RE SINOM (HONG KONG) LTD

HCMP 73/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 73 OF 2009

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D E C I S I O N

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The application

1.   This is a notice of originating motion issued by Sinom (Hong Kong) Limited (“the Company”), seeking an injunction that Mount Gibson Mining Limited (“MGM”) be restrained from presenting any petition to this court for the winding up of the Company based on the sum of US$8,669,838.67 claimed in the statutory demand dated 24 October 2008 and served on the Company the same day.

2.   MGM is a subsidiary of Mount Gibson Iron Limited, which is a mining company incorporated in Western Australia and listed on the Australian Securities Exchange. The amount claimed in the demand was for the balance of price due to MGM as per the final adjusted invoices for three shipments of iron ore sold and delivered by MGM to the Company during May to June 2008, pursuant to an agreement dated 25 May 2005 (“the Agreement”) for long term supply of hematite lump ore and fine ore produced by MGM from 1 January 2005 until the completion of mining at the mines in Tallering Peak and Extension Hill in approximately December 2010.

3.   On 5 November 2008, MGM issued a notice to the Company to terminate the Agreement alleging breach of the Company in failing to cause a letter of credit to be provided, to nominate or send a vessel to collect the shipment of ore scheduled for 22 September to 1 October 2008 and for the shipment scheduled for 16 to 25 October 2008.

4.   On 12 November 2008, the Company by its solicitors issued a reply to the statutory demand disputing liability to pay on the basis there is a genuine and serious cross-claim which exceeded the amount of MGM’s claim in the demand. MGM’s solicitors were put on notice that the Company required written confirmation from MGM it would not lodge a winding-up petition, failing which the Company would seek an injunction. Subsequent correspondence was exchanged between solicitors.

5.   On 12 January 2009, MGM’s solicitors informed the Company’s solicitors that they did not have instructions to present a winding-up petition for the time being and in the event MGM should ultimately decide to do so, MGM was willing to provide the Company with at least five clear business days’ notice in advance. The Company took the view that did not remove the threat or allay its concern and insisted on withdrawal of the statutory demand. MGM declined to do so, contending that its claim for damages arising out of its termination of the Agreement by reason of the Company’s breach was well in excess of the Company’s cross-claims. The present application was issued on 14 January 2009.

6.   Directions were given on 12 February 2009 for the filing of evidence in opposition and in reply and the adjournment of the application for substantive argument.

7.   Both MGM and the Company have referred various disputes under the Agreement to arbitration in Australia, in late 2008 and early 2009 and arbitration has commenced. Pleadings filed in the arbitration proceedings have been placed before this court. All the cross-claims and reverse cross-claim raised in this hearing are covered in the arbitration proceedings.

The legal principles

8.   The applicable legal principles are largely non-controversial. I will endeavour to state them succinctly.

9.   The principles governing applications for interim injunctions in American Cyanamid Co. v. Ethicon Ltd. [1975] AC 396 do not apply to this situation, as the granting of an injunction to restrain the presentation of a winding-up petition would finally dispose of the issue in dispute in the present proceedings (Bryanston Finance Ltd. v De Vries (No. 2) [1976] 1 Ch 63 at 80E to 81E).

10.   The court will grant a quia timet injunction to prevent the presentation of a winding-up petition which it considers would be an abuse of process. Great circumspection must be exercised in doing so, as the right to petition for winding up in appropriate circumstances is a right conferred by statute, and a would-be petitioner should not be restrained from exercising it except on clear and persuasive grounds (Bryanston Finance, supra., at 78D to E, 79A to D).

11.   As with a petition where there is a bona fide dispute of the debt on substantial grounds (“a disputed debt petition”), where the company has a genuine and serious cross-claim against the petitioner greater than or equal to the petitioner’s debt (“a cross-claim petition”), such a petition may be restrained from proceeding (Re Pan Interiors Ltd. [2005] EWHC 3241 (Ch), paras. [34] to [39]). It is an abuse of the process of the court to make a statutory demand or present a winding-up petition based on a claim to which there is a triable defence (In re A Company (No. 0012209 of 1991) [1992] 1 WLR 351). A cross-claim petition is regarded in the same way (Southern Cross Group plc v. Deka Immobilien Investment GmbH [2005] All ER (D) 374, paras. [29] & [30]; Re Pan Interiors, supra., para. [35]).

12.   To successfully resist a cross-claim petition, the company has the onus of establishing that its cross-claim is genuine, serious and of substance. There must be supporting relevant details to demonstrate that the cross-claim is based on substantial ground. The test is very much the same as the test for a disputed debt petition for deciding whether a debt is disputed in good faith and on substantial grounds (Applications to Wind Up Companies, by Derek French, 2^nd edition, paras 6.10.7.2 and 6.10.7.3 and the cases there cited).

13.   In Re Bayoil SA [1999] 1 WLR 147 at 154B, Nourse LJ said it was also necessary for the company in a cross-claim petition to show that it has been unable to litigate its cross-claim. In the subsequent decision of Popely v. Popely [2004] EWCA Civ 463 at para. [124], Jonathan Parker LJ (with whom the other members of the English Court of Appeal agreed) said he did not understand Nourse LJ to be intending to lay down an absolute requirement to that effect. Rather, he understood Nourse LJ to be doing no more than indicating that where there has been delay in the prosecution of the cross-claim, the delay must not be such as to throw real doubt on the genuineness of the cross-claim. Popely was applied in Re Pan Interiors, supra. and Marchands Associates LLP v. Thompson Partnership LLP [2004] EWCA Civ 878, para. [46].

