control protected Pac-Asia in the interim period before it became a shareholder of PKR by exercising its rights under the call option. Secondly, board control afforded Pac-Asia practical means of protecting its investment (of several millions of dollars) in PKR. The expiry of the option is not relevant to this purpose.

28 In any event, the term pleaded in par 11(h)(ii) is not alleged to be conditional upon the option being extant. That being so, the mere expiry of the option does not, in our opinion, detract from the force of the term in question.

29 Accordingly, we remain of the view that there is a serious issue to be tried arising out of the allegation in par 11(h)(ii) of the statement of claim.

30 We should say something about the respondents' alternative argument based on cl 8.7 of the share mortgage, which provides:

"(a) [Fleuris] must not permit to be appointed as a director of [PKR] more than two persons without the prior approval of [Pac-Asia].

(b) [Fleuris] must not exercise any powers to appoint or remove more than two directors of [PKR] without [Pac-Asia's] prior approval."

31 On the material before this Court, the appointment of the third appellants was in breach of cl 8.7. Counsel for the appellants submitted that that was irrelevant as the share option having expired, and the respondents' rights in regard to board control having expired, there could no longer be any complaint about board control. We do not accept these submissions. We have found against the appellants' arguments concerning the significance of the alleged expiry of the share option. But, in any event, the breach of cl 8.7 is not cured by any subsequent events of the kind on which the appellants rely.

32 Counsel for the interveners (The Golf Club and related companies) pointed out that PKR is not a party to the share mortgage. This was not an argument raised by counsel for the appellants until, in reply, he took up the issue. Accordingly, senior counsel for the respondents dealt with the question very briefly, also in reply. He submitted that, in all the circumstances (the share mortgage being part of the Investment Agreement), PKR is to be regarded as contractually bound to ensure that the provisions of cl 8.7 thereof were implemented.

33 In our view, there is also a serious issue to be tried as to the effect of cl 8.7, but the more important issue is that based on the term pleaded in par 11(h) of the statement of claim.

34 Counsel for the appellants informed the Court that the appellants intended to rely on various arguments based on illegality. The appellants, apparently, will contend at the trial that the Investment Agreement, or some or all of the instruments entered into pursuant thereto, contravene the Port Kennedy Development Agreement Act. On this basis, the appellants contend that they are not obliged to make any repayments whatever to Pac-Asia. These arguments were not developed before this Court and in our view they do not detract from finding that there are serious issues to be tried as we have held.

35 McKechnie J held that the respondents "have a clearly arguable case". We have come to a similar conclusion.

36 At the commencement of argument on the appeal, the Court allowed the appellants to lead fresh evidence to the effect that PKR owes the National Australia Bank $615,998. The bank has informed PKR that it is concerned about PKR's ability to repay its debt to the bank. The bank has sent PKR a demand for repayment but has also issued a "letter of forbearance" for a period of three months, thereafter. The effect of these letters is that the bank requires repayment by 31 December 2000. According to PKR, if the injunction is not dissolved and the sale of assets does not proceed it will not be able to repay the money it owes to the bank by that date. That is to say, at 31 December 2000 PKR will not be able to repay its debts as and when they fall due.

37 The prospect of PKR becoming insolvent is a primary factor in the balance of convenience issue. In this regard, there is a considerable body of evidence that suggests that, even were the injunction to be set aside, PKR, in any event, is insolvent. Counsel for the appellants accepted that some $2 million is owing by PKR to creditors other than Fleuris. PKR owes Fleuris $1 million. Accordingly, PKR owes $3 million to creditors other than Pac-Asia. According to a balance sheet of PKR as at 30 April 2000, total current assets amount to $2.8 million. According to the affidavit of Mr Alan Boys a chartered accountant, assuming the validity of Pac-Asia's claims, PKR has a deficiency of current assets over current liabilities of over $10 million. Mr Boys' evidence is disputed by Mr Lukin and it is not possible to come to a final decision on this issue. It is sufficient to say, however, that it is strongly arguable that PKR is presently insolvent.

