EQUATORIAL MINING PTY LTD v. MAPLETREE HOLDINGS LTD AND OTHERS

HCMP 1081/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1081 OF 2008

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J U D G M E N T

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1.  This is an application for Norwich Pharmacal relief.  The plaintiff is an Australian listed company.  I refer to it as EQM.

EQM’s mining Business

2.  EQM is a mineral exploration company.  It was registered and listed in Austria in October 1986.  It is being sued by an Irish company called Errigal Limited (“Errigal”) in New South Wales (“the Errigal proceedings”). 

3.  In about 1990, EQM had about AU$7 million as its main asset.  In 1991, one Niugini Mining Limited (“NML”) was a 25% shareholder of EQM.  NML’s controlling shareholder was one Battle Mountain Inc. (“Battle Mountain”).  NML also had interests in another company called Inversiones Minerales del Inca SA (“IMDI”).

4.  In April 1991, IMDI acquired the option rights to 20 contiguous copper oxide mining leases in a place called Leonor in Northern Chile.  The consideration for the 20 leases (“the Leonor Leases”) were US$9 million and 5% net smelter return royalty during the life of the mine.  The vendor of the Leonor Leases was one Minera Cobrenorte Limitada (“Cobrenorte”).  The US$9 million was to be paid by IMDI to Cobrenorte as follows:

(i)  US$600,000 on 9 April 1991;

(ii)    US$3,000,000 on 9 August 1991; and

(iii)  US$5,400,000 on 2 April 1992.

Between April and July 1991, IMDI also spent a further US$600,000 in exploration and other costs at the Leonor Leases.

5.  In about July 1991, Battle Mountain decided that NML and IMDI should not be involved in copper mines but should concentrate on other business.  At the end of July 1991, EQM agreed with Battle Mountain to takeover IMDI’s option rights in the Leonor Leases.  The consideration from EQM were to assume the obligations of IMDI to Cobrenorte and to repay IMDI the expenses and costs for exploration and administration.  Such costs were claimed by IMDI to be at US$1,200,000.

6.  On 8 August 1991, EQM entered into an agreement with IMDI and one Pacific Rim Resources Limited (“Pacific Rim”), IMID’s associated or direct holding company.  By the agreement, EQM agreed to acquire IMDI’s option rights in the Leonor Leases.

7.  By the agreement, IMDI agreed to pay on behalf of EQM US$3,000,000 to Cobrenorte payable under the options.  This sum was due on 9 August 1991.  IMDI also agreed to pay on behalf of EQM legal and administration costs in exercising the option rights subject to a maximum of US$500,000.

8.  As security for EQM’s repayment to IMDI of the said sums of US$3,000,000 and US$500,000, the agreement required EQM to pay Pacific Rim US$3,500,000.  This sum was repayable by Pacific Rim to EQM upon EQM having fully reimbursed IMDI the said US$3,000,000 and US$500,000.

Payment of US$1,000,000 for EQM

9.  On about 7 August 1991, EQM pursuant to the agreement remitted US$2,500,000 to the bank account of Pacific Rim.  On about the same day, another sum of US$1,000,000 was also remitted to the bank account of Pacific Rim.  Hence, the US$3,500,000 was paid by and on behalf of EQM to Pacific Rim on about 7 August 1991. 

10.  Errigal claims in the Errigal proceedings that the US$1,000,000 was paid by it for EQM.  EQM disputes this.

11.  One Mr McAleer, a director of EQM between 1990 and 2002, made a statement on 25 August 2007.  He explained in the statement the circumstances leading to the payment of the US$1,000,000 allegedly made by Errigal to Pacific Rim.  He said when EQM took over IMDI’s option rights in the Leonor Leases, it did not have any idea how it would fund the acquisition.  It only had AU$7 million.  It became apparent that third party funding would be required.  It was then decided to seek a third party to contribute to ¹/₃ of the project costs.  Another director of EQM, Mr Geoff Loudon agreed to source the necessary third party funding. 

12.  There was little time available and sourcing from the market or existing shareholders was not possible.  It was also agreed that the third party funding should be by way of acquisition of equity interest in the project and not by a loan to EQM.  It however did not take Loudon more than a week to source the necessary funds. 

Acquisition of Errigal

13.  Regarding the channelling of funds from the third party to the project, McAleer suggested the use of an Irish company.  If such a company was not owned, managed or controlled in Ireland, it would not be treated as an Irish resident for tax purpose.  McAleer also offered to arrange non-Irish directors for the Irish company and Loudon agreed.

