Supreme Court New South Wales Medium Neutral Citation: Sumiseki Materials Co Ltd -v- Wambo Coal Pty Ltd [No.2] [2013] NSWSC 488 Hearing dates: 19 & 26 April 2013 Decision date: 03 May 2013 Jurisdiction: Equity Division - Commercial List Before: Hammerschlag J Decision: 1. Profit of the company is on a stand alone not consolidated basis 2. Post judgment interest is at the prescribed rate 3. Stay of modification order refused. Catchwords: CORPORATIONS - construction of company's constitution - whether the words "profit of the company available for dividend purposes" means the company on a stand alone basis or the company and its controlled entities - whether contract under which the Constitution was amended to include the words concerned should be rectified - PRACTICE AND PROCEDURE - interest on money judgment - whether the rate should be at the prescribed rate or at a contractual rate which pertained to pre judgment obligations - whether there should be a stay of an order modifying the Constitution Legislation Cited: Civil Procedure Act 2005 (NSW) Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005 Cases Cited: Sumiseki Materials Co Ltd v Wambo Coal Ltd [2013] NSWSC 235 Prenn v Simmonds [1971] 1 WLR 1381 Industrial Equity Limited v Blackburn (1977) 137 CLR 567 Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534 Pukallus v Cameron (1982) 180 CLR 447 Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council (No 2) [2010] NSWCA 183 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: 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 1On 25 March 2013 I gave judgment determining, principally, that on its proper construction Art 2.1B of the Constitution entitles Sumiseki as the B Class shareholder to receive dividends equivalent to 25% of the profit of Wambo disclosed in its accounts. Additionally, I ordered that to remove all doubt the Constitution should 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": Sumiseki Materials Co Ltd v Wambo Coal Ltd [2013] NSWSC 235. 2Three issues remain. They are: (a)whether the "profit of the Company available for dividend purposes" under Art 2.1B of the Constitution is or should be the consolidated profit of Wambo and its controlled entities or the profit of Wambo on a stand alone basis; (b)whether that part of the money judgment representing unpaid dividends to which Sumiseki is entitled should bear post judgment interest at the rate of 10% per annum which is provided for in cl 6 of the Restructure Agreement or at the prescribed rate pursuant to s 101(2) of the Civil Procedure Act 2005 (which is currently 9% per annum); and (c)whether there should be a stay, pending appeal, of the order that the Constitution be modified. 3The Court had the benefit of written submissions and oral argument. CONSOLIDATED OR STAND ALONE PROFIT Sumiseki's contentions 4Sumiseki contends that where Art 2.1B of the Constitution refers to "the profit of the Company available for dividend purposes", this means, on its proper construction, the consolidated profit of Wambo and any controlled entities. 5In the alternative, it contends that there should be an order rectifying Annexure B to the Restructure Agreement by deleting the words "the profit of the Company" wherever appearing and replacing them with the words "the profit of, as a consolidated entity, the Company and all controlled entities of the Company". It seeks an order that PAML and Wambo specifically perform the Restructure Agreement as so rectified by amending Wambo's Constitution accordingly. 6It also seeks "pursuant to its oppression case" an order under s 233(1)(b) of the Act modifying Wambo's Constitution so as to use instead of the words "the profit of the Company" where they appear, the words "the profit of, as a consolidated entity, the Company and all controlled entities of the Company". The facts 7Wambo's financial statements as at 31 December 2011 reveal that it has two controlled entities, Wambo Coal Terminal Pty Limited, which apparently provides transport services, and Wambo North Pty Limited, which (I was informed) operates the underground mine. Wambo North was incorporated on about 1 September 2005. 8At the time of the Restructure Agreement, Wambo had a subsidiary known as Wollemi Services Pty Limited. However, it did not produce consolidated accounts because costs incurred by the subsidiary were recharged to Wambo and so reflected in Wambo's stand alone results. 9Wambo first produced consolidated accounts in 2005. From 2005 to 2009 the B Class dividend was calculated on consolidated profit. On 7 November 2008 Gregg Wickstra wrote to Komaki Nagasaki stating that Sumiseki's dividend was calculated by reference to Wambo's consolidated profit. 10Komaki Nagasaki gave unchallenged affidavit evidence that his "understanding and intention when the Restructure Agreement was executed by Sumiseki was that even if Wambo had subsidiaries, Sumiseki would be entitled to 25% of their profit as well, because our entitlement to profit was on a consolidated basis". 11Malcolm MacLennan gave unchallenged affidavit evidence that at the time the Restructure Agreement was negotiated, his understanding was that the B Class dividend was to be calculated as 25% of Wambo's net profit after tax ("NPAT") as shown in Wambo's audited accounts and that the relevant NPAT was to be that of Wambo and its controlled entities as they existed from time to time. His evidence was that he had always assumed that from its incorporation the profit of Wambo North would be included and the profit of any Wambo controlled entities. 12Tony Haggarty gave unchallenged affidavit evidence that when entering into the Restructure Agreement his intention was that Wambo's NPAT would be calculated on a consolidated entity basis and would include the profit or loss from any subsidiaries. 