14.   In Hong Kong, it was said by the Court of Appeal in Re SY Engineering, CACV No. 1896 of 2001, [2002] HKEC 241 at paras. 15 to 16 that inability to litigate the cross-claim must be shown by the company for the court to reject a cross-claim petition. I had considered the two lines of English cases in Re Landune International Ltd. [2005] 4 HKLRD 46 at paras. 26 to 30 and expressed the view that SY Engineering does not bind me on this issue, as the relevant dicta were obiter and founded on dicta in Re Bayoil which were not part of the ratio decidendi. As in Landune International, I propose to adopt the approach in the subsequent English decisions that inability to litigate is not an absolute requirement.

15.   Where a cross-claim is raised by the company, it is open to the petitioning creditor to bring in a reverse cross-claim to extinguish the company’s cross-claim. If the reverse cross-claim, together with the petition debt, exceed the company’s cross-claim, the petition may be allowed to proceed, but not if the reverse cross-claim is disputed on substantial grounds (Montgomery v. Wanda Modes Ltd. [2002] 1 BCLC 289, paras. [38] to [40]; Re City Top Engineering Ltd. [2006] 2 HKLRD 562, paras. [20] to [27]). In this situation, the approach is to consider the overall relationship between the parties to see whether there is, at the end of the day, an undisputed or undisputable debt that is or will be due to the petitioning creditor (Re Jade Union Investment Ltd., HCCW No. 400 of 2003, [2004] HKEC 306, Barma J, 5 March 2004, para. 12). It is not necessary for the reverse cross-claim to be quantified, so long as it is certain to come into existence and its combined effect with the petition debt is of sufficient size to offset the cross-claim (Re To Kin Wah, HCB No. 9856 of 2007, Barma J, 16 October 2008, paras. 7 to 9).

16.   The existence of an arbitration clause, or of the commencement of arbitration, does not prevent the court from considering whether or not the company has established the existence of a bona fide dispute of substance in relation to the debt on which the petition is based (Re Jade Union Investment Ltd., supra., paras. 13 to 27).

The petitioning debt

17.   Pursuant to the Agreement, the Company was obliged to purchase ore from MGM at the price determined in accordance with clause 4.1 and directly referable to the iron content of the shipment multiplied by the Hamersley Benchmark Price applicable at the date of purchase. The Hamersley Benchmark Price is set as a result of negotiations between Rio Tinto Limited and its major Japanese customers and applies for the period of 12 consecutive months commencing 1 April each year. In 2008, the Hamersley Benchmark Price was not set until 24 June 2008. MGM invoiced the Company in the meantime for shipments taken after 1 April 2008 based on the old Benchmark Price, pending the setting of the new Benchmark Price for the year of 2008 to 2009, on the basis that adjustments would be made for these shipments after the new Benchmark Price was published.

18.   Between 1 April and 24 June 2008, MGM delivered five shipments of ore to the Company pursuant to the Agreement, being shipments MGM 151, 156, 158, 161 and 164. In relation to each shipment, the Company provided a letter of credit in advance of that shipment, and, following delivery of the ore, MGM had drawn on 90% of the letter of credit on the basis of its provisional invoice which was based on the provisional assessment of the quality and weight of the ore undertaken at the port of loading. After discharge of the ore at the port of discharge, MGM then issued a final invoice to the Company, based on the final assessment of the quality and weight undertaken at the port of discharge.

19.   On 24 June 2008, MGM informed the Company of the new Benchmark Price, which had been adjusted upwards, with the result that the amounts payable by the Company for the ore supplied after 1 April 2008 would increase. On 25 June, 10 July, 29 July, 10 September and 11 September 2008, MGM issued final adjusted invoices to the Company for the five shipments. These invoices reflected the adjustments to the price by reason of the increase in the Benchmark Price and the adjustments against the specifications pursuant to clause 4.1 of the Agreement.

20.   As the invoices had not been fully paid by 22 July 2008, MGM’s solicitors in Australia, Freehills, sent a letter to the Company on that day demanding payment of the amounts outstanding being US$15,474,324.93, which was based on the Benchmark Price increase but did not include adjustments resulting from the final assessment of the quality and weight of ore at the port of discharge. If the latter adjustments were included, the amount outstanding should be US$15,942,489.86.

21.   On 28 July 2008, the Company’s solicitors, Ince & Co., replied to Freehills’ letter, stating that save for the amount due in respect of one of the shipments (MGM 151, the Cape Courage shipment), the Company would arrange to settle all other remaining adjusted invoices, subject to a reservation of rights in respect of alleged short delivery and renegotiations of the demurrage and despatch rates pursuant to clauses 11.1.2 and 4.2 of the Agreement.

22.   On 29 August 2008, the Company paid the final adjusted sum owing in relation to shipment MGM 156 of approximately US$3.2 million. Thus, as at 12 September 2008, in addition to the balance owing for the Cape Courage shipment, the amount of US$8,669,838.67 was outstanding as regards the other three shipments (MGM 158, 161 and 164). Freehills issued a letter to Ince & Co. that day demanding payment of the invoices for those three shipments.

23.   On 26 September 2008, the Company’s managing director Andy Zhang Zhi confirmed to MGM’s chief financial officer Alan Rule that the Company had paid adjustment of a shipment which amounted to around US$3.2 million, that the balance owing should be around US$8 million and the Company was “processing” that.

24.   The statutory demand for US$8,669,838.67 was issued by MGM’s Hong Kong solicitors, Jones Day, on 24 October 2008.

25.   There was a difference of US$603,358 between the amount in the statutory demand and the amount originally invoiced for these shipments as demanded in the letter of Freehills dated 22 July 2008. However, looking at the chain of relevant correspondence as summarised above, I am satisfied that the Company had agreed to settle the outstanding amount for these shipments in the sum of US$8,066,480.67 as originally invoiced and did not raise any dispute as to the adjusted figure by which the amount was increased to US$8,669,838.67.