38 According to Mr Lukin, the total benefit that PKR will receive, if the agreement proposed to be entered into with PKGC is completed, is between $15 million and $20 million. This sum is made up of $1,400,000 for the golf course head lease, $2 million for the first land grants, four further instalments of $1 million, $450,000 for land owned by PKR, and a percentage of land grants "emerging from the project under cl 10 of the State agreement" which are estimated to be in the range of $8 million to $13 million. According to Mr Lukin, if this agreement and the sale of the head lease to The Golf Club or a related company are completed, PKR will be able to pay all of its creditors and provide a return to shareholders.

39 According to the respondents, however, the total sale price under the proposed transaction, properly calculated, at net present value, is only between $10 million and $12.5 million. Furthermore, completion will take some 10 years. On this basis, Pac-Asia is likely to receive less than 50 per cent of its claim, and over a very long period of time.

40 It is not possible to come to any firm conclusion as to the likely amount that PKR is likely to realise from the proposed sale. It is plain, however, that the value placed by Mr Lukin on the transaction is highly speculative. Moreover, the price at which PKR proposes to sell its undertaking is substantially less than the value attributed to it in a valuation prepared by Colliers Jardine as at 18 January 1999. The price of the head lease of the golf course is $1.4 million, whereas the golf course was estimated by Colliers Jardine to have a value of between $3 million and $5 million. The overall valuation of the assets by Colliers Jardine was $25 million, and this is $5 million to $10 million more than the amount which, according to the appellants, will be received if the proposed transaction is allowed to proceed and is less than half of that amount as calculated by the respondents. In these circumstances, there are real doubts as to the appropriateness of the price at which the assets are to be sold.

41 If the proposed sale is allowed to proceed, the result will be that the whole of PKR's undertaking will be sold. There will be a disposal of the entire substratum of the company. In that sense, there is little difference between the proposed transaction and a winding up under the aegis of a liquidator. In a sense, as the respondents assert, the sale by PKR of its assets will be in substance a de facto liquidation, but not one under the control of the Court and its officers.

42 Importantly, upon the agreement being entered into, $1 million will be payable immediately to Fleuris. Fleuris is facing financial difficulties and the $1 million so paid to it will assist it in staving off winding up proceedings. Moreover, $100,000 is payable annually to each of Messrs Lukin and Sheehan who are to be consultants to the project. Undoubtedly, even if PKR is not insolvent (and we have pointed out that this is a disputed issue), it is in financial difficulties, and there is an inference that the proposed transaction is calculated to put at least Fleuris in a position preferential to other creditors. Additionally, as we have indicated, there are serious doubts as to the price at which the assets are to be sold.

43 All these matters militate against the sale being allowed to proceed and weigh in favour of an injunction being ordered.

44 The submissions of the appellants focussed on the prejudice that the appellants might suffer if the injunction were allowed to stand and PKR was put into liquidation. Counsel for the appellants drew attention to cl 24(1)(b) and cl 25(1) of the State Agreement. Clause 24(1)(b) provides that the State may by notice terminate the State Agreement if PKR goes into liquidation "and unless within three months from the date of such liquidation the interest of [PKR] in this agreement and in every lease and licence granted or assigned under this agreement (to the benefit of which [PKR] is entitled at the date of such liquidation) is assigned to an assignee or assignees approved by the Minister under cl 20 ...". Clause 25(1) provides that, on the cessation or termination of the agreement, except as otherwise agreed by the Minister, the rights of PKR or of any assignee to any lease granted under the agreement shall terminate.

45 The effect of these two clauses is that unless there is an assignment as contemplated thereby within three months from the date of liquidation, the State Agreement terminates, as do PKR's rights thereunder. According to counsel for the appellants, should this occur, PKR would be left only with its land, which is valued at $480,000. This, it is said, would be a disastrous result for PKR, its shareholders and its creditors.

