Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326
• Hearing dates: 13, 14, 15 May 2014
• Decision date: 17 September 2014
• Before: Bathurst CJ at [1]; Beazley P at [2]; Barrett JA at [3]

Decision

1. Vary order 3 made in the Equity Division on 3 May 2013 by omitting "as and from 29 June 2001".

2. Appeal otherwise dismissed.

3. Cross-appeal dismissed.

4 Order that the appellants pay the respondent's costs of the appeal.

5. Order that the cross-appellant pay the cross-respondents' costs of the cross-appeal.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

• Catchwords: CORPORATIONS - membership rights and remedies - share capital - dividends - payment of dividends - whether the constitution required the payment of dividends on a particular class of shares without declaration or other decision to pay - where the constitution created a right to receive a dividend in respect of a particular period and specified the date for payment thereof - each such dividend to be equal to a stated fraction of "the profit of the company available for dividend purposes" for the period "based on" accounts for the period - meaning of "available for dividend purposes" - extent to which the directors had discretion in determining the profit of a period "available for dividend purposes" - CORPORATIONS - members' remedies and internal disputes - oppressive or unfair conduct - whether conduct of the company by accepting a contractual restraint on the payment of dividends and relying on that and other grounds to withhold dividend was within Corporations Act s 232 - where the contractual restraint was embodied in a loan agreement with the holding company - whether there was any commercial rationale for the restraint - where the company's decision to accept the restraint was made by directors all of whom were officers of the holding company - CORPORATIONS - constitution of a company - alteration thereof - by court order - time at which the alteration takes effect - EQUITY - rectification - rectification of instruments ex abundanti cautela - CORPORATIONS - constitution of a company - whether the constitution is amenable to equitable jurisdiction to order rectification - PROCEDURE - amendment of claim - whether discretion miscarried when an amendment application made on the eighth day of the trial was refused.
• Legislation Cited: Civil Procedure Act 2005 (NSW); Companies Act 1961 (NSW); Companies and Securities Legislation (Miscellaneous Amendments) Act 1985 (Cth); Companies (New South Wales) Code; Company Law Review Act 1998 (Cth) Corporations Law of New South Wales; Corporations Act 2001 (Cth); Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth)
• Cases Cited: Aon Risk Services Pty Ltd v Australian National University [2009] HCA 27; 239 CLR 175; Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc [1981] HCA 39; 148 CLR 170; Ammonia Soda Co Ltd v Chamberlain [1918] 1 Ch 266; Australasian Oil Exploration Ltd v Lachberg [1958] HCA 51; 101 CLR 119; Bagot Pneumatic Tyre Co v Clipper Pneumatic Tyre Co [1902] 1 Ch 146; Bailey v Medical Defence Union Ltd [1995] HCA 28; 184 CLR 399; Best v Newton King Ltd [1942] NZLR 360; Bishop v Smyrna and Cassaba Railway Co [1895] 2 Ch 265; Bluebottle UK Ltd v Commissioner of Taxation [2007] HCA 54; 232 CLR 598; Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693; Burk v Ottawa Gas & Electric Co 123 Pac 857 (1912); Burland v Earle [1902] AC 83; Caird v Moss (1886) 33 Ch D 22; Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95; Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55; Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; 149 CLR 337; Company of Proprietors of the Kent Waterworks v Lamplough [1904] AC 27; Crocker v Waltham Watch Co 53 NE 2d 230 (1944); De Vall v Wainwright Gas Co [1932] 2 DLR 145; Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 88 ALJR 447; Evans v Chapman [1902] WN 78; Evling v Israel & Oppenheimer Ltd [1918] 1 Ch 101; Fidelity Management & Research Co v Gulf Canada Resources Ltd (1996) 27 BLR (2d) 135; Fisher v Black and White Publishing Co [1901] 1 Ch 174; Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603; Heesh v Baker [2008] NSWSC 711; 67 ACSR 192; Henry v The Great Northern Railway Co (1857) 1 DeG & J 606; 44 ER 858; HNA Irish Nominees Ltd v Kinghorn (No 2) [2012] FCA 228; 88 ACSR 427; House v R [1936] HCA 40; 55 CLR 499; Industrial Equity Ltd v Blackburn [1977] HCA 59; (1977) 137 CLR 567; Jenkins v Enterprise Gold Mines NL (1992) 6 ACSR 539; Lavercombe v Auscott Ltd [2006] NSWSC 867; 202 FLR 390; Lee v Neuchatel Asphalte Co (1889) 41 Ch D 1; Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144; 156 FCR 1; Long Acre Press Ltd v Odhams Press Ltd [1930] 2 Ch 196; Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; 310 ALR 113; Marra Developments Ltd v B W Rofe Pty Ltd [1977] 2 NSWLR 616; McKillen v Misland (Cyprus) Investments Ltd [2011] EWHC 3466 (Ch); Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692; Namberry Craft Pty Ltd v Watson [2011] VSC 136; O'Neill v Phillips [1999] 1 WLR 1092; Paterson v R Paterson & Sons Ltd [1916] 2 SLT 227; Prenn v Simmonds [1971] 1 WLR 1381; QBE Insurance Group Ltd v Australian Securities Commission (1992) 38 FCR 270; Re Buck [1964] VR 284; Re Buenos Ayres Great Southern Railway Co Ltd [1947] 1 Ch 384; Re Cumberland Holdings Ltd (1976) 1 ACLR 361; Re Odessa Waterworks Co Ltd [1901] 2 Ch 190n; Re Saul D Harrison & Sons plc [1995] 1 BCLC 14; Re The Spanish Prospecting Co Ltd [1911] 1 Ch 92; Santos Ltd v Pettingell (1979) 4 ACLR 110; Scott v Frank F Scott (London) Ltd [1940] Ch 794; Simon v HPM Industries Pty Ltd (1989) 15 ACLR 427; Smolarek v Liwszyc [2006] WASCA 50; 32 WAR 101; Sumiseki Materials Co Ltd v Wambo Coal Pty Ltd [2013] NSWSC 235; Sumiseki Materials Co Ltd v Wambo Coal Pty Ltd (No 2) [2013] NSWSC 488; Sun Alliance Investments Pty Ltd v Commissioner of Taxation [2004] FCAFC 11; 134 FCR 102; Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164; Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104; 84 ACSR 121; Tosich v Tosich Construction Pty Ltd (1993) 10 ACSR 590; Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326; Trilogy Management Ltd v YT Charitable Foundation (International) Ltd [2012] JCA 152; Wayde v New South Wales Rugby League Ltd [1985] HCA 68; 180 CLR 459; Weinstock v Beck [2011] NSWCA 228; Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; 86 ALJR 1
• Texts Cited: S Aleveras and J du Plessis, "The payment of dividends: Legal confusion, complexities and the need for comprehensive reform in Australia" (2014) 32 Company and Securities Law Journal 312; J K Walsh, "The exercise of powers in the interests of a company" (1967) 8 University of Western Australia Law Review 176
• Category: Principal judgment
• Parties: Wambo Coal Pty Ltd (First Appellant); Peabody Australia Mining Limited (Second Appellant); Sumiseki Materials Co Ltd (Respondent)
• Representation: Counsel: N J Young QC/K L Andronos (Appellants); N C Hutley SC/M J Darke (Respondent); Solicitors: Johnson Winter & Slattery (Appellants); Allens Respondent
• File Number(s): CA2013/159593

Decision under appeal

• Citation: [2013] NSWSC 235, [2013] NSWSC 488
• Before: Hammerschlag J
• File Number(s): 2010/234866

HEADNOTE

[This headnote is not to be read as part of the judgment]

At all material times, there were two shareholders of Wambo Coal Pty Ltd ("Wambo"). Sumiseki Materials Co Ltd ("Sumiseki") held 25 million B class shares, being all the B class shares on issue. Peabody Australia Mining Ltd ("PAML") held all the ordinary shares on issue. PAML was a wholly owned subsidiary of Peabody Energy Corporation of the United States.

Article 2.1B was inserted into Wambo's constitution in 2001 pursuant to a "restructure agreement". It stated that a holder of a B class share had the right "to receive a dividend in respect of the 6 month period commencing [stated date] and ending [stated dated] equal to" a particular fraction of "an amount equal to the profit of the Company available for dividend purposes for" the relevant period "based on" the company's accounts for that period, which dividend was "to be paid" by a specified day after the end of the period.

Other provisions of the constitution (which predated article 2.1B) empowered the directors to "declare and pay such interim and final dividends as, in their judgment, the financial position of the company justifies"; to capitalise profits and effect bonus issues of shares; to "set aside out of the profits of the company such reserves or provisions for such purposes as they think fit"; and to "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".

Wambo's directors decided not to pay B class shareholder dividends in respect of the 6 month periods ending 31 December 2009, 30 June 2010, 31 December 2010, 30 June 2011 and 31 December 2011. Sumiseki brought proceedings in the Equity Division against Wambo alleging an entitlement to dividends in respect of those periods. The primary judge found that article 2.1B conferred a right on Sumiseki, as the holder of the B class shares, to be paid dividends for the relevant periods regardless of any decision of Wambo's directors that such dividends should be paid, that Wambo's failure to pay the dividends in respect of those periods amounted to oppressive conduct within s 232 of the Corporations Act 2001 (Cth) and that an order should be made pursuant to s 233(1)(b) to vary Wambo's constitution to better secure Sumiseki's dividend rights. A claim by Sumiseki for an order rectifying Wambo's constitution(or, alternatively, the restructure agreement) was dismissed.

The issues on appeal were:

(i) Whether Wambo's constitution, on its proper construction, entitled Sumiseki to the right to receive a dividend in respect of the periods specified in article 2.1B calculated in accordance with the formula therein contained to the exclusion of any discretion given to Wambo's directors with respect to dividends or the capitalising, reserving or carrying forward of profits and without any decision of the directors that the dividend should be paid.

(ii) Whether the decision of Wambo's directors not to pay dividends for the periods in question amounted to conduct that was oppressive to, unfairly prejudicial to or unfairly discriminatory against Sumiseki within the terms of s 232 of the Corporations Act.

(iii) Whether the order made by the judge under s 233(1)(b) that article 2.1B be modified in a certain way "as and from 29 June 2001" was of any force or effect, having regard to s 137 of the Corporations Act.

(iv) Whether the primary judge erred in holding that equity's rectification jurisdiction does not extend to a company's constitution.

(v) Whether the primary judge erred in declining to make an order rectifying the restructure agreement.

Held, dismissing the appeal and cross appeal (Barrett JA; Bathurst CJ and Beazley P concurring):

With respect to (i):

1. While distribution of profits as dividends is usually a matter for the internal management of a company, on a proper construction Wambo's constitution the B class dividend is a mandatory dividend that becomes payable by Wambo on each date for payment specified in article 2.1B, regardless of any decision that it should be declared or paid, and the company was obliged to pay accordingly: [73]-[84], [106]-[117].

Corporations Act 2001 (Cth) ss 124(1)(d) and 140, and Part 2H.4 considered.

Bluebottle UK Ltd v Commissioner of Taxation [2007] HCA 54; 232 CLR 598, Burland v Earle [1902] AC 83, Evling v Israel & Oppenheimer Ltd [1918] 1 Ch 101, Paterson v R Paterson & Sons Ltd [1916] 2 SLT 227, Bishop v Smyrna and Cassaba Railway Co [1895] 2 Ch 265, Re Odessa Waterworks Co Ltd [1901] 2 Ch 190n, Wood v Lary 47 Hun 550 (1888), Burk v Ottawa Gas & Electric Co 123 Pac 857 (1912), Crocker v Waltham Watch Co 53 NE 2d 230 (1944) considered.

Industrial Equity Ltd v Blackburn [1977] HCA 59; (1977) 137 CLR 567 cited.

2. On a proper construction of Wambo's constitution, "profits available for dividend purposes" refers to the period's net profit attributable to members undiminished by any discretionary applications of the directors powers conferred by articles 9.2, 9.4 and 9.5 but subject to such diminution, if any, as is required by law: [85]-[103], [118]-[127].

Fisher v Black and White Publishing Co [1901] 1 Ch 174, Paterson v R Paterson & Sons Ltd [1916] 2 SLT 227, Long Acre Press Ltd v Odhams Press Ltd [1930] 2 Ch 196, De Vall v Wainwright Gas Co [1932] 2 DLR 145, Best v Newton King Ltd [1942] NZLR 360, Re Buenos Ayres Great Southern Railway Co Ltd [1947] 1 Ch 384, Re Buck [1964] VR 284, Tosich v Tosich Construction Pty Ltd (1993) 10 ACSR 590, Fidelity Management & Research Co v Gulf Canada Resources Ltd (1996) 27 BLR (2d) 135, Heesh v Baker [2008] NSWSC 711; 67 ACSR 192, Prenn v Simmonds [1971] 1 WLR 1381, Bagot Pneumatic Tyre Co v Clipper Pneumatic Tyre Co [1902] 1 Ch 146 considered.

With respect to (ii):

4. The decision of Wambo's directors not to pay Sumiseki the dividends it was entitled to receive during the periods in question and, in some periods, to adopt contractual constraints as a means of unfairly bolstering an asserted inability to pay dividends constituted oppressive conduct within s 232 of the Corporations Act 2001 (Cth): [135]-[226].

Corporations Act 2001 (Cth) s 232 applied.

Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104, Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95, Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692, O'Neill v Phillips [1999] 1 WLR 1092, Smolarek v Liwszyc [2006] WASCA 50; 32 WAR 101, Wayde v New South Wales Rugby League Ltd [1985] HCA 68; 180 CLR 459, Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55 considered.

With respect to (iii):

5. The fact that one provision of the statute (s 137(b)(ii)) caused an order made by a court under another provision of the same statute (s 233(1)(b)) to have an effect not wholly coinciding with the express terms of the order does not call into question the validity or regularity of the order however since the specification of the past date in the primary judge's order has no force, for the sake of good order and clarity, the order should be varied by omitting the words "as and from 29 June 2001": [232]-[234].

Corporations Act 2001 (Cth) ss 137, 232 and 233 considered.

With respect to (iv):

6. Notwithstanding recent statutory developments, equity's rectification jurisdiction still does not extend to a company's constitution,

Corporations Act 2001 (Cth) ss 117, 118, 119, 136, 140, 231, 249, 249A, 249B and 1322.

Evans v Chapman [1902] WN 78, Scott v Frank F Scott (London) Ltd [1940] Ch 794, Santos Ltd v Pettingell (1979) 4 ACLR 110, Simon v HPM Industries Pty Ltd (1989) 15 ACLR 427, Weinstock v Beck [2011] NSWCA 228, McKillen v Misland (Cyprus) Investments Ltd [2011] EWHC 3466 (Ch), Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144; 156 FCR 1 applied.

Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603, Lavercombe v Auscott Ltd [2006] NSWSC 867; 202 FLR 390 considered.

Bailey v Medical Defence Union Ltd [1995] HCA 28; 184 CLR 399, Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693 cited.

With respect to (v):

7. The fact that rectification of the restructure agreement could not produce any result beyond that already achieved by the judge's s 233(1)(b) order, coupled with the principle that equity does not act in vain, means that the discretionary jurisdiction should not be exercised. [263]-[267].

Corporations Act 2001 (Cth) ss 411 and 413, and Part 5.1 cited.

Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603, Caird v Moss (1886) 33 Ch D 22 distinguished.

Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326 cited.

JUDGMENT

1 BATHURST CJ: I agree with Barrett JA.

2 BEAZLEY P: I have had the advantage of reading in draft the reasons of Barrett JA. I agree with his Honour's reasons and with the orders he proposes.

3 BARRETT JA: These proceedings concern the rights of Sumiseki Materials Co Ltd ("Sumiseki") as a shareholder of Wambo Coal Pty Ltd ("Wambo").

4 There were, at all times after 16 December 2009, two shareholders of Wambo. Sumiseki held 25 million B class shares, being all B class shares on issue. Those shares were issued to Sumiseki in June 2001. The other shares on issue were ordinary shares. All the ordinary shares were held by Peabody Australia Mining Ltd ("PAML"), a wholly owned Australian member of the group of which Peabody Energy Corporation of the United States is the ultimate holding company. In these reasons, the expression "Peabody" is used in circumstances where it is unnecessary to identify a particular entity within that group.

5 At the centre of the controversy is a provision of Wambo's constitution concerning dividend rights in respect of the B class shares and the operation of that provision in relation to financial periods that ended on 31 December 2009, 30 June 2010, 31 December 2010, 30 June 2011 and 31 December 2011.

The origin of Sumiseki's shareholding in Wambo

6 Sumiseki's holding of 25 million B class shares in Wambo was obtained by it in accordance with a written contract dated 29 June 2001 referred to as the "restructure agreement". The parties to that contract were Sumiseki, Wambo and Hunter Coal Co Pty Ltd ("Hunter"). Hunter was, at that time, the sole shareholder of Wambo which was (and is) the owner and operator of a coal mine near Singleton.

7 By virtue of earlier transactions (including sale by Sumiseki to Hunter of the whole of the issued share capital of Wambo), Sumiseki became, in January 2001, the holder of debenture stock of Hunter of a nominal or face amount of $50 million. In addition, Sumiseki had, as against Hunter, a contractual right to surrender (and to require redemption of) up to one-half of that debenture stock in return for an obligation of Hunter to make ongoing payments (called "profit interest" payments) calculated by reference to profits of Wambo. At the lower end of the scale, surrender of $1 million of the debenture stock by Sumiseki would bring to it annual "profit interest" payments by Hunter equal to 1 per cent of the profits of Wambo available for dividend. At the higher end, surrender of the full $25 million of the debenture stock would bring to Sumiseki annual "profit interest" payments by Hunter equal to 25 per cent of the Wambo profits available for dividend. The right to require redemption of debenture stock and its replacement by Hunter's obligation to make "profit interest" payments was exercisable by Sumiseki on one occasion only and was available until 10 January 2006.

8 The "profit interest" payments by Hunter to Sumiseki were provided for in an agreement (designated the "profit interest agreement") made between those companies on 10 January 2001. The agreement provided that, on exercise by Sumiseki of the right of surrender and substitution, Sumiseki would be "provided with a 1% Profit Interest for each $1 million amount" of debenture stock surrendered, with satisfaction of that "profit interest" being by way of payment by Hunter "once a year by 30 November each year". The term "Profit Interest" was defined as follows:

"Profit Interest means the right to receive from HCPL [ie, Hunter] an amount equal to the profit of WMC [ie, Wambo] available for dividend purposes in a year ended 30 June based on the Accounts."

9 The expression "Accounts" was defined as "the audited accounts of WMC [ie, Wambo] for the 12 month period ending on 30 June in a year"; and there was a provision as follows concerning the "Accounts":

"4. Accounts:

(a) HCPL [ie, Hunter] warrants that the Accounts will be prepared in accordance with the Corporations Law and applicable accounting standards and that the Accounts will show a true and fair view of the profit or loss of WMC [Wambo] for the financial year ended on 30 June in a year.

