BB Retail Capital Pty Ltd v Alexandria Landfill Pty Ltd

The issues

1. There was no issue between the parties that the notes described as Tranche A notes in the put option deed were to be converted in accordance with the formula in cl 7.5(a) of the Terms of Issue. However, ALF and Mr Malouf contended that the Tranche B notes were to be converted on the basis of one preference share for each $1 of notes. The primary judge found, in favour of BB, that the Tranche B notes were to be converted at the rate specified in cl 7.5(a). This is the subject of the cross-appeal.
2. There was no issue that there was some organic debt at the conversion date. However, the primary judge concluded that borrowing to raise funds to redeem convertible notes, totalling $11.8 million, and an increase in a bank overdraft of $2.9 million, used for the same purpose, did not constitute organic debt for the purpose of the formula. This conclusion is the subject of the appeal.

The admissibility issue

1. In support of its contention that the 20 million Tranche B notes issued to BB were to be converted on a one-to-one basis, ALF sought to rely on correspondence which passed between ALF and BB in the period leading up to the execution of the put option deed.
2. The first of these documents was an email dated 14 November 2010 from Mr Bundy of BB to Mr Malouf, making a proposal to subscribe for $30 million convertible notes. He proposed subscribing for $20 million of those notes over the period from February to July 2011, in respect of which there would be what was described as a predetermined exit option. The calculation of this exit option was said to be based on a forecast EBITDA for the business conducted by ALF's subsidiaries as at June 2013, of $66,132,000 at a multiple of 3.75%, plus a value of the land component, of $155 million at multiples ranging between 4% and 5%, depending on the date of the exercise of the option.
3. The email from Mr Malouf in response, dated 15 November 2010, commented and crossed out some of these proposals. The exercise date for the put option was varied, the multiples for the land component were crossed out and amendments to the dates on which the notes were to be issued were proposed.
4. On 17 November 2010, BB provided ALF with a draft term sheet. The following sections are relevant for the purpose of the appeal on this issue: "Amount $20,000,000 is available to be drawdown as per the following schedule: November 2010 $5,000,000 January 2011 $5,000,000 February 2011 $3,000,000 March 2011 $3,000,000 April 2011 $1,000,000 May 2011 $3,000,000

Drawdown cannot occur earlier than the 20th of the month as specified above." "Conversion Conversion Date: This note is convertible to shares in November 2012 Rate of Conversion: the note will convert to equity at a rate of $1.00 per share per $1.00 of the value of the note. DADI Shares outstanding at conversion date: 280 Million" "Pre-determined Exit Dealt with by side agreement will require one other, so I don't forget In the event that a sale of the business does not occur prior, both parties agree to the following options exercisable at June 30 2015: BBRC: put option to sell their proportion of shares based on a value of the business of 4x multiple of a pre-determined valuation. DADI: call option to buy BBRC shares based on a value of the business of 4.5x multiple of a pre-determined valuation Where the pre-determined valuation is equal to the June 30, 2013 forecast of EBITDA plus $155,000,000 for the land component. Any sale amount would be equal to BBRC % holding of the total value." "Other In addition to this Senior Convertible Note, BBRC will provide a further $10M as existing Convertible Notes payable upon signing on X November 2011 BBRC will be granted the same terms and conditions as the existing note"

1. On 18 November 2010, Mr Malouf replied, enclosing a document he described as "Terms Sheet/Heads of agreement". The following portions are said to be relevant for the purpose of the cross-appeal: "1 On 24th November 2010 will pay and subscribe for $10 Million in T2 Convertible Notes in Alexandria Landfill Pty Ltd. 2 BBRC will make additional payments as subscriptions totalling $20 Million in T2 Convertible Notes in Alexandria Landfill Pty Ltd on the following dates 24th November 2010 $5,000,000 21st January 2011 $5,000,000 21st February 2011 $3,000,000 21st March 2011 $3,000,000 21st April 2011 $1,000,000 20th May 2011 $3,000,000" "Conversion Date All Notes will convert to shares on January 1st 2013" "Rate of Conversion Each $1.00 of Note value will convert to one share in Alexandria Landfill Pty Ltd. Issued Shares in Alexandria Landfill Pty Ltd at conversion date will be 280 Million." "Separate Deed granting Put Call Options as follows, In the event that, a sale of the business does not occur prior to June 30th 2015 then BBRC has a Put option to sell their 20Million shares back to Malouf for $29,966,285. At 1st July 2015 and if BBRC has not exercised the Put Option then Malouf can exercise a Call option to buy BBRC 20 Million shares back for $32,328,142."
2. The primary judge rejected the admissibility of this material: BB Retail Capital Pty Ltd v Alexandria Landfill Pty Ltd [2014] NSWSC 1363 (the Trial Judgment). He concluded that it contained evidence of prior negotiations, which was not admissible on the question of the construction of the contract, holding that the documents contained statements reflective of the parties actual intentions and expectations. As part of its cross-appeal, ALF appealed against the rejection of this evidence.