26.   I hold there is no dispute as to the debt in the statutory demand.

The cross-claims of the Company

27.   The cross-claims raised by the Company relate to (1) short delivery of the contractual quantity of iron ore by MGM during the years of 2006 and 2007; and (2) the non-payment of demurrage and detention concerning three shipments of iron ore, namely, a February/March 2008 shipment carried on the vessel Ever Shining, an April/May 2008 shipment carried on Elinakos, and a March/April 2008 shipment on Cape Courage.

28.   The claim for loss of profit arising from short shipments of lump ore for 2006 was estimated at US$1,853,850.78. The claim for loss of profit arising from short shipment of fine ore for that year was estimated at US$314,215.20.

29.   The claim for loss of profit arising from short shipments of lump ore for 2007 was estimated at US$16,583,112.25.

30.   MGM disputes all the cross-claims in relation to short delivery.

31.   In respect of the claims for demurrage relating to Ever Shining (US$203,187.85) and Elinakos (US$111,506.25), making a total sum of US$314,694.10, MGM has accepted its liability to pay and would set off this amount against the Company’s indebtedness.

32.   For the claim for detention relating to Cape Courage (US$450,505.04), MGM disputes liability but has acknowledged that US$92,419.79 is owed to the Company in respect of demurrage and would set off this amount against the Company’s indebtedness.

33.   The total amount of the Company’s cross-claims is US$19,516,377.37.

34.   I turn to consider each of the cross-claims that are disputed by MGM.

Short delivery in 2006

35.   The Company’s case for short delivery in 2006 may be stated as follows.

36.   Under the Agreement, and as confirmed and clarified in the letter of MGM to the Company dated 17 November 2006, MGM was obliged to supply lump and fine ore at the rate and shipment sizes for each year in which the obligation arose as set out in the table below:

	Lump ore	Fine ore
1 January 2005 to 31 December 2005	6 x 60,000 metric tonne
1 January 2006 to end of mine life (estimated as 31 December 2010)	13 x 60,000 metric tonne each year	2 x 40,000 metric tonne each year

38.   Clause 15 provided for events which may be declared to be force majeure by either party. It was provided that without limiting the specific events stipulated, any other cause not within the control of the party who would, but for clause 15, be in default and which by the exercise of reasonable diligence it was unable to prevent (whether the effect of the same was partial or general), no liability for damage or delay should arise against that party.

39.   MGM’s letter of 22 December 2005 provided for two shipments in the first quarter shipping schedule of 2006. It stated that due to delay in mine development, the quality of iron ore produced in the first half of 2006 was expected to be lower than the past 12 months in 2005. It would be necessary for the Company to load split cargoes of lumps and fines for contractual tonnage and any cargo the Company elected not to take in any month of 2006 would be forfeited and not be transferred to any other month.

40.   The Company wrote in reply on 8 February 2006 protesting that MGM was proposing by its letter of 22 December to vary the Agreement by providing ore outside of specification, providing sailing schedule outside the time stipulated, requesting the Company to split load, requiring the Company to elect to take cargo or otherwise have cargo forfeited, and implying possibility of short quantity in delivery. MGM was reminded that under clause 18.3 of the Agreement, any variations to the terms needed to be agreed in writing by both parties to have effect. The Company reserved all legal rights to hold MGM responsible for any non-performance of the Agreement.

41.   Apart from the shipment on 7 January 2006, no further shipment was made in the first quarter.

42.   On 17 January 2006, MGM notified the Company that due to the effects of ex tropical cyclone, the roads between the mine site and the rail siding had been closed, preventing transport of the ore and declared a force majeure event for a forthcoming January shipment. It was further stated this would impact upon all shipments scheduled for the first quarter.

43.   On 14 February 2006, MGM provided the Company with a proposed shipping schedule for two shipments in the second quarter of 2006, with laydays of 11/20 April 2006 and 1/10 June 2006. On 27 March 2006, MGM informed the Company it would probably not be able to meet the 11/20 April shipment and was unsure if this would affect the proposed June shipment. On 31 March 2006, MGM informed the Company it did not have any fine ore available at the time. No shipment was made in the second quarter.

44.   As only one shipment was made in 2006 up to that point, on 4 May 2006 the Company’s solicitors in Australia, Messrs. Minter Ellison, wrote to MGM regarding its failure to supply lump and fine ore contractual tonnage. The Company also rejected the force majeure notice given by MGM to the Company on 17 January 2006. MGM responded by a letter of Freehills dated 10 May 2006 denying breach of the Agreement and proposing a meeting to discuss issues in dispute.

45.   On 21 June 2006, MGM provided the shipping schedule for the remaining period of 2006. It was stated that the laydays for the fourth quarter were tentative and dependent on third quarter performance. No shipment in July 2006 was made.

46.   On 26 July 2006, MGM provided revised shipping schedules for the August to November 2006 shipments. On 17 August 2006, MGM agreed to give 20% discount for the August shipment and allowed the Company to take another shipment within 2006 at 2005 prices. On 5 September 2006, MGM proposed amended shipment schedules for September to the end of 2006. On 9 September 2006, a shipment of fine ore was made on the Company’s nominated vessel and on 10 September 2006, a shipment of lump ore was made. On 5 October 2006, a shipment of lump ore was made to the Company but this was agreed and taken as a shipment for 2005 pursuant to MGM’s concession and not included as part of the annual shipments for 2006. No shipments were made for the rest of the period in 2006.

47.   Thus, only two shipments of lump ore were made in 2006 totalling 80,442 mt and only one shipment of fine ore of 36,359 mt was made. The contracted quantity of lump ore was 780,000 mt and that of fine ore was 80,000 mt. There was a shortfall of 699,558 mt of lump ore and a shortfall of 43,641 mt of fine ore.