(b) HCPL [Hunter] undertakes to provide the Accounts to SCM by 30 November each year and to provide a statement identifying the profit of WMC [Wambo] available for the dividend purposes each year based on those Accounts."

10 Sumiseki entered into the restructure agreement on 29 June 2001 against the background of its right under the profit interest agreement to surrender up to $25 million nominal amount of its Hunter debenture stock and to require Hunter (which was then Wambo's sole shareholder) to make annual "profit interest" payments geared to annual profits of Wambo. The obvious purpose of the restructure agreement was to eliminate $25 million of Sumiseki's $50 million holding of debenture stock of Hunter and to cause Sumiseki to have instead a direct shareholding interest in Wambo generating, in the form of dividends on Wambo shares, returns corresponding with the "profit interest" payments that Sumiseki would have received from Hunter had Sumiseki exercised in full its right to surrender $25 million of its debenture stock to Hunter in return for "profit interest" commitments of Hunter under the profit interest agreement.

11 Under the restructure agreement, Sumiseki paid $25 million to Wambo as subscription moneys for 25 million B class shares in the capital of Wambo, Wambo applied the $25 million proceeds of the share issue in reduction of separate indebtedness owed by it to Hunter and Hunter in turn applied $25 million in reduction of its debenture stock indebtedness to Sumiseki. No cash changed hands. Rather, Sumiseki made a promissory note to the order of Wambo in the sum of $25 million and delivered that note to Wambo, Wambo endorsed and negotiated the promissory note to Hunter and Hunter endorsed and negotiated the promissory note to Sumiseki, at which point the maker of the note became its holder.

12 The restructure agreement prescribed steps to be taken by Wambo and Hunter to create B class shares in Wambo's capital and to incorporate into Wambo's constitution provisions accommodating such shares and defining the rights carried by them. That was necessary in order to enable Wambo to issue shares through which Sumiseki would receive direct from Wambo dividends equivalent to the "profit interest" payments it would otherwise have received from Hunter. The restructure agreement set out in detail the alterations that were to be made to the constitution. Those alterations were in due course made. The steps involving subscription by Sumiseki for 25 million B class shares and the "round robin" payments effected by the making and negotiation of the promissory note followed.

13 Two other provisions of the restructure agreement deserve mention. Clause 6 contained a promise by Hunter that if Wambo did not pay dividends in accordance with the proviso of the constitution requiring the payment of such dividends, Hunter would, first, cause Wambo to do so and, second, pay interest on the dividend amount at a specified rate until paid. Clause 4 contained a warranty by Hunter that, while Sumiseki held B class shares, the "Accounts" as defined in the relevant provision of Wambo's constitution would "be prepared in accordance with the Corporations Law and applicable accounting standards" and would "show a true and fair view of the profit or loss of WMC [ie, Wambo] for the financial year ended on 30 June in a year".

Relevant provisions of Wambo's constitution

14 Among the provisions inserted into Wambo's constitution in accordance with the restructure agreement were articles 2.1A and 2.1B, as follows:

"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."

15 Other provisions inserted in the same way were concerned with transfer of B class shares and are of no present relevance.

16 Pre-existing provisions of the constitution (which continue in force today) include articles 9.1(a), 9.2, 9.4(a) and 9.5:

"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."

"9.2 Capitalisation of Profits

Subject to any rights or restrictions attached to any shares or class of shares, the directors may capitalise and distribute among such of the member as would be entitled to receive dividends and in the same proportions any amount:

(1) forming part of the undivided profits of the company;

(2) forming part of any share premium account or capital redemption reserve;

(3) representing profits arising from an unascertained accretion to capital or from a revaluation of the assets of the company;

(4) arising from the realisation of any assets of the company; or

(5) otherwise available for distribution as a dividend."

"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.

(b)

(c)

"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."

Relevant dividend decisions within Wambo

17 Sumiseki became the holder of the B class shares on 29 June 2001. For all relevant periods thereafter, up to and including that which ended on 30 June 2009, Wambo paid dividends on the B class shares. Each such dividend was calculated in the way considered by Sumiseki to be required by article 2.1B, that is, as a simple fraction of profits disclosed by Wambo's accounts for the relevant period. That pattern was not maintained after the period ending 30 June 2009; and it was that departure that eventually caused Sumiseki to resort to legal proceedings.

18 On 30 March 2010, the board of directors of Wambo adopted financial statements for the year ended 31 December 2009. These disclosed a profit but the directors resolved:

"to declare that no dividend will be paid to ordinary or B Class Shareholders for the period to 31 December 2009."

19 The reasons for this decision appeared in a briefing paper submitted to and considered by the board. Two reasons were stated:

(a) that net cash flow forecast for the six months ending on 30 June 2010 was not sufficient to cover commitments for the period without resort to a particular credit facility; and

(b) that Wambo did not satisfy financial covenants in clause 8.1 of a loan agreement made between Wambo and PAML on 27 March 2010 and was therefore "restricted from making dividend payments to shareholders until these are satisfied".

20 Accounts of Wambo for the period to 30 June 2010 were approved by the directors at a board meeting held on 27 September 2010. That meeting resolved that "no dividend will be paid to ordinary or B Class Shareholders for the period to 30 June 2010". Two reasons were stated in a board briefing paper: first, that non-satisfaction of financial covenants in the 27 March 2010 loan agreement caused Wambo to be "restricted from making dividend payments to shareholders until all of these are satisfied"; and, second, that there was a need to retain cash "until a decision on a future expansion is made and related funding sources are more certain".

21 Accounts for the period ended 31 December 2010 were approved at a directors' meeting held on 30 March 2011. The minutes record that a briefing paper was considered. Then:

"The Board noted that there has been an improvement in the gearing ratio but that the debt to equity ratio was high. This will be relevant for future financing needs. The Board discussed that a decision on funding any potential future expansions will be required in 2012 and the Company should start considering the options.

In light of the following factors:

● the covenants in the unsecured loan with PAML are currently satisfied;

● the future potential expansion plans and resulting capital expenditure and funding needs of the Company;

● the financial commitments if the Company is to pursue owner operator plans for the Wambo open cut;

● need to ensure adequate headroom for risks related to future operations and potential expansion plans and other risks to cash flows of the business;

The directors resolved that an amount of AUD$25,000,000 was the profit available for dividend purposes for the 6 months period ended 31 December 2010."

22 The relevant determination for the period ended 30 June 2011 was made at a meeting of directors held on 29 September 2011. After approving accounts and considering a briefing paper, the board resolved that, in the light of several matters identified in a briefing paper, "there are no profits available for dividend purposes for the 6 month period ended 30 June 2011". The matters identified were the poor performance of the contractor at the open-cut mine, the fact that the contractor had only recently forecast further decreases in production which called into question whether the open-cut would break even, let alone make a profit for the year ended 31 December 2011 and the need to ensure "adequate headroom" for risks related to future operations and potential expansion plans and other risks to cash flows of the business.

23 A meeting of directors held on 27 March 2012 adopted accounts for the period to 31 December 2011 and considered the question of dividend for the period. It was resolved that "there are no profits available for dividend purposes for the 6 month period ended 31 December 2011". Four matters arising from a paper submitted to the board were mentioned in this connection. Three related to commercial considerations (continuing poor performance of the contractor at the open-cut mine, major uncertainty about the viability of the open-cut operations at the Wambo mine and the lack of decision regarding possible expansion and its funding). The fourth matter referred to the 27 March 2010 loan agreement between Wambo and PAML, as follows:

"the fact that for the relevant period Wambo did not satisfy the Debt Service Cover ratio under the Unsecured Loan Facility between Wambo and PAML."

24 Wambo's accounts for each of the five periods just mentioned disclosed profits. The directors proceeded on a clear footing that it was for them to decide how much, if any, of the profits so disclosed should be treated as "profits available for dividend purposes"; and that no dividend would be payable on the B class shares unless the directors had decided that it should be paid. On each occasion, Wambo, through its directors, approached the dividend right attached to the B class shares on the basis that profits were, as referred to in article 2.1B, "available for dividend purposes" only if and to the extent that the directors had determined that they were so available and that it was for the directors to determine whether there should be any distribution of those profits by way of dividend on the B class shares. In relation to three of the five periods, non-satisfaction of financial covenants in the 27 March 2010 loan agreement between Wambo and PAML was expressed to be one of the reasons for the board's decision that profits were not available and no B class dividend should be paid.

The proceedings in the Equity Division

25 In proceedings brought against Wambo and PAML in the Equity Division of the Supreme Court, Sumiseki contended that

(a) it was entitled, by virtue of the B class shares it held and the relevant provisions of Wambo's constitution, to be paid certain amounts by Wambo as dividends;

(b) failure of Wambo to pay those dividends to it amounted to conduct within s 232 of the Corporations Act 2001 (Cth); and

(c) there should be an order under s 233(1)(b) of that Act modifying Wambo's constitution in a way that better secured to Sumiseki the dividend rights it considered itself to have.

26 The main issue was as to the true construction of article 2.1B of Wambo's constitution and whether that provision created in Sumiseki, as the sole holder of B class shares, a right to be paid dividends at particular times regardless of any decision of Wambo's directors that such dividends should be paid; and, if so, the amount of the dividends so to be paid.

27 The questions were, in broad terms, whether the right to dividends on the B class shares involved mandatory dividends payable without the exercise of any discretion by or within Wambo; and whether the amount of profit "available for dividend purposes" depended on discretionary decisions of Wambo's directors and, if so, whether any such decisions they might make to carry profits to reserves, to retain profits without carrying them to reserves or otherwise to reduce (or even eliminate) the quantum to be distributed were to be taken into account in identifying the amount "available for dividend purposes". Sumiseki argued, in essence, that the directors had no discretion in the matter of payment or amount and that the "available" profit for a period was the maximum that could lawfully be distributed.

28 The primary judge (Hammerschlag J) found in favour of Sumiseki on all the matters mentioned. His Honour made a declaration that, on its true construction, article 2.1B conferred

"the right, to the exclusion of any discretion given to the directors with respect to the declaration or payment of dividends or the capitalising, reserving or carrying forward of profits, to receive a dividend, by the dates specified in the article, of 1/25,000,000 of 25% of the maximum amount of the profit of the Company which is capable of lawfully being distributed as dividend for the 6 month periods specified in the article based on the relevant interim account or accounts."

29 His Honour also made a declaration that

"the conduct of Wambo's affairs in denying Sumiseki's right and expectation to payment of the B class dividend was contrary to the interests of Wambo as a whole and/or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, Sumiseki, within the terms of s 232 of the Corporations Act 2001 (Cth)."

30 The third order made by the judge was an order that the constitution of Wambo "be modified as and from 29 June 2001" so as to cause article 2.1B to be in express terms corresponding with the construction declared by the first declaration.

31 There was also an order (order 5) that Wambo pay to Sumiseki $26,293,500 "being the amount of unpaid dividends" as set out in an annexure to Sumiseki's closing submissions at trial, together with $5,817,622 interest on the dividend amounts up to the date of the making of the court's orders. The annexure to the submissions set out a calculation of B class dividends, on the basis for which Sumiseki contended, for each of the five accounting periods in dispute.

32 Sumiseki also made rectification claims. It maintained that Wambo's constitution (or, in the alternative, the part of the restructure agreement setting out the provisions concerning B class shares to be inserted into the constitution) should be rectified to make it clear that the dividend entitlement extended to profits undiminished by appropriations or other decisions made by the directors. It sought like rectification to the effect that the profits referred to in article 2.1B were the consolidated profits of Wambo and its controlled entities, as distinct from Wambo alone.

33 The primary judge decided that the rectification jurisdiction is not available in relation to a company's constitution.

34 As to the restructure agreement and the first of the rectification claims, the judge was of the opinion that a case for the grant of relief had been made out but that, as a matter of discretion, no order should be made. This was because of the order under s 233(1)(b), based on the s 232 findings, modifying the constitution made any further order unnecessary.

35 As to the second rectification claim, the primary judge held that the profits referred to in article 2.1B were the "stand-alone" profits of Wambo and that Sumiseki had not established any common intention to the contrary on the part of the parties to the restructure agreement.

36 His Honour also rejected a claim by Sumiseki based on an estoppel by convention precluding Wambo from departing from the construction of the dividend provisions favoured by Sumiseki.

37 The primary judge delivered two judgments. Reasons were published on 25 March 2013 (Sumiseki Materials Co Ltd v Wambo Coal Pty Ltd [2013] NSWSC 235) and 3 May 2013 (Sumiseki Materials Co Ltd v Wambo Coal Pty Ltd (No 2) [2013] NSWSC 488). His Honour made orders on the latter date. Wambo and PAML filed a notice of appeal on 2 August 2013. Sumiseki filed a notice of cross-appeal on 16 August 2013. An amended notice of cross-appeal was filed in the course of the hearing in this Court. There is also a notice of contention.

Issues on appeal

38 The issues raised by the notice of appeal, amended notice of cross-appeal and notice of contention are as follows:

1. Whether the primary judge erred in his conclusion that the constitution, on its proper construction, required the payment of dividends on the 25 million B class shares of an aggregate amount equal to 25 per cent of the maximum amount of the profit of Wambo for the relevant period capable of lawful distribution as dividends based on the accounts for the period, such maximum being ascertained without regard for the amount that the directors determine can or should properly be made available by way of dividend.

2. Whether the primary judge erred in his conclusion that the determinations of the directors of Wambo in respect of dividends for the periods in question involved conduct in the affairs of Wambo that was contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to or unfairly discriminatory against Sumiseki within the terms of s 232 of the Corporations Act.

3. Whether the primary judge erred in his conclusion that failure of Wambo to make the relevant dividend payments was conduct within s 232 of the Corporations Act; and whether his Honour should instead have concluded that the directors of Wambo acted, in that respect, in accordance with their legal obligations.

4. Whether the order made by the judge under s 233(1)(b) in consequence of his conclusions as to conduct within s 232 (an order that article 2.1B be modified in a certain way "as and from 29 June 2001") was of any force or effect, having regard to s 137 of the Corporations Act.

5. Whether the primary judge erred in holding that the rectification jurisdiction does not extend to a company's constitution and refusing rectification that would have made it clear that relevant profits for the purposes of article 2.1B are those which are undiminished by decisions of the directors and that there is no discretion to withhold B class dividends.

6. Whether the primary judge erred in declining to make an order rectifying the restructure agreement to make it clear that relevant profits for the purposes of article 2.1B are those which are undiminished by decisions of the directors and that there is no discretion to withhold B class dividends.

7. Whether the primary judge erred in concluding that no estoppel by convention operated against Wambo so as to prevent its resiling from the construction of article 2.1B under which relevant profits are those which are undiminished by decisions of the directors and that there is no discretion to withhold B class dividends.

8. Whether the primary judge erred in dismissing an application by Sumiseki (made on the eighth day of the trial) for leave to amend to include a claim for damages for breach of the restructure agreement, subject to its being rectified.

39 The grounds of appeal as originally framed raised the question whether rectification should have been ordered so as to define (or re-define) "profit of the Company available for dividend purposes" as consolidated profit of Wambo and its controlled entities. Sumiseki abandoned that contention in the course of the hearing. In addition, Wambo and PAML ultimately did not seek to agitate the question whether the covenants in the 27 March 2010 loan agreement provided a basis on which Wambo was entitled to refuse to pay B class dividends if it was otherwise liable to pay.

Construction - the decision of the primary judge

40 In approaching the question of the correct construction of the provisions of Wambo's constitution concerning dividends on B class shares, the primary judge saw his task as being to discover the meaning objectively (that is, according to what a reasonable person would have understood the relevant words in the constitution to mean), with attention given to the language used, the commercial circumstances addressed, the purpose of the provision and the objects which it was intended to secure. He said that the whole of the instrument must be considered and preference given to a construction supplying a congruent operation to the various components of the whole of an instrument; that, if the words used are unambiguous, the court must give effect to them; and that 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. His Honour noted that, in Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; 149 CLR 337 at 352, it was said by Mason J that where 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; and that, having regard to what was said in Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; 86 ALJR 1, by Gummow, Heydon and Bell JJ at [2]-[5], regard may not be had to surrounding circumstances except in case of ambiguity (his Honour was, of course, writing before the High Court's decision in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 88 ALJR 447; and see Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; 310 ALR 113 and Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164]).

41 Against that background, the primary judge proceeded to consider a number of the decided cases to which reference will be made presently. He then said (at [161]-[163]):

"The 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.

The 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.

Did 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."

42 Several reasons were given for that conclusion. In the first place, aspects of the constitution itself were relevant:

1. The words in article 2.1B "[d]espite any provision in this Constitution to the contrary" displace the operation of articles 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. His Honour did not accept a submission of Wambo and PAML that even if the quoted words displaced the operation of articles 9.1(a), 9.4(a) and 9.5, the words "profit of the Company available for dividend purposes" in articles 2.1B(d) and 2.1B(e) themselves conferred an independent discretion for the directors to utilise profits for other purposes. That, the judge said, would mean attributing to the parties an intention to give back by implication what had expressly been taken away. Articles 9.1(a), 9.4(a) and 9.5 were seen as "the sole repositories" of relevant discretions of the directors.

2. Article 2.1B, in contrast to article 2.1A (which gives a holder of ordinary shares the right to receive dividends "as determined from time to time"), contains no formulation requiring the directors (or giving them a discretion) to determine the amount of the dividends.

3. Article 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.

4. Article 2.1B(f) provides for the payment of a final dividend at the end of Wambo's winding up. That dividend, the judge said, 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.

43 The judge then considered certain contractual documents. He referred first to the deed of variation to the free cash flow escrow agreement which inserted a definition of "B Class Dividend Entitlements" into that agreement. The effect of the variation, his Honour said, 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", but whatever was not paid as 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 striking the B class dividend, the balance would simply be paid over as Free Cash Flow, with the result that the discretion would have no financial effect. This was seen as an indication that no discretion was intended. Additionally, Wambo was required to estimate the profit available for the B Class dividends on a six monthly basis with supporting details. The judge thought it unlikely that the notification would have to take into account possible exercises of discretions, the occasion for which may not yet have arisen.

44 The restructure agreement was also referred to. Its recitals 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 the restructure agreement. The recitals further recorded that Hunter was indebted to Sumiseki for $50 million in respect of debenture stock and that the parties had agreed that part of that indebtedness might be forgiven by Sumiseki in exchange for a grant of a profit interest on the terms set out in the restructure agreement. The debenture stock carried a fixed interest rate and was to be repaid out of Free Cash Flow. Sumiseki's rights to payment of principal and interest on its debenture stock were not a matter of discretion on the part of the Wambo directors. Having regard to these matters, the primary judge concluded as follows (at [172]):

"Sumiseki 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."

