New South Wales Court of Appeal CITATION: Australian Hardboards Limited and Others v Hudson Investment Group Limited [2006] NSWCA 146 HEARING DATE(S): 14, 15, 16 February 2006 JUDGMENT DATE: 6 June 2006 JUDGMENT OF: Giles JA at 1; Santow JA at 2; Bryson JA at 133 DECISION: (1) Save for the variation in (2), appeal and cross-appeal dismissed. ; (2) Vary order 8 made by Einstein J on 15 September 2005 to read –; 8. Order that the Third Defendant execute and deliver to the Plaintiff mortgages in favour of the Plaintiff in such form as the parties may agree or, in default of agreement within 21 days from 6 June 2006, as may be settled by an Associate Justice.; (3) Appellants to pay the costs of the appeal and cross-appellant to pay the costs of the cross-appeal. CATCHWORDS: RECTIFICATION – Rectification of a deed (the "Entitlement Deed"). - CORPORATIONS – Whether a previous deed purporting to amend the Entitlement Deed was validly executed by the two companies concerned – Whether absence of board authority to execute deed – Whether there was breach of fiduciary duty and its effect where common directors purporting to act for each company – "ratification" by way of ratifying what occurred at non-existent meeting – formalities required for genuine board meetings. - CONTRACT – Whether letter intended to constitute legally binding agreement – Masters v Cameron – possible fourth category. LEGISLATION CITED: Corporations Law s260B Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 CASES CITED: Bush v National Australia Bank Ltd (1992) 35 NSWLR 390 Commissioner of Stamp Duties (NSW) v Carlenka Pty Limited (1995) 41 NSWLR 329 Masters v Cameron (1954) 91 CLR 343 Poliwka v Heven Holdings Ltd (No 2) (1992) 8 ACSR 747 AUSTRALIAN HARDBOARDS LIMITED (ACN 088 183 420) (First Appellant/First Cross-Respondent) PARTIES: HUDSON TIMBER PRODUCTS LIMITED (ACN 081 809 814) (Second Appellant/Second Cross-Respondent) A H BREMER PARK PTY LIMITED (ACN 089 657 188) (Third Appellant/Third Cross-Respondent) HUDSON INVESTMENT GROUP LIMITED (ACN 004 683 729) (Respondent/Cross-Appellant) FILE NUMBER(S): CA 40768/05 COUNSEL: C R C NEWLINDS, SC/ P T NEWTON (Appellants/Cross-Respondents) L G FOSTER, SC/ D R STACK (Opponent/Respondent) SOLICITORS: Corrs Chambers Westgarth (Appellants/Cross-Respondents) Deacons (Respondent/Cross-Appellant) LOWER COURT JURISDICTION: Supreme Court - Equity Division LOWER COURT FILE NUMBER(S): SC 50066/04 LOWER COURT JUDICIAL OFFICER: Einstein J LOWER COURT DATE OF DECISION: 12 August 2005, 13 September 2005 LOWER COURT MEDIUM NEUTRAL CITATION: [2005] NSWSC 716, [2005] NSWSC 931 IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40768/05 SC 50066/04 GILES JA SANTOW JA BRYSON JA 6 JUNE 2006 AUSTRALIAN HARDBOARDS LIMITED and Others v HUDSON INVESTMENT GROUP LIMITED Judgment 1 GILES JA: I agree with Santow JA. 2 SANTOW JA: INTRODUCTION This appeal, while again seeking rectification of a deed ("the Entitlement Deed"), concentrates on a challenge to the trial judge's conclusion that a deed purporting to amend the Entitlement Deed was never validly executed by the two companies concerned. Invalidity was held to follow from the absence of board authority to execute the deed and breach by the directors of their fiduciary duties in attempting to cause their respective companies to enter into the deed. The directors were on notice of any lack of authority as they were common to both companies who were parties to the deed. 3 The events leading up to these proceedings began with a property joint venture to develop certain potentially valuable land of some 335 hectares in Ipswich, Queensland. The venture was constituted by a Heads of Agreement ("Heads of Agreement") entered into on 27 November 2000 by one of the appellants, Australian Hardboards Limited ("AHL"), and the respondent, Hudson Investment Group Limited ("HIG" or "Investment"). The third party was a developer, Wingate Properties Pty Limited ("Wingate"). Those heads provided for the division of profits from the development of that land ("the Land"), at the time owned by AHL. At that time, and until a re-structure of shareholdings on 8 June 2001, HIG owned directly 100% of the shares in AHL. 4 The Land adjoined a factory used by the Hudson Group of companies for wood manufacturing. To realise its potential as residential land, a water treatment plant would need to be built so that contaminated water no longer needed to be discharged upon that adjoining land. Hence the joint venture, to realise its potential, required further developmental steps and a reasonable time period to bring them about. 5 On 8 June 2001 a restructure of the Hudson Group took place. HIG by an agreement referred to as "the Share Purchase Agreement" sold the whole of the issued shares it owned in AHL to a then 89% owned affiliate of HIG called Hudson Timber Products Pty Limited ("HTP" or "Timber"). It did so for $25.251 million, satisfied by the allotment to HIG of approximately 3% of HTP's capital. That necessarily diluted HIG's indirect interest in the Land from a 100% interest via AHL to a 92% interest via HTP; the latter now owned 100% of AHL, which owned 100% of A H Bremer Park Pty Limited ("Bremer"), which by now in turn owned the Land. 6 That dilution of HIG's indirect interest in the land led to HIG being given certain entitlements should the Land be later sold. That was done under the deed called the Entitlement Deed also dated 8 June 2001 between AHL and HIG. It was that Entitlement Deed which AHL, HTP and Bremer unsuccessfully sought to rectify. The Entitlement Deed provides for shareholder approval of AHL's financial assistance to HIG in connection with HIG's disposal to HTP of AHL (clause 3 at Blue, 819). That financial assistance was AHL's promise to pay $10 million (less a deposit paid of $3.5 million) to HIG in the event the Land was sold before a Sunset Date (8 June 2006); see cl 4 of the Entitlement Deed, quoted below. 7 Shareholder approval was subsequently sought and obtained from, respectively, AHL's sole shareholder HTP, and HTP's own shareholders. This was pursuant to s260B of the Corporations Law. Significantly, the documentation sent to shareholders reflected the precise terms of the Entitlement Deed, with no reference to rectification, actual or proposed, or to an intention differing from the words used. 8 On appeal AHL again presses its claim to rectify cl 4 of the Entitlement Deed (Blue, 820). Clause 4 is in the following terms (HIG being referred to as Hudson and AHL as Hardboards): 4. Payment The parties agree that if the ultimate control over or ultimate beneficial ownership interest in the Land changes in any way (a 'Disposal') on or before the Sunset Date, Hardboards must on the date of the Disposal, pay to Hudson the lesser of the following amounts: (a) $10,000,000 less the Deposit, and (b) the value of the aggregate consideration received by Hardboards in relation to the Disposal less the Deposit." By cl 8 of the Entitlement Deed, this amount to be paid to HIG (on the contingency of sale of the Land by 8 June 2006) was to be secured by a mortgage in HIG's favour. The "Deposit" paid was defined as $3.5 million. 9 The rectification sought was described by the appellant's Amended Notice of Appeal in these terms: ""His Honour should have found that it was the common intention of AHL and HIG at the time of entry into the Entitlement Deed (8 June, 2001) that if AHL disposes of all of its control over or all of its beneficial ownership in the Land on or before 8 June, 2006 then AHL must on the date of disposal pay to HIG an amount up to $10 million from the net profit received by AHL on the development and disposal of the Land in accordance with the Heads of Agreement." [emphasis added] 10 In argument on appeal, a more complex version of what was said to be the common intention was asserted for purposes of rectification, though not strongly pressed (T, 36 Appeal transcript). It was derived from cl 4 as sought to be altered by the deed called the Second Deed of Amendment. The Second Deed of Amendment was supposedly entered into on 5 September 2001, but was held never to have been validly executed. Essentially it purported to fix HIG's entitlement under cl 4 so HIG did not get the first $10 million on disposal of the Land. Instead HIG would receive a profit share calculated on a sliding scale above $10 million in any aggregate consideration received by AHL or HTP on a disposal of the Land, so long as disposal occurred before the Sunset Date (8 June 2006). So gross is the difference between the words of cl 4 and the complexities of the sliding scale, it strains credulity to consider that the latter represented the parties' common intention. 