Short delivery in 2007

48.   On 16 November 2006, MGM provided a proposed annual shipping schedule for 2007. The Company informed MGM on 8 December 2006 the proposed laydays for 2007 were generally acceptable and asked for a make-up of the two missed shipments in the last quarter of 2006 to be included in 2007. MGM replied that additional tonnage could not be made up for 2006.

49.   There were discussions between the parties regarding the price for the shipment in January 2007. MGM turned down the Company’s request for a discount. In the end, this shipment was not made. Only two shipments of lump ore were made in the first quarter of 2007.

50.   On 14 February 2007, MGM advised the Company of the shipping schedule for April to June 2007. Three shipments of lump ore were made in the second quarter.

51.   The shipping schedule for the third quarter was notified to the Company on 15 May 2007. Three shipments of lump ore and one shipment of fine ore were made in this quarter.

52.   On 15 August 2007, MGM provided the shipping schedule for the fourth quarter.

53.   On 25 September 2007, MGM gave a notice of force majeure to the Company indicating that due to congestion at the Port of Geraldton, caused in part by the scheduled shutdowns of the port in September, October and November 2007, it was prevented from delivering in 2007 one of the shipments of lump ore. The Company rejected MGM’s declaration of force majeure, alleging that the difficulties were due to MGM assuming delivery obligations which it knew it could not meet.

54.   In the fourth quarter, three shipments of lump ore and one shipment of fine ore were made. No fourth shipment of lump ore was made in this quarter.

55.   Thus, 11 shipments of lump ore were made in 2007 instead of 13 shipments as required by the Agreement. The total quantity delivered was 570,485 mt. The amount short delivered was 209,515 mt, made up of (1) one shipment of 60,000 mt which MGM originally scheduled for delivery in January 2007, but because of the price negotiation this shipment could not be made during the initial January laydays proposed by MGM; (2) one shipment of 60,000 mt which should be made in the fourth quarter; and (3) 89,515 mt being the remaining quantity for each of the monthly shipments made which were short of the contractual tonnage of 60,000 mt per shipment.

Claim for loss of profit due to short delivery

56.   The Company’s estimate on the loss of profits arising from the short delivery was based on the difference between the contract price and the prevailing market price at the time when the lump and fine ores ought to have been delivered under the Agreement.

57.   The contract price was determined by multiplying the base benchmark price for each “dry metric tonne” unit (“DMT”) applicable at the relevant time with the actual percentage of iron content for each shipment. The quantity of iron ore delivered by MGM was usually on a “wet metric tonne” (“WMT”) basis, being 1 to 2.5% higher than DMT and as the difference is not significant, it has been ignored in this calculation. The contract price per DMT plus the applicable freight gave the CNF (costs and freight) contract price.

58.   The prevailing market price was primarily obtained from offers made and/or contracts entered into by the Company for similar grade of iron ore around the relevant time. Where it was unable to obtain contracts or offers, it made an estimation of the prevailing market price based on its perception and expectation of the price trend in the market at the relevant time.

59.   For 2006, the 11 missed shipments of lump ore are spread out during the ten remaining months in that year. As there are 11 shipments over a ten-month period, the one extra shipment of 60,000 DMT with the balance quantity of 39,558 DMT from the January and August 2006 shipments are put in the month of December, this being the latest date upon which MGM should have delivered the remaining quantity to fulfil its contractual obligation.

60.   For the short delivery of fine ore of 43,461 DMT in 2006, the loss was calculated on the basis of the prevailing market price in December 2006, that being the latest by which the delivery should have been made.

61.   For the short delivery of lump ore in 2007, the loss was calculated on the basis of the prevailing market price in December 2007, that being the latest by which the shortfall should have been delivered. As the market price at that time had risen more than 75% above the contract price, that accounted for the very substantial loss of profit estimated at over US$16.5 million, notwithstanding that the quantity short delivered was just about 30% of the short delivery in 2006.

MGM’s case on the cross-claims for short delivery

62.   In respect of the short delivery in 2006, these contentions were raised by MGM.

63.   Firstly, on 7 and 22 December 2005, MGM had advised the Company in accordance with clause 16.1 of the Agreement there had been materially changed circumstances to MGM’s business which would impact on the volume and quantity of ore, thereby engaging clause 16.1. This clause provided that in the event either MGM’s production costs or schedules, or the Company’s market should change to the extent that the obligations contracted in the Agreement materially impact on the profitability of either party, both parties will negotiate in good faith in an attempt to establish revised equitable contractual arrangements to preserve the relationship between them. If the parties fail to reach agreement following negotiations in accordance with clause 16.1, it was provided in clause 16.2 that either party may terminate the Agreement by giving six months written notice to the other.

64.   Secondly, MGM relied on the declaration of a force majeure event due to the tropical cyclone in January 2006.

65.   Thirdly, reliance was placed on a meeting on 23 May 2006 between Andy Zhang and Alan Rule. It was alleged that at the meeting, all outstanding issues between MGM and the Company were discussed and resolved. As a result, neither party subsequently gave notice under clause 16.2 of the Agreement, nor did the Company commence legal proceedings threatened in the letter of Minter Ellison dated 4 May 2006.

66.   For the above reasons, it was contended that the Company would have no valid cross-claim in respect of short shipment in 2006.

67.   For the short delivery in 2007, MGM has raised these contentions.

68.   Firstly, it was asserted that there was a variation to the Agreement in that it was agreed there would only be a total of 13 shipments during 2007, as it was envisaged that the shipping schedule would be affected by rail carrier performance.

69.   Secondly, in respect of the shipment in January which was not made, this was because the Company had sought a 15% discount for this shipment, which MGM declined to give as this was not provided for in the Agreement. By letter dated 28 December 2006, MGM cancelled the shipment in accordance with clause 9.6.1 b) of the Agreement as a vessel was not nominated by the Company within time.

