Supreme Court New South Wales Medium Neutral Citation: Sumiseki Materials Co Ltd -v- Wambo Coal Pty Ltd [2013] NSWSC 235 Hearing dates: 6, 7, 11, 12, 13, 14, 18 & 19 February 2013 Decision date: 25 March 2013 Jurisdiction: Equity Division - Commercial List Before: Hammerschlag J Decision: Plaintiff entitled to declaratory relief with respect to the construction of the Restructure Agreement and the Constitution and to a monetary verdict in respect of unpaid dividends. Order under s 233 of the Corporations Act 2001 (Cth) that the Constitution be modified by inserting after the word "contrary" in the first line of Art 2.1B the words "including any provision which purports to grant the directors a discretion with respect to the declaration or payment of dividends or the capitalising, reserving or carrying forward of profits". Plaintiff's claim for declaratory relief with respect to the operation of cl 13 of the Restructure Agreement dismissed. Catchwords: CONTRACT - CORPORATIONS - where a written Restructure Agreement required parties to amend a company's constitution to provide for the issue of and rights governing B Class shares including the right to receive dividends calculated by reference to profits of the company available for dividend purposes - construction of the phrase "profits available for dividend purposes" in the agreement and constitution - whether the words used by the parties in the particular instruments gave to the directors of the company discretion to utilise distributable profits for purposes other than paying the B Class dividend - RECTIFICATION - whether if the agreement and constitution are to be properly construed contrary to the plaintiff's contention, the requirements for rectifying the agreement have been satisfied - ESTOPPEL - whether the defendant has unconscionably departed from an assumption common to the parties - MINORITY OPPRESSION - Corporations Act 2001 (Cth) ss 232, 233 - whether in denying the plaintiff its rights and expectations to receive dividends on the B Class shares there has been conduct of the company's affairs oppressive to, unfairly prejudicial to, or unfairly discriminatory against the plaintiff - whether relief should be given - REMEDIES - where a contractual provision entitles one party to be offered participation in new projects - where no new project has yet been embarked upon and where none may be embarked upon - whether a declaration of the validity and legal enforceability of the provision should be made because the other party previously denied enforceability of the provision. Legislation Cited: Corporations Act 2001 (Cth) Cases Cited: Gardner v Dairy Industry Authority of New South Wales (1977) 52 ALJR 180 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137 Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; (2011) 86 ALJR 1 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1 Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64 Pacific Carriers v BNP Paribas (2004) 218 CLR 451 HNA Irish Nominee Ltd v Kinghorn (2010) 78 ACSR 553 Prenn v Simmonds [1971] 1 WLR 1381 Heesh v Baker [2008] NSWSC 711; (2008) 67 ACSR 192 Long Acre Press Ltd v Odhams Press Ltd [1930] 2 Ch 196 Fisher v Black and White Publishing Company [1901] 1 Ch 174 Bagot Pneumatic Tyre Company v Clipper Pneumatic Tyre Company [1902] 1 Ch 146 Evling v Israel & Oppenheimer Ltd [1918] 1 Ch 101 re Buenos Ayres Great Southern Railway Co Ltd [1947] 1 Ch 384 Tosich v Tosich Construction Pty Ltd (1993) 10 ACSR 590 Simon v HPM Industries Pty Ltd (1989) 15 ACLR 427 Crane v Hegeman-Harris Co Inc [1939] 1 All ER 662 Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) 6 NSWLR 740 Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 Westland Savings Bank v Hancock [1987] 2 NZLR 21 Muriti v Prendergast [2005] NSWSC 281 Pukallus v Cameron (1982) 180 CLR 447 Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 The Commonwealth of Australia v Verwayen (1990) 170 CLR 394 Maurice Tarabay v Fifty Property Investments Pty Ltd [2009] NSWSC 617 Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359 Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 84 ACSR 121 HNA Irish Nominee Ltd v Kinghorn (No 2) (2012) 88 ACSR 427 Re Cumberland Holdings Ltd (1976) 1 ACLR 361 Jenkins v Enterprise Gold Mines NL (1992) 6 ACSR 539 Category: Principal judgment Parties: Sumiseki Materials Co Ltd - Plaintiff Wambo Coal Pty Ltd (ACN 000 668 057) - First Defendant Peabody Australia Mining Limited (ACN 002 818 699) - Second Defendant Representation: Counsel: N.C. Hutley SC with M.J. Darke - Plaintiff S.D. Robb QC with J.R. Williams - Defendants Solicitors: Allens Linklaters - Plaintiff Herbert Smith Freehills - Defendants File Number(s): 2010/234866 Judgment Introduction 1HIS HONOUR: This is a dispute about the rights and entitlements of the plaintiff as the holder of B Class shares in the first defendant. The second defendant holds all of the ordinary shares in the first defendant. 2The hearing took eight days. Mr N.C. Hutley SC with Mr M.J. Darke appeared for the plaintiff. Mr S.D. Robb QC with Mr J.R. Williams appeared for the defendants. Some 5000 pages of documentary material was tendered. The plaintiff's Commercial List Statement in its final form runs to 67 pages and the Commercial List Response to 42 pages. No less than ten sets of written submissions of varying length and form were provided by the parties. There was extensive oral argument during which positions were refined. Because it is impractical to refer to every document referred to by the parties and to restate all of the arguments, I have referred only to such of the evidence and arguments as is necessary to facilitate an understanding of the real issues between the parties and why I have reached the conclusions I have reached. Background The management buy out 3The first defendant ("Wambo") extracts coal from a mine at Wollemi, about sixteen kilometres to the southwest of Singleton in the Hunter Valley region of New South Wales. 4The plaintiff ("Sumiseki" or "Sumitomo") was formerly known as Sumitomo Coal Mining Overseas Co Limited. From 1992 until 2001 Sumiseki owned and operated the mine, owning all shares on issue (being ordinary shares) in Wambo. Sumiseki had, by way of loans, invested around $250M in the mine. The mine was making losses and Sumiseki decided to sell it. It retained Mr Malcolm MacLennan, an expert in the coal industry, to assist in managing the mine and in the sale process. Later, a management buy out group consisting of Excel Mining ("Excel"), Resource Finance Corporation and Malcolm MacLennan emerged as a potential buyer. 5On 6 October 2000 Sumiseki and the management buy out group signed Heads of Agreement which contemplated the sale to the management buy out group of Sumiseki's shares in Wambo and Sumiseki lending money to Wambo with a right to convert up to half of the loan into equity. 6Hunter Coal Pty Ltd ("Hunter") became the management buy out group's vehicle. 7The management buy out was completed on 10 January 2001 when Sumiseki sold its shares in Wambo to Hunter. On that day Mr Tony Haggarty (who was associated with Excel) became chairman of Wambo and Malcolm MacLennan and Mr Andrew Plummer (who was associated with Resource Finance Corporation) joined the board of Wambo. 8The terms of the management buy out are contained in a series of interrelated transaction documents which include a Share Sale Deed, a Subscription Agreement, a Debenture Trust Deed, a Profit Interest Agreement and a Free Cash Flow Escrow Agreement. It suffices to identify the centrally relevant provisions of those instruments. 9By the Share Sale Deed, Sumiseki sold all its shares in Wambo to Hunter. 10The Share Sale Deed includes the following cl 13: 13 NEW UNDERGROUND PROJECTS If at any time after closure of the Wollemi Mine, the Company decides to exploit any underground coal on its current Tenements, the Purchaser will procure the Company to offer to [Sumitomo] the right to participate up to 50% in any such new operation on the basis that [Sumitomo] would be obliged to contribute its share of the capital expenditure necessary for the new operation and [Sumitomo's] proportionate interest in such new operation will reflect the proportion which [Sumitomo's] capital contribution represents to the total of all capital contribution required for the new operation. 11By the Subscription Agreement, Sumiseki funded the buy out by subscribing for Debenture Stock in Wambo with a face value equal to $100M on the footing that, of that amount, $50M was acknowledged to represent the amount of the indebtedness of Wambo to Sumiseki. The Debenture Stock was then immediately cancelled and substituted by Debenture Stock issued by Hunter to Sumiseki, so that Sumiseki became Hunter's creditor for $50M. The Debenture Stock bore interest at 1% above a specified Bank Bill Rate. 12By the Profit Interest Agreement (the only parties to which were Sumiseki and Hunter), Sumiseki could forgive up to 50% of the $50M payable under the Debenture Stock in exchange for a 1% Profit Interest for each $1M amount so forgiven. 13The Profit Interest Agreement defined "Profit Interest" to mean: [T]he right to receive from [Hunter] an amount equal to the profit of [Wambo] available for dividend purposes in a year ended 30 June based on the Accounts. 14It defined "Accounts" to mean: [T]he audited accounts of [Wambo] for the 12 month period ending on 30 June in a year. 15By cl 6 of the Profit Interest Agreement, if Hunter sold all the shares in Wambo to any person, at its election, it was to cause the same person to acquire, or it was itself to acquire, Sumiseki's Profit Interest at a price percentage equivalent to the price to be received by Hunter for its shares in Wambo. If it sold only some of its shares in Wambo, the provisions would apply on a pro-rata basis. 16By cl 4 of the Profit Interest Agreement, Hunter warranted that the Accounts would be prepared in accordance with the Corporations Law and applicable accounting standards and that they would show a true and fair view of the profit or loss of Wambo for the financial year ended on 30 June in a year. Clause 5 provided that if Hunter did not pay the Profit Interest to Sumiseki in any year ended 30 June in which profits of Wambo were available for dividend purposes by 30 November in the same calendar year, then interest at 10% per annum would be payable on the amount due. 17At that time Wambo's activities included underground long wall mining operations in what is known as the Wollemi mine. Wambo was contemplating cessation of these activities ("Cessation") and the development of a new open cut mine operation at Wollemi ("New Operations"). 18By the Free Cash Flow Escrow Agreement, until Cessation, 100% of any cash surplus derived from the Wollemi mine ("Wollemi Cash Surplus") and 50% of any cash surplus from the New Operations ("New Operations Cash Surplus") were to be paid to Macquarie Bank as escrow agent to be held for the purposes of the Subscription Agreement. After Cessation the amount to be paid was 50% of any New Operations Cash Surplus and 50% of any Other Cash Surplus (being all other revenue received from dealing with assets of Wambo). Funds paid into the escrow account were to belong to Sumiseki and be released to it in satisfaction of Wambo's obligations under the Subscription Agreement. The Restructure Agreement 19In about May 2001 Sumiseki was considering converting a portion of the debt into Profit Interest. Certain taxation implications of this concerned Sumiseki. In discussions between Sumiseki and Hunter a number of options were considered. One option (described as option 2) was that instead of Sumiseki having a Profit Interest, it be issued, in substitution for its debt, special B Class shares, the only right attaching to which would be to receive a dividend equal to the Profit Interest. The B Class shares would carry no voting rights. 20In the negotiations Sumiseki was represented by Mr Komaki Nagasaki, its President and Chief Executive Officer. It was assisted by a solicitor, Mr Tony Wassaf of the firm Allen Allen and Hemsley, Sydney. Hunter was represented primarily by Malcolm MacLennan. Tony Haggarty and Andrew Plummer, who were at the relevant times directors of Wambo and Hunter, were also involved. Hunter and Wambo were assisted by a solicitor, Mr Damien Clarke, of the firm McCullough Robertson, Brisbane. 21On 29 June 2001 Sumiseki, Hunter and Wambo signed a written Restructure Agreement and a Deed of Variation to the Free Cash Flow Escrow Agreement. The execution of the Deed of Variation was a condition precedent to the Restructure Agreement. 22Clause 1.2 of the Restructure Agreement provided as follows: On or before 29 June 2001, [Wambo] will create B Class shares in the terms set out in annexure 'B' to this Agreement and Hunter Coal will make the necessary amendments to the constitution to give effect to the creation of that class of share. 23Annexure B to the Restructure Agreement was a resolution ("the Resolution") setting out, amongst others, the rights of the B Class shares. 24The Restructure Agreement recorded that the Profit Interest Agreement would cease to be of any force or effect. Sumiseki agreed to subscribe for 25 million B Class shares and to pay Wambo $25M. Wambo agreed to issue 25 million B Class shares to Sumiseki. The subscription moneys would immediately be applied by Wambo to reduce its debt to Hunter, and Hunter would apply the money to reduce its debt to Sumiseki. 25Thus Hunter came to hold all the ordinary shares in Wambo and Sumiseki became the holder of B Class shares in Wambo. 26Clause 5 of the Restructure Agreement provided that if Hunter sold all the ordinary shares while Sumiseki was the holder of the B Class shares, Hunter would cause the same person to acquire from Sumiseki all of the B Class shares at an equivalent price to that paid for the ordinary shares, or alternatively Hunter would acquire those shares at that price. If Hunter sold some of the ordinary shares in Wambo, the provision would apply on a pro-rata basis. The Resolution 27It will facilitate an understanding of the dispute if the terms of the Resolution are set out at this point, together with other centrally relevant provisions of Wambo's constitution ("the Constitution"). 