11 Nonetheless, the appellants sought to justify rectification of the Entitlement Deed on the following basis. It was said that unless so rectified, cl 4 would overcompensate HIG for giving up its 100% indirect interest in the Land. The appellants accepted that the purpose of cl 4 of the Deed was to give HIG the benefit of an interest in any future upside from disposal of the Land at any time before 8 June 2006. HIG, in disposing of 100% of AHL to a partly owned subsidiary HTP, was thereby reducing from a 100% indirect interest in the Land to a 92% indirect interest in the Land. It was, as I have said, doing so for a consideration of $25.251 million, satisfied by an allotment of approximately 3% of HTP's shares so bringing HIG's holding up from 89% to 92% of HTP. The appellants argued that this $25.251 million already compensated HIG for any loss of future upside from future sale of the Land. Were cl 4(b) left unrectified, it was said, then HIG would be compensated twice-over upon a future sale of the Land. Hence it was said rectification was needed to substitute "net profit" or the sliding scale for aggregate consideration. 12 The trial judge, Einstein J, was not, as required for rectification, "comfortably satisfied" that either version of the supposed common intention ($10 million from "net profit" or sliding scale) represented an actual common intention of HIG and AHL, in entering into the Entitlement Deed. In that regard, he made adverse findings on the credit of HIG's principal director (between 27 May 1998 to 16 October 2003), Mr McLeod, who was as well Chief Executive and Managing Director of HTP and a director of AHL and Bremer. He also made adverse findings on the credit of his co-director, Mr Holland. They were both common directors of AHL and HTP at the time of the Entitlement Deed and continued, till a further group restructure in May/June 2003, to remain common directors of all of AHL, HTP and HIG. After that restructure, Mr McLeod remained a common director of HTP and AHL but no longer of HIG. 13 On appeal, the appellants place primary reliance not on rectification, though still pressed. Rather, they rely upon the efficacy of the Second Deed of Amendment. It was signed by Mr McLeod attesting the seal purportedly on behalf of HIG and Mr Holland attesting the seal purportedly on behalf of AHL on or about 5 September 2001. It purported to vary cl 4 of the Entitlement Deed to confer on HIG not the first $10 million of aggregate consideration (less the deposit), but the profit share earlier described on a sliding scale above $10 million. The appellants rely on the Second Deed of Amendment also for its purported variation of the Entitlement Deed to remove the obligation to secure the amount payable to HIG by mortgage. 14 To succeed on these matters, the appellants had to overcome a finding by the trial judge that the Second Deed of Amendment had never been validly executed. The trial judge, unimpressed by the credit of the purported signatories and after a careful review of the evidence of the practice followed for directors' meetings, concluded that there had never been a directors' meeting of HIG in November 2001 (or earlier) authorising the affixing of the common seal. He also found that there had not been, on 21 December 2001, any subsequent effective "ratification" by the directors of HIG when they purported to confirm the minutes of an earlier non-existent November 2001 meeting. These findings are challenged on appeal. Breach of fiduciary duty, found by the trial judge against the then directors of HIG in entering into the Second Amendment Deed, is likewise challenged. It would only remain relevant if the Second Deed of Amendment were, contrary to the trial judge's determination, executed with the necessary board authority under seal. 15 There was a First Deed of Amendment, bearing the earlier date of 20 June 2001. It was signed by Mr McLeod purportedly on behalf of HIG and by Mr Holland purportedly on behalf of AHL. It was dated by Mr Hughes signing as company secretary purportedly under the seal in both cases. It purported to make various amendments to the Entitlement Deed at the behest, so it was said, of ANZ Bank, principal lender to the Hudson Group. In particular, it deleted the requirement for a mortgage in cl 8 to secure the payment in cl 4. The trial judge concluded that it too was not validly executed with the necessary board authority and involved breach by the directors of their fiduciary duties. This was because: (a) deletion of the mortgage from the Entitlement Deed was entirely for the benefit of AHL and entirely in disregard of the interests of HIG; (b) knowledge of that breach of fiduciary duty must be attributed to AHL because of McLeod and Holland's common directorships of HIG and AHL; and (c) there was no reliable evidence of any meeting of directors of HIG or AHL authorising execution or the affixing of the seal and indeed there was evidence to the contrary. 16 The appellants did not challenge the trial judge's conclusion as to the First Deed of Amendment. 17 The respondent brings a cross-appeal. The gravamen of that cross-appeal is that there was a later binding agreement, contrary to the conclusion reached by the trial judge, whereby HTP agreed in mid-2003 to dispose of 50% of its shareholding in Bremer (and hence the Land) to HIG. This was said to have been agreed in principle prior to, and to have become binding by virtue and upon the terms of, a letter of 23 July 2003 ("the Letter"). The cross-appeal challenges the conclusion of the trial judge that no binding agreement was thereby entered into. The trial judge had concluded that upon the proper construction of the Letter and taking into account what he described as "loose ends" to be resolved, the parties intended that a further formal agreement be first entered into before they were to be legally bound, citing Masters v Cameron (1954) 91 CLR 343 at 360. SALIENT FACTS 18 I set out the salient facts below, elaborating later on those disputed. 19 The plaintiff at trial, HIG, incorporated in 1967, has at all material times been a public company listed on the Australian Stock Exchange ("ASX"). 20 Relevantly for issues anterior to a 2003 Group restructure, the principal shareholdings in HIG were at all material times held by Mr Vincent Tan and his family and associates. Mr Tan is currently a director of HIG. He did not give evidence. 21 Prior to the Share Purchase Agreement referred to earlier being entered into, HIG owned both 100% of the first defendant at trial, AHL (an unlisted company) and approximately 89% of the second defendant, HTP. 22 AHL was incorporated on 22 June 1999. It changed its name to its current name on 3 September 1999. 23 HTP was incorporated on 27 February 1998 and listed on the ASX on 23 December 1998. On 4 June 2003, it changed its name to Hudson Timber Products Limited as part of the 2003 Group restructure. 24 At all material times anterior to the 2003 Group restructure the directorships of each of HIG, AHL and HTP included the fourth defendant, Mr McLeod and the fifth defendant, Mr Holland. 25 Mr Hughes was at all material times company secretary of HIG, AHL and HTP. The post-2003 Group restructure circumstances of relevance were that Mr McLeod remained a director of HTP and AHL (and a Mr Hills remained a director of AHL). The Land 26 AHL operated a factory in Ipswich, Queensland. The Hudson timber and building products manufacturing operations were located on 22 hectares of this land. The factory produced large quantities of waste water and discharged this waste water via an irrigation system over the otherwise unused 335 hectares of land. 27 A property developer, Wingate, identified the Land as having significant development potential. It was decided that, were the factory to dispose of its water through a water treatment facility, the remaining 335 plus hectares of land could be then used for property development purposes. The Heads of Agreement – 27 November 2000 28 On 27 November 2000 Heads of Agreement were entered into between Wingate, AHL and HIG for the purpose of considering proposals for the development of the Land. 29 The Land had previously been re-valued (specifically with the contemplated joint venture in mind) from a nominal value in the books of AHL to $10 million. The Heads of Agreement had some obscurities, but it was common ground that their effect was that the Hudson companies contributed the land to a proposed joint venture for its development, Wingate contributed its expertise, and if the joint venture went ahead there would first be paid to the Hudson companies $10 million representing their contribution of the land and the profits thereafter would be shared. The Share Purchase Agreement – 8 June 2001 30 By the Share Purchase Agreement entered into on 8 June 2001 (some six months after the Heads of Agreement), HIG sold the whole of the issued shares in AHL to HTP for $25.251 million satisfied by the allotment to HIG of approximately 3% of HTP's capital. HTP thus became, following the sale, a 92% owned subsidiary of HIG, having previously been an 89% owned subsidiary of HIG. The Entitlement Deed – 8 June 2001 31 By a second agreement (the Entitlement Deed), entered into as part of the same 8 June 2001 restructure, the benefits of cl 4 were conferred on HIG. These were calculated to have the effect that HIG (notwithstanding the sale) would retain a benefit from the development and eventual disposal of the Land, assuming it occurred before 8 June 2006. The dispute relates to whether that benefit was to be based upon net profit on sale of the Land or aggregate consideration received. 