The primary judgment

1. The primary judge emphasised the use of the words, unless ALF and a noteholder "otherwise agree", in cll 7.1 and 8.1 of the Terms of Issue and that it was "common ground that the effect of cl 4.3 of the [put option deed] is that the parties did 'otherwise agree' [on redemption] for the purpose of cl 8.1 of the Terms of Issue": Trial Judgment at [78].
2. The primary judge rejected the submission by ALF that the recital in the put option deed, to which I have referred in par [24] above, led to the conclusion that BB would only be entitled to 20 million shares on conversion. He pointed to the fact that the language used in cl 4.3(c) of the put option deed showed that the parties were aware of the need to be "quite specific" about any agreement to vary the Terms of Issue: Trial Judgment at [86]. He said that had the parties intended to vary the conversion ratio, they would have done more than simply make the reference contained alongside the heading "Background".
3. The primary judge pointed out that the statement in the "Background" recital was followed immediately by the statement that Mr Malouf had granted the put option in respect of the same number of shares. He pointed out that this was the minimum number of preference shares that could be issued to BB in respect of the $20 million convertible notes.
4. In these circumstances, the primary judge concluded that the "Background" recital was no more than a statement of what would inevitably be available to be the subject of the put option. He also pointed to cl 7.12(g) of the Terms of Issue, stating that, having regard to the warranty by Mr Malouf, it appeared to be the expectation of the parties that there would be no organic debt at the time of conversion.
5. As I indicated, the primary judge ruled that the material to which I have referred in pars [41]-[44] above was inadmissible. He also concluded that even if it was admissible, it would not have altered his views. He pointed to the fact that the term sheets supplied by Mr Malouf (see par [44] above) referred to both the 10 million and 20 million convertible notes as being "T2 Convertible Notes". He pointed to the fact that ALF accepted that the 10 million convertible notes issued to BB and similar notes to be issued to other investors converted in accordance with the formula in cl 7.5(a) of the Terms of Issue. In those circumstances, he concluded that the description of the notes in the 18 November term sheet shed no light on whether the parties intended to modify the conversion ratio in cl 7 of the Terms of Issue in respect of the 20 million T2 convertible notes.
6. So far as the organic debt issue was concerned, the primary judge stated that ALF borrowed $11.8 million from three investors, which was used to redeem the Tranche 1 convertible notes, which he said were, in turn, issued for the purpose of repaying the vendor finance provided by Valad. He concluded however that he could not be satisfied that the borrowings were themselves organic debt. He said that the Valad debt was organic debt because it fell within the second limb of the definition of such debt, namely, "debt used to complete the purchase and establishment of the waste site". He said that the question of whether a refinance was itself organic debt depended on whether the amount borrowed fell within the first limb of the definition, namely, whether it was for the "general business" of ALF. The primary judge stated that that depended on the circumstances in which the debt was incurred and there was no evidence to satisfy him that the borrowing fell within the first limb of the definition.
7. His Honour reached a similar conclusion in respect of the $2.9 million short term funding facility obtained from Westpac for the purpose of redeeming convertible notes.

The conversion ratio for the 20 million Tranche B convertible notes issued to BB and the admissibility issue

1. Although these issues were the subject of the cross-appeal, it is convenient to deal with them prior to dealing with the organic debt issue.