45 His Honour did not accept a submission of Wambo and PAML that clause 5 of the restructure agreement favoured the discretionary construction they propounded because it showed that the parties valued the B class shares on the same basis as ordinary shares which had no fixed dividend right. His Honour said that, even if the parties did attribute equal value to the shares of each class for the purpose of the specific circumstances with which clause 5 dealt, it did not follow that the dividend rights of the classes were equal. This was because 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. In the judge's opinion, the equating of value favoured rather than undermined the construction for which Sumiseki contended.

Construction - grounds of appeal and submissions on appeal

46 Wambo and PAML do not question the general approach taken by the judge to the task of construing Wambo's constitution. They say, however, that article 2.1B concerning B class shares, on its correct construction, incorporates the long-standing and well understood power of directors to decide whether the interests of the company require all or some of profits otherwise distributable to be retained rather than being made available as dividends. They also point out that article 2.1B does not regulate or control all aspects of the process and that missing components can be supplied only by article 9.1(a) which leaves discretion with the directors, which discretion, it is said, is maintained in relation to dividends on B class shares as well as other dividends. In any event, it is submitted, profits of a period are "available for dividend purposes" only if the directors have not determined to deal with them in some other way.

47 Wambo and PAML further submit that "net profit after tax" would have been the natural and obvious choice of words if some automatic and mechanical process were intended.

48 Emphasis is also placed on the words "based on" in article 2.1B. Those words are said to indicate that a process involving decision and judgment is envisaged. Reference is, in the same way, made to paragraphs (b) and (c) of article 2.1B which confer on the holder of B class shares a right to receive not only a copy of the accounts each relevant period but also a statement identifying the profit of the period available for dividend "based on" those accounts.

49 The opening words of article 2.1B ("Despite any provision of this construction to the contrary") are viewed by Wambo and PAML as compatible with the discretionary nature of the B class dividend for which they contend. For example, the half-yearly regime laid down by article 2.1B is inconsistent with the wholly discretionary timing envisaged by article 9.1(a). Implicit in this submission is acceptance of the proposition that article 2.1B displaces or confines discretions that would otherwise apply. But the displacement is regarded as limited.

50 Wambo and PAML emphasise that determination of profits available for dividend, of its very nature, depends on decisions of the directors.

51 Sumiseki's position is that the primary judge correctly construed the constitution as a whole. It also advances particular points in support of that construction.

The legal context - dividends out of profits

52 Before the submissions concerning construction of the constitution are addressed, it is necessary to consider certain aspects of the legal context in which the matter is to be approached. The first of these concerns the principle that dividends are paid out of profits.

53 Wambo was incorporated in New South Wales in 1969. The Companies Act 1961 (NSW) was then in force and was superseded by, successively, the Companies (New South Wales) Code (from 1 January 1981), the Corporations Law of New South Wales (from 1 January 1991) and the Corporations Act 2001 (Cth) (from 15 July 2001).

54 The matter proceeded before the primary judge on the footing that, at the time of its alteration in June 2001 in accordance with the restructure agreement, the constitution of Wambo consisted solely of provisions contained in articles of association. As in force at the time of Wambo's incorporation, however, the Companies Act 1961 (NSW) required, as part of the process of application for incorporation, lodgment of a memorandum of association, either alone or together with articles of association. Part of the required content of the memorandum (s 18(1)(c)) was a statement of "the amount of share capital with which the company proposes to be registered and the division thereof into shares of fixed amount".

55 The articles of association that were before the primary judge (and are before this Court) are not dated but were obviously adopted at a time when the Corporations Law was in force in a form that included Table A regulations, that is, some time within the period 1 January 1991 to 1 July 1998. No doubt because the matter was dealt with in the memorandum, those articles do not refer to the amount of share capital or its division into shares of fixed amount.

56 Statutory provisions prohibiting the payment of dividends "except out of profits" (or "out of profits of the company") were in force when Wambo was incorporated (Companies Act 1961 (NSW), s 376(1)), when the articles of association in evidence were adopted (Corporations Law, s 201) and when articles 2.1A and 2.1B were added to the constitution on 29 June 2001 (Corporations Law, s 254T). It may be accepted, therefore, that article 2.1B was framed on the footing that the dividends with which it was concerned could not be paid otherwise than out of "profits" and that the expression "profit of the Company available for dividend purposes" was employed in full knowledge of that rule.

57 The form of s 254T of the Corporations Act now in force was introduced by the Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth) with effect from 28 June 2010, that is, towards the end of the second of the dividend periods to which the proceedings relate. It does not maintain the statutory rule that dividends must not be paid except out of profits. The revised s 254T prohibits payment of a dividend by a company unless there is an excess of assets over its liabilities sufficient for the payment of the dividend, the dividend is fair and reasonable to shareholders as a whole and the dividend payment does not materially prejudice the company's ability to pay its creditors. It may be, however, that there remains a general law principle that dividends may only be paid out of profits, given the essential nature of a dividend as a "share of profits": Henry v The Great Northern Railway Co (1857) 1 DeG & J 606; 44 ER 858 at 873 per Knight Bruce LJ; and see S Aleveras and J du Plessis, "The payment of dividends: Legal confusion, complexities and the need for comprehensive reform in Australia" (2014) 32 Company and Securities Law Journal 312.

58 A century and a quarter ago, Lindley LJ said in Lee v Neuchatel Asphalte Co (1889) 41 Ch D 1 at 21:

"There is nothing at all in the Acts about how dividends are to be paid, nor how profits are to be reckoned; all that is left, and very judiciously and properly left, to the commercial world. It is not a subject for an Act of Parliament to say how accounts are to be kept; what is to be put into the capital account, what into an income account, is left to men of business."

59 Much has changed. In 1889, there was no statutory prohibition upon the payment of dividends except out of profits. In this country, a statutory prohibition was introduced in Victoria 1896, in Tasmania in 1920 and nationally upon the adoption of the uniform companies legislation of 1961-2. Statutory provisions also came to regulate the form and content of company accounts and the process of "how profits are to be reckoned". As in force today, the provisions concerning accounts are found in Chapter 2M (s 285 to 344) of the Corporations Act.

The legal context - accounting for profits

60 Under Chapter 2M, a company must prepare a financial report for each year. The financial statements included in such an annual financial report consist of a profit and loss statement for the year, a balance sheet and as at the end of the year, a statement of cash flows for the year and, if required by accounting standards, a consolidated version of each of these. This requirement is imposed by s 295. Under s 296, the financial report must comply with the accounting standards in force under s 234. Section 297 requires that the financial statements and accompanying notes give a "true and fair view" of the financial position and performance of the company and, as to any consolidated version, of the consolidated entity. If adherence to accounting standards would lead to a situation where a true and fair view is not presented, notes to the financial statements must contain additional information necessary to ensure a true and fair view (s 295(3)(c)).

61 The task of ensuring compliance by a company with these requirements falls to the company's directors. In concept, the profit of a period is "the amount of gain made by the business during the year. . . ascertained by a comparison of the assets of the business at the two dates" (Re The Spanish Prospecting Co Ltd [1911] 1 Ch 92 at 98), with the comparison "determined by prevailing accounting principles and standards, to better enable the comparison to be determined conveniently by accountants": Sun Alliance Investments Pty Ltd v Commissioner of Taxation [2004] FCAFC 11; 134 FCR 102 at [39]. Some of the tasks of directors, therefore, are to quantify revenue and expenses for the period, to decide whether debts receivable are likely to be recovered in full and to judge whether stock on hand is likely to realise the value at which it was recorded at the start of the period. There may be a need to provide for expected liabilities. There will also be decisions as to steps that should be taken to cause the profit and loss statement to accord with accounting standards and, ultimately, as to what is necessary to present a true and fair view.

62 The accounting standard AASB 108 deals with the possibility that there may be no accounting standard applying to a particular transaction or event. If that is so, "management shall use its judgement in developing and applying an accounting policy" that results in information that is relevant to the economic decision-making needs of users and is reliable. The standard goes on to identify materials to which regard is to be had in addressing such issues.

63 An example of a matter calling for judgment in the preparation of the profit and loss statement comes from the accounting standard AASB 136 dealing with recognition and measurement of "impairment losses" for certain types of assets. A decision must be made whether the recoverable amount of an asset is less than the carrying amount. If it is, the carrying amount must be reduced to the recoverable amount and the reduction is an impairment loss which must be "recognised immediately in profit or loss", unless the asset is carried at a revalued amount in accordance with another standard, in which event the impairment loss is to be treated as a revaluation decrease in accordance with that other standard.

64 Ultimately, the process of evaluation and decision-making undertaken within the entity will be reflected in a statement of profit or loss for the period containing line items or sub-totals of the kind suggested by paragraph 4.1(b) of the accounting standard AASB 1018:

"(i) profit or loss/result from ordinary activities before income tax expense (income tax revenue);

(ii) income tax expense (income tax revenue) relating to ordinary activities;

(iii) profit or loss/result from ordinary activities after related income tax expense (income tax revenue);

(iv) profit or loss/result from extraordinary items after related income tax expense (income tax revenue);

(v) net profit or loss/result;

(vi) net profit or loss/result attributable to outside equity interest; and

(vii) net profit or loss/result attributable to members of the parent entity."

65 It is the amount of the period's net profit attributable to members that is carried to the balance sheet in the way referred to by Lockhart J in QBE Insurance Group Ltd v Australian Securities Commission (1992) 38 FCR 270 at 283:

"Once the company's 'profit' has been determined by reference to the prescribed format for the profit and loss account, it is open to the company to deal with that 'profit' in any one or more of the following ways:

by declaring dividends;

by transfering the whole or part of the profit to a capital reserve;

by retention of profits."

66 It is by being dealt with in one or more of those ways that the profit for the period comes to be included as part of shareholders funds recorded in the balance sheet, consisting of share capital, reserves and retained profits. The profit transferred may be reflected there wholly as an addition to the retained earnings as they existed at the start of the financial period, with any dividend for the period also recorded so that retained earnings at balance date are those at the start of the period plus profit for the period minus the dividend. There may also be other adjustments. The nature of the process is illustrated by the following example contained in guidance notes to AASB 101:

	Consolidated		Parent
	20-2	20-1	20-2	20-1
	$'000	$'000	$'000	$'000
RETAINED EARNINGS
Balance at start of period	X	X	X	X
Changes in accounting policy	-	(X)	-	(X)
Restated balance	X	X	X	X
Actuarial gains (losses) on defined benefit plans recognised directly in retained earnings	X	(X)	X	(X)
Profit for the period	X	X	X	X
Total for the period	X	X	X	X
Dividends	(X)	(X)	(X)	(X)
Balance at end of period	X	X	X	X

67 Alternatively, the whole or some part of the net profit attributable to members for the particular period may, upon transfer to the balance sheet, be reflected as an accretion to a reserve, with only any residue added to retained earnings as they existed at the beginning of the period.

68 Special considerations may arise where a dividend is to be paid from current year profits but there are accumulated losses. Avoidance of adverse taxation consequences for shareholders receiving the dividend may then make it appropriate to transfer the current year profits to a profit appropriation reserve at the reporting date so that, when the dividend is recorded as paid from that profit appropriation reserve, there is no confusion regarding the nature of the payment and the dividend can be paid as a franked dividend. The prior period accumulated losses then remain within retained earnings at the reporting date.

69 The methodology just outlined is supported by one of several general law principles that have developed regarding the existence and recognition of profits as a proper source of dividends, many of which co-exist with the current statutory rules. The particular principle - often associated with Ammonia Soda Co Ltd v Chamberlain [1918] 1 Ch 266 - is to the effect that a company does not need to make good previous years revenue losses before distributing a current year's profits. Mahoney JA put the matter thus in Marra Developments Ltd v B W Rofe Pty Ltd [1977] 2 NSWLR 616 at 630:

"It has also been said that a company may base a dividend upon the revenue profits of such a period, even though it has in previous periods incurred revenue losses and those losses have not been recouped, and, therefore, represent a loss of capital."

70 Mahoney JA also referred to the principle that capital profits may in appropriate circumstances be relied on for dividend purposes; but there can be no capital profit for this purpose unless the company has its paid up capital intact - or, as it was put by Dixon CJ, McTiernan and Taylor JJ in Australasian Oil Exploration Ltd v Lachberg [1958] HCA 51; 101 CLR 119 at 133, "unless upon a balance of account it appears that there has been an accretion to the paid-up capital".

71 There is no need, in this case, to go further into the rules about how profits are computed. The important point is that profits represent the result of a comparison, made in accordance with legal rules, of the financial position at the end of a given period with the financial position at its beginning, a calculation, in money terms, of the extent of the improvement or deterioration (after the making of provisions that are either required or judged prudent) and the carrying of the result of the comparison to the equity section of the balance sheet in order that the benefit or detriment, as it affects the financial position of the proprietors, may be recognised. Where there is a profit for the period, it is at the point of the carrying of that profit to shareholders funds in the balance sheet that decisions are made as to whether the profit should be allocated to a reserve, applied against accumulated losses, reflected in a new and separate profit appropriation reserve or simply recognised as an accretion to retained earnings.

72 The application of legal norms (including those derived from accounting standards) is an essential part of the process of quantifying profits. So too are judgment and prudent decision-making within the limits that legal norms allow and to the extent necessary to give effect to them.

The legal context - payment of dividends

73 Section 124(1)(d) of the Corporations Act empowers a company to "distribute any of the company's property among the members, in kind or otherwise". Statutory provisions concerning the application of profits and the payment of dividends are in Part 2H.4 (s 254S to s 254W).

74 Section 254T has already been mentioned (see [57] above). It imposes a prohibition upon payment of a dividend unless specified conditions are satisfied. Section 254S enables a company to "capitalise profits". Section 254U creates a replaceable rule which, having regard to s 135(1) and the fact that Wambo has not repealed its constitution since 1 July 1998, does not apply to Wambo. It provides as follows:

" (1) The directors may determine that a dividend is payable and fix:

(a) the amount; and

(b) the time for payment; and

(c) the method of payment.

The methods of payment may include the payment of cash, the issue of shares, the grant of options and the transfer of assets.

(2) Interest is not payable on a dividend."

75 Section 254V is in these terms:

"(1) A company does not incur a debt merely by fixing the amount or time for payment of a dividend. The debt arises only when the time fixed for payment arrives and the decision to pay the dividend may be revoked at any time before then.

(2) However, if the company has a constitution and it provides for the declaration of dividends, the company incurs a debt when the dividend is declared."

76 Section 254W deals with particular types of companies. The only provision that concerns proprietary companies is s 254W(2) which, however, creates a replaceable rule inapplicable to Wambo:

"Subject to the terms on which shares in a proprietary company are on issue, the directors may pay dividends as they see fit."

77 Because neither s 254U nor s 254W(2) applies to Wambo, the only statutory provision affecting the process of payment of dividends by Wambo is s 254V. That section contemplates that the company itself will "fix" the amount of a dividend or the time for its payment (or both) and that payment of the dividend will be the product of a "decision to pay" it. Those concepts reflect the common state of affairs in which a decision-making organ of the company (either the board of directors or the members in general meeting) decides that a particular amount (usually a particular amount per share) should be paid by way of dividend on a particular day to persons registered as the holders of shares at a particular time. A process of that kind attends what are, in traditional terms, the "declaration" of a "final" dividend and a decision to "pay" an "interim" dividend: see Bluebottle UK Ltd v Commissioner of Taxation [2007] HCA 54; 232 CLR 598 at [18] - [21]; Industrial Equity Ltd v Blackburn [1977] HCA 59; (1977) 137 CLR 567 at 572.

78 Where, as here, the rules in s 254U and 254W(2) do not apply, the processes by which dividends are quantified and paid are those prescribed by the constitution, construed as a whole: Bluebottle UK Ltd v Deputy Commissioner of Taxation (above) at [31]-[35]. Legal literature is replete with statements about differences between interim dividends and final dividends, the processes of declaring and paying dividends and the respective roles of the directors and the company in general meeting in the process of releasing profits by way of dividends. These reflect not rules of law but the effects of commonly encountered provisions of company constitutions at different periods of commercial history. For a proprietary company such a Wambo in Australia today, the only legal rules on the subject are those imposed by s 254T (which identifies conditions that must be satisfied to permit payment of a dividend) and s 254V (which deals with the question of when action by a company in relation to a dividend causes it to incur a debt). The matter with which s 254V is concerned can be of significance when solvency is in doubt: see s 588G and Bluebottle UK Ltd v Commissioner of Taxation (above) at [38].

79 Under commonly encountered provisions of company constitutions, the decision to make profits available for dividends lies within the discretion of the directors, subject to any special restrictions. That position was referred to by Lord Davey, speaking for the Judicial Committee of the Privy Council, in Burland v Earle [1902] AC 83 at 95:

"Their Lordships are not aware of any principle which compels a joint stock company while a going concern to divide the whole of its profits amongst its shareholders. Whether the whole or any part should be divided, or what portion should be divided and what portion retained, are entirely questions of internal management which the shareholders must decide for themselves, and the Court has no jurisdiction to control or review their decision, or to say what is a 'fair' or 'reasonable' sum to retain undivided, or what reserve fund may be 'properly' required."

80 But as J K Walsh pointed out in his article "The exercise of powers in the interests of a company" (1967) 8 University of Western Australia Law Review 176 at 193, this does not mean that the courts will never interfere on the question of dividends. Lord Davey was careful to add:

"These are questions for the shareholders to decide subject to any restrictions or directions contained in the articles of association or by-laws of the company."

81 A company's constitution may depart from the traditional form under which decisions whether dividends are to be paid and, if so, when and in what amounts are to be made by the directors or the company in general meeting on the directors' recommendation. Although a dividend always involves a payment by the company and the function of paying falls to the board of directors (or a delegate), the constitution itself may set the dividend amount and require that it be paid, thereby removing those matters from the scope of internal decision-making and, in particular, from any process of declaration for which the constitution provides. An example of such a situation is provided by Evling v Israel & Oppenheimer Ltd [1918] 1 Ch 101 where it was held that holders of particular shares were entitled by way of dividend to a given part of a year's profit regardless of any decision of the company and that those shareholders had a right to declaratory relief accordingly, even in the absence of declaration of a dividend. The circumstances in Paterson v R Paterson & Sons Ltd [1916] 2 SLT 227, a case to be referred to in greater detail presently, were similar. The decision in Bishop v Smyrna and Cassaba Railway Co [1895] 2 Ch 265 concerning rights of preference shareholders to funds in the hands of a liquidator was seen by Byrne J, in Re Odessa Waterworks Co Ltd [1901] 2 Ch 190n (at 195), as turning on the circumstance that the preference dividend right was, by the constitution, "conferred as a right independently of declaration of dividend".

82 United States case law provides like examples. In Wood v Lary 47 Hun 550 (1888), a statement that holders of stock of a particular class were to receive non-cumulative dividends at a rate of 6 per cent whenever in any year the net earnings were sufficient was held to require payment of the dividend if the earnings existed. In Burk v Ottawa Gas & Electric Co 123 Pac 857 (1912), the particular provision was held to create in the directors "a positive duty to pay a dividend whenever in any year there were net profits available" and that "funds that might be used for that purpose could not rightfully be expended for extensions merely for the benefit of the business, nor could they be withheld to meet the expenses of the next year". In Crocker v Waltham Watch Co 53 NE 2d 230 (1944), it was decided that words concerning dividends on particular shares suggesting "immediacy and necessity" and "expressive of the imperative" negatived "any suggestion of discretion or determination of policy by the directors".