14.  In late July or early August 1991, McAleer obtained Errigal from an Irish accountant firm.  He also arranged a few of his friends who were non-residents of Ireland to be its directors.  He informed the other directors of EQM about the development of funding.  The US$1,000,000 was then paid by Errigal as its contribution to the US$3,000,000 due from EQM to Cobrenorte on 9 August 1991.  Errigal further paid US$150,000 as its contribution to EQM’s US$450,000 working capital and exploration expenses.  Errigal’s total contribution of US$1,150,000 was borrowed from the 2nd defendant herein.  With this contribution, Errigal became the owner of ¹/₃ of the equity of the mining project.

The 1993 Agreement

15.  At the end of 1992, McAleer decided that if EQM was going to raise substantial funds for the project, it had to own 100% equity of the project.  In February 1993, he proposed to Errigal to buy out its equity in the project.  Errigal was represented by one John Brogan.  An agreement was then made between EQM and its subsidiaries on the one part and Errigal on the other (“the 1993 Agreement”). 

16.  By the 1993 Agreement, Errigal waived and forgone its rights and entitlement to the US$1,150,000.  In return, EQM and its subsidiaries agreed to pay Errigal 15% of all dividends that EQM’s mining subsidiary CCML may declare and pay.  The Errigal proceedings were commenced by Errigal in 2006 against EQM and its subsidiaries for Errigal’s share of dividends pursuant to the 1993 Agreement.  Errigal’s claim amounts to US$29,645,000 or more.

Ownership of Errigal

17.  I now deal with the ownership of Errigal.  The shares of Errigal are held by Morguard Enterprises Limited (“Morguard”) and Sterling Securities Limited (“Sterling”).  Morguard and Sterling are nominee shareholders only.  They originally held the shares on behalf of the 2nd defendant, Omnium Investments Limited (“Omnium”).  Omnium was a vehicle used by a firm of solicitors in Hong Kong to administer trusts for clients.  Omnium held the beneficial interest of the Errigal shares as the trustee of a PNG Trust.  In other words, Omnium through Morguard and Sterling established and held Errigal for the PNG Trust.

18.  In about 2004 or 2005, Omnium’s trusteeship for the PNG Trust was taken over by the 1st defendant, Mapletree Holdings Limited (“Mapletree”) which is still the trustee of the PNG Trust.  The 3rd defendant is a solicitor.  He was responsible for making decisions for Omnium on behalf of the PNG Trust.  After the change of trusteeship, he was and still is responsible for making decisions for Mapletree on behalf of the PNG Trust.

Suspicion of wrongdoing and potential claims of EQM

19.  EQM in these proceedings says that Errigal was established on behalf of the PNG Trust.  Those behind the PNG Trust therefore have an economic interest in Errigal.  If the former directors of EQM are behind the PNG Trust, then these former directors would have committed breaches of their directors’ duties to EQM.  The reason being that a former director was not entitled to obtain any unauthorized and improper benefit from his office of director and could not divert a benefit of EQM to some other party.  At the time of the 1993 Agreement, there were statutory prohibitions against such conduct in the Corporation Law of New South Wales.

20.  EQM goes further to say that it has reasonable grounds to believe that Loudon, McAleer and/or its other former directors may be behind the PNG Trust and are therefore interested in Errigal.  On the basis of such belief, EQM further says that it has reasonable grounds to believe that it can make the following claims:

(1) claims against one or more of the directors of EQM for seeking to obtain unauthorized and improper benefit from their position as EQM directors, including by establishing Errigal in 1991, entering into the 1993 Agreement and pursuing Errigal’s claim in the Errigal Proceedings.

(2) claims against other persons for knowingly assisting a former director or directors of EQM in any such breaches of director’s duties.

(3) further defences (including setting the 1993 Agreement aside) in the Errigal proceedings and possible Third Party actions in those proceedings.

Necessity for discovery

21.  In order to establish of the above claims, EQM finds it necessary to establish the identity of those behind the PNG Trust.  It therefore seeks the disclosure by the three defendants herein information and documents on the identity of the settlor and beneficiaries of the PNG Trust, documents showing a financial relationship between the PNG Trust on the one hand and Loudon and/or McAleer (or persons associated with them) on the other and documents recording payments or other financial benefit received by Loudon and/or McAleer in connection with the PNG Trust from the time of inception of the Trust.