The parties' submissions

1. In relation to the admissibility issue, ALF submitted that the material rejected by the primary judge was admissible, not on the basis that it reflected the actual intention and expectations of the parties, but rather because it disclosed the commercial purpose of the transaction the subject of the put option deed and revealed the manner in which the parties had calculated the exercise price for the put and call options. As it emerged, particular reliance was placed on the latter matter by ALF in support of its submissions on the conversion issue.
2. In its submissions, ALF described the structure of the arrangement between it and BB as containing a covenant by BB to subscribe for $20 million of convertible notes, on the assumption that there would be 280 million shares on issue at the conversion date, each having a face value of $1. It submitted that the put option exercise price of $29,966,285 bore a ratio of 7.1% to the value of the company, which the parties had stipulated in their email negotiations, a similar ratio to that which 20 million shares would bear to a total issue capital of 280 million shares. Senior counsel for ALF elaborated on this issue demonstrating that the figure of $29,966,285 was 7.14% of the value of the business, using the June 2013 forecast of EBITDA, namely, four times $66,132,000 EBITDA ($264,528,000) plus $155 million in respect of the land component. He stated that the call option price could be calculated in a similar way but using a multiple of 4.5 EBITDA. In that context, ALF identified the issue between the parties as whether "the documents" objectively demonstrated that the options related to the whole of the shares derived from conversion and hence compelled a conversion rate of 1 to 1, or whether "the documents" left open the possibility that a residual parcel of shares would remain with BB after the exercise of the options.
3. ALF submitted that if the 20 million Tranche B notes converted according to the formula in the Terms of Issue, BB would receive more than $20 million shares if there was organic debt at the time of conversion. It submitted that if BB was then to exercise the put option, it would have received interest during the term of the notes, plus dividends on the shares after conversion, plus a return of the amount originally invested by it, plus the balance of the exercise price (presumably the difference between $29,966,285 and $20 million), together with an additional parcel of shares calculated by reference to the formula.
4. Senior counsel for ALF submitted that such a result could not have been the parties intention. He submitted that it resulted in BB obtaining more shares as the position of ALF weakened, yet being entitled to be paid out the full value of the company based on the forecast. He submitted that this would "make little commercial sense". However, he accepted in that context that, subject to an Exit occurring, the exercise date at which the option could be exercised would be in excess of two years after conversion and that if there was organic debt, BB would receive fewer shares than other noteholders, but be compensated by an option exercisable more than two years thereafter.
5. ALF submitted that its construction was supported by a proper reading of the put option deed, including the definition of "specified option preference shares". Senior counsel for ALF stated that it was not necessary for the put option deed to expressly state that what was agreed was different from the terms of issue. Rather, he submitted that a contrary agreement could be construed by necessary implication from the words used. In that context, he pointed to cl 1.6 of the put option deed, which provided that the deed prevailed over the Terms of Issue to the extent of any inconsistency.
6. BB submitted that the task of the primary judge was not to construe an ambiguous conversion clause to determine the parties' true intention but was rather limited to determining, as a question of fact, whether ALF and BB had made an agreement to vary the rate of conversion. It submitted, in these circumstances, that reference to an implied agreement was "apt to confuse". However, it accepted that no particular form of words was required to evidence such an agreement. Senior counsel for BB submitted that what was required was a consensus contrary to the consensus in the Terms of Issue. He pointed to the material ruled inadmissible by the primary judge and submitted that the one thing that was clear from those documents was that the $10 million notes and the $20 million notes were to be converted at the same rate.
7. BB submitted that the terms of the put option deed demonstrated that the parties were well aware of the need to make provision to vary the Terms of Issue when that was required to give effect to their bargain. In addition to cl 4.3(a), it pointed to cl 9(b), which provided for a supplementary interest payment not provided for in cl 3 of the Terms of Issue. Senior counsel for BB submitted that it was unlikely that a central matter such as the conversion ratio would be left to a process of inference or imputation. He also pointed to the entire agreement clause.
8. Senior counsel for BB submitted that the definition of "Specified Option Preference Shares" in the deed did not refer to any particular preference shares resulting from conversion. In those circumstances, he submitted that it was simply stating that on conversion, BB would be the holder of at least 20 million shares. He pointed out that even on the construction advanced by ALF, BB would hold 30 million shares, more if there was organic debt, as the formula in the Terms of Issue applied to the 10 million Tranche A notes.
9. BB also pointed out that the put option deed was not limited to the 20 million Tranche B convertible notes, but applied to the whole 30 million notes to be acquired by BB. It pointed out that the supplementary interest provided for in cl 9(b) related to the whole of the notes and the definition of Exercise Price in the put option deed included an offset for capital distribution from sales of assets, which would include a return of capital on the entirety of the preference shares received by BB on conversion (at least 30 million). It submitted that these provisions were inconsistent with the 20 million notes being treated differently to the 10 million notes on conversion.
10. In dealing with the documents ruled inadmissible, senior counsel for BB submitted that the fact that an exercise price of 7.1% of EBITDA plus the land component was determined said nothing about the conversion rate, because it was calculated by reference to the fact the option was over 7.1% of the estimated issued capital of the Group. He emphasised that there was nothing to suggest that conversion would take place other than on a common basis for all notes, stating that there was no evidence of a contrary agreement and that the agreement he contended for could not be one which was described as uncommercial.