28The Resolution introduced into the Constitution Art 2.1A (which deals with the ordinary shares) and Art 2.1B (which specifies the rights attaching to the B Class shares). It is in the following terms: 2.1A Holder of ordinary shares The holder of an ordinary share has the right: (a) to receive notice of and attend general meetings of the Company; (b) to vote at a general meeting of the Company, on the basis of one vote for each share held; (c) in a winding up or reduction of capital of the Company to repayment of the capital paid up on that share and to participate in the surplus assets of the Company; (d) to receive dividends to be payable to the holders of ordinary shares as determined from time to time provided there are no dividends due and payable to the holder of B class shares at the relevant point in time. 2.1B Holder of B class shares Despite any provision in this constitution to the contrary, the holder of a B Class share has the right: (a) to receive notice of and attend general meetings of the Company; (b) to receive a copy of the Interim Accounts for each 6 month period commencing 1 July and ending 31 December in each year by 31 March in the following year together with a statement identifying the profit of the Company available for dividend purposes for that period based on those Interim Accounts; where Interim Accounts means the unaudited accounts of the Company prepared in accordance with the Corporations Law and applicable accounting standards for the relevant period, which accounts show a true and fair value of the profit or loss for the Company for the relevant period; (c) to receive a copy of the Accounts, for the financial year ending 30 June 2002 and for each subsequent financial year ending on the anniversary of that date, by 30 November following the last day of the relevant financial year together with a statement identifying the profit of the Company available for dividend purposes for the relevant financial year based on those Accounts, where Accounts means the audited accounts of the Company prepared in accordance with the Corporations Law and applicable accounting standards for the relevant period, which accounts show a true and fair value of the profit or loss for the Company for the relevant period; (d) to receive a dividend in respect of the 6 month period commencing 1 July 2001 and ending 31 December 2001 and in respect of every 6 month period beginning and ending on the same dates in each subsequent year equal to the amount determined in accordance with the following formula, such dividend to be paid in respect of each period in immediately available funds by 31 March following the last day of the relevant period: 1 x 25% of the Profit Interest 25,000,000 where:- Profit Interest means an amount equal to the profit of the Company available for dividend purposes for the relevant 6 month period in an amount based on the Interim Accounts for that period; (e) to receive a dividend in respect of the 6 month period beginning 1 January 2002 and ending 30 June 2002 and in respect of every 6 month period beginning and ending on the same dates in each subsequent year in an amount equal to the amount determined in accordance with the following formula, such dividend to be paid in respect of each period in immediately available funds by 30 September following the last day of the relevant period: 1 x 25% of the Profit Interest 25,000,000 where:- Profit Interest means for the first 6 month period an amount equal to the profit of the Company available for dividend purposes for the year ending 30 June 2002 based on the Accounts for that year less the profit of the Company paid as a dividend under paragraph (d) for the 6 month period from 1 July 2001 to 31 December 2001 and for each subsequent 6 month period an amount equal to the profit of the Company available for dividend purposes for the relevant year ending on 30 June based on the Accounts for the relevant year less the profit of the Company paid as a dividend under paragraph (d) for the 6 month period during that relevant year; and (f) to receive a dividend in respect of the period commencing either 1 January or 1 July (whichever date has occurred last) immediately preceding the winding up of the Company and ending on the day the Company is finally dissolved in an amount equal to the amount determined in accordance with the following formula such dividend to be paid in immediately available funds on the day the final distribution is made by the liquidator of the Company: 1 x 25% of the Profit Interest 25,000,000 Where - Profit Interest means an amount equal to the profit of the Company available for dividend purposes for the period commencing on either 1 January or 1 July (whichever date has occurred last) immediately preceding the winding up of the Company and ending on the day the Company is finally dissolved based on the accounts of the liquidator for that period; but does not have the right: (g) in a winding up or reduction of capital of the Company to repayment of any of the capital paid up on that share or, other than in accordance with clause 2.1B(f), to participate in the distribution of the surplus assets of the Company; or (h) to vote at a general meeting of the Company. 29Clauses 9.1(a), 9.4(a) and 9.5 of the Constitution have at all times provided as follows: 9.1 Dividends (a) The directors may declare and pay such interim and final dividends as, in their judgment, the financial position of the company justifies. 9.4 Reserves (a) The directors may set aside out of the profits of the company such reserves or provisions for such purposes as they think fit. 9.5 Carry forward of profits The directors may carry forward so much of the profits remaining as they consider ought not to be distributed as dividends or capitalised without transferring those profits to a reserve or provision. 30The Deed of Variation to the Free Cash Flow Escrow Agreement altered Sumiseki's entitlement to the Wollemi Cash Surplus (ie after payment of the B Class Dividend Entitlements), and Sumiseki's entitlement to the Other Cash Flow Surplus so as to be less 50% of the B Class Dividend Entitlements. It defined "B Class Dividend Entitlements" to mean: [A]n amount representing so much of the profit of [Wambo] for the relevant period which [Wambo] reasonably estimates will be distributed by way of dividend to the holders of the B class shares in accordance with the provisions of the constitution for [Wambo] which amount must be immediately notified to [Sumitomo] by [Wambo] with supporting details. 31The effect was that henceforth payment of the B Class dividend took precedence over repayment of Sumiseki's loan. Pre-Resolution negotiations 32The following negotiations preceded the Restructure Agreement and the passing of the Resolution. 33On 29 June 2001 Hunter proposed the issue of B Class shares with the only right attaching to them being to receive a dividend equal to the profit interest. 34On 7 June 2001 the solicitor Tony Wassaf wrote to Komaki Nagasaki concerning the proposal for the issue of B Class shares as follows: My comments on option 2 are as follows: 1. Special B class shares in Wambo are ok - the only issue is what rights attach to the shares. 2. The proposal below is that the only right is a right to a dividend equal to the Profit Interest. To equate to the 25% Profit Interest, it will need to be a annual fixed mandatory dividend equal to 25% of Wambo profit available for dividend purposes. The directors must pay it - there is no discretion for the directors for dividends on these shares, which is normally the case for dividends. 3. The only other right to consider is what happens on winding up. In that situation, where [Sumitomo] has a Profit Interest, [Sumitomo] is an unsecured creditor for whatever then is the value of the Profit Interest. That value depends on the assets and liabilities of Wambo at that time. The sale of assets can give rise to profits available for dividend purposes so the value is not necessarily nil. As a holder of B class shares, [Sumitomo] will no longer be a creditor and if it is to be entitled to anything on winding up it will need to have that right as part of the rights attaching to the shares. As a minimum, on winding up, [Sumitomo] should be entitled to an amount equal to the value of the 25% Profit Interest at that time. 4. Will [Sumitomo] have to provide $25m in cash or can directions be used without cash? This is a tax/accounting issue. 5. The Profit Interest Agreement will need to be substantially amended or cancelled and a new agreement entered into to give effect to this proposal. The tax implications of this need to be checked. If you have any queries, please call me. (emphasis added) 35On 21 June 2001 Damien Clarke sent Tony Wassaf a draft Restructure Agreement which made provision for the issue to Sumiseki of B Class shares, to be issued on the terms of a resolution amending the Constitution by inserting a new Art 2.1B which contained the terms of the resolution Hunter would bind itself to pass. 36Later that day Tony Wassaf sent an email to Damien Clarke, in which he said, relevantly: I do not have the [Wambo] constitution but dividends are normally expressed to be in the discretion of the directors - rule 2.1B should make it clear that the dividend rights in this rule prevail over other provisions in the constitution dealing with dividends. 37Damien Clarke's response was to provide an amended Art 2.1B, which for the first time inserted the words at the commencement of the proposed resolution, "[d]espite any provision in this constitution to the contrary". The proposed resolution so framed was agreed upon. Changes to the shareholdings in Wambo 38In November 2002 Resource Finance Corporation merged with Excel. Excel then held 75% of Hunter. Malcolm MacLennan held 25%. In May 2004 Excel was listed on the Australian Stock Exchange and shortly thereafter Malcolm MacLennan sold his 25% in Hunter to Excel. From August 2004 Excel was the sole shareholder in Hunter. 39On 6 July 2006 Peabody Energy Australia Pty Limited (formerly Peabody Pacific Pty Limited) ("PEA"), a subsidiary of Peabody Energy Corporation of St Louis, Missouri, USA ("Peabody"), announced a proposal to acquire all the shares in Excel by way of a Scheme of Arrangement conditional, amongst others, upon approval by Excel shareholders and the Federal Court of Australia. 40On 11 October 2006 a number of Peabody nominees, including Mr Stephen Smith, were appointed to the board of Wambo. Tony Haggarty, Malcolm MacLennan and Andrew Plummer resigned. 41The Annual Financial Report of Wambo for 30 June 2006 was signed on 29 November 2006 by Stephen Smith. Note 15 to the Consolidated Financial Statements includes the following: Holders of B class shares are entitled to receive annual dividend equivalent to 25% of the profit after income tax, however are not entitled to vote at shareholder meetings. In the event of winding up the company, B class shareholders are not entitled to any distribution of equity. 42The Scheme Booklet contained detailed information about Excel and Wambo. Amongst others, it made the following statements: Sumitomo Coal Mining Limited holds non voting shares in Wambo which entitle it to an annual distribution equal to 25% of the net profit after tax from the mine. (Footnote 3 to paragraph 3.1 of the Scheme Booklet) Sumitomo Coal Mining Co Ltd holds a non-voting interest entitling it to 25% of net profit after-tax from Wambo. (Table 7 in the Scheme Booklet.) Sumitomo Coal Mining Co Pty Ltd holds a non-voting interest entitling it to 25% of net profit after tax from Wambo. (Figure 4 in the Scheme Booklet.) Excel owns 100% of Wambo Coal Pty Ltd. However, Sumitomo Coal Mining Co Ltd (Sumitomo) holds a non-voting interest in Wambo, which entitles it to an annual distribution equal to 25% of the mine's net profit after-tax (but no capital rights). (Paragraph 4.2.1 of the Scheme Booklet.) 43The Scheme of Arrangement was implemented on 25 October 2006. 44Excel changed its name to Peabody Australia Mining Limited ("PAML"). 45In these proceedings the parties drew no substantive distinction between Peabody and PEA or between Peabody and PAML. 46On 16 December 2009 under another Scheme of Arrangement, all assets of Hunter became assets of PAML and Hunter Coal was deregistered. From then on PAML owned all the ordinary shares in Wambo. Payment of the B Class dividends 47From the time of the issue of the B Class shares up to and including the year ended 30 June 2006 Sumiseki received dividends on the B Class shares equivalent to 25% of Wambo's after tax profits as disclosed in its statutory accounts (the figures are not exact because they were rounded off). Where profits are referred to, they are, unless otherwise stated, on an after tax basis. 48Wambo's profit for the financial year ended 30 June 2002 was $42.786M and Sumiseki received dividends of $10.696M. Wambo's profit for the financial year ended 30 June 2003 was $18.347M and Sumiseki received dividends of $4.587M. Wambo's profit for the financial year ended 30 June 2004 was $15.837M and Sumiseki received dividends of $3.959M. Wambo's profit for the financial year ended 30 June 2005 was $95.530M and Sumiseki received dividends of $23.882M. Wambo's profit for the financial year ended 30 June 2006 was $35.556M and Sumiseki received dividends of $8.889M. 49For a time after the introduction of Peabody, dividends continued to be paid to Sumiseki on the same footing. 50In December 2006 Wambo changed its financial year end from 30 June to 31 December. 51For the six months ended 31 December 2006 Wambo's profit was $7.199M and Sumiseki received $1.877M. 52On 30 April 2007 Wambo published a Special Purpose Financial Report for the six months ended 31 December 2006. Note 17 is in the same terms as Note 15 to the 30 June 2006 accounts. 53For the six months ended 30 June 2007 Wambo's profit was $3.626M and Sumiseki received $906,500. 54On 17 October 2007 Mr Gregg Wickstra was appointed a director of Wambo. (He was appointed a director of PEA on 1 February 2008 and of PAML on 8 June 2009). 55Wambo made a loss for the six months ended 31 December 2007 and also for the six months ended 30 June 2008. No dividends were paid for those periods. 56On 30 May 2008 Wambo published a General Purpose Financial Report for the period ended 31 December 2007. It was signed by Gregg Wickstra and contains a note (Note 21) in the same terms as Notes 15 and 17 to the June 2006 and December 2006 accounts. Events culminating in the non-payment of the B Class dividends 57From the time of issue of the B Class shares until the introduction of Peabody, Sumiseki was treated as being entitled to be paid a fixed mandatory dividend equivalent to 25% of the after tax profits of Wambo. 58However, from about September 2008 there commenced a series of occurrences which culminated firstly in Wambo and Peabody taking the position that payment of dividends on the B Class shares was a matter entirely within the discretion of Wambo's directors, and later in the directors deciding not to pay the B Class dividend. 59Thus, although Wambo's accounts for the six month periods ended 31 December 2009, 30 June 2010, 30 June 2011 and 31 December 2011 disclosed after tax profit from which dividends could have been paid, acting on the basis that the board had a discretion to do so, Wambo declared that no dividends would be paid to Sumiseki (or at all). 