In the High Court of New Zealand Wellington Registry Civ-2011-418-66
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IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2011-418-66 IN THE MATTER OF an application under s265 of the Property Law Act 2007 AND IN THE MATTER OF Pike River Coal Limited (in receivership) BETWEEN PIKE RIVER COAL LIMITED (IN RECEIVERSHIP) First Plaintiff AND JOHN HOWARD ROSS FISK, DAVID JOHN BRIDGMAN, MALCOLM GRANT HOLLIS Second Plaintiffs AND O'MALLEY FARMING LIMITED First Defendant AND ROBERT WILLIAM BROWN, ADRIAN JOHN BENJAMIN, H & M TRUSTEE FIVE LIMITED Second Defendant AND SOLID ENERGY NEW ZEALAND LIMITED Third Defendant Hearing: 26 July 2011 Counsel: M D O'Brien and R L Pinny for First and Second Plaintiffs C Carruthers QC for Defendant Judgment: 14 October 2011 JUDGMENT OF WILLIAMS J In accordance with r 11.5, I direct the Registrar to endorse this judgment with the delivery time of 10.30am on the 14th October 2011. PIKE RIVER COAL LIMITED (IN RECEIVERSHIP) V O'MALLEY FARMING LIMITED HC WN CIV-2011- 418-66 14 October 2011 Introduction [1] Between 2008 and 2010 Pike River Coal Limited (Pike River) operated a coal mine under the Paparoa Ranges near Greymouth. Resource consents permitted Pike River to extract 17.6 million tonnes of coal valued, it is said, at around NZ$4 billion. Between 19 November and 24 November 2010 a series of explosions rocked the mine. Twenty-nine miners were killed within the mine either as a result of the explosions or their toxic aftermath. The mine was sealed and has yet to be reopened. The bodies remain interred. A Royal Commission of Inquiry currently proceeds whose task it is to determine causes and responsibilities for this disaster. [2] Within three weeks receivers were appointed. Pike River currently owes $75 million to first ranking secured creditors and $15 million to unsecured trade creditors. [3] The receivers want to sell the mine. Despite uncertainty over whether the mine will be reopened and the bodies of the 29 miners recovered, the receivers say they are “reasonably confident” that a sale will be completed that will benefit all creditors. I understand that indicative offers have been received (including one from Solid Energy New Zealand Limited (Solid Energy)). The receivers hope to complete the sale in a timely fashion. [4] It is in this context that the receivers of Pike River wearing their lessee’s hat now apply for relief from cancellation against the lessors of Pike River’s Ikamatua rail loading facility. The Ikamatua facility [5] When Pike River began to plan its mining operation it needed to find a way of transporting its product to a port for export. The original plan was to move the coal by road to Greymouth and then barge it by sea to New Plymouth for export into Asia and the Indian subcontinent. That proposal was overtaken on 18 December 2007 when Pike River struck a Coal Transport Agreement (CTA) with Solid Energy. [6] Solid Energy is a State-owned Enterprise with a large West Cost-based coal mining business. It operates the Stockton Coal Mine north of Westport. [7] This agreement with Solid Energy facilitated Pike River’s access to the Midland Railway Line which crosses the Southern Alps into the eastern port of Lyttelton. For reasons not gone into, access to the Midland line represented a better overall deal for Pike River, even though it meant that coal ships from Asia would have to add two extra days’ steaming (around North Cape and back again on the return trip) in order to make Lyttelton rather than New Plymouth. [8] The reason that Solid Energy was the gateway for Pike River onto the Midland line was that Solid Energy had its own agreements with KiwiRail and Port Lyttelton by which, it seems, Solid Energy had purchased all available capacity on that line. As at December 2007, Solid Energy had excess capacity under the agreements and it made some of that capacity available to Pike River. [9] Once access to the Port of Lyttelton was in hand, this had knock-on effects in terms of Pike River’s supply chain. Pike River needed rail and loading infrastructure adjacent to the Midland line and reasonably close by road to the Pike River mine. In 2008, Pike River found land suitable for a rail, stockpiling and loading facility at Ikamatua north east of Greymouth and about 22 kms by road from the Pike River mine. The necessary land was in two titles owned respectively by O’Malley Farming Limited (O’Malley) and the R W Brown Family Trust (Brown). [10] In June 2008, Pike River entered into 25 year leases with O’Malley and Brown. The rail, stockpile and loading facility