70.   Thirdly, for the remaining shipment which was not made, MGM relied on the notification of a force majeure event caused by congestion at the Port of Geraldton as per its letter to the Company dated 25 September 2007.

71.   Mr. Carolan, who appeared for MGM, raised an additional contention, in respect of the short delivery of 89,515 mt, which was the remaining quantity for each of the monthly shipments made that fell short of the contractual tonnage of 60,000 mt per shipment. He submitted that on the evidence, the parties had agreed to vary the Agreement in that the Company would accept the total quantity as advised in the annual shipping schedule provided by MGM on 16 November 2006, instead of the total contract tonnage of 780,000 mt.

Is there a genuine and serious cross-claim on short delivery

72.   Mr. Carolan acknowledged that the validity of the opposition to the cross-claim for short delivery in 2006 is “less clear”, as compared to the opposition raised regarding the cross-claim for 2007. That seems to be a fair assessment of the position.

73.   I am inclined to agree with Mr. Whitehead, SC, leading counsel for the Company, the three contentions raised in respect of the 2006 cross-claims are plainly matters that should go to trial in the arbitration proceedings.

74.   On the face of the letters of MGM dated 7 and 22 December 2005, no express mention was made of clause 16.1 of the Agreement or of the production costs of MGM. They were presented as a fait accompli rather than an invitation to negotiate. In these letters, MGM made unilateral requests for addendums to be signed. At the very least, it is arguable whether clause 16.1 was validly engaged.

75.   As for the alleged verbal agreement at the meeting on 23 May 2006 by which all issues were discussed and resolved, Andy Zhang, who has set out his recollection of the discussion, denied this. He asserted he had never represented orally or in writing that the Company would waive its rights to claim against MGM for the short shipments in 2006. Mr. Carolan submitted that the denial of the Company ought to be considered with regard to the delay in making any claim on the short shipments in 2006 until the letter of Ince & Co dated 28 July 2008. Even then, the Company’s solicitors had only reserved the right to hold MGM liable for short shipment.

76.   Mr. Whitehead relied on the provisions of the Agreement. Clause 19.1.1 of the Agreement provided that no waiver of any breach of the Agreement or of any of its terms shall be effective unless it is in writing and signed by the party against whom it is claimed. Clause 19.1.2 provided that no waiver of any breach shall be a waiver of any other or subsequent breach.

77.   In my judgment, there is an arguable case whether there was any waiver of the right to claim for short delivery in 2006. I hold that the Company has established a genuine cross-claim of substance under this head. The estimated claim as quantified is US$2,168,065.98.

78.   I turn to consider the arguments raised in respect of the cross-claim for 2007.

79.   Regarding the shipment not made in January 2007, I am of the view that the Company does not have a solid cross-claim on the available evidence. This shipment was cancelled due to the Company requesting for a discount, which it was not entitled to under the Agreement, and was turned down by MGM. The Company did not nominate a performing vessel at least 25 days before the commencement of the laydays, pursuant to clause 9.5. MGM was entitled to cancel the shipment, pursuant to clause 9.6.1 b). The Company’s allegation that it did not receive the letter of MGM dated 28 December 2006 cancelling the shipment is neither here nor there. An amount of US$4,749,000 (US$79.15 x 60,000 DMT) attributable to this head of claim would have to be knocked off from the total quantification of the cross-claims.

80.   For the other shipment for which a notice of force majeure in September 2007 was issued, the Company had written to MGM on 9 October 2007 disputing MGM’s declaration. The Company alleged that the reason why MGM was not in full capacity to supply the cargo was because it had entered into new sales agreements with new buyers after obtaining the maintenance plan from the Port of Geraldton. MGM did not make a proper arrangement to balance the supply and export based on the new contracts. It would not have the problem if it did not enter into the new contracts or had made due efforts to allocate the supply properly for all the existing sales agreements. The inability to fulfil the contractual obligation was due to MGM’s under-estimation of its capacity to supply. It was also contended that if a force majeure event had indeed occurred, MGM should have declared force majeure to all its buyers and evenly adjusted the quantity for all the sales agreements. Instead, MGM had only given a notice of force majeure to the Company.

81.   MGM had written to the Company on 22 October 2007 refuting all the allegations. It was asserted that the Company had made a number of incorrect factual assumptions, that all of MGM’s delivery obligations had been finalised before the Port Authority announced the shutdown for the Port on 27 June 2007, and that MGM did not assume delivery obligations which it knew it could not meet. MGM did not find it necessary to declare force majeure to other customers, because these customers had agreed to adjust their planned shipping schedules to accommodate MGM’s difficulties in making delivery.

82.   MGM did not adduce evidence to back up the assertions made in its reply of 22 October 2007.

83.   The fact that the Company did not follow up its complaint of short delivery until the letter of Ince & Co dated 28 July 2008 does not necessarily mean the dispute it raised regarding the force majeure notice should be treated with suspicion.

84.   I am unable to say in the circumstances the contentions raised by the Company in disputing the force majeure event are unlikely to succeed. The dispute would need to be resolved in the arbitration proceedings. I hold that the Company has established a serious and substantial cross-claim in respect of the short delivery of the shipment for which MGM issued the force majeure notice in September 2007. The estimated claim under this head is US$4,749,000.

85.   As for the allegation that the parties had agreed to vary the Agreement by allowing MGM to make only a total of 13 shipments during 2007, which would include the two shipments of fine ore, I do not think this was cogently established on the available evidence, as according to the shipping schedule provided by MGM on 16 November 2006, it was stipulated that 13 shipments of lump ore and two shipments of fine ore would be made, making a total of 15 shipments.