60In September 2008 Peabody and PAML, in conjunction with the group's auditors, Ernst & Young, started considering whether Sumiseki's interest in Wambo through the B Class shares should be treated as debt or equity for accounting purposes. If the B Class dividend entitlements were viewed as debt (which would be the case if the dividends were required to be paid when Wambo made a profit) the obligation would have to be reflected as a financial liability in the consolidated accounts of the group. 61An early herald of the attitude which Wambo ultimately took, that the B Class shares did not entitle Sumiseki to a dividend upon Wambo making profits, was an email which Mr Andrew Carrick of Ernst & Young sent to Messrs Phelps and Morrissey of Ernst & Young on 28 November 2008. Andrew Carrick said, relevantly, the following: Attached are the details of the Wambo Class B shares · 25,000,000 fully paid class B shares owned by Sumitomo · Were treated as equity by KPMG on transition to IFRS (understood to be ordinary shares but with a dividend right) Rights attaching to the shares · Receive notice and attend general meetings of the Company · Receive a copy of the Interim Accounts by 31 March (prior to change of year end to December) - interpret as 3 months after half year end · Receive a copy of audited financial statements by 30 November (prior to change of year end to December) - interpret as 4 months after year end · Receive a dividend each six months based on profit for the preceding six months. The dividend is payable on each share is 1/25 million shares x 25% of profit interest · The profit interest is defined as "an amount equal to the profit of the company available for dividend purposes". An interpretation of this may be a dividend is not payable in the event the directors deem the company would not be solvent even if a profit is made - considering Corporations Act rules on distributable profits. This interpretation may provide us with additional elements of discretion that may improve the profit interests characterisation as equity · The shares do not have any rights in a windings up or reduction of capital in the company · The shareholder has no right to repayment of any of the capital paid up on that share · Peabody does have some pre-emptive rights over the transfer of the B Class shares to a 3rd party. 62An Ernst & Young Internal Memorandum dated 17 December 2008 concluded that the B Class shares should be accounted for as equity in Sumiseki's hands because: The entitlement to profit does not arise until the directors have exercised their judgement in the determination if profits are available for dividend purposes. Specifically, the directors can determine that in the best interests of the company, there are no profits available for dividend purposes and not issue a dividend for the B class shares. In addition, there is no "catch-up" requirement to pay "missed" dividends. 63The Memorandum went on to state: Reasons for conclusion The critical issue surrounding whether the instrument is debt or equity is whether there is a contractual obligation to pay amounts. This revolves around consideration of the understanding of "profit interest". The profit interest is defined as "an amount equal to the profit of the company available for dividend purposes". There is no definition within the agreement as to how profits are to be determined as "available for dividend purposes". In the absence of specific definitions, we have considered the application of the Corporations Act, common law and generally accepted principles of determining a dividend. The Corporations Act (s 254T) states "a dividend can only be paid out of the profits of the company". In addition, the directors are under obligation to protect the solvency of the company and manage capital accordingly. In short, the directors must exercise their judgement in determining if profits are available for dividend purposes. A dividend would not be payable in the event the directors deem the company would not be solvent even if a profit is made - considering Corporations Act rules on distributable profits. For example, if the company made a $10m loss in the first half, no amount could be paid as distributable profits. In the second half, if the company made a $10m profit, it would be up to the directors to consider the capital of the company; and whether the second half profits should instead be used to restore the capital of the company and thus determine no profit would be available for dividend purposes in the second half. 64In discussions on or about 20 February 2009 between Janette Hewson, Peabody's internal counsel, and Andrew Carrick, the following question was posed to be asked of Peabody's external legal advisors, Freehills: Does the Board have an unconditional right to determine what are distributable profits being an appropriate amount of profits to be distributed to shareholders, including nil, irrespective of the statutory profits of the Company for the period? 65By letter dated 2 March 2009 Freehills advised, amongst others, as follows: The first interpretation is that the right to 25% of the profits available for dividend purposes is a reference to 25% of the amount of profits declared by directors to be available for distribution as a dividend, pursuant to Rule 9.1(a) of the Wambo Constitution. In other words, if there was a profit of $100, and the directors thought it prudent to declare a dividend of $60, the B Class Share would be entitled to an amount of $15. The alternative interpretation is that the B Class share provides an entitlement to the entirety of the profit pool, irrespective of what dividend is declared by directors. In the previous example, the B Class share would be entitled to $25 and not $15. 66The advice concluded that the better view was that the answer to the question posed was yes. 67On 3 March 2009 Peabody obtained advice to the same effect from Janette Hewson. Ernst & Young, relying, amongst others, on the Freehills advice and that of Janette Hewson, expressed the same view in an Internal Memorandum (apparently brought into existence in early March 2009 but incorrectly bearing the date 20 February 2009). Their conclusion was as follows: Wambo's directors retained absolute discretion to determine what profits available for dividends purposes [sic] and the dividend right attaching to the B Class shares does not amount to an unconditional right to receive a dividend once an accounting profit has been earned by Wambo. 68Ernst & Young requested a representation letter from Wambo's directors that the directors confirmed that in their view they retained the absolute discretion to determine the level of profit available for dividend purposes to be paid to shareholders, including the B Class shareholder. The directors of Wambo provided a representation letter dated 16 March 2009 in those terms. The letter was signed by Mr Julian Thornton, a director of Wambo (he had been appointed on 3 May 2007). 69A draft General Purpose Financial Report for the year ended 31 December 2008 was brought into existence by 11 March 2009. The draft contained a note (Note 20) in relation to the B Class dividends in the same terms as the notes earlier referred to. 70On 11 March 2009 Gregg Wickstra informed Janette Hewson and Mr Shane Young (PEA's Manager Joint Ventures) that the "Sumitomo dividend" needed to be paid by 31 March 2009. 71On 23 March 2009 a meeting of directors of Wambo was held. Present were Julian Thornton and Gregg Wickstra with Janette Hewson and Shane Young by invitation. The directors noted that "available profits" of Wambo as at 31 December 2008 were $5.799M and that the General Purpose Financial Report was approved, subject to certain handwritten changes. A briefing paper prepared by Gregg Wickstra was attached to the minutes. It recorded, amongst others, that the decision to declare a dividend is at the directors' absolution discretion, that when deciding whether to declare a dividend it is important to consider whether there are available profits from which dividends can be paid at any point in time, and that under Part 2.1B of the Constitution the directors may resolve to declare a dividend to B Class shareholders at their absolute discretion. The directors declared a dividend for the year 2008 to the B Class shareholder of $1,449,750, "being 25% of the available profits of the Company, franked to 7.12%". 72Gregg Wickstra signed Wambo's General Purpose Financial Report for the year ended 31 December 2008 on 23 March 2009. Note 20 to the accounts includes the following: Holders of B class shares are entitled to receive interim and annual dividends equivalent to 25% of the profit interest for the relevant six month period. Profit interest is the amount of profit of the company for the period available for dividend purposes as determined by the directors. The Class B shareholders are not entitled to vote at shareholder meetings and in the event of winding up the company, B class shareholders are not entitled to any distribution of the surplus assets of the company or repayment of any of the capital paid up on that share. 73Over the years PAML had supported Wambo by way of loan finance. This enabled Wambo to carry out capital works. 74On 1 December 2004 PAML (then Excel) and Wambo signed a written Loan Agreement under which PAML agreed to advance moneys to Wambo at 8% per annum, interest to be paid monthly in arrears, and repayable on seven days notice. The Loan Agreement is a brief document with few conditions, no doubt reflecting the fact the arrangement was between parent and subsidiary. Also, interest had not been paid monthly but rather capitalised. By 30 June 2009 there was interest accrued of $28.3M. 75As at 31 December 2008 the outstanding amount of the loan was some $210M. Note 16 to the accounts as at that date reads: At 31 December 2008 the loan from immediate parent entity is repayable on demand however there is no intention to call the loan within the next twelve months. 76From mid 2009 a number of persons within Peabody, including Shane Young, Gregg Wickstra, Mr Brett Mawby (Head of Tax Australia) and Mr John Busch (Senior Finance Manager) began to consider the loan arrangements between Wambo and PAML. 77On 1 July 2009 Brett Mawby wrote to Shane Young, Gregg Wickstra and John Busch relevantly as follows: [A]fter chatting with Shane about the loan this afternoon it occurred to me there is no term in the loan. Perhaps I might have considered this on some earlier occasion because the absence of a term means the ATO might challenge the instrument as an equity instrument. Though, they do have a copy of the unsigned loan agreement and didn't raise it as an issue as part of the risk review. I would suggest that we take this opportunity to either make amendments to the loan agreement to insert a <10 year term or do away with the loan and execute a new one. In addition to the insertion of a term I would also suggest we deal with the ability to capitalise interest (the existing loan is silent on this) and that we consider inserting a floating interest rate (the latter to ensure the instrument is on commercial terms). I've attached the instrument we used recently to recapitalise the USD Excel Note. We could use this with minimal changes. 78The instrument attached was a short form loan agreement with no burdensome covenants. 79On 19 August 2009 Mrs Maria da Conceicao da Silva de Santana (known as Connie de Santana) was appointed Chief Financial Officer and a director of PEA. She was appointed a director of Wambo on 17 September 2009. She was appointed a director of PAML on 5 October 2009 and resigned from that office on 24 March 2010. 80From about 16 September 2009 Peabody started to investigate the cost of Wambo being financed externally with no support from any other company. John Busch was closely involved in this process. 81On 18 September 2009 Connie de Santana was present at a meeting of directors of Wambo at which was also present Julian Thornton and Mr Robert Hammond (who had been appointed on 12 May 2009). The meeting was called to determine whether a dividend should be paid to the B Class shareholders. Also present were Gregg Wickstra, Shane Young and John Busch. Attached to the minutes is a briefing paper by Gregg Wickstra in substantially the same form as the briefing paper considered at the directors' meeting of Wambo on 23 March 2009. The Board noted that the available profits of Wambo as at 30 June 2009 were $29.234M and resolved to declare a dividend to B Class shareholders of $7,308,500, being 25% of the available profits, 1.26% franked. 82Connie de Santana's evidence was that at the meeting Gregg Wickstra conveyed to her that in the past a mechanistic approach had been applied to the payment of the B Class share dividends. The approach had been that if there was a profit and the company would not be insolvent by declaring the 25% dividend, Wambo had to declare it. She said that Gregg Wickstra told her that this was his understanding of the rights conferred upon Sumiseki under the Constitution and that this had been his understanding from the time of his appointment. She said that she proceeded in subsequent periods to depart from this approach based on her view as to the construction of the Constitution and that in coming to that view, she used her own judgment and relied on advice received from internal and external counsel. 83She said that by the time of her appointment, there had arisen within Peabody an issue with respect to how the B Class shares should be dealt with in the accounts of Peabody. It was part of the remit from her boss (Julian Thornton) and the Chief Financial Officer in the US (Mr Mark Cruise) to sort the problem out. A way of doing this was to alter Sumiseki's entitlements under the Constitution. 84She said that her main concern at the meeting was to satisfy herself, as a director, that Wambo was sufficiently solvent to support a distribution of profit and that her concern arose out of a review of Wambo's primary source of finance, being the loan from PAML. At the meeting she reviewed the 2004 loan and concluded that it was effectively at call. She said she was concerned to satisfy herself that it was properly classified as non-current. If it were to be classified as a current liability, this would place Wambo in a difficult position. She saw the classification as critical as to whether Wambo was sufficiently solvent to support the dividend distribution. At the meeting she asked whether Wambo had a formal letter of support in relation to the loan. She said she recalled becoming aware that there was no letter of support but that one of the directors said that PAML would not call on the 2004 loan in the coming 12 months and thereby put Wambo in a potentially insolvent position. On that footing she felt able to support payment of the proposed dividend on the B Class shares. 