The plaintiff’s evidence

22.  EQM filed a number of affidavits in support of this application.  They supplied the factual basis for EQM’s belief that Loudon, McAleer and/or its other former directors may be behind the PNG Trust and are thus interested in Errigal.

23.  Mr Sherlock, a former non-executive director and chairman of EQM, said on affidavit that he did not believe that EQM had a genuine need for third party funding in order to meet the payment obligations to Cobrenorte.  He found it strange that a substantial funding of US$1,000,000 could be obtained from an independent third party within a week particularly when no due diligence had been undertaken by EQM in relation to Errigal or vice versa.  EQM’s feasibility report on the mining project, which comprised of three volumes of documents, was dated 12 August 1991 and was after the payment of the US$1,000,000 allegedly made by Errigal.  In the usual case, the investor would have obtained and reviewed the detail information of the project before deciding whether to invest in the project.  The 3rd defendant, who was making decision for Omnium on behalf of the PNG Trust, did not appear to have undertaking such study.

24.  From the above evidence, Mr Sherlock inferred that the reason why Errigal was contented to invest the US$1,000,000 in the project and EQM was contented to accept the investment was because Errigal was not a bona fide independent third party investor.  He suspected that there was a member or members of the EQM board behind Errigal. 

25.  Furthermore, Errigal was also made available by McAleer who arranged his friends to sit on its board.  He made this arrangement for the third party that was allegedly sourced by Loudon in a short time.  Loudon also appeared to have negotiated on behalf of Errigal which led to the 1993 Agreement.  There was also evidence of Loudon having represented Errigal in the board of a subsidiary of EQM and documentation showing that Loudon had conducted negotiation on behalf of Errigal.  In about March 1999, Loudon had sought EQM’s consent for relocating the domicile of Errigal.

26.  There is also evidence that Loudon had many commercial connections with various directors and officers of Errigal as well as Morguard and Sterling, the nominee shareholders of Errigal.  Loudon was also connected with Mapletree, the 1st defendant.  There was also hearsay evidence from various people saying that Mr Loudon was the person behind Errigal.

The legal principle

27.  In order to confirm that Loudon and/or McAleer and/or the other former directors of EQM are behind the PNG Trust and thus interested in Errigal, EQM makes this application for Norwich Pharmacal relief.  On the legal principle, I refer to the statement by Lord Reid in Norwich Pharmacal Co. & Ors v Customs & Exercise Commissioners [1974] AC 133 at 175B-C:

“… if through no fault of his own a person gets mixed up in the tortious acts of others so as to facilitate their wrong-doing he may incur no personal liability but he comes under a duty to assist the person who has been wronged by giving him full information and disclosing the identity of the wrongdoers.  I do not think that it matters whether he became so mixed up by voluntary action on his part or because it was his duty to do what he did.  It may be that if this causes him expense the person seeking the information ought to reimburse him.  But justice requires that he should co-operate in righting the wrong if he unwittingly facilitated its perpetration.”

28.  The requirements for granting such relief have been developed and extended as summarized in para. 3.04 of Disclosure 3rd Edition:

“(1)   That a wrong has been carried out, or at least arguably carried out, by a wrongdoer.

(2) That the claimant intends to assert his legal rights against the wrongdoer.

(3)    That there is the need for an order to enable action to be brought against the wrongdoer, usually to require the defendant to the application to identify the wrongdoer.  In other words, that an order is necessary to assist the claimant in achieving justice and there is no other practical source of information, or that it is just and convenient to make the order sought.

(4)    That the defendant or respondent is a person who was mixed up in, or facilitated the wrongdoing (even innocently) or has some relationship with the wrongdoer sought to be identified, and is able to provide the information necessary to enable the wrongdoer to be identified or sued.”

29.  Under the 1st requirement, if there are reasonable grounds for supposing that a wrong has been inflicted on the plaintiff, but not all the facts that the plaintiff needs for pleading a case against someone are in place, Norwich Pharmacal relief may still be granted for the provision by the defendant of information to enable the wrongdoer to be identified and/or the wrongdoing to be confirmed (see P v T Ltd [1997] 1 WLR 1309 at 1318C-F, Carlton Film Distributors Ltd v VCI Plc [2003] FSR 876 at paras. 7 and 11, A Co v B Co [2002] 3 HKLRD 111 at para. 27(3), Mitsui & Co. Ltd v Nexen Petroleum UK Ltd [2005] 3 All ER 511 at 517f-h and Evergreen International Storage & Transportation Corporation v The HSBC Ltd & Anor, HCMP 1619/2007 at paras. 58-62.  EQM therefore appears to be entitled to have the information and documents from the defendants to find out whether its former directors are behind the PNG Trust and hence had benefited Errigal at the expense of EQM.