83 Whether distribution of profits as dividends is mandatory (in the sense that no separate decision to declare or pay is required and the company has no right to withhold) depends on the meaning and effect of relevant provisions of the constitution according to their true construction. Those provisions have the contractual force set out in s 140 of the Corporations Act and may therefore be the source of rights of one or more members against both the company and other members, as well as restrictions upon the powers of the directors.

84 No consideration of principle stands against the recognition of mandatory dividend rights. The fact that, on a particular future occasion, performance of the obligation to pay such dividends may conflict with the legal prohibition in s 254T or raise issues under s 588G does not preclude such recognition - any more than the theoretical possibility that some unforeseen statutory obstacle will in future prohibit performance of any contractual obligation precludes the making of the contract by which the obligation is created.

Profits "available for dividend purposes"

85 On one view, profits of a particular period will properly be regarded as "available for dividend purposes" if their existence is established by the financial statements for that period and no legal rule or provision of the company's constitution stands in the way of their distribution as dividends. The alternative view is, in essence, the same but with a qualification that recognises an ability of the directors to appropriate profits of the period to reserves or simply to retain earnings and thereby to diminish or eliminate that which is "available". The matter is dealt with in a number of decided cases (many referred to in submissions) to which I now turn - noting, as I do so, that every case turns on the construction of particular provisions.

86 In Fisher v Black and White Publishing Co [1901] 1 Ch 174, an article directing the manner of applying "the profits from time to time available for dividend" was held to operate only upon the net profit after making any deductions that the directors could properly make before declaring a dividend. That construction accommodated a provision that enabled the directors, "before recommending any dividend", to set aside "out of the profits of the company such sum as they may think proper and a reserved fund to meet contingencies, or for equalising dividends, or for repairing or maintaining the works connected with the business of the company".

87 The articles under consideration in Paterson v R Paterson & Sons Ltd (above) contained two relevant provisions. Article 12 provided that, after allowing for certain expenses, "the profits of the company shall be applied" in paying certain dividends on certain shares. The articles incorporated the regulations in Table A by a provision making those regulations applicable "only so far as they are not excluded, altered, or modified by" the articles themselves. Regulation 99 of Table A empowered the directors, before recommending any dividend, to set aside sums out of profits for reserves. All five members of the House of Lords held that the holders of the shares referred to in article 12 were entitled to have profits applied according to that article before any transfer by the directors to reserves. The reasoning appears from the following passage in the speech of Lord Kinnear (at 229):

"The parties, who are members of this trading company, have agreed by Clause 12 of the Articles of Association, which has the effect of a contract inter se, that the profits of the company shall be applied in a certain specified way which is set forth in detail. So far as the directors are concerned, this is a peremptory mandate which they are bound to obey; and if they are so bound, it follows that the profits must be distributed in the manner prescribed and in no other way. But then it is said that there is brought in a discretion by the 99th Article in Table A, which allows the directors to set aside a proportion of the profits to reserve, if they so think fit. Nobody disputes that that is a most reasonable discretion for directors to have, and that it may be an extremely useful one. But then, is it consistent with an express direction in the form of a peremptory mandate that they shall distribute the profits in one particular way and no other? Table A is applicable to this company only in so far as its provisions are not altered, modified, or excluded by the company's own Articles of Association; and I am of opinion that Article 99 is effectually excluded by Clause 12. I come to this conclusion on two grounds: first, that the existence of any discretion in the directors is inconsistent with the absolute and peremptory character of the direction for distribution; and secondly, as my noble friend has pointed out, that in certain events the exercise of the supposed discretion under Table A must necessarily defeat the rights created by Clause 12. The question is one of construction of a contract, and I think the Court has answered it in the right way."

88 The "absolute and peremptory" character of the direction that profits be applied in satisfying dividends on the particular shares and the subordination, as a matter of drafting, of the provision granting power to the directors to the provision creating the dividend right thus combined to ensure that the right was to be satisfied without interference or diminution resulting from exercise of the power.

89 The result in Long Acre Press Ltd v Odhams Press Ltd [1930] 2 Ch 196 was similar to that in Fisher v Black and White Publishing Co (above). The rights there in question were rights of holders of convertible unsecured notes. The noteholders were entitled to interest at specified rates plus part of the excess of "the profits of the company available for dividend in respect of any year or other accounting period" over the amount required to pay certain fixed dividends. The decision was that the "profits" referred to were those available "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 interest of the company". Reference was made to Fisher v Black and White Publishing Co and the fact that there was, in that case, a provision "giving the directors power to set aside out of the profits a reserve fund". The full effect of that provision (in particular, the words "before recommending any dividend") was not stated; and there was no indication whether any like provision applied in the Long Acre case itself.

90 De Vall v Wainwright Gas Co [1932] 2 DLR 145 was a decision of the Court of Appeal of Alberta. The letters patent of the company stated that certain preference shares "shall confer the right to receive out of the profits of each year a preferential dividend for such year" at a specified rate on the capital paid up. The by-laws stated that the directors "may, before declaring any dividend, set aside out of the profits of the company such sums as they think proper as a reserve or reserves. . .". It was held that the dividend right was a right in respect of such profits as the directors decided to make available by way of dividend after making transfers to reserves.

91 Among questions considered by five judges of the New Zealand Court of Appeal in Best v Newton King Ltd [1942] NZLR 360 were whether a provision of the constitution conferred a right to a preference dividend at a particular rate, limited for payment in each year only by the requirement that profits have been earned and regardless of declaration by the directors; and whether the dividend was payable out of such profits as were earned or only those that the directors decided to make available for dividends. The only basis on which it was suggested that dividends on those shares fell to be dealt with otherwise than under the general provisions for declaration and payment was a provision concerning voting that covered the possibility that the dividends might be "in arrear for more than three calendar months". That was held not to imply a due date for payment regardless of the general processes for which the constitution provided.

92 Re Buenos Ayres Great Southern Railway Co Ltd [1947] 1 Ch 384, concerned preference shares carrying the right to receive out of the profits of each year a fixed dividend of 5 per cent, or so much of that dividend as the profits were sufficient to pay. A provision of the articles allowed the directors to carry to a reserve fund "for each year such part of the undivided profits of the company from whatever source arising, as they may think fit". Romer J held that the articles did not dispense with the need for declaration of the relevant dividend and, that the function of declaring dividends was a function of the directors, so that the quoted provision operated in the same way as Fisher v Black and White Publishing Co and Long Acre Press Ltd v Odhams Press Ltd and the profits from which the fixed dividends were to be paid were not ascertained until any transfer to the reserve had been made.

93 Re Buck [1964] VR 284 involved a contest between life tenant and remainderman. The question was, in essence, whether dividends had become payable on certain preference shares despite the absence of any specific decision to declare or to pay. It was recognised that the constitution could, by appropriate language, exclude the principle that decisions as to payment of dividends are a matter of internal management. The issue was whether such an exclusion was effected by a provision stating that the preference shares "shall confer the right to a fixed cumulative preferential dividend at the rate of six pounds per centum per annum on the capital for the time being paid up thereon". Hudson J decided that there was no exclusion. As a matter of construction, the provision in question was not "a complete and unambiguous statement of a right in preference shareholders to a dividend at the rate of six per cent payable at the end of each year out of the profits for that year regardless of any decision on the part of the company or its directors as to whether those profits should be distributed or kept in reserve or carried forward for future use in the company's business".

94 The question in Tosich v Tosich Construction Pty Ltd (1993) 10 ACSR 590 concerned provisions under which holders of shares of particular classes were given "an absolute power to declare dividends on any shares in the capital of the company and to pay interim dividends". It was also stated that all profits "must be distributed in equal shares to the holders of [the shares of those classes], unless such holders unanimously agree to the contrary, as to profits to be set aside as reserves or as to rates of distribution for classes of shares". Another provision, (article 112) empowered the company in general meeting to declare dividends, but with no dividend exceeding the amount recommended by the directors. Article 115 empowered the directors to set aside sums out of profits before recommending any dividend. Lockhart J held that the powers of holders of the shares of the particular classes were constrained by the part of article 112 stating that the dividend was not to exceed the amount recommended by the directors. The power of the directors to transfer profits to reserves before making a recommendation therefore meant that only so much of the profit as was not carried to reserves and was recommended by directors was at the disposal of the holders of the shares of the particular classes for distribution and dividends.

95 The relevant provision in Fidelity Management & Research Co v Gulf Canada Resources Ltd (1996) 27 BLR (2d) 135 was:

"The holders of Series 1 Preference Shares shall be entitled to receive, and the Corporation shall pay thereon, as and when declared by the board of directors out of monies of the Corporation properly applicable to the payment of dividends, cumulative preferential cash dividends payable in the manner hereafter provided."

96 The Ontario Court of Justice decided that, despite the statement that the shareholder was "entitled to receive" and specification of dates on which dividends were "payable", there was no right to dividend in the absence of declaration by the directors. This followed from the words "as and when declared by the board of directors".

97 The observations in Heesh v Baker [2008] NSWSC 711; 67 ACSR 192 concerning availability of profits for dividend (quoted by the primary judge) were made in the context of provisions conferring on directors the power to declare dividends and allowing them, before making any declaration, to set aside out of profits such sums as they thought proper as reserves.

98 It is clear that, as between member and company, the meaning of "profits available for dividend" (or for "dividend purposes") and the question whether and, if so, to what extent, earnings may be appropriated to reserves (or in some other way) before such profits are struck depend wholly on the construction of the constitution.

99 Reference was made in submissions on both sides to Prenn v Simmonds [1971] 1 WLR 1381, which did not involve rights as between member and company. In issue there was the construction of a contract creating a right to purchase a shareholding interest if the profits of the company "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" amounted to a specified sum after payment or provision for certain taxes. It was held that the contract referred to the net profits after tax for the relevant periods, determined according to established accounting practice. Lord Wilberforce (with whom the other members of the House of Lords agreed) said (at 1389):

"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 decide 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."

100 As between vendor and purchaser of shares, therefore, the carrying to reserves of profits disclosed by the profit and loss account was regarded as not depriving those profits of their character as "available for dividend".

101 A different issue arose in Bagot Pneumatic Tyre Co v Clipper Pneumatic Tyre Co [1902] 1 Ch 146, another case concerning a contractual promise, being a promise by a company to make an annual payment of a certain amount "out of their remaining profits available for dividend" - with "remaining" referring back to an earlier provision contemplating payment of certain dividends and transfer to a reserve fund of such amount as the directors thought fit. The question was whether depreciation in the value of certain assets, as determined and recorded, was properly regarded as having reduced the "profits available for dividend". The question was answered in the affirmative. Romer LJ said (at 159):

"In my opinion, the agreement of March 3 was not intended to deprive the defendant company of their ordinary right of ascertaining in the proper course of business and in good faith the profits of the company 'available for dividend' in any particular year."

102 An allowance for depreciation of the particular assets was thus viewed as a proper charge against profits for the year and therefore as a reduction in the quantum available for dividend. This was not a case of setting aside profits to a reserve (or "ploughing back") but of recognising an item in the nature of an expense in the determination of profits.

103 It cannot be said that decided cases indicate some fixed meaning of "profits available for dividend purposes". The meaning depends very much on context.

Construing the constitution in this case

104 Submissions about the true construction of relevant provisions of Wambo's constitution approached the matter at two levels. First, attention was given to the words themselves in the context of the instrument as a whole. Secondly, regard was had, in addition, to surrounding circumstances. The same approach is adopted in these reasons.

105 Various matters were put forward as supporting one construction rather than another or as indicating some particular emphasis. The submissions dealt with a number of specific matters and canvassed various possibilities. Those submissions have been of value in identifying doubts and difficulties and in elucidating possible ways of resolving them. In the end, however, the court must make its own assessment by reference to the words as it finds them.

The right created by article 2.1B

106 Each of article 2.1A and article 2.1B defines the "right" of a particular member. Article 2.1A defines the "right" of a member who is a holder of an ordinary share. Article 2.1B defines the "right" of a member who is a holder of a B class share. In relation to dividends, the "right" of a holder of an ordinary share is "to receive dividends to be payable to the holders of ordinary shares as determined from time to time" (subject to a proviso); while the "right" of a holder of a B class share is "to receive a dividend in respect of [a stated period] equal to the amount determined in accordance with the following formula, such dividend to be paid ... in immediately available funds by [a given date following the expiration of the stated period]".

107 The position in relation to B class shares may be illustrated by considering hypothetical examples. Take, in the first instance, the period of six months that will end on 31 December 2020. The following steps will be taken as required by the formula in article 2.1B(1)(d) and the definitions of "Interim Accounts" and "Profit Interest":

1. Examine the unaudited accounts of Wambo that are prepared for the period of six months ending on 31 December 2020 in accordance with the corporations legislation and otherwise in the manner stated in the definition of "Interim Accounts";

2. Determine, "based on" those unaudited accounts, "the profit of the Company available for dividend purposes for" the period of six months ending on 31 December 2020;

3. Ascertain 25 per cent of an amount equal to the "profit" so determined;

4. Calculate one-twenty five millionth of the sum so ascertained.

108 By operation of article 2.1B(d), a member holding a B class share will have, by virtue of the holding of that share, "the right . . . to receive a dividend in respect of" the period of six months ending on 31 December 2020 "equal to the amount" produced by the taking of those steps 1 to 4. It is the dividend thus quantified as the subject of "the right . . . to receive" that article 2.1B(d) describes as "to be paid in immediately available funds by" 31 March 2021.

109 A similar procedure will be required in relation to the next period of six months, that is, the period ending on 30 June 2021. In accordance with article 2.1B(e), the accounts to be examined in that case will be the audited accounts of Wambo that are prepared for the financial year ending on 30 June 2021 in accordance with the corporations legislation and otherwise in the manner stated in the definition of "Accounts". It will be necessary to determine, "based on" those accounts, "the profit of the Company available for dividend for the year ending" 30 June 2021. From that full year profit figure will be subtracted "the profit of the Company paid as dividend under paragraph (d) for the six month period" ending 31 December 2020. Steps 3 and 4 at [107] above will then be taken in relation to the result of that subtraction. The result of the taking of those steps will be the amount of the dividend that the holder of a B class share will have "the right . . . to receive" in respect of the period of six months ending on 30 June 2021; and article 2.1B(e) will describe that dividend as the "dividend to be paid in immediately available funds" by 30 September 2021.

110 Important aspects of these provisions are thus that they:

(a) create "a right . . . to receive" a dividend "in respect of" each period of six months;

(b) lay down the manner of calculating the "amount" of each such dividend;

(c) fix as the "amount" a sum derived by simple arithmetic from the single item "profit of the Company available for dividend purposes for" the particular period (or such a single item minus the "profit of the Company paid as dividend" under an identified provision for the immediately preceding period), "based on" identified financial statements; and

(d) state that each dividend is "to be paid in immediately available funds by" a specified date.

111 The constitution vests in the holder of a B class share "a right . . . to receive" every such calculated sum as dividend, states that the calculated sum is "to be paid" and fixes a date by which it is "to be paid". Because the dividend to which the right extends is "to be paid" by the specified date, the constitution imposes on the company an obligation to pay it.

112 The right of a holder of ordinary shares under article 2.1A is quite different. There is, in that case, a "right to . . . receive dividends to be payable to the holders of ordinary shares as determined from time to time"; but the right exists only if "there are no dividends due and payable to the holder of B class shares at the relevant point in time". The right is, at best, a right to receive what it is determined from time to time should be given. There is no calculated sum, no fixed date and no statement that something is "to be paid".

113 Each provision creates "a right to . . . receive" - in one case, a dividend amount described as the product of a calculation; and in the other, dividends that are from time to time determined to be payable. A process of decision-making going beyond mere arithmetic is central to the "right" that s 2.1A confers but quite foreign to the "right" created by article 2.1B. If there is, "based on" the particular accounts, "profit of the Company available for dividend purposes for" the particular period, article 2.1B operates, first, to vest in the holders for the time being of the B class shares a right to receive, as dividend on B class shares, a calculated proportion of that "profit" and, second, to impose upon the company an obligation to cause that amount to be paid in immediately available funds not later than the date fixed by the article.

114 Effect must be given to the "right" and concomitant obligation with respect to dividends arising from article 2.1B notwithstanding the absence of any determination under article 9.1 that a dividend of the relevant amount should be declared or paid. Decisions by the directors under that article are called for when provision for the payment of a dividend and the calculation of its amount are not found elsewhere in the constitution; and only profits not specifically disposed of by article 2.1B can be made the subject of such decisions. This is the effect of the opening words of article 2.1B:

"Despite any provision in this constitution to the contrary, the holder of a B class share has the right . . . ".

115 The dividend right created by article 2.1B and the concomitant obligation of the company to satisfy that right exist and must be given effect to "despite" the contrary statement that a right to receive dividends (and, therefore, the duty to pay) arise only from a decision of the directors under article 9.1.

116 The correctness of the construction of article 2.1B that I have outlined is also indicated by article 2.1B(f) which creates, in respect of the B class shares, a right to 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", that is, a period during which a liquidator is in office and the powers of the directors are, by s 471A of the Corporations Act, suspended and unavailable unless either the liquidator or the court allows the directors to act. The dividend provided for in article 2.1B(f) is to be calculated by reference to the profit available for dividend purposes for the specified period "based on the accounts of the liquidator for that period". Although questions not immediately relevant arise in relation to the precise operation of article 2.1B(f), the fact that there is to be a dividend based on accounts prepared by a liquidator for a period during some or all of which the directors are inactive confirms that there is no room for the exercise of discretions as to the paying or withholding of the dividend.

117 The primary judge was, in my respectful opinion, correct in concluding that that the B class dividend is a "mandatory dividend" that becomes payable by Wambo on each date for payment specified in article 2.1B, regardless of any decision that it should be declared or paid; and the company is obliged to pay accordingly.

The profits referred to in article 2.1B

118 I turn now to the words "the profit of the Company available for dividend purposes", as used in article 2.1B.

119 The question here is whether the profit that is "available" for dividend purposes for a particular period referred to in article 2.1B(d) or 2.1B(e) is the whole of net profit attributable to members for the period (as referred to at [65] above) or only so much of that profit as remains after transfers or appropriations have been made by the directors under articles 9.2, 9.4 and 9.5. Looked at from another perspective, the question is whether the powers of the directors with respect to the profit of a period referred to in article 2.1B(d) or 2.1B(e) extend to only so much of the net profit attributable to members for the period as is not absorbed in satisfying the dividend right created by that article.