32 The critical provisions of the Entitlement Deed are, as to cl 4, set out under "Introduction" above, and as to cll 5, 6 and 8, below. 5 Disposal Undertaking AHL agrees that it will not undertake a Disposal: (a) which does not involve AHL ceasing to have all control over, or all of its beneficial ownership in, the Land; and (b) unless it is on arms length terms and the consideration to be received is cash payable as at the date of the Disposal 6 Best Endeavours (a) AHL shall use its best endeavours to develop and Dispose of the Land before the Sunset Date on the best possible commercial terms. (b) AHL shall not do anything, suffer, or permit anyone else to do anything which may have the effect of diminishing the value of the Land. 8 Security AHL shall grant HIG the Mortgage as and when required by HIG [This provision constituted an obligation of AHL to grant a mortgage over the land to secure the payment of the amounts stipulated by clause 4] [Clause 1 defined deposit to mean '$3.5 million', mortgage to mean 'the mortgage in the form required by Hudson', and "Sunset date" to mean 'the fifth anniversary of this deed'.]" Incorporation of AH Bremer 33 In August 2000, Bremer was incorporated. Mr McLeod and Mr Holland were appointed directors. Mr Hughes was appointed as company secretary. The shareholdings of Bremer consisted of two shares, both held by AHL. 34 Between December 2001 and January 2002, Bremer acquired the Land which had been owned by AHL. It can be accepted that Bremer was intended to be the vehicle by which the land would be developed and the profits shared between HIG/AHL and Wingate, the property developer. The 2003 restructure 35 In about May and June 2003, HTP underwent a major restructure which involved, inter alia: (1) the change of the company's name to HTP; (2) HTP buying back and cancelling 220,000,000 of its shares from HIG for $17.6 million which was satisfied by a discharge of a $17.6m intercompany loan owed by HIG to HTP; (3) the sale by HIG of 14,000,000 shares in HTP which raised $2.1 million, which was then paid by HIG to HTP to discharge the balance of HIG's indebtedness to HTP; and (4) a raising of capital by HTP through the offer of shares under a prospectus dated 28 May 2003 ("the Prospectus"). 36 On completion of these steps, HIG's shareholding interest in HTP decreased from 92% to 22.2%. HTP remained the owner of 100% of the share capital of AHL. 37 Over the period from around July 2003 to August 2003, HIG sold the balance of its shareholding in HTP (22.2%) on market. 38 In March 2003, AHL proposed to sell one of its shares in Bremer to Wingate for $200. This proposal has not been carried out to date. 39 These events provide the immediate background to the Letter, described below. The Bremer Share Sale Agreement of 23 July 2003 ("the Letter") 40 In a separate 2003 transaction HTP is said by the respondent, but disputed by the appellants, to have become legally bound to sell one-half of the issued shares in Bremer to HIG for $100. 41 The sale was approved by HTP as a proposal in general meeting on 16 June 2003 pursuant to an Explanatory Memorandum dated 16 May 2003. 42 HIG contends that the agreement was effected by a countersigned letter dated 23 July 2003. HTP has however refused to execute a transfer of the Bremer shares. 43 The trial judge concluded that no binding agreement was thereby entered into; that conclusion is challenged by way of the respondent's cross-appeal. The First and Second Deeds of Amendment 44 AHL, HTP and Bremer unsuccessfully contended at first instance that the First Deed of Amendment, the parties to which were HIG and AHL and which bears the date 20 June 2001, was valid and had the effect of deleting HIG's mortgage entitlement from the Entitlement Deed. 45 AHL, HTP and Bremer also unsuccessfully contended at first instance that the Second Deed of Amendment between HIG and AHL, appearing to be dated 5 September 2001, was valid, and that it had the effect of significantly reducing the amount to be paid to HIG on a Disposal of the Land. For example, if the sale price were $10 million, HIG would not receive any amount at all. It also purported to delete HIG's mortgage entitlement from the Entitlement Deed. They contended that it was executed on 5 September 2001, or at least its execution was ratified on 20 November 2001 or 21 December 2001. 46 Both instruments were purportedly sealed and witnessed, for HIG, by Mr McLeod and the company secretary and, for AHL, by Mr Holland and the company secretary. 47 HIG successfully contended at first instance that: (a) the Board of HIG never approved entry into these instruments so that they were ineffective for want of authority; and (b) further, as the instruments were said to have been beneficial to AHL and detrimental to HIG, Mr McLeod and Mr Holland breached their duties to HIG as directors in purporting to cause their execution. Relief sought by HIG 48 HIG was successful at first instance: (a) in seeking to have declared void (or set aside) each of the two purported amendments to the Entitlement Deed; and (b) in seeking specific performance of the Entitlement Deed, including the obligation that AHL provide it with the mortgage required under cl 8. HIG was unsuccessful in seeking to enforce the Letter. 49 AHL, HTP and Bremer unsuccessfully contended by their cross-claim at first instance that the Entitlement Deed should be rectified by reference to the alleged common intention of AHL and HIG at the time of entry into that deed. I have described earlier the contention in that regard. It was said to be supported by the congruence of their rectification case with the arrangements proposed in the Heads of Agreement entered into with Wingate. The proposition as put at trial and summarised by the trial judge, was that the new factor which emerged around mid-June 2001 involved the principal lender to the Hudson Group, ANZ Bank, being dissatisfied with the arrangements proposed in the Heads of Agreement. Once the ANZ Bank's concern was determined to be satisfied by HIG selling its interests in AHL to HTP, it became necessary for arrangements to be made in the altered environment to accommodate the Heads of Agreement. 50 I will deal further with that contention and the variants on it put in argument on appeal under "Disposition". 51 In addition, AHL, HTP and Bremer as appellants seek again to argue that the Second Deed of Amendment was effective to remove the requirement for a mortgage and to alter cl 4 in the manner I have earlier described under "Introduction". Trial Judgment 52 The trial judge found, for reasons he elaborated, both Mr McLeod and Mr Holland to be unreliable witnesses (Judgment [36]-[39]). He also noted that no evidence had been given by Mr Tan, or by Mr Williams who had represented the Wingate interests in relation to the Heads of Agreement. He considered the evidence given by Mr McLeod to be unsatisfactory in the extreme, particularly as regards the Heads of Agreement. 53 However, he did accept the following evidence from Mr McLeod (Judgment [47]-[52]): (a) by early March 2001 HTP had experienced a significant drop in its revenues placing it in breach of a number of financial covenants required by the ANZ Bank as part of its financing arrangements; (b) hence Mr McLeod commenced discussions with the ANZ Bank with a view to HTP restructuring its balance sheet by reducing debt, with the most effective way to carry out that object being to raise equity; (c) the ANZ Bank agreed in principle to a proposal for the sale of HIG's shareholding in AHL to HTP; (d) Mr McLeod became involved in negotiating the terms and conditions of the transfer, in which negotiation he represented the interests of HTP, and Mr Tan represented the interests of HIG, these negotiations taking place in late April/early May 2001, and (e) Mr McLeod opposed Mr Tan's suggestion that the Land be transferred to HIG for no cost prior to the sale, stating that neither AHL nor the ANZ Bank would permit this. 54 However, on reviewing the evidence, the trial judge rejected as unreliable Mr McLeod's evidence that he had reached an arrangement/agreement that HIG would be obtaining a predetermined profit share; Judgment [55]. 55 The trial judge preferred the evidence of the legal adviser Mr Restas of Atanaskovic Hartnell as reliable (Judgment [57]). Mr Restas had been heavily involved in preparing the material documentation which followed the Heads of Agreement and in particular in preparing, with his partner Mr Simmons, the Share Purchase Agreement and Entitlement Deed, the latter involving another solicitor, Mr Kyriac. 