85Her evidence was that she considered that for the Wambo directors to plan in its best interests, they needed longer term certainty around its funding position than could be provided by assurances from PAML directors from time to time, particularly having regard to Wambo's potential for expansion. 86During October 2009 John Busch made contact with Mr Mark Couchman of the ANZ Bank ("ANZ") and Mr Nick Rees of the Commonwealth Bank seeking indicative pricing on a revolving line of credit for Wambo on a stand-alone basis. A 3-year facility with a balloon repayment of 50% at the end of year 3 was mentioned. Apparently no, or no meaningful response, was received from the Commonwealth Bank and PAML did not follow the matter up with that institution. 87On 20 October 2009 Shane Young sent an email to John Busch and others in the following terms: Heard anything on the question of what interest rate terms and covenants a commercial (arms-length) Wambo loan might have? 88Later that day Shane Young sent to Connie de Santana and Gregg Wickstra a draft Presentation to B Class Shareholders, intended to persuade Sumiseki to agree to changes to the B Class share rights to overcome Peabody's accounting problem in the US. The proposal is described as being "aimed at changing the tax characterisation of the Class B shares (from tax 'equity' to 'debt') such that Wambo can join the Peabody tax consolidated group". One section of the Presentation is headed "[t]he problem with a debt-laden Wambo?" Amongst others, the following appears beneath the heading: Initial investigations have indicated that external debt raising is not possible, forcing an ever increasing reliance on Wambo's majority shareholder (Peabody). 89Another section of the proposal is entitled "Summary of Class B Shareholding Changes" and sets out in column form the rights of the B shares before the proposed change and after it: Class B Shares BEFORE the proposed change Class B Shares AFTER the proposed change Dividend entitlement calculated as 25% of profits Dividend entitlement calculated as 25% of cumulative profits and losses after deducting minimum notional interest payments No payments made if Wambo makes a loss Minimum notional interest payment guaranteed even if Wambo's [sic] makes a loss Total payments to Class B shareholders equates to 25% of Wambo profits Total payments to Class B shareholders equates to 25% of Wambo profits and losses Directors' discretion to pay dividends implied by the Wambo Constitution Directors' discretion to pay dividends explicit in the Wambo Constitution If withheld by the company, the Class B dividend entitlement would not be carried forward to future periods If withheld by the company, the Class B dividend entitlement is carried forward to future periods via the Guarantee Account No payment to Class B shareholders upon cessation of mining activites Payment of A$25m to Class B shareholders upon cessation of mining activities No participation in winding up of the Company No participation in winding up of the Company 90On 21 October 2009 John Busch wrote the following to Shane Young: Indicative terms on a 3-year term loan. Covenants - EBITDA to interest coverage 4x (i.e. EBITDA no less than 4x) - Debt to capital of 30% - Debt to EBITDA of 3x (i.e. Debt no greater than 3x EBITDA) These are the typical covenants on a term-loan. As you'll see in the attached file with the current finance leases and intercompany loans we're already "over the limit" in terms the ratios above. That presents a problem. Interest costs - 90-day BBSY + 3.5%; 90-day is -3.9% to give an all-in of 7.4%. This seems awfully low to me. I think it is the result of "halo effect" for Peabody. Interest rates are at historic lows and are expected to increase - I would build in a rate increase in the model and I would add at least another 2% to the margin. I think a rate around 10% is starting to feel "reasonable." - Upfront fee of 2% (on entire amount borrowed) Amortisation - 50% amortisation at the end of year 3. Assume 25% amortisation in years 1 and year 2. Other Additional gearing could be had with a PEA/PEC parent company guarantee; need detailed financials, cash flow projections, etc. We're left with that a "high level" response from the bank is that Wambo, by itself, cannot get the financing it needs to expand. We're projecting that we'll need $500m to expand and grow the business. In order to model that I would (1) Put in a 3-year loan, 50% repayment at end of year 3 (2) Calculate the above ratios: EBITDA to interest coverage / debt-to-capital / debt-to-EBITDA and we can see how far out of the range the ratios would be vs. compared to what one would expect to see in a true 3rd-party borrowing. Finally, if we want to get highly accurate pricing we need to give the bank high-level revenue, EBITDA, cash flow projections. Due to confidentiality reasons that probably won't happen but recognize they didn't have much to work with. 91Later that day Shane Young sent an email to Connie de Santana in the following terms: FYI - not only is Wambo unable to raise financing by itself, covenants typical for the type of financing they would obtain would be breached in any case. I will ask John about any dividend restrictions for these typical loans. 92At 11:32pm that night, Shane Young wrote the following email to John Busch: Do you know if there would also be covenants restricting dividend payments in such financing? 93The following day, John Busch replied to Shane Young: No more than 50% of NPAT to be paid to shareholders. 94On 18 December 2009 Shane Young sent to Mr Walter Hawkins Jr, Senior Vice-President of Finance Peabody, Connie de Santana, John Busch and others a "final draft" of an updated Wambo-PAML Intercompany Loan Agreement, under cover of an email in the following terms: Attached is the final draft of our updated Wambo-PAML intercompany loan agreement. Given the existence of the B Class Shareholders at Wambo (Sumiseki), we want to ensure this is exactly what we want to implement before signing. However we will need to sign this before 31 December 2009. 95The draft instrument contemplates a loan of $150M for a period of two years, or such other period as agreed in writing between the parties. It is in simple form and contains no covenants restricting the payment of dividends or imposing financial ratios on the borrower. Walter Hawkins responded by email dated 22 December 2009: This looks fine from my perspective. Please proceed. 96On 23 December 2009 John Busch emailed Walter Hawkins a "final version" of the proposed PAML/Wambo loan, copying in Connie de Santana and others. John Busch's email said: Can you please sign (as a Director of PAML, next to your name), scan and email a copy back, and put the original in the mail to my attention. 97The document had provision for Walter Hawkins and Connie de Santana to sign as directors of PAML. 98On 14 January 2010 Connie de Santana emailed Walter Hawkins and others: Walter, I am re-reviewing the proposed loan agreement between HunterCoal and Wambo - I will phone you on this tomorrow - I want to insert some covenants and more specific repayments. Aim is to have new loan agreement in place prior to next potential declaration (March). 99Connie de Santana gave evidence that the covenants she had in mind included ones limiting distributions to shareholders. 100Connie de Santana gave evidence that she recalled a conversation (although she could not recall the specific discussion) with Walter Hawkins, following her email, about it being appropriate for the intercompany loan to reflect an arms-length external loan arrangement, and that it was appropriate to include covenants and specific repayments. She said that following the conversation she discussed with John Busch and Shane Young, refreshing discussions with the various external lenders, to obtain indicative loan terms to provide a benchmark for the proposed loan agreement. She said she understood that it was unlikely that Wambo could obtain the financing it sought from an external lender but that if the banks did indicate a willingness to provide unsecured funding to Wambo, she would have considered such a proposal. 101On 31 January 2010 Connie de Santana emailed Shane Young and John Busch saying: [W]e need more urgent pressure on the loan matter - time line is too late - need by mid Feb so that we can review and resolve before next dividend declaration - please revert to banks on Monday. 102On 17 February 2010 Mark Couchman of ANZ sent to John Busch a "Discussion Term-sheet" for a non-revolving cash advance facility of $130M and a working capital facility of $50M. The discussion sheet envisaged a series of covenants including dividend payment restrictions and other financial covenants to be discussed. It envisaged the security of a share mortgage by PAML over its shareholding in Wambo and Wambo giving a fixed and floating charge. 103On 26 February 2010 John Busch received from the National Australia Bank ("NAB") a presentation outlining that bank's approach to project finance for an indicative loan amount of $120M - $140M. 104Peabody prepared a comparison between the existing loan arrangements and the term sheets from ANZ and NAB. 105On 1 March 2010 Peabody produced a discussion term sheet setting out proposed terms for a loan from PAML to Wambo including a series of financial covenants requiring Wambo to comply with specified ratios, although not containing a covenant restricting dividend payments. Further discussions within Peabody took place between 4 March and 26 March 2010 including a slide presentation to the Wambo Board on 26 March 2010, noting, amongst others, that PAML rejected the option to provide a formal letter of comfort to Wambo. 106On 23 March 2010 Julian Thornton, on behalf of Peabody, wrote to Komaki Nagasaki, stating that it had become clear that both parties failed to agree on fundamental issues that affect Wambo going forward, including their respective views on the operation of cl 13 of the Share Sale Deed and the directors' discretions with respect to the B Class shares' dividends. Peabody took the position (from which it resiled in the proceedings) that cl 13 was uncertain and unenforceable. It also took the position that the directors had an unfettered discretion to declare or not to declare dividends on the B Class shares. 107On 27 March 2010 the Board of Directors of Wambo met and approved the execution by Wambo, as Borrower, of a written loan agreement ("the Loan") with PAML, as Lender. Connie de Santana and Mr Stephen John Hedges signed it as directors of Wambo. The Loan records the existence of the 2004 Loan Agreement. PAML granted Wambo a term loan facility for an initial principal amount equal to the amount owing on 31 March 2010, including interest, under the 2004 Loan Agreement and a revolving credit facility of $60M. Wambo must repay the Loan by 29 March 2013. 108Clause 8.1 of the Loan is in the following terms: The Borrower will not declare, make or pay any Distribution unless: (a) as at the date on which the proposed Distribution is to be declared or paid, no Event of Default is outstanding or would be reasonably likely to result from the payment of that Distribution; and (b) as at the immediately preceding Relevant Date: (i) the ratio of Consolidated Cashflow to Debt Service is greater than 2.25:1; (ii) the ratio of Consolidated Cashflow to Interest Expense is not less than 4.0:1; (iii) the Gearing Ratio is (when expressed as a percentage) not greater than 40%; and (c) the amount of the Distribution does not exceed 50% of the Consolidated Cashflow. 109Clause 9 of the Loan specifies "Events of Default" which include the breach by Wambo of any non-monetary obligation under the Loan. Events after the Loan 110For the year ended 31 December 2009, on a consolidated basis, Wambo made net profits after tax of $47.690M, of which $29.234M was earned in the six months to 30 June 2009. On 25 September 2009 Wambo declared a dividend on the B Class shares of $7,308,500 (being 25% of the profits earned to 30 June). 111On 30 March 2010 (the day after the Loan) the directors of Wambo resolved that no dividends would be paid by Wambo for the 6 months to 31 December 2009. The decision was notified to Sumiseki on 31 March 2010. 112Amongst Wambo's reasons for not paying a dividend for this period was that it did not satisfy the Debt Service Cover Ratio covenant under Clause 8.1 of the Loan. 113For the six month period ended 30 June 2010, on a consolidated basis, Wambo made net profits after tax of $39.442M. 114On 27 September 2010 the directors of Wambo resolved that no dividends would be paid for this period. The decision was notified to Sumiseki on 28 September 2010. 115Amongst Wambo's reasons for not paying a dividend for this period was that it did not satisfy the Debt Service Cover Ratio covenant under Clause 8.1 of the Loan. 116For the six month period ended 31 December 2010, on a consolidated basis, Wambo made net profits after tax of $44.197M. 117On 30 March 2011 the directors of Wambo resolved that an amount of $25M was available for dividend purposes for the year ending 31 December 2010. They also resolved that a dividend of 75% of this amount ($18.750M) would be paid to PAML, and that a dividend of the remaining 25% ($6.250M) would be paid to Sumiseki. The decision was notified to Sumiseki on 31 March 2011. 118For the six month period ended 30 June 2011, on a consolidated basis, Wambo made net profits after tax of $25.666M. 119On 29 September 2011 the directors of Wambo resolved that no dividends would be paid for this period. The decision was notified to Sumiseki on 30 September 2011. 120Amongst Wambo's reasons for not paying a dividend for this period was that it did not satisfy the Debt Service Cover Ratio covenant under Clause 8.1 of the Loan. 121For the six month period ended 31 December 2011, on a consolidated basis, Wambo made net profits after tax of $9.396M. 122On 27 March 2012 the directors of Wambo resolved that no dividends would be paid for this period. The decision was notified to Sumiseki on 30 March. 123Amongst Wambo's reasons for not paying a dividend for this period was that it did not satisfy the Debt Service Cover Ratio covenant under Clause 8.1 of the Loan. THE CLAUSE 13 CONTROVERSY 124The principal dispute between the parties centres around the rights of Sumiseki to be paid dividends on the B Class shares. However, there is a separate dispute about Sumiseki's right under cl 13 of the Share Sale Deed to be offered participation in any new operation should Wambo decide to exploit underground coal. 125From as early as March 2010 PAML (on its own behalf and presumably also on behalf of Wambo) took the position that cl 13 was uncertain and unenforceable. 