were built on the O’Malley land. It included a large rail loop connecting to the Midland line; a stockpiling area; a loading facility on the loop; and a short stretch of dual carriageway, 11 metres wide, from the loading and stockpile facility to the eastern boundary of the Brown land. The Brown land had a frontage to Atarau Road – a public road – on its west side. Pike River extended the 11 metre dual carriageway private road from the O’Malley boundary, across the Brown land to Atarau Road. [11] The rail loop, road, stockpile and loading facility cost Pike River $10.5 million to build. [12] To transport the coal from Pike River’s mine to the Ikamatua facility is complicated. The coal is mixed with water into slurry at the mine and piped to a processing plant about seven kms away. There the coal is de-watered and stockpiled. It is then loaded as needed onto trucks and transported by road to the Ikamatua facility. [13] At the Ikamatua facility the trucks dump the coal into large hoppers. Conveyers then move and drop the coal into trains, the trains having left the Midland line and accessed the Ikamatua loop. Once loaded, the trains rejoin the Midland line and continue to the Port of Lyttelton. I was advised that Ikamatua is the only facility on the West Coast capable of loading “long trains” effectively. Presumably that reflects the size of the loop on the O’Malley land. Leases [14] As can be seen the bulk of the Ikamatua facility is contained on the O’Malley lease. Annual rent for that land is $50,000 + GST. The Brown lease has a much lower annual rent of $28,000 + GST since it only provides the road way connection to Atarau Road. [15] Other terms are common to both leases. The lease, as I have said, is for 25 years. Pike River has a right of renewal for a further five years. Rent is paid annually and in advance. It is subject to annual review. Pike River can assign the lease without prior consent of the lessor provided certain conditions are met. The conditions include that there is “no existing unremedied breach of any of the terms of the lease”. On the other hand, relevantly, the lessor has the right to re-enter the property and determine the lease if: (a) The landlord gives written notice to the tenant specifying any breach (other than a rent breach) where the breach remains unremedied for 10 working days after notice (clause 10.1(b)); or (b) The tenant is placed in receivership (clause 10.1(f)). [16] On expiry or termination of the lease, the lessor may require Pike River to remove its structures or additions from the land and make good any damage caused. The obligation is to “as far as is reasonably possible restore” the leased property to its prior condition. [17] Pike River has no express right to cancel the lease. [18] The balance of the O’Malley land is run as a sheep and cattle farm with a pine plantation. The pines were planted around 2005 and will mature in 15 to 20 years. Current turnover for the farm is in the range of $700-$800,000 per annum. It supports three O’Malley family members and an employee. [19] The balance of the Brown land also has a plantation with trees maturing in approximately 12 years. Prior to the Pike River lease, the Brown land also carried beef cattle on its own account. Now a neighbour grazes part of the Brown land in return for maintenance services. Receivership and sale [20] The current lease dispute came about as a result of the closure of the mine following the November 2010 explosions. Nearly all of 170 people employed by Pike River have lost their jobs and, as I have said, the current position is that Pike River owes approximately $75 million to secured creditors, and $15 million to unsecured trade creditors. [21] The receivers’ first goal is to stabilise the atmosphere in the mine so it can be physically reopened. The next goal is to sell it. Indicative bids were received in June 2011. Several indicative bids were either conditional upon continuing access to the Ikamatua facility, or assume such access. Final bids are expected shortly and any sale will follow quickly thereafter. [22] When Pike River went into receivership it gave Solid Energy force majeure notices and Solid Energy cancelled the CTA. This relieved Pike River of its take or pay obligations under the agreement but it also broke Pike River’s export supply chain. This makes no difference in the short term since the mine is closed, but it could have a significant impact on any sale price. Receivers move to protect Pike River’s position [23] When Pike River was placed in receivership, the receivers tried to contact the principals for O’Malley and Brown.