120 The starting point in addressing that question is the proposition that, unless there is some legally binding stipulation to the contrary, profits of a period may be dealt with at the discretion of the company's decision-makers. Provided that the positive requirements of any such binding stipulation have been satisfied and no negative stipulation stands in the way, all remaining profits are "available", in the sense that they are capable of being applied in any way in which profits may lawfully be applied.

121 Two aspects of the constitution persuade me that, on the proper construction of its provisions, the article 2.1B(d) or 2.1B(e) right of the holder of B class shares is a right to the relevant fraction of the period's net profit attributable to members undiminished by any discretionary applications under articles 9.2, 9.4 and 9.5 but subject to such diminution, if any, as is required (or such prohibition, if any, as is imposed) by law; and that the directors' power to make applications under those articles independently of requirements of law extends only to so much of the period's net profit attributable to members as remains after that fraction has been allocated for satisfaction of the dividend rights of the holder of B class shares.

122 In the first place, it is clear that articles 9.1, 9.2, 9.4 and 9.5 (together with article 9.3 creating so-called "ancillary powers" concerning specie dividends and bonus issues under articles 9.1 and 9.2 respectively) proceed on the footing that all applications of profits are a matter for the discretion of the directors and that profits can never be applied except as the directors decide. Once it is recognised that article 2.1B cuts across that scheme by displacing the discretion of the directors under article 9.1 as to whether dividends in respect of article 2.1B(d) and 2.1B(e) periods should be paid, it must likewise be recognised that article 2.1B also displaces the powers that the directors could exercise under provisions allied with article 9.1. If it were otherwise, the dividend right could be set at nought by a decision of the directors that all profits of a period should simply be carried to retained earnings.

123 Secondly, effect must again be given to the opening words of article 2.1B: "Despite any provision of this constitution to the contrary. . . ". Those opening words require interpretation of the description "available for dividend purposes" in a way that is not affected by contrary indications elsewhere in the constitution.

124 Any legal rule requiring profits to be applied in a particular way or precluding the distribution of profits will affect the quantum of the profit of a period "available for dividend purposes".

125 Thus, if the law requires some part of a period's profits to be carried to a reserve, compliance with that requirement will diminish the profits "available for dividend purposes" by the amount transferred. For these purposes, the statement in s 296 of the Corporations Act that the financial report must comply with the accounting standards in force under s 234 means that requirements of the accounting standards as to application of profits must be met before profits "available for dividend purposes" are struck. Reserves contemplated by the accounting standards include asset revaluation reserve (AASB 116, AASB 138), foreign exchange translation reserve (AASB 121) and cash flow hedge reserve (AASB 139). If those or any other accounting standards require that some part of the profit of a period be carried to reserves, that part will be excluded from profit "available for dividend purposes"; and this will be so even though it may be necessary for judgment to be brought to bear in determining the amount to be transferred in satisfaction of the legal requirement.

126 Any legal prohibition upon distribution will, in the same way, affect the availability of profits for dividend purposes. An example of such a prohibition may be found in Company of Proprietors of the Kent Waterworks v Lamplough [1904] AC 27. An applicable statute stated that the profits "to be divided among the undertakers in any year shall not exceed the prescribed rate". Distribution of profits in excess of that limit being unlawful, any excess profits were obviously not available for distribution. It follows, in the present context, that the whole of the profits of a particular period will be deprived of the quality of being "available for dividend purposes" if s 254T of the Corporations Act operates at the time for distribution of those profits to prohibit the payment of dividends. As noted at [57] above, s 254T precludes the payment of a dividend unless there is an excess of assets over liabilities sufficient for the payment of the dividend, the dividend is fair and reasonable to shareholders as a whole and the dividend payment does not materially prejudice the company's ability to pay its creditors. If all those conditions are not satisfied and the legal prohibition on the payment of any dividend operates, the situation is one in which no profits are available for dividend purposes; and that situation will continue unless and until the legal prohibition is no longer operative.

127 Lord Wilberforce's statement in Prenn v Simmonds (above) that "all profits earned are available for dividend; what is done with them then is a matter of choice which rests with those who control the company" - made in another country at another time - does not wholly accommodate today's legal requirements. The choice to which his Lordship referred is obviously curtailed by any legal rule controlling it. Subject to that, the statement in Prenn v Simmonds correctly describes the concept of availability of profits for dividend purposes relevant to the present case. It follows that the profits of a particular period to which article 2.1B refers are those which no legally binding stipulation requires to be dealt with in a particular way (including by being withheld altogether) - in other words, such residue, if any, as exists after all inroads and restrictions indicated by such legally binding stipulations have been accommodated. The effect of the article is to require that any such residue be applied, to the stated extent, in paying dividends on B class shares; and this must be done whatever views the directors may have as to more appropriate or prudent methods of application of profits.

"Based on"

128 It remains to consider the words "based on" in the phrase "the profit of the Company available for dividend purposes for [the relevant period] based on [the accounts for that period]." The statement that the "profits available for dividend purposes" for a period are to be "based on" the accounts for the period indicates that the process is not one of blind acceptance of a "bottom line" figure in those accounts. Some adjustment or refinement may be necessary to obtain what is, in an objective sense, a true reflex of the profit for the period.

129 An example of a situation in which the "based on" direction would have had meaningful and effective operation is found in Trilogy Management Ltd v YT Charitable Foundation (International) Ltd [2012] JCA 152. In that case, the company's constitution directed that the directors should, "in any financial year in which profits of that year are available for dividend", recommend that a particular proportion of "such profits" be paid in dividends. Up to 2004, the company had prepared its accounts on the historical cost basis. In 2005, the accounts were prepared in accordance with International Financial Reporting Standards which required that certain investments be stated at their fair value, with movements in fair value being recognised in the income statement. The practical effect of adopting the new basis was that both the balance sheet and the income statement were presented differently from the way in which they had been presented in previous years. In the balance sheet, the figure for investments, under the new method, reflected the fair value: the investments were "marked to market". Because the current market value was significantly in excess of the historical cost, there was a significant increase in net assets, matched by an equal increase in retained earnings, over the figure shown in the 2004 accounts. In the income statement, changes during the year in the fair value of investments were required to be included in the calculation of profit or loss even if none of the investments were realised.

130 At the end of 2004, the investments stood in the books at their cost. Because of the changed method of accounting, their opening value in the 2005 accounts was some $225.8 million greater than that cost. During 2005, some investments were sold. They realized some $104 million more than their cost but this was more than offset by a decline in fair value of the other investments exceeding $111 million. The overall result for the year was a loss of some $2.1 million - subject to the effect of the increase of $225.8 million recognized at the start of the year because of the adoption of the different method of accounting.

131 The Jersey Court of Appeal, reversing a decision of the Royal Court, decided that the proper meaning of the words "profits of that year" in the company's constitution was "profits of that year as ascertained by the generally accepted accounting principle applied by the company in the preparation of its accounts from time to time"; and that, for the year 2005, there had been no such profits and no mandatory dividend was required. This result was reached even though comparison of the net asset figures recorded at year end in the 2004 accounts ($240 million) and the 2005 accounts ($463.7million) showed an increase of $223.7million. This was, in reality, the revaluation figure of $225.8 million less the loss for the year 2005 of $2.1million.

132 The words "based on" would have reinforced that result by emphasizing that profit was to be found by taking the content of the financial statements as a base and subjecting it to a process of objective analysis to find the true profit unaffected by anomalies.

Surrounding circumstances

133 There is no need, in this case, to give close consideration to the extent that regard may be had to "surrounding circumstances" in construing the constitution of a company: see generally Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144; 156 FCR 1. It is sufficient to note that the construction that the words themselves warrant is entirely consistent with the origin of the B class shares as a substitute for the contractual right as against Hunter created by the restructure agreement. Under the contractual regime, Sumiseki's right was a right to be paid by Hunter regardless of any decision of Wambo's directors concerning payment of a dividend; and, as in Prenn v Simmonds (above), the parties clearly contracted by reference to profits earned rather than what might then be done with them within the company.

Conclusion on construction

134 Sumiseki, by virtue of its holding of B class shares, was entitled to receive dividends on the basis for which it contended at trial (save that the relevant profits of any period were those of Wambo itself, not the consolidated profits of Wambo and its controlled entities). The judge's decision on the construction question concerning Wambo's constitution and, in particular, article 2.1B, was correct. Sumiseki's dividend rights were not satisfied in respect of periods ending 31 December 2009, 30 June 2010, 31 December 2010 (as to part), 30 June 2011 and 31 December 2011.

Oppression - factual background and findings

135 The primary judge's conclusion on the question of construction was, in a real sense, sufficient to dispose of the principal controversy. His Honour nevertheless proceeded to address Sumiseki's claims based on s 232 of the Corporations Act. In doing so, he referred to a course of events commencing in September 2008. At that date, Sumiseki had held the 25 million B class shares in Wambo for more than seven years and, as the judge noted, "was treated as being entitled to be paid a fixed mandatory dividend equivalent to 25 per cent of the after tax profits of Wambo". That attitude changed. It is necessary to trace the process. In doing so, I set out the primary judge's findings and some additional matters drawn from the evidence.

136 When Sumiseki received the allotment of 25 million B class shares on 29 June 2001, Hunter was the holder of all the ordinary shares in Wambo. As has been seen, the B class shares were taken up by Sumiseki in substitution for certain contractual rights it had against Hunter. In November 2002, Excel came to hold 75 per cent of the shares in Hunter and in August 2004, Excel became the sole shareholder in Hunter. By means of a scheme of arrangement implemented on 25 October 2006, Peabody Energy Australia Pty Ltd ("PEA") acquired all the shares in Excel which changed its name to Peabody Australia Mining Ltd. By a subsequent scheme of arrangement (implemented on 16 December 2009), all of the assets and liabilities of Hunter became assets and liabilities of PAML and Hunter was deregistered. From that point, PAML, a wholly owned subsidiary of PEA, was the holder of all the ordinary shares in Wambo.

137 The events beginning in September 2008 (that is, almost two years after PEA had become the indirect owner of all ordinary shares in Wambo) culminated in Wambo and PAML adopting the view that payment of dividends on the B class shares in Wambo was a matter entirely within the discretion of Wambo's directors. Subsequently, the Wambo directors decided not to pay dividends on the B class shares in respect of the periods already mentioned.

138 In September 2008 Peabody, in conjunction with the group's auditors, Ernst & Young, began to address the question whether Sumiseki's shareholding interest in Wambo should, from Wambo's perspective, be treated as debt or equity for accounting purposes. The concern was that if the correct classification was debt, a financial liability would have to be reflected in the consolidated accounts of the group.

139 On 28 November 2008, Mr Carrick of Ernst & Young sent to colleagues for discussion an email setting out the provisions in Wambo's constitution concerning the B class shares. An Ernst & Young internal memorandum of 17 December 2008 expressed the view that the B Class shares should be accounted for as equity in Wambo's accounts 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."

140 In discussions on or about 20 February 2009 between Ms Hewson (Peabody's internal lawyer in Australia) and Mr Carrick, the following question was framed in order that advice might be sought from Freehills, PAML's external solicitors:

"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?"

141 That question was in due course put to Freehills who, in a letter dated 2 March 2009, set out the competing interpretations:

"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."

142 Freehills said that, in their opinion, the "better view" was that the answer to the question posed was "yes" - that is, that the "first interpretation" was to be preferred. Ms Hewson accepted and adopted this interpretation, as did Ernst & Young in an internal memorandum of late February 2009 which read in part as follows:

"Wambo's directors retain 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."

143 At Ernst & Young's request, Wambo's directors provided a representation letter dated 16 March 2009 confirming 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.

144 Draft financial statements of Wambo for the year ended 31 December 2008 came into existence at some point before 11 March 2009 and contained a note in relation to the B class dividends in terms corresponding with those employed in the accounts for several earlier periods:

"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."

145 Gregg Wickstra was appointed a director of Wambo on 17 October 2007, a director of PEA on 1 February 2008 and a director of PAML on 8 June 2009. He was an executive of Peabody. On 11 March 2009, Mr Wickstra informed Ms Hewson and Mr Young that the "Sumitomo dividend" needed to be paid by 31 March 2009.

146 The directors of Wambo noted at a meeting of 23 March 2009 that "available profits" of Wambo as at 31 December 2008 were $5.799 million and that the financial statements were approved, subject to certain handwritten changes. A briefing paper prepared by Mr Wickstra and attached to the minutes recorded that the decision to declare a dividend was at the directors' absolute discretion; that when deciding whether to declare a dividend it was important to consider whether there were available profits from which dividends could be paid; and that, under Wambo's constitution, the directors could resolve to pay a dividend on the B class shares at their absolute discretion. The directors declared a dividend on the B class shares for the year 2008 of $1,449,750, "being 25% of the available profits of the Company, franked to 7.12%".

147 A note to the 31 December 2008 accounts concerning the rights attached to the B class shares was in a form substantially different from that which had been included in the accounts for earlier periods. It read as follows:

"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."

148 In mid-2009, attention within PAML came to focus on loan arrangements under which Peabody (and, in a direct sense, PAML) funded Wambo. Up to the year 2004, Wambo had no parent company funding from Peabody. All funding was from external sources, mainly through finance leases and hire purchase agreements. For subsequent periods, there was Peabody funding, the position being as follows:

Date	Parent Funding	External funding
30 June 2006	$ 26.4m	$ 63.6m
31 December 2006	32.4m	125.9m
31 December 2007	203.9m	121.7m
31 December 2008	210.0m	58.5m
31 December 2009	123.7m	51.3m
31 December 2010	89.2m	43.8m
31 December 2011	28.4m	35.3m

149 Excel and Wambo were parties to a written loan agreement dated 1 December 2004 under which parent company funding was to be provided by loans provided at 8 per cent per annum, with interest to be paid monthly in arrears, and the indebtedness to be satisfied on seven days notice. PAML became a party to the agreement as successor to Excel. The loan agreement was a short-form document with very few conditions. Interest had been capitalised so that, by 30 June 2009, interest of $28.3 million was accrued but unpaid. As noted above, the outstanding indebtedness at 31 December 2008 was $210 million. A note to Wambo's accounts as at that date stated:

"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."

150 From mid-2009, a number of persons within Peabody in Australia, including Mr Young, Mr Wickstra, Brett Mawby (Head of Tax Australia) and John Busch (Senior Finance Manager) began to consider the loan arrangements between Wambo and PAML.

151 On 1 July 2009, Mr Mawby wrote to Mr Young, Mr Wickstra and Mr Busch noting that the existing loan had no fixed term and that "the ATO might challenge the instrument as an equity instrument". Mr Mawby suggested that the loan agreement be amended to "insert a <10 year term" or that new loan arrangements be made. He also said:

"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)."

152 Mr Mawby attached a document that had been used for a similar purpose in another context. That document was a relatively short loan agreement with no burdensome covenants.

153 On 19 August 2009, Ms de Santana was appointed chief financial officer and a director of PEA. She became a director of Wambo on 17 September 2009 and of PAML on 5 October 2009. She resigned from the latter office on 24 March 2010.

154 From about 16 September 2009, Peabody began to investigate the cost of external financing of Wambo without Peabody support. John Busch was closely involved in this process. The investigation did not lead to any concrete proposal for the raising of loan funds from sources outside the Peabody Group.

155 The directors of Wambo met on 18 September 2009. The meeting considered whether a dividend should be paid on the B class shares in respect of the period to 30 June 2009. A briefing paper by Mr Wickstra in substantially the same form as that considered at the meeting on 23 March 2009 was before the meeting. The board noted that the available profits of Wambo as at 30 June 2009 were $29.234 million and resolved to declare a dividend to B class shareholders of $7,308,500, being 25 per cent of the available profits, 1.26 per cent franked.

156 Ms de Santana gave evidence that Mr Wickstra said to her at the meeting of 18 September 2009 that, in the past, a "mechanistic approach" had been applied to the payment of dividends on B class share shares. If there was a profit and Wambo would not become insolvent by paying the 25 per cent dividend, Wambo paid it. Ms de Santana said that Mr Wickstra had told her that this was his understanding of the rights conferred upon Sumiseki by Wambo's constitution and that he had held this 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.

157 Ms de Santana said that her main concern at the board meeting of 18 September 2009 was to satisfy herself, as a director of Wambo, that the company's financial position was such as to support a distribution of profit. She had concerns about solvency arising from a review of Wambo's primary source of finance, being the loan from PAML. She had reviewed the existing loan agreement and concluded that the loan was effectively at call. She was concerned to satisfy herself that it was properly classified as a non-current liability in Wambo's accounts since, if it were to be classified as a current liability, Wambo would be in "a difficult position". Ms de Santana saw the classification as critical to the question whether Wambo would be solvent if a dividend was paid on the basis previously adopted.

158 Ms de Santana asked at the board meeting whether Wambo had a formal letter of support from PAML 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 loan in the following 12 months. On that footing, she felt able to support payment of the proposed dividend on the B class shares. Ms de Santana's evidence was that she considered that the Wambo directors needed longer-term certainty about the funding position than could be provided by assurances from PAML's directors from time to time, particularly having regard to Wambo's potential for expansion.

159 On 25 September 2009 Wambo paid a dividend on the B class shares of $7,308,500, being 25% of the profits attributable to the second half of the financial year.

160 During October 2009 Mr Busch made contact with banks 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 per cent at the end of year 3 was mentioned.

161 At the same time, work was proceeding on a proposal to seek Sumiseki's concurrence in the proposal to vary the rights attaching to the B class shares. On 20 October 2009, Mr Young sent to Ms de Santana and Mr Wickstra a draft presentation intended to encourage or persuade Sumiseki to agree to changes to the B class share rights to overcome an accounting problem that Peabody faced in the United States. The variation of rights proposal was described as "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". There was reference to the fact that "[I]nitial investigations have indicated that external debt raising is not possible, forcing an ever increasing reliance on Wambo's majority shareholder (Peabody)." A section of the proposal is entitled "Summary of Class B Shareholding Changes" set 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 at 25% of profits	Dividend entitlement calculated at 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 activities	Payment of A$25m to Class B shareholders upon cessation of mining activities
No participation winding up of the Company	No participation in winding up of the Company "

162 With the idea of external funding having borne no fruit, attention turned to revision of the terms of the loan agreement between Wambo and PAML. On 21 October 2009, Mr Busch wrote to Mr Young setting out "indicative terms" of a three year loan. These included what were described as "typical covenants on a term-loan" as follows:

"- EBITDA to interest coverage 4x (i.e. EBITDA no less than 4x)

- Debt to capital of 30 per cent

- Debt to EBITDA of 3x (i.e. Debt no greater than 3x EBITDA)"

163 It was noted that Wambo was already "over the limit" in terms of such ratios and that that "presents a problem".

164 Later on the same day, Mr Young sent an email to Ms 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."

165 Mr Young later raised with Mr Busch the question whether typical covenants for a term loan would restrict dividend payments. Mr Busch's response was:

"No more than 50% of NPAT to be paid to shareholders."