13Andrew Plummer gave unchallenged affidavit evidence that at the time of the Restructure Agreement he looked at Wambo and all of its subsidiaries as one entity and it was his expectation that any profit that flowed from the subsidiaries would be consolidated for the purposes of determining Wambo's NPAT. He gave evidence that in his experience, subsidiaries would generally be created for efficient tax treatment, not in order to segregate profitability and that therefore, at the time, he considered that Wambo's profit was the consolidation of everything having to do with Wambo, including its subsidiaries. 14PAML and Wambo now take the position that under the Constitution Sumiseki's dividend entitlements are properly to be calculated not on consolidated profit but on Wambo's stand alone profit. Sumiseki, understandably, takes umbrage. Construction 15Sumiseki prays in aid of its construction the conclusion by Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 that the words "[t]he aggregate profits of RTT earned during [a 4 year period] and available for dividend" meant the consolidated profits of the group consisting of RTT and its subsidiaries. 16Sumiseki submits that support for its construction is to be found from the fact that both the unaudited Interim Accounts and audited Accounts referred to in Art 2.1B are required to be prepared in accordance with the Corporations Law and applicable accounting standards, which at all material times have required Wambo's accounts to be prepared on a consolidated basis. 17It further submits that its construction accords with the object of the transaction, which is to give Sumiseki 25% of Wambo's yearly profit payable by reference to the most commercially relevant measurement of Wambo's profitability, and that it is consistent with the concept of profit available for dividend purposes because all profits earned by Wambo and its consolidated entities are capable of being paid as dividends. It further submits that this approach leaves the measurement of Wambo's profitability least open to manipulation by the holder of the ordinary shares. 18The construction contended for by Sumiseki cannot be upheld because it is contrary to the clear and ordinary meaning of the words used in Art 2.1B. 19Where Art 2.1B uses the words "the Company" and "the profits of the Company", there is no room for attributing a meaning to them other than Wambo itself and the profit of Wambo itself. 20Sumiseki's construction is also contrary to the well-established company law principle that dividends can only be paid out of the separate profits of the company paying them. Consolidated profits of a holding company and its subsidiaries as disclosed by group accounts cannot be the source of dividends paid by the holding company: see Industrial Equity Limited v Blackburn (1977) 137 CLR 567; Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534. In Prenn v Simmonds Lord Wilberforce was not concerned with whether dividends could be paid out of consolidated profits. 21That the applicable accounting standards may have required Wambo to produce consolidated accounts does not assist Sumiseki. This does not have the consequence of either relieving Wambo from producing stand alone accounts or enabling dividends to be paid on the basis of consolidated accounts. 22Accounting Standard AASB 1024 entitled Consolidated Accounts applied at the time of the Restructure Agreement. Paragraph 11 of that Standard provided that: Consolidated Accounts shall be prepared by combining the accounts of each of the entities comprising the economic entity and this aggregated information shall be presented as one set of accounts. 23The commentary to the paragraph included the following statement: The provision of one set of accounts for the economic entity enhances the ability of those users of financial reports who have an interest in the existence of the economic entity to assess the performance, financial position, and financing and investing of the economic entity, rather than having to rely solely on individual accounts. However, the preparation of consolidated accounts does not, of itself, overcome the need to prepare individual accounts for the entities within the economic entity. Rectification 24Sumiseki contends that unchallenged evidence established that it was the common intention of Sumiseki and Wambo that the B Class dividend would be calculated on Wambo's consolidated profit. 25There is no doubt that the commercial expectation of both Sumiseki and Wambo, as reflected in the states of mind of the persons who represented them at the time of the Restructure Agreement, was that the B Class dividend would yield a return reflecting the profitability of the commercial entity comprising Wambo and its controlled entities. 26The evidence of Komaki Nagasaki, Malcolm MacLennan and Tony Haggarty perhaps goes so far as to disclose an intention that this be the case, although I do not consider that the evidence of Andrew Plummer establishes more than expectation. 27The expectation was met from 2005 to 2009 by Wambo paying the B Class dividend on the basis of consolidated profit. However, Wambo itself had earned sufficient profits to enable the dividend properly to be paid by it in any event. 28But such an expectation (or for that matter, intention) does not in this case inexorably translate into a common intention that there be a binding contractual obligation on Wambo to pay dividends calculated on an amount including profits which were not its own. 29The corporators' expectation would be met by Wambo's subsidiaries declaring dividends from their own profits to Wambo, resulting in the revenue contributing to Wambo's own profit available for distribution. Correspondingly, Wambo's own level of profits might be adversely affected by it assisting its subsidiaries. This would accommodate the proper discharge of their duties by the directors of the subsidiaries, taking into account the particular interests of the entity concerned. 