56 Mr Restas' evidence, as summarised in considerable detail by the trial judge, was that in the context of acting for HIG he queried with Mr McLeod on 6 June 2001 whether HIG should receive the first $10 million of any consideration received for the sale of the Land, rather than the first $10 million of profit. This was because he considered the latter to be unreasonable from the point of view of HIG in the event that no profit was made from the development of the Land. 57 It was Mr Restas who then prepared a revised version of the Entitlement Deed and sent it to Mr McLeod providing for payment, on disposal of the Land, of the lesser of $10 million (less deposit) and the value of the aggregate consideration received by AHL in relation to the disposal of the Land; see Judgment [73]. That was in the form of cl 4 of the Entitlement Deed as executed. He specifically drew Mr McLeod's attention to this provision. 58 While Mr McLeod maintained in cross-examination that this referred to the balance of the profits, he conceded that: (a) he understood that, in the conversation of 6 June 2001, Mr Restas was making a distinction between consideration and profit; and (b) he knew that the agreement he signed contained the word "consideration", not "profit"; Judgment [74]. 59 Both the draft Entitlement Deed and the final version submitted to Mr McLeod contained a provision requiring AHL to grant HIG a mortgage to secure AHL's obligations under the Deed; Judgment [77]. 60 Significantly, in the Explanatory Memorandum prepared by Mr Restas in relation to s260B of the Corporations Law, reference is made to the agreement being one whereby AHL would pay the first $10 million of proceeds to HIG; Judgment at [83]. 61 In regard to the mortgage, Mr McLeod gave evidence that (a) ANZ was not prepared to consent to HIG taking a mortgage over any asset of AHL; (b) ANZ's refusal meant that part of the Entitlement Deed could not be performed; (c) He discussed the likely stamp duty that such a mortgage would attract with Mr Restas and with Mr Tan; (d) Mr Tan agreed that, due the cost of stamp duty and because HTP was 90% owned by HIG, they should amend the Entitlement Deed by deleting the requirement for a mortgage; and (e) Mr Restas agreed to draw up an amendment reflecting that; Judgment at [84]. 62 That provides the background to the First Deed of Amendment which was purportedly executed under the common seal of AHL with Mr Holland signing as a director and HIG with Mr McLeod signing as a director, and dated by Mr Hughes signing as secretary in each case on 20 June 2001; Judgment [85]. 63 The background to the Second Deed of Amendment is that Mr Restas gave evidence that on 4 September 2001 Mr McLeod instructed him to amend the Entitlement Deed to reflect that HIG will receive half of the consideration above the $10 million, less the deposit; Judgment [87]. The reason which Mr McLeod gave Mr Restas, according Mr Restas' evidence, was that the auditor had an issue with the Entitlement Deed. 64 Later on 4 September 2001 and again on 5 September 2001, Mr Restas sent Mr McLeod by email the proposed deed to amend the Entitlement Deed, which provided that HIG change its right to the first $10 million received in connection with a "disposal" to a right to receive $10 million only if the amount received in connection with the "disposal" was equal to or greater than $24.667 million. (I interpolate that the case for rectification hardly sits with "changing" a right to the first $10 million on disposal of the Land.) Mr Restas recorded his advice that this would amount to HIG giving AHL a "financial benefit" for the purposes of the Corporations Act; Judgment [87] at Red, 102B. 65 Mr Knox, Chief Financial Officer of HIG, gave evidence that Mr Seaton, a partner at PriceWaterhouseCoopers, told him that the first $10 million of value of the surplus land could not be shown as an asset in the books of AHL, because under the terms of the Entitlement Deed, the first $10 million of proceeds were to go to HIG. This had meant a reduction of the net assets of the HTP side of the group of $10 million, thereby producing a loss in the books of HTP. Mr Knox accepted that the only way this could be fixed was if the terms of the Entitlement Deed were changed so that there "didn't have to be shown up a big black hole of $10 million in the books of the Timber group [HTP]"; Judgment [88]-[90]. 66 Under cross-examination, the following exchange took place with Mr McLeod, in which the trial judge points to him giving inconsistent answers: "Q --- …Why you changed the entitlement deed is because you came to realise that the deal that you get meant that AHL's financial position was unacceptable to the bank because the deal you did meant it could not ascribe $10 million to the value of the land in its books, correct? … Q — … You subsequently came to realise after a discussion with Mr Seton at the bank that AHL — at Pricewaterhouse I should say, that AHL had put that land in its books at $10 million, which it couldn't have there if it had to pay the $10 million to HIG, and that's why you changed the deed. A — That's exactly right. Q --- It had nothing to do with it being inconsistent with the Wingate heads of agreement or anything else. It had to do with a mistake that you had made in putting it into the books of AHL at $10 million which you shouldn't have done. A — That is wrong. … Q--- Because what happened was, Mr McLeod, in August or September of 2001 you went to an audit meeting at Pricewaterhouse with a Mr Seton and Mr Seton drew to your attention, at a time at which the bank was on your back, that you had to deduct $10 million in the value of AHL because you were obliged to pay that money to HIG? A — It's wrong. Q — And that's why you changed it, because you were in a hole. That's what I want to suggest to you. A — Well, I suggest you are totally wrong." 67 At their respective general meetings on 6 August 2001, the shareholders of both HIG and HTP approved the Share Purchase Agreement and related Entitlement Deed. These included Explanatory Statements which contained, inter alia, the following, no reference being made to anything other than the $10 million and in particular no reference being made ascribing this to "net profits" or "profits": "in the event the Land is disposed of by AHL on or before 8 June 2006, AHL will pay HIGL the lesser of: · $10 million; and · the value of the aggregate consideration received by AHL in relation to the disposal of the Land, in both cases less the deposit of $3.5 million already paid by AHL to HIGL…" (Red 104J-Y). 68 Mr McLeod then gave further evidence recorded by the trial judge at Judgment [95]-[99], summarised as follows: (i) Mr McLeod gave evidence that, when in late August 2001, Mr Seaton of PwC raised his understanding of the Entitlement Deed, to the effect that the value of the land in the consolidated accounts of HTP would be nil as there was an obligation to pay HIG the first $10 million of proceeds, Mr McLeod said that this was incorrect as HIG was entitled to the first $10 million in profits. At this time, he reviewed the Entitlement Deed and "first appreciated that the Entitlement Deed did not reflect the commercial agreement that had been reached between [himself] and Mr Tan". (ii) He gave evidence that he and Mr Tan attempted to resolve things informally, but Mr Seaton suggested that a new agreement be drafted to make the position clear and he agreed and instructed Hartnells to prepare the Second Deed of Amendment. (iii) The trial judge then set out a lengthy passage of cross-examination in which as the trial judge observed, Mr McLeod prevaricated. At times Mr McLeod contended that the arrangement which he had reached with Mr Tan was reached in conversations but was then unable to identify any such conversations as appearing in his affidavit. (iv) At other times he suggested that he did agree a formula in the terms to be found in cl 4 of the Second Amending Deed, but then later accepted that he did not contend that the commercial agreement with Mr Tan was that there would be a formula as appears in that clause. 69 The trial judge summarised Mr McLeod's understanding of the agreement from his evidence as follows: (i) the underlying commercial agreement was that AHL was to receive the first $10 million of proceeds from the sale of the Land and HIG was to receive the first $10 million in profits on a pre-tax basis (T, 210.12); (ii) his understanding at the time was that the words "aggregate consideration" so used, might mean or meant, profit (T, 223-4); (iii) his evidence in this regard was that his interpretation at this time was that, assuming the joint venture was in place, "aggregate consideration received by AHL would be the same as profit" (T, 224.11-229.10 and see Judgment [99]-[101]). 70 I deal under "Disposition" with Mr McLeod's evidence in more detail, as also the remaining factual background concerning the various directors' meetings. DISPOSITION 71 In the course of argument on appeal, an Amended Notice of Appeal was filed by the appellant, deleting a number of earlier grounds. 