46 There are a number of comments to be made about this submission. The first is that, as we have stated, there is a strongly arguable case that PKR is already insolvent. This detracts from any unfairness that might result from a winding up triggered by the injunction. Secondly, should cl 25(1) take effect, the party that stands to lose the most is Pac-Asia, that being by several millions of dollars the largest creditor of PKR. This fact is to be seen in the light of evidence that Pac-Asia "will make further funding available, with a view to maximising the return on the project, to the benefit of PKR, its shareholders and creditors" if "the project is re-structured in what Pac-Asia considers to be a realistic and profitable manner (and in a manner approved by the Minister) and if the project proceeds in accordance with the Investment Agreement". A director of Pac-Asia has stated on oath that, generally speaking, and subject to its requirements being met, Pac-Asia "wishes to preserve the project in PKR so that it can (in one way or another) maximise the return on its investment, or at least recover its investment". These matters suggest that there must be some prospect that, should a winding up occur, Pac-Asia will take steps to prevent cl 25(1) from taking effect.

47 There are other factors to take into account in weighing the balance of convenience.

48 We appreciate that the issues as to whether Pac-Asia has a contractual right as pleaded in par 11(h)(ii) of the statement of claim, and whether the appointment of the four Fleuris directors was valid, are the subjects of genuine dispute. Nevertheless, it cannot be gainsaid that Pac-Asia is vitally concerned with the way in which the Port Kennedy Project is to be dealt with. If the proposed sale is allowed to proceed it will mean that the project is disposed of solely in accordance with the wishes of the appellants (and arguably invalidly and in breach of contract), albeit that the vast majority of the funds utilised for the acquisition of those assets were provided by Pac-Asia and albeit that, of the proposed proceeds, Fleuris is to acquire $1 million immediately and there is no certainty as to when and how much Pac-Asia will be paid in respect of the amounts owing to it. Indeed, as we understood the submissions of counsel for the appellants, it is accepted by them that the proceeds of the proposed sale would only be sufficient to pay a fraction of Pac-Asia's claim.

49 Moreover, if the proposed sale proceeds, the whole basis of the appellants' interest in PKR will be rendered nugatory. There will then be no longer any purpose in Pac-Asia maintaining its claim for control of the board of PKR. We accept, on the evidence as it stands, the submission made by Pac-Asia that it invested in the project on the strength of it being an ongoing business and the whole raison d'etre of Pac-Asia's investment will be destroyed. The business previously carried on by PKR, in respect of which Pac-Asia asserts its rights of control, will no longer be continued.

50 As against this scenario, if a winding up is granted, and if cl 25(1) of the State Agreement takes effect, the financial consequences to PKR, Fleuris and Pac-Asia as well as The Golf Club and its associated companies will be extremely severe. Whether this will indeed occur in the light of the factors we have mentioned, is uncertain.

51 The appellants also rely on the effect on third parties of the proposed injunction. The third parties concerned are The Golf Club, Golf Club Holdings Ltd and PKDG.

52 As was pointed out by the majority in Patrick Stevedores Operations (No 2) Pty Ltd v Maritime Union of Australia [1998] HCA 30; (1998) 195 CLR 1 at 41:

"In applications to grant interlocutory injunctions, the court is concerned to examine and in appropriate cases to protect, pending the trial, the moving party's right to relief against that party's opponent. But the rights of plaintiff and defendant are not the only rights considered in determining where the balance of convenience lies."

Their Honours approved statements made by other authorities to the effect that courts will not ordinarily and without special necessity grant an injunction "where the injunction will have the effect of very materially injuring the rights of third parties not before the court" (per Cumming-Bruce LJ in Miller v Jackson [1977] EWCA Civ 6; [1977] QB 966 at 988), but went on to say (at 42) that the weight to be given to third party interests "varies according to the circumstances".

53 In the present case, there is one aspect of the "circumstances" which in our view is particularly significant. According to an affidavit filed on behalf of the appellants, Mr Tony Melville, a Melbourne solicitor, who was a director of the parent company of The Golf Club and who had seen various letters written by the parties to the existing dispute, had stated to the deponent that:

"The Golf Club (WA) Ltd felt that they had been informed by [PKR] of all material facts. He said that he knew the substance of the dispute because [the respondents' solicitors] had disclosed the issues involved to The Golf Club (WA) Ltd."