Grounds of opposition

30.  The defendants oppose these proceedings on various grounds.  They firstly submit that there is no cogent evidence that a wrong has been committed against EQM.  Alternatively, they say that EQM is trying to use the Norwich Pharmacal jurisdiction to obtain discovery in aid of a claim that EQM knows to exist and already has sufficient information to advance.  They therefore say that there is no need for the Norwich Pharmacal relief.  Furthermore, they say that EQM may be able to obtain the PNG Trust Deed and related information from the Errigal proceedings if it should take steps to do so.

The first ground

31.  On the first ground, though there is still insufficient evidence to show a prima facie case that Loudon and/or McAleer and/or other persons associated with them are indeed behind the PNG Trust, I am of the view that EQM has already demonstrated sufficient evidence to show good grounds for supposing that they are behind the PNG Trust and Errigal.  The defendants’ first ground therefore fails.

The second ground

32.  The next ground says that EQM knows of a claim and already has sufficient information to advance it.  This ground does not sit comfortably with the first ground.  In any case, even when considered in isolation, this ground is still not valid.  The evidence proffered by EQM may show good grounds for supposing the infliction of wrong on it, but a prima facie case has not yet been shown.  On this point, I would refer to Mitsui & Co. Ltd v Nexen Petroleum UK Ltd at 517G where Lightman J said:

“Relief can be ordered where the identity of the claimant is known, but where the claimant requires disclosure of crucial information in order to be able to bring its claim or where the claimant requires a missing piece of the jigsaw.”

In this case, the obtaining of the information and documents from the defendants may confirm whether there is any wrongdoer as well as the existence of the claim.  The information and documents being sought may indeed turn out to be the missing piece of the jigsaw.

33.  Without the missing piece, EQM is not in a position to make any claim against any of its former directors for obtaining or having obtained unauthorized and improper benefits through the office of director.  Mr Sophocles, a partner of the firm of solicitors acting for EQM in the Errigal proceedings, has also confirmed on affidavit that it would be improper now for EQM to advance allegations of equitable fraud against the suspected former directors because of the strict rules on conduct of litigation in New South Wales.  He referred to a statutory prohibition on lawyers to advance a claim or a defence unless the material available shows a reasonable prospect of success.  There are also “Advocacy Rules” which make it improper for EQM’s legal representatives to advance a claim or defence of equitable fraud without obtaining the documents and information sought in these proceedings.  I agree with Mr Sophocles’ view.  This ground of objection also fails.

The third ground

34.  Regarding discovery in the Errigal proceedings, the defendants refer to several means for obtaining the PNG Trust Deed and related information.  One of these means is the cross-examination of the 3rd defendant, Mr Hoddinott and Mr John Brogan in those proceedings.  Counsel for the 3rd defendant has confirmed that Messrs Hoddinott and Brogan will give evidence at the trial of the Errigal proceedings.  The other means are the issue of a letter of request by the New South Wales Court in the Errigal proceedings to this court and the discovery summons issued by EQM to Messrs Loudon, McAleer and Brogan under Rule 5.3 of the Uniform Civil Procedure Rules 2005 of New South Wales.

35.  EQM submits that the cross-examination of Hoddinott and Brogan in the Errigal proceedings is not a viable means.  The reason being that the PNG Trust Deed and the identity of those behind the trust are not matters relevant to the issues in those proceedings.  Cross-examination on the PNG Trust Deed and the identity of those behind the trust may not be allowed.  EQM says that Errigal has indeed raised this ground of irrelevance previously in the Errigal proceedings to oppose an attempt by EQM to seek discovery of the PNG Trust Deed.  Furthermore, Brogan has answered some interrogatories for Errigal on 21 August 2007 in the Errigal proceedings and it appears that he cannot provide the information sought in these proceedings.

36.  Though Hoddinott has confirmed through counsel in these proceedings that he will attend the trail of the Errigal proceedings (and assuming that the question of relevance will not be a bar), EQM will still be unable to test his evidence without the documents sought in these proceedings.  I think EQM’s argument is valid.

37.  Regarding the letter of request, that was for the purpose of examination of witnesses and not for discovery.  The ground of relevance also applies to the issue of the letter.  Errigal has in fact objected to the issue of the letter on the ground that the evidence sought by the letter was irrelevant to the issues in those proceedings.  Eventually, EQM did not pursue the application for this reason.  I think this argument of EQM is also valid.