126In its Third Further Amended Summons, Wambo seeks declarations that: (a) [C]lause 13 of the Share Sale Deed between the plaintiff, the defendants and [Sumitomo] dated 10 January 2001 (the Share Sale Deed) is valid and legally enforceable. (b) [I]t is an implied term of the Share Sale Deed that, in procuring the first defendant to make an offer to the plaintiff pursuant to clause 13 of that Deed, the second defendant is obliged at all times to act in good faith and reasonably. (c) [I]t is an implied term of the Share Sale Deed that, in making any offer to the plaintiff pursuant to clause 13 of that Deed, the first defendant is obliged at all times to act in good faith and reasonably." 127During the course of the hearing PAML and Wambo made an in Court admission that, contrary to the position earlier taken, they now accept that cl 13 is neither uncertain nor unenforceable. Sumiseki put that in these circumstances it was entitled to the declarations it seeks, particularly because of PAML and Wambo's earlier denial. 128PAML and Wambo's earlier denial may have been unjustified and even regrettable, but it is not suggested that any circumstances which might enliven the operation of cl 13 have arisen, nor is it suggested that there is any anticipation that such circumstances will occur in the foreseeable future. There are no facts disclosing any controversy with respect to the application of cl 13 which are the subject of any dispute between the parties. Such facts may never arise. 129It is accordingly not appropriate for the Court to make declarations in the terms sought. They are theoretical only and are of no practical use; see Gardner v Dairy Industry Authority of New South Wales (1977) 52 ALJR 180. CONSTRUCTION 130Sumiseki contends that where they appear in the Restructure Agreement and the Constitution, the words "the profit of the Company available for dividend purposes", in their plain and ordinary meaning, describe the profit stated in Wambo's accounts which is capable of lawfully being distributed to shareholders as a dividend. On this construction, once Wambo's accounts disclose an after tax profit out of which dividends are capable of being declared, 25% of that profit must be paid to the B Class shareholder. 131On Sumiseki's construction it is entitled to receive dividends equivalent to 25% of the profit earned by Wambo during the 12 months ended 31 December 2009 and during all subsequent six month periods, as disclosed in the accounts, less any dividends paid for those periods. It seeks a declaration as to the true construction of the provision and orders for the payment of the shortfall. 132It says that if, contrary to its primary contention, the words are ambiguous, the circumstances surrounding the entry into of the Restructure Agreement (being things known to all the parties) support its construction. 133PAML and Wambo contend that profit "available for dividend purposes" has a generally accepted meaning, being that profit which is left over, and out of which a dividend may be paid, after the directors have first determined whether any part of the full profit disclosed in the accounts should be devoted to other purposes. The principles 134The ascertainment of the true meaning of the words "profit of the Company available for dividend purposes" where they appear both in the Restructure Agreement and the Resolution is a matter of construction, in the first instance of a commercial contract and in the second of a company's constitution. 135The meaning of the words used in a commercial contract is to be determined objectively, that is, by what a reasonable person would have understood them to mean. This requires attention to the language used by the parties, the commercial circumstances which the document addresses, the purpose of the transaction and the objects which it was intended to secure. The whole of the instrument has to be considered. Preference is given to a construction supplying a congruent operation to the various components of the whole of an instrument: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 529; International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 160. 136The meaning of a company's constitution, like any other commercial contract, is to be determined objectively. 137If the words used are unambiguous, the Court must give effect to them. A court is not justified in disregarding unambiguous language simply because the contract would have a more commercial and businesslike operation if an interpretation different to that dictated by the language were adopted: Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137 at [55]; Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; (2011) 86 ALJR 1. 138Where words used in a contract are ambiguous, the Court can, in determining the objective intention of the parties, have regard to all of the surrounding circumstances which were known to them at the time of the contract: Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 352. 139As to commercial contracts generally, in recent years a number of judicial statements have been made by intermediate appellate courts to the effect that regard may be had to surrounding circumstances even in the absence of ambiguity: see for example Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1 at 10 and following, 47 and following; Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at 616-618, 663-678; Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64 at [178]. These statements were based on a reading of what has been said by the High Court, particularly in Pacific Carriers v BNP Paribas (2004) 218 CLR 451, Toll v Alphapharm, Wilkie v Gordian Runoff, and IATA v Ansett. 140The traditional view was that surrounding circumstances were never to be taken into account in construing a company's constitution, although recent authorities have departed from this on the basis that a more limited reference to surrounding circumstances is permissible: Lion Nathan v Coopers Brewery at 13, [56]; HNA Irish Nominee Ltd v Kinghorn (2010) 78 ACSR 553 at [42]. 141In Lion Nathan v Coopers Brewery at 13, [56] Weinberg J said: There is nothing in any of the recent authorities dealing with the rules of interpretation of ordinary contracts which suggests that the broader and more flexible approach now favoured by the High Court in relation to such contracts, can be applied without qualification to the interpretation of corporate constitutions. 142However, in Western Export Services v Jireh, the High Court (Gummow, Heydon and Bell JJ) said at [2]-[5]: [2] The primary judge had referred to what he described as "the summary of principles" in Franklins Pty Ltd v Metcash Trading Ltd. The applicant in this court refers to that decision and to MBF Investments Pty Ltd v Nolan as authority rejecting the requirement that it is essential to identify ambiguity in the language of the contract before the court may have regard to the surrounding circumstances and object of the transaction. The applicant also refers to statements in England said to be to the same effect, including that by Lord Steyn in R (Westminster City Council) v National Asylum Support Service. [3] Acceptance of the applicant's submission, clearly would require reconsideration by this court of what was said in Codelfa Construction Pty Ltd v State Rail Authority of NSW by Mason J, with the concurrence of Stephen J and Wilson J, to be the "true rule" as to the admission of evidence of surrounding circumstances. Until this court embarks upon that exercise and disapproves or revises what was said in Codelfa, intermediate appellate courts are bound to follow that precedent. The same is true of primary judges, notwithstanding what may appear to have been said by intermediate appellate courts. [4] The position of Codelfa, as a binding authority, was made clear in the joint reasons of five Justices in Royal Botanic Gardens and Domain Trust v South Sydney City Council and it should not have been necessary to reiterate the point here. [5] We do not read anything said in this court in Pacific Carriers Ltd v BNP Paribas; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd; Wilkie v Gordian Runoff Ltd and International Air Transport Association v Ansett Australia Holdings Ltd as operating inconsistently with what was said by Mason J in the passage in Codelfa to which we have referred. 143Thus, the approach I am bound to take is that unless the words under consideration are ambiguous, regard may not be had to surrounding circumstances. The meaning of the words is to be derived from an objective assessment of the particular document or documents being construed. Consideration 144In my view, and as I consider is revealed by the analysis which follows, the words used by these parties in their specific instruments have the meaning for which Sumiseki contends. 145Sumiseki prayed in aid of its construction what was said by Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, which concerned a formulation materially indistinguishable from the words in the present case. 146Mr Prenn sold to Dr Simmonds shares in R.T.T. Clause 1 of their written agreement provided, amongst others, for a payment by Mr Prenn to Dr Simmonds and for the sale to Dr Simmonds of shares in R.T.T. Clause 2 provided, relevantly, that the provisions of cl 1 would not take effect unless any one of a number of conditions had been satisfied, including that "[t]he aggregate profits of R.T.T. earned during the four years ending August 19, 1963 and available for dividend on the ordinary stock units for the time being issued whether declared or not shall have amounted to ₤300,000" after tax. At 1389 his Lordship said: The reference (in paragraph (b)) to profits "available for dividend on the ordinary stock units," so far from pointing toward the limited construction, points, for me, the other way. For both commercially and on the established accounting practice, all profits of the group are available for these dividends. It is true that a large part of the profits was ploughed back into the business of the subsidiaries, and that both parties must have contemplated that this would be done, but this is not to the point. To say so, is to confuse the earning of profits with their appropriation: all profits earned are available for dividend; what is done with them is a matter of choice which rests with those who control the company. Even if they decided to "plough them back" they still remain "available for dividend," so long as they remain in the balance sheet as "balance on profit and loss account." 147It seems that Lord Wilberforce had in mind the meaning given to the word "available" in the Macquarie Concise Dictionary 4th ed, which is "suitable or ready for use; at hand; of use or service". On this approach, profits are available if they are capable of being used to pay dividends. 148PAML and Wambo relied on what was said by Barrett J (as his Honour then was) in Heesh v Baker [2008] NSWSC 711; (2008) 67 ACSR 192, which they submitted is to different effect and supports the construction for which they contend. 149Barrett J was called on to consider whether certain shareholders were creditors of a company ("York") for the purposes of Part 5.3A of the Corporations Act 2001 (Cth) ("the Act"), solely by reason of their rights against York under its constitution and the terms of issue of redeemable preference shares held by them. They claimed to be future creditors on the basis that there would be a debt or claim in respect of dividends or redemption monies in the future, or that they were contingent creditors, York having an existing obligation to make payment out of which a payment liability would arise on a future event. 150Having regard to the terms of issue of the shares and the constitution of York, his Honour held that the shareholders were neither future nor contingent creditors in respect of any dividends, absent there being a declaration of those dividends. In the context of a company's ability to declare dividends out of profits, at 203, [42]-[45], under the heading "[o]bservations on the availability of profits", his Honour said: [42] The constitution of York contains provisions about ascertaining profits and the distributable quantum. Article 18.4 says that the directors, "may, before declaring any dividend, set aside out of the profits of the company such sums as they think proper as reserves, to be applied, at the discretion of the directors, for any purpose for which the profits of the company may properly be applied". Article 19.1 permits the capitalisation of profits. Under both these provisions, profits that might otherwise have been used to pay dividends may be applied in other ways. Only such residue of profits as remains after any such applications is properly available for dividend. [43] Circumstances may be such that it is either necessary or prudent to carry profits to a reserve rather than treating them as available for dividends. An unrealised capital gain arising by reason of revaluation and disclosed in the accounts may be the source of a dividend. As the High Court observed in Commissioner of Taxation (Cth) v Sun Alliance Investments Pty Ltd (in liq) (2005) 225 CLR 488 ; 222 ALR 286 ; 80 ALJR 202 ; [2005] HCA 70 at [49], "the concept of profits in the context of company law is sufficiently broad to encompass unrealised capital profits". But good practice or adherence to accounting standards may not only impose constraints upon revaluation (so that, for example, classes of assets rather than individual assets are considered) but also require that the unrealised surplus be carried to a revaluation reserve. [44] At an even earlier stage, directors will be called upon to exercise judgment and prudence in relation to contingencies. To the extent that debts owing to the company may be judged unlikely to be recovered, it will be appropriate to recognise a provision for doubtful debts which reflects in the determination of profits as such. [45] These and similar matters are of significance because they show not only that principles of prudence are to be applied in determining profits but also that profits, once ascertained, may be in part devoted to other purposes before being considered a proper source of dividends. This is sometimes said to represent the difference between distributable profits and profits available for dividend - the latter being, in the words of Maugham J in Long Acre Press Ltd v Odhams Press Ltd [1930] 2 Ch 196 at 202, those profits "available for dividend after making any reserve or other similar application which the directors, in good faith, acting on behalf of the company, think it is their duty to make in the interests of the company". 