GREYMOUTH GAS KAIMIRO LIMITED AND ORS V SWIFT ENERGY NEW ZEALAND LIMITED HC AK CIV-2009-404-000977

GREYMOUTH GAS KAIMIRO LIMITED AND ORS V SWIFT ENERGY NEW ZEALAND LIMITED HC AK CIV-2009-404-000977 25 February 2009IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2009-404-000977BETWEEN GREYMOUTH GAS KAIMIRO LIMITED, GREYMOUTH GAS PARAHAKA LIMITED, GREYMOUTH GAS TURANGI LIMITED, GREYMOUTH PETROLEUM TURANGI LIMITED Plaintiffs AND SWIFT ENERGY NEW ZEALAND LIMITED Defendant Hearing: 25 February 2009 Appearances: M D O'Brien for the Plaintiffs J Shackleton for the Defendant Judgment: 25 February 2009 Reasons: 3 March 2009REASONS FOR JUDGMENT OF DUFFY JThis judgment was delivered by Justice Duffy on 3 March 2009 at 11.30 am, pursuant to r 11.5 of the High Court Rules Registrar/Deputy Registrar Date:Solicitors: Bell Gully P O Box 4199 Shortland Street Auckland 1140 for the Plaintiffs Simpson Grierson Private Bag 92518 Wellesley Street Auckland 1141 for the DefendantIntroduction[1] On 25 February 2009 I granted the plaintiffs an interim injunction to restrain the movement of funds payable by the Bank of New Zealand (BNZ), under a letter of credit, to the defendant or its nominee from being dealt with in any way other than by deposit to a specified New Zealand bank account. At the time I granted the interim injunction I said I would deliver my reasons for doing so later. I now set them out. [2] The application for an interim injunction was heard on an urgent basis. It was filed late on 24 February 2009 and called in the Duty Judge list before me at 10.00 am on 25 February 2009. By then the defendant's solicitor had notice of the application and appeared to oppose the application. When it was called, I was advised that the payment which the plaintiffs sought to restrain was due to be made at 2.30 pm that day. This meant there was only limited time to hear the parties' argument. [3] It was not until shortly before 1.00 pm that I informed the parties that I was going to grant some form of interim relief to preserve the Greymouth companies' position until such time as the parties had a better opportunity to present their cases to the Court. I asked the parties to see if they could come to some agreement on the terms of the interim relief and to obtain a fixture for the purpose of a further hearing on the grant of interim relief should that be necessary. When the parties returned at 2.00 pm, they had responsibly prepared draft orders for interim relief and obtained a fixture for 17 March 2009 for a further hearing should the grant of the injunction need to be re-visited. I then made orders in terms of the draft orders the parties had presented to me. The exigencies under which the parties appeared before me and which have led to the grant of interim relief need to be borne in mind by the Judge who hears any further argument on the topic of interim relief. [4] On 2 May 2008 the plaintiffs (the Greymouth companies) purchased the defendant's (Swift NZ) 80 percent interest in petroleum exploration permit 38742 (the permit interest). The purchase price for the permit was US$15 million. At settlement of the purchase the Greymouth companies provided Swift NZ with threeunconditional and irrevocable letters of credit (known as letters of credit 2, 3 and 4). Each letter of credit was for the sum of US$5 million. [5] The Greymouth companies have put the BNZ in funds to meet payment on presentation of letter of credit number 2. The presentation of letter of credit 2 to the BNZ for payment was to occur at 2.30 pm on 25 February 2009. This is the payment for which an interim injunction is sought. [6] Since the parties entered into the sale and purchase agreement for the permit interest, a royalty holder third party by the name of GXL Royalties Limited (GXL) has challenged the sale of the permit interest. The challenge takes two forms. First, there have been judicial review proceedings challenging the consent the Minister of Energy gave to the sale of the permit interest. Those proceedings were heard in the Wellington High Court in September 2008 and a decision is yet to be issued. Secondly, there are proceedings GXL issued on 13 August 2008 against the Greymouth companies and Swift NZ seeking a declaration that the sale of the permit interest is unlawful for non-compliance with the Royalty Deed. This proceeding is yet to be heard. [7] In the light of GXL's actions, the parties took steps to provide for the potential eventuality of the sale of the permit interest being unwound. They entered into a letter agreement on 25 August 2008 which provided in part that:... [Swift NZ] agrees that if the sale and assignment by [Swift NZ] of its interest in the Permit to the Greymouth companies is unlawful, ineffective or not valid, the Greymouth companies may ... require [Swift NZ] to return, without interest, all or such part of the purchase price ... it has received from the Greymouth companies and [Swift NZ] shall do so (and shall make appropriate arrangements to ensure it is able to do so) and the parties shall forthwith resume the participating interest each party held in the permit before completion. (emphasis added)[8] Since reaching this agreement the Greymouth companies have become concerned about Swift NZ's intentions to honour the terms of the 25 August 2008 letter agreement. Swift NZ is not conducting business in New Zealand. Its parent company in the United States has experienced a significant decline in its share value. Publicly available information shows that the parent company's share value has declined from US$50.36 per share on 2 May 2008 to US$9.08 per share on23 February 2009. The parent company's market capitalisation has fallen from US$1.53 billion to US$309 million. The current liquidity ratio is 0.51. Its Unaudited Summary Balance Sheet shows that as at 31 