38.  Regarding the discovery summons issued by EQM under Rule 5.3 of the Uniform Civil Procedure Rules, there are several reasons why it would not be useful.  From EQM’s evidence, this summons is still not ready for hearing.  It may not be heard until November 2008 or even later.  Furthermore, Messrs Loudon, McAleer and Brogan may have the necessary information but not the PNG Trust Deed or related documents.  In that event, the discovery summons cannot assist as it can only lead to an order for discovery of documents and not disclosure of information.  On the other hand, the defendants herein should have the necessary information as well as the PNG Trust Deed and related documents which are discoverable under Norwich Pharmacal jurisdiction. 

39.  The discovery summons has one further limitation in that it can only be used against prospective defendants for discovery of documents.  But there is so far no evidence to show that any of the defendants herein are wrongdoers.  The evidence disclosed so far only suggests that the defendants herein may be innocent parties who were innocently involved in or facilitated the wrongdoing of others.  Hence the discovery summons cannot be addressed to these defendants for discovery or to seek the necessary information from Loudon, McAleer and Brogan.

Norwich Pharmacal relief as a remedy of last resort

40.  The defendants also submit that the Norwich Pharmacal relief should be a remedy of last resort and it should only be used if the information is not otherwise available.  In the light of my foregoing discussion of the various ways and means for discovery, I am of the view that the Norwich Pharmacal relief is indeed the last resort for EQM.

The decision

41.  Having found that EQM is entitled to have discovery of the information and documents as stated in the originating summons and the defendants do not have any ground to oppose the same, I make the following order:

“1. An order for discovery against the Defendants requiring each of them to disclose forthwith to the Plaintiff the following information and documents, if any, in their possession, custody or power as set out below, to allow the Plaintiff to inspect those documents and take copies thereof.

(i)    the trust deed of a trust known as the PNG Trust (the ‘PNG Trust Deed’), together with any amendment(s) made to thereto;

(ii)   any other document showing the identity of the settlor of the PNG Trust;

(iii) any other document showing the identity of any beneficiary of the PNG Trust from its inception;

(iv) any document showing a financial relationship between the PNG Trust, on the one hand, and Archibald Geoffrey Loudon and/or Peter McAleer (or persons associated with either of them), on the other hand from its inception; and

(v)  any document which records any payment or other financial benefit received by Archibald Geoffrey Loudon and/or Peter McAleer (or persons associated with either of them) in connection with the PNG Trust from its inception.

2.  An order requiring each of the Defendants to disclose forthwith to the Plaintiff:

(i)    the identity of the settlor of the PNG Trust; and

(ii)   the identity of the beneficiary or beneficiaries of the PNG Trust from its inception.

3.  An order that the Plaintiff be at liberty to use the information and/or documents disclosed by the Defendants or any of them in compliance with paragraphs 1 and 2 above for the purpose of bringing or defending legal proceedings commenced, or to be commenced, by or against the Plaintiff in the Supreme Court of New South Wales and/or any court of competent jurisdiction, including proceedings that may be commenced by the Plaintiff against Errigal Limited and/or former directors of Equatorial Mining Pty Limited.”

Costs

42.  On costs, counsel for EQM submits that the documents to be disclosed may or may not implicate the defendants or one or more of them.  Counsel thus asks me to reserve the costs of these proceedings until such time as the documents and information are available and then fix a further date for arguing costs.  I do not think this a reasonable way to deal with the costs of these proceedings.  If the documents and information should confirm EQM’s belief, it can then launch a claim against the wrongdoers and recover these costs from them.  The evidence suggests that these are wealthy individuals.  If no wrongdoing should be revealed, EQM should bear these costs.  There is no reason for reserving these costs.

43.  Counsel for the defendants also submit that the defendants should only be required to make discovery after their costs have been paid as EQM is not domiciled in Hong Kong.  I also do not favour this approach.  To defer discovery until after taxation and payment of costs will delay the discovery.  The Errigal proceedings will be tried in February 2009 and the discovery should not be deferred.  EQM is also a substantial listed company in Australia and the risk of its default on the payment of costs to the defendants does not appear to be significant.  I therefore make the following costs order nisi:

“4. An order nisi that the costs of these proceedings be to the defendants and the plaintiff do pay the defendants reasonable costs for their compliance with this order.”