Consideration

1. The admissibility issue can be dealt with shortly.
2. ALF was correct in pointing out that evidence of negotiations may be admissible in construing a contract, not on the basis that such evidence shows the subjective expectations and intentions of the parties but rather that it shows the context in which the agreement was made and the surrounding circumstances objectively known to the parties: Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; 149 CLR 337 at 352; Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; 240 CLR 45 at [30]. Further, as Emmett JA recently pointed out in Righi v Kissane Family Pty Ltd [2015] NSWCA 238 at [48], Ward and Gleeson JJA agreeing, the line between using extrinsic evidence of negotiations to show the context in which the agreement was made or using such evidence to show the subjective intention of the parties as an aid to construction can be blurred.
3. If, in the present case, the basis of tender was to demonstrate, for example, that it was known to both parties that the forecast EBITDA for the business of ALF as at June 2013 was $66,132,000, then the documents would have been admissible to prove that fact. However, the purpose of the tender was to demonstrate the manner of calculation of the exercise price for the put and call options.
4. It does not seem to me that the material is admissible for that purpose. To use the material to demonstrate, through the negotiations between the parties, how the put option exercise price was arrived at, is to go beyond using the material to provide context or evidence of surrounding circumstances. Rather, this is seeking to rely on the manner to which the parties negotiated the agreement as an aid to construction. In my opinion, the primary judge was correct in rejecting the tender in these circumstances.
5. However, for the reasons which appear below, the admission of the material would not have affected my view of the correct construction of the put option deed.
6. It was not suggested by ALF that the conversion ratio in the Terms of Issue was varied by an agreement separate to the put option deed. What was put was that the variation arose by necessary implication from the words used in that deed. I am unable to agree.
7. It is important to note at the outset that the put option deed contained a covenant by BB to subscribe for 30 million notes. If it was intended that any of them were to convert in accordance with a formula different to that contained in the Terms of Issue, that would be a matter which it would be expected would be clearly stated in the agreement.
8. I do not think that the recital under the heading "Background" alters the position. It states what is clear, namely, that at the time of conversion, BB would be the holder of 20 million notes. That follows inevitably from the fact that BB had no entitlement to redeem at least the Tranche B notes.
9. In that context, the definition of "Specified Option Preference Shares" was quite generic. It did not refer to the shares in question, namely, those shares obtained on conversion of the Tranche B notes, as distinct from the other preference shares to which BB may be entitled. The option could be exercised utilising, at least in part, shares issued as a result of the conversion of the Tranche A notes.
10. Similarly, the supplementary option provision in cl 4.3 entitling redemption in particular circumstances was not limited to the Tranche B notes. Further, the adjustment to the option price resulting from a capital distribution was not limited to a capital distribution in respect of the Tranche B notes, or in respect of shares issued as a result of conversion of those notes.
11. Once it is recognised that the put option deed did not distinguish in any way between the Tranche A and Tranche B notes, it is difficult to see how the put option deed, by implication, required that the notes be treated differently on conversion. As the primary judge pointed out, the parties would have been aware of the express provisions of cl 7.1, to which I have referred in par [15] above. If the parties intended to vary the conversion ratio, it would be surprising if they did not do so expressly, but rather did so as a matter of necessary implication.
12. ALF's primary argument was based on the fact that the put option protected BB in respect of its initial investment of $20 million subscription money for the Tranche B convertible notes, plus, having regard to the put option price, provided it with additional funds over that amount. I have set out this argument in pars [56]-[57] above. In essence, ALF submitted that if the construction contended for by BB was correct, then as the company's position weakened, BB would receive more shares as well as the put option price, something which it suggested made no commercial sense.
13. It should be noted that this argument does not depend on the documents ruled inadmissible, but rather depends on the existence of the put option and its exercise price.
14. However, the submission that the construction urged by BB is one that produces commercial nonsense overlooks the fact that at least the Tranche B notes were issued on the condition that the election to redeem in cl 4.1 was not available. This option, available to noteholders who made the election within the time prescribed in cl 4.1(b) and (c), not only meant that they would receive cash on maturity, but also the further interest provided for in cl 4.3 of the Terms of Issue.
15. By contrast, as I have pointed out, except in the circumstances prescribed in cl 4.3 of the put option deed, BB had no right to redeem the Tranche B notes, but merely the right to put the shares resulting from conversion of those notes to Mr Malouf, at the earliest 30 months after conversion.
16. Taking these matters into account, it could not be said that the construction preferred by the primary judge was commercially nonsensical or arbitrary and capricious: Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640 at [35]; Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; 129 CLR 99 at 109.
17. In these circumstances, the primary judge was correct in concluding that there was no agreement that the Tranche B convertible notes would convert on a different basis to that contained in the Terms of Issue.
18. Even if the correspondence leading up to the entry into the put option deed was admitted, the position, in my view, would remain the same.
19. At most, the correspondence showed the basis upon which the issue price for the put option was arrived at. Even if this did demonstrate that the price represented the value of 20 million shares, based on the EBIDTA assumption and particular multiples, it did not provide any basis for the conclusion that the agreement itself contained, by necessary implication, the term contended for by ALF. Significantly, the term sheet supplied by Mr Malouf during the course of negotiations did not itself suggest that the Tranche A and Tranche B notes would convert on a different basis.
20. Further, the fact that the parties adopted a particular methodology to determine the put option price did not lead to the result that the conclusion arrived at by the primary judge on the application of the conversion formula was arbitrary and capricious or uncommercial.