86.   That leaves the last contention, which was an alleged variation of the Agreement by which the Company agreed to accept delivery short of the contractual quantity.

87.   MGM provided the annual shipping schedule for 2007 to the Company on 16 November 2006, in which it was stated that 13 shipments of lump ore would be made with a total quantity of only 706,500 mt, which was short of the total contractual tonnage of 780,000 mt. This was followed up with an email of 21 November 2006 in which MGM explained that given the performance of its rail carrier in past years, it had taken a conservative approach to the schedule in 2007 and had provided a schedule to its customers that it was confident of achieving. It was further stated that once the rail carrier achieved the increased tonnages, MGM would revise the schedule to the Company and this might be in early to mid 2007.

88.   The Company replied on 8 December 2006 stating that under the current market circumstances, it would “generally accept [MGM’s] 2007 laydays plus a make-up of the cancelled two shipments for the last quarter of 2006.” It was also mentioned by the Company that “some incentive to the base price will be discussed when necessary in view of the general market situation”. However, MGM declined to deliver additional tonnage to make up for the two shipments outstanding for 2006 and turned down the possibility of offering incentives for future shipments when it responded to the email the same day.

89.   On 21 February 2007, MGM informed the Company that it did not have the flexibility at that time to change its schedule, as it would impact on its remaining buyers who had accepted the schedule for the second quarter in 2007.

90.   The Company replied on 25 February 2007 and confirmed the shipping schedule for the second quarter. On 12 March 2007, Andy Zhang wrote to Alan Rule stating that the Company “has confirmed the shipping schedule of this year”.

91.   Mr. Carolan submitted on the basis of the above exchanges there was an agreement to vary the quantity to be delivered in 2007 and that the Company had agreed to accept a lesser quantity as advised in the annual shipping schedule. This contention was not even explicitly made in the affidavit of MGM’s director, Luke Tonkin, who only made the point that MGM had, by virtue of the above exchanges, proceeded on the basis that the Company had accepted a variation to the Agreement in accepting only 13 shipments during 2007. He made no mention that the Company had also agreed to accept a total quantity of only 706,500 mt instead of 780,000 mt.

92.   Mr. Whitehead submitted that on the evidence, the Company was prepared to accept the annual shipping schedule of 2007 on the basis of two conditions, namely, the making up of two outstanding shipments in 2006 and an incentive in the price for future shipments. As these conditions were turned down by MGM, there was no agreement to vary the Company’s contractual entitlement. I am inclined to think the evidence of the alleged variation of the Agreement is not so clear. There is a case to go to trial. For the short shipment of 89,515 mt, I hold that there is a serious cross-claim, which should be resolved in the arbitration proceedings. The estimated claim under this head is US$7,085,112.25 (US$79.15 x 89,515 DMT).

Claim for detention

93.   Under clause 10.3.6 of the Agreement, it was provided that in the event of non-availability of hematite ore for loading due to reasons other than force majeure as per clause 15, MGM is liable for detention fees, which may be charged by the vessel’s owners.

94.   This claim relates to the shipment on Cape Courage which took place in March/April 2008. The vessel arrived at the Port of Geraldton on 19 March but did not complete loading until 4 April. It was scheduled to berth on 27 March for cargo loading but berthing was delayed to 2 April. According to the information provided by MGM’s local port agent and the Geraldton Port Authority, it would appear that the change in the berthing schedule was caused by the non-availability of the cargo rather than any problem associated with the berth or port traffic. The Company paid demurrage in the sum of US$450,505.04 to the vessel’s owner and claims this amount from MGM.

MGM’s case on the claim for detention

95.   MGM accepted liability to pay demurrage at US$92,419.79 only. In the affidavit of Luke Tonkin, he asserted MGM had sufficient cargo to enable it to commence loading on 28 March 2008 and claimed that a decision was made by the Geraldton Port Authority on 28 March to only allow Cape Courage to berth, initially on 1 April and subsequently on 2 April. It was claimed that any delays to the commencement of loading were caused by events not within MGM’s control and could not have been prevented through the exercise of reasonable diligence.

96.   No evidence has been adduced by MGM to back up the assertions on affidavit.

97.   Mr. Carolan informed the court that MGM would reserve its position in the arbitration regarding this claim and would adduce evidence in the arbitration to show that Cape Courage did not arrive in port until after the scheduled laydays and demurrage is not payable. As no such evidence is adduced before this court, I do not propose to take this into account.

Is there a genuine and serious cross-claim on detention

98.   I am satisfied on the available evidence there is a cross-claim of substance on the amount claimed for detention.

Conclusion on the cross-claims of the Company

99.   To recapitulate the findings made above, the Company has a genuine and substantial cross-claim in respect of these items:

(1) claims for demurrage relating to Ever Shining and Elinakos at US$203,187.85 and US$111,506.25;

(2) claim for detention relating to Cape Courage at US$450,505.04;

(3) claim for loss of profit for short shipments in 2006, estimated at US$2,168,065.98; and

(4) claim for loss of profit for short shipments in 2007, estimated at US$11,834,112.25 (US$4,749,000 + US$7,085,112.25).

100.   The total amount of cross-claims of substance arrived at is US$14,767,377.37. As this is in excess of the debt in the statutory demand of US$8,669,838.67, MGM would have to pray in aid a reverse cross-claim of an amount greater than US$6,097,538.70 to offset completely the Company’s cross-claims.

The reverse cross-claim of MGM

101.   The reverse cross-claim arose in this way.

102.   Under clause 9.4 of the Agreement, the Company was obliged to notify MGM at least 30 days prior to the commencement of each month of the estimated time of arrival of any vessel due within that month in accordance with the quarterly shipping schedule supplied by MGM. Such notification shall state the quantity to be loaded and, if possible, the name of the vessel.