54 As we have mentioned, The Golf Club entered into the sub-lease after argument before Anderson J had been completed and before his Honour delivered judgment. It follows that The Golf Club, knowing "all the material facts", must be taken to have known at the time the sub-lease was concluded that an injunction had been sought by Pac-Asia restraining PKR dealing in any way with its assets. On that basis, The Golf Club entered into the sub-lease in full knowledge that Pac-Asia was asserting its rights to control over PKR, that Pac-Asia contended that four of the six directors of PKR were not validly appointed, that any sub-lease entered into between it and PKR with the incumbent board would be subject to challenge, and indeed that Pac-Asia was seeking an injunction restraining the disposal of PKR's assets including the entering into of agreements such as the sub-lease. The Golf Club entered into the sub-lease in full knowledge of the risks involved and, indeed, together with PKR, sought to pre-empt the injunction by entering into the sub-lease before Anderson J delivered his reasons.

55 In the circumstances, we do not consider the potential effect of the injunction on The Golf Club and its related companies to be a consideration of particular weight.

56 The appellants submit that the effect of the injunction will force PKR to carry on business against its will, and this would be contrary to principle: Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1997] UKHL 17; [1998] AC 1, referred to in Patrick Stevedores (at 46 - 47). This, however, is not the kind of case referred to in Co-operative Insurance Society Ltd v Argyll Stores. The Argyll Stores case involved a claim for a mandatory injunction requiring the respondent to carry on a business. There was the possibility of "repeated applications for rulings on compliance with the order". It would be difficult for the court to supervise compliance with the order. There was an inherent problem with drafting the requisite order with appropriate precision. None of these considerations presently arise. The injunction ordered by McKechnie J is not a mandatory injunction ordering specific performance to carry on an activity over a period of time. It merely prevents the sale of PKR's undertaking. Similar considerations in Patrick Stevedores led the majority to distinguish that case from Argyll Stores. The same distinction operates in this case.

57 The appellants submit further that an alternative remedy is open to Pac-Asia, namely the appointment of a receiver. In our view, however, there are two answers to this submission. Firstly, the appointment of a receiver will not satisfy Pac-Asia's claim to be entitled to appoint four directors to the board of PKR and to be able to exercise control in that way. Secondly, it seems to us to be inevitable that any appointment of a receiver would be strenuously resisted by the appellants and the same issues that presently arise will be agitated again in proceedings of that kind. In our opinion, the appointment of a receiver in the particular circumstances would not be a satisfactory alternative remedy.

58 The appellants have tendered an undertaking that PKR would use the proceeds of sale solely for the purposes of paying creditors and ongoing operating (including legal) costs. This undertaking, however, does not adequately protect Pac-Asia inasmuch as it does not prevent PKR utilising the proceeds of the sale to pay Fleuris and Messrs Lukin and Sheehan in priority to Pac-Asia. Moreover, the undertaking does not remedy the fundamental problem that the irremediable loss to Pac-Asia, should the injunction not be granted, is that the control over the board of PKR, the subject of the litigation, will be rendered pointless should the sale proceed.

59 In our opinion, an important factor in assessing the balance of convenience is the determination of the status quo. We would adopt the statement of the learned author of Seaman: Civil Procedure in Western Australia, 52.1.7 that "the status quo may often be that state of affairs from which springs a serious question to be tried as to the invasion by the defendant of a legal or equitable right of the plaintiff for the enforcement of which the defendant is amenable to the jurisdiction of the court". This proposition is peculiarly apposite to the present case. Here, the difficulties stem from the change in the board of PKR. That arguably was a breach of Pac-Asia's contractual rights. Any order that does not attempt to maintain the status quo as at that date may have the effect of destroying the value of those rights entirely.

60 Should the injunction not be granted, Pac-Asia will lose any right it may have to participate in the project it has substantially funded, it will lose any value in the control over PKR that, arguably, PKR and Fleuris agreed to afford it, it is likely not to be able to recover a significant portion of the moneys it advanced and will have to wait an inordinate time to be paid the balance. Moreover, it is arguable that should the sale proceed, Fleuris will improperly be preferred as a creditor of PKR.