The organic debt issue

1. As I indicated, the primary judge concluded that the $14.7 million debt (made up of the $11.8 million borrowed from three investors and the $2.9 million short term funding facility obtained from Westpac), whose characterisation was in dispute, was used to redeem Tranche 1 convertible notes, which were, in turn, issued to refinance the Valad debt. While supporting the finding of the primary judge that the debts did not fall within the definition of "Organic Debt", ALF, by notice of contention, challenged his finding that the proceeds of the Tranche 1 notes were in fact used to refinance the Valad debt. In these circumstances, it is necessary to deal with the transactions of January 2009, to which I have referred in pars [5]-[7] above, in more detail.
2. The debt in question was made up first of $11.8 million, incurred to redeem the notes of three investors. The first, a Mr Mark Ellis, redeemed his notes in consideration of the issue of a secured bond for $6 million. The second, a Ms Raelynn Malouf, redeemed her notes in consideration of a secured bond of $4.5 million. The third investor, Ralph Lauren Pty Ltd, agreed to loan $1.3 million for 12 months to enable its notes to be redeemed.
3. There was no issue between the parties that the $2.9 million short term facility from Westpac was used to redeem Tranche 1 convertible notes.
4. Neither party disputed that the borrowings in question were used to redeem notes held by investors who were entitled to redeem their notes, or that the notes were issued at the time of the restructure of the Valad arrangements, to which I have referred above. However, the parties did not agree as to the manner of the application of the funds raised as a result of the issue of the Tranche 1 convertible notes. BB supported the conclusion of the primary judge that they were used as part of the Valad refinancing. ALF contended that the primary judge was incorrect in so concluding.
5. The precise flow of funds to Valad is not entirely clear. Both parties placed reliance on a submission made by ALF to the Australian Taxation Office on 6 February 2011. That submission referred to the fact that in 2008, ALF had an opportunity to remove the Valad loan facility and to facilitate the offer to private investors of an opportunity to invest in the waste facility project. The submission pointed out that with $45 million being provided by ALF, and $20 million by Carlewie, Valad received $65 million in satisfaction of a debt of $93,112,000 payable if the facility had run its full term.
6. The submission also stated that Carlewie did not have the requisite funds to pay the consideration for the assignment of the Valad debt. It stated that external funds, raised by the issue of the convertible notes, enabled ALF to repay the inter-company loans it owed. As a consequence, money flowed to Carlewie which enabled it to provide consideration for the assignment.
7. The document also stated that, in fact, the $20 million consideration for the assignment was paid directly out of ALF's account and recorded as a loan by ALF to Carlewie.
8. So much appears to have been common ground. Senior counsel for ALF accepted that between $29 to $31 million was raised by the issue of Tranche 1 convertible notes. ALF also accepted that $20 million was advanced by ALF to Carlewie, which was utilised in acquiring the Valad facility. It also seemed to accept that the balance of the Tranche 1 notes were used by ALF, together with $11 million of its own funds, to meet the other obligations to Valad under the restructuring arrangements.