103.   Under clause 9.5, the Company was obliged to nominate each performing vessel at least 25 days before the commencement of the laydays stated in the nomination. Such nomination shall set forth the name of the vessel, its estimated time of arrival at the loading port, laydays, hatch plan and quantity.

104.   By clause 5.2, the Company was required to open and keep open letters of credit with provision for three months’ shipments in advance, to cover all shipments under the Agreement. Clause 18.1 provided that if at any time during the term of the Agreement the Company should fail to comply with clause 5.2, MGM may terminate the Agreement by giving written notice to the Company.

105.   Until the end of September 2008, the spot price for iron ore was above the Hamersley Benchmark Price. Towards the end of September 2008, the spot price fell below the Hamersley Benchmark Price.

106.   In August 2008, MGM issued monthly shipping schedules to the Company, confirming one September shipment and two October shipments. On 4 September 2008, the Company requested that the September shipment be postponed by one month. This was rejected by MGM on 9 September. The Company failed to notify MGM of the estimated time of arrival vessels due at least 30 days before the commencement of September, and failed to nominate a vessel at least 25 days before the commencement of the September laydays.

107.   On 22 September 2008, the Company requested MGM to postpone the two October shipments. This was rejected by MGM on 23 September. MGM stated that postponing the October shipments would amount to a breach of an essential term of the Agreement.

108.   Freehills wrote to Ince & Co. on 6 October 2008, stating, inter alia, that if the Company should fail to provide a written proposal in relation to MGM’s damages concerning the September 2008 shipment and a written proposal in relation to the two October shipments by 10 October, MGM would refer the dispute to arbitration.

109.   No written proposal was provided by the Company. On 14 October 2008, Freehills wrote to Ince & Co. and Andy Zhang in respect of the September shipment, giving notice that unless the Company was to pay for the ore by 28 October 2008, MGM might resell the ore and seek to claim damages from the Company. Further, the Company was put on notice that if the dispute could not be resolved by 14 November 2008, MGM would refer the dispute to arbitration.

110.   On 23 October 2008, the Company informed MGM that a force majeure event had occurred because its banks had refused its application to open letters of credit to pay for the two October shipments, notwithstanding it had sufficient credit line available at those banks.

111.   Freehills on behalf of MGM rejected the notice of force majeure on 24 October, on the grounds that the Company had available resources to open the required letters of credit to pay for the October shipments. Further, MGM would be prepared to accept an upfront cash payment rather than a letter of credit.

112.   The statutory demand was issued by Jones Day on 24 October.

113.   On 5 November 2008, the Company wrote to MGM invoking clause 16, claiming that the market had changed to such an extent that the performance of the obligations under the Agreement would materially impact on its profitability. The Company requested MGM to negotiate revised equitable contractual arrangements in accordance with clause 16.1.

114.   On the same day, MGM issued a notice of termination of the Agreement pursuant to clause 18.1 on the basis that the Company had failed to comply with its obligations under clause 5.2. The Company was scheduled to take a shipment between 22 September and 1 October 2008, but had failed to cause a letter of credit to be provided, to nominate a vessel, or send a vessel to collect the shipment. Further, the Company was scheduled to take a shipment between 16 and 25 October 2008, but had failed to cause a letter of credit to be provided, to nominate a vessel, or send a vessel to collect the shipment.

115.   Spot price had fallen below the contract price by October 2008, and remained so up to the end of March 2009 until the Hamersley Benchmark Price was set for the next period of 12 consecutive months commencing 1 April 2009. MGM had to find other buyers of ore at lower prices and claims the difference as damages against the Company in respect of shipments which ought to have been made under the Agreement.

116.   To mitigate its loss, MGM entered into offtake agreements with APAC Resources Limited (“APAC”) and Shougang Concord International Enterprises Company Limited (“Shougang”), by which APAC and/or Shougang agreed to purchase the available production of MGM at, inter alia, Tallering Peak and Extension Hill at these prices: (1) US$40 per WMT from 1 November 2008 to 31 December 2008; (2) US $56 per WMT from 3 January 2009 to 30 June 2009; and (3) at a 10% discount to Hamersley Benchmark Prices incorporating certain specification penalties from 1 July 2009 onwards.

117.   MGM has calculated that its loss and damage arising from the Company’s breach would be a minimum of US $97,000,000. This represented the cash flow revenue shortfall arrived at by multiplying the price differential against the tonnage in DMT based on the Tallering Peak and Extension Hill life of mine plans and the Company’s related contractual tonnage from these operations through to 2010. The price differential was calculated as the difference between (1) the Hamersley Benchmark Price per DMT multiplied by the percentage iron contained per WMT and then converted into DMT using applicable moisture content; and (2) the negotiated price that MGM would receive from APAC and Shougang. The resulting difference in cash flow was then discounted by 13% as the present-day value of the loss and damage was calculated having regard, in part, to the sale and supply of ore that would have taken place in future had the Agreement been performed.

118.   For the purpose of the present application, MGM is taking only the loss between the period from September 2008 to 31 March 2009. The quantum of its loss during that period could be precisely calculated. Based on the Hamersley Benchmark Price that applied from 1 April 2008 to 31 March 2009, the average realised selling price for the period to 31 January 2009 that MGM would have received for its Tallering Peak ore sales was US $123.35 per WMT lump ore and US $85.21 per WMT for fine ore. Applying that formula, MGM calculated that at least US $44,000,000 of its total minimum US $97,000,000 loss and damage from the Company’s breach will arise from the period of September 2008 to 31 March 2009. The loss and damage up to 31 March 2009 was not discounted by 13% because the discount is only applied to future revenue. In applying the formula, it has been assumed in the Company’s favour that MGM would be able to mitigate its loss by selling every cargo of ore previously allocated to the Company to either APAC or Shougang.