151At [24] his Honour set out Arts 18.1 and 18.2 of York's constitution. They were in the following terms: 18.1 Subject to the rights of persons (if any) entitled of shares with special rights to dividend, the Directors may declare a final dividend out of profits as they see fit but in accordance with the Corporations Act and may authorise the payment or crediting by the Company to the Members of such a dividend. 18.2 The Directors may authorise the payment or crediting by the Company to the Members of such interim dividends as appear to the Directors to be justified by the profits of the Company as they see fit but in accordance with the Corporations Act. 152At [28] his Honour observed: As I have said, the articles place the matter of release of dividends in the hands of the directors who must, however, recognise special rights to dividends carried by any shares. 153PAML and Wambo submitted that the meaning attributed to the formulation by his Honour is a generally understood one in the field of corporations. They also relied on a statement by Campbell JA in Phoenix v City of Canada Bay Council at [174] to the following effect: If the document in question is drawn by a lawyer, is manifestly intended to effect a legal transaction, and uses an expression that is not an expression in common use but that has a meaning in an area of legal discourse that is relevant to the document in question, that in itself provides a basis for the reasonable reader concluding that that expression is used in its special legal sense, unless there are other factors present that show it is not used in that special legal sense. So understood, the presumption is consistent with the current approach to construction. 154Sumiseki says that profits are available under Art 2.1B to pay the B Class dividend if that dividend could lawfully be declared out of them. PAML and Wambo's position is that profits are available for the purpose of paying the B Class dividend only after the directors have considered whether any part of them which might otherwise have been used for that purpose should be devoted to some other purpose. 155On the approach taken by Lord Wilberforce in Prenn v Simmonds, profits are available for dividend purposes even if the directors have the discretion to appropriate them, or some of them, to uses in priority to the payment of dividends. They are available because they can be used for either. 156The construction contended for by PAML and Wambo and the approach of Barrett J in Heesh v Baker posit the existence of a discretion in the directors to devote profits which might otherwise be used to pay the B Class dividend to some other purpose in priority to the payment of the B Class dividend. 157In Heesh v Baker, Arts 18.1 and 18.2 of the constitution of York gave the directors wide power to devote profits to purposes other than the declaration and payment of dividends. 158In Long Acre Press Ltd v Odhams Press Ltd [1930] 2 Ch 196, cited by Barrett J, Maugham J referred to and relied upon Fisher v Black and White Publishing Company [1901] 1 Ch 174, in which one of the clauses in the articles under consideration gave directors power to set aside out of the profits of the company a reserve fund. 159If York had been obliged to pay a dividend calculated by direct reference to a profit figure yielded by the accounts, and the directors had been given no discretion to devote any of it to other purposes, all of it would have been available for dividend purposes. 160This demonstrates, unsurprisingly, that the meaning of the formulation depends on the specific context in which it is used. For this reason, other decisions which have considered similar phrases are of limited assistance: see for example Bagot Pneumatic Tyre Company v Clipper Pneumatic Tyre Company [1902] 1 Ch 146; Evling v Israel & Oppenheimer Ltd [1918] 1 Ch 101; In re Buenos Ayres Great Southern Railway Co Ltd [1947] 1 Ch 384; Tosich v Tosich Construction Pty Ltd (1993) 10 ACSR 590. 161The true inquiry distils into whether, viewed objectively and having regard to the entire instrument under consideration, the parties intended the directors to have the power to determine whether part of a profit disclosed by the accounts and otherwise lawfully available to be distributed as the B Class dividend could be devoted to other purposes. 162The discretion of the directors to deal with profits derives exclusively from the Constitution and is conferred by Arts 9.1(a), 9.4(a) and 9.5. 163Did the parties by the words they chose in the Restructure Agreement and the Resolution intend to exclude, in so far as they might otherwise have applied to the B Class shares, the powers given to the directors in Arts 9.1(a), 9.4(a) and 9.5 of the Constitution? In my view, the question is to be answered in the affirmative. 164First, the words in Art 2.1B "[d]espite any provision in this Constitution to the contrary" displace the operation of Arts 9.1(a), 9.4(a) and 9.5 in so far as they might otherwise have applied to the true and fair value of the profit of Wambo as shown in the accounts. 165To meet this, PAML and Wambo put that the commencing words of Art 2.1B might displace the operation of Arts 9.1(a), 9.4(a) and 9.5, but that the words in Art 2.1(d) and (e) "profit of the Company available for dividend purposes" themselves independently conferred discretion on the directors to utilise profits for other purposes. This submission is unsustainable. It would mean attributing to the parties an intention to give back by implication what had expressly been taken away. In my view, Arts 9.1(a), 9.4(a) and 9.5 are the sole repositories of the discretion anyway. 166Secondly, in contrast to Art 2.1A, which gives the holder of ordinary shares the right to receive dividends "as determined from time to time", Art 2.1B contains no formulation requiring the directors (or giving them a discretion) to determine the amount of the dividends. 167Thirdly, Art 2.1B contains machinery which enables the ascertainment, objectively, of an amount capable of being distributed as a dividend. If the directors had a plenary discretion to devote all or some of the profit figure disclosed by the working of that machinery, it would render the structure otiose. 168Fourthly, Art 2.1B(f) provides for the payment of a final dividend at the end of Wambo's winding up. The dividend then payable would not be one determined by the directors in their discretion, given that the directors would have been relieved of the power to do so. The article uses the same formulation, indicating that Sumiseki's construction should be preferred. 169Fifthly, the Deed of Variation to the Free Cash Flow Escrow Agreement inserted a definition of "B Class Dividend Entitlements". The effect of the variation was to give priority to the payment to Sumiseki of the B Class dividend out of what otherwise would have been part of Free Cash Flow. However, whatever was not paid in respect of the B Class dividend would still be required to be paid to Sumiseki as part of Free Cash Flow. Wambo was required to estimate the profit available to pay the B Class dividend on a six monthly basis. If the directors of Wambo had the discretion to devote part of the profit to other purposes before the B Class dividend was to be calculated, the balance would simply be paid over as Free Cash Flow. The discretion would have no financial effect. This is an indication that none was intended. Additionally, Wambo was required to estimate the profit available for the B Class dividends on a six monthly basis with supporting details. It seems unlikely that the notification would have to take into account possible exercises of discretions, the occasion for which may not yet have arisen. 170The recitals to the Restructure Agreement recorded that Sumiseki and Hunter entered into the Profit Interest Agreement on 10 January 2001 and that the parties had agreed to restructure the arrangements including the termination of the Profit Interest Agreement on the terms and conditions set out in this agreement. The Profit Interest Agreement refers to the Subscription Agreement, which in turn refers to the Share Sale Deed. 171The recitals to the Profit Interest Agreement recorded that Hunter was indebted to Sumiseki for $50M pursuant to the Debenture Stock and that the parties had agreed that part of the indebtedness may be forgiven by Sumiseki in exchange for being granted a Profit Interest on the terms set out in that instrument. The Debenture Stock bore a fixed interest rate and was to be repaid out of Free Cash Flow as earlier discussed. Sumiseki's rights to be paid on the Debenture Stock were not a matter of discretion in the hands of the Wambo directors. At the same time as the Profit Interest Agreement was entered into, Wambo came under the control of Hunter. 172Sumiseki received the Profit Interest in return for a fixed right to receive repayment of its loan and interest on the Debenture Stock. In my view, it more accords with the objects these transactions were intended to secure that Sumiseki would get, in return, a dividend objectively determinable on the basis of profits earned, rather than a Profit Interest the value of which depended on discretions of the directors of Wambo (and for that matter, Hunter) being exercised in its favour. 173PAML and Wambo put a submission that cl 5 of the Restructure Agreement favoured their construction on the footing that it showed that the parties valued the B Class shares on the same basis as ordinary shares, the latter not having any fixed dividend rights. Even if the parties did, for the purpose of the specific circumstances in which cl 5 operates, attribute equal value to each class of shares, it does not follow that their dividend entitlements were equated. Each class had widely differing rights. The B Class shares had no voting rights but fixed dividend rights. The ordinary shares did not have fixed dividend rights but gave control of Wambo. The equating of value more favours Sumiseki's construction than undermines it. Conclusion 174Sumiseki is entitled to the declaratory relief it seeks and to the payment of the dividends which should have been, but were not, paid. RECTIFICATION 175Sumiseki seeks an order for rectification should its asserted construction not find favour. Although it is not necessary to deal with this claim, I will do so because I consider that if, contrary to my view, the Restructure Agreement and the Resolution are not to be construed as Sumiseki contends, it is entitled to an order rectifying the Restructure Agreement and a consequential order requiring Wambo to change the Constitution. 176Sumiseki says that at the time the Restructure Agreement was entered into and the Resolution passed, it, PAML and Wambo each subjectively intended the proposed Resolution to operate in accordance with the construction for which it contends. It seeks rectification of the Restructure Agreement by: (a)inserting after "contrary" in the first line of Art 2.1B in annexure 'B' to that agreement the words "including any provision which purports to grant the directors a discretion with respect to the declaration or payment of dividends or the capitalising, reserving or carrying forward of profits"; or (b)deleting the words "the profit of the Company available for dividend purposes", wherever appearing in annexure 'B' to that agreement, and replacing them in each instance with the words "the net profit after tax of, as a consolidated entity, the Company and all controlled entities of the Company". 177It was not suggested that these formulations of the relief would not reflect that intention if it were established. 178Sumiseki seeks a consequential order that PAML and Wambo specifically perform the Restructure Agreement (as rectified) by amending the Constitution. 179A formal submission was put by Sumiseki that the Court should also order rectification of the Constitution. Sumiseki accepted, however, that on current authority the remedy of rectification is not available in relation to a company's constitution: see Simon v HPM Industries Pty Ltd (1989) 15 ACLR 427. It was not put that this authority should be departed from at first instance. The principles 180Where a written agreement does not, as a result of a common mistake by parties, express their true agreement correctly, the Court may rectify the agreement. The words may have been purposely used, but not give effect to the true intention of the parties. It must be established by clear and convincing proof that the parties had an actual intention as to the legal and factual operation of the instrument which was inconsistent, in a clearly identified way, with the legal and factual operation it does have, although an outward expression of accord as to their common intention is not required. Where there has been prolonged negotiations resulting in a formal instrument, with parties having their own legal advisors, there is a strong assumption that the instrument represents their real intention: Crane v Hegeman-Harris Co Inc [1939] 1 All ER 662 at 664-665; Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 at 350; Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329; NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) 6 NSWLR 740. 181In Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 at [287] Campbell JA, with whom Tobias JA and Mason P agreed, said: [M]ere proof that the subjective intentions of contracting parties were identical, if each contracting party had kept his or her intention completely to himself or herself, would not amount to showing a consensual relationship between the parties... 182Subsequent conduct by parties acting as if the document stood in the form into which it is sought to be rectified can be evidence, even strong evidence, of the existence of an intention on the part of that party to contract in those terms: see for example Westland Savings Bank v Hancock [1987] 2 NZLR 21 at 31; Muriti v Prendergast [2005] NSWSC 281 at [107] and following. Consideration 183PAML and Wambo submit that Sumiseki has not proved the existence of a common intention to the requisite clarity. They accept that "in a general sense" all of the guiding minds of the relevant parties intended Art 2.1B to operate to require payment to Sumiseki of a dividend equal to 25% of Wambo's profit while Wambo was under the ownership and control of PAML. 184They say that Sumiseki has failed to establish sufficient common intention because the directors of Wambo did not turn their minds to what would happen if Wambo did not have sufficient cash to pay the mandated dividend, or the extent to which their constitutional discretion to declare dividends might be affected by Art 2.1B. 185They say that no sufficient common intention has been established because the directors did not contemplate how the provision would operate in the unforeseen circumstance that payment of the B Class dividend would or might imperil Wambo's solvency or financial position. Based on Ryledar v Euphoric, they also say that Sumiseki was required to prove that the subjective understanding of the guiding minds of each party was communicated to the guiding mind of each other party and that Sumiseki had not done so. 186As I have earlier said, PAML and Wambo accept that the evidence of Sumiseki's witnesses proves that "in a general sense" all parties intended Art 2.1B to operate, in practice, to require Wambo to pay Sumiseki a fixed and mandatory dividend equal to 25% of Wambo's profit whilst Wambo was under PAML's ownership and control. 