9. In these circumstances, ALF submitted that while funds received from the Tranche 1 convertible notes indirectly aided the refinancing, there was no direct refinancing. Senior counsel for ALF accepted however that the funds raised by the notes issue were used for the general business of the company.
10. Senior counsel for BB stated that the effect of the finding of the primary judge was that the Tranche 1 notes were not used directly to discharge the Valad debt, but rather were used to fund the transaction which enabled the restructuring to take place.
11. It seems to me that on the material to which I have referred above, it is not possible to state that any particular funds raised from the issue of the Tranche 1 notes were paid directly to Valad in discharge of ALF's liability. What is clear, however, is the fact that funds were raised to enable completion of the restructure and used directly or indirectly for that purpose.

The parties' submissions

1. BB submitted that the question of whether the borrowing was for the general business of the ALF Group did "not depend on the form of the borrowing but on the intended use or application of the proceeds". It submitted that the character of the borrowing was to be determined by the use to which the funds were put in the conduct of the business. It submitted that ALF had a contractual obligation to redeem the Tranche 1 convertible notes and the redemption was in the ordinary course of business.
2. Senior counsel for BB submitted that the debt was either organic debt or project debt. He pointed to the width of the word "activities" in the definition of project debt, submitting that if a liability incurred to redeem the notes was not organic debt, then it was a debt incurred in the activity of redeeming a note and therefore project debt, something in respect of which approval of 75% of convertible noteholders was required.
3. In these circumstances, senior counsel for BB submitted that if a company chooses to discharge an obligation by raising funds, the debt is for the general business of the enterprise and thus organic debt.
4. ALF submitted that once it was accepted that the proceeds of the notes issue were not used directly to refinance the Valad debt, it was necessary to examine the purpose behind the actual obligation incurred. It stated that this purpose was to redeem convertible notes. It submitted, relying on the decision in Fire Nymph Products Pty Ltd v Heating Centre Pty Ltd (1988) 14 NSWLR 460 (Fire Nymph), that the transaction was not one for the "general business of the ordinary conduct of the business of the Group".
5. Senior counsel for ALF, in submitting that the borrowing did not fall within the definition of organic debt, pointed out that the definition referred to amounts borrowed by any member of the Group. He submitted that an indebtedness brought about by the exercise of an election to redeem did not fit readily within the definition of having been borrowed.
6. Senior counsel for ALF pointed to the fact that if the notes were converted, no organic debt would arise as a result. He submitted that if the debt incurred to redeem the notes was organic debt, then noteholders would be given the benefit of an increase in shareholding on conversion. He said that it would produce an "anomalous commercial outcome" if there would be a different number of shares issued depending on whether noteholders redeemed rather than converted. In these circumstances, he submitted that the debt was not organic debt.