December 2008, it held cash and cash equivalents of only US$283,000 while its current liabilities were US$153.499 million and its current assets were $78.086 million. [9] Under the terms of the letters of credit, Swift NZ can direct that payment be made to its nominee. The Greymouth companies are concerned, therefore, that on presentation of letter of credit 2 Swift NZ will direct the BNZ to pay the US$5 million to Swift's parent company in the United States. Should GXL's challenges to the sale of the permit interest be successful, it will be impossible to recover the funds once this is done. [10] In order to alleviate their concerns, the Greymouth companies wrote to Swift NZ on 9 February 2009 asking about what appropriate arrangements it had made to ensure it could repay the US$5 million should the need to do so eventuate. Swift NZ's response dated 9 February 2009 and received by facsimile transmission on 11 February 2009 was to do no more than write to the Greymouth companies stating that appropriate arrangements to that effect had been made. Nothing was said about what the appropriate arrangements might be. The Greymouth companies wrote again on 12 February 2009 reiterating their concerns about recoverability of payments under the letters of credit. Swift NZ did not respond to this letter. Since its letter dated 9 February 2009, Swift NZ has steadfastly refused to advise the Greymouth companies of what it has in mind as an appropriate arrangement to ensure its ability to repay the purchase price of the permit interest. [11] The Greymouth companies have responded to Swift NZ's silence by issuing civil proceedings alleging Swift NZ is in breach of the letter agreement of 25 August 2008 by failing to make appropriate arrangements to ensure it is able to return all or part of the purchase price. The Greymouth companies allege that Swift NZ is intending to either pay the letter of credit funds to its parent company in the United States or to nominate its parent company as the recipient of the funds under letter of credit 2. The Greymouth companies allege that this is not an appropriate arrangement in terms of the letter agreement of 25 August 2008.[12] In support of the injunction application, the Greymouth companies have filed an affidavit of one of their directors, Robert Dunphy. This affidavit provides documentary evidence to establish an evidential foundation to support the allegations the Greymouth companies make. This evidence is to be understood against the background of the global financial crisis and the deteriorating financial position of Swift NZ's parent company in the United States. In addition, the Greymouth companies invite the Court to infer from the silence of Swift NZ that its intentions on receipt of the funds paid under letter of credit 2 are as alleged by them. [13] The Greymouth companies submit that in terms of the usual tests to be applied for when to grant an interim injunction, they have established there is a serious question to be tried and the balance of convenience lies in their favour. They seek an interim injunction on terms which obliges Swift NZ to deposit the funds it receives under the letters of credit to a New Zealand bank account. The funds are to remain on deposit until the proceeding is disposed of either by a judgment of this Court or through arbitration. [14] Swift NZ has had little time to prepare to oppose the granting of an interim injunction. When it appeared before me on 25 February 2009 it had not had time to file a notice of opposition or supporting affidavit evidence. I do not say this to be critical of Swift NZ but merely to outline the difficulties which the company faced in the hearing before me. Swift NZ makes the following points in opposition to a grant of interim relief. [15] First, under the letter of agreement of 25 August 2008, Swift NZ is not required to inform the Greymouth companies of the appropriate arrangements it has made to ensure it is able to repay the purchase price or any part thereof [16] Secondly, Swift NZ has discharged its obligations under the letter agreement of 25 August 2008 by writing to the Greymouth Companies by letter dated 9 February 2009 to inform them that Swift NZ has in place appropriate arrangements for the repayment of the purchase price should that become necessary.[17] Thirdly, Swift NZ rejects any suggestion that it, or its parent company in the United States, will be unable to repay any payments of the purchase price should that have to occur. In this regard Swift NZ contends that the evidence of the drop in share value of its parent company in the United States is not sufficient to establish that there is any real financial risk of the purchase price not being returned. [18] Fourthly, Swift NZ directed my attention to clause 3.4.2 of the agreement for sale and purchase of the permit interest. Under this clause, the Greymouth companies undertook not to commence proceedings of any kind whatsoever to interfere, delay, hinder or prevent the surety (BNZ) in each of the three irrevocable unconditional letters of credit numbers 2, 3 and 4 from paying out to the seller on presentation of the irrevocable, unconditional letters of credit numbers 2, 3 and 4. Swift NZ submitted that this clause was an insurmountable barrier to the Greymouth companies in this proceeding. [19] Finally, Swift NZ contended that the Greymouth companies had delayed too long in applying for an interim injunction and that this disqualified them from obtaining it.Discussion[20] The Greymouth companies have persuaded me their proceeding raises a serious question to be tried. I consider that the relevant terms of the letter agreement of 25 August 2008 require an objective assessment to be made of whether or not Swift NZ has taken appropriate steps to ensure it is able to repay the purchase price or