166 On 18 December 2009, Mr Young sent to Mr Walter Hawkins Jr (Senior Vice-President of Finance of Peabody in the United States), Ms de Santana, Mr Busch and others a "final draft" of a proposed new loan agreement between Wambo and PAML 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."

167 The draft contemplated a loan of $150 million for a period of two years, or such other period as was agreed in writing between the parties. There were no covenants of the kind outlined by Mr Busch in response to the inquiries made of him by Mr Young. There was thus no restriction on the payment of dividends and no financial ratios were imposed on the borrower. Mr Hawkins responded by email dated 22 December 2009:

"This looks fine from my perspective. Please proceed."

168 On 23 December 2009, Mr Busch emailed Mr Hawkins a "final version" of the proposed loan agreement, with copies to Ms de Santana and others. Mr Busch said in his email:

"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."

169 The document had provision for Mr Hawkins and Ms de Santana to sign as directors of PAML. Ms de Santano was a director of PAML but Mr Hawkins was not.

170 On 14 January 2010 Ms de Santana emailed Mr Hawkins (with copies to 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)."

171 Ms de Santana gave evidence that the covenants she had it in mind to insert included covenants limiting distributions to shareholders. She said that she recalled a conversation with Mr Hawkins, following the email of 14 January 2010, referring to the need for the intercompany loan to be on arms-length terms such as would be found in an external loan arrangement; and that, to that end, it was appropriate to include covenants and specific repayments. She said that, following the conversation, she discussed with Mr Busch and Mr Young a renewal of discussions with external lenders to obtain indicative loan terms that would provide a benchmark for the proposed Wambo-PAML agreement. She said that she understood that it was unlikely that Wambo could obtain the financing it needed 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.

172 On 31 January 2010 Ms de Santana emailed Mr Young and Mr 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."

173 Indicative proposals were received from ANZ and NAB during February 2010. These referred to certain loan covenants. The ANZ document envisaged a dividend payment restriction under which dividends were limited to 25% of the previous year's net profit after tax. The NAB document was cast in more general terms that did not refer explicitly to any dividend restriction.

174 These bank documents resulted in the preparation of a "discussion term sheet" dated 1 March 2010 setting out revised loan terms proposed to apply between Wambo and PAML. The revised terms included a series of financial covenants requiring Wambo to comply with specified ratios - specifically, debt service cover ratio, interest cover ratio, gearing ratio, profit life cover ratio and loan cover ratio; plus "Other financial covenants to be discussed". There was still no reference to a covenant restricting dividend payments.

175 Further discussions 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.

176 On 27 March 2010, the board of Wambo met and approved the execution by Wambo, as borrower, of a new loan agreement with PAML as lender. Ms de Santana and Mr Hedges signed as directors of Wambo. The agreement provided for Wambo a term loan facility for an initial principal amount equal to the amount owing under existing arrangements on 31 March 2010 (including interest) and a revolving credit facility of $60 million. The due date for repayment was 29 March 2013.

177 Clause 8.1 of the loan agreement was 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 40per cent; and

(c) the amount of the Distribution does not exceed 50per cent of the Consolidated Cashflow."

178 Clause 9 of the loan agreement set out "Events of Default" which included the breach by Wambo of any non-monetary obligation under the agreement.

179 On 30 March 2010, the day after the new loan agreement was entered into, the directors of Wambo resolved that no dividend be paid for the six months to 31 December 2009. That decision was notified to Sumiseki on 31 March 2010. Among the stated reasons for the decision was that the debt service cover ratio covenant under clause 8.1(b)(i) of the loan agreement was not satisfied. The position was the same for the six months period ended 30 June 2010 which accounted for a consolidated net profit after tax was $39.442 million. Notification to Sumiseki of the decision that no dividend be paid again referred to non-satisfaction of the debt service cover ratio covenant in clause 8.1(b)(i).

180 For the six month period ended 31 December 2010, the consolidated net profit after tax of Wambo was $44.197 million. On 30 March 2011, the directors of Wambo resolved that an amount of $25 million was available for dividend and that dividends of 75 per cent and 25 percent of this amount ($18.750 million and $6.250 million) be paid on the ordinary and the B class shares respectively. The decision was notified to Sumiseki on 31 March 2011 and payment was duly made.

181 For each of the next two six month periods (ended 30 June 2011 and 31 December 2011), Wambo's had a consolidated net profit after tax ($25.666 million in one case and $9.396 in the other). The directors of Wambo resolved that no dividend be paid for either period and, in so notifying Sumiseki, referred to non-satisfaction of the debt service cover ratio in clause 8.1(b)(i) of the loan agreement.

Oppression - submissions and decision at trial

182 Sumiseki argued at trial that:

(a) Wambo's failure and refusal (at the instigation or with the concurrence of PAML) to pay dividends in accordance with a common expectation of the parties; and

(b) the making of the March 2010 loan agreement

amounted to commercial unfairness satisfying one of the criteria in s 232(d) and (e) of the Corporations Act.

183 The primary judge said that the "essential criterion" for the operation of s 232 is "commercial unfairness" assessed objectively in the eyes of a commercial bystander. He referred to the question whether the conduct is so unfair that reasonable directors would have thought it to be unfair. He continued:

"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."

184 Reference was made, in that context, to Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104; 84 ACSR 121 at [176]; HNA Irish Nominees Ltd v Kinghorn (No 2) [2012] FCA 228; 88 ACSR 427 at [502]-[503]; Re Cumberland Holdings Ltd (1976) 1 ACLR 361 and Jenkins v Enterprise Gold Mines NL (1992) 6 ACSR 539 at 552.

185 His Honour described Sumiseki's s 232 claim as "founded on the existence of a legitimate expectation of receiving the B Class dividends". Sumiseki, he said, did not seek to impeach the loan agreement. Rather, it relied on the making of the loan agreement by Wambo, arguing that that conduct of Wambo's affairs was oppressive to, unfairly prejudicial to, or unfairly discriminatory against Sumiseki.

186 The primary judge then dealt with the contention of Wambo and PAML that neither the directors' determination not to pay dividends nor the entry into of the loan agreement was oppressive because Wambo (and PAML) had legitimate commercial reasons for both. Those reasons centred on Wambo's other financial needs and constraints including upon capital expenditure. Furthermore, it was submitted, Wambo was unable to obtain suitable financing externally and care had been taken to ensure that the terms of the loan agreement were arms length terms. PAML, it was submitted, could not have been expected to provide funding on an unsecured basis without the protections a prudent lender would require.

187 Key findings were then stated: that, from late 2008 PAML and, under its stewardship, Wambo had embarked on a course of conduct which culminated in their taking the position that the B class dividend should not be paid; that, from about 18 September 2009, "a primary goal" of Wambo and PAML was "to thwart the payment of the B Class dividend, contrary to the legitimate expectations of Sumiseki"; and that both the goal itself and a significant part of the means by which Wambo and PAML sought to achieve it (that is, by committing Wambo to the loan agreement "incorporating burdensome covenants not in its interests") "smack of commercial unfairness".

188 The judge referred to the legal advice obtained in March 2009 on the question whether the constitution gave the directors a discretion not to pay the B class dividend. He noted that the advisers were given a copy of the constitution but no facts about the origin of Sumiseki's shareholding.

189 The primary judge next traced events in the period during which the proposal for revision of the B class share rights eventually put to Sumiseki in October 2009 was in the course of formulation by Wambo and PAML. That proposal, as put to Sumiseki, referred to the apparent impossibility of Wambo's obtaining external financing and the view, based on the legal advice, that payment of the B class dividends was discretionary; also, that if profits of a given period were not paid out, the deficiency would not be made good in a later period.

190 Ms de Santana's evidence about the presentation to Sumiseki of the proposed B class reformulation to Sumiseki was referred to by the primary judge in the following terms:

"Under 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."

191 His Honour then evaluated the process by which the loan agreement was developed. The final draft of a proposed agreement sent by Mr Young to Mr Hawkins on 18 December 2009 was, his Honour said, "in simple terms" with "no burdensome covenants". Mr Young said it needed to be signed before 31 December 2009. Mr Hawkins' response of 22 December 2009 was that the agreement "looked fine" to him, but, for reasons which the judge considered unexplained, the agreement was not signed.

192 Ms de Santana then took the initiative. On 14 January 2010, she wrote to Mr Hawkins that she wanted to insert some covenants which, the judge found, "included covenants which had not previously been insisted upon by Peabody and were plainly not in Wambo's interests". Part of Mr Hawkins' cross-examination was then quoted as follows:

"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."

193 The primary judge regarded Ms de Santana as an unsatisfactory witness. He did not accept her evidence. His reasons were as follows:

"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.

Her 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.' "

194 The judge noted that Ms de Santana, in contrast to Mr Hawkins (whose evidence he accepted), denied that the sole purpose of the covenants was to inhibit the payment of dividends to Sumiseki. Her evidence was that she thought that, in negotiating the loan, she was acting in the interests of Wambo's shareholders as a whole and that she did not think that she was preferring the interests of PAML as the holder of ordinary shares over those of the B class shareholder. His Honour found, however, that "a prime motivation" of Ms 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".

195 The judge found that Peabody had supported Wambo financially for years without any controversy and that there was no suggestion that Peabody would have withdrawn support. When the directors of Wambo came to decide that no dividends should be paid for the six months ended 31 December 2009, one of their purported reasons was that there would be breach of one of the covenants in the loan agreement. They also relied on this with respect to the six month periods ended 30 June 2010 and 31 December 2011.

196 The thrust of the response of Wambo and PAML to the claim of oppressive conduct within Wambo was that Wambo could not have obtained external finance on terms more beneficial than those reflected in the loan agreement and that PAML had no obligation (nor could it reasonably be expected) to provide funding to Wambo on better terms than could be obtained externally. Wambo and PAML submitted that the decisions of the directors to commit Wambo to the loan agreement and not to pay B class dividends on the particular occasions were made in good faith and reasonably. They noted that Sumiseki did not seek to impeach those decisions by having them set aside.

197 In support of the proposition that Wambo could not have obtained external financing on terms more favourable than those in the Loan, Wambo and PAML relied on the evidence of investigations with the various banks. The judge found this evidence "unconvincing". He formed an opinion that the investigations were "perfunctory" and had been undertaken "for the purpose of justifying entry into of the Loan rather than for the purpose of obtaining external finance". In the end, however, the judge accepted that Wambo could not have obtained external finance.

198 The primary judge then said (at [244] - [247]:

"PAML 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.

PAML 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.

It 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.

Neither 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."

199 Conclusions were stated as follows (at [249] - [251]:

"In 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.

I 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'.

There is no need for, or scope to make, any consequential order for the payment of dividends as this flows from my other findings."

Oppression - submissions in this Court

200 Wambo and PAML take issue with the primary judge's resort to Sumiseki's "legitimate expectation" of receiving B class dividends according to its view of the intended operation of article 2.1B. They point to the observation of Campbell JA in Tomanovic v Global Mortgage Equity Corporation Pty Ltd (above) at [171] that use of the language of "legitimate expectation" might suggest that it is the subjective expectations of a party that are of importance to the oppression remedy. As Basten JA noted in Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95, the real question is whether, in the words of Young J in Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704, "objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair".

201 The danger that reference to "legitimate expectation" may introduce an impermissible element of subjectivity is recognised in decided cases. Lord Hoffmann, who had referred to "legitimate expectation" in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 19, later said (in O'Neill v Phillips [1999] 1 WLR 1092 at 1102) that it was probably a mistake to do so when the real inquiry is whether equitable principle makes it unfair for a party to exercise legal rights. PAML and Wambo correctly submit that denial of "legitimate expectation", of itself, does not attract the statutory jurisdiction and that an essential finding is that the impugned conduct was objectively oppressive, unfairly prejudicial or unfairly discriminatory in the way the legislation contemplates.

202 From that base, Wambo and PAML submit that the primary judge abandoned objective analysis in favour of exploration of, and reliance on, findings as to the parties' subjective intentions and motivations. They point, in particular, to the finding that an intention and motivation of Ms de Santana (and, through her, Wambo and PAML) was to "thwart" the payment of B class dividends contrary to the legitimate expectation of Sumiseki. Wambo and PAML say that any such intention and motivation was not relevant to the inquiry to be undertaken by the judge and, even if it were relevant, the finding was not supported by evidence.

203 Sumiseki's response is that the primary judge recognised that the statutory jurisdiction is exercisable in the case of conduct that, on an objective assessment, entails commercial unfairness. They also say that his Honour correctly applied that principle and that, to the extent that attention was given to any expectation of Sumiseki, this was not inconsistent with an objective inquiry.

204 The central proposition advanced by Sumiseki is that, on the evidence, the execution of the new loan agreement on 29 March 2010 and the subsequent course of conduct within Wambo concerning B class dividends involved objective unfairness and a visible departure from standards of fair dealing warranting the conclusion that the statutory jurisdiction was exercisable.

Oppression - assessment

205 The characterisation thus advanced by Sumiseki is, in my opinion, both open and justified. The evidence shows that, in mid-2009, attention was given to the terms of the loan agreement between Wambo and PAML because of a concern that the loan, in its then current form, might have to be reflected as a financial liability in the group's consolidated accounts. There was an allied concern about the attitude of the Australian Taxation Office. The apprehensions arose mainly because of the absence of a fixed loan term. On 1 July 2009, Mr Mawby (Peabody's head of tax in Australia) suggested three modifications of the loan arrangement to address this concern: inclusion of a fixed term of up to ten years, addition of a provision permitting capitalisation of interest and the adoption of a floating interest rate. He said nothing about dividend payment restrictions, from which one infers that that matter was irrelevant to the concerns that caused the loan terms to be examined.

206 After her appointment to Australia in August 2009, Ms de Santana became concerned about the loan arrangement for a different reason. The on-demand nature of the loan raised in her mind a question about the appropriateness of the classification of Wambo's indebtedness as a non-current liability in its accounts, a matter that had potentially serious implications for Wambo's solvency. The concern Ms de Santana developed in the latter part of 2009 was, to some extent, mitigated by a view or expectation that PAML would not call the loan in the following 12 months. But Ms de Santana was of the view that the Wambo directors needed longer-term certainty than could be provided by ad hoc assurances of the kind given by PAML.

207 It was at that point that investigation of external funding of Wambo was undertaken and "indicative terms" of a three-year loan by an outside financier were identified. These involved financial ratios that Wambo's then existing financial position did not satisfy. The indicative arms length terms did not involve any covenants against the payment of dividends.

208 A draft agreement that neither restricted dividend payments by Wambo nor imposed financial ratios had been prepared in Australia and approved by certain Peabody personnel by the end of December 2009. These included Mr Hawkins, the officer who, according to Ms de Santana, agreed some time after 14 January 2010 that the loan should be on arms length terms. But no agreement in terms of that draft (approved by Mr Hawkins and others) was executed. In January 2010, Ms de Santana returned to the matter of financial covenants. Proposed loan terms were revised after receipt of indicative proposals from ANZ and NAB during February 2010. That revision caused the draft already approved by certain persons to be expanded to include financial covenants. Significantly, however, none of those covenants restricted dividend payments.

209 The final form of agreement submitted to Wambo's board on 27 March 2010 included restrictions on the payment of dividends in the form of clause 8.1 (see [177] above). There was, on the evidence, no articulated reason why PAML required those covenants. It had, for many years, been content with a loan agreement that did not contain them; and the concerns that had caused the loan terms to be re-examined (that is, the taxation issue addressed in mid-2009 and the balance sheet classification issue relevant to Wambo's solvency addressed after August 2009) in no way involved or turned upon the absence of contractual controls on the payment of dividends. Nor was there any articulated reason why Wambo should willingly accept the covenants restricting the payment of dividends. Yet the agreement containing the covenants was approved by the Wambo board on 27 March 2010 and executed by Wambo on 29 March 2010. Then, on the very next day, the board met again and resolved that no dividend be paid for the six months to 31 December 2009 because, among other reasons, the restriction on the payment of dividends adopted by Wambo some 24 hours earlier would be infringed if a dividend were paid.

210 Ms de Santana accepted in cross-examination that it was her idea that the revised loan agreement should include covenants restricting the payment of dividends by Wambo. Ms de Santana also accepted that she had played a leading role in the events that caused Wambo to accept, as against PAML, contractual restraints destructive of its ability to pay B class dividends on the basis that had, until at least late 2008, been uncontroversial.

211 Of particular significance is the fact that acceptance of the dividend restriction by Wambo followed an unsuccessful attempt by PAML to persuade Sumiseki to agree to a revised dividend regime with respect to B class shares. On 29 October 2009, Wambo, through Ms de Santana and others, put to Sumiseki the proposal outlined in the draft presentation of 20 October 2009 referred to at [161] above. Ms de Santana confirmed in cross-examination that Sumiseki simply rejected the idea that the B class dividend rights should be varied. She also confirmed that the summary, in the draft of 20 October 2009, of existing B class dividend rights (to the effect that there was a discretion in the Wambo board to pay or withhold) had been formulated with a view to persuading Sumiseki to agree to change. It is relevant to note the following part of Ms de Santana's cross-examination (the reference to "the left hand column on 2366" is a reference to the left hand column at [161] above):

"Q. The reason you set out what appears in the left-hand column on 2366 was to persuade my client to accede to changes to the class B share rights to overcome Peabody's accounting problem in the US. That's correct, isn't it?

A. Yes.

Q. You were saying to them we're in a position as a matter of commerce to see that you don't get profits under the class B shares because we have a discretion to exercise, and if we exercise it unfavourably to a distribution you will never see that profit again. That's what you were saying, weren't you?

A. That's as is written.

Q. That's what you were intending to put to my client, correct, when you approved this document. That's correct, isn't it?

A. That's what's on the document, yes.

Q. Would you address my question and answer it. That's what you were intending as a senior executive of Peabody to put to my client; correct?

A. Yes.

Q. And also as a director of Wambo; correct?

A. Yes."

212 The sequence of events disclosed by the evidence shows that, in the second half of 2009, two objective reasons for possible variation of the loan agreement between Wambo and PAML were identified, that neither of those reasons had anything to do with the absence from the agreement of restriction on the payment of dividends by Wambo and that resolution of the two identified concerns did not involve or envisage the creation of any such restriction. In or about late October 2009, Peabody attempted to persuade Sumiseki to agree to a variation of the dividend rights attached to the B class shares. Sumiseki did not agree. Thereafter, Ms de Santana (embracing the "better view" expressed by Freehills after examining the bare words of the constitution) promoted an interpretation of article 2B.1 that effectively put B class dividends at the mercy of board decisions and pursued the idea that the revised loan agreement should include covenants restricting the payment of dividends by Wambo. It is not clear precisely when she began to do so. The "discussion term sheet" dated 1 March 2010 (see [174] above) envisaged various ratios and restrictions, but none limiting the payment of dividends. A Wambo document entitled "Analysis of financing options" and also dated 1 March 2010 concluded that "the only viable financing option available to Wambo in the short term" was to request PAML to do one of two things: "provide a letter of comfort supporting Wambo's financial position for the next 12 months"; or "renegotiate the loan to remove the 'at call' nature of the loan". There followed a comparison of the terms of the existing PAML loan and the proposals obtained from ANZ and NAB. Under a heading "Dividend Restrictions" it was recorded that the existing loan agreement imposed no such restrictions and that ANZ proposed a restriction of "25% of Net profits (and compliance with other covenants)". "N/A" appeared in respect of NAB and there was a concluding "comment":

"No dividends assumed in our financial projections, ANZ loan would allow Wambo to pay B Class dividends."