Consideration

1. As I indicated (at par [92] above), ALF accepted that the proceeds of the notes issue were used for the general business of the company. Incorporating the definition of "Enterprise" into the definition of "Organic Debt", the question is whether the incurring of debt to redeem Tranche 1 notes fell within the general business of the ordinary business of the company.
2. In Fire Nymph at 464, Rogers CJ of Comm D pointed out that the expression "ordinary course of ordinary business" was designed to overcome the conclusion by Mahoney JA, in Reynolds Bros (Motors) Pty Ltd v Esanda Ltd (1983) 8 ACLR 422 at 427, that the expression "ordinary course of business" could include transactions that were "exceptional or unprecedented". Rogers CJ of Comm D stated that the expression "ordinary course of ordinary business" did not include something "unusual or exceptional" but "something ordinarily done in the course of the particular business of the company".
3. His Honour's judgment was affirmed on appeal: Fire Nymph Products Pty Ltd v Heating Centre Pty Ltd (in liq) (1992) 7 ACSR 365. In the course of his judgment, at 370-371, Gleeson CJ cited with approval the statement in Francis Beaufort Palmer, AF Topham, Palmers Company Precedents, (16th ed 1951, Stevens) at 51, to the effect that the phrase "ordinary business" includes "sales, leases, mortgages, charges, payments of debts, discharge of liabilities, and other transactions with a view to carrying on the concern".
4. Raising funds to repay debts, in my opinion, would fall within the ordinary course of a company's business. However, having regard to the incorporation of the definition of "Enterprise" in the definition of "Organic Debt" in the Terms of Issue, the question is whether the raising of funds to redeem the notes fell within the general business of the ordinary business of the company.
5. It is difficult to see what the expression "general business of the ordinary business" adds to the expression "ordinary business". However, if it is read to exclude transactions which were exceptional or unprecedented, the raising of funds to redeem convertible notes would not fall within that category. The Terms of Issue clearly contemplated that the notes may have been redeemed (cl 8.1). Once that is recognised, the raising of funds to meet that liability on redemption could hardly be described as exceptional or unprecedented.
6. As I indicated, it was submitted that an indebtedness brought about by an election to redeem did not fall comfortably within the definition of organic debt as money having been borrowed. There are two difficulties with this submission. First, the amount said to be organic debt was not the liability to redeem, but the amount borrowed to meet that liability. Second, to the extent that it is relevant, the notes themselves were described as a debt obligation.
7. Finally, ALF relied on what it described as the "anomalous commercial outcome", saying that it could not have been intended that a different number of shares would issue depending on whether notes were redeemed with borrowed funds rather than otherwise. There is no reason to suggest that such a result is uncommercial when it is borne in mind that the capital structure would be different if shares were redeemed rather than converted, particularly if they were redeemed with borrowed funds. Further, redemption, whether effected through borrowed funds or otherwise, did not operate to dilute Mr Malouf's interests in the capital of the company to below the 75% threshold which would be achieved if no shares were redeemed and there was no organic debt. This can be shown by a simple example. If all notes were converted, Mr Malouf's interests would hold 75% of the capital of the company and noteholders would hold 25%. As BB held 30 million of the 70 million notes on conversion, it would hold 10.71% of the company. If all notes other than the BB notes were redeemed out of borrowed funds, BB would hold 12.5% of the capital of the company on conversion (30 million divided by (280 million minus 40 million) multiplied by 100), whilst Mr Malouf's interests would hold 87.5% of the capital (this assumes that bonus interest is paid on redemption out of cash on hand). If all notes were redeemed out of cash on hand, BB would hold 10.71% of the capital of the company, whilst Mr Malouf's interests would hold 89.29%. There is nothing uncommercial about any of these results. As I indicated, they simply reflect different capital structures on conversion.
8. In these circumstances, in my respectful submission, the primary judge erred in concluding that the $14.7 million debt was not organic debt for the purpose of the conversion ratio.

Conclusion

1. In the result, the appeal should be allowed and the cross-appeal dismissed. The parties should be directed to bring in short minutes of any consequential orders required to give effect to this judgment. BB should have its costs of the appeal and the proceedings below. It is common ground that any such costs orders should be made against Mr Malouf rather than ALF.
2. The orders I would make are as follow: 1. Appeal allowed. 2. Cross-appeal dismissed. 3. Set aside the orders made by Stevenson J on 23 October 2014. 4. Order that the second respondent pay the appellant's costs of the appeal and cross-appeal and have a certificate under the Suitors' Fund Act 1951 (NSW), if eligible. 5. Order that the second respondent pay the appellant's costs of the proceedings in the Court below. 6. Direct the parties to bring in short minutes of any consequential orders required to give effect to these reasons.
3. BEAZLEY P: I have had the advantage of reading in draft the reasons of the Chief Justice. I agree with his Honour's reasons and with the orders he proposes.
4. MACFARLAN JA: I agree with the judgment of Bathurst CJ and add the following observations.