119.   It was contended that this US $44,000,000 constituted a debt due and payable by the Company even though it had issued a notice under clause 16.1 on 5 November 2008 and assuming that the necessary precondition for this clause had arisen in that the Company’s market had changed as at that date to the extent that the obligations in the Agreement would materially impact on its profitability. The parties should then negotiate in good faith and if they failed to reach agreement following negotiations in accordance with clause 16.1, either party may terminate the Agreement pursuant to clause 16.2 by giving six months written notice to the other. The Company would remain obliged to accept and pay for shipments of iron ore pursuant to the Agreement at Hamersley Benchmark Prices up to the date the termination took effect under clause 16.2.

120.   Allowing for a minimum of one month for good-faith negotiations, together with six months’ notice of termination following on from the clause 16.1 notice issued on 5 November 2008, the Agreement could not have been lawfully terminated before 5 June 2009 at the earliest, which was two months after 31 March 2009.

121.   For the sake of argument, even if the price differential were to be calculated using not the lower prices at which the ore was sold to APAC and Shougang but at notional spot prices as high as the Hamersley Benchmark Price for fine ore at US$84.43 per WMT (so there would be no loss in respect of fine ore), the resulting loss in respect of lump ore for the period of September 2008 to 31 March 2009 would still be US$20.6 million.

The Company’s case on the reverse cross-claim

122.   Mr. Whitehead raised these defences to the reverse cross-claim.

123.   Firstly, the Company relied on the force majeure notice on 23 October 2008, contending that its obligation to open a letter of credit was suspended by reason of a cause or causes not within its control.

124.   The Company has not however adduced any evidence to back up its assertion in the notice that it had applied to its banks to open relevant letters of credit in favour of MGM to cover the purchase price of the two shipments of ore in October 2008, and that the banks had refused to entertain its application for letters of credit for the time being notwithstanding that the Company had sufficient credit line available at those banks. Mr Whitehead relied on the fact that the notice was issued in the eye of the financial tsunami at the time.

125.   Secondly, it had given notice under clause 16.1 to MGM on 5 November 2008. On receiving such notice, MGM was obliged to enter into negotiations with the Company in good faith pursuant to this provision to establish revised equitable contractual arrangements to preserve the relationship between them. It was contended that MGM was not permitted to meet a clause 16.1 notice with a notice of termination under clause 18.1. Mr. Whitehead submitted the notice of termination was overridden by the clause 16.1 notice.

126.   Thirdly, it was contended that in entering into the offtake agreements with APAC and Shougang, MGM had put the performance of the Agreement beyond its power. MGM is not entitled to claim loss and damage calculated by reference to the Agreement remaining on foot to the end of the contract.

Is there a dispute on substantial grounds on the reverse cross-claim

127.   On the first ground of defence, I am inclined to agree with Mr. Carolan that this does not appear to be a realistic defence. It is doubtful if an event of force majeure was made out on the available evidence. In any event, the short answer is that MGM had in the letter of Freehills dated 24 October 2008 offered an option to the Company that it would be prepared to accept an upfront cash payment. Mr. Carolan drew my attention to the unaudited balance sheet of the Company as at 31 October 2008. This showed that Company had current assets under “Bank and Cash” in the region of HK$372 million (equivalent to over US$40 million), far more than what was required for the purchase price of the shipment.

128.   Nor do I think the second ground of defence is one of substance. The Company was in default of its obligations to nominate vessels for the shipments in September and October 2008 and to cause a letter of credit to be provided for these shipments. The default was not likely to be excused by its force majeure notice. The Company’s breach of clause 5.2 gave rise to the entitlement of MGM to terminate the Agreement under clause 18.1. I have reservation about Mr. Whitehead’s argument that the right of MGM to terminate for breach was taken away or suspended by the Company serving a notice under clause 16.1. The obligation to negotiate under clause 16.1 was only in relation to the change which had caused material impact on the profitability of either party, not in relation to the existing breach of an essential term of the Agreement such as clause 5.2.

129.   In any event, I think it is immaterial whether the Agreement was validly terminated on 5 November 2008 by MGM’s notice, or whether it could only have been validly terminated by either party under clause 16.2 on six months’ notice following the Company’s clause 16.1 notice on 5 November 2008. Regardless of whichever way the Agreement was terminated, the Company would still be liable to pay damages to MGM for its breach arising out of the failure to take one shipment in September and two shipments in October 2008.

130.   The total tonnage for the three shipments of lump ore was about 180,000 WMT. Using the price differential in the calculations based on four scenarios provided by MGM, the range per WMT was between US$84.74 and US$38.14, giving total claims in the range of between US$15,253,200 and US$6,865,200. As mentioned earlier, for present purpose, it would suffice if MGM could make out a reverse cross-claim of substance greater than US$6,097,538.70.

131.   The third ground of defence is immaterial in the present proceedings. By 14 October 2008, the Company was in breach of the Agreement and on that day Freehills gave notice to the Company of the intention of MGM to resell the ore to another unless the Company was to pay the purchase price by 28 October. The offtake agreements with APAC and Shougang were made in mitigation of the loss and damage caused by the Company’s breach. For present purpose, MGM has not sought to rely on its claim for loss and damage calculated by reference to the Agreement remaining on foot to the end of the contract.

The financial status and solvency of the Company

132.   In view of the conclusions I have reached, it is not necessary to consider the financial status and solvency of the Company.

Conclusion and orders

133.   For the reasons given above, the Company’s application for an injunction to restrain presentation of a winding-up petition based on the debt demanded in the statutory demand of 24 October 2008 is dismissed.

134.   I make an order nisi that the Company is to pay the costs of MGM.