any part thereof. Implicit in this understanding is a requirement that Swift NZ will provide details of the arrangements they intend to make. It follows that I do not accept Swift NZ's argument that it is not required to inform the Greymouth companies of the arrangements it has made to repay the purchase price. Nor do I accept its argument that its letter dated 9 February 2009 to the Greymouth companies sufficiently discharged its obligations under the letter agreement of 25 August 2008. [21] I consider that any objective analysis of what are appropriate arrangements needs to be undertaken with prevailing circumstances in mind. At a time when thereis a global financial crisis that has been worsening since August 2008, what are appropriate arrangements may differ from what would have been considered appropriate in August 2008. The evidence of the drop in share value of Swift NZ's parent company as well as its current liquidity ratio are relevant circumstances to take into account in an assessment of the appropriateness of the arrangements Swift NZ has made for repayment. I consider that in the context of the type of hearing before me today, it is appropriate to draw the inference that there is a financial risk to the Greymouth companies if the funds paid under letter of credit 2 are permitted to be sent off shore to the parent company of Swift NZ Limited. It follows that I reject the third argument of Swift NZ. [22] I am also persuaded by the Greymouth companies that the proper inference to draw from Swift NZ's actions to date is that its intention is to send the funds received under letter of credit 2 off shore to the parent company. In view of the evidence before me of the parent company's financial position and given the unusual circumstances created by the global financial crisis, I think there is a serious case to be made out for the view that sending the funds off shore to the parent company is not an appropriate arrangement in terms of the letter agreement of 25 August 2008. This would mean that Swift NZ is in breach of the letter agreement. [23] I do not think that prohibiting the funds paid under letter of credit 2 from being sent off shore, or being dealt with in any way other than under the agreed terms of the interim injunction of 25 February 2009, breaches Clause 3.4.2 of the sale and purchase agreement of the permit interest. The terms of the interim injunction do not have the effect of interfering, delaying, hindering or preventing the BNZ from paying out to Swift NZ or its nominee on presentation of letter of credit 2. The impact of the interim injunction is felt by Swift NZ Limited, which is required to direct the BNZ to pay the money to the bank account nominated in the interim injunction order. The Greymouth companies have provided the BNZ with funds in order for it to be able to honour letter of credit 2 and there is nothing in the present proceeding which directly affects the BNZ when it comes to paying under letter of credit 2. I, therefore, find that Swift NZ's reliance on Clause 3.4.2 of the sale and purchase agreement does not help resist the grant of an interim injunction.[24] As to delay, I do not consider that the space of time between 9 February 2009 when the Greymouth companies first began making enquiries of Swift NZ about the arrangements it had made to honour the 25 August 2008 letter agreement is such that it amounts to delay that would disqualify the Greymouth companies from now obtaining an interim injunction. I consider they were entitled to pursue other more informal means of protecting their position. They were not to know that Swift NZ would adopt the position it has done. After sending their letter of 12 February 2009, the Greymouth companies were entitled to expect that Swift NZ would reply to it. I can understand how it has come about that no action was taken until the filing of the proceeding on 24 February 2009. It follows that I do not find there has been any delay in applying for the interim injunction. [25] When it comes to the balance of convenience test, I consider the balance lies squarely in favour of the grant of interim relief. Swift NZ has not informed me of any hardship it will suffer if the interim relief is granted. On 17 March 2009 Swift NZ will have the opportunity to revisit the grant of interim relief. It is difficult to see how its position can be irreparably harmed by the restriction the interim injunction will impose on it between now and then. Any damage that Swift NZ does suffer will be financial and that can be remedied by an award of damages. The Greymouth companies have provided an undertaking as to damages and no issue has been raised about their ability to honour that undertaking. [26] At the same time I have trouble seeing how Swift NZ could remedy any damage the Greymouth companies would suffer if the interim injunction were not granted. Since I have found there is a serious risk that once funds paid under letter of credit 2 are sent off shore they may not be able to be recovered, it follows that recovery of damages is also at risk. This of itself is a factor favouring the grant of interim relief. I am satisfied that there is a real prospect of the Greymouth companies suffering irreparable damage if interim relief were not granted to them on the terms sought. [27] When I stand back and look at the matter overall and take into account the general principles relating to the grant of interim injunctions, I am satisfied that thisis a case where interim relief of the type set out in the order of 25 February 2009 was appropriately granted.Result[28] The Greymouth companies have been granted an interim injunction on the terms set out in the order of 25 February 2009. The interim injunction application is to be called before the Court again on 17 March 2009. Costs are reserved. Duffy J