The cross appeal - terms of conversion of Notes

1. The Deed of 1 December 2010 between the parties (the "December Deed") provided for BB to subscribe for ALF Convertible Notes of a face value of $30 million on terms that they would be convertible in accordance with the Deed Poll of 5 January 2009 and the Terms of Issue contained in Schedule 1 to it.
2. Clause 7.1 of the Terms of Issue provided for conversion of Convertible Notes in accordance with the formula for conversion specified in Clause 7.5, unless ALF and a note-holder otherwise agreed.
3. ALF contended in the proceedings that the December Deed contained an implied agreement "otherwise". It argued that unless the $20 million Tranche B notes were to be converted on a 1:1 basis, rather than according to the formula in Clause 7.5 of the Terms of Issue, the terms of conversion of those notes would be inconsistent with the terms of the put option provided for in the December Deed. However, there was to be a period of in excess of two years between the date for conversion of the notes (1 January 2013) and the commencement of the period for exercise of the put option (1 July 2015). The potential for changes in ALF's value during this period means that there is no obvious reason why the terms of conversion should necessarily have equated in financial terms to the terms on which the put option could have been exercised.
4. It would not have been sufficient for ALF to demonstrate that the implied agreement for which it contended would have given rise to a fairer or more business-like result. In the absence of an express agreement that conversion was to be at a rate other than that specified in the Terms of Issue, ALF would have had to demonstrate that that was the only conclusion consistent with the December Deed. An analogy can be drawn with cases in which agreements are alleged to have been made by conduct. In such cases, the conduct relied on must unambiguously indicate that the parties intended to contract. It must be "of such a character as necessarily to lead to the inference" that an offer has been accepted (Brogden v Metropolitan Railway Co [1877] 2 App Cas 666 at 686; cited in Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; 53 NSWLR 153 at [162]). In the present case, it was thus necessary for ALF to identify the provisions of the December Deed that necessarily indicated that the parties had reached an implied agreement of the type contemplated by the proviso to Clause 7.1. Neither the terms of the put option nor any of the other provisions of the December Deed did this.

The appeal - the meaning of "Organic Debt"

1. I agree with Bathurst CJ that BB did not establish that the debts in question were debts "used to complete the purchase and establishment of the waste site at Eastern Creek" within the last part of the definition of "Organic Debt" in the December Deed. If it had done that it would in my view have been unnecessary for it to establish that the debts were also within the first part of that definition (compare Trial Judgment at [143]) as the word "including", joining the two parts of the definition, had the effect of deeming debts within the second part to fall also within the first part.
2. I also agree with Bathurst CJ that the subject debts nevertheless fell within the first part of the definition of "Organic Debt" because they represented amounts borrowed by members of the group "for the general business of the Enterprise". I do not consider that the definition of "Enterprise", referring to the "ordinary conduct of the business of the Group" had the effect of excluding transactions which were exceptional or unprecedented from the definition of "Organic Debt". As I see it, the references to "general business of the Enterprise" and "the ordinary conduct of the business of the Group" in the definitions of "Organic Debt" and "Enterprise" respectively are essentially repetitive. The position thus differs from that in Fire Nymph Products Pty Ltd v Heating Centre (1988) 14 NSWLR 460 where two similar expressions in the one phrase ("ordinary course of ordinary business") had the effect of limiting relevant transactions to those that were not only part of the "ordinary business" but were also effected in the "ordinary course" of that business, thus excluding exceptional or unprecedented transactions. The different structure adopted in the December Deed did not impose the same double limitation.
3. In any event, as Bathurst CJ concludes, even if exceptional or unprecedented transactions are excluded, "the raising of funds to redeem convertible notes would not fall within that category" (see par [105] above).

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