72 The essential issues which emerge from the way the appeal and cross-appeal were argued are as follows: Question 1 – Rectification : Was the trial judge in error in declining to order rectification of the Entitlement Deed? Question 2 – Valid Execution or Ratification of Second Deed of Amendment: Was the trial judge in error in concluding that the Second Amending Deed had not been validly executed, or otherwise validly ratified by a directors' meeting on 21 December 2001? This question necessarily comprehends the various bases upon which the trial judge concluded that the Second Amending Deed had not been validly executed. They were: (a) that the common seal had not been affixed with the authority of a properly constituted meeting of directors, (b) that the relevant directors, in purporting to sign on behalf of the respective companies, were in breach of their fiduciary duties, and (c) to the extent that ratification could have cured these matters, that ratification did not occur on 21 December 2001. (It should be noted that the Amended Notice of Appeal deletes reference to ratification as having occurred on 20 November 2001.) Question 3 – Cross-appeal – binding agreement by letter of 23 July 2003: Was the trial judge in error in concluding that there was no binding agreement brought about by the Letter whereby HTP purported to dispose of its 50% shareholding in Bremer, the latter as owner of the land? Question 4 – Variation to orders with respect to mortgage and deposit: In light of the answers to the above questions, what, if any, variations to the orders made by the trial judge are appropriate, and in particular orders 8, 9 and 11 dealing with the provision of a mortgage and payment of deposit? Question 1 – Rectification 73 At Judgment [21] the trial judge accurately sets out the principles applicable to relief by way of rectification. Rectification of the Entitlement Deed depends on establishing, by clear and convincing proof, that at the time of its execution both AHL and HIG had an actual common intention as to the effect of cl 4 of the Entitlement Deed which was: (a) inconsistent with the effect of cl 4 as it was expressed, and (b) capable of proof in clear and precise terms, both as to substance and detail of the precise variation which needed to be made, even if the precise words in which the terms should be expressed are not required to be part of that demonstrated common intention; cf Bush v National Australia Bank Ltd (1992) 35 NSWLR 390 per Hodgson J and Commissioner of Stamp Duties (NSW) v Carlenka Pty Limited (1995) 41 NSWLR 329 per Sheller JA. 74 I have earlier set out Mr McLeod's evidence, whose veracity must be crucial to the case for rectification. That he was not accepted as a reliable witness by the trial judge, who preferred the contrary evidence of Mr Restas, the lawyer primarily involved in the Entitlement Deed, severely undermines, if not destroys, the case for rectification. Particularly telling is the observation of the trial judge at [237]: "[237] In relation to the discussion which took place between Mr Restas and Mr McLeod it should be recalled that under cross-examination Mr McLeod conceded that Mr Restas had said to him on 6 June 2001 that it would be more appropriate if the first 10 million of consideration was paid to HIG rather than the first 10 million of profit, given that the asset was worth 10 million and that he, Mr McLeod, had understood that Mr Restas was drawing a distinction between consideration and profit and was pointing up a terminological difference between the term "profit" and the term 'consideration'. [Transcript 234]" 75 Just previously, there appears the following question and answer in the cross-examination of Mr McLeod concerning the conversation above referred to on 6 June 2001: "Q. And he said it would be simple and neater simply to increase the price to 35,000,000 and to have 28.5 million of the consideration paid at the completion, with the balance paid at the time the land is disposed of? A. Yes, I recall that." 76 The subsequent cross-examination saw Mr McLeod attempt to argue that he understood the term "consideration" to mean "profit" (Black T, 235.35-.39) but the trial judge observed that he then conceded that: "the idea of the transaction was that the consideration for the purchase that was going to be received by Hudson Group for its share in Hardboards was $35 million and there was reluctant acceptance that the $35 million included the value which was being ascribed to the land of $10 million which Hudson would receive in the event of a disposal, that being the value at the time of the Heads of Agreement on a pre-approval basis meaning before the necessary development approvals"; see Black, 235-6. 77 The following cross-examination at Black, 237-243, when the concessions ultimately made are taken into account, drew out the following: (a) around May 2001, the proposed purchase price for AHL when it was to be sold by HIG to HTP was originally $35 million, in accordance with the term sheet prepared and sent to the ANZ Bank (Black, 235.45-.49); (b) that purchase price of $35 million was not sustainable in that the independent experts in their reports (required for the purpose of the s260B resolution in respect of the financial assistance) could not justify that value so that it was negotiated down from $35 million to $25 million (Black, 238.26-.31; 257.20-.43) and was so shown in the relevant terms sheet; (c) Mr McLeod did not unequivocally deny that the reduction in $10 million recognised that there was going to be an extra $10 million coming to HIG out of the proceeds of the sale of the Land which was anticipated to take place before the sunset date, merely pointing out that it was "also there for the 35 million", Black, 239.16-.30; (d) The land in the books of AHL insofar as shown at $2 million did not reflect its cost to AHL, being surplus land upon which water had previously been discharged, with such value ascribed to the land being a low value; Black, 243.30-244.11; (e) Accordingly, anything that the Land was sold for above that very low value that it had cost AHL would be profit; Black, 244.34-.37; (f) Mr McLeod did not accept the further proposition that it followed that the Entitlement Deed meant that HIG would share in the proceeds of the Land to reflect the increase from whatever nominal value at which the Land had been acquired by AHL to the market value of $10 million. He contended that the further costs of the joint venture development would necessarily have first to be deducted before a net profit could be paid, allowing for the deposit of $3.5 million already paid. Mr McLeod asserted that for HIG to get any further payment the Land would have to have been sold for $13.5 million but subsequently retreated to saying it had to be sold for $10 million (Black, 244.44-249.15), with a further qualification that there was a cap on HIG's participation at $10 million; (g) Mr McLeod conceded that, after a discussion with the auditor Mr Seaton at a meeting in August or September 2001 at PriceWaterhouseCoopers, he appreciated that the Entitlement Deed he had signed with the requirement that the $10 million (less the Deposit) go to HIG upon disposal of the Land meant that AHL could no longer show it in its books at $10 million; Black, 253.15-.21; and (h) Finally, Mr McLeod conceded that "part of what [HIG] was giving away on terms of its part of the bargain was the ultimate ownership and benefit in that Land worth $10 million"; Black, 260.15-.19. 78 This summation of a lengthy cross-examination demonstrated, if nothing else, that Mr McLeod came close to conceding that the $10 million in the Entitlement Deed could equate to profit in the sense that, AHL having acquired the land for virtually nothing, any consideration paid for it would represent profit to it, subject only to deducting its share of the cost of redevelopment to achieve that profit. However, the cross-examination did not support the theory advanced by the appellants on appeal that the consideration of $25.251 million, satisfied by an allotment of approximately 3% of HTP's shares, already fully compensated for the $10 million supposedly lost to HIG when it sold AHL. 79 The appellants squarely founded the appeal as to rectification on the proposition that the $25.251 million included, or at least was treated at the time as if it included, $10 million representing the value of the Land. That being so, they submitted, the Entitlement Deed was meant to provide for a profit share, not payment of $10 million out of the sale consideration; because otherwise HIG would be paid twice over for the Land. There are many difficulties with the submission. The evidence did not clearly support that the $25.251 million was treated at the time as including $10 million representing the value of the Land. More important, Mr McLeod did not explain cl 4 of the Entitlement Deed as he understood it in this way – it would have been a simple explanation to give if it had been the correct one. And the evidence of Mr Restas provided a sound basis for the agreement being as recorded in the end in cl 4 of the Entitlement Deed; that is so, whatever may have been Mr McLeod's earlier understanding, cl 4 having been specifically drawn to his attention in the context of choosing between the first $10 million of any consideration received in the sale of the Land and the first $10 million of profit. 