213 A provision restricting dividends to 25 per cent of net profits would have accommodated payment of the B class dividend on the basis that had been adopted over several years.

214 A document headed "Consideration of funding options" dated 26 March 2010 was prepared for the Wambo board. It recorded that Wambo had requested PAML to adopt one of the two courses identified in the document of 1 March 2010, that is, provide a letter of comfort supporting Wambo's financial position for the next 12 months or renegotiate the loan "to remove the 'at call' nature of the loan". There followed a statement that PAML had "provided a letter and term sheet proposing new loan terms including" several then set out. Among these were "Cash distribution covenants" (debt service cover ratio, interest cover ratio and gearing ratio), followed by "Other restrictions":

"* All three covenants must be in compliance before cash can be distributed outside of Wambo.

* When all three ratios are in compliance, 50% of CFADS [cash flow available for debt service] will be available for dividend distribution."

215 In an email dated 25 March 2010 to Mr Busch, Teresa Wiseman asked for "PAML's rationale behind the linkage of the covenants to dividend distributions". Mr Busch replied on 26 March 2010:

"The Undertakings set-out in clause 8 of the Unsecured Loan Facility Agreement are reasonable, typical, and provide a level of comfort to the lender. The covenants are modelled after term sheets received from independent 3rd parties and are typical of what is found in a financing of this nature. Unlike a typical financing however where these covenants are used for companies with the loan, and a breach would mean default by the borrower, in the Unsecured Facility Agreement they merely restrict the usage of cash. The covenants ensure that until Wambo has reached a level of financial stability, cash is retained and is only used to repay debt and facilitate the day-to-day operations."

216 Ms Wiseman was the author of a Wambo board paper dated 26 March 2010. The paper explained briefly the need to eliminate the "at call" nature of the PAML loan. Reference was made to loan proposals received from ANZ and NAB and reasons why they were not acceptable from Wambo's perspective. There was then an outline of the new terms proposed by PAML, including:

"(Significantly) a breach of financial covenants by Wambo under the PAML agreement results only in restrictions over dividend payments to shareholders (in their capacity as a shareholder) as opposed to default and accelerated repayment."

217 The Wambo board met on Saturday 27 March 2010. The directors present were Ms de Santana and Mr Hedges. Handwritten notes made by Mr Hedges were in evidence. These show that there was fairly detailed discussion of the differences between the terms proposed by ANZ and those of the agreement proposed to be entered into with PAML. It was noted that, under the ANZ terms, breach of financial covenants would mean that "ANZ could put W into receivership", whereas under the PAML proposal cash flows were restricted to meeting of loan repayments and "once covts [sic] met can then make divd [sic] distributions". The terms proposed by PAML were thus presented as less onerous to Wambo than those proposed by ANZ. It was resolved by the Wambo board that the PAML loan agreement "is approved subject to resolution of outstanding issues". Ms de Santana explained in an affidavit that these involved confirmation that there was no requirement to offer the funding opportunity to the B class shareholder and "a number of administrative details".

218 The formulation of the restriction on the payment of dividends was something that arose only after the failure of efforts to persuade Sumiseki to agree to a modification of the B class dividend right. The restriction, as ultimately included in the loan agreement, was proposed by PAML after Ms de Santana had embraced the idea that B class dividends were essentially discretionary and had indicated in January 2010 that she "wanted to include some covenants" in the loan agreement. No rationale for that desire consistent with the interests of Wambo suggests itself: from Wambo's perspective, the fewer covenants there were, the better its position would be; and covenants, as such, had nothing to do with the two matters of concern that had prompted an examination of the loan terms. Some reason unrelated to Wambo's welfare was behind the stated desire. Ultimately, the expressed reason was, in effect, that the loan should appear to be an arms length loan or, at least, to have features of an arms length loan - although why there should be any need for arms length terms does not appear to be explained. The terms proposed by ANZ were used as a yardstick - but, at the same time, it was made clear that, as regards financial covenants, PAML was prepared to adopt a position more benign to Wambo that that indicated by ANZ. Whereas breach of the covenants in a hypothetical ANZ agreement would create grounds for the calling up and enforcement of the loan, the consequence under the PAML agreement as eventually executed was merely a restraint on the payment of dividends. Thus, resort was had to arms length terms proposed by ANZ to justify a provision that did not reflect those arms length terms and was more benign to the borrower. Furthermore, the ink on the loan agreement containing this provision was scarcely dry when the board of Wambo determined that no B class dividend should be paid and gave two reasons for that decision, one being that payment would breach the dividend restriction provision.

219 It is relevant to refer to the structure of the Wambo board. As at 27 March 2010, Ms de Santana and Mr Hedges were the only directors of Wambo. Both were present at the meeting. Ms de Santana had been appointed to the board on 17 September 2009; Mr Hedges on 24 March 2010, three days before the meeting. Ms de Santana was a director of PAML from 5 October 2009 to 24 March 2010, that is, for all but the last few days of the period commencing in early 2010 during which the proposal to include dividend restrictions was developed and implemented. Mr Hedges' handwritten notes of the meeting include the following:

"Directors' disclosures - no personal interest in proceedings. Noted we are all PEAL employees."

220 The situation was one in which the two directors of Wambo who deliberated upon the loan agreement proposal were employees of PEA (the Australian holding company of the lender, PAML) and one of those directors had been a director of the lender until three days before the meeting and was the initiator of the plan to subject Wambo to dividend restriction provisions. While a board structure of that kind may be relatively commonplace within a wholly-owned group (where, in broad terms, the interests of the subsidiary and those of the parent may be expected to coincide, at least while insolvency is not foreseeable), it does emphasise that no mechanism was at work within the Peabody group to ensure that the separate interests of Wambo, a company with a non-Peabody shareholder, were considered or assessed by anyone capable of bringing to bear judgment attuned solely to Wambo's welfare, unclouded by allegiance to PAML and the Peabody group more widely.

221 Ms de Santana's failure to appreciate and deal with the situation of conflict in which she was placed was made plain by her own evidence. In answers to questions put to her by the primary judge, Ms de Santana acknowledged that the loan agreement covenants were to protect PAML as lender and that, in causing them to be inserted into the agreement, she was "looking at the interests of PAML". When asked whether she had someone else look after the interests of Wambo or was acting on behalf of Wambo as well, she said:

"I was acting on behalf of both."

222 An objective appraisal of the circumstances as a whole leads comfortably to the conclusion that the contractual provision restricting payment of dividends by Wambo was not born of any compelling commercial requirement of Wambo or of PAML or of any rational desire of either party to adopt arms length terms for the sake of adopting arms length terms. It was, rather, a calculated reaction to the lack of success in attempting to persuade Sumiseki to agree to modification of the B class dividend rights to its disadvantage. The revised loan agreement was used as a means of forcing (or attempting to force) on Sumiseki, as a matter of fact and commercial reality, a position with respect to enjoyment of its legal rights to which it had declined to agree and which it could not legitimately be forced to accept. Mr Hawkins accepted as much in cross-examination (see [192] above).

223 The revised loan agreement was deployed in that way just three days after Wambo's board resolved to commit their company to it. Non-satisfaction of the financial covenants in clause 8.1 was one of two expressed reasons for the board's decision on 30 March 2010 that there should be no dividend on the B class shares for the period to 31 December 2009. The same rationale was expressed for like decisions at the 27 September 2010 board meeting (in respect of the period to 30 June 2010) and the 27 March 2012 board meeting (in respect of the period to 31 December 2011).

224 It may be accepted that the primary judge, in his assessment of the relevant aspect of the conduct of Wambo's affairs, referred to a "thwarting" of Sumiseki's "legitimate expectation" to have B class dividends paid according to the course that had been established over several years - and which, on my assessment, represented the legal entitlement of Sumiseki under Wambo's constitution. But I do not regard his Honour as having resorted to any impermissible analysis according to subjective factors. The Court of Appeal of Western Australia (Steytler P, McLure and Buss JJA), in Smolarek v Liwszyc [2006] WASCA 50; 32 WAR 101, noted, at [77], that, notwithstanding the criticism of the expression "legitimate expectation" by Lord Hoffman already noticed, that expression has been used in this kind of context to describe "an understanding or expectation of a member which, because of equitable considerations, can make it unfair for a party to exercise legal rights". Lord Hoffmann said that the real question is as to the "correlative right" that may be sourced in the relationship between company members making it unfair, on equitable principles, for a majority to exercise a power available to them to the prejudice of another member.

225 Brennan J observed in Wayde v New South Wales Rugby League Ltd [1985] HCA 68; 180 CLR 459 (at 472) that conduct will be oppressive if that conduct was unfair according to ordinary standards of reasonableness and fair dealing; and oppression, at a minimum, imports unfairness. In Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55, the Full Federal Court (Siopis, Rares and Davies JJ) put the matter this way (at [9]):

"The test of unfairness requires an objective assessment of the conduct in question with regard to the particular context in which the conduct occurs. The question is whether objectively in the eyes of the commercial bystander there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair. As the test is objective, whether or not the conduct is oppressive will not depend upon the motives for what was done. It is the effect of the acts that is material."

226 In this case, objectively fair behaviour within Wambo entailed adherence to the established course of conduct with respect to B class dividends. Sumiseki had a right that made it unfair on equitable principles for Wambo to depart from that course and, in particular, to resort to the proposal for revision of the loan agreement put forward by PAML as a means of doing so. It is true that the loan agreement covenants did not play a direct part in two of the five relevant decisions concerning B class dividends. But the adoption of the contractual constraint was a means of unfairly bolstering the asserted ability of Wambo to deny dividends. The judge was right to regard Wambo's departure as within the composite description in s 232 of the Corporations Act ("oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member").

Oppression - remedy

227 The judge's conclusion on the s 232 question, coupled with his view about the correct construction of article 2.1B, caused him to say (at [250] of the first judgment):

"I 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".

228 The declaration in fact made is set out at [29] above. The primary judge also made an order as follows:

"3. Orders that Article 2.1B be modified as and from 29 June 2001 by:

(a) inserting after the word 'contrary' in the first line of Article 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';

(b) deleting the words 'the profit of the Company available for dividend purposes', wherever appearing in Article 2.1B, and replacing them in each instance with the words 'the maximum amount of the profit of the Company which is capable of lawfully being distributed as a dividend'."

229 Wambo and PAML say that there was no power to make this order, even if the conclusions concerning s 232 are correct. They point to s 233(1) which says that the court can "make any order under this section that it considers appropriate in relation to the company", including an order "that the company's existing constitution be modified or repealed" (s 233(1)(b)). They then point to s 137 which says that if an existing constitution is modified or repealed, the modification or repeal takes effect:

"(b) if it is the result of a Court order made under section 233:

(ii) on the date on which the order is made if it specifies no later date; or

(iii) on a date specified by the order."

230 It was submitted that, because of s 137(b) and the statement in the order that the constitution is modified "as and from 29 June 2001", the modification purportedly effected by the order was in terms not authorised by the legislation and was therefore ineffective.

231 I do not accept that submission. Section 137(b) does not control or qualify the power conferred on the court by s 233(1)(c). It recognises that an order under s 233(1)(c) may specify a date on which the relevant modification is to take effect. It also recognises that an order may, in terms, specify any date, whether before, after or coinciding with the date of the making of the order. If no date is specified or the specified date is not later than the date of the making of the order, s 137(b)(1) causes the modification to take effect on the date on which the order is made. Only if there is a specified date and that date is later than the date of the making of the order does s 137(b)(ii) cause the modification to take effect on the specified date.

232 In the present case, the order specified 29 June 2001 as the date on which the modification was to have effect. It could have (but did not) modify the constitution by including a provision that operated immediately and prospectively and stated what the dividend right attaching to the B class shares was, and was to be taken always to have been. Because that expedient was not adopted and the order specified a past date "as and from" which the modification of the constitution was to be effective, s 137(b)(i) caused the modification to have effect from the date on which the order was made, thereby depriving the order of the retrospective operation envisaged by its express terms.

233 The fact that one provision of the statute caused an order made by a court under another provision of the same statute to have an effect not wholly coinciding with the express terms of the order does not call into question the validity or regularity of the order. There is no issue of statutory contravention or non-compliance and no issue of want of power. The statute, read as a whole, merely dictates that the consequences of the making of the order are, in one respect, different from those that the words of the order contemplate.

234 Since the specification of the past date has no force there is, in substance, no need to interfere with it. It is, however, undesirable that an order of the court should appear, on its face, to have some operation and effect at odds with the operation and effect it is afforded by law. For the sake of good order and clarity, therefore, the order should be varied by omitting the words "as and from 29 June 2001".

Sumiseki's rectification claims

235 Sumiseki claimed an order for rectification of Wambo's constitution (or, in the alternative, the part of the restructure agreement setting out the provisions regarding B class shares to be inserted into the constitution) to make it clear that relevant profits for the purposes of article 2.1B are profits undiminished by decisions of the directors. The primary judge held that rectification cannot be ordered in respect of a company's constitution. He also decided, however, that Sumiseki had made out a case for rectification of the restructure agreement but declined to make an order. This was apparently because Sumiseki's position was regarded as sufficiently secured by the declaration as to the correct construction of article 2.1B and the order in fact made under s 233(1)(b) of the Corporations Act.

236 On the view I take, the declaration as to the true meaning of article 2.1B should stand, as should the order s 233(1)(b) for modification of the constitution, although with the ineffective specification of an operative date removed. That being so, there is a question whether there is any utility in addressing the rectification claims.

237 In the light of the matters I have mentioned, any order for rectification of Wambo's constitution or the restructure agreement would be a measure ex abundanti cautela of the kind described by Campbell JA in Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603 at [539]:

"Even though one can arrive by a process of construction at a meaning for cl 4.4(a), I would still make an order rectifying cl 4.4(a) to make that meaning clear on the face of the document. Even if a mistake in the expression of a document is able to be read in the correct (that is, the intended) sense as a matter of construction, nevertheless rectification can be granted ex abundanti cautela: Standard Portland Cement Co Pty Ltd v Good [1982] 2 NSWLR 668 at 672-673 per Lord Templeman; Sipad Holding ddpo v Popovic (1995) 61 FCR 205 at 213 per Lehane J; L E Stewart Investments Pty Ltd v F C & M Legge Building Contractors & Developers [2003] NSWSC 193; (2003) 11 BPR 21,053; [2004] NSW Conv R 56-070 at [25] per Barrett J."

238 Both Giles JA (at [48]) and Allsop P agreed with Campbell JA on that aspect. Allsop P said (at [27]:

"[A]s Campbell JA points out, an order for rectification can bemade out of an abundance of caution. Given the time and money the parties have thus far spent on this dispute, I agree that the order as proposed by Campbell JA should be made in the interests of good order, clarity and finality."

239 Like considerations apply here. The question is therefore whether confirmatory rectification of the provision defining the B class dividend right should be effected in the interests of good order, clarity and finality. That species of rectification, like rectification as more generally encountered, is based on the common intention of the relevant parties. Whereas in other cases the question is whether the shared intention is properly embodied in the instrument, the question in a case of the present kind is whether the common intention found by a process of construction to exist should be reflected in reformed or improved wording.

Rectification of a company's constitution

240 I proceed therefore to consider the question whether a court of equity may order rectification of a company's constitution. Wambo and PAML relied on long-standing authority to the effect that it may not. Sumiseki says that developments in statute law mean that that authority is no longer applicable and that the judge should have proceeded on the footing that the equitable jurisdiction was available.

241 In Evans v Chapman [1902] WN 78, one of the seven signatories to articles of association lodged to obtain the incorporation of a company sued the other six and the company itself seeking an order rectifying those articles. It was held that the equitable jurisdiction was not available and that proper mode of rectification was by resort to the statutory power of alteration. Scott v Frank F Scott (London) Ltd [1940] Ch 794 was also a case in which rectification was sought in relation to articles signed before and registered at the time of incorporation. The Court of Appeal held that there was no jurisdiction to order rectification of that instrument. This was because of the statutory force given to its provisions following registration - a force that bound not only the signatories but also the company created upon and by virtue of the registration of the constitutive documents.

242 The same approach was taken in this country in Santos Ltd v Pettingell (1979) 4 ACLR 110 and Simon v HPM Industries Pty Ltd (1989) 15 ACLR 427. In the latter case, Hodgson J observed (at 436-437) that, while the original articles of association of a company did, in one sense, give effect to private agreements or intentions of the corporators, registration of the articles was required, "so that persons dealing with the company can ascertain what are the provisions regulating the affairs of the company". In addition, the statutory contract created by companies legislation was a contract binding the company which was not a party to the original agreements or intentions. In those circumstances, it seemed to Hodgson J that, as a matter of principle, a distinction could be drawn between articles of association and the kinds of documents in relation to which the remedy of rectification is granted.

243 In Weinstock v Beck [2011] NSWCA 228 at [130], Handley AJA (Giles JA concurring), referring to Scott v Frank F Scott (London) Ltd, said simply: ". . . the court cannot rectify a company's articles of association." Similar statements may be found in other recent cases in both Australia and England: see, for example, Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (above) at [57] and McKillen v Misland (Cyprus) Investments Ltd [2011] EWHC 3466 (Ch). In the English case, David Richards J, after referring to the decision of the English Court of Appeal in Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693, said (at [62]):

"Articles of association have a special status as a 'statutory contract', adopted pursuant to the Companies Act, requiring public registration and capable of amendment by special resolution. By reason of these provisions, the court has no jurisdiction to order rectification of articles or to set them aside on grounds of misrepresentation."

244 The contractual force that a company's constitution has in Australia today derives from s 140(1) of the Corporations Act:

"A company's constitution (if any) and any replaceable rules that apply to the company have effect as a contract:

(a) between the company and each member; and

(b) between the company and each director and company secretary; and

(c) between a member and each other member;

under which each person agrees to observe and perform the constitution and rules so far as they apply to that person."