61 Should the injunction be granted, PKR may receive substantially less for its undertaking than otherwise would be the case and Fleuris may receive substantially less as a creditor of PKR. This consequence, however, is not a certain one (for the reasons we have explained).

62 In our view, the potential injustice to the respondents should an injunction not be granted is greater than the potential injustice to the appellants should the injunction remain on foot: cf Cayne v Global Natural Resources Plc [1984] 1 All ER 225 (at 237). Overall, it seems to us that the balance of convenience favours the respondents. In this we differ from the view of McKechnie J who found that the balance was "in equipoise". His Honour held that should an injunction not be granted, "there will be nothing left upon which a judgment might effectively operate. The Court's process will be frustrated". These views led his Honour to decide that an injunction should be ordered. We agree with the conclusion of the learned Judge.

63 In the circumstances, we would dismiss the appeal against the injunction.

64 As regards the undertaking as to damages proffered by the respondents, the appellants claim security on the basis that Pac-Asia is a foreign company without assets in the jurisdiction. In our opinion, however, the value of Pac-Asia's claim (although it is subject to dispute) is sufficient security. We appreciate that the appellants contend that, despite the fact that Pac-Asia has provided PKR directly or indirectly with several millions of dollars, PKR has no obligation to repay any of the sums advanced. The appellants' argument in this respect is entirely novel, was not developed before us and without foreclosing it in any way, cannot at this stage be given any weight.

65 McKechnie J considered that Pac-Asia's claim against PKR was sufficient for him to decline to make an order for security for costs. We are not persuaded that his Honour wrongly exercised his discretion in this respect.

66 Mr Bennett appeared on behalf of The Golf Club, Golf Club Holdings and PKDG and sought leave to intervene on their behalf. Golf Club Holdings is the nominee of The Golf Club to acquire (by exercise of first right of refusal) the head lease from PKR. He sought an order requiring the respondents to provide undertakings as to damages to these three parties and also sought that security be provided for these undertakings.

67 As regards The Golf Club and Golf Club Holdings, we regard it as of particular importance that the sub-lease was entered into after the respondents had sought an injunction, after argument before Anderson J had been concluded but before judgment had been delivered. As we have stated above, these two companies acquired their rights, knowing of the claim of Pac-Asia and knowing all the material facts. The Golf Club knew that the respondents had made a claim for an injunction but was nevertheless prepared to bind itself contractually under the sub-lease while Anderson J reserved judgment. Having done that, it now seeks to protect itself by an undertaking as to damages with security, should the interlocutory injunction not be made permanent after trial. Nothing that the respondents have done to protect their rights should have come as a surprise to The Golf Club. It took the risk that an injunction might be granted in the reasonable future. In the circumstances, as a matter of discretion, we would not order that the respondents provide it or its nominee with an undertaking as to damages.

68 As regards PKDG, the proposed purchaser, there seems to us to be no basis whatever for the claim for an undertaking. PKDG has as yet no accrued or vested rights to protect. It has merely an expectation that were it not for the injunction PKR would enter into the proposed contract with it. That, in our view, is not a proper ground for the requirement of an undertaking as to damages.

69 We would dismiss the appeal in its entirety and would not require an undertaking as to damages to be provided to The Golf Club, Golf Club Holdings and PKDG.

70 There is one further comment that we would make. McKechnie J stated, "It is essential that the parties immediately confer and make realistic attempts to identify the issues and the evidence so that the matter can be entered for trial at an early date. It may be that there can be a trial of a preliminary issue, ...". We agree entirely with these sentiments. It seems to us that the preliminary issues that should be tried on an expedited basis are those concerning the respondents' right to control the board of directors of PKR. In other words, the critical question is that posed by par 11(h)(ii) of the statement of claim, as well as the claim that cl 8.7 of the share mortgage has been breached.

71 The question whether there should be a preliminary issue and an expedited trial in respect thereof is a matter entirely within the discretion of Anderson J who is the Long Causes List Judge managing the case. Without wishing in any way to influence his Honour, we would express our agreement with McKechnie J that it seems to be in the parties' interests to have an expedited trial on the issues we have identified.