80 Moreover, the expert's report and explanatory memorandum that went to shareholders for s260B approval following the entry into the Entitlement Deed make no mention of any interpretation of that deed that would treat the $10 million as referable to future "net profit" after taking into account the costs of an ongoing joint venture or the sliding scale. 81 The asset re-evaluation that took place on the sale of AHL TO HTP, referred to in a fax from AHL to HIG of 9 May 2001 (Blue, 411-414) confirmed: (a) the total asset value attributed to AHL following the revaluation was $25 million; (b) the so-called surplus land appears in the books of AHL's non-fixed assets against the description "value of land as the water treatment plant (directors)" at $10 million, clearly indicating a directors' valuation rather than cost, and (c) the land itself was described in the summary as "JV land subject to Wingate Development", again at $10 million. In those circumstances, the base accounting documents themselves give no credence to the case for rectification. 82 Summing up, the various versions of what, on the rectification case, should have been the correct statement in the Entitlement Deed of the parties' supposed common intention are belied by (a) Mr McLeod's lack of credibility as against Mr Restas' with the latter's account being preferred of what occurred in the drafting process; (b) absence of any communication of the supposed common intention to shareholders; (c) their lack of credible support for a rationale other than a changed intention, after the Entitlement Deed was entered into; and (d) the fact of the Second Deed of Amendment with its formulation of a sliding scale for profit to HIG above $10 million and its being expressed as a change to the Entitlement Deed, bore all the hallmarks of changed intention signalling a new agreement, not rectification; (e) the changed intention is readily explained by the auditor's issue with the Entitlement Deed. Conclusion 83 No basis has been shown for disturbing the trial judge's conclusion that the requirements for rectification of the Entitlement Deed were not satisfied. Question 2 – Valid Execution or Ratification of Second Deed of Amendment 84 The First Deed of Amendment bears date 20 June 2001 while the Second Deed of Amendment bears date 5 September 2001. In each case the relevant amending deed purports to be signed under common seal. In each case it is signed by Mr McLeod purportedly on behalf of HIG and Mr Holland purportedly on behalf of AHL. Mr McLeod was a director of both HIG and AHL at the relevant time as was Mr Holland. Thus, there can be no doubt that Mr McLeod would be on notice of any failure to affix the common seal not only of HIG but also of AHL and conversely Mr Holland. Likewise, each owes a fiduciary duty to act for the benefit of both HIG and AHL and must be taken to be on notice of any adverse effect on HIG from entry into the relevant amending deeds. 85 Although the appellants did not challenge the trial judge's conclusion that the First Deed of Amendment was not validly executed, some reference to it is appropriate. 86 No mention is made in the minutes of the meeting of the directors of AHL of 21 June 2001 (Blue, 1148) of entry into that First Deed of Amendment. The minutes are rather directed to the Entitlement Deed dated 8 June 2001 and to the financial assistance requiring the passing of relevant shareholder resolutions. 87 Similarly, the minutes of a meeting of directors of HIG dated 26 June 2001 contain no mention of the First Deed of Amendment. 88 Significantly, the documents sent to shareholders of AHL for the purpose of approving the relevant financial assistance make no mention of the First Deed of Amendment or the deletion, if such were intended to take effect, of the requirement in cl 4 for a mortgage intended to secure payment under cl 4. 89 The principal issues litigated at trial were identified by the trial judge as including "whether HIG conferred upon Mr McLeod authority to execute the amending deed dated 20 June 2001 … amending the Entitlement Deed by, amongst others, deleting the benefit of the mortgage"; Judgment at [31(1)]. 90 At [207]-[215], the trial judge reviewed the state of disarray of the minutes relating to the First Deed of Amendment. Correctly in my view, he concluded that there was no reliable evidence of any meeting of directors of either HIG or AHL authorising the execution of the First Deed of Amendment. Moreover, he correctly noted that the Explanatory Memoranda for the shareholders' meetings of HIG and HTP of 6 August 2001, called pursuant to the Notice of General Meeting of 5 July 2001, both made plain that under the terms of the Entitlement Deed, AHL would need to provide HIG with a mortgage over the Land to secure the payment promised to be made to HIG. 91 It is observed, again correctly, that if it be the case that there was little prospect of obtaining the approval of the ANZ Bank to such mortgage, this does not detract from the simple fact that HIG had obtained a contractual entitlement which was then purportedly withdrawn from it. 92 Finally, it is correctly concluded that the relevant provisions of the First Deed of Amendment including deletion of the mortgage, as well as deletion of the benefit of interest on the deposit payable to the party entitled to it under cl 2(d), were acts entirely for the benefit of AHL. They were likewise entirely in disregard of the interests of HIG. Knowledge of the breach of fiduciary duty thereby entailed must be attributed to AHL given the common directorships of Mr McLeod and Mr Holland and their knowledge of what must be taken to have occurred. 93 Turning to the Second Deed of Amendment upon which the appellants concentrated their attention, it was said to have been executed on 5 September 2001. At Judgment [163]-[165] the trial judge reviewed the matters which underpinned his finding, not challenged on appeal, that "on the balance of probabilities no such meeting took place" with the consequence that "no authority was given to any person on 5 September 2001 to attend [sic] the company seal to the Second Deed of Amendment", concluding that "no resolution was passed to the effect of that suggested by these fictional minutes". 94 Earlier in his judgment, the trial judge reviewed the legal requirements of a valid meeting of directors, which I respectfully adopt (Judgment [116]-[119]). He then turned to the clearly unsatisfactory practice of having what were termed "single agenda meetings" which he described at [120]. He described how these meetings were in reality Mr McLeod speaking separately to individual directors in a casual and informal fashion and then producing a minute purporting to state a formal resolution. He concluded, correctly, that such "single agenda meetings" do not constitute valid meetings or indeed meetings at all. There was simply lacking the necessary demonstrable expression of collective will, on the part of the directors as a board so far as concerns making or approving the necessary resolution nor anything identified in the Articles permitting a more informal procedure matching what occurred; compare Ipp J in Poliwka v Heven Holdings Ltd (No 2) (1992) 8 ACSR 747 at 785-6. That conclusion was not challenged on appeal. 95 What was contended on appeal was that whatever deficiencies may have applied to the original purported execution of the Second Deed of Amendment, ratification occurred at the board meeting on 21 December 2001 (Blue, 2022). 96 When one turns to the meeting that was said to have taken place on 21 December 2001, and assuming that a board meeting genuinely occurred, the question becomes whether the resolution there recorded sufficed to give effect to the purported earlier execution of the Second Deed of Amendment, putting for the moment to one side any question of breach of fiduciary duty by the directors involved in the original execution. 97 The resolution relied upon commences as follows: "Tabled at the meeting were the Minutes of the previous Directors' Meetings held on the following dates:- * 20 November 2001 * 26 November 2001 With the consent of the Meeting the Minutes as tabled were taken as read. Following a review of the tabled Minutes by Directors it was RESOLVED that approval be given for the Chairman to sign the tabled Directors' Minutes as a true record of proceedings at those Meetings." 98 Reference is thus made to a meeting purportedly of directors of HIG held on 20 November 2001 at which, again, were purportedly present Mr McLeod as chairman, Mr Holland and Mr Meers, the same directors as were purportedly present on 21 December 2001, though in Mr Holland's case by telephone. There is no reliance for ratification on any supposed meeting on 20 November 2001. The trial judge found that no such meeting had occurred, and there is no challenge to that conclusion. 