187It is an understatement that the evidence establishes such an intention only in a general sense. Sumiseki brought clear and convincing proof of an actual and clear intention on the part of itself, PAML and Wambo that the B Class shares would carry that right. 188Komaki Nagasaki, Malcolm MacLennan, Tony Haggarty and Andrew Plummer, all gave clear and unchallenged evidence to that effect. Each was an impressive witness (in particular Komaki Nagasaki) whose evidence I accept. 189Komaki Nagasaki gave direct evidence that it was his intention and understanding that the directors would not have any discretion to determine the amount to distribute to Sumiseki. The dividend payment was to be non-discretionary. 190Malcolm MacLennan gave evidence that it was his intention that the payment of the B Class dividend was to be calculated at 25% of Wambo's net profits after tax as shown in its audited accounts and that he did not, nor does he now, believe that the directors had any discretion in relation to paying it. He gave evidence that, as he understood it, the lawyers were instructed to amend the articles so there was no discretion in the payment of the B Class dividend and that he believed and understood that the directors did not have any discretion to set aside any reserves or provisions out of profits before the dividend was calculated. 191Tony Haggarty gave evidence of having received Tony Wassaf's email on 21 June 2001 and having read Tony Wassaf's statement that rule 2.1B should make it clear that the dividend rights in that rule were to prevail over other provisions of the Constitution dealing with dividends. He says that this accorded with his intention that the dividend rights which would attach to the B Class shares would prevail over other provisions in Wambo's Constitution dealing with dividends and any general powers that the directors possessed to ordinarily determine dividends. He said that he understood and agreed, after the terms of the Resolution had been settled, that in respect of the B Class shares the directors of Wambo did not have a discretion as to whether to pay a dividend to the B Class shareholder. He said that there was a discussion. Tony Wassaf had raised the issue of the B Class shares, that there may be some risk of discretion in the payment of dividends under the Corporations Law, and the discussion was how to deal with that issue and remove that risk from the arrangements. 192Andrew Plummer gave evidence that at the time of the entry of the Restructure Agreement, it was his understanding and intention that the B Class shares required Wambo to distribute to Sumiseki every six months 25% of its net profit after tax, based on the accounts. 193The say so of these witnesses is corroborated by contemporaneous documents and conduct of the parties, as well as clear subsequent and sustained conduct consistent with it. 194It is corroborated by the advice given by Tony Wassaf on 7 June 2001 and by the letter Tony Wassaf wrote to Damien Clarke on 21 June 2001. 195It is corroborated by Damien Clarke's response and the insertion into the Resolution of the words "[d]espite any provision in this constitution to the contrary" to give effect to it. If by reason of the holding in Ryledar v Euphoric, it is a requirement that the subjective intention be communicated between parties, this material satisfies it. I do observe, however, that there is tension between such a requirement and other judicial statements to the effect that outward expression of accord is not required: see for example Pukallus v Cameron (1982) 180 CLR 447 at 452. 196For years afterwards Wambo, under PAML's stewardship, paid dividends to Sumiseki in accordance with this subjective intention. 197Wambo's audited accounts contain notes reflecting it and statements to the same effect appear in the Scheme Booklet used when Peabody took control. 198The existence of the common intention so clearly established by the evidence, that the B Class dividend would be paid out of distributable profits, is not undermined by the failure (if that is what occurred) on the part of the relevant guiding minds to consider all or any circumstances in which the intended arrangement might be thwarted by adverse financial circumstances. 199First, the B Class shares only get dividends if there are profits. 200Secondly, statutory limits are imposed upon the payment of the B Class dividend which cover the position. Section 254T of the Act provides that: (1) A company must not pay a dividend unless: (a) the company's assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and (b) the payment of the dividend is fair and reasonable to the company's shareholders as a whole; and (c) the payment of the dividend does not materially prejudice the company's ability to pay its creditors. Note 1: As an example, the payment of a dividend would materially prejudice the company's ability to pay its creditors if the company would become insolvent as a result of the payment. Note 2: For a director's duty to prevent insolvent trading on payment of dividends, see section 588G. (2) Assets and liabilities are to be calculated for the purposes of this section in accordance with accounting standards in force at the relevant time (even if the standard does not otherwise apply to the financial year of some or all of the companies concerned) 201Thirdly, the obligation to pay the B Class dividend is in principle no different from any other financial obligation which Wambo may have undertaken which in the future it may not be able to meet. 202That no individual contemplated the situation where Wambo would make profits which would be available for dividend purposes but might be imperilled should the payments be made, does not displace the existence of the actual common intention as to what the primary obligation of Wambo would be. 203If Wambo found itself in the position that it could not lawfully perform its obligations under the Constitution, the directors would have to act accordingly. Companies regularly find themselves in this position. But this is beside the point. Sumiseki's amendment application 204During the hearing Sumiseki sought to amend its Summons and Commercial List Statement by making a claim for damages for breach of the Restructure Agreement on the footing that it was entitled to rectification of that instrument, which would entitle it to an order requiring the Constitution to be amended now but not retrospectively. This would mean, it put, that it would have a claim for damages with respect to the period between the date of the Restructure Agreement (from which time PAML and Wambo would have been in breach by failing to pass a resolution as required by the rectified Restructure Agreement) and the date of actual amendment of the Constitution. Its loss would equate to the value of the dividends not paid in the meantime, less any benefit accrued to it as a result of Wambo retaining and using to its advantage those moneys (which may have enhanced the value of the B-Shares). Sumiseki accepted that the grant of the amendment would necessitate a further hearing on damages because PAML and Wambo were entitled to the opportunity to lead relevant evidence. It submitted that the Court should order an inquiry into quantum to be held later. 205I refused the amendment. Sumiseki had had a full opportunity to motivate its case. In fact, an earlier fixture of the hearing had been vacated at its instance. It is likely that I could not have presided over any further hearing because PAML and Wambo's witnesses may well have included some who had already given evidence before me and whose credit was under challenge. There is a public interest in the finality of litigation, in particular substantial commercial litigation such as this case: see Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175. Conclusion 206Sumiseki would be entitled to an order for rectification of the Restructure Agreement as prayed. 207There was no issue that if Sumiseki was so entitled, an order for specific performance should follow. ESTOPPEL 208As another alternative, Sumiseki contends that in entering into the Restructure Agreement the parties operated on the mutual assumption that the Resolution would have operation in accordance with the construction for which it contends, that PAML and Wambo's departure from this assumption is unconscionable in the circumstances, and that they should be estopped from denying that the Restructure Agreement has the effect it would have if Sumiseki's construction were correct. 209The central principle of the doctrine of estoppel is that the law will not permit an unconscionable (or unconscientious) departure by one party from the subject matter of an assumption which had been adopted by the other party as the basis of some relationship, course of conduct, act or omission which would operate to that other party's detriment if the assumption not be adhered to. The remedy is to effect the minimum equity needed to avoid the relevant detriment: see The Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 429 and 444. 210PAML and Wambo identified a number of reasons why, they say, no estoppel can arise. These included that estoppel cannot operate to vary rights in a company's constitution, that Sumiseki has not established that the parties conducted their relationship on the basis of the alleged mutual assumption, that Sumiseki has not established that it suffered any relevant detriment in acting upon the alleged mutual assumption and that the estoppel contended for would require the directors to pay a dividend even when to do so would materially prejudice creditors and would be inconsistent with the duties of directors under the Act. 211It is not necessary to deal with these contentions because even if I had not found for Sumiseki with respect to Construction, the estoppel claim would be bound to fail in any event. 212Its efficacy depends in the first instance on Sumiseki establishing the claimed common assumption which is the same common intention which founds its rectification claim. If it failed to establish the common intention for rectification purposes, its claimed estoppel would also fail. 213On the other hand, if it established the common intention, it would get rectification of the Restructure Agreement ab initio. It has proved that common intention and has established its entitlement to rectification. This is the minimum equity. 214Once Sumiseki gets this, there is no room for an estoppel because there is no common assumption from which PAML and Wambo are departing. They are simply in breach of contract: see Maurice Tarabay v Fifty Property Investments Pty Ltd [2009] NSWSC 617 at [141] and following. OPPRESSION 215Sumiseki contends that: (a)PAML and Wambo's failure and refusal to pay dividends in accordance with the parties' common expectation; and (b)the entry into of the Loan amount to commercial unfairness constituting oppressive conduct, unfairly prejudicial to Sumiseki within s 232(a) and (e) of the Act. 216Sumiseki seeks an order under s 233(1)(b) of the Act, effective from 29 June 2001, that the Constitution be modified so as to conform with its intended operation. The relevant provisions 217Sections 232 and 233 of the Act provide as follows: 232 Grounds for Court order The Court may make an order under section 233 if: (a) the conduct of a company's affairs; or (b) an actual or proposed act or omission by or on behalf of a company; or (c) a resolution, or a proposed resolution, of members or a class of members of a company; is either: (d) contrary to the interests of the members as a whole; or (e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity. For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company. 233 Orders the Court can make (1) The Court can make any order under this section that it considers appropriate in relation to the company, including an order: (a) that the company be wound up; (b) that the company's existing constitution be modified or repealed; (c) regulating the conduct of the company's affairs in the future; (d) for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law; (e) for the purchase of shares with an appropriate reduction of the company's share capital; (f) for the company to institute, prosecute, defend or discontinue specified proceedings; (g) authorising a member, or a person to whom a share in the company has been transmitted by will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company; (h) appointing a receiver or a receiver and manager of any or all of the company's property; (i) restraining a person from engaging in specified conduct or from doing a specified act; (j) requiring a person to do a specified act. Order that the company be wound up (2) If an order that a company be wound up is made under this section, the provisions of this Act relating to the winding up of companies apply: (a) as if the order were made under section 461; and (b) with such changes as are necessary. Order altering constitution (3) If an order made under this section repeals or modifies a company's constitution, or requires the company to adopt a constitution, the company does not have the power under section 136 to change or repeal the constitution if that change or repeal would be inconsistent with the provisions of the order, unless: (a) the order states that the company does have the power to make such a change or repeal; or (b) the company first obtains the leave of the Court. The principles 218The essential criterion of conduct that is "oppressive to, unfairly prejudicial to, or unfairly discriminatory against" within s 232 of the Act is commercial unfairness. Commercial unfairness is assessed objectively in the eyes of a commercial bystander: Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692. The test is whether the conduct is so unfair that reasonable directors would have thought it to be unfair: Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359 at [181]. Using a rule in a company's constitution in a manner which equity would regard as contrary to good faith may satisfy this requirement. Unfair or unjust action (or inaction) taken in the interests of a parent company and against the interests of a subsidiary and other shareholders may qualify. That an action of directors is in breach of fiduciary duty will be relevant whether there has been unfairness in the context of oppression: see Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 84 ACSR 121 at [176]; HNA Irish Nominee Ltd v Kinghorn (No 2) (2012) 88 ACSR 427 at [502]-[503]; Re Cumberland Holdings Ltd (1976) 1 ACLR 361; Jenkins v Enterprise Gold Mines NL (1992) 6 ACSR 539 at 552. Consideration 219Sumiseki's claim of oppression is founded on the existence of a legitimate expectation of receiving the B Class dividends. Sumiseki does not seek to impeach the Loan. It relies on the entry into of the Loan as supportive of its contention that the conduct of Wambo's affairs was oppressive to, unfairly prejudicial to, or unfairly discriminatory against Sumiseki. 220PAML and Wambo put that neither the directors' determination not to pay dividends nor the entry into of the Loan were oppressive because Wambo (and PAML) had legitimate commercial reasons for both. 221They say that the directors of Wambo legitimately considered it not appropriate to make profits available for dividends, given Wambo's other financial needs and constraints including capital expenditure. 222They say that they went to great lengths to ensure that the terms of the Loan were at arms-length and that it would not have been possible for Wambo to raise funds in the external funding market on terms which were relevantly materially more advantageous to it. They say that the provision of loan finance on arms-length terms is not oppressive and that Sumiseki's complaint requires acceptance of the proposition that PAML was obliged to provide funding on an unsecured basis without the protections a prudent lender would require. 223From late 2008 PAML and, under its stewardship, Wambo embarked on a course of conduct which culminated in them taking a position that the B Class dividend should not be paid. 224The evidence establishes, to my satisfaction, that from about 18 September 2009 a primary goal of PAML and Wambo was to thwart the payment of the B Class dividend, contrary to the legitimate expectations of Sumiseki. 225In my view, both the goal itself and a significant part of the means by which PAML and Wambo sought to achieve it, that is, by committing Wambo to the Loan incorporating burdensome covenants not in its interests, smack of commercial unfairness. 226In March 2009 PAML and Wambo obtained legal advice on whether the Constitution gave the directors a discretion not to pay the B Class dividend. Thereafter, they provided to the auditors a representation letter that the directors considered they had such a discretion. 227There is no suggestion that the advisors were given any of the facts, apart from the Constitution, from which such an expectation may (and as it happens had) arisen. In accordance with Art 2.1B, a dividend was to be paid by 31 March 2009 and initially the directors exercised this newfound discretion in favour of Sumiseki at the board meeting of 23 March 2009. 228By 1 July 2009 the question of the terms of the loan between PAML and Wambo had arisen in the context of the capitalisation of interest and whether the loan was debt or equity. 229On 16 September 2009 John Busch started the process of costing external funding. 230By 18 September 2009 that process had only begun. Payment of the B Class dividend was due by the end of September. Wambo had made profits as at 30 June 2009 of $29.234M and the directors determined that the B Class dividend of 25% should be paid. 231The proposed presentation to Sumiseki came into existence in October 2009 and although negotiations with the banks were in their infancy, the presentation made the statement that: Initial investigations have indicated that external debt raising is not possible, forcing an ever increasing reliance on Wambo's majority shareholder (Peabody). 232As set out above, the presentation also summarised PAML and Wambo's view of the B Class share rights. One of these was asserted to be that if dividends were withheld, the B Class dividend entitlement would not be carried forward to future periods. 233Under cross-examination, Connie de Santana reluctantly accepted that what was being conveyed was that the Peabody interests (presumably meaning the directors appointed by those interests) had a discretion to exercise and if they exercised it unfavourably to a distribution, Sumiseki would never see that profit again. She accepted that she knew this to be a disastrous construction from the point of view of Sumiseki. She denied that they were trying to push Sumiseki to accede to the package by a commercial threat that Sumiseki would never see a dividend. 234On 18 December 2009 Shane Young sent to Walter Hawkins a final draft of a proposed intercompany loan agreement in simple terms and with no burdensome covenants, which he said needed to be signed before 31 December 2009. Walter Hawkins responded on 22 December 2009 that the agreement looked fine to him but, for reasons which were left unexplained, the instrument was not signed. Rather, on 14 January 2010 Connie de Santana wrote that she wanted to insert some covenants which, as they turned out, included covenants which had not previously been insisted upon by Peabody and were plainly not in Wambo's interests. These included the covenants which transpired to be cl 8.1 of the Loan. 235Under cross-examination, Walter Hawkins gave the following evidence: HUTLEY: You would have known, as night follows day, that the consequence of raising these covenants could have been waived in the blink of an eye for the benefit of your organisation should you think it appropriate; correct? HAWKINS: Yes. HUTLEY: It was obvious to you that the sole purpose of these covenants was to inhibit the conferring of benefits upon Sumiseki. That's correct, isn't it? HAWKINS: Yes. HUTLEY: And you understood that a director of Wambo was proposing a covenant, the sole purpose of which was to inhibit the conferring of benefits on one of its shareholders; correct? HAWKINS: The imposition of the covenants was to protect the position of the lender. HUTLEY: Would you address my question and do this court the courtesy of answering it? HAWKINS: Yes. 236Connie de Santana was an unsatisfactory witness whose evidence I do not accept. She displayed a reluctance to answer clear questions because, I consider, she well understood the difficulty of the position in which she had placed herself in proposing covenants which were clearly adverse to the interests of Wambo (in whose interests she had a duty to act) and solely in the interests of PAML. PAML had not suggested, let alone imposed, them. 237Her reluctance to answer questions was displayed when, asked whether the covenants were in the interests of Wambo, she responded that they were appropriate for the loan that was put in place. On being pressed with the same question, her response was that they were covenants of a reasonable nature. Her evidence culminated in the following exchange with the Court: HIS HONOUR: At the time you formed the intention to include additional covenants, including those distribution limitations, had you formed the view that the directors of Wambo had a free discretion whether or not to declare dividends? DE SANTANA: Yes. HIS HONOUR: Does it follow that you understood from that that those covenants fitted that free discretion to declare those dividends? DE SANTANA: Sorry, can you clarify, please, your Honour? HIS HONOUR: You told me that it was your understanding that when you were proposing those dividend restriction covenants under the articles of Wambo, the directors had a free discretion whether to declare dividends or not? DE SANTANA: Yes. HIS HONOUR: By imposing those covenants then in the loan agreements you must have understood that that free discretion was now being limited or fettered? DE SANTANA: Limiting, yes. HIS HONOUR: How was that in the interests of Wambo? DE SANTANA: It would be in the interests of PAML. HIS HONOUR: So what you are telling me by implication is you understood it wasn't in the interests of Wambo but in the interests of PAML? DE SANTANA: Yes. 238In contrast to Walter Hawkins, whose evidence I accept on the subject, she denied that the sole purpose of the covenants was to inhibit the declaration of a dividend to Sumiseki. Her evidence was that she thought in negotiating the loan she was acting in the interests of shareholders as a whole and that she did not think that she was preferring the interests of the Peabody shareholders to the B Class shareholder in relation to the refinancing. 239I have no difficulty in concluding that a prime motivation of Connie de Santana was to thwart payment of the B Class dividend and that she was prepared to sacrifice Wambo's interests to achieve that goal. 240PAML held all the voting stock in Wambo. Peabody had, understandably, for years supported Wambo without any controversy. There was no suggestion that Peabody would have withdrawn support. It had the sole power to appoint Wambo's directors. 241When the directors came to determine that no dividends should be paid for the six months ended 31 December 2009, one of the bases upon which they purported to rely was that there would be non-satisfaction of the Loan covenants. They also relied on this with respect to the six month periods ended 30 June 2010 and 31 December 2011. 242The thrust of PAML and Wambo's response to the claim of oppressive conduct on their part is that Wambo could not have obtained external financial support on terms more beneficial than those reflected in the Loan and that PAML has no obligation, nor can it reasonably be expected, to provide funding to Wambo on better terms than could be obtained externally. They submit that the decisions of the directors to commit Wambo to the Loan and not to pay dividends (when they determined not to do so) were made in good faith and reasonably, and Sumiseki does not seek to impeach them by having any of them set aside. 243In support of the proposition that Wambo could not have obtained external financing on terms more favourable than those in the Loan, PAML and Wambo relied on the evidence of their investigations with the various banks. I found this evidence unconvincing. The investigations gave the distinct impression of being perfunctory and for the purpose of justifying entry into of the Loan rather than for the purpose of obtaining external finance. PAML and Wambo also sought to rely on the expert evidence of a chartered accountant, Mr Gregory Meredith, who has had lengthy experience in providing expert evidence in various litigation support assignments and in which capacity he has experience in the investigation, analysis, negotiation and covenants attached to facility agreements. Sumiseki objected to the admission of this evidence on the basis that Gregory Meredith's experience did not qualify him to opine. I have some reservations that it does. However, I am prepared to assume that Wambo could not have obtained such finance because I consider that in the present circumstances this is immaterial. 244PAML had, and has, no obligation to provide funding to Wambo on uneconomical terms or indeed at all. But it also is not at liberty to ride roughshod over Wambo's legal obligations and the legitimate and mutual expectations of the shareholders. So-called commercial justification which ignores these circumstances is not commercial justification at all, but unfair commercial conduct intended to prefer PAML's interests over those of the shareholders of Wambo as a whole, and in particular, those of the B Class shareholder. 245PAML must take Wambo as it finds it. If by reason of Wambo's legal obligations or by reason of legitimate expectations common to Wambo and its shareholders a loan to Wambo on non arms-length commercial terms does not suit PAML, it need not make it. 246It is not suggested that Wambo has ever been unable to pay the B Class dividend out of profits earned. It is not suggested that it would ever have been imperilled by paying those dividends, or that it would now be imperilled if it did so. 247Neither PAML nor Wambo now seek to raise the terms of the covenants in the loan as a basis upon which Wambo could refuse to pay the B Class dividend if it is otherwise liable to do so. 248There is no need for Sumiseki to impeach any particular decision of the directors in its quest to obtain no more than payment of the B Class dividend. Conclusion 249In my view, the conduct of Wambo's affairs in denying Sumiseki's right and expectation to payment of the B Class dividend was oppressive to and unfairly prejudicial to Sumiseki. 250I have found that the Constitution, properly construed, gives Sumiseki the right to payment of the B Class dividend as it contends. However, its terms gave rise to significant debate as to their operation and facilitated oppressive conduct. Also, third parties may have occasion to rely upon the Constitution. In these circumstances, and to remove all doubt, I consider it nevertheless appropriate to order under s 233(1)(b) of the Act that the Constitution be modified as and from 29 June 2001 by inserting after the word "contrary" in the first line of Art 2.1B the words "including any provision which purports to grant the directors a discretion with respect to the declaration or payment of dividends or the capitalising, reserving or carrying forward of profits". 251There is no need for, or scope to make, any consequential order for the payment of dividends as this flows from my other findings. RELIEF 252Sumiseki is entitled to declaratory relief with respect to the construction of the Restructure Agreement and the Constitution and to a monetary verdict in respect of unpaid dividends. 253I order that the Constitution be modified by inserting after the word "contrary" in the first line of Art 2.1B the words "including any provision which purports to grant the directors a discretion with respect to the declaration or payment of dividends or the capitalising, reserving or carrying forward of profits". 254Sumiseki's claim with respect to cl 13 is dismissed. 255Short Minutes are to be brought in reflecting this outcome. 256I will hear the parties on costs and on any issues which the parties draw to my attention as still being required to be dealt with. 257The Exhibits are to be returned. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 May 2013