30One can readily understand Sumiseki's disappointment at Wambo's volte-face but Sumiseki is not without protection. It has the benefit of s 232 of the Act. Having regard to the existence of the expectation (and perhaps even without it), if, contrary to past practice, B Class dividends were henceforth not calculated on consolidated profit and, absent bona fide commercial justification, profits earned by Wambo's subsidiaries were not to be declared as dividends to Wambo enabling them to form part of the revenue contributing to Wambo's profit available for dividend purposes, it may well be that this would amount to the affairs of Wambo being conducted in a manner which is oppressive to, unfairly prejudicial to, or unfairly discriminatory against Sumiseki as contemplated by that section. 31PAML and Wambo submit that rectification is, in any event, not available because there was no disclosure between Sumiseki and Wambo of the asserted common intention. There has been some debate in the authorities as to whether rectification requires outward expression of the asserted accord. The question was arguably left open by the High Court in Pukallus v Cameron (1982) 180 CLR 447 at 452, where Wilson J, with whom Gibbs CJ agreed, considered that "it may not be necessary to show that the accord found outward expression". However, in Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 at [273] and following, Campbell JA collected the authorities and concluded that there is such a requirement. The High Court has yet to opine further on the matter. On the basis that this is a requirement, Sumiseki's claim for rectification does not meet it. 32Its claim for rectification accordingly fails. Oppression 33Sumiseki's claim based on oppression can briefly be disposed of. No claim of oppression based on a failure to pay dividends calculated on a consolidated, as opposed to a stand alone, basis was brought. The claim brought was in connection with a refusal to pay dividends at all. INTEREST 34Sections 101(1), (2) and (3) of the Civil Procedure Act 2005 provide as follows: (1) Unless the court orders otherwise, interest is payable on so much of the amount of a judgment (exclusive of any order for costs) as is from time to time unpaid. (2) Interest under subsection (1) is to be calculated, at the prescribed rate or at such other rate as the court may order, as from: (a) the date on which the judgment takes effect, or (b) such later date as the court may order. (3) Despite subsection (1), interest is not payable on the amount of a judgment if the amount is paid in full within 28 days after the date on which the judgment takes effect, unless the court orders to the contrary. 35The prescribed post-judgment interest rate is currently 9% per annum: see Uniform Civil Procedure Rules 2005 Pt 36 r 36.7. 36Clause 6 of the Restructure Agreement provides that if Wambo does not pay Sumiseki dividends by the due date for payment, Wambo "will pay interest at the rate of 10% per annum on the amount due until that amount is paid to" Sumiseki. 37There is no dispute that Sumiseki is entitled to a money judgment in the amount of the dividends unpaid together with pre-judgment interest at the rate of 10% from the due date of payment. There is also no dispute that Sumiseki will be entitled to post-judgment interest at the prescribed rate on the pre-judgment interest component of the verdict. 38Sumiseki contends that if the judgment amount is not paid within 28 days of judgment, it should be awarded post-judgment interest at that rate on the amount of the dividends unpaid, on the footing that this is the rate to which it would otherwise be contractually entitled. 39The Restructure Agreement does not make any provision for the payment of interest at the contract rate on any judgment for unpaid dividends. 40Sumiseki will be entitled to execute on its judgment. 41The covenant to pay interest on unpaid dividends is merged in the judgment for the principal sum and ceases to be enforceable. Sumiseki is accordingly not entitled to interest on the judgment debt at the contractual rate: see Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council (No 2) [2010] NSWCA 183. The prescribed interest rate will apply. STAY 42PAML and Wambo apparently intend to appeal. 43I record that with one exception the parties agreed on the conditions for a stay of the monetary component of the judgment. Those conditions include the provision by Wambo of security for the monetary verdict. However, PAML and Wambo sought to contend that the amount of the security should be reduced by the amount of $7,793,365, which they wished to assert is owed by Sumiseki to Wambo on a cause unrelated to the circumstances to these proceedings, being on an indemnity known as the tailings indemnity. PAML and Wambo sought leave to file and read an affidavit of Cameron David Hanson, annexing correspondence about the amount and a letter from Sumiseki's solicitors. I declined the leave sought and gave ex tempore reasons. The contention raised a factually disputed claim not brought in the proceedings and I did not consider that its admission would conduce to the quick, just and cheap resolution of the issue. 44The parties, however, remained at issue as to whether the order modifying Wambo's Constitution should be stayed. In my view, it should not. 45Sumiseki is entitled to the fruits of its victory. But more importantly, the terms of the Constitution gave rise to significant debate and third parties may have occasion to rely on that instrument. There is a declaration as to the proper construction of the Constitution which is to the same effect as the order made, in respect of which there is not, and cannot be, a stay. I see no relevant detriment to PAML and Wambo in refusing a stay of the modification order. CONCLUSION 46I will stand the matter over for a short time to allow Short Minutes of Order to be brought in reflecting these reasons and updated figures. ********** 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: 03 May 2013