245 This form of words was first employed in s 78(1) of the Companies Act 1981 (Cth), as adopted by s 52 of the Companies and Securities Legislation (Miscellaneous Amendments) Act 1985 (Cth). Its effect was the subject of the following observations of McHugh and Gummow JJ in Bailey v Medical Defence Union Ltd [1995] HCA 28; 184 CLR 399 at 435-436:

"In so far as the memorandum and articles, pursuant to such legislative provision, constitute a contract between the company and its individual members or between the members inter se, the contract is of an unusual type. First, the members are deemed to have contracted on the basis that, since the articles, and in general the memorandum, can be altered by special resolution of the company, the terms of the contract are variable from time to time without agreement of both parties to that variation. Secondly, there is no jurisdiction in a court of equity to rectify the articles of association even if they do not accord with the concurrent intention of all the signatories thereof at the moment of signature; the articles may be amended only pursuant to statutory authority [87]. Thirdly, the direct enforcement by a member of rights under such a contract against the company may have to overcome obstacles placed in its path by the rule in Foss v Harbottle [(1843) 2 Hare 462; 67 ER 189]. Fourthly, as Salmond J pointed out in Shalfoon v Cheddar Valley Co-operative Dairy Co Ltd [[1924] NZLR 561 at 580], whilst a contract binds those who made it and their personal representatives, the articles in a company limited by shares bind the owners thereof for the time being and the obligations imposed by the deemed covenant are appurtenant to the shares and pass with ownership of them. Finally, the view has been taken, not without doubt, that, in the absence of some other statutory provision, the effect of the decision in Houldsworth v City of Glasgow Bank [(1880) 5 App Cas 317] is to preclude a member of a company limited by shares from suing the company for damages for breach of contract whilst still a member and without seeking rescission of the contract whereby the shares were obtained."

246 In submitting that changes to legislation and practice militate against continued acceptance of the approach indicated by earlier cases, Sumiseki points, in particular, to the following matters: first, a company may now come into existence without a constitution and adopt one subsequently; secondly, it is no longer necessary for the constitution of a proprietary company to be lodged or registered; thirdly, the terms of a company's constitution are today of reduced significance to outsiders, given the abolition of both the ultra vires doctrine and the notion that persons dealing with a company may be taken to have constructive notice of lodged documents; and, fourthly, s 1322(4)(b) of the Corporations Act provides a mechanism for effecting rectification of a constitution that has been registered.

247 It is true that legislation has changed since the leading cases denying the availability of rectification were decided. It is necessary to survey the statutory scheme that now prevails.

248 Since amendments introduced by the Company Law Review Act 1998 (Cth) took effect on 1 July 1998, there has been no requirement in the corporations legislation that a company have a constitution at formation or at any later time. Under s 119 of the Corporations Act, a company comes into existence as a body corporate at the beginning of the day on which it is registered. Registration of a company occurs under s 118(1)(b) and can be effected by Australian Securities and Investments Commission (ASIC) only if an application has been lodged under s 117. Such an application may be made by any person: s 117(1). It must identify each person who consents in writing to be a member or a director or a secretary: s 117(2)(c), (d), (e). If the company is to be a public company and "is to have a constitution on registration", a "copy of the constitution" (necessarily, a copy of the constitution that the company "is to have" at the future point of its registration) must be lodged with the application: s 117(3).

249 Under these provisions, there must be, in every case, lodgment of an application; there must be, in a particular type of case, lodgment of a copy of the proposed constitution of the company; and the only registration that occurs is registration of the company as a company. The application is not registered; nor is any constitution or copy of a proposed constitution registered.

250 Adoption of a constitution by a company is dealt with by s 136(1):

"A company adopts a constitution:

(a) on registration--if each person specified in the application for the company's registration as a person who consents to become a member agrees in writing to the terms of a constitution before the application is lodged; or

(b) after registration--if the company passes a special resolution adopting a constitution or a court order is made under section 233 that requires the company to adopt the constitution."

251 A company does not have a constitution unless and until s 136(1)(a) or s 136(1)(b) causes a constitution to be adopted. Adoption occurs only if a specified event or series of events has happened. Under s 136(1)(a), adoption occurs on registration of the company if each of several identified persons has, before lodgment of the application for registration of the company, agreed in writing to the terms of the constitution. A separate written assent of each such person is thus envisaged. There is no requirement that all such persons subscribe a single document. Under s 136(1)(b), adoption occurs if (and when), after registration, conduct amounting to the passing of a special resolution having particular content is engaged in by persons capable of passing such a resolution (or a court order of a particular kind is made). Where a public company adopts a constitution by special resolution, a copy of the resolution must be lodged with ASIC: s 136(5). There is no corresponding requirement in relation to a proprietary company.

252 The persons identified in the s 117 application as those who consent in writing to be members become the members of the company on its registration: s 231(a). Thereafter, the composition of the body of members changes according to the content of the register of members: s 231(b). It is in relation to the fluctuating body of members, along with the company itself and other persons particularly identified, that s 140(1) causes the constitution to have contractual effect.

253 The general provision concerning alteration of the constitution is s 136(2):

"The company may modify or repeal its constitution, or a provision of its constitution, by special resolution."

254 The reference to "the" company, rather than "a" company, is explained by the fact that s 136(1) sets out the alternative procedures by which a company may adopt a constitution and s 136(2) is concerned only with a company that has implemented one of those procedures. Under s 136(5), a copy of a special resolution altering the constitution of a public company (but not a proprietary company) must be lodged with ASIC.

255 The power of alteration is vested by s 136(2) in the company itself. The power may be exercised by whatever processes are sufficient under the Act to constitute the passing of a special resolution. In terms of the relevant s 9 definition, one of the essential characteristics of a special resolution is that it "has been passed by at least 75% of the votes cast by members entitled to vote on the resolution". The other essential characteristic (referred to in the s 9 definition and derived from s 249L(1)(c)) is that the notice of the meeting at which the resolution is passed "set out an intention to propose the special resolution and state the resolution". Both these requirements may, however, be bypassed where, pursuant to s 249A(2) or s 249B(1), every member or, in the case of a single-member company, the sole member signs a document signifying consent to the passing of the resolution.

256 Except where resort is had to s 249A(2) or s 249B(1), the process by which a constitution is adopted under s 136(1)(b) or an existing constitution is altered under s 136(2) does not consist of the signing of any document. Rather, the necessary conditions are satisfied if a meeting of members is duly convened, the notice of meeting meets certain requirements as to content and a particular majority of the votes cast by members favours adoption or alteration. If those conditions are satisfied, the constitution as adopted or altered in accordance with the resolution is binding in the way described in s 140(1) despite the opposition expressed by any members who actively voted against the resolution and the silence of members who voted neither for nor against. In all cases, including those dealt with under s 249A(2) and s 249B(1), the company's directors and secretaries are bound despite their entire lack of participation and opportunity to participate.

257 Only in two situations is it possible to view the content of the constitution as coinciding with a shared intention of all of the company's members for the time being: first, where the constitution was adopted in the way provided for in s 136(1)(a) and both that constitution and the composition of the company's membership have thereafter remained unchanged; and, second, where the constitution was adopted in the way provided for in s 136(1)(b), every member voted in favour of the adoption and both the constitution and the composition of the membership have thereafter remained unchanged. But even in those two cases, there is no basis for inferring that the other parties to the statutory contract - the company itself and its directors and secretaries - were ever parties to the shared intention of the whole of the members.

258 A court of equity may rectify an instrument that fails to record the true intention of the parties to it. It is by no means clear that a company's constitution is, for these purposes, an instrument. If it is, the parties to the instrument are, at any given time, the persons referred to in s 140(1) as they then exist: the company, each member, each director and each secretary. If rectification were sought at a particular time, the question would be as to the shared and common intention of all those persons. The fact that all the members, as constituted at some earlier time when a special resolution was unanimously adopted, had had a particular intention inconsistent with the terms of the resolution would be insufficient to warrant rectification. There would be no justification for regarding the intention of any subsequently admitted (and presently existing) member as corresponding with that of the totality of the members at the relevant past time; and the members' shared intention at that past time would indicate nothing about the intention of the directors and secretaries at any time. In Santos Ltd v Pettingell (above), Rath J made the important point that, where a provision of the constitution is adopted in accordance with an antecedent agreement, it affects also the members who were not parties to the agreement and may have had no knowledge of it upon acquiring their shares. In addition, there is no means of ensuring that subsequent acquirers of shares become aware of any rectified form of the constitution.

259 Against this background, I do not consider that any of the first, second and fourth matters on which Sumiseki relies (see [246] above) provides any basis for revision of the view that equity will not decree rectification of a company's constitution. The matters of lodgment and registration - dealt with differently under earlier legislation - are not relevant one way or the other to the jurisdiction to order rectification of instruments for mistake where the written words are contrary to the intention of the parties. Nor, to my mind, is it relevant that the ultra vires doctrine has been abolished, that outsiders may no longer be fixed with notice of lodged documents or that a company may now come into existence without a constitution and adopt one subsequently. These matters are not in any way concerned with the foundation for rectification of instruments, being disconformity between the written expression and the intention of the persons bound.

260 To the extent that Sumiseki relies on the proposition that s 1322(4)(b) of the Corporations Act provides a mechanism for effecting rectification of a constitution that has been registered, it proceeds on a misapprehension. Section 1322(4)(b) enables a court having jurisdiction under the Corporations Act to direct "rectification of any register kept by ASIC under this Act". Section 117(3) and s 136(5), dealing with public companies only, require lodgment with ASIC. There is no reference to registration by ASIC or to ASIC's keeping of any register containing the content of items lodged in conformity with s 117(3) or s 136(5). For reasons corresponding with those discussed in Lavercombe v Auscott Ltd [2006] NSWSC 867; 202 FLR 390 at [23]-[28], it is not possible to say that the content of any company's constitution created under the current statutory regime appears in or forms part of any "register kept by ASIC" as referred to in s 1322(4)(b). The position was different under earlier legislation: see, for example, Companies Act 1961 (NSW), s 16(3) and s 29(1) which provided for registration of memorandum and articles once lodged.

261 I should mention, in conclusion, that Wambo's constitution came into existence before the adoption of the present statutory scheme and that the alteration in 2001 introducing the provisions about B class shares was made after that adoption. The constitution, as it originally existed, consisted of a memorandum and articles, each of which was signed by the persons desiring incorporation and lodged (Companies Act 1961 (NSW), s 14(1) and s 29(2)(c)). The memorandum and articles so signed were an instrument, as in Evans v Chapman (above) and Scott v Frank F Scott (London) Ltd (above). The mechanism by which the B class share provision was inserted was a special resolution and while one or more instruments no doubt played a part in the process by which the special resolution was passed, there was thereafter no discrete instrument that embodied the constitution as amended.

262 The primary judge was right when he decided that the unavailability of rectification in relation to a company's constitution continues under the current legislation.

Rectification of the restructure agreement

263 Sumiseki's contention here is that the restructure agreement should be rectified by altering the terms of what was, at the time the agreement was executed, the proposed new article 2.1B set out in it. The contention proceeds on the footing that, if those terms are altered, a provision of the agreement will, as it were, be reactivated and require action to be taken. The provision is clause 1.2, as follows:

"On or before 29 June 2001, WMC [ie, 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."

264 Sumiseki says that, although clause 1.2 imposed a contractual obligation on Hunter, that obligation, if still subsisting and unsatisfied, is now an obligation of PAML because of steps taken under Part 5.1 of the Corporations Act in 2009. On 16 December 2009, the Federal Court of Australia made an order pursuant to s 411(4)(b) approving a scheme of arrangement between Hunter and its members. The scheme did not, in terms, involve any compromise or arrangement affecting the rights of Hunter's members or any class of them; nor was it cast as a compromise or arrangement between Hunter and its creditors or any class of them. Its sole effect was expressed to be "by virtue of the order of the Court pursuant to section 413(1) of the Corporations Act", an order which effected transfer to PAML of the whole of the assets and liabilities of Hunter, with "liabilities" being understood in the comprehensive sense emerging from s 413(4). The parties to this appeal were content to proceed on the basis that the combined effect of the scheme terms, the order of the Federal Court and the Part 5.1 provisions was to cause PAML to incur every unsatisfied obligation owed by Hunter, including any continuing obligation sourced in clause 1.2 of the restructure agreement. I proceed accordingly.

265 Wambo and PAML submit that rectification of the restructure agreement should not be ordered because the contract has been fully performed. They refer to Caird v Moss (1886) 33 Ch D 22. That submission puts the matter too broadly. It may well be that rectification will properly be refused where performance is no longer possible (see, for example, Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326 at 344) but that would not be the case here. Even though Hunter, in the past, performed the contract by causing the constitution of Wambo to be altered by adding article 2.1A in the unrectified form, it would still be possible for PAML, as the inheritor of the contractual obligation of Hunter, to perform the contract as rectified by causing the constitution to be altered again so as to include article 2.1A in the rectified form. Indeed, Sumiseki's position is that rectification should be supplemented by an order compelling such action by PAML.

266 There is, however, a different reason why any discretion to order rectification of the restructure agreement should not be exercised. If PAML, as Hunter's successor, were to take action amounting to the passing of a special resolution of Wambo, the alteration of Wambo's constitution by the resolution would take effect on a day determined by s 137(a), being the day of the passing of the resolution or, if the resolution specified some later day, that later day. The alteration could not be made to have retroactive effect. An order for rectification of the agreement followed by action by PAML to alter the constitution (whether or not that action was compelled by another order of the court) could therefore not produce any result different from that which has already been achieved by the order the primary judge made under s 233(1)(b). For reasons already discussed, the part of that order that purported to give the modification retroactive operation was ineffective to do so and the modification took effect on the day on which the order was made, that is, 3 May 2013. It would therefore be pointless for the court to make a further order the working out of which would proceed on the false premise that the constitution was in the form in which it stood before 3 May 2013 and involve adoption of precisely the alteration that had been achieved on that day.

Conclusions on rectification

267 For the reasons stated at [239] above, the only aspect of the rectification jurisdiction to which resort might have been had in this case is that which involves rectification ex abundanti cautela. Because it is not open to a court of equity to order rectification of a company's constitution, no order will be made with respect to Wambo's constitution. As to the restructure agreement, the fact that rectification could not produce any result beyond that already achieved by the judge's s 233(1)(b) order, coupled with the principle that equity does not act in vain, means that the discretionary jurisdiction should not be exercised.

Estoppel by convention

268 The conclusion I have reached as to the correct construction of article 2.1B makes it unnecessary to consider the question whether Wambo was precluded by any conventional estoppel from departing from a course of conduct under which B class dividends were paid on the basis for which Sumiseki contended.

The amendment application

269 In the course of the trial, Sumiseki sought to amend its summons and Commercial List statement by making a claim for damages for breach of the restructure agreement if the result of the rectification claims was alteration of Wambo's constitution prospectively from the time of the court's order but not retrospectively so as to cover the period from the date of the agreement (29 June 2001) to the making of the order. Sumiseki apprehended that, in that eventuality, it would have a claim for damages for breach of contract with respect to that period, its loss being the equivalent of the dividends not paid before the effective date of the alteration of the constitution, less any benefit accruing to it (as the holder of the B class shares) as a result of Wambo's retaining and using those moneys to its advantage. The judge refused that application. Sumiseki maintains that the order thus refused should be made by this Court.

270 I venture to repeat, in that connection, what I said in Kelly v Mina [2014] NSWCA 9 at [45]-[48]. The amendment application was governed by s 64 of the Civil Procedure Act 2005 (NSW) which, in subsection (1), provides that, at any stage of proceedings, the court may order that any document in the proceedings be amended, or that leave be granted to a party to amend any document in the proceedings. Section 64(2) then provides:

"Subject to section 58, all necessary amendments are to be made for the purpose of determining the real questions raised by or otherwise depending on the proceedings, correcting any defect or error in the proceedings and avoiding multiplicity of proceedings."

271 The decision the judge was required to make on the amendment application was a discretionary decision on a matter of practice and procedure. Appellate intervention is justified only upon the principles stated in House v R [1936] HCA 40; 55 CLR 499 at 505. An appellate court should be slow to interfere and ought not to reverse the judge's decision unless convinced that it is plainly erroneous: Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc [1981] HCA 39; 148 CLR 170.

272 Particularly in light of the opening words of s 64(2), the provisions in Part 6 Division 1 of the Civil Procedure Act were binding on the primary judge. In accordance with s 58, he was bound to seek to act in accordance with the dictates of justice and, in so doing, to have regard to s 56 concerning the "overriding purpose" of the Act and rules of court in their application to civil proceedings; also that, in addressing the amendment application in the particular statutory context, his Honour was required to take into account a combination of factors identified by the High Court in Aon Risk Services Pty Ltd v Australian National University [2009] HCA 27; 239 CLR 175 and usefully summarised by Vickery J in Namberry Craft Pty Ltd v Watson [2011] VSC 136 (at [38]) as follows:

(a) whether there will be substantial delay caused by the amendment;

(b) the extent of wasted costs that will be incurred;

(c) whether there is an irreparable element of unfair prejudice caused by the amendment, arising, for example, by inconvenience and stress caused to individuals or inordinate pressures placed upon corporations, which cannot be adequately compensated for, whatever costs may be awarded;

(d) concerns of case management arising from the stage in the proceeding when the amendment is sought, including the fact that the time of the court is a publicly funded resource, and whether the grant of the amendment will result in inefficiencies arising from the vacation or adjournment of trials;

(e) whether the grant of the amendment will lessen public confidence in the judicial system; and

(f) whether a satisfactory explanation has been given for seeking the amendment at the stage when it is sought.

273 As this court has emphasised more than once, Part 6 Div 1 of the Civil Procedure Act made substantive and important changes to the law so that considerations of promptness and efficiency in the conduct of civil litigation are afforded a new and special importance which may sometimes provoke a sense of injustice in a party who has failed to proceed with despatch.

274 On the view I have taken, the constitution of Wambo with respect to B class dividends was, by the judge's order under s 233(1)(b), modified with effect from the making of that order on 3 May 2013. To that extent, the contingency against which Sumiseki sought to guard by its amendment application has arisen. At the same time, however, I share the primary judge's opinion that article 2.1B, on its correct construction, has always been the source of a dividend entitlement on the part of Sumiseki on the basis for which it contends in this Court. It follows that the primary judge's order 5 (see [31] above) should stand: Sumiseki was throughout entitled to B class dividends on the basis for which it now contends and order 5 recognised and gave effect to that entitlement. To the extent that Sumiseki sought, by the amendment application, to cast the claim more widely and to assert an entitlement to damages beyond the unpaid dividend amounts and interest on them, the judge correctly held that it had raised at an inopportunely late stage avenues of inquiry that would have broadened the scope of a trial that was already in progress on issues that had been clearly defined for some time. His Honour clearly took into account, at the least, the factors (a), (b), (d) and (f) at [272] above and saw them as indicating that the amendment should not be allowed.

275 This Court should not disturb the judge's discretionary decision on the amendment application. No sufficient basis for such intervention has been shown.

Disposition

276 In my opinion, orders should be made as follows:

1. Vary order 3 made in the Equity Division on 3 May 2013 by omitting "as and from 29 June 2001".

2. Appeal otherwise dismissed.

3. Cross-appeal dismissed

4. Order that the appellants pay the respondent's costs of the appeal.

5. Order that the cross-appellant pay the cross-respondents' costs of the cross-appeal.

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Decision last updated: 03 December 2014