99 All that the "minutes" of the supposed meeting of 20 November 2001 appear relevantly to provide is a reference to minutes of previous directors' meetings held on various dates including 5 September 2001. The operative purported resolution on 20 November 2001 was as follows: "Following a review of the tabled minutes, it was RESOLVED that approval be given for the Chairman to sign the Minutes of the following Directors' Meetings as a true record of the proceedings at those meetings. 5 September 2001 …" 100 Further on in those same minutes, under the heading: " Secretarial : Common Seal", and under the date 5 September 2001, appears the following: "Deed of Amendment: Parties: Hudson Investment Group Limited Australian Hardboards Limited The document provides for amendments to an Entitlement Deed dated 8 June 2001." 101 A fundamental problem with all of this is that there was no meeting on 5 September 2001 according to the unchallenged finding of the court at Judgment [165]. 102 The notion that ratification could in those circumstances thereby occur in relation to matters purportedly done at a non-existent meeting is implausible in the extreme. The relevant resolutions do not purport to authorise a fresh affixing of the common seal or to ratify the affixing of the common seal that should have taken place by a resolution of the Board. Merely to approve as a true record minutes of a meeting that did not occur in the manner here can have no legal effect; still less to approve as a true record minutes of a meeting approving earlier minutes when the latter meeting did not occur either. 103 While the trial judge accepted that, on the evidence, the balance of probabilities favoured the proposition that the 21 December 2001 HIG board meeting did take place, he found that "there was no review of the tabled minutes by the directors and … there was no discussion about the fact that the 20 November 2001 meeting had never taken place, nor about the fact that the document purporting to be minutes of that meeting were entirely fictitious"; Judgment [199]. He further found "that the directors attending the meeting never discussed, nor resolved to accept, nor assented to, nor lent their approval … to the resolution [approving the chairman signing the tabled directors' minutes as a true record of proceedings at the earlier meetings] being accepted as authenticating a fictitious resolution …". Nor was the Second Deed of Amendment placed before the meeting of 21 December 2001. 104 There is no basis for calling in aid, as the appellants did, some kind of presumption of regularity. The evidence lent itself to a presumption of irregularity. It cannot be concluded that the directors applied their minds to an ultimate ratification of the application of the seal to the Deed of Amendment noted in the fictitious minutes of 20 November 2001. The correct conclusion is that they did not, and their second-hand approval as correct of minutes which they must have known were fictitious should be seen as an ineffective charade. 105 Even if it be the case that Mr Meers did not act mechanically without noticing the reference to the 20 November 2001 minutes, as the appellants argued on appeal challenging the conclusion to the contrary at [201], I conclude that the Second Deed of Amendment was not, so far as affixing of the common seal was concerned, the subject of any effective ratification, and in that respect agree with the final conclusion to that effect by the trial judge at [205]. 106 While it is in those circumstances not necessary to consider whether Mr McLeod breached his fiduciary obligations to HIG in each aspect of his conduct concerning the Second Deed of Amendment, I consider that (a) he was disentitled from participating in any resolution that HIG enter the Second Amending Deed; and (b) he was disentitled from affixing the HIG common seal to that deed. Conclusion 107 The Second Amending Deed was not validly entered into or executed, nor was it ratified. Question 3 – Cross-appeal – binding agreement by letter of 23 July 2003 108 The issue here concerns whether the trial judge correctly concluded that the Letter (signed 23 July 2003) did not constitute a legally binding agreement, by reason of the terms of that letter read in the light of preceding (and following) events. He reached that conclusion essentially on the basis that the number of loose ends remaining to be tied caused it to fall within the so-called third category in Masters v Cameron (1954) 91 CLR 343 at 360: "The case … in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract." per Dixon J 109 The form of the letter, from Mr Tan as a director of HIG to Mr McLeod as Managing Director of HTP, was in the following terms (the paragraph numbers have been added for reference purposes): "Dear Bruce AH BREMER PARK PTY LIMITED AND THE IPSWICH LAND [1] We refer to the Hudson Timber & Hardware Limited Notice of Meeting and Explanatory Statement dated 16 May 2003 ('Notice of Meeting') and the ensuing shareholders meeting held on 16 June 2003. [2] Hudson Timber Products Limited (formerly Hudson Timber & Hardware Limited) ('HTP') have agreed to sell and Hudson Investment Group Limited ('HIG') has agreed to purchase for $100.00 Australian Hardboards Limited ('AHL') [sic] remaining 50% shareholding in AH Bremer Park Pty Limited ('AHB'), as described in paragraph 2.3.4 of the abovementioned Notice of Meeting for $100.00. [3] HIG acknowledges that for AHL to transfer the 50% shareholding in AHB, GE Capital Finance Pty Limited have confirmed that the release of the fixed and floating charge over AHB will be subject to: i) the payment of $3m to AHL, being a part payment of the receivable owing by AHB to AHL; and ii) a fully funded, EPA approved, Water Treatment Plant for approximately $7.5m. [4] Following the transfer of the 50% shareholding HIG agrees that AHL will retain a mortgage over HIG's 50% shareholding in AHB until payment of the remaining, approximately, $1m owing to AHL by AHB. [5] Further, HIG understands that the liabilities of AHB are approximately $10m and include: a) an intercompany loan between AHB and AHL for $4.7 million to be repaid from the sale of the Ipswich land; as set out in the Shareholder Agreement dated 31 March 2003 between AHL, AHB and Wingate Property Pty Limited ('Shareholder Agreement'). This will be reduced by $3 million following the payment set out in i) above; b) an intercompany loan due from AHB to HIG for $1 million resulting from the recent sale of part of Lot 4 of the AHB land; and c) loan to external financiers amounting to $4 million (Perpetual Trustee $1.5 million and Pacific Portfolio Investments Pty Limited $2.5 million). [6] The Shareholders Agreement dated 31 March 2003 between AHL, AHB and Wingate Properties Pty Limited ('Wingate') required Wingate to loan $3 million to AHB, such funds will then be used by AHB to repay the $3 million intercompany loan due to AHL, as per i) above. [7] The above letter has been prepared to set out the general terms agreed between Hudson, AHL and AHB and is in no way meant to replace or prejudice the Shareholder Agreement or the Profit Share Deed dated 11 April 2003 between AHL, AHB and Wingate and further both HIG and Hudson, agree that Atanaskovic Hartnell be instructed to prepare an agreement to reflect the above matters. Yours faithfully [signed] Vincent Tan Director Hudson Investment Group Limited I agree to the above requests. [signed] Bruce McLeod Managing Director Hudson Timber Products Limited" 110 It will be apparent that if the letter were legally effective, it would constitute an agreement by HTP to sell 50% of the shares in Bremer to HIG, and thus a 50% interest in the underlying property of Bremer, being the Land. This was for a nominal consideration of $100 with further terms set out at cll 3-6. 111 Importantly, cl 7 states: "the above letter has been prepared to set out the general terms agreed between Hudson, AHL and AHP and is in no way meant to replace or prejudice the Shareholder Agreement or the Profit Share Deed dated 11 April 2003 between AHL, AHP and Wingate and further both HIG and Hudson, agree that Atanaskovic Hartnell be instructed to prepare an agreement to reflect the above matters." 112 The significance of the letter and this issue needs to be considered against the shareholding that existed after a further re-structure in June 2003. At this point, HIG had reduced its shareholding in HTP first to 22.2% and later by sale on the market to zero. HTP continued to own 100% of AHL, which in turn owned 100% of Bremer and thus the Land. 113 HIG would thus have retained no interest in the Land save as derived from the Entitlement Deed. If the Letter were effective, HIG would thereby derive a direct 50% interest in Bremer acquired for nominal consideration and thus an indirect 50% interest in the Land owned through Bremer. 114 The further background concerning the circumstances in which the Letter came into existence is to be found in Mr McLeod's evidence and in the trial judge's observations on it. The latter is to be found at Judgment [323]-[326], with the further history of the entry into of the Letter at [327]-[328]. 115 The trial judge records that a shareholder booklet for a meeting to be held of shareholders of HTP for 16 June 2003 referred to HTP proposing to sell its remaining 50% shareholding in Bremer to HIG for $100. Likewise an explanatory statement issued by HIG in its shareholder booklet in relation to a proposed general meeting for 16 June 2003 included a very similar explanation; Judgment [332]. 116 Reference should also be made to the 30 June 2000 annual report of HTP dated 17 September 2003, published when there was no dispute between the parties. It recorded the arrangement in relation to Bremer in the following terms: "(d) proposed sale of AH Bremer Park Pty Limited The prospectus lodged with the Australian Stock Exchange on 29 May 2003 contemplated the disposal of A H Bremer Park Pty Limited. The disposal was subject to certain pre-conditions which are not satisfied at the date of this report. The preconditions relate to the receipt of $3,000,000 in cash and the construction of a water treatment plant at the cost of the developers of A H Bremer Park Pty Ltd ." [emphasis added] 117 What is significant about that annual report and the emphasised words referring to the "certain preconditions which are not satisfied" is that while the first precondition relating to the receipt of $3 million in cash appears to be reflected in para 3(i), the second precondition "construction of a water treatment plant at the cost of the developers of A H Bremer Park Pty Limited" finds its counterpart in a rather more general provision. It makes no reference to the cost of the construction of the water treatment plant being for the developer's expense, though conceivably implied. 118 It remains to record that these proposals were submitted to the shareholders of the relevant companies and the shareholders then approved the proposal, doing so in advance of the Letter being entered into; in fact in June 2003. However, the strength of that contention is somewhat weakened by the fact that what was approved was a "proposal" to sell the relevant shareholding rather than an actual agreement already entered into, itself subject to shareholder approval. 119 HIG in effect put its contention that there was a binding agreement either informally reached before the Letter and approved by shareholders, or as consummated by the Letter. It contended this was so notwithstanding that there were significant "loose ends" still to be sorted out or resolved. Counsel for HIG specifically relied on a decision of McLelland J in Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622. His Honour decided that "there is in reality a fourth class additional to the three mentioned in Masters v Cameron". This was where the parties had reached agreement to be bound immediately and exclusively by certain terms but envisaged the making of the further contract which will replace the first, this latter contract containing, by consent, additional terms. For reasons developed below, I consider that the trial judge was not in error in rejecting this as an apt description of the parties' intent. 120 Whether parties intend to enter into a legally binding agreement is, as Mahoney JA put it in Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 330-1, "a consequence which the law imposes upon, or sees as a result of, what the parties have said and done". The trial judge placed particular reliance on the fact that there were "loose ends" and that those "'loose ends' included a further agreement and one moreover not limited to the two parties to the letter agreement"; see Judgment [343]-[347]. Inferentially, those parties whose further agreement would be required were, at least, Wingate and plausibly also GE Capital. 121 In the case of GE Capital, further agreement would relate to how the requirements of GE Capital, as a financier, should be accommodated. I refer here to the funding arrangements for the proposed water treatment plant, only addressed in broad outline in the letter agreement. 122 As to Wingate, it is important to appreciate that the parties did not intend to replace or prejudice the Shareholder Agreement of 31 March 2003 (see para 7 of the Letter) (Blue, 2415). Under that agreement it would be necessary, as the trial judge observed at [346], for Wingate as party to it to "sign to a Shareholders' Agreement which would comprehend the sale by HTP to HIG of the remaining 50% shareholding in Bremer". More precisely, Wingate was to have a 50% interest in Bremer acquired from AHL and rights of pre-emption and a qualified veto over a new prospective shareholder. Thus cl 12.3 of the Shareholder Agreement provides that if a "Shareholder" wishes to sell some or all of its shares it must first offer to sell those shares to the other Shareholder, in accordance with conventional pre-emptive rights. Importantly, a Shareholder was prohibited from transferring its shares in Bremer to any other person without the other Shareholder's consent, though that consent must not unreasonably be withheld. There is some definition of the requirements for a proposed new Shareholder; see cl 12.4. 123 That is reinforced by cl 12.2(j) which precludes any party in any way attempting "to give any other person an interest in the project or in Bremer". 124 Accordingly, I would consider that these were not merely matters of minor significance but more fundamental, calling for further negotiation and for careful recording in the agreement to be prepared by Atanaskovic Hartnell. Such negotiation clearly had the capacity to affect the outline arrangements sketched in the Letter in significant ways. Moreover, if the Letter had immediate effect, AHL could be in breach of the Shareholders Agreement, requiring AHL to comply with the pre-emptive rights of Wingate in cl 12.3 and with the associated provisions of cll 12.1 and 12.2(i). 125 While the submission to shareholders of the relevant companies of the proposed sale demonstrates an intention for it to happen, I do not consider that decisive. What was submitted to shareholders was described as a "proposal", not a binding agreement. 126 Further, after 23 July 2003 Atanaskovic Hartnell were instructed to prepare an agreement to "reflect" the matters in the Letter. In the solicitors' correspondence over the following months there was extensive negotiation of a number of matters. Some were derived from the Letter, for example accommodating GE's requirements. Others were not, for example the question of an easement to be granted by Bremer to Hardboards. The complexity of the exercise and the matters found necessary to resolve give firm support to the conclusion that, in the Letter's reference to instructing Atanaskovic Hartnell to prepare an agreement, the parties to it recognised that they had not yet reached a binding agreement and would not do so until the formal documentation was executed. Conclusion 127 I consider that the trial judge was correct in concluding that the Letter was not intended to give rise to a legally binding agreement. Question 4 – Variation to orders with respect to mortgage and deposit 128 Some debate occurred concerning the orders made by the trial judge. 129 It was contended by the appellants that the order to pay the deposit should not have been made. It was argued that there was no issue at trial or any finding by the trial judge as to the deposit. There was an issue, in that the respondent claimed specific performance and if there was good reason for the deposit not to be paid it was incumbent on the appellants to raise the issue. I presently see no practical difficulty in compliance with the order made. If it be the case that the deposit has been paid, then there is nothing further to do. If the deposit has not been paid then it must be paid. 130 It was contended by the appellants that the form of mortgage ordered was inappropriate, in particular that it had been taken up by the judge without recognition that the appellants would immediately be in default. The respondent accepted that there was a basis for complaint, and was willing to have the order amended to provide for reference to an Associate Judge if the parties could not agree. OVERALL CONCLUSION 131 I consider that the appellants have failed in their challenge to the trial judge's conclusion as to each of the questions earlier identified and likewise that the cross-appeal must fail. 132 Accordingly, I propose orders as follows: (1) Save for the variation in (2), appeal and cross-appeal dismissed. (2) Vary order 8 made by Einstein J on 15 September 2005 to read – 8. Order that the Third Defendant execute and deliver to the Plaintiff mortgages in favour of the Plaintiff in such form as the parties may agree or, in default of agreement within 21 days from 6 June 2006, as may be settled by an Associate Justice. (3) Appellants to pay the costs of the appeal and cross-appellant to pay the costs of the cross-appeal